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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 14, 1998
REGISTRATION NO. 333-37833
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
BALANCED CARE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 8361 25-1761898
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
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5021 LOUISE DRIVE, SUITE 200
MECHANICSBURG, PENNSYLVANIA 17055
(717) 796-6100
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
BRAD E. HOLLINGER
CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF EXECUTIVE OFFICER
BALANCED CARE CORPORATION
5021 LOUISE DRIVE, SUITE 200
MECHANICSBURG, PENNSYLVANIA 17055
(717) 796-6100
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
Copies to:
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RONALD D. WEST MARK KESSEL
KIRKPATRICK & LOCKHART LLP SHEARMAN & STERLING
1500 OLIVER BUILDING 599 LEXINGTON AVENUE
PITTSBURGH, PENNSYLVANIA 15222-2312 NEW YORK, NEW YORK 10022-6069
(412) 355-6500 (212) 848-4000
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------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this registration statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JANUARY 14, 1998
BALANCED CARE CORPORATION LOGO
LOGO
7,000,000 SHARES
COMMON STOCK
All of the shares of Common Stock offered hereby (the "Offering") will be
issued and are being sold by Balanced Care Corporation (the "Company"). Prior to
the Offering, there has been no public market for the Common Stock. It is
currently estimated that the initial public offering price will be between $8.50
and $10.50 per share. See "Underwriting" for the method of determining the
initial public offering price.
---------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 9.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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========================================================================================================
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS COMPANY(1)
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Per Share............................. $ $ $
- --------------------------------------------------------------------------------------------------------
Total (2)............................. $ $ $
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(1) Before deducting expenses payable by the Company, estimated at $1,500,000.
(2) The Company has granted the Underwriters a 30-day option to purchase up to
1,050,000 additional shares of Common Stock solely to cover over-allotments,
if any. See "Underwriting." If such option is exercised in full, the total
Price to Public, Underwriting Discounts and Commissions and Proceeds to
Company will be $ , $ and $ , respectively.
---------------------
The Common Stock is offered by the Underwriters as stated herein, subject
to receipt and acceptance by them and subject to their right to reject any order
in whole or in part. It is expected that delivery of such shares will be made
through the offices of BancAmerica Robertson Stephens, San Francisco,
California, on or about , 1998.
BANCAMERICA ROBERTSON STEPHENS
BT ALEX. BROWN
SALOMON SMITH BARNEY
The date of this Prospectus is , 1998.
<PAGE> 3
[PHOTOS/MAP]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING STABILIZING BIDS, SYNDICATE COVERING TRANSACTIONS OR THE IMPOSITION OF
PENALTY BIDS. FOR A DISCUSSION OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE> 4
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY
SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER
TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION
WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE
COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
---------------------
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TABLE OF CONTENTS PAGE
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Summary............................................................................... 4
Risk Factors.......................................................................... 9
Use of Proceeds....................................................................... 17
Dividend Policy....................................................................... 17
Capitalization........................................................................ 18
Dilution.............................................................................. 19
Selected Consolidated Financial and Operating Data.................................... 20
Management's Discussion and Analysis of Financial Condition and Results of
Operations.......................................................................... 22
Unaudited Pro Forma Financial Information............................................. 32
Business.............................................................................. 52
Management............................................................................ 75
Certain Transactions.................................................................. 85
Principal Stockholders................................................................ 87
Description of Capital Stock.......................................................... 90
Shares Eligible For Future Sale....................................................... 91
Underwriting.......................................................................... 93
Legal Matters......................................................................... 95
Experts............................................................................... 95
Additional Information................................................................ 97
Index to Financial Statements......................................................... F-1
</TABLE>
---------------------
The Company intends to furnish to its stockholders annual reports
containing audited financial statements and an opinion thereon expressed by
independent certified public accountants and quarterly reports for the first
three quarters of each fiscal year containing unaudited interim financial
information.
3
<PAGE> 5
SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including that appearing in "Risk Factors" and the financial
statements, including the notes thereto, appearing elsewhere in this Prospectus.
Except where otherwise indicated, all share and per share data in this
Prospectus have been adjusted to reflect: (i) a three-for-four reverse split of
the Common Stock effected on October 14, 1997 and (ii) the conversion of all
outstanding shares of Series A Convertible Preferred Stock and Series B
Convertible Preferred Stock of the Company (together, the "Outstanding Preferred
Stock") into an aggregate of 4,620,531 shares of Common Stock effective upon
completion of the Offering. See "Description of Capital Stock" and "Principal
Stockholders." In addition, unless otherwise indicated, all information in this
Prospectus assumes no exercise of the Underwriters' over-allotment option.
References herein to fiscal years are references to the fiscal year of the
Company ended June 30 of the year specified. References herein to "the Company"
are references to the Company and its consolidated subsidiaries.
THE COMPANY
The Company was formed in April 1995 to develop senior care continuums
which meet the needs of upper middle, middle and moderate income populations in
non-urban, secondary markets. The Company considers upper middle, middle and
moderate income populations to consist of those individuals whose income and
assets enable them to afford senior living and care services at average daily
rates of $85, $75 and $65, respectively. The Company intends to utilize assisted
living facilities in selected markets as the primary entry point and service
platform to develop a care continuum (the "Balanced Care Continuum") consisting
of various health care and hospitality services, including, where appropriate,
rehabilitation therapies, physical, occupational and speech therapy, home health
care services on an intermittent basis, dementia and Alzheimer's services and
skilled/subacute care delivered in a skilled nursing setting, enabling residents
to age in place. The Company believes that non-urban, secondary markets are
underserved, highly fragmented and less prone to intense competition from larger
providers. The Company believes that these factors will enable it to establish a
leading position as a provider of a market differentiated, consumer preferred
continuum of senior care services in such markets. To achieve its goals, the
Company intends to: (i) provide a range of high quality, individualized senior
care services and programs, (ii) develop the Balanced Care Continuum, (iii)
focus on non-urban, secondary markets, (iv) continue developing the Company's
signature assisted living facilities, (v) pursue growth through selective
acquisitions, (vi) achieve the benefits of regional density by clustering, and
(vii) expand referral networks and strategic alliances.
After its formation, the Company raised its initial $2 million private
equity funding in September 1995. The Company obtained a $91 million financing
commitment for acquisitions and assisted living facility development projects
from a health care real estate investment trust ("REIT") in March 1996. A $12
million private equity funding followed which occurred in two stages in
September 1996 and March 1997. The Company has a limited operating history and
has incurred operating losses since its inception. See "Risk Factors -- Limited
Operating History; Losses."
Since its inception, the Company has grown principally through
acquisitions. The Company completed acquisitions of Foster Health Care
Affiliates ("Foster") in August 1996, Keystone Affiliates ("Keystone") in
January 1997, Heavenly Health Care, Inc. d/b/a Joe Clark Residential Care Homes
("Clark") in May and August 1997, Feltrop's Personal Care Home ("Feltrop") and
Butler Senior Care ("Butler") in October 1997, Triangle Retirement Services,
Inc. d/b/a Northridge Retirement Center ("Northridge") in December 1997 and
Gethsemane Affiliates ("Gethsemane") in January 1998 (collectively, the "Recent
Acquisitions"). The Company completed the divestiture of Long-Term Care
Pharmaceutical, Inc. (the "Pharmacy Divestiture") in October 1997. The Company
has also leased two facilities and has designed, developed and opened eight of
its signature assisted living facilities. As of January 2, 1998, the Company
operated a total of 32 assisted living facilities, 13 skilled nursing facilities
and four independent living facilities in Pennsylvania, Missouri, Arkansas,
North Carolina and Wisconsin, as well as a home health care agency in Missouri
and a rehabilitation therapy operation in Pennsylvania. Assuming completion of
the planned divestiture of the Company's assisted living
4
<PAGE> 6
facilities in Wisconsin, the Company will own nine and lease 33 senior living
and health care facilities in Pennsylvania, Missouri, Arkansas and North
Carolina with a capacity for 1,398 assisted living residents, 1,294 skilled
nursing patients and 154 independent living residents. See "Risk
Factors--Assisted Living Facility Development, Construction and Occupancy
Risks," "Risk Factors--Acquisition Risks; Difficulties of Integration,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Planned Divestiture," "Unaudited Pro Forma Financial Information"
and "Business--Operating Facilities." In addition to the eight signature
assisted living facilities opened to date, the Company anticipates opening two
additional signature assisted living facilities, which are currently under
construction, prior to February 1998.
The Company generates revenues from patient services, resident services and
other sources which consist primarily of development fees. Patient services
represent charges for room and board, therapies, pharmacy, medical supplies and
subacute services provided in its skilled nursing facilities as well as
rehabilitation services provided to assisted living facility residents. Resident
services represent revenues earned from assisted living residents for room and
board and ancillary charges. Development fees are earned for developing assisted
living facilities for REITs or other owners. The Company's pro forma revenues of
$71.6 million for the fiscal year ended June 30, 1997, consist of 73.4% patient
services, 24.6% resident services and 2.0% other revenue. For the quarter ended
September 30, 1997, pro forma revenues of $21.2 million included 69.1% from
patient services, 22.8% from resident services and 8.1% from other revenues. The
Company would have had a net loss for the year ended June 30, 1997 of $1,084,000
and net income of $24,000 for the three month period ended September 30, 1997 on
a pro forma basis. See "Unaudited Pro Forma Financial Information."
The Balanced Care Continuum is being developed to deliver consumer-focused
health care and hospitality services that balance seniors' desire for
independence with their evolving health care needs. The Company's philosophy
includes the belief that wellness and preventative therapy will strengthen
residents, improve their health and forestall the deterioration that generally
accompanies aging, thus extending their lives and lengths of stay in assisted
living facilities. The Company's wellness-oriented program, Balanced Gold(SM),
has been developed to predict and proactively address resident care needs,
including stabilizing and improving residents' cognitive, emotional and physical
well being. The Balanced Gold(SM) program is included in the Company's core
services package at each of its newly-developed signature assisted living
facilities, and the Company intends to implement all or part of the program at
its other assisted living facilities as appropriate. Preventative, restorative
and rehabilitative services are also expected to be made available to residents
through outpatient medical rehabilitation, home health care, programs for
residents with Alzheimer's and other services provided by the Company or by an
alliance partner or other third-party. By offering services and programs that
are intended to enable residents to stay healthier longer and prolong their stay
at assisted living facilities, the Company believes that its services and
programs will address the preferences and needs of seniors, while at the same
time forestalling the need for residents to move to a more costly long-term care
setting, such as a skilled nursing facility. As resident needs mandate migration
into a skilled nursing or subacute program, the Company believes that its
skilled nursing facilities will provide a transition for the resident with a
focus on demonstrated outcomes and cost effective care. The Company believes
that its approach to senior care will enable it to be a leading provider of a
range of senior care services in targeted non-urban, secondary markets. See
"Risk Factors--Implementation of Strategies."
The senior care industry is characterized by a wide range of living
accommodations and health care services. For those who are able to live in a
home setting, home health care and other limited services can be provided.
Community housing or retirement centers, which are commonly referred to as
independent living facilities, are also available to persons who need limited
assistance, such as with meal preparation, housekeeping and laundry. Assisted
living facilities are typically for those persons whose physical or cognitive
frailties have reached a stage where other living accommodations can no longer
provide the level of care required, but who do not yet need the continuous
medical attention provided in a skilled nursing facility. Generally, assisted
living facilities provide a combination of housing and 24-hour personal support
services designed to assist seniors with activities of daily living ("ADLs"),
which include bathing, eating, personal hygiene, grooming, ambulating and
dressing.
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<PAGE> 7
Certain assisted living facilities also offer higher levels of personal
assistance for residents with Alzheimer's disease or other forms of dementia.
Skilled nursing facilities provide care for those who need a minimum of three
hours of nursing per day.
The Company believes that the assisted living industry is evolving as the
preferred alternative to meet the growing demand for a cost effective setting
for those seniors who cannot live independently due to physical or cognitive
frailties but who do not require the more intensive medical attention provided
by a skilled nursing facility. According to the United States Bureau of the
Census, the portion of the United States population aged 75 and older is
expected to increase by approximately 29%, from approximately 13.0 million in
1990 to approximately 16.8 million by the year 2000, and the number of persons
aged 85 and older, as a segment of the United States population, is expected to
increase by approximately 43%, from approximately 3.0 million in 1990 to over
4.3 million by the year 2000. The United States Bureau of the Census data shows
that approximately 45% of persons aged 85 years and older, approximately 24% of
persons aged 80 to 84 and approximately 20% of persons aged 75 to 79 need
assistance with ADLs. In 1996, according to industry estimates, the assisted and
independent living industries generated approximately $12 to $14 billion in
revenues.
The Company believes that a number of factors will contribute to the
continued growth of the assisted living industry, including (i) consumer
preference, (ii) cost effectiveness, (iii) changing income and family dynamics,
(iv) demographics and (v) supply/demand imbalance.
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THE OFFERING
Common Stock Offered by the
Company............................. 7,000,000 shares
Common Stock to be Outstanding
after the Offering................ 15,645,343 shares(1)
Use of Proceeds..................... To repay outstanding long-term
indebtedness of $8,151,000 and
indebtedness of $29,473,000 incurred to
fund the purchase of four completed
acquisitions; the balance will be used
for general corporate purposes,
including working capital and possible
future acquisitions. See "Use of
Proceeds."
Proposed American Stock Exchange
Symbol.............................. BAL
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(1) Based on shares outstanding as of September 30, 1997. Excludes (i) 937,867
shares issuable upon the exercise of warrants to purchase Common Stock
outstanding as of such date at a weighted average exercise price of $0.62
per share, (ii) 1,013,425 shares issuable upon the exercise of outstanding
options to purchase shares of Common Stock granted under the Company's stock
option plan as of such date at a weighted average exercise price of $4.23
per share and (iii) 1,011,575 shares reserved for issuance upon the grant of
options under the Company's stock option plan as of such date. See
"Management -- Stock Incentive Plan."
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
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YEAR ENDED JUNE 30, THREE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------- -----------------------------------------
PRO FORMA PRO FORMA
AS AS
PRO FORMA ADJUSTED PRO FORMA ADJUSTED
1995(1) 1996 1997(2) 1997(3) 1997(4) 1996(2) 1997 1997(3) 1997(4)
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STATEMENT OF OPERATIONS DATA:
Revenues:
Patient services............. $ -- $ -- $41,616 $52,605 $52,605 $ 3,304 $14,496 $14,693 $14,693
Resident services............ -- 737 6,778 17,612 17,612 993 2,998 4,841 4,841
Other revenues............... -- 74 1,086 1,405 1,405 75 1,644 1,715 1,715
----- ----- ------- ------- ------- ------- ------- ------- -------
Total revenues......... -- 811 49,480 71,622 71,622 4,372 19,138 21,249 21,249
Loss from operations........... (10) (814) (3,787) (1,955) (1,955) (556) (526) (52) (52)
Net income (loss).............. $ (10) $ (909) $(4,492) $(3,461) $(1,084) $ (729) $ (657) $ (570) $ 24
Net income (loss) per
share(5)..................... $ -- $(0.30) $ (0.57) $ (0.44) $ (0.08) $ (0.09) $ (0.08) $ (0.07) $ --
Weighted average common and
common equivalent shares
outstanding(5)............... 2,921 3,070 7,936 7,936 13,407 7,936 7,962 7,962 13,433
Supplementary net loss per
share(5)..................... N/A N/A $ (0.42) N/A N/A N/A $ (0.05) N/A N/A
SELECTED OPERATING DATA:
Facilities operated at end of
period:
Assisted living.............. -- 8 18 25 25 8 20 26 26
Skilled nursing.............. -- -- 12 13 13 10 12 13 13
Independent living........... -- -- 4 4 4 3 4 4 4
Resident capacity at end of
period:
Assisted living.............. -- 213 707 1,144 1,144 225 782 1,194 1,194
Skilled nursing.............. -- -- 1,228 1,294 1,294 1,125 1,228 1,294 1,294
Independent living........... -- -- 120 140 140 92 127 147 147
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SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA--CONTINUED
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
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<CAPTION>
SEPTEMBER 30,
-------------------------------
PRO FORMA
JUNE 30, AS
------------------------- PRO FORMA ADJUSTED
1995 1996 1997 1997 1997(3) 1997(4)
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BALANCE SHEET DATA:
Working capital.............................................. $ 16 $ 727 $13,300 $10,966 $(15,611) $36,624
Total assets................................................. 17 7,292 33,017 31,624 63,993 86,714
Long-term debt, net of current portion....................... -- 5,043 8,177 8,354 8,354 244
Redeemable preferred stock................................... -- -- 13,249 13,875 13,875 --
Stockholders' equity......................................... 17 1,124 (1,444) (2,727) 169 74,389
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(1) From inception at April 17, 1995.
(2) Includes results of operations of Foster beginning September 1, 1996, the
results of operations of Keystone beginning February 1, 1997, and the
results of operations of Clark beginning May 16, 1997.
(3) Gives effect to the acquisitions of Foster, Keystone, Clark, Feltrop,
Butler, Northridge and Gethsemane and the Pharmacy Divestiture as if such
transactions had occurred on July 1, 1996 with respect to statement of
operations data for the fiscal year ended June 30, 1997 and for the quarter
ended September 30, 1997, and as of September 30, 1997 with respect to
balance sheet data. Such data are not necessarily indicative of the results
of operations that would have been achieved had such transactions occurred
on the dates indicated or that may be expected to occur in the future as a
result of such transactions.
(4) Gives effect to: (i) the sale by the Company of 7,000,000 shares of Common
Stock in the Offering (at an assumed initial public offering price of $9.50
per share and after deducting estimated underwriting discounts and
commissions and offering expenses) and the anticipated application of the
net proceeds therefrom and (ii) the conversion of all Outstanding Preferred
Stock into an aggregate of 4,620,531 shares of Common Stock, as if such
transactions had occurred on July 1, 1996 with respect to statement of
operations data for the fiscal year ended June 30, 1997 and for the quarter
ended September 30, 1997, and as of September 30, 1997 with respect to
balance sheet and selected operating data.
(5) See Note 1(q) to the Notes to Consolidated Financial Statements of the
Company. Supplementary loss per share data is only applicable to the latest
fiscal year and subsequent interim period.
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RISK FACTORS
In addition to the other information contained in this Prospectus, the
following risk factors should be considered in evaluating the Company and its
business before purchasing shares of the Common Stock offered hereby.
LIMITED OPERATING HISTORY; LOSSES
The Company was formed in April 1995 and has a limited operating history.
The Company incurred losses of $10,000, $909,000, $4,492,000 and $657,000 for
its fiscal years ended June 30, 1995 (from inception at April 17, 1995), 1996
and 1997 and the three-month period ended September 30, 1997, respectively, and
had an accumulated deficit of $5,411,000 and $6,068,000 as of June 30, 1997 and
September 30, 1997, respectively. The Company would have had a net loss for the
year ended June 30, 1997 of $1,084,000 and net income of $24,000 for the
three-month period ended September 30, 1997, on a pro forma basis after giving
effect to the Recent Acquisitions and the Pharmacy Divestiture as if such
transactions had occurred on July 1, 1996 and assuming completion of the
Offering. The Company's newly developed assisted living facilities are expected
to incur operating losses until they achieve targeted occupancy levels of
approximately 92%. The Company's signature assisted living facility models range
in size from 48 units to 106 units. The Company expects to achieve the targeted
occupancy level approximately 10 to 21 months after opening, depending on the
size of the facility. In addition, the Company's acquired operations, even if
profitable when acquired, may incur operating losses pending their integration
into the Company's business. Several of the facilities that have been acquired
by the Company experienced operating losses in fiscal 1997. See "Selected
Consolidated Financial and Operating Data," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Unaudited Pro
Forma Financial Information." Accordingly, there can be no assurance that the
Company will not continue to incur losses. Failure to achieve profitability
could have a material adverse effect on the Company's business, results of
operations and financial condition.
IMPLEMENTATION OF STRATEGIES
To date, the Company's growth has been primarily attributable to
acquisitions of assisted living and skilled nursing facilities. The Company's
first signature assisted living facility opened in May 1997. The Company has
opened seven additional signature assisted living facilities in September,
October, November and December 1997. The Company intends to develop a "Balanced
Care Continuum" through the development and selective acquisition of additional
assisted living facilities and, where appropriate, skilled nursing facilities,
as well as the provision of medical rehabilitation, home health care and skilled
nursing services. The Company expects that the number and types of facilities
and business operations that it owns, operates or manages will increase
substantially if the Company is successful in implementing its strategies.
Implementation of the Company's strategies will place a significant burden on
the Company's management resources and require the development, implementation
and continual enhancement of sufficient operational, resident care, financial
and management information systems. Successful implementation of the Company's
strategies will also depend on its ability to carry out its development plans
and to effect acquisitions and alliances and to attract, motivate and retain
management, professional, marketing and other key personnel. There can be no
assurance that its strategies can be implemented successfully or that sufficient
management resources and operational, resident or patient care, financial and
management information systems will be available. If the Company is unable to
effectively implement its strategies or to manage its growth, its business,
results of operations and financial condition could be materially and adversely
affected.
NEED FOR ADDITIONAL CAPITAL
The Company will need to obtain substantial additional capital resources to
fund its development and acquisition strategy as well as its working capital
needs to fund the growth in its operations. The estimated cost to complete the
facilities planned for development over the next three years is estimated to
range from $500 to $600 million which substantially exceeds the financial
resources
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currently available to the Company and the estimated net proceeds of the
Offering. Accordingly, the Company's future growth will depend on its ability to
obtain additional development, acquisition and working capital financing on
acceptable terms. The Company may seek additional financing through public or
private financing sources, including equity, debt or lease financing. Financings
effected through the issuance of securities could result in substantial dilution
to holders of Common Stock. There can be no assurance that adequate funding will
be available as needed or on terms acceptable to the Company. Insufficient
development, acquisition and working capital financial resources could result in
the Company delaying or eliminating all or some of its development projects and
acquisition plans or otherwise slowing the growth of its operations, which could
have a material adverse effect on the Company's business, results of operations
and financial condition. See "Use of Proceeds" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
ASSISTED LIVING FACILITY DEVELOPMENT, CONSTRUCTION AND OCCUPANCY RISKS
To date, the Company has developed, built and opened eight of its signature
assisted living facilities. The Company plans to develop approximately 75
Company-designed assisted living facilities with an aggregate capacity of
approximately 6,000 residents over the next three years. Achievement of these
development goals will depend upon a number of factors, including the Company's
ability to acquire suitable development sites at acceptable prices, to obtain
adequate financing on acceptable terms, to obtain zoning, land use, building,
occupancy, licensing and other required governmental permits on a timely basis,
and to control construction costs and project completion schedules. In addition,
numerous factors outside the Company's control will impact the successful
implementation of its development plans, including competition for site
acquisitions, shortages of, or the inability to obtain, labor or materials,
changes in applicable laws or regulations or in the method of applying such laws
and regulations, the failure of general contractors or subcontractors to perform
under their contracts, strikes and adverse weather. There can be no assurance
that the Company will not encounter delays in its development program or that it
will be successful in developing and constructing planned or additional assisted
living facilities or that completed facilities will achieve targeted occupancy
rates or otherwise be economically successful. The Company's inability to
achieve its development plans or the delay of those plans could have a material
adverse effect on its business, results of operations and financial condition.
ACQUISITION RISKS; DIFFICULTIES OF INTEGRATION
To date, the Company's growth has been primarily attributable to
acquisitions. The Company plans to continue to expand its business through
acquisitions. Pursuit of an acquisition strategy entails the risks inherent in
assessing the value, strengths, weaknesses, contingent or other liabilities and
potential profitability of acquisition candidates and in integrating the
operations of acquired businesses. The Company's success in effecting
acquisitions will depend on numerous factors, including its ability to identify
suitable acquisition candidates and negotiate acceptable purchase terms, the
competition for acquisitions, the Company's ability to finance acquisitions, and
the availability of appropriate government licenses and approvals. Successful
integration of acquired businesses will depend on the Company's ability to
effect any required changes in operations or personnel, and may require
renovation or other capital expenditures or the funding of unforeseen
liabilities. There can be no assurance that the Company will consummate future
acquisitions, that operations of acquired facilities can be successfully
integrated or that acquired operations will be profitable.
10
<PAGE> 12
SUBSTANTIAL FIXED CHARGES; PLEDGE OF ASSETS
The Company leases most of its facilities under long-term operating leases.
Lease and debt service obligations of the Company for fiscal 1997 aggregated
approximately $6,300,000. On a pro forma basis after giving effect to the Recent
Acquisitions as if such transactions had occurred on July 1, 1996, the Company
would have had aggregate lease and debt service obligations for fiscal 1997 of
approximately $8,800,000. Leases generally provide for rent increases and
require the Company to pay taxes, utilities and insurance obligations. The
Company intends to continue to finance the development of its properties through
a combination of operating leases and mortgage financing and thus expects that
the amount of its lease-related and debt service obligations will increase as
the Company pursues its growth strategy. As a result, an increasing portion of
the Company's cash flow will be devoted to lease payments and debt service,
which will reduce the amount of cash flow otherwise available to support the
Company's growth. Such leases and mortgages also typically contain rent coverage
and other financial covenants. There can be no assurance that the Company will
generate sufficient cash flow from operations to cover required lease and debt
service payments or that the financial performance of the Company or of
particular subsidiaries or facilities will be adequate to meet applicable
financial covenants. Any payment or other default could cause a lender to
foreclose upon any collateral securing the indebtedness or, in the case of an
operating lease, could terminate the lease, resulting in a loss of revenue and
asset value to the Company. In certain cases, indebtedness secured by real
estate of a facility is also secured by a pledge of the Company's operating
interest in the facility and, in certain other cases, indebtedness and facility
leases are secured by a pledge of stock of certain of the Company's
subsidiaries. Since most of the Company's leases and financing agreements
contain cross-default and cross-collateralization provisions, a default by the
Company on one of its payment obligations could adversely affect a significant
number of the Company's other obligations and properties. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
GOVERNMENT REGULATION
The health care industry is subject to extensive federal and state
regulation and frequent regulatory change. Federal, state and local laws
governing long-term care and other services provided to seniors address, among
other things, adequacy of medical care, distribution of pharmaceuticals,
operating policies, licensing and certificate of need requirements. Long-term
care facilities are also periodically inspected to assure continued compliance
with various standards and licensing requirements under state law. There are
currently no federal laws or regulations specifically defining or regulating
assisted living facilities. However, while many states have not yet enacted
specific assisted living laws or regulations, the Company's assisted living
facilities are subject to state regulation, licensing, approvals by state and
local health, welfare and social service agencies and other regulatory
authorities and compliance with building codes and environmental laws. In
addition, in several states, including Arkansas, Missouri, New Jersey and North
Carolina, certificate of need laws apply to assisted living facilities.
Certificate of need or similar laws require that a state agency approve certain
acquisitions and determine that a need exists for certain services, the addition
of beds and capital expenditure or other changes. North Carolina also recently
imposed a moratorium on the addition of adult care home beds, subject to certain
exceptions where binding commitments have been made to establish or expand an
adult care home facility. When the issuance or renewal of certificates of need
or other similar government approvals are required, changes in existing laws or
adoption of new laws could adversely affect the Company's development or
acquisition strategy and/or its operations if it is unable to obtain such
certificates of need approvals or renewals thereof. Also, health care providers
have been subjected to increasing scrutiny under anti-trust laws as the
integration and consolidation of the health care industry increases and affects
competition. Regulation of the assisted living industry is evolving. The Company
cannot predict the content of new regulations and their effect on its business.
There can be no assurance that regulatory or other legal developments will not
affect adversely the Company's business, results of operations and financial
condition.
11
<PAGE> 13
Federal and state anti-remuneration laws, such as the Medicare/Medicaid
anti-kickback law, govern certain financial arrangements (including employment
or service contracts) between health care providers and others who may be in a
position to refer or recommend patients or services to such providers. These
laws prohibit, among other things, certain direct and indirect payments that are
intended to induce the referral of patients to, the arranging for services by,
or the recommending of a particular provider of health care items or services.
The Medicare/Medicaid anti-kickback law has been broadly interpreted to apply to
certain contractual relationships between health care providers and sources of
patient referral. A number of similar state laws exist which often have not been
interpreted by courts or regulatory agencies. The Department of Health and Human
Services periodically issues "special fraud alerts" which address specific areas
of concern, including a June 1995 alert that related to fraudulent practices in
the provision of home health care. The alert identified fraudulent home health
care practices such as cost report fraud, billing for excessive services or
services not rendered, use of unlicensed or untrained staff and kickbacks.
Additionally, federal "Stark" legislation prohibits, with limited exceptions,
the referral of patients for certain services, including home health care
services, physical therapy and occupational therapy, by a physician to entities
in which they have an ownership or financial interest. Violation of these laws
can result in loss of licensure, civil and criminal penalties, and exclusion of
health care providers or suppliers from participating in the Medicare and
Medicaid programs. Additionally, the Balanced Budget Act of 1997 (the "Budget
Act"), signed into law on August 5, 1997, contains a number of anti-fraud
provisions designed to further fight abuse and enhance program integrity.
Furthermore, some states restrict certain business or fee relationships between
physicians and other providers of health care services. The Company believes
that its operations are in substantial compliance with the laws applicable to
Medicare and Medicaid providers, including anti-fraud and abuse provisions;
however, there can be no assurance that the administrative or judicial
interpretation of such laws or the regulations promulgated thereunder will not
in the future have a material adverse impact on the Company's operations or that
the Company will not be subject to an investigation which would require a
significant investment of time and manpower by the Company. Assisted living
facilities may be eligible to participate as Medicaid providers and receive
reimbursement through Medicaid waiver programs and managed care plans. If the
Company elects to become a Medicaid provider with respect to its assisted living
facilities, such entities would become subject to all of the requirements
applicable to Medicaid providers, including the anti-fraud and abuse
legislation. Although the Company believes that it complies with federal and
state anti-remuneration statutes at all times, there can be no assurance that
such laws will be interpreted in a manner consistent with the practices of the
Company.
The Americans with Disabilities Act of 1990 requires all places of public
accommodation to meet certain federal requirements related to access and use by
disabled persons. A number of additional federal, state and local laws exist
which also may require modifications to existing and planned properties to
create access to the properties by disabled persons. While the Company believes
that its properties comply with present requirements or are exempt therefrom, if
required changes involve a greater expenditure than anticipated or must be made
more quickly than anticipated, additional costs will be incurred by the Company.
Further legislation may impose additional burdens or restrictions relating to
access by disabled persons. The costs of complying with any new legislation
could be substantial.
HEALTH CARE REFORM
In addition to extensive existing government health care regulation, there
are many initiatives on the federal and state levels for comprehensive reforms
affecting the payment for and availability of health care services. It is not
clear what proposals, if any, will be adopted, or what effect such proposals
would have on the Company's business. Various aspects of these health care
proposals, such as reductions in funding of the Medicare and Medicaid programs,
potential changes in reimbursement regulations by the Health Care Financing
Administration ("HCFA"), enhanced pressure to contain health care costs by
Medicare, Medicaid and other payors and permitting greater state flexibility in
the administration of Medicaid, could adversely affect the Company's business,
results of operations and
12
<PAGE> 14
financial condition. The Company's skilled nursing facilities that participate
in applicable state Medicaid programs are subject to the risk of changes in
Medicaid reimbursement and payment delays resulting from budgetary shortfalls of
state Medicaid programs. The Company's current concentration of skilled nursing
facilities in Missouri and Pennsylvania exposes it to the risk of changes in
Medicaid reimbursement programs in those states. Medicare and Medicaid
certification is a critical factor contributing to the revenues and
profitability of long-term care facilities. Changes in certification and
participation requirements of the Medicare and Medicaid programs have
restricted, and are likely to further restrict, eligibility for reimbursement
under those programs. Failure to obtain and maintain Medicare and Medicaid
certification at the Company's long-term care facilities could result in a
significant loss of revenue. In addition, private payors, including managed care
payors, increasingly are demanding that providers accept discounted fees or
assume all or a portion of the financial risk for delivery of health care
services, including capitated payments where the provider is responsible, for a
fixed fee, for providing all services needed by certain patients. Capitated
payments can result in significant losses when patients require expensive
treatments not adequately covered by the capitated rate. Efforts to impose
reduced payments, greater discounts and more stringent cost controls by
government and other payors are expected to continue. The Company cannot predict
what reform proposals or reimbursement limitations will be adopted in the future
or the effect any such changes will have on its operations. There can be no
assurance that currently proposed legislation, future health care legislation,
reforms or changes in the administration or interpretation of governmental
health care programs or regulations will not have a material adverse effect on
the Company's business, results of operations and financial condition. Concern
about the potential effect of various proposed health care reforms has
contributed to volatility of prices of securities of health care companies and
could similarly affect the price of the Common Stock in the future.
GEOGRAPHIC CONCENTRATION OF BUSINESS
Currently, a substantial portion of the Company's facilities, including
facilities under construction and development and those comprising the Recent
Acquisitions are located in Pennsylvania and Missouri. Operating revenues
attributable to the Company's business in those states accounted for
approximately 95% and 97% of the Company's total operating revenues for the year
ended June 30, 1997 and the three month period ended September 30, 1997,
respectively, and, on a pro forma basis, after giving effect to the Recent
Acquisitions and the Pharmacy Divestiture, would have accounted for 94% and 93%
of total operating revenues for the fiscal year ended June 30, 1997 and the
three month period ended September 30, 1997, respectively. As part of its
strategy, the Company intends to continue to develop and acquire facilities in
Pennsylvania and Missouri, as well as other states. Until the Company's
operations become more geographically dispersed, the Company will be more
susceptible to downturns in local and regional economies and changes in state or
local regulation because such conditions and events could affect a relatively
high percentage of the total number of facilities currently in operation and
under development. As a result of such factors, there can be no assurance that
such geographic concentration will not have a material adverse effect on the
Company's business, results of operations or financial condition.
LIABILITY AND INSURANCE
Providing health care services involves an inherent risk of liability.
Participants in the senior living and health care industry are subject to
lawsuits alleging negligence or related legal theories, many of which may
involve large claims and significant legal costs. The Company currently
maintains liability insurance intended to cover medical malpractice, wrongful
death and other claims which it believes is adequate and in keeping with
industry practice. However, claims in excess of the Company's insurance coverage
or claims not covered by the Company's insurance (e.g., claims for punitive
damages) may arise. A successful claim against the Company not covered by or in
excess of the Company's insurance coverage could have a material adverse effect
on the Company's business, results of operations and financial condition. Claims
against the Company, regardless of their merit or eventual outcome, may also
have a material adverse effect upon the Company's reputation and its ability to
attract residents or
13
<PAGE> 15
expand its business. The Company's insurance policies generally must be renewed
annually, and there can be no assurance that the Company will be able to obtain
liability insurance coverage in the future on acceptable terms, if at all. See
"Business -- Liability and Insurance."
COMPETITION
The senior living and health care industry is highly competitive and the
Company believes that competition in its current and targeted markets will
continue to increase. The Company faces current and prospective competition for
residents and patients and for employees from numerous local, regional and
national providers of facility-based assisted living and long-term care, as well
as rehabilitation therapy and home-based health care providers. Many of the
Company's current and potential competitors are significantly larger and have
greater financial and marketing resources than the Company. There are currently
few regulatory and other barriers to entry into the assisted living industry. If
the development of new assisted living facilities surpasses the demand for such
facilities in particular markets, such markets could become saturated. The
Company also expects to compete for acquisitions of additional assisted living
and long-term care facilities and other senior health care operations.
Competition could limit the Company's ability to attract residents and patients
and expand its business and could have a material adverse effect on the
Company's business, results of operations and financial condition.
ENVIRONMENTAL RISKS
Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real property may be
held liable for the cost of removal or remediation of certain hazardous or toxic
substances that may be located on, in or under the property. These laws and
regulations may impose liability regardless of whether the owner or operator was
responsible for, or knew of, the presence of the hazardous or toxic substances.
The liability of the owner or operator and the cost of any required remediation
or removal of hazardous or toxic substances could be substantial and is
generally not limited. The presence of hazardous or toxic substances in or under
such properties could also subject the Company to lawsuits by or liability to
adjacent property owners, residents of the facilities or employees who are
injured by contamination. The presence of hazardous or toxic substances at any
property held or operated by the Company in the future could have a material
adverse effect on the Company's business, results of operations and financial
condition. In addition, if contamination is found, it could adversely affect the
Company's ability to continue to operate, to lease or to sell the contaminated
property or to use that property as collateral for future loans.
CONTROL BY CURRENT STOCKHOLDERS; CHANGE OF CONTROL
Upon completion of the Offering, current stockholders and holders of
options or warrants to acquire Common Stock, including the Company's executive
officers and directors and their affiliates, will own beneficially approximately
55.3% of the outstanding shares of Common Stock and the rights to purchase an
additional 7.5% of the outstanding shares of Common Stock through the exercise
of currently exercisable options and warrants (51.8% and 7.1%, respectively, if
the Underwriter's over-allotment option is exercised in full). As a result,
these stockholders, acting together, would be able to exert substantial
influence over the Company and matters requiring approval by the Company's
stockholders, including the election of the directors. The voting power of these
stockholders under certain circumstances could have the effect of delaying or
preventing a change in control of the Company.
In addition, the acquisition by one or more related persons of 50% or more
of the Common Stock constitutes a default under certain leases between the
Company and Meditrust and may result in the termination of such leases or the
exercise of other remedies thereunder by the lessor. See "Certain Transactions."
14
<PAGE> 16
DEPENDENCE ON KEY PERSONNEL
The Company's success to date has been significantly dependent on the
contributions of Brad E. Hollinger, the Company's Chairman of the Board,
President and Chief Executive Officer and one of its founders, and the loss of
his services could have a material adverse effect on the Company's business,
results of operations and financial condition. See "Management" for a discussion
of a Securities and Exchange Commission (the "Commission") proceeding with
respect to Mr. Hollinger. The Company's success also depends to a significant
extent upon a number of other key employees of the Company. The Company is party
to employment agreements with Mr. Hollinger and several other key employees. See
"Management -- Employment Agreements." The loss of the services of one or more
other key employees also could have a material adverse effect on the Company. In
addition, the Company believes that its future success will depend in part upon
its ability to attract and retain additional highly-skilled professional,
managerial, sales and marketing personnel. Competition for such personnel is
intense. There can be no assurance that the Company will be successful in
attracting and retaining the personnel that it requires for its business and
planned growth.
LABOR COSTS
The Company competes with various health care providers and other employers
for limited qualified and skilled personnel in the markets that it serves. The
Company expects that its labor costs will increase over time. Currently, none of
the Company's employees is represented by a labor union. If employees of the
Company were to unionize, the Company could incur labor costs higher than those
of competitors with non-union employees. The Company's business, results of
operations and financial condition could be adversely affected if the Company is
unable to control its labor costs.
NO PRIOR TRADING MARKET; POTENTIAL VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for the Common
Stock, and there can be no assurance that an active trading market for the
Common Stock will develop or, if one does develop, that it will be maintained.
The initial public offering price, which will be established by negotiations
between the Company and the representatives of the Underwriters, does not
reflect book value per share and may not be indicative of prices that will
prevail in the trading market for the Common Stock. The stock market has
experienced extreme price and volume fluctuations which have particularly
affected the market price for many health care companies and which have often
been unrelated to the operating performance of these companies. The trading
price of the Common Stock could also be subject to significant fluctuations in
response to variations in periodic operating results, changes in management,
future announcements concerning the Company, legislative or regulatory changes,
general trends in the industry and other events or factors. See
"Business -- Competition," "Business -- Government Regulation" and
"Underwriting."
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have outstanding
15,645,343 shares of Common Stock (16,695,343 shares outstanding if the
Underwriters' over-allotment option is exercised in full) including 9,817,867
shares of Common Stock owned beneficially by existing stockholders. The
7,000,000 shares of Common Stock to be sold pursuant to the Offering will be
eligible for sale without restriction under the Securities Act in the public
market after the completion of the Offering. Pursuant to an agreement with the
Company, the Company and certain existing stockholders of the Company owning
shares of Common Stock have agreed with the Underwriters that they will not
offer, sell or otherwise dispose of any shares of Common Stock (other than, in
the case of the Company, pursuant to its existing employee stock option plan)
for a period of 180 days after the date of this Prospectus without the prior
written consent of the representatives of the Underwriters. To the extent not
subject to the restrictions set forth above, 45,281 shares of Common Stock owned
by existing stockholders and, following the expiration or waiver of the
restrictions set forth above, 9,772,586 additional shares of Common Stock will
be immediately available for sale into the open market pursuant to Rule 144
under
15
<PAGE> 17
the Securities Act (including the volume and other limitations set forth
therein) and could impair the Company's future ability to raise capital through
an offering of its equity securities. In addition, certain of the Company's
existing stockholders have rights to demand registration of their shares under
the Securities Act, which registration would permit such stockholders to sell
their shares without being subject to the restrictions of Rule 144. See
"Description of Capital Stock" and "Shares Eligible for Future Sale."
DILUTION
The initial public offering price of the Common Stock is substantially more
than the net tangible book value per share of the Common Stock. Accordingly, the
purchasers of shares of Common Stock pursuant to the Offering will experience
immediate and substantial dilution in the net tangible book value per share of
Common Stock from the initial public offering price. The net tangible book value
dilution to new investors in the Offering will be $4.68 per share at an assumed
initial public offering price of $9.50 per share. See "Dilution."
ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Certificate of Incorporation and
By-laws and Delaware law could have the effect of making it more difficult for a
third party to acquire, or of discouraging a third party from attempting to
acquire, control of the Company. Such provisions could limit the price that
certain investors might be willing to pay in the future for shares of the
Company's Common Stock. Certain of such provisions allow the Company to issue
preferred stock with rights senior to those of the Common Stock and impose
various procedural and other requirements which could make it more difficult for
stockholders to effect certain corporate actions. See "Description of Capital
Stock." Furthermore, the Company has entered into certain leases which provide
that the Company will be in default under such leases in the event of a change
of control of the Company. See "--Control by Current Stockholders; Change of
Control."
16
<PAGE> 18
USE OF PROCEEDS
Based on an assumed initial public offering price of $9.50 per share (the
midpoint of the estimated range of initial public offering prices), the Company
will receive approximately $60,345,000 from the sale of shares of Common Stock
in the Offering after deduction of estimated underwriting discounts and
commissions and estimated expenses (approximately $69,621,750 if the
Underwriters' over-allotment option is exercised in full). The Company intends
to use the net proceeds from the Offering to repay outstanding long-term
indebtedness of $8,151,000 and indebtedness of $29,473,000 incurred to fund the
purchase of four completed acquisitions; the balance will be used for general
corporate purposes, including working capital and possible future acquisitions.
The long-term indebtedness is secured by mortgages amortized over 30 years, of
which $5,038,000 is due in May 2006 and bears interest at 10.6% per annum, and
the remainder is due in September 2008 and bears interest at 10.7% per annum.
The acquisition indebtedness to be repaid is due not later than March 31, 1998
and bears interest at prime rate plus 2.0%. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Planned
Divestiture." Pending their application, the net proceeds of the Offering will
be invested in short-term, interest bearing securities.
DIVIDEND POLICY
The Company has not paid or declared any dividends on its capital stock
since its inception. The Company anticipates that, following the completion of
the Offering, earnings will be retained for development of its business and will
not be distributed to stockholders as dividends. The declaration and payment by
the Company of any future dividends and the amount thereof will depend upon the
Company's results of operations, financial condition, cash requirements, future
prospects, limitations imposed by credit agreements or senior securities and
other factors deemed relevant by the Board of Directors. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and Note 7 of the Notes to
Consolidated Financial Statements of the Company.
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<PAGE> 19
CAPITALIZATION
The following table sets forth as of September 30, 1997: (i) the actual
capitalization of the Company, (ii) the pro forma capitalization of the Company
giving effect to the acquisitions of Feltrop, Butler, Northridge and Gethsemane
and the Pharmacy Divestiture and the borrowing of $29,473,000 under a bridge
financing arrangement with a health care REIT to fund the aggregate purchase
price of such acquisitions and estimated transaction costs, and (iii) the pro
forma capitalization of the Company as adjusted to reflect (a) the sale by the
Company of 7,000,000 shares of Common Stock in the Offering at an assumed
initial public offering price of $9.50 per share (the midpoint of the estimated
range of initial public offering prices) after deducting estimated underwriting
discounts and commissions and estimated offering expenses, and the application
of the net proceeds therefrom, and (b) the conversion of all Outstanding
Preferred Stock into an aggregate of 4,620,531 shares of Common Stock.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
-------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Short-term debt, including current portion of long-term
debt................................................... $ 98 $29,571 $ 57
------- ------- ---
Long-term debt, net of current portion................... $ 8,354 $ 8,354 $ 244
------- ------- ---
Redeemable preferred stock:
Series B Convertible Preferred Stock, par value $.001
per share; 5,009,750 shares authorized and
outstanding;
none outstanding on a pro forma as adjusted basis... 13,875 13,875 --
------- ------- ---
Stockholders' equity:
Preferred Stock, par value $.001 per share;
5,000,000 authorized; none outstanding.............. -- -- --
Series A Convertible Preferred Stock, par value $.001
per share; 1,150,958 shares authorized and
outstanding;
none outstanding on a pro forma as adjusted basis... 1 1 --
Common Stock, par value $.001 per share; 50,000,000
shares authorized; 4,024,812 shares outstanding;
4,024,812 shares outstanding on a pro forma basis;
15,645,343 shares outstanding on a pro forma as
adjusted basis(1)................................... 5 5 16
Additional paid-in capital............................. 3,335 3,335 77,545
Accumulated deficit.................................... (6,068) (3,172) (3,172)
------- ------- ---
Total stockholders' equity.......................... (2,727) 169 74,389
------- ------- ---
Total capitalization........................... $19,600 $51,969 $74,690
======= ======= ===
</TABLE>
- ------------
(1) Excludes as of September 30, 1997 (i) 937,867 shares issuable upon the
exercise of warrants to purchase Common Stock outstanding as of such date at
a weighted average exercise price of $0.62 per share, (ii) 1,013,425 shares
issuable upon the exercise of outstanding options to purchase shares of
Common Stock granted under the Company's stock option plan as of such date
at a weighted average exercise price of $4.23 per share and (iii) 1,011,575
shares reserved for issuance upon the grant of options under the Company's
stock option plan as of such date.
18
<PAGE> 20
DILUTION
The adjusted net tangible book value of the Company prior to the Offering
at September 30, 1997 was $8,858,000 or $1.02 per share of Common Stock.
Adjusted net tangible book value per share represents the amount of the
Company's total net tangible assets less total liabilities, divided by the
number of shares of Common Stock issued and outstanding at that date after
giving effect to the conversion of the Outstanding Preferred Stock. After giving
effect to the sale of the shares of Common Stock in the Offering (at an assumed
initial offering price of $9.50 per share) and before deducting anticipated
offering expenses and underwriting discounts and commissions, the adjusted pro
forma net tangible book value of the Company at September 30, 1997 would have
been $75,358,000 or $4.82 per share, representing an immediate $4.68 per share
dilution to new investors purchasing shares at the initial public offering
price. The following table illustrates such per share dilution.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............................ $ 9.50
Historical tangible book value per share......................... $(0.58)
Increase per share attributable to conversion of Outstanding
Preferred Stock............................................... 1.60
-------
Adjusted net tangible book value prior to the Offering........... 1.02
Increase per share attributable to new investors................. 3.80
-------
Adjusted pro forma net tangible book value per share after the Offering.... 4.82
-------
Dilution per share to new investors (1).................................... $ 4.68
=======
</TABLE>
- ------------
(1) Dilution is determined by subtracting pro forma net tangible book value per
share after giving effect to the Offering from the initial public offering
price paid by a new investor for a share of Common Stock. The foregoing
calculation assumes no exercise of any outstanding warrants or options to
purchase shares of Common Stock. As of September 30, 1997, there were
outstanding warrants to purchase 937,867 shares of Common Stock at a
weighted average exercise price of $0.62 per share and options to purchase
1,013,425 shares of Common Stock at a weighted average exercise price of
$4.23 per share. See "Management -- Stock Incentive Plan." If all the
warrants and options outstanding as of such date were to be exercised
immediately, dilution per share to new investors would be $4.94.
The following table sets forth, on a pro forma basis as of September 30,
1997, the number of shares of Common Stock purchased from the Company, the total
consideration paid and the average price per share paid by existing stockholders
and by new investors (assuming the sale by the Company of 7,000,000 shares in
the Offering at an assumed initial public offering price of $9.50 per share),
before deduction of underwriting discounts and commissions and offering
expenses:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
---------------------------- -----------------------------
PERCENT AFTER PERCENT AFTER AVERAGE PRICE
NUMBER OFFERING AMOUNT OFFERING PER SHARE
---------- ------------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Existing
stockholders....... 8,645,343 55.3% $14,668,000 18.1% $ 1.70
New investors........ 7,000,000 44.7 66,500,000 81.9 9.50
---------- ----- ----------- -----
Total.............. 15,645,343 100.0% $81,168,000 100.0%
========== ===== =========== =====
</TABLE>
19
<PAGE> 21
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
The selected consolidated "Statement of Operations Data" and "Balance Sheet
Data" presented below as of June 30, 1997 and 1996 and for the years then ended
and the period April 17, 1995 (date of inception) to June 30, 1995, have been
derived from the consolidated financial statements of the Company, which have
been audited by KPMG Peat Marwick LLP, independent certified public accountants
and which are included elsewhere in the Prospectus. The "Balance Sheet Data" as
of June 30, 1995 are derived from audited financial statements not included in
this Prospectus. The selected consolidated financial data as of September 30,
1997 and for the three months ended September 30, 1996 and 1997 are derived from
unaudited consolidated financial statements of the Company which, in the opinion
of management of the Company, include all adjustments, consisting of normal,
recurring accruals, necessary for a fair presentation of the consolidated
results of operations and financial position of the Company for such periods.
Operating results for the three-month period ended September 30, 1997 are not
necessarily indicative of the results that may be expected for any other interim
period or for the full year. The selected financial data set forth below should
be read in conjunction with the Consolidated Financial Statements of the Company
and the unaudited pro forma financial information, together with the respective
notes thereto, included elsewhere in this Prospectus. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Unaudited Pro Forma Financial Information."
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------- -------------------------------------------
PRO FORMA PRO FORMA
PRO FORMA AS ADJUSTED PRO FORMA AS ADJUSTED
1995(1) 1996 1997(2) 1997(3) 1997(4) 1996(2) 1997 1997(3) 1997(4)
------- ------ ------- --------- ----------- ------- ------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Patient services............ $ -- $ -- $41,616 $52,605 $52,605 $ 3,304 $14,496 $14,693 $14,693
Resident services........... -- 737 6,778 17,612 17,612 993 2,998 4,841 4,841
Other revenues.............. -- 74 1,086 1,405 1,405 75 1,644 1,715 1,715
----- ------ ------- ------- -------
Total revenues........ -- 811 49,480 71,622 71,622 4,372 19,138 21,249 21,249
----- ------ ------- ------- -------
Operating Expenses:
Facility operating expenses:
Salaries, wages and
benefits................ -- 320 19,186 28,825 28,825 1,851 7,305 8,412 8,412
Other operating
expenses................ -- 179 20,727 27,988 27,988 1,765 7,187 7,487 7,487
General and administrative
expense................... 10 1,000 5,653 5,653 5,653 747 2,679 2,679 2,679
Lease expense............... -- 77 5,417 7,810 7,810 475 2,212 2,212 2,212
Depreciation and
amortization expense...... -- 49 693 1,710 1,710 90 281 511 511
Write-down of long-lived
assets.................... -- -- 1,591 1,591 1,591 -- -- -- --
----- ------ ------- ------- -------
Total operating
expenses............ 10 1,625 53,267 73,577 73,577 4,928 19,664 21,301 21,301
----- ------ ------- ------- -------
Loss from operations.......... (10) (814) (3,787) (1,955) (1,955) (556) (526) (52) (52)
Other income (expense):
Interest income............. -- 13 265 265 265 13 113 113 113
Interest expense............ -- (102) (917) (4,079) (117) (183) (237) (1,011) (21)
----- ------ ------- ------- -------
Income (loss) before income
taxes....................... (10) (903) (4,439) (5,769) (1,807) (726) (650) (950) 40
Provision (benefit) for income
taxes....................... -- 6 53 (2,308) (723) 3 7 (380) 16
----- ------ ------- ------- -------
Net income (loss)............. $ (10) $ (909) $(4,492) $(3,461) $(1,084) $ (729) $ (657) $ (570) $ 24
===== ====== ======= ======= =======
Net income (loss) per
share(5).................... -- $(0.30) $ (0.57) $ (0.44) $ (0.08) $ (0.09) $ (0.08) $ (0.07) $ --
===== ====== ======= ======= =======
Weighted average common and
common equivalent shares
outstanding(5).............. 2,921 3,070 7,936 7,936 13,407 7,936 7,962 7,962 13,433
===== ====== ======= ======= =======
Supplementary net loss per
share(5).................... $ N/A $ N/A $ (0.42) $ N/A $ N/A $ N/A $ (0.05) $ N/A $ N/A
===== ====== ======= ======= =======
</TABLE>
20
<PAGE> 22
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA -- CONTINUED
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------- -------------------------------------------
PRO FORMA PRO FORMA
PRO FORMA AS ADJUSTED PRO FORMA AS ADJUSTED
1995(1) 1996 1997(2) 1997(3) 1997(4) 1996(2) 1997 1997(3) 1997(4)
------- ------ ------- --------- ----------- ------- ------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Facilities operated at end of
period:
Assisted living............. -- 8 18 25 25 8 20 26 26
Skilled nursing............. -- -- 12 13 13 10 12 13 13
Independent living.......... -- -- 4 4 4 3 4 4 4
Resident capacity at end of
period:
Assisted living............. -- 213 707 1,144 1,144 225 782 1,194 1,194
Skilled nursing............. -- -- 1,228 1,294 1,294 1,125 1,228 1,294 1,294
Independent living.......... -- -- 120 140 140 92 127 147 147
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------------------
JUNE 30, PRO FORMA
-------------------------- PRO FORMA AS ADJUSTED
1995 1996 1997 1997 1997(3) 1997(4)
------- ------ ------- ------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.............................................. $ 16 $ 727 $13,300 $10,966 $(15,611) $36,624
Total assets................................................. 17 7,292 33,017 31,624 63,993 86,714
Long-term debt, net of current portion....................... -- 5,043 8,177 8,354 8,354 244
Redeemable preferred stock................................... -- -- 13,249 13,875 13,875 --
Stockholders' equity......................................... 17 1,124 (1,444) (2,727) 169 74,389
</TABLE>
- ------------
(1) From inception at April 17, 1995.
(2) Includes results of operations of Foster beginning September 1, 1996, the
results of operations of Keystone beginning February 1, 1997, and the
results of operations of Clark beginning May 16, 1997.
(3) Gives effect to the acquisitions of Foster, Keystone, Clark, Feltrop,
Butler, Northridge and Gethsemane and the Pharmacy Divestiture as if such
transactions had occurred on July 1, 1996 with respect to statement of
operations data for the fiscal year ended June 30, 1997 and for the quarter
ended September 30, 1997, and as of September 30, 1997 with respect to
balance sheet data. Such data is not necessarily indicative of the results
of operations that would have been achieved had such transactions occurred
on the dates indicated or that may be expected to occur in the future as a
result of such transactions.
(4) Gives effect to (i) the sale by the Company of 7,000,000 shares of Common
Stock in the Offering (at an assumed initial public offering price of $9.50
per share and after deducting estimated underwriting discounts and
commissions and offering expenses) and the anticipated application of the
net proceeds therefrom and (ii) the conversion of all outstanding Preferred
Stock into an aggregate of 4,620,531 shares of Common Stock, as if such
transactions had occurred on July 1, 1996 with respect to statement of
operations data for the fiscal year ended June 30, 1997 and for the quarter
ended September 30, 1997, and as of September 30, 1997 with respect to
balance sheet and selected operating data.
(5) See Note 1(q) to the Notes to Consolidated Financial Statements of the
Company. Supplementary loss per share data is only applicable to the latest
fiscal year and subsequent interim period.
21
<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Consolidated Financial Data" and the Consolidated Financial Statements
of the Company and related Notes thereto included elsewhere in the Prospectus.
This Prospectus contains, in addition to historical information, forward-looking
statements that involve risks and uncertainties. The Company's actual results
could differ materially. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in "Risk Factors"
as well as those discussed elsewhere in this Prospectus.
COMPANY OVERVIEW
The Company was formed in April 1995 to develop senior care continuums
which meet the needs of upper middle, middle and moderate income populations in
non-urban, secondary markets. The Company intends to utilize assisted living
facilities in selected markets as the primary entry point and service platform
to develop the Balanced Care Continuum consisting of various health care and
hospitality services, including, where appropriate, rehabilitation therapies,
physical, occupational and speech therapy, home health care services on an
intermittent basis, dementia and Alzheimer's services and skilled/subacute care
delivered in a skilled nursing setting, enabling residents to age in place.
Since its inception, the Company has grown primarily through acquisitions.
The Company completed the Recent Acquisitions of Foster in August 1996, Keystone
in January 1997, Clark in May and August 1997, Feltrop and Butler in October
1997, Northridge in December 1997 and Gethsemane in January 1998. The Company
completed the Pharmacy Divestiture in October 1997. The Company has also leased
two facilities and has designed, developed and opened eight of its signature
assisted living facilities. As of January 2, 1998, the Company operated a total
of 32 assisted living facilities, 13 skilled nursing facilities and four
independent living facilities in Pennsylvania, Missouri, Arkansas, North
Carolina and Wisconsin, as well as a home health care agency in Missouri and a
rehabilitation therapy operation in Pennsylvania. Assuming completion of the
planned divestiture of the Company's assisted living facilities in Wisconsin,
the Company will own nine and lease 33 senior living and health care facilities
in Pennsylvania, Missouri, Arkansas and North Carolina with a capacity for 1,398
assisted living residents, 1,294 skilled nursing patients and 154 independent
living residents. See "-- Recent Acquisitions" and "Planned Divestiture" and
"Unaudited Pro Forma Financial Information." In addition to the eight signature
assisted living facilities opened to date by the Company, the Company
anticipates opening two additional assisted living facilities, which are
currently under construction, prior to February 1998.
Over the next three years, the Company plans to develop approximately 75 of
its signature assisted living facilities in targeted secondary markets creating
additional capacity of approximately 6,000 residents. The Company estimates that
the cost to complete these signature assisted living facilities will be between
$500 and $600 million. In addition, the Company expects that its need for
financing to fund future acquisitions will be significant, although the timing
and size of any future acquisitions cannot be predicted.
In order to achieve its growth plans, the Company will be required to
obtain substantial additional financing. The Company anticipates that it will
use a combination of the net proceeds to the Company from the Offering, existing
lease financing commitments and other arrangements with health care REITs, a
working capital line of credit, future equity and debt financing and cash
generated from operations to fund its development and acquisition activities.
The estimated costs over the next three years of the Company's planned
development and expansion are significantly in excess of estimated future cash
flows from operations, expected proceeds from the Offering and existing REIT and
other financing arrangements. The Company currently estimates that the net
proceeds from the Offering, together with its existing financing arrangements,
will be sufficient to fund its development and
22
<PAGE> 24
acquisition program for the next 12 to 18 months. There can be no assurance that
any additional financing needed to fund the Company's growth plans will be
available or that the Company will not require or seek additional financing
prior to 12 months after the completion of the Offering. See "-- Liquidity and
Capital Resources" and "Risk Factors -- Need for Additional Capital."
Historically, the Company has generated revenues from three primary
sources: patient services, resident services and other revenues. Patient
services revenues include charges for room and board, rehabilitation therapies,
pharmacy, medical supplies, subacute care and other programs provided to
patients in skilled nursing facilities as well as rehabilitation services
provided to assisted living facility residents. Revenues from Medicare, Medicaid
and private pay and other sources represented 38%, 38% and 24%, respectively, of
patient services revenues for the fiscal year ended June 30, 1997. Resident
services include all revenues earned from services provided to assisted living
facility residents except for therapies and home health care services provided
by the Company's licensed agencies which are included in patient services
revenues. Other revenues include development fees, management fees and
miscellaneous other revenues. Development fees are earned for developing
assisted living facilities for REITs. As the Company implements its business
plan, management believes that the mix of the Company's revenues may change and
that revenues from assisted living resident services and development activities
will increase as a percentage of total revenues.
The Company classifies its operating expenses into the following
categories: (i) facility operating expenses which include labor, food,
marketing, rehabilitation therapy costs, and other direct facility expenses;
(ii) general and administrative expenses, which primarily include corporate
office expenses, regional office expenses, development and pre-opening expenses
and other overhead costs; (iii) lease expense, which includes rent for the
facilities operated by the Company as well as corporate office and other rent;
and (iv) depreciation and amortization. In anticipation of its planned growth,
the Company has made significant investments in its infrastructure during fiscal
1997 and early fiscal 1998. These investments include attracting management and
regional personnel and installing information systems to support and manage
growth.
23
<PAGE> 25
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain data as
a percentage of total revenue:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED JUNE 30,
------------------- --------------------
1996 1997 1996 1997
----- ----- ------ -----
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue(1)................................... 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Facility operating expenses...................... 82.7 75.7 61.5 80.8
General and administrative expense............... 17.1 14.0 123.4 11.4
Lease expense.................................... 10.9 11.6 9.5 10.9
Depreciation and amortization expense............ 2.0 1.5 6.0 1.4
Write-down of long-lived assets.................. -- -- -- 3.2
------ ----- ------ -----
Loss from operations............................... (12.7) (2.8) (100.4) (7.7)
Other income (expense):
Interest income.................................. 0.3 0.6 1.6 0.5
Interest expense................................. (4.2) (1.2) (12.5) (1.8)
------ ----- ------ -----
Loss before income taxes........................... (16.6) (3.4) (111.3) (9.0)
Provision for income taxes......................... (0.1) -- (0.8) (0.1)
------ ----- ------ -----
Net loss........................................... (16.7) (3.4) (112.1) (9.1)
====== ===== ====== =====
</TABLE>
- ------------
(1) The Company had no revenues for the period from April 17, 1995 (date of
inception) through June 30, 1995.
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1996
Total Revenue. Total revenue for the three months ended September 30, 1997
increased by $14,766,000 to $19,138,000 compared to $4,372,000 for the three
months ended September 30, 1996. This increase was due to the significant
acquisitions and new assisted living facility openings since the first quarter
of fiscal 1997. Patient service revenues increased to $14,496,000 for the 1997
period from $3,304,000 for the comparable 1996 period. The 1996 period contained
only one month of revenue from the Foster operation, which was acquired on
August 31, 1996, while the 1997 period contained a full three months of revenue
from both the Foster and Keystone operations. Resident services revenue
increased by $2,005,000 due to the increase in assisted and independent living
resident capacity from 317 at September 30, 1996 to 909 at September 30, 1997.
Other revenues grew from $75,000 for the 1996 period to $1,644,000 for the 1997
period due primarily to development fees of $1,626,000 earned on projects under
development for other entities.
Operating Expenses. Total operating expenses increased by $14,736,000 to
$19,664,000 for the three months ended September 30, 1997 from $4,928,000 for
the three months ended September 30, 1996. The increase in total operating
expenses in the 1997 period is attributable primarily to the growth in facility
operating expenses, the administrative expenditures related to building the
Company's infrastructure to support and manage its growth, lease expense and
depreciation.
Facility operating expenses for the 1997 period increased by $10,876,000 to
$14,492,000 from $3,616,000 for the 1996 period. As a percentage of total
revenue, facility operating expenses were 75.7% for the 1997 period and 82.7%
for the 1996 period. The 1996 period contained only one month of facility
operating expenses from the Foster operation, while the 1997 period contained a
full quarter of
24
<PAGE> 26
facility operating expenses of both the Foster and Keystone operations, as well
as facility operating expenses from the Company's developed assisted living
facilities.
General and administrative expenses increased by $1,932,000 to $2,679,000
for the three months ended September 30, 1997 from $747,000 for the three months
ended September 30, 1996. As a percentage of total revenue, these expenses
decreased to 14.0% for the 1997 period from 17.1% for the 1996 period. Of the
$1,932,000 increase in general and administrative expenses in 1997,
approximately $1,259,000 resulted from labor costs relating to the addition of
new corporate and regional office staff to plan and manage the Company's actual
and anticipated growth. The remaining $673,000 increase was attributable to
increased marketing, consulting, accounting and rent due to expansion of
existing corporate office space and other general expenses related to the
Company's growth.
Lease expense increased to $2,212,000 for the three months ended September
30, 1997 from $475,000 for the three months ended September 30, 1996, an
increase of $1,737,000. This increase is the result of facility operating leases
related to the acquisitions made during and subsequent to the first quarter of
fiscal 1997. As a percentage of total revenue, these expenses totaled to 11.6%
for the 1997 period and 10.9% for the 1996 period.
Depreciation and amortization increased by $191,000 to $281,000 for the
three months ended September 30, 1997 from $90,000 for the three months ended
September 30, 1996. This increase resulted from the additional depreciation and
amortization on assets acquired and goodwill recorded as a result of
acquisitions.
Other Income (Expense). Interest income increased by $100,000 to $113,000
for the three months ended September 30, 1997 from $13,000 for the three months
ended September 30, 1996. The increase is attributable to the higher level of
invested funds due to receipt of proceeds from the sale of shares of Series B
Convertible Preferred Stock in September 1996 and April 1997. Interest expense
increased by $54,000 to $237,000 for the three months ended September 30, 1997
from $183,000 for the three months ended September 30, 1996. This was due to the
mortgage financing of $3,115,000 incurred in connection with the acquisition of
two skilled nursing facilities in Missouri on August 31, 1997.
Provision for Income Taxes. Income tax expense of $7,000 for the 1997
period and $3,000 for the 1996 period resulted from taxable income reported on
individual state corporate tax returns in states that do not permit consolidated
filings.
Net Loss. The Company's net loss decreased by $72,000 to $657,000 for the
three months ended September 30, 1997 from $729,000 for the three months ended
September 30, 1996, a decrease of $72,000 or 10%. This decrease results mainly
from the Company's growth, which allows the leveraging of fixed costs over a
larger revenue base.
FISCAL YEAR ENDED JUNE 30, 1997 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1996
Total Revenue. Total revenue for fiscal 1997 increased by $48,669,000 to
$49,480,000 from $811,000 in fiscal 1996 due mainly to the significant
acquisitions made during fiscal 1997. Patient service revenues were $41,616,000
in fiscal 1997 due to the increase in skilled nursing bed capacity from zero to
1,228 resulting from the Foster and Keystone acquisitions. Resident services
revenue increased by $6,041,000 due to the increase in assisted and independent
living resident capacity from 213 to 827 at June 30, 1996 and 1997,
respectively. Other revenues grew from $74,000 in fiscal 1996 to $1,086,000 in
fiscal 1997 due primarily to development fees of $1,015,000 earned on 14
facilities under construction for health care REITs.
Operating Expenses. Total operating expenses for fiscal 1997 increased by
$51,642,000 to $53,267,000 from $1,625,000 in fiscal 1996. As a percentage of
total revenue, total operating expenses
25
<PAGE> 27
decreased to 107.7% in fiscal 1997 from 200.4% in fiscal 1996. The increase in
total operating expenses in fiscal 1997 is attributable primarily to the growth
in facility operating expenses, the administrative expenditures related to
building the Company's infrastructure to support and manage its growth, lease
expense, depreciation and the write-down of long-lived assets.
Facility operating expenses for fiscal 1997 increased by $39,414,000 to
$39,913,000 (including $19,186,000 of salaries, wages and benefits) from
$499,000 in fiscal 1996. As a percentage of total revenue, facility operating
expenses increased to 80.8% in fiscal 1997 from 61.5% in fiscal 1996. Facility
operating expenses related to existing operations increased by $2,708,000 as
these operations were owned by the Company for a full year in fiscal 1997. The
remainder of the facility operating expense increase was attributable to the
operations acquired during fiscal 1997.
General and administrative expenses for fiscal 1997 increased by $4,653,000
to $5,653,000 from $1,000,000 in fiscal 1996. As a percentage of total revenue,
these expenses decreased to 11.4% in fiscal 1997 from 123.4% in fiscal 1996 as a
result of the Company's minimal total revenues in fiscal 1996. Of the $4,653,000
increase in general and administrative expenses in fiscal 1997, approximately
$3,164,000 resulted from labor and travel costs relating to the addition of new
corporate and regional office staff to plan and manage the Company's actual and
anticipated growth and $1,489,000 was attributable to marketing, consulting,
development, pre-opening, accounting and rent due to expansion of existing
corporate office space and other general expenses related to the Company's
growth.
Lease expense for fiscal 1997 increased by $5,340,000 to $5,417,000 from
$77,000 in fiscal 1996. As a percentage of total revenue, these expenses
increased to 10.9% in fiscal 1997 from 9.5% in fiscal 1996 as a result of the
facility operating leases related to the acquisitions made during fiscal 1997.
Depreciation and amortization expense for fiscal 1997 increased by $644,000
to $693,000 from $49,000 in fiscal 1996. Of this increase, $413,000 resulted
from a full year of depreciation on the seven owned Wisconsin assisted living
facilities acquired in May 1996 and the two owned Missouri skilled nursing
facilities acquired in August 1996 while $231,000 was due to goodwill
amortization and deferred financing and leasing cost amortization relating
primarily to the Foster and Keystone acquisitions.
In June 1997, management determined that the Wisconsin market does not
provide adequate opportunity to achieve the operational efficiencies necessary
to operate profitably. As a result, the Company committed to a plan for the
disposal of its Wisconsin assisted living facilities. As a result, a non-cash
charge of $1,591,000 has been recorded to write these assets down to their
estimated fair value of approximately $3,150,000 based on the present value of
expected discounted future cash flows less estimated costs of disposal. For the
year ended June 30, 1997, the Wisconsin operations experienced a pretax loss of
$381,000 before the asset write-down. The Company plans to dispose of its
Wisconsin facilities as soon as practicable.
The Company also decided in June 1997 to approach national pharmacy
providers about acquiring the Pharmacy. Management decided to sell the Pharmacy
in order to focus on its assisted living and skilled nursing operations. In
addition, the Pharmacy Divestiture provided some of the working capital needed
to sustain the Company's continued growth.
Other Income (Expense). Interest income for fiscal 1997 increased by
$252,000 to $265,000 from $13,000 in fiscal 1996. The increase is attributable
to the higher level of invested funds due to receipt of proceeds from the sale
of shares of Series B Convertible Preferred Stock in September 1996 and April
1997. Interest expense for fiscal 1997 increased by $815,000 to $917,000 from
$102,000 in fiscal 1996 due primarily to mortgage financing of $5,046,000
incurred in connection with the acquisition of assisted living facilities in
Wisconsin and $3,115,000 incurred in connection with the acquisition of two
skilled nursing facilities in Missouri.
Provision for Income Taxes. Income tax expense in fiscal 1997 of $53,000
resulted from taxable income reported on individual state corporate tax returns
in states that do not permit consolidated filings.
26
<PAGE> 28
Net Loss. Net loss for fiscal 1997 increased by $3,583,000 to $4,492,000
from $909,000 in fiscal 1996. This increase is primarily attributable to the
write-down of long-lived assets of $1,591,000 in respect of the Company's
Wisconsin assisted living facilities and the increased general and
administrative expenses incurred to plan and manage the Company's actual and
anticipated growth.
LIQUIDITY AND CAPITAL RESOURCES
General
The Company completed the sale of the assets of the Pharmacy for net
proceeds of approximately $4,700,000 in October 1997. Due to the Company's NOL
carryforwards and other book/tax timing differences, no federal taxes are
expected to be paid on the gain realized.
The Company has recently entered into non-binding letters of intent
aggregating $365 million with the following health care REITs and others (the
"Owners"): (i) Meditrust for $150 million, (ii) Nationwide Health Properties,
Inc. ("NHP") for $100 million, (iii) Capstone Capital Corporation ("Capstone")
for $50 million, (iv) American Health Properties, Inc. ("AHP") for $35 million
and (v) Ocwen Financial Corporation ("Ocwen") for $30 million. These letters of
intent represent arrangements whereby the REITs will fund development projects
or acquisitions and the Company will develop assisted living facilities for the
Owners or the Owners will acquire existing facilities identified by the Company
and lease them to the Company. Initial lease rates under these arrangements are
expected to range from 3.2% to 3.4% over the 10-year Treasury rate. Specific
development projects and acquisitions require approval of the REITs prior to the
financing of a transaction. See "Business--Development."
The Company's lease arrangements are generally for initial terms of 10 to
15 years with aggregate renewal option periods ranging from 15 to 25 years and
provide for contractually fixed rent plus additional rent, subject to certain
limits. The additional rent is capped at 2% or 3% of the prior year's total rent
depending on the REIT involved and is based on either the annual increase in
revenues of the facility or the increase in the consumer price index. The
Company's lease arrangements generally contain a purchase option at the end of
the initial lease term and each renewal term to purchase the facility at its
fair market value. Certain of the Company's lease arrangements limit the
Company's right to operate other senior care facilities within a ten mile radius
of the leased facility during the term of the lease and for a period of up to
five years thereafter.
The Company leases most of its facilities under long-term operating leases.
Lease obligations for fiscal 1998 are approximately $8,200,000. The Company's
financing documents contain financial covenants and other restrictions which:
(i) require the Company to meet certain financial tests and maintain certain
escrows of funds, (ii) limit, among other things, the ability of the Company and
certain of its subsidiaries to borrow additional funds, dispose of assets and
engage in mergers or other business combinations, (iii) prohibit the Company
from operating competing facilities within a ten mile radius of the leased or
mortgaged facilities.
The Company has obtained a commitment from a bank for a $10,000,000 line of
credit to be secured by the accounts receivable of its skilled nursing
operations. The line of credit will be for a term of three years and outstanding
borrowings will bear interest at LIBOR plus 2.75% or prime rate plus 0.5%. The
Company will be able to draw on this line of credit to the extent of its
eligible receivables, which were approximately $3,500,000 at September 30, 1997.
Borrowings under the line of credit are expected to be available in January
1998.
The Company plans to use the net proceeds from the Offering to repay
$8,151,000 of outstanding long-term debt, indebtedness of $29,473,000 incurred
to fund the purchase of the assets and business of Feltrop, Butler, Northridge
and Gethsemane. The remainder of the net proceeds will be used for working
capital and other general corporate purposes.
The estimated cost to complete and achieve stabilized occupancy of the
approximately 75 new signature assisted living facilities targeted for
completion over the next three years, is between
27
<PAGE> 29
$500,000,000 and $600,000,000 which substantially exceeds the net proceeds of
the Offering (after the repayment of indebtedness and funding of the Pending
Acquisition) and existing working capital and financing arrangements. The
Company currently estimates that the net proceeds of the Offering, together with
its existing financing commitments, will be sufficient to fund its development
and acquisition programs for the next 12 to 18 months. There can be no assurance
that any additional financing needed to fund the Company's growth plans will be
available or that the Company will not require or seek additional financing
prior to 12 months after the completion of the Offering. See "Risk
Factors -- Need for Additional Capital."
The Company's future results of operations and financial condition may be
affected by a number of factors including, without limitation, the ability of
the Company to successfully implement its strategies; the need for substantial
additional capital resources to fund the Company's development and acquisition
strategy as well as its working capital needs to fund the growth in its
operations; the ability of the Company to achieve its assisted living facility
development goals; the risks associated with construction and occupancy; the
ability of the Company to effect acquisitions and integrate acquired businesses
into its operations; the substantial fixed charges under long-term operating
leases for the Company's facilities; the extensive federal and state regulation
of the health care industry and frequent changes to such regulations; and health
care reform, including proposed changes in Medicare and Medicaid funding. See
"Risk Factors" for a discussion of these and other risk factors relating to the
Company and its business, and "Business" for a discussion of the Company's
business.
Operating Activities
For the three months ended September 30, 1997, operating activities used
cash of $3,578,000. This resulted from the net loss of $657,000, the increase of
$1,095,000 in accounts receivable from patient services due to increased per
diem reimbursements and rehabilitation therapy volume, the increase in deferred
costs and other current assets of $1,351,000 resulting from the Company's
substantial development activities and a reduction in accounts payable and other
current liabilities of $814,000. Cash was provided primarily by the non-cash
lease expense, depreciation and amortization of $314,000 and the increase in
deferred revenues of $25,000.
In fiscal 1997, operating activities used cash of $36,000. Cash was used
primarily for the $4,492,000 net loss, the $3,066,000 increase in accounts
receivable from patient services due to increased per diem reimbursements and
rehabilitation therapy volume after the Foster acquisition, the $1,396,000
increase in deferred costs resulting from the Company's substantial development
operations and acquisition activities and the $739,000 increase in other current
assets. Cash was provided primarily from $693,000 of depreciation and
amortization, $1,454,000 of non-cash lease expense resulting from straight-line
recognition of certain facility rents, the $1,591,000 of non-cash write-down of
long-lived assets, $579,000 increase in deferred revenues, and $5,340,000
increase in current liabilities resulting from increased therapy volumes in
health care operations, increased corporate office staff and the Company's
significant growth in general.
In fiscal 1996, operating activities used cash of $564,000. Cash was used
primarily for the $909,000 in net losses and the $666,000 of deferred
development and acquisition costs. Cash was provided by the $1,052,000 increase
in current liabilities resulting from growth in corporate office staffing and
the related accounts payable and accrued expenses.
Financing Activities
The Company has historically financed its development program and
acquisitions through a combination of lease and mortgage financing with health
care REIT and private convertible equity funding.
In September 1995, the Company raised its initial private equity funding
through the sale of $2,000,000 of Series A Convertible Preferred Stock to an
individual private investor. The funding of this investment was staged over a
one year period through September 1996. In March 1996, the Company
28
<PAGE> 30
obtained a $91,000,000 financing commitment from Meditrust for acquisitions
($60,000,000) and development projects ($31,000,000). The Company also realized
net proceeds of $11,982,000 through a private sale of Series B Convertible
Preferred Stock to a group of venture capital investors. Half of this investment
was funded in September and October of 1996. Investment of the remainder of the
funds was contingent on the Company achieving certain performance milestones
such as meeting or exceeding the operating budget and the project development
timetable. In April 1997, the remaining funds were invested in the Company.
Notes payable of $1,476,000, issued in connection with the Foster acquisition,
were repaid during 1997.
In connection with the lease or debt financing of the Company's
acquisitions, the REIT lease and debt financings included required lease
deposits or debt service reserves which range from three to six months' rent or
debt service. These lease deposits or debt service reserves are recorded as
restricted investments. For leasing transactions, the Company owns the
restricted investment, pays rent on funds advanced by the REIT and amortizes the
lease liability as a corresponding reduction of rent expense in the period when
the related rent is expensed.
Investing Activities
For the three months ended September 30, 1997, the Company's investing
activities used $1,789,000. Of this amount $734,000 was used for purchases of
property and equipment and $769,000 was used for lease deposits. The remaining
$286,000 relates to increases in goodwill and other assets.
In fiscal 1997, investing activities used $7,199,000. Of these funds,
$1,822,000 was used for purchases of property and equipment, $1,546,000 for debt
service reserves and lease deposits, $1,882,000 of goodwill related to the
Keystone and Foster acquisitions, $1,462,000 relating to increases in other
assets for deferred financing costs, project costs and pre-opening costs and
$487,000 relating to acquisitions. In fiscal 1996, investing activities used
$5,481,000 of which $4,701,000 was used for the acquisition of assisted living
facilities in Wisconsin.
COMPLETED ACQUISITIONS AND DIVESTITURE
In March 1996, the Company acquired the operations of a 68-bed assisted
living facility in Pennsylvania for cash of approximately $318,000 which has
been recorded as goodwill. HCPI, Inc., a health care REIT, acquired the facility
for $2,350,000 and leased it to the Company pursuant to a 15-year lease
agreement with three five-year renewal options. In May 1996, the Company
acquired seven assisted living facilities in Wisconsin with 158 licensed beds
for $5,046,000 including transaction costs, which was funded with mortgage
financing provided by Meditrust.
In August 1996, the Company completed the Foster acquisition of 10 skilled
nursing operations, a facility-based home health agency and the Pharmacy, all in
Missouri. In this transaction, the Company exchanged 1,200,000 shares of Common
Stock for all of the outstanding common stock of two of the skilled nursing
companies and incurred additional indebtedness of $3,115,000 which was funded
with mortgage financing from Meditrust. The Company also purchased the stock of
the Pharmacy, another skilled nursing company which leases its facility from a
third-party owner, and the non-real estate assets and operations of seven
skilled nursing facilities for short-term notes payable of approximately
$1,476,000. Goodwill of approximately $1,851,000 relating to the Pharmacy was
recorded for this acquisition. The Pharmacy has been reclassified as an asset
held for sale at June 30, 1997. The real estate assets of these seven skilled
nursing facilities were purchased by Hawthorn Health Properties, Inc. ("HHP")
for approximately $39,100,000. Commencing in August 1996, the Company leased
these seven facilities from HHP pursuant to a 12-year lease agreement with four
6-year renewal options. In February 1997, the Company leased two assisted living
facilities in Missouri from the same seller. The facilities have a capacity for
61 residents. The initial lease term is for three years with two one-year
renewal options. See "Management -- Certain Relationships and Related
Transactions."
In January 1997, the Company consummated the Keystone acquisition which
involved the operations of five assisted living facilities with 317 beds and two
skilled nursing facilities with 103 beds
29
<PAGE> 31
located in Pennsylvania. Capstone, a health care REIT, acquired the facilities
and certain other assets for approximately $21,600,000 including transaction
costs and leased them to the Company pursuant to an 11-year lease agreement with
three five-year renewal options. The Company paid approximately $1,800,000 in
cash and issued 187,500 shares of Common Stock for the operations of the
existing facilities and the rights to seven early stage development projects.
Goodwill of approximately $1,800,000 was recorded for this acquisition and is
being amortized over 25 years. This agreement provides for additional payments
of up to $500,000. These payments are to be made in five installments of
$100,000 when financing closes for each of the first five development projects.
When made, these payments will be recorded as additional goodwill and amortized
over 25 years.
In May 1997, the Company completed the Clark acquisition which involved
leasehold interests in three assisted living facilities with 77 operating beds
in and around Nevada, Missouri. In August 1997, the Company acquired a fourth
leasehold interest in an assisted living facility with a capacity for 25
residents. The facilities were acquired by Capstone for approximately $5,335,000
including transaction costs and the Company entered into a 10-year lease of the
facilities with three five-year renewal options.
In October 1997, the Company purchased the assets and business of Feltrop,
a 92-bed assisted living facility in Pennsylvania for approximately $5,842,000
including transaction costs. This acquisition has been accounted for using the
purchase method and the estimated goodwill of approximately $1,550,000 will be
amortized over 40 years. This acquisition was financed through a bridge
financing arrangement with a health care REIT which will be repaid with proceeds
from the Offering.
The Company sold the inventory, furniture and equipment, certain prepaid
assets and the operations of the Pharmacy in October 1997 for approximately
$4,700,000, net of estimated transaction costs.
In October 1997, the Company purchased the assets and business of Butler
which is comprised of three assisted living facilities located in Pennsylvania
with a capacity of 172 residents. The purchase price was approximately
$9,554,000, including transaction costs. This acquisition has been accounted for
using the purchase method and the estimated goodwill of $3,093,000 will be
amortized over 40 years. The asset purchase agreement provides for additional
purchase price payments of up to $4,100,000 contingent upon achieving certain
future targeted operating results. This acquisition was financed through a
bridge financing arrangement with a health care REIT, which will be repaid with
proceeds from the Offering.
The Northridge acquisition, which occurred on December 1, 1997, involved
the purchase of the assets and business of a 117-bed assisted living facility
which is to be accounted for as a purchase. The purchase price of approximately
$8,549,000, including transaction costs, was paid in cash. The Company estimates
that goodwill of approximately $3,349,000 will be recorded for this acquisition
and amortized over 40 years. This acquisition was financed with bridge financing
with a health care REIT which will be repaid with proceeds from the Offering.
The Gethsemane acquisition, which occurred on January 2, 1998, involved the
purchase of the assets of a 66-bed skilled nursing facility and a 51-bed
assisted living facility which are to be accounted for as purchases. The
purchase price of approximately $5,528,000 for the skilled nursing facility,
including transaction costs, was paid in cash. This acquisition was financed
with bridge financing with a health care REIT which will be repaid with proceeds
from the Offering. The agreement for the assisted living facility provides for a
cash purchase price of up to $1,200,000 based upon a multiple (5.80 times) of
the Gethsemane assisted living facility's annualized net operating income for
the period from the closing date through June 30, 1998. This payment is expected
to be made during the quarter ending September 30, 1998 and will be recorded as
additional goodwill. The Company estimates that goodwill of approximately
$535,000 (excluding any contingent payments) will be recorded for the skilled
nursing facility acquisition and amortized over 40 years.
30
<PAGE> 32
PLANNED DIVESTITURE
In June 1997, the Company committed to a plan for the disposal of its seven
Wisconsin assisted living facilities. As a result, a non-cash charge of
$1,591,000 has been recorded to write these assets down to their estimated fair
value based on the present value of expected future cash flows less estimated
costs of disposal. For the year ended June 30, 1997 and the three months ended
September 30, 1997, the Wisconsin operations experienced a pretax loss of
$381,000 and $156,000, respectively, before the asset write-down. See
"Business -- Operating Facilities."
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, Earnings Per Share ("SFAS No. 128"). The statement replaces the
presentation of primary earnings per share ("EPS") with a presentation of basic
EPS. Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted average number of common shares outstanding
for the period. SFAS No. 128 also requires dual presentation of basic and
diluted EPS on the face of the income statement and other reconciliations and
disclosures. The Company is required to adopt SFAS No. 128 in its fiscal year
ending June 30, 1998. Accordingly, the EPS presentation herein does not reflect
the presentation requirements of SFAS No. 128. Basic EPS is expected to be
higher than primary EPS would be in future periods as primary EPS includes
common stock equivalents while basic EPS will not. There is no difference
between the loss per share calculated under SFAS No. 128 and the loss per share
presented in the Company's consolidated financial statements.
IMPACT OF INFLATION
The senior living and health care industry is labor intensive. Wages and
labor costs are especially sensitive to inflation and marketplace labor
shortages. To date, the Company has offset its increased operating costs by
increasing charges for its services and expanding its services. Inflation could,
however, affect the Company's future revenues and results of operations due to
the Company's dependence on its senior resident population, most of whom rely on
relatively fixed incomes to pay for the Company's services. As a result, the
Company may not be able to raise resident service fees to fully account for
increased operating expenses. In structuring its fees, the Company attempts to
anticipate inflation levels, but there can be no assurance that the Company will
be able to anticipate fully or otherwise respond to any future inflationary
pressures.
31
<PAGE> 33
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The accompanying unaudited pro forma financial information gives effect to
(i) the acquisition of Foster which was completed on August 31, 1996, (ii) the
acquisition of Keystone which was completed on January 31, 1997, (iii) the
acquisition of Clark which was completed on May 15, 1997 and August 18, 1997,
(iv) the acquisition of Feltrop which was completed on October 9, 1997, (v) the
acquisition of Butler which was completed on October 30, 1997, (vi) the
acquisition of Northridge which was completed on December 1, 1997, (vii) the
sale of the Pharmacy which was completed on October 16, 1997 and (viii) the
acquisition of Gethsemane which was completed on January 2, 1998, as if such
acquisitions and the Pharmacy Divestiture had been consummated as of September
30, 1997 in the case of pro forma balance sheet data and July 1, 1996 in the
case of pro forma statement of operations data. The pro forma balance sheet data
combines the historical balance sheet data of the Company, Feltrop, Butler,
Northridge and Gethsemane as of September 30, 1997 and excludes the Pharmacy
balance sheet data as of September 30, 1997. The pro forma statement of
operations data for the fiscal year ended June 30, 1997 and the three months
ended September 30, 1997 combines the actual statement of operations data of the
Company, Feltrop, Butler, Northridge and Gethsemane for the year ended June 30,
1997 and the three months ended September 30, 1997, the actual statement of
operations data for Foster, Keystone and Clark for the period from July 1, 1996
through the respective acquisition dates and excludes the statement of
operations data of the Pharmacy for the year ended June 30, 1997 and the three
months ended September 30, 1997.
The column captioned "Pro Forma As Adjusted" reflects the aforementioned
completed acquisitions and the Pharmacy Divestiture and gives effect to (i) the
sale by the Company of 7,000,000 shares of Common Stock in the Offering at an
assumed initial public offering price of $9.50 per share after deducting
estimated underwriting discounts and commissions and estimated offering expenses
and the anticipated application of the net proceeds therefrom and (ii) the
conversion of all Outstanding Preferred Stock into an aggregate of 4,620,531
shares of Common Stock. See "Use of Proceeds" and "Capitalization."
The pro forma data is based on the historical financial statements of the
Company, Foster, Keystone, Clark, Butler, Gethsemane, Feltrop, Northridge and
Pharmacy and gives effect to the acquisitions under the purchase method of
accounting, to the Pharmacy Divestiture and to the assumptions and adjustments
(which the Company believes to be reasonable) described in the accompanying
Notes to Unaudited Pro Forma Financial Information. Under the purchase method of
accounting, assets acquired and liabilities assumed are recorded at their
estimated fair values as of the date of acquisition. The pro forma adjustments
reflected in the following data (with regard to the Feltrop, Butler, Northridge
and Gethsemane acquisitions) are estimated and may differ from the actual
adjustments when they become known. In management's opinion, the estimated pro
forma adjustments are not expected to differ materially from the actual
adjustments when they become known. The unaudited pro forma financial
information should be read in conjunction with the audited financial statements
of the Company, Foster, Keystone, Clark, Feltrop, Butler, Northridge and
Gethsemane and the related notes thereto included elsewhere in this Prospectus.
See "Index to Financial Statements."
RECENT ACQUISITIONS
Foster
The Foster acquisition was consummated on August 31, 1996 and has been
accounted for as a purchase. This transaction involved the acquisition of two
skilled nursing facilities, a home health operation and a pharmacy company as
well as the non-real estate assets and operations of eight skilled nursing
facilities. The total purchase price of approximately $8,691,000 was comprised
of 1,200,000 shares of Common Stock valued at $1.33 per share, the issuance of
notes payable aggregating $1,476,000, mortgage financing of $3,115,000,
liabilities assumed of approximately $1,800,000 and transaction costs of
approximately $700,000. Goodwill of approximately $1,851,000 related to the
Pharmacy was recorded for this acquisition. The Pharmacy has been reclassified
as an asset held for
32
<PAGE> 34
sale at June 30, 1997. The real estate assets of seven skilled nursing
facilities were acquired by a third-party for approximately $39,100,000 and are
leased to the Company. The remaining skilled nursing facility is also leased
from another third party.
Keystone
The Keystone acquisition occurred on January 31, 1997 and involved the
operations of five assisted living facilities and two skilled nursing facilities
and the rights to seven early stage development projects. This acquisition has
been accounted for as a purchase. The total purchase price of approximately
$2,050,000 was comprised of approximately $1,800,000 in cash and 187,500 shares
of Common Stock valued at $1.33 per share. Goodwill of approximately $1,800,000
was recorded and is being amortized over 25 years. The real estate and certain
other assets were acquired by a health care REIT for $21,600,000 and are leased
to the Company. The agreement provides for additional payments of up to
$500,000. These payments are to be made in five installments of $100,000 when
financing closes for each of the first five development projects. When made,
these payments will be recorded as additional goodwill and amortized over 25
years.
Clark
The Clark acquisition occurred on May 15, 1997 with respect to three
assisted living operations and on August 18, 1997 with respect to a fourth
assisted living operation. This transaction represents the acquisition of
leasehold interests in four assisted living facilities as a result of entering
into a lease obligation. These facilities have an aggregate capacity of 102
residents. The real estate assets were acquired by a health care REIT for
$5,335,000 and are leased to the Company. The acquisition involved no payment by
the Company and no goodwill was recorded since the total costs of acquiring the
facilities were borne by the REIT.
Feltrop
The Feltrop acquisition occurred on October 9, 1997 and involved the
purchase of a 92-bed assisted living facility which has been accounted for as a
purchase. The purchase price of approximately $5,842,000, including transaction
costs, was paid in cash. The Company has recorded goodwill of approximately
$1,550,000 for this acquisition which is being amortized over 40 years.
Butler
The Butler acquisition occurred on October 30, 1997 and involved the
purchase of three assisted living facilities with an aggregate capacity of 172
residents which has been accounted for as a purchase. The purchase price of
approximately $9,554,000, including transaction costs, was paid in cash. The
asset purchase agreement also provides for additional purchase price payments. A
29-bed addition (the "Addition") is under construction at one of the facilities
which is expected to open in January 1998. The agreement provides for additional
cash payments as follows: (i) a $450,000 payment when the Addition becomes
operational, (ii) payments during 1998 when the Addition becomes 80% occupied
and 90% occupied based on a multiple of Butler's net operating income, and (iii)
a final payment in January 1999 based on a multiple of Butler's annualized net
operating income for the six months ended December 31, 1998. Based on estimates
of Butler's 1998 net operating income, the Company estimates that additional
payments of approximately $4,100,000 will be made. Except for the initial
payment of $450,000 which has been recorded, the contingent payments will be
recorded as additional goodwill when the net operating income targets have been
achieved. The Company estimates that goodwill of approximately $3,093,000
(excluding future contingent payments) will be recorded for this acquisition and
amortized over 40 years.
33
<PAGE> 35
Northridge
The Northridge acquisition, which occurred on December 1, 1997, involved
the purchase of a 117-bed assisted living facility which has been accounted for
as a purchase. The purchase price of approximately $8,549,000, including
transaction costs, was paid in cash. The Company estimates that goodwill of
approximately $3,349,000 will be recorded for this acquisition and amortized
over 40 years.
Gethsemane
The Gethsemane acquisition occurred on January 2, 1998 and involved the
purchase of the assets of a 66-bed skilled nursing facility and a 51-bed
assisted living facility which are to be accounted for as purchases. The
purchase price of approximately $5,528,000 for the skilled nursing facility,
including transaction costs, is to be paid in cash. The agreement for the
assisted living facility provides for a cash purchase price of up to $1,200,000
based upon a multiple (5.80 times) of the Gethsemane assisted living facility's
annualized net operating income for the period from the closing date through
June 30, 1998. This payment is expected to be made during the quarter ending
September 30, 1998 and will be recorded as additional goodwill. The Company
estimates that goodwill of approximately $535,000 (excluding any contingent
payment) will be recorded and amortized over 40 years.
PHARMACY DIVESTITURE
On October 16, 1997, the Company sold the inventory, furniture and
equipment, certain prepaid assets and the operations of the Pharmacy for
approximately $4,700,000, net of estimated transaction costs.
34
<PAGE> 36
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997
(DOLLARS AND SHARE AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
PHARMACY
RECENT DIVESTITURE
THE COMPANY ACQUISITIONS PRO FORMA
ACTUAL PRO FORMA ADJUSTMENTS
----------- ------------ -----------
<S> <C> <C> <C>
Revenues:
Patient services............................................................ $14,496 $ 853 $(656)(a)
Resident services........................................................... 2,998 1,843 0
Other revenues.............................................................. 1,644 71 0
------- ------ -----
Total revenues........................................................ 19,138 2,767 (656)
------- ------ -----
Expenses:
Facility operating expenses:
Salaries, wages and benefits.............................................. 7,305 1,187 (80)(a)
Other operating expenses.................................................. 7,187 771 (471)(a)
General and administrative.................................................. 2,679 0 0
Lease expense............................................................... 2,212 0 0
Depreciation and amortization expense....................................... 281 229 1(a)
Write-down of long-lived assets............................................. 0 0 0
------- ------ -----
Total expenses............................................................ 19,664 2,187 (550)
------- ------ -----
Income (loss) from operations................................................. (526) 580 (106)
Other income (expense):
Interest income............................................................. 113 0 0
Interest expense............................................................ (237) (774) 0
------- ------ -----
Income (loss) before taxes.................................................... (650) (194) (106)
Provision (benefit) for income taxes.......................................... 7 (78) (42)(a)
------- ------ -----
Net income (loss)............................................................. $ (657) $ (116) $ (64)
======= ====== =====
Pro forma net income (loss) per share......................................... $ (0.08)
=======
Shares used in computing pro forma loss per share............................. 7,962
=======
<CAPTION>
CONSOLIDATED
CONSOLIDATED OFFERING PRO FORMA
PRO FORMA ADJUSTMENTS AS ADJUSTED
------------ ----------- ------------
<S> <C> <C> <C>
Revenues:
Patient services............................................................ $ 14,693 $ 0 $ 14,693
Resident services........................................................... 4,841 0 4,841
Other revenues.............................................................. 1,715 0 1,715
------- ---- -------
Total revenues........................................................ 21,249 0 21,249
------- ---- -------
Expenses:
Facility operating expenses:
Salaries, wages and benefits.............................................. 8,412 0 8,412
Other operating expenses.................................................. 7,487 0 7,487
General and administrative.................................................. 2,679 0 2,679
Lease expense............................................................... 2,212 0 2,212
Depreciation and amortization expense....................................... 511 0 511
Write-down of long-lived assets............................................. 0 0 0
------- ---- -------
Total expenses............................................................ 21,301 0 21,301
------- ---- -------
Income (loss) from operations................................................. (52) 0 (52)
Other income (expense):
Interest income............................................................. 113 0 113
Interest expense............................................................ (1,011) 990(c) (21)
------- ---- -------
Income (loss) before taxes.................................................... (950) 990 40
Provision (benefit) for income taxes.......................................... (380) 396(d) 16
------- ---- -------
Net income (loss)............................................................. $ (570) $ 594 $ 24
======= ==== =======
Pro forma net income (loss) per share......................................... $ (0.07) $ --(d-1)
======= =======
Shares used in computing pro forma loss per share............................. 7,962 5,471 13,433
======= ==== =======
</TABLE>
35
<PAGE> 37
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
RECENT ACQUISITIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FELTROP BUTLER NORTHRIDGE
-------------------------------- -------------------------------- ------
PRO FORMA PRO FORMA PRO FORMA PRO FORMA
ACTUAL ADJUSTMENTS SUBTOTAL ACTUAL ADJUSTMENTS SUBTOTAL ACTUAL
------ ----------- --------- ------ ----------- --------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Patient services......................... $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Resident services........................ 472 0 472 673 0 673 698
Other revenues........................... 0 0 0 64 0 64 7
---- ----- ----- ---- ----- ----- ----
Total revenues......................... 472 0 472 737 0 737 705
---- ----- ----- ---- ----- ----- ----
Expenses:
Facility operating expenses:
Salaries, wages and benefits........... 237 0 237 267 0 267 329
Other operating expenses............... 180 0 180 174 0 174 117
General and administrative............... 0 0 0 0 0 0 0
Lease expense............................ 0 0 0 0 0 0 0
Depreciation and amortization expense.... 14 32(e) 46 35 36(h) 71 35
Write-down of long-lived assets.......... 0 0 0 0 0 0 0
---- ----- ----- ---- ----- ----- ----
Total expenses......................... 431 32 463 476 36 512 481
---- ----- ----- ---- ----- ----- ----
Income (loss) from operations............. 41 (32) 9 261 (36) 225 224
Other income (expense):
Interest income.......................... 0 0 0 7 (7)(i) 0 4
Interest expense......................... (29) (124)(f) (153) (51) (200)(i) (251) (68)
---- ----- ----- ---- ----- ----- ----
Income (loss) before taxes................ 12 (156) (144) 217 (243) (26) 160
Provision (benefit) for income taxes...... 0 (58)(g) (58) 0 (10)(j) (10) 0
---- ----- ----- ---- ----- ----- ----
Net income (loss)......................... $ 12 $ (98) $ (86) $217 $(233) $ (16) $160
---- ----- ----- ---- ----- ----- ----
<CAPTION>
GETHSEMANE
-------------------------------- RECENT
PRO FORMA PRO FORMA PRO FORMA PRO FORMA ACQUISITIONS
ADJUSTMENTS SUBTOTAL ACTUAL ADJUSTMENTS SUBTOTAL PRO FORMA
----------- --------- ------ ----------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Patient services......................... $ 0 $ 0 $853 $ 0 $ 853 $ 853
Resident services........................ 0 698 0 0 0 1,843
Other revenues........................... 0 7 0 0 0 71
----- ----- ---- ----- ----- -----
Total revenues......................... 0 705 853 0 853 2,767
----- ----- ---- ----- ----- -----
Expenses:
Facility operating expenses:
Salaries, wages and benefits........... 0 329 354 0 354 1,187
Other operating expenses............... 0 117 300 0 300 771
General and administrative............... 0 0 0 0 0 0
Lease expense............................ 0 0 0 0 0 0
Depreciation and amortization expense.... 28(k) 63 36 13(n) 49 229
Write-down of long-lived assets.......... 0 0 0 0 0 0
----- ----- ---- ----- ----- -----
Total expenses......................... 28 509 690 13 703 2,187
----- ----- ---- ----- ----- -----
Income (loss) from operations............. (28) 196 163 (13) 150 580
Other income (expense):
Interest income.......................... (4)(l) 0 0 0 0 0
Interest expense......................... (157)(l) (225) (60) (85)(o) (145) (774)
----- ----- ---- ----- ----- -----
Income (loss) before taxes................ (189) (29) 103 (98) 5 (194)
Provision (benefit) for income taxes...... (12)(m) (12) 0 2(p) 2 (78)
----- ----- ---- ----- ----- -----
Net income (loss)......................... $(177) $ (17) $103 $(100) $ 3 $ (116)
----- ----- ---- ----- ----- -----
</TABLE>
36
<PAGE> 38
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997
PHARMACY DIVESTITURE
The Pharmacy Divestiture column represents the income statement of the Pharmacy
operations for the three months ended September 30, 1997.
(a) Represents the elimination of the results of the Pharmacy from the pro
forma statement of operations.
CONSOLIDATED TAX PROVISION ADJUSTMENT
(b) Represents the tax provision on the income before taxes at the
Company's estimated consolidated statutory tax rate of 40%.
OFFERING ADJUSTMENTS
The increase in shares used in computing pro forma loss per share represents (i)
4,608,000 of the 7,000,000 shares to be issued in the Offering, the net proceeds
of which will be used for the repayment of debt and (ii) the 863,218 shares
issued upon conversion of the Series A Preferred Stock.
(c) Represents the elimination of interest expense on the Company's
outstanding mortgage loans from assumed debt repayment with Offering
proceeds and the repayment of short-term debt incurred for the Feltrop,
Butler, Northridge and Gethsemane acquisitions, detailed as follows
(dollars in thousands):
<TABLE>
<CAPTION>
OUTSTANDING INTEREST INTEREST
BALANCE RATE ADJUSTMENT
----------- -------- ----------
<S> <C> <C> <C>
Foster Mortgage........................... $ 3,115 10.7% $ 83
Wisconsin Mortgage........................ 5,044 10.6% 133
Feltrop Bridge Financing.................. 5,842 10.5% 153
Butler Bridge Financing................... 9,554 10.5% 251
Northridge Bridge Financing............... 8,549 10.5% 225
Gethsemane Bridge Financing............... 5,528 10.5% 145
----
Total pro forma adjustment........... $990
====
</TABLE>
(d) Represents the tax effect of the interest expense savings from the
assumed repayment of debt at an estimated consolidated statutory tax
rate of 40%.
PRO FORMA NET LOSS PER SHARE
(d-1) The pro forma net loss per share is computed as follows:
<TABLE>
<S> <C>
Weighted average common and common equivalent shares............... 7,962
Shares utilized from offering proceeds to repay debt............... 4,608
Shares issued upon conversion of Series A Preferred Stock.......... 863
------
13,433
Pro forma net income............................................... $ 24
Pro forma net income per share..................................... $ --
</TABLE>
FELTROP
The Feltrop actual column represents the income statement of Feltrop for the
three months ended September 30, 1997.
37
<PAGE> 39
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS -- (CONTINUED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997
(e) Represents the net adjustment of (i) depreciation expense to equal the
Company's estimated depreciation and (ii) the amortization of the
excess of the purchase price over the fair value of the net assets
acquired. Adjustment is calculated as follows (dollars in thousands):
<TABLE>
<S> <C>
Three months depreciation.................................................... $ 36
Seller's depreciation........................................................ (14)
---
22
Goodwill amortization for three months ($1,550/40 years/4 quarters) 10
---
Net adjustment............................................................... $ 32
===
</TABLE>
(f) Represents the elimination of interest expense on the debt of the
seller not assumed by the Company and interest expense on the Company's
$5,842,000 bridge financing at 10.5%.
(g) Represents the tax provision on the adjusted pro forma income at an
estimated statutory tax rate of 40%.
BUTLER
The Butler actual column represents the income statement of Butler for the three
months ended September 30, 1997.
(h) Represents the net adjustment of (i) depreciation expense to equal the
Company's estimated depreciation and (ii) the amortization of the
excess of the purchase price over the fair value of the net assets
acquired. Adjustment is calculated as follows (dollars in thousands):
<TABLE>
<S> <C>
Three months depreciation........................................... $ 52
Seller's depreciation............................................... (35)
----
17
Goodwill amortization for three months ($3,093/40 years/4
quarters)......................................................... 19
----
Net adjustment...................................................... $ 36
====
</TABLE>
(i) Represents the elimination of (i) seller's historical interest income
since the Company did not acquire the financial instruments which
generated this interest income, (ii) interest expense on debt of the
seller not assumed by the Company, and (iii) interest expense on the
Company's $9,554,000 bridge financing at 10.5%.
(j) Represents the tax provision on the adjusted pro forma income at an
estimated consolidated statutory tax rate of 40%.
NORTHRIDGE
The Northridge actual column represents the income statement of Northridge for
the three months ended September 30, 1997.
(k) Represents the adjustment of (i) depreciation expense to equal the
Company's estimated depreciation and the (ii) amortization of the
excess of the purchase price over the fair value of the net assets
acquired. Adjustment is calculated as follows (dollars in thousands):
<TABLE>
<S> <C>
Three months depreciation........................................... $ 42
Seller's depreciation............................................... (35)
----
7
Goodwill amortization for three months ($3,349/40 years/4
quarters)......................................................... 21
----
Net adjustment...................................................... $ 28
====
</TABLE>
38
<PAGE> 40
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS -- (CONTINUED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997
(l) Represents the elimination of (i) seller's historical interest income
since the Company did not acquire the financial instruments which
generated this interest income, (ii) interest income on investments and
interest expense on the debt of the seller not assumed by the Company,
and (iii) interest expense on the Company's $8,549,000 bridge financing
at 10.5%.
(m) Represents the tax provision on the adjusted pro forma income at an
estimated consolidated statutory tax rate of 40%.
GETHSEMANE
The actual Gethsemane column represents the combined income statement of
Gethsemane for the three months ended September 30, 1997.
(n) Represents the adjustments of (i) depreciation expense to equal the
Company's estimated depreciation and (ii) the amortization of the
excess of the purchase price over the fair value of the net assets
acquired. Adjustment is calculated as follows (dollars in thousands):
<TABLE>
<S> <C>
Three months depreciation.......................................... $ 46
Seller's depreciation.............................................. (36)
----
10
Annual goodwill amortization ($535)/40 years/4 quarters)........... 3
----
Net adjustment..................................................... $ 13
====
</TABLE>
(o) Represents the elimination of (i) interest expense on debt of the
seller not assumed by the Company, and (ii) interest expense on the
Company's $5,528,000 bridge financing at 10.5%
(p) Represents the tax provision on the adjusted pro forma income at an
estimated consolidated statutory tax rate of 40%.
39
<PAGE> 41
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1997
(DOLLARS AND SHARE AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
PHARMACY
DIVESTITURE
THE COMPANY RECENT PRO FORMA
ACTUAL ACQUISITIONS ADJUSTMENTS
----------- ------------ -----------
<S> <C> <C> <C>
Revenues:
Patient services........................................................ $41,616 $ 13,294 $(2,305)(a)
Resident services....................................................... 6,778 10,834 0
Other revenues.......................................................... 1,086 470 (151)(a)
------- ------- -------
Total revenues.................................................... 49,480 24,598 (2,456)
------- ------- -------
Operating Expenses:
Facility operating expenses:
Salaries, wages and benefits.......................................... 19,186 9,934 (295)(a)
Other operating expenses.............................................. 20,727 8,928 (1,667)(a)
General and administrative expense...................................... 5,653 0 0
Lease expense........................................................... 5,417 2,481 (88)(a)
Depreciation and amortization expense................................... 693 1,012 5(a)
Write-down of long-lived assets......................................... 1,591 0 0
------- ------- -------
Total expenses.................................................... 53,267 22,355 (2,045)
------- ------- -------
Income (loss) from operations............................................. (3,787) 2,243 (411)
Other income (expense):
Interest income......................................................... 265 0 0
Interest expense........................................................ (917) (3,162) 0
------- ------- -------
Income (loss) before taxes................................................ (4,439) (919) (411)
Provision (benefit) for income taxes...................................... 53 (371) (164)(a)
------- ------- -------
Net income (loss)......................................................... $(4,492) $ (548) $ (247)
======= ======= =======
Pro forma net loss per share.............................................. $ (0.57)
=======
Shares used in computing pro forma loss per share......................... 7,936
=======
<CAPTION>
CONSOLIDATED
CONSOLIDATED OFFERING PRO FORMA AS
PRO FORMA ADJUSTMENTS ADJUSTED
------------ ----------- ------------
<S> <C<C> <C> <C>
Revenues:
Patient services........................................................ $ 52,605 $ 0 $ 52,605
Resident services....................................................... 17,612 0 17,612
Other revenues.......................................................... 1,405 0 1,405
------- ------- -------
Total revenues.................................................... 71,622 0 71,622
------- ------- -------
Operating Expenses:
Facility operating expenses:
Salaries, wages and benefits.......................................... 28,825 0 28,825
Other operating expenses.............................................. 27,988 0 27,988
General and administrative expense...................................... 5,653 0 5,653
Lease expense........................................................... 7,810 0 7,810
Depreciation and amortization expense................................... 1,710 0 1,710
Write-down of long-lived assets......................................... 1,591 0 1,591
------- ------- -------
Total expenses.................................................... 73,577 0 73,577
------- ------- -------
Income (loss) from operations............................................. (1,955) 0 (1,955)
Other income (expense):
Interest income......................................................... 265 0 265
Interest expense........................................................ (4,079) 3,962(c) (117)
------- ------- -------
Income (loss) before taxes................................................ (5,769) 3,962 (1,807)
Provision (benefit) for income taxes...................................... (2,308) 1,585(d) (723)
------- ------- -------
Net income (loss)......................................................... $ (3,461) $ 2,377 $ (1,084)
======= ======= =======
Pro forma net loss per share.............................................. $ (0.44) $ (0.08) (d-1)
======= =======
Shares used in computing pro forma loss per share......................... 7,936 5,471 13,407
======= ======= =======
</TABLE>
40
<PAGE> 42
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
RECENT ACQUISITIONS
FOR THE YEAR ENDED JUNE 30, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOSTER KEYSTONE CLARK
------------------------------ ------------------------------ ------------------------------
PRO FORMA PRO FORMA PRO FORMA PRO FORMA PRO FORMA PRO FORMA
ACTUAL ADJUSTMENTS SUBTOTAL ACTUAL ADJUSTMENTS SUBTOTAL ACTUAL ADJUSTMENTS SUBTOTAL
------ ----------- --------- ------ ----------- --------- ------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Patient services............. $6,707 $ 0 $ 6,707 $3,711 $ 0 $ 3,711 $ 0 $ 0 $ 0
Resident services............ 211 0 211 2,331 0 2,331 1,172 0 1,172
Other revenues............... 270 0 270 0 0 0 0 0 0
------ ----- ------ ------ ------ ------ ------ ----- ------
Total revenues............. 7,188 0 7,188 6,042 0 6,042 1,172 0 1,172
------ ----- ------ ------ ------ ------ ------ ----- ------
Operating Expenses:
Facility operating expenses:
Salaries, wages and
benefits................... 2,872 0 2,872 2,203 0 2,203 365 0 365
Other operating expenses.... 3,027 167(e) 3,194 2,731 0 2,731 211 0 211
General and administrative
expense..................... 0 0 0 0 0 0 0 0 0
Lease expense................ 68 747(f) 815 0 1,195(k) 1,195 153 318(o) 471
Depreciation and amortization
expense..................... 181 (130)(g) 51 381 (338)(l) 43 0 0 0
Write-down of long-lived
assets...................... 0 0 0 0 0 0 0 0 0
------ ----- ------ ------ ------ ------ ------ ----- ------
Total expenses............. 6,148 784 6,932 5,315 857 6,172 729 318 1,047
------ ----- ------ ------ ------ ------ ------ ----- ------
Income (loss) from
operations................... 1,040 (784) 256 727 (857) (130) 443 (318) 125
Other income (expense):
Interest income.............. 46 (46)(h) 0 0 0 0 0 0 0
Interest expense............. (255) 187(i) (68) (490) 490(m) 0 0 0....... 0
------ ----- ------ ------ ------ ------ ------ ----- ------
Income (loss) before taxes.... 831 (643) 188 237 (367) (130) 443 (318) 125
Provision (benefit) for income
taxes........................ 26 48(j) 74 0 (53)(n) (53) 0 50(p) 50
------ ----- ------ ------ ------ ------ ------ ----- ------
Net income (loss)............. $ 805 $(691) $ 114 $ 237 $ (314) $ (77) $ 443 $(368) $ 75
====== ===== ====== ====== ====== ====== ====== ===== ======
<CAPTION>
NORTHRIDGE
FELTROP BUTLER -----------------------------
--------------------------------- ------------------------------ PRO
PRO FORMA PRO FORMA PRO FORMA PRO FORMA PRO FORMA FORMA
ACTUAL ADJUSTMENTS SUBTOTAL ACTUAL ADJUSTMENTS SUBTOTAL ACTUAL ADJUSTMENTS SUBTOTAL
------- ----------- --------- ------ ----------- --------- ------ ----------- --------
<S> <C> <C> <C> <C>
Revenues:
Patient services.............$ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Resident services............ 1,980 0 1,980 2,617 0 2,617 2,523 0 2,523
Other revenues............... 0 0 0 182 0 182 17 0 17
------ ----- ------ ------ ------ ------ ------ ------ ------
Total revenues............. 1,980 0 1,980 2,799 0 2,799 2,540 0 2,540
------ ----- ------ ------ ------ ------ ------ ------ ------
Operating Expenses:
Facility operating expenses:
Salaries, wages and
benefits................... 1,041 0 1,041 1,017 0 1,017 1,209 0 1,209
Other operating expenses.... 491 0 491 774 0 774 473 0 473
General and administrative
expense..................... 0 0 0 0 0 0 0 0 0
Lease expense................ 0 0 0 0 0 0 0 0 0
Depreciation and amortization
expense..................... 73 111(q) 184 135 152(t) 287 142 109(w) 251
Write-down of long-lived
assets...................... 0 0 0 0 0 0 0 0 0
------ ----- ------ ------ ------ ------ ------ ------ ------
Total expenses............. 1,605 111 1,716 1,926 152 2,078 1,824 109 1,933
------ ----- ------ ------ ------ ------ ------ ------ ------
Income (loss) from
operations................... 375 (111) 264 873 (152) 721 716 (109) 607
Other income (expense):
Interest income.............. 1 (1)(r) 0 17 (17)(u) 0 17 (17)(x) 0
Interest expense............. (119) (494)(r) (613) (183) (820)(u) (1,003) (265) (633)(x) (898)
------ ----- ------ ------ ------ ------ ------ ------ ------
Income (loss) before taxes.... 257 (606) (349) 707 (989) (282) 468 (759) (291)
Provision (benefit) for income
taxes........................ 0 (140)(s) (140) 0 (113)(v) (113) 0 (117)(y) (117)
------ ----- ------ ------ ------ ------ ------ ------ ------
Net income (loss).............$ 257 $(466) $ (209) $ 707 $(876) $ (169) $ 468 $(642) $ (174)
====== ===== ====== ====== ====== ====== ====== ====== ======
<CAPTION>
GETHSEMANE
---------------------------------
PRO PRO RECENT
FORMA FORMA ACQUISITIONS
ACTUAL ADJUSTMENTS SUBTOTAL PRO FORMA
------- -------- --------- ------------
Revenues:
Patient services.............$2,876 $ 0 $ 2,876 $ 13,294
Resident services............ 0 0 0 10,834
Other revenues............... 1 0 1 470
------
Total revenues............. 2,877 0 2,877 24,598
------
Operating Expenses:
Facility operating expenses:
Salaries, wages and
benefits................... 1,227 0 1,227 9,934
Other operating expenses.... 1,054 0 1,054 8,928
General and administrative
expense..................... 0 0 0 0
Lease expense................ 0 0 0 2,481
Depreciation and amortization
expense..................... 120 76 (z) 196 1,012
Write-down of long-lived
assets...................... 0 0 0 0
------
Total expenses............. 2,401 76 2,477 22,355
------
Income (loss) from
operations................... 476 (76) 400 2,243
Other income (expense):
Interest income.............. 0 0 0 0
Interest expense............. (191) (389) (aa) (580) (3,162)
------
Income (loss) before taxes.... 285 (465) (180) (919)
Provision (benefit) for income
taxes........................ 0 (72) (bb) (72) (371)
------
Net income (loss).............$ 285 $ (393) $ (108) $ (548)
======
</TABLE>
41
<PAGE> 43
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1997
PHARMACY DIVESTITURE
The Pharmacy Divestiture column represents the income statement of the Pharmacy
operations for the year ended June 30, 1997.
(a) Represents the elimination of the results of the Pharmacy from the pro
forma statement of operations.
CONSOLIDATED TAX PROVISION ADJUSTMENT
(b) Represents the tax provision on the adjusted pro forma consolidated
income before taxes at the Company's estimated consolidated statutory
tax rate of 40%.
OFFERING ADJUSTMENTS
The increase in shares used in computing pro forma loss per share represents (i)
4,608,000 of the 7,000,000 shares to be issued in the Offering, the net proceeds
of which will be used for the repayment of debt and (ii) the 863,218 shares to
be issued upon conversion of the Series A Preferred Stock.
(c) Represents the elimination of interest expense on the Company's
outstanding mortgage loans from assumed debt repayment with Offering
proceeds and the repayment of short-term debt incurred for the Feltrop,
Butler, Northridge and Gethsemane acquisitions detailed as follows
(dollars in thousands):
<TABLE>
<CAPTION>
OUTSTANDING INTEREST INTEREST
BALANCE RATE ADJUSTMENT
----------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Foster Mortgage............................... $ 3,115 10.7% $ 333
Wisconsin Mortgage............................ 5,036 10.6% 535
Feltrop Bridge Financing...................... 5,842 10.5% 613
Butler Bridge Financing....................... 9,554 10.5% 1,003
Northridge Bridge Financing................... 8,549 10.5% 898
Gethsemane Bridge Financing................... 5,528 10.5% 580
-----
Total pro forma adjustment.......... $3,962
=====
</TABLE>
(d) Represents the tax effect of the interest expense savings from the
assumed repayment of debt at an estimated consolidated statutory tax
rate of 40%.
PRO FORMA NET LOSS PER SHARE
(d-1) The pro forma net loss per share is computed as follows (dollars in
thousands, except per share amounts):
<TABLE>
<S> <C>
Weighted average common and common equivalent shares (see Note 1(q)
to the Consolidated Financial Statements of the Company)......... 7,936
Shares utilized from offering proceeds to repay debt............... 4,608
Shares issued upon conversion of Series A Preferred Stock.......... 863
-------
13,407
Pro forma net loss................................................. $(1,084)
Pro forma net loss per share....................................... $ (0.08)
</TABLE>
42
<PAGE> 44
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS -- (CONTINUED)
FOR THE YEAR ENDED JUNE 30, 1997
FOSTER
The Foster actual column represents the combined income statement of the Foster
companies for the period from July 1, 1996 through August 31, 1996, the date of
acquisition.
(e) Represents the addition of a $167,000 management fee paid by the
Company to the seller.
(f) Represents the Company's lease expense on the seven skilled nursing
facilities based on the lessor's cost of $41,385,000 at a 10.71% lease
rate (based on a 360-day year) net of a $16,000 reduction of lease
expense representing amortization of straight-line lease liability (See
note 1(m) to the consolidated financial statements of the Company) for
the period from July 1, 1996 through August 31, 1996, the date of
acquisition (($41,385,000 x 10.71%/360 days x 62 days) - $16,000 =
$747,000).
(g) Represents the net of (i) elimination of historical depreciation and
amortization of the seller; (ii) the addition of the Company's
depreciation; (iii) the amortization of the excess of the purchase
price over the fair value of the assets acquired of $1,851,000 over 25
years and (iv) the amortization of deferred financing costs of $598,000
over 12 years, calculated as follows (dollars in thousands):
<TABLE>
<S> <C>
Depreciation and amortization of seller.............................. $(181)
Depreciation on facilities acquired.................................. 31
Goodwill amortization................................................ 12
Amortization of deferred financing costs............................. 8
-----
$(130)
=====
</TABLE>
(h) Represents the elimination of interest income of the seller since the
Company did not acquire the interest bearing financial instruments
which generated this interest income.
(i) Represents the net effect of eliminating interest expense on
capital-related financing of the seller not assumed by the Company of
$244,000 and the addition of interest expense on the Company's
$3,115,000 financing at 10.7%.
(j) Represents the net tax provision on the adjusted pro forma income at an
estimated consolidated statutory tax rate of 40%.
KEYSTONE
The Keystone actual column represents the combined income statement of the
Keystone companies for the period from July 1, 1996 through January 31, 1997,
the date of acquisition.
(k) Represents adjustments to reflect the Company's rent expense based on
the REIT's costs of $21,600,000 at 10% lease rate net of a $65,000
reduction of lease expense representing amortization of lease deposit
funding from a REIT. (See note 1(m) to the Consolidated Financial
Statements of the Company).
(l) Represents the net effect of (i) eliminating the prior owners'
depreciation and (ii) the amortization of the excess of the purchase
price over the fair value of the assets acquired of $1,840,000 over 25
years (dollars in thousands):
<TABLE>
<S> <C>
Seller's depreciation................................................ $(381)
Goodwill amortization................................................ 43
-----
$(338)
=====
</TABLE>
Approximately $308,000 was allocated to the cost of land acquired in
this transaction which represented the estimated fair value of the
improved land.
43
<PAGE> 45
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS -- (CONTINUED)
FOR THE YEAR ENDED JUNE 30, 1997
(m) Represents elimination of seller's interest expense on long-term debt
which was not assumed by the Company.
(n) Represents the tax provision on the adjusted pro forma income at an
estimated consolidated statutory tax rate of 40%.
CLARK
The Clark actual column represents the income statements for three of the Clark
operations for the period from July 1, 1996 through May 15, 1997 (the date of
acquisition) combined with the income statement for the fourth Clark operation
for the period from July 1, 1996 through June 30, 1997. This facility was
acquired on August 18, 1997 and was immaterial to the consolidated financial
statements of the Company.
(o) Represents adjustments to reflect: (i) the elimination of the seller's
lease costs of $153,000; (ii) the Company's lease expense based on the
lessor's cost of $4,001,000 at a 10% lease rate for the three
facilities purchased May 15, 1997 for the period July 1, 1996 through
May 15, 1997, the date of acquisition; and (iii) the Company's lease
expense based on the lessor's cost of $1,334,000 at a 10% lease rate
for the facility purchased August 18, 1997 for the period July 1, 1996
through June 30, 1997 and (iv) a $13,000 reduction of lease expense
representing amortization of lease deposit funding from the REIT. (See
note 1(m) to the Consolidated Financial Statements of the Company).
(p) Represents the tax provision on the adjusted pro forma income at an
estimated consolidated statutory tax rate of 40%.
FELTROP
The Feltrop actual column represents the income statement of Feltrop for the
year ended June 30, 1997.
(q) Represents the net adjustment of (i) depreciation expense to equal the
Company's estimated depreciation and (ii) the amortization of the
excess of the purchase price over the fair value of the net assets
acquired. Adjustment is calculated as follows (dollars in thousands):
<TABLE>
<S> <C>
Annual depreciation................................................. $144
Seller's depreciation............................................... (73)
-----
71
Annual goodwill amortization ($1,550/40 years)...................... 40
-----
Net adjustment...................................................... $111
=====
</TABLE>
(r) Represents the elimination of (i) seller's interest income, (ii)
interest expense on the debt of the seller not assumed by the Company,
and (iii) interest expense on the Company's $5,842,000 bridge
financing at 10.5%.
(s) Represents the tax provision on the adjusted pro forma income at an
estimated consolidated statutory tax rate of 40%.
44
<PAGE> 46
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS -- (CONTINUED)
FOR THE YEAR ENDED JUNE 30, 1997
BUTLER
(t) Represents the net adjustment of (i) depreciation expense to equal the
Company's estimated depreciation and (ii) the amortization of the
excess of the purchase price over the fair value of the net assets
acquired. Adjustment is calculated as follows (dollars in thousands):
<TABLE>
<S> <C>
Annual depreciation................................................. $210
Seller's depreciation............................................... (135)
-----
75
Annual goodwill amortization ($3,093/40 years)...................... 77
-----
Net adjustment...................................................... $152
=====
</TABLE>
(u) Represents the elimination of (i) seller's historical interest income
since the Company did not acquire the financial instruments which
generated this interest income, (ii) interest expense on debt of the
seller not assumed by the Company, and (iii) interest expense on the
Company's $9,554,000 bridge financing at 10.5%.
(v) Represents the tax provision on the adjusted pro forma income at an
estimated consolidated statutory tax rate of 40%.
NORTHRIDGE
The Northridge actual column represents the income statement of Northridge for
the year ended June 30, 1997.
(w) Represents the net adjustment of (i) depreciation expense to equal the
Company's estimated depreciation and (ii) the amortization of the
excess of the purchase price over the fair value of the net assets
acquired. Adjustment is calculated as follows (dollars in thousands):
<TABLE>
<S> <C>
Annual depreciation................................................. $167
Seller's depreciation............................................... (142)
-----
25
Annual goodwill depreciation ($3,349/40 years)...................... 84
-----
Net adjustment...................................................... $109
=====
</TABLE>
(x) Represents the elimination of (i) seller's historical interest income,
(ii) interest expense on the debt of the seller not assumed by the
Company, and (iii) interest expense on the Company's $8,549,000 bridge
financing at 10.5%.
(y) Represents the tax provision on the adjusted pro forma income at an
estimated consolidated statutory tax rate of 40%.
45
<PAGE> 47
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS -- (CONTINUED)
FOR THE YEAR ENDED JUNE 30, 1997
GETHSEMANE
The actual Gethsemane column represents the combined income statement of
Gethsemane for the year ended June 30, 1997.
(z) Represents the net adjustment of (i) depreciation expense to equal the
Company's estimated depreciation and (ii) the amortization of the
excess of the purchase price over the fair value of the net assets
acquired. Adjustment is calculated as follows (dollars in thousands):
<TABLE>
<S> <C>
Annual depreciation................................................. $183
Seller's depreciation............................................... (120)
-----
63
Annual goodwill amortization ($535/40 years)........................ 13
-----
Net adjustment...................................................... $ 76
=====
</TABLE>
(aa) Represents the elimination of (i) interest expense on debt of the
seller not assumed by the Company, and (ii) interest expense on the
Company's $5,528,000 bridge financing at 10.5%.
(bb) Represents the tax provision on the adjusted pro forma income at an
estimated consolidated statutory tax rate of 40%.
46
<PAGE> 48
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PHARMACY
RECENT DIVESTITURE
THE COMPANY ACQUISITIONS PRO FORMA CONSOLIDATED
ACTUAL PRO FORMA ADJUSTMENTS PRO FORMA
----------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.................................... $ 2,362 $ 0 $ 4,700(a) $ 7,062
Accounts receivable.......................................... 7,774 0 0 7,774
Deferred costs............................................... 2,373 0 0 2,373
Prepaid expenses and other current assets.................... 1,938 0 (2)(a) 1,936
Assets held for sale......................................... 4,801 0 (1,802)(a) 2,999
------- ------ ------- --------
Total current assets..................................... 19,248 0 2,896 22,144
Due to/from affiliates......................................... 0 0 0 0
Investments in subsidiaries.................................... 0 0 0 0
Restricted investments......................................... 2,594 0 0 2,594
Property and equipment, net.................................... 4,841 20,946 0 25,787
Goodwill, net.................................................. 2,290 8,527 0 10,817
Other assets................................................... 2,651 0 0 2,651
------- ------ ------- --------
Total assets $31,624 $ 29,473 $ 2,896 $ 63,993
======= ====== ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt and short-term
borrowings................................................. $ 98 $ 29,473 $ 0 29,571
Accounts payable............................................. 4,858 0 0 4,858
Accrued payroll.............................................. 1,154 0 0 1,154
Accrued expenses............................................. 2,172 0 0 2,172
------- ------ ------- --------
Total current liabilities................................ 8,282 29,473 0 37,755
Long-term debt................................................. 8,354 0 0 8,354
Straight-line lease liability.................................. 3,166 0 0 3,166
Deferred revenues.............................................. 604 0 0 604
Other liabilities.............................................. 70 0 0 70
------- ------ ------- --------
Total liabilities........................................ 20,476 29,473 0 49,949
------- ------ ------- --------
REDEEMABLE STOCK
Series B....................................................... 13,875 0 0 13,875
------- ------ ------- --------
STOCKHOLDERS' EQUITY
Preferred A stock.............................................. 1 0 0 1
Common stock................................................... 5 0 0 5
Additional paid-in capital..................................... 3,335 0 0 3,335
Accumulated earnings (deficit)................................. (6,068) 0 2,896(a) (3,172)
------- ------ ------- --------
Total stockholders' equity................................... (2,727) 0 2,896 169
------- ------ ------- --------
Total liabilities and stockholders' equity............... $31,624 $ 29,473 $ 2,896 63,993
======= ====== ======= ========
<CAPTION>
CONSOLIDATED
OFFERING PRO FORMA
ADJUSTMENTS ELIMINATIONS AS ADJUSTED
----------- ------------ ------------
<S> <C><C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.................................... $ 22,721(b) $ 0 $ 29,783
Accounts receivable.......................................... 0 0 7,774
Deferred costs............................................... 0 0 2,373
Prepaid expenses and other current assets.................... 0 0 1,936
Assets held for sale......................................... 0 0 2,999
-------- -------
Total current assets..................................... 22,721 0 44,865
Due to/from affiliates......................................... 0 0 0
Investments in subsidiaries.................................... 29,473(b) (29,473) 0
Restricted investments......................................... 0 0 2,594
Property and equipment, net.................................... 0 0 25,787
Goodwill, net.................................................. 0 0 10,817
Other assets................................................... 0 0 2,651
-------- -------
Total assets $ 52,194 $(29,473) $ 86,714
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt and short-term
borrowings................................................. $ (29,514) $ 0 $ 57
Accounts payable............................................. 0 0 4,858
Accrued payroll.............................................. 0 0 1,154
Accrued expenses............................................. 0 0 2,172
-------- -------
Total current liabilities................................ (29,514) 0 8,241
Long-term debt................................................. (8,110)(b) 0 244
Straight-line lease liability.................................. 0 0 3,166
Deferred revenues.............................................. 0 0 604
Other liabilities.............................................. 0 0 70
-------- -------
Total liabilities........................................ (37,624) 0 12,325
-------- -------
REDEEMABLE STOCK
Series B....................................................... (13,875) 0 0
-------- -------
STOCKHOLDERS' EQUITY
Preferred A stock.............................................. (1)(b) 0 0
Common stock................................................... 11(b) 0 16
Additional paid-in capital..................................... 103,683(b) (29,473) 77,545
Accumulated earnings (deficit)................................. 0 0 (3,172)
-------- -------
Total stockholders' equity................................... 103,693 (29,473) 74,389
-------- -------
Total liabilities and stockholders' equity............... $ 52,194 $(29,473) $ 86,714
======== =======
</TABLE>
47
<PAGE> 49
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
RECENT ACQUISITIONS
SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FELTROP BUTLER NORTHRIDGE
-------------------------------- -------------------------------- --------------------
PRO FORMA PRO FORMA PRO FORMA PRO FORMA PRO FORMA
ACTUAL ADJUSTMENTS SUBTOTAL ACTUAL ADJUSTMENTS SUBTOTAL ACTUAL ADJUSTMENTS
------ ----------- --------- ------ ----------- --------- ------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash
equivalents.............. $ 6 $ (6)(c) $ 0 $ 100 $ (100)(e) $ 0 $ 210 $ (210)(g)
Accounts receivable........ 28 (28)(c) 0 9 (9)(e) 0 1 (1)(g)
Deferred costs............. 0 0 0 0 0 0 0 0
Prepaid expenses and other
current assets........... 17 (17)(c) 0 20 (20)(e) 0 323 (323)(g)
Assets held for sale....... 0 0 0 0 0 0 0 0
------ ------ ------ ------ ------- ------ ------ -------
Total current assets... 51 (51) 0 129 (129) 0 534 (534)
<CAPTION>
GETHSEMANE
-------------------------------- RECENT
PRO FORMA PRO FORMA PRO FORMA ACQUISITIONS
SUBTOTAL ACTUAL ADJUSTMENTS SUBTOTAL PRO FORMA
--------- ------ ----------- --------- -----------
<S> <<C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash
equivalents.............. $ 0 $ 25 $ (25)(i) $ 0 $ 0
Accounts receivable........ 0 205 (205)(i) 0 0
Deferred costs............. 0 0 0 0 0
Prepaid expenses and other
current assets........... 0 107 (107)(i) 0 0
Assets held for sale....... 0 0 0 0 0
------ -------
Total current assets... 0 337 (337) 0 0
Due to/from affiliates....... 0 0 0 0 0 0 0 0
Investments in
subsidiaries............... 0 0 0 0 0 0 0 0
Restricted investments....... 0 0 0 0 0 0 0 0
Property and equipment,
net........................ 1,232 3,060(d) 4,292 3,704 2,757(f) 6,461 3,044 2,156(h)
Goodwill, net................ 0 1,550(d) 1,550 0 3,093(f) 3,093 0 3,349(h)
Other assets................. 0 0 0 6 (6)(e) 0 186 (186)(g)
------ ------ ------ ------ ------- ------ ------ -------
Total assets........... $1,283 $ 4,559 $ 5,842 $3,839 $ 5,715 $ 9,554 $3,764 $ 4,785
====== ====== ====== ====== ======= ====== ====== =======
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Current portion of
long-term debt and short-
term borrowings.......... $ 117 $ 5,725(c) $ 5,842 $ 266 $ 9,288(e) $ 9,554 $ 193 $ 8,356(g)
Accounts payable........... 40 (40)(c) 0 77 (77)(e) 0 28 (28)(g)
Accrued payroll............ 0 0 0 52 (52)(e) 0 47 (47)(g)
Accrued expenses........... 83 (83)(c) 0 13 (13)(e) 0 40 (40)(g)
------ ------ ------ ------ ------- ------ ------ -------
Total current
liabilities........... 240 5,602 5,842 408 9,146 9,554 308 8,241
Long-term debt............... 944 (944)(c) 0 2,284 (2,284)(e) 0 2,819 (2,819)(g)
Straight-line lease
liability.................. 0 0 0 0 0 0 0 0
Deferred revenues............ 0 0 0 0 0 0 0 0
Other liabilities............ 0 0 0 0 0 0 0 0
------ ------ ------ ------ ------- ------ ------ -------
Total liabilities...... 1,184 4,658 5,842 2,692 6,862 9,554 3,127 5,422
------ ------ ------ ------ ------- ------ ------ -------
REDEEMABLE STOCK
Series B..................... 0 0 0 0 0 0 0 0
------ ------ ------ ------ ------- ------ ------ -------
STOCKHOLDERS' EQUITY
Preferred A stock............ 0 0 0 0 0 0 0 0
Common stock................. 0 0 0 22 (22)(f) 0 3 (3)(h)
Additional paid-in capital... 0 0 0 844 (844)(f) 0 50 (50)(h)
Accumulated earnings
(deficit).................. 99 (99)(d) 0 281 (281)(f) 0 584 (584)(h)
------ ------ ------ ------ ------- ------ ------ -------
Total stockholders'
equity................... 99 (99) 0 1,147 (1,147) 0 637 (637)
------ ------ ------ ------ ------- ------ ------ -------
Total liabilities and
stockholders'
equity................ $1,283 $ 4,559 $ 5,842 $3,839 $ 5,715 $ 9,554 $3,764 $ 4,785
====== ====== ====== ====== ======= ====== ====== =======
<CAPTION>
Due to/from affiliates....... 0 0 0 0 0
<S> <<C> <C> <C> <C> <C>
Investments in
subsidiaries............... 0 0 0 0 0
Restricted investments....... 0 0 0 0 0
Property and equipment,
net........................ 5,200 3,902 1,091(j) 4,993 20,946
Goodwill, net................ 3,349 0 535(j) 535 8,527
Other assets................. 0 11 (11)(i) 0 0
------ -------
Total assets........... $ 8,549 $4,250 $ 1,278 $ 5,528 $29,473
====== =======
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Current portion of
long-term debt and short-
term borrowings.......... $ 8,549 $ 456 $ 5,072(i) $ 5,528 $29,473
Accounts payable........... 0 269 (269)(i) 0 0
Accrued payroll............ 0 121 (121)(i) 0 0
Accrued expenses........... 0 18 (18)(i) 0 0
------ -------
Total current
liabilities........... 8,549 864 4,664 5,528 29,473
Long-term debt............... 0 2,356 (2,356)(i) 0 0
Straight-line lease
liability.................. 0 0 0 0 0
Deferred revenues............ 0 0 0 0 0
Other liabilities............ 0 343 (343)(i) 0 0
------ -------
Total liabilities...... 8,549 3,563 1,965 5,528 29,473
------ -------
REDEEMABLE STOCK
Series B..................... 0 0 0 0 0
------ -------
STOCKHOLDERS' EQUITY
Preferred A stock............ 0 0 0 0 0
Common stock................. 0 10 (10)(j) 0 0
Additional paid-in capital... 0 240 (240)(j) 0 0
Accumulated earnings
(deficit).................. 0 437 (437)(j) 0 0
------ -------
Total stockholders'
equity................... 0 687 (687) 0 0
------ -------
Total liabilities and
stockholders'
equity................ $ 8,549 $4,250 $ 1,278 $ 5,528 $29,473
====== =======
</TABLE>
48
<PAGE> 50
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997
PHARMACY DIVESTITURE
(a) Represents the sale of the Pharmacy's operations, furniture and
equipment and certain prepaid expenses for net proceeds of $4,700,000.
The goodwill allocation of $1,851,000 to the Pharmacy was determined
using the estimated fair value of the pharmacy business based on
discounted cash flows.
OFFERING ADJUSTMENTS
(b) Assumes net proceeds from the Offering of $60,345,000 from the sale of
7,000,000 shares of common stock at $9.50 per share less assumed
offering expenses of $6,155,000. The assumed use of proceeds is to
repay long-term debt of $8,151,000 and to repay indebtedness of
$29,473,000 incurred to fund the purchase price of four completed
acquisitions; the balance of the proceeds retained for working capital
and other general corporate purposes. Simultaneous with the offering,
the Series A and Series B Preferred Stock will be converted into Common
Stock.
FELTROP
(c) To eliminate certain assets and liabilities of the seller which were
not purchased or assumed by the Company. The current portion of
long-term debt and short-term borrowings represents the net of (i)
elimination of seller's debt of $117,000 and (ii) short-term debt of
$5,842,000 incurred to finance the acquisition.
(d) Purchase accounting adjustments to: (i) record property and equipment
at estimated fair value, (ii) record goodwill for the excess of the
purchase price over the fair value of the net assets acquired, (iii)
eliminate seller's accumulated deficit (dollars in thousands):
<TABLE>
<CAPTION>
ESTIMATED FAIR VALUE
ASSET USEFUL LIFE OF ASSET
-------------------------------------------------------- ----------- ----------
<S> <C> <C>
Land.................................................... -- $ 430
Building and improvements............................... 40 years 3,586
Furniture and equipment................................. 5 years 276
------
Estimated fair value of assets at acquisition date...... 4,292
Net fixed assets of seller at September 30, 1997........ (1,232)
------
Property and equipment.................................. $ 3,060
======
Goodwill................................................ $ 1,550
======
Stockholders' equity.................................... $ (99)
======
</TABLE>
The estimated fair value was based on a valuation prepared by an
independent appraiser.
BUTLER
(e) To eliminate certain assets and liabilities of the seller which will
not be purchased or assumed by the Company. The current portion of
long-term debt and short-term borrowings represents the net of (i)
elimination of seller's debt of $266,000 and (ii) short-term debt of
$9,554,000 incurred to finance the acquisition.
(f) Purchase accounting adjustments to: (i) record property and equipment
at estimated fair value, (ii) record goodwill for the excess of the
purchase price over the fair value of the net
49
<PAGE> 51
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEETS -- (CONTINUED)
SEPTEMBER 30, 1997
assets acquired and (iii) eliminate the seller's historical stockholders'
equity (dollars in thousands):
<TABLE>
<CAPTION>
ESTIMATED FAIR VALUE
ASSET USEFUL LIFE OF ASSET
-------------------------------------------------------- ----------- ----------
<S> <C> <C>
Land.................................................... -- $ 980
Building and improvements............................... 40 years 4,863
Furniture and equipment................................. 7 years 618
------
Estimated fair value of assets at acquisition date...... 6,461
Net fixed assets of seller at September 30, 1997........ (3,704)
------
Property and equipment.................................. $ 2,757
======
Goodwill................................................ $ 3,093
======
Stockholders' equity.................................... $ (1,147)
======
</TABLE>
The estimated fair value was based on a valuation prepared by an
independent appraiser.
NORTHRIDGE
(g) To eliminate certain assets and liabilities of the seller which will
not be purchased or assumed by the Company and to record the short-term
borrowings incurred to finance the purchase price of $8,549,000.
(h) Purchase accounting adjustments (i) record property and equipment at
estimated fair value, (ii) record goodwill for the excess of the
purchase price over the fair value of the net assets acquired and (iii)
eliminate the seller's historical stockholders' equity (dollars in
thousands):
<TABLE>
<CAPTION>
ESTIMATED FAIR VALUE
ASSET USEFUL LIFE OF ASSET
------------------------------------------------------ ----------- ----------
<S> <C> <C>
Land.................................................. -- $ 390
Building and improvements............................. 40 years 4,410
Furniture and equipment............................... 7 years 400
-------
Estimated fair value of assets at acquisition date.... 5,200
Net fixed assets of seller at September 30, 1997...... (3,044)
-------
Property and equipment................................ $ 2,156
=======
Goodwill.............................................. $ 3,349
=======
Stockholders' equity.................................. $ (637)
=======
</TABLE>
The estimated fair value was based on a valuation prepared by an
independent appraiser.
GETHSEMANE
(i) To eliminate certain assets and liabilities of the seller which will
not be purchased or assumed by the Company and to record the short-term
borrowings incurred to finance the purchase price of $5,528,000.
50
<PAGE> 52
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEETS -- (CONTINUED)
SEPTEMBER 30, 1997
(j) Purchase accounting adjustments (i) record property and equipment at
estimated fair value, (ii) record goodwill for the excess of the
purchase price over the fair value of the net assets acquired and
(iii) eliminate the seller's historical stockholders' equity (dollars
in thousands):
<TABLE>
<CAPTION>
ESTIMATED FAIR VALUE
ASSET USEFUL LIFE OF ASSET
------------------------------------------------------ ----------- ----------
<S> <C> <C>
Land.................................................. -- $ 172
Building and improvements............................. 40 years 4,465
Furniture and equipment............................... 5 years 356
-------
Estimated fair value of assets at acquisition date.... 4,993
Net fixed assets of seller at September 30, 1997...... (3,902)
-------
Property and equipment................................ $ 1,091
=======
Goodwill.............................................. $ 535
=======
Stockholders' equity.................................. $ (687)
=======
</TABLE>
The estimated fair value was based on a valuation prepared by an
independent appraiser.
51
<PAGE> 53
BUSINESS
OVERVIEW
The Company was formed in April 1995 to develop senior care continuums
which meet the needs of upper middle, middle and moderate income populations in
non-urban, secondary markets. The Company considers upper middle, middle and
moderate income populations to consist of those individuals whose income and
assets enable them to afford senior living and care services at average daily
rates of $85, $75 and $65, respectively. The Company intends to utilize assisted
living facilities in selected markets as the primary entry point and service
platform to develop the Balanced Care Continuum consisting of various health
care and hospitality services, including, where appropriate, rehabilitation
therapies, physical, occupational and speech therapy, home health care services
on an intermittent basis, dementia and Alzheimer's services and skilled/subacute
care delivered in a skilled nursing setting, enabling residents to age in place.
The Company believes that non-urban, secondary markets are underserved, highly
fragmented and less prone to intense competition from larger providers. The
Company believes that these factors will enable it to establish a leading
position as a provider of a market differentiated, consumer preferred continuum
of senior care services in such markets. To achieve its goals, the Company
intends to: (i) provide a range of high quality, individualized senior care
services and programs, (ii) develop the Balanced Care Continuum, (iii) focus on
non-urban, secondary markets, (iv) continue developing the Company's signature
assisted living facilities, (v) pursue growth through selective acquisitions,
(vi) achieve the benefits of regional density by clustering, and (vii) expand
referral networks and strategic alliances.
After its formation, the Company raised its initial $2 million private
equity funding in September 1995. The Company obtained a $91 million financing
commitment for acquisitions and assisted living facility development projects
from a health care REIT in March 1996. A $12 million private equity funding
followed which occurred in two stages in September 1996 and March 1997. The
Company has a limited operating history and has incurred operating losses since
its inception. See "Risk Factors -- Limited Operating History; Losses."
Since its inception, the Company has grown primarily through acquisitions.
The Company completed the Recent Acquisitions of Foster in August 1996, Keystone
in January 1997, Clark in May and August 1997, Feltrop and Butler in October
1997, Northridge in December 1997 and Gethsemane in January 1998. The Company
completed the Pharmacy Divestiture in October 1997. The Company has also leased
two facilities and has designed, developed and opened eight of its signature
assisted living facilities. As of January 2, 1998, the Company operated a total
of 32 assisted living facilities, 13 skilled nursing facilities and four
independent living facilities in Pennsylvania, Missouri, Arkansas, North
Carolina and Wisconsin, as well as a home health care agency in Missouri and a
rehabilitation therapy operation in Pennsylvania. Assuming completion of the
planned divestiture of the Company's assisted living facilities in Wisconsin,
the Company will own nine and lease 33 senior living and health care facilities
in Pennsylvania, Missouri, Arkansas and North Carolina with a capacity for 1,398
assisted living residents, 1,294 skilled nursing patients and 154 independent
living residents. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Planned Divestiture" and "Unaudited Pro
Forma Financial Information." In addition to the eight signature assisted living
facilities opened to date by the Company, the Company anticipates opening an
additional two signature assisted living facilities, all of which are currently
under construction, prior to February 1998.
The Balanced Care Continuum is being developed to deliver consumer-focused
health care and hospitality services that balance seniors' desire for
independence with their evolving health care needs. The Company's philosophy
includes the belief that wellness and preventative therapy will strengthen
residents, improve their health and forestall the deterioration that generally
accompanies aging, thus extending their lives and lengths of stay in assisted
living facilities. The Company's wellness-oriented program, Balanced Gold(SM),
has been developed to predict and proactively address resident care needs,
including stabilizing and improving residents' cognitive, emotional and physical
well being. The Balanced Gold(SM) program is included in the Company's core
services package at each
52
<PAGE> 54
of its newly-developed signature assisted living facilities, and the Company
intends to implement all or part of the program at its other assisted living
facilities as appropriate. Preventative, restorative and rehabilitative services
are also expected to be made available to residents through outpatient medical
rehabilitation, home health care, programs for residents with Alzheimer's and
other services provided by the Company or by an alliance partner or other third
party. By offering services and programs that are intended to enable residents
to stay healthier longer and prolong their stay at assisted living facilities,
the Company believes that its services and programs will address the preferences
and needs of seniors, while at the same time forestalling the need for residents
to move to a more costly long-term care setting, such as a skilled nursing
facility. As resident needs mandate migration into a skilled nursing or subacute
program, the Company believes that its skilled nursing facilities will provide a
transition for the resident with a focus on demonstrated outcomes and cost
effective care. The Company believes that its approach to senior care will
enable it to be a leading provider of a continuum of senior care services in
targeted non-urban, secondary markets.
THE SENIOR CARE INDUSTRY
The senior care industry is characterized by a wide range of living
accommodations and health care services. For those who are able to live in a
home setting, home health care and other limited services can be provided.
Community housing or retirement centers, which are commonly referred to as
independent living facilities, are also available to persons who need limited
assistance, such as with meal preparation, housekeeping and laundry. Assisted
living facilities are typically for those persons whose physical or cognitive
frailties have reached a stage where other living accommodations can no longer
provide the level of care required but who do not yet need the continuous
medical attention provided in a skilled nursing facility. Generally, assisted
living facilities provide a combination of housing and 24-hour personal support
services designed to assist seniors with activities of daily living ("ADLs"),
which include bathing, eating, personal hygiene, grooming, ambulating and
dressing. Certain assisted living facilities also offer higher levels of
personal assistance for residents with Alzheimer's disease or other forms of
dementia. Skilled nursing facilities provide care for those who need a minimum
of three hours of nursing per day.
The senior care industry, including assisted living, is highly fragmented
and characterized by numerous providers whose services, experience and capital
resources vary widely. The Company believes that few operators of assisted
living facilities, particularly those in secondary markets, focus on providing a
range of senior living and health care services that have been designed to
enable residents to stay in a preferred setting longer. Most of the markets
targeted by the Company for development have existing assisted living and/or
skilled nursing providers.
The Company believes that the assisted living industry is evolving as the
preferred alternative to meet the growing demand for a cost effective setting
for those seniors who cannot live independently due to physical or cognitive
frailties, but who do not require the more intensive medical attention provided
by a skilled nursing facility. According to the United States Bureau of the
Census, approximately 45% of persons aged 85 years and older, approximately 24%
of persons aged 80 to 84 and approximately 20% of persons aged 75 to 79 need
assistance with ADLs. In 1996, according to industry estimates, the assisted and
independent living industries generated approximately $12 to $14 billion in
revenues.
The Company believes that a number of factors will contribute to the
continued growth of the assisted living industry, including:
Consumer Preference
The Company believes that assisted living is increasingly becoming the
setting preferred by prospective residents as well as their families, who are
often the decision makers for seniors. Assisted living is generally a more
attractive, service oriented and lower cost alternative to other types of senior
53
<PAGE> 55
care facilities, offering seniors greater independence and allowing them to age
in place in a residential setting.
Cost Effectiveness
Assisted living facilities provide a cost effective alternative to other
types of facilities that may provide more care than a senior needs. The average
annual cost for a patient in a skilled nursing facility approaches $40,000 and,
in the case of a private pay patient, can exceed $75,000 per year in certain
markets. In contrast, the average annual cost for a resident of an assisted
living facility is generally 30% to 50% lower than skilled nursing facilities
located in the same region. Additionally, the Company also believes that the
cost of assisted living services compares favorably with home health care,
particularly when costs associated with housing, meals and personal care
assistance are taken into account.
Changing Income and Family Dynamics
The Company believes that the increasing income of seniors, as well as
changing family dynamics, will increase the demand for assisted living and
health care services. According to the United States Bureau of the Census, the
median income of the elderly population has been increasing. Accordingly, the
Company believes that the number of seniors who are able to afford high-quality
senior residential services such as those offered by the Company will also
increase. Additionally, the number of two-income households has increased over
the last decade and the geographical separation of senior family members from
their adult children has risen. As a result, many families that traditionally
would have provided the care and services offered by the Company to senior
family members are less able to do so. The Company believes that assisted living
facilities represent an attractive and independent environment for senior family
members.
Demographics
The target market for the Company's services are persons generally 75 years
and older, one of the fastest growing segments of the United States population.
According to the United States Bureau of the Census, the portion of the United
States population aged 75 and older is expected to increase by approximately
29%, from approximately 13.0 million in 1990 to approximately 16.8 million by
the year 2000, and the number of persons aged 85 and older, as a segment of the
United States population, is expected to increase by approximately 43%, from
approximately 3.0 million in 1990 to over 4.3 million by the year 2000.
Furthermore, the number of persons afflicted with Alzheimer's disease is also
expected to increase in the coming years. According to data published by the
American Psychiatric Association, Alzheimer's disease affects approximately 5%
to 8% of individuals over the age 65, 15% to 20% of individuals over the age of
75 and 25% to 50% of individuals over the age of 85.
Supply/Demand Imbalance
The Company believes that non-urban secondary markets are often underserved
with respect to assisted living facilities. Based on bed need analyses performed
by the Company in connection with the prospective development of its assisted
living facilities, the need for the Company's services in its target markets is
typically three times the number of beds sought to be developed. When combined
with its market differentiated services package, the Company believes that it is
well positioned to be the preferred provider of senior care services in its
targeted markets.
While the senior population is growing significantly, the supply of skilled
nursing beds per thousand persons aged 85 years and older is declining. This
imbalance may be attributed to a number of factors in addition to the aging of
the population. Many states, in an effort to maintain controls of Medicaid
expenditures on long-term care, have implemented more restrictive
certificate-of-need regulations or similar legislation that restricts the supply
of licensed skilled nursing facility beds. Additionally, acuity-based
reimbursement systems have encouraged skilled nursing facilities to focus
54
<PAGE> 56
on higher acuity patients. The Company also believes that high construction
costs and limits on government reimbursement for the full cost of construction
and start-up expenses will also contain the growth and supply of traditional
skilled nursing beds. These factors, taken in combination, result in relatively
fewer skilled nursing beds available for the increasing number of seniors who
require assistance with ADLs but do not require 24-hour medical attention.
THE BALANCED CARE PHILOSOPHY
The Company's philosophy for addressing seniors' living and care needs
includes the belief that wellness and preventative therapy will strengthen
residents, improve their health and forestall the deterioration that generally
accompanies aging, thus extending their lives and lengths of stay in assisted
living facilities. As a result, elements of the Balanced Care Continuum include
the Company's Balanced Gold(SM) program and the provision of medical
rehabilitation, home health, skilled nursing and subacute care services.
BALANCED CARE STRATEGY
The Company's objective is to be a leading provider of continuums of senior
living and health care services in selected non-urban, secondary markets. In
order to achieve this goal, the Company intends to:
Provide a Range of High Quality, Individualized Senior Care Services and
Programs
The Company's individualized care and living programs are designed to
enable the Company to provide a range of services and programs that maximize
resident satisfaction, strengthen residents, improve their overall health and
forestall the deterioration that generally accompanies aging. The Company's
admission process is designed to identify the unique needs of each resident and
to work with the resident, the resident's family, physicians and Company staff
in developing an individualized living program which meets the care needs,
living preferences and income level of the resident. The individualized care
program is periodically reviewed and updated to ensure that the residents' needs
are being met as they evolve.
Develop the Balanced Care Continuum
The Balanced Care Continuum is being developed to provide consumer-focused
health care and hospitality services delivered in an attractive and appropriate
setting that balances seniors' desire for independence with their evolving
health care needs, thus enabling the Company to retain residents longer as they
age in place. The Company intends to develop the Balanced Care Continuum
utilizing assisted living facilities in selected markets as the primary entry
point into, and service platform from which to build, comprehensive senior care
and living services, including medical rehabilitation, home health care, skilled
nursing and subacute care. Depending on the characteristics of a particular
market, the Company may offer all or a portion of the Balanced Care Continuum to
seniors in that market. Elements of the Balanced Care Continuum include the
following programs and services (See "-- Care and Services Programs"):
Balanced Gold(SM) Program. The key factors leading to the discharge of a
resident from an assisted living facility into a more costly, less home-like
setting include falls, incontinence and cognitive impairment. The Company has
developed its Balanced Gold(SM) wellness-oriented program to specifically
address a variety of factors that can affect adversely the health of assisted
living residents, including balance and gait difficulties, incontinence,
cognitive impairment, stress due to pain and chronic conditions and grieving due
to multiple losses in the residents' life. The Balanced Gold(SM) program
includes tai chi exercise to improve balance and gait problems; individually
designed exercise programs, including incontinence and pelvic exercises and diet
guidelines; "Wisdom Keeper" programs to challenge and stimulate mental
capabilities; "Relaxation and Vitality" programs of deep breathing, stretching
exercises and sitting and walking meditation; "Golden Living" programs to assist
55
<PAGE> 57
with grief and loss; gardening to encourage nurturing and independence; and
walking programs to promote health and fitness. Company staff, in consultation
with the resident as well as his or her family and medical consultants,
determine which of the Balanced Gold(SM) activities are appropriate and best
suited to the resident's needs, interests and capabilities. The Balanced
Gold(SM) program is included as an integral and differentiating element of the
Company's core services package at each of its newly-developed signature
assisted living facilities, and the Company intends to implement all or part of
the program at its other assisted living facilities as appropriate. See "-- Care
and Services Programs -- Balanced Gold(SM)."
Medical Rehabilitation. The Company believes that rehabilitation and
strengthening significantly improve the health of residents and prevent
injuries. Rehabilitation services include preventative therapies designed to
forestall the development of further frailties, and restorative therapies for
residents who have a specific illness, injury, condition or disease but do not
require many of the services provided in a skilled nursing facility or an acute
care hospital. These services may be provided through a Company-owned skilled
nursing facility or medical rehabilitation operation or through alliances with
other providers. The Company's signature assisted living facilities have been
specifically designed to accommodate medical rehabilitation services and to
include fully-equipped therapy gyms. See "-- Care and Services
Programs -- Medical Rehabilitation."
Home Health Care. The Balanced Care Continuum includes home health care
services offered to seniors in their homes as well as to residents of the
Company's assisted living or independent living facilities. Home health care
services include specialty nursing to individuals with long-term chronic health
conditions, disabilities or post-procedural needs, as well as respiratory,
monitoring and other medical equipment and supplies. In addition to expanding
the range of services offered, the provision of home care to at-home residents
is also expected to enable the Company to identify and establish relationships
with potential new residents for its assisted living facilities. See "-- Care
and Services Programs -- Home Health Care."
Skilled Nursing and Subacute Care. When the condition of an assisted
living resident has deteriorated such that it is no longer appropriate for the
resident to remain in an assisted living facility, the Company will discharge
the resident to a skilled nursing or subacute care facility. To ensure that
residents receive cost effective care in the appropriate care setting, the
Company has identified specific discharge criteria which indicate that a
resident requires the continuous attention of a skilled nurse or physician. As
assisted living industry regulations become more restrictive, discharge criteria
such as those that the Company has identified will become increasingly important
in determining which residents are appropriate for the Company's assisted living
facilities. The Balanced Care Continuum encompasses owned and operated or
strategically aligned relationships with skilled nursing and subacute care
facilities in the Company's markets. See "-- Care and Services
Programs -- Skilled Nursing and Subacute Services."
Focus on Non-Urban, Secondary Markets
The Company intends to continue to focus on providing a continuum of senior
living and health care services to upper middle, middle and moderate income
populations in non-urban, secondary markets. The Company considers upper middle,
middle and moderate income populations to consist of those individuals whose
income and assets enable them to afford senior living and care services at
average daily rates of $85, $75 and $65, respectively. These markets are
believed to be underserved, highly fragmented, less prone to intense competition
from larger providers, and otherwise have characteristics that the Company
believes will enable it to establish a leading position within a targeted
market. The Company generally considers a non-urban market with a population of
between 10,000 and 200,000 to be a "secondary market."
Management believes that the Company's competitive position in its targeted
markets is enhanced by the disciplined practices applied to market selection.
The Company utilizes an in-house developed model for market analysis to
determine the net bed need expected for each community. This analysis
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<PAGE> 58
considers such factors as population, income and age demographics and the number
of competitor beds in the market to arrive at the demonstrated net bed need,
excluding the facility proposed by the Company. A net bed need of at least three
times the size proposed is necessary in order for the Company to proceed to
enter that market. Also considered are the opportunity for the Company to offer
a range of services comprising the senior living and health care continuum, the
sophistication of competitor facilities, and the ability to maximize management
resources in a specific market by clustering its development and operating
activities.
Continue Developing the Balanced Care Signature Assisted Living Facilities
The Company has designed three signature assisted living facility models to
attract the upper middle, middle and moderate upward income populations in its
target markets. The Company's signature assisted living facilities range in size
from 48 units to 106 units and are designed to accommodate the full range of
assisted living services offered by the Company, including the Company's core
services Balanced Gold(SM) program, as well as a special program for residents
with Alzheimer's and other forms of dementia. In addition, the Company's
signature facilities are each designed to include a fully-equipped medical
rehabilitation therapy gym and treatment rooms. Medical rehabilitation services
are provided by certified physical, occupational and speech therapists and
psychologists, with physician oversight. By providing a consistent level of high
quality services in an easily recognized signature facility, the Company
anticipates creating brand-name awareness within a market for a range of care
and income levels. In addition to the eight signature assisted living facilities
opened to date, the Company anticipates opening an additional two facilities,
currently under development, prior to February 1998. During the next three
years, the Company plans to develop approximately 75 of these signature
facilities in its targeted markets.
Pursue Growth Through Selective Acquisitions
Since its inception, the Company's growth has been primarily attributable
to acquisitions. The Company has acquired or leased 24 assisted living
facilities with a capacity for 1,119 residents, 13 skilled nursing facilities
with a capacity for 1,294 patients, and four independent living facilities with
a capacity for 140 residents, as well as a home health care agency (excluding
the Company's seven Wisconsin assisted living facilities and the Pharmacy). The
Company intends to pursue selective acquisitions to enter new markets, to enable
the Company to develop and provide one or more components of the Balanced Care
Continuum in its markets, to create clusters of assisted living facilities in
selected markets, to benefit from operating efficiencies and to develop a
leading market position. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Planned Divestiture" and "Unaudited Pro
Forma Financial Information."
Achieve the Benefits of Regional Density by Clustering
The Company's development and acquisition strategies focus on clustering
facilities to achieve maximum regional density and to provide residents with a
seamless range of services, prices and settings along a continuum of care and
cost. The Company believes that this strategy will enable it to achieve
operational and management efficiencies while delivering high quality care and
services within its target markets. In addition, clustering will enable the
Company to coordinate the marketing of Balanced Care Continuum components
including assisted living, medical rehabilitation, home health care, skilled
nursing and subacute care. Regional density will also allow the Company to
benefit from community familiarity with assisted living generally, and with the
Company's signature assisted living models in particular.
Expand Referral Networks and Strategic Alliances
The Company believes that strategic alliances can be a cost effective means
of providing the Balanced Care Continuum and a means of easing an individual's
transition from one setting to another. Accordingly, the Company will consider
entering into joint ventures or other alliances with local and
57
<PAGE> 59
regional hospital systems, skilled nursing facilities, medical rehabilitation
providers, home health care and other senior health care providers and
physicians, as well as managed care organizations. The Company believes that
such arrangements or alliances, which could range from joint marketing
arrangements to joint venture arrangements, will enable it to be strategically
positioned within its targeted markets.
CARE AND SERVICES PROGRAMS
The Company offers a continuum of services to seniors that include assisted
living, medical rehabilitation, home health care, skilled nursing, subacute care
and independent living services.
Assisted Living Services
Admission; Resident Care Plan. The Company intends that its assisted
living facilities be the principal entry point into the Balanced Care Continuum.
As a result, the assisted living admission process is crucial to the proper
placement of residents and in the development of tailored resident care plans.
Upon admission to one of the Company's assisted living facilities, a physician
assesses the resident's health status and determines his or her care needs. A
lifestyle assessment is also conducted in consultation with the resident, as
well as his or her family and medical consultants, to determine the resident's
care and services preferences. From this assessment, each resident's
individualized care plan is developed to ensure that all staff members rendering
services meet the resident's specific needs and preferences whenever possible.
Each resident's care plan is reviewed periodically to determine when a change in
services is needed. The Company seeks to provide assisted living services that
allow a resident to maintain a dignified, independent lifestyle. Residents and
their families are encouraged to be partners in their care and to take as much
responsibility as possible for their well being.
Care and Services. The Company offers a range of assisted living care and
services which are available 24 hours per day at each of its assisted living
facilities. The core services package offered by the Company includes personal
care, support and certain supplemental services. Personal care services include
assistance with ADLs, such as ambulating, bathing, dressing, eating, grooming,
personal hygiene, monitoring or assistance with medications and confusion
management. Support services include meal preparation, assistance with social
and recreational activities, laundry services, general housekeeping, maintenance
services and transportation services. Supplemental services, which are offered
at an extra charge, include extra transportation services, beauty and barber
services, extra laundry services and non-routine care services. The Balanced
Gold(SM) program is included in the Company's core services package at each of
its newly-developed signature assisted living facilities, and the Company
intends to implement all or part of the program at its other assisted living
facilities as appropriate. The Company's facilities have been designed to
accommodate special programs including those for residents with Alzheimer's and
other forms of dementia, as well as medical rehabilitation and home health care
services. Medical rehabilitation services are provided by certified physical,
occupational and speech therapists and psychologists, with physician oversight.
Home health care services are provided through the Company's licensed home
health agency in Missouri or by a third party.
Balanced Gold(SM). The Company's Balanced Gold(SM) program is a
wellness-oriented program which assists residents in remaining independent and
involved with their families, other residents and the local community. The
Balanced Gold(SM) program is included in the Company's core services package at
each of its newly-developed signature assisted living facilities, and the
Company intends to implement all or part of the program at its other assisted
living facilities as appropriate. Balanced Gold(SM) is designed to address a
variety of factors that may affect adversely the health of assisted living
residents, including balance and gait difficulties, incontinence, cognitive
impairment, stress due to pain and chronic conditions and grieving due to
multiple losses in the resident's life. The Balanced Gold(SM) program includes
tai chi exercise to improve balance and gait problems; individually designed
exercise programs, including incontinence and pelvic exercises and diet
guidelines; "Wisdom Keeper" programs to challenge and stimulate mental
capabilities; "Relaxation and Vitality" programs of deep breathing, stretching
exercises and sitting and walking meditation; "Golden Living" programs to assist
58
<PAGE> 60
with grief and loss; gardening to encourage nurturing and independence; and
walking programs to promote health and fitness. Company staff, in consultation
with the resident, as well as his or her family and medical consultants,
determine which of the Balanced Gold(SM) activities are appropriate and best
suited to the resident's needs, interests and capabilities.
Alzheimer's Program. The Company is developing, with the assistance of its
Health Care Advisory Board, an approach to Alzheimer's and other forms of
dementia that includes specialized assessments and clinical approaches for early
and accurate detection, placement and intervention. To meet the needs of
residents with Alzheimer's disease and other related forms of dementia, the
Company is developing specially designed programs to maintain familiarity,
reduce confusion, and still provide a pleasant and appropriate living
environment for these residents. The Company's approach to Alzheimer's also
calls for support groups to be organized in conjunction with the local chapter
of the Alzheimer's Association to provide a safe and supportive community
through which caregivers can share their thoughts and concerns. The Company's
signature assisted living facilities are designed to enable these specialized
services to be provided at all future locations.
The Company currently operates an Alzheimer's program at one of its
assisted living facilities and at three dedicated units in its skilled nursing
facilities. These units feature areas specifically designed to provide
attention, care and services needed to help residents with Alzheimer's maintain
a higher quality of life. The Alzheimer's team members are specially trained to
understand behavior, maximize function, promote safety and encourage resident
independence.
Medication Management. Each assisted living facility contracts with a
pharmacy to provide prescription drugs to those residents who desire to utilize
the pharmacy. Residents are free to use a pharmacy of their choice.
Additionally, subject to state regulatory requirements, at the resident's
request, and based on the facility's assessment of the resident's needs, the
assisted living facility may manage a resident's medications by storing
prescription drugs within the facility, delivering the drugs to the resident and
reminding the resident when the medications need to be taken.
Assisted Living Charges. Monthly assisted living resident charges are
based, in part, on the type of assisted living suite selected and are set at
rates designed to be within the means of seniors in the secondary markets served
by the Company. In addition to its core services package, the Company offers
three additional levels of services to residents whose frailties or medical
condition are more acute. These additional levels of services are currently
offered at prices equal to 4%, 8%, and 12% above the price of the Company's core
assisted living services package. As of June 30, 1997, approximately 25%, 20%
and 10% of the Company's assisted living residents received services at the
first, second and third levels of additional services, respectively.
Substantially all of the Company's current revenues from the provision of
assisted living services are attributable to private payors.
Medical Rehabilitation Services
The Company's philosophy for addressing seniors' living and care needs
includes the belief that preventative therapy will strengthen residents, improve
their overall health and forestall the deterioration that generally accompanies
aging, thus extending their lives and lengths of stay in assisted living
facilities. The Company has developed specialized medical rehabilitation
programs to address the needs of seniors, including programs to specifically
address balance and gait difficulties, incontinence, lymphodema, pain and
osteoarthritis, as well as specific preventative therapy programs for seniors.
For residents in the Company's signature assisted living facilities, each
rehabilitation program is followed up with specialized regimens offered as part
of the Balanced Gold(SM) program. Should a resident's condition warrant
additional rehabilitation, on-staff and contracted therapists are available.
The Company currently provides medical rehabilitation services, including
physical and occupational therapy, on an outpatient basis to residents at two of
its assisted living facilities as well as to patients in a surrounding
community. These outpatient services are provided through the Company's licensed
rehabilitation agency in Pennsylvania or certain of its skilled nursing
facilities. Rehabilitation
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services are provided at the Company's other facilities through contract
services, outpatient rehabilitation facilities or home health agencies.
The Company intends to establish or acquire additional licensed
rehabilitation agencies in those states where it is developing assisted living
facilities. These agencies will enable the Company to provide medical
rehabilitation services to its assisted living residents and the surrounding
communities. Additionally, the Company may enter into strategic joint venture
relationships with rehabilitation providers to provide medical rehabilitation in
certain markets.
Substantially all of the Company's current revenues from provision of
medical rehabilitation services are attributable to federal government
reimbursement programs.
Home Health Care Services
The Company provides home health care services through its licensed home
health agency in Missouri to residents at five of its assisted and independent
living facilities and patients from the surrounding areas. The services the
Company provides include: (i) general and specialty nursing services to
individuals with acute illness, long-term chronic health conditions, permanent
disabilities, terminal illnesses or post-procedural needs; (ii) therapy services
consisting of, among other things, physical, occupational, speech, and medical
social services; (iii) personal care services and assistance with ADLs; (iv)
hospice care for persons in the final phases of incurable disease; (v)
respiratory, monitoring, medical equipment and supplies; and (vi) a
comprehensive range of home infusion and enteral therapies. The Company intends
to develop, acquire or manage home health care service businesses in order to
provide home health care services at other facilities and to seniors living in
surrounding areas. Assisted living residents receiving home health care services
may require skilled nursing services as their medical conditions warrant.
Substantially all of the Company's current revenues from provision of home
health care services are attributable to federal government reimbursement
programs.
Skilled Nursing and Subacute Services
The Company currently provides skilled nursing services at three facilities
in northeast Pennsylvania (169 licensed beds) and ten facilities (1,125 licensed
beds) in southwest Missouri. The Company's skilled nursing facilities provide
traditional long-term care through 24-hour per day skilled nursing care by
registered nurses, licensed practical nurses and certified nursing aides. The
Company also offers a range of subacute care services at its skilled nursing
facilities including specialized programs for pulmonary care, medical
rehabilitation, wound care and dialysis. Subacute care is generally short-term,
goal-oriented care intended for individuals who have a specific illness, injury
or disease, but who do not require many of the services provided in an acute
care hospital. Board certified physicians direct the subacute programs offered
at these facilities.
For fiscal 1997, approximately 76% of the Company's skilled nursing
revenues were attributable to federal and state government reimbursement
programs.
Independent Living Services
The Company operates four independent living facilities in Missouri located
adjacent to skilled nursing facilities operated by the Company. Services
provided at such facilities include: meal preparation, housekeeping, laundry and
transportation. These facilities are licensed as assisted living facilities and
may be converted from independent living facilities at the option of the
Company.
All of the Company's current revenues from the provision of independent
living services are attributable to private payors.
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THE BALANCED CARE SIGNATURE ASSISTED LIVING FACILITY MODEL
The architectural and interior design concept of the Company's signature
assisted living facility models incorporates the Company's operating philosophy
of protecting resident privacy, enabling freedom of choice, encouraging
independence and fostering individuality in a home-like setting. The buildings
are residential in appearance, designed as "neighborhoods" within a "community,"
and offer a home-like environment, while being constructed to institutional
health care facility standards. The building designs incorporate the Company's
mission and dedication to providing a new outlook for seniors, encouraging
choice, wellness, and vitality. The Company believes that its signature
facilities achieve its mission and goals to meet the needs and expectations of
its residents and their families, providing a secure environment and care in a
home-like setting where the Company is responsive to each individual's special
needs and the universal desire for independence, dignity and purpose. The
Company believes that its residential environment also accomplishes several
other objectives, including: (i) lessening the trauma of change for residents
and their families; (ii) achieving operational efficiencies; (iii) facilitating
resident mobility and ease of access by caregivers; and (iv) differentiating the
Company from other assisted living and long-term care operators.
The models are freestanding buildings that range in size from 48 units to
106 units and are designed to accommodate the full range of assisted living
services offered by the Company, including the Company's Balanced Gold(SM) and
Alzheimer's programs. The buildings are usually single story and of
incombustible construction, and are designed to accommodate future expansion.
The interior layout is designed to promote efficient delivery of resident care
as well as resident independence. The design of the facilities allows
specialized grouping of residents and a central core for resident interaction.
In addition, the buildings are designed with a fully-equipped therapy gym and
treatment rooms for provision of medical rehabilitation services. The buildings
range in size from 27,000 square feet to 68,000 square feet and are adaptable to
construction on sites ranging from two to five acres. Approximately 38% of a
building is devoted to common areas and contains resident amenities including a
parlor, living room, dining room, club room, library, activity room,
beauty/barber shop, spa, laundry, wellness (therapy) center and neighborhood
lounges with pantries. The support areas include administrative offices,
resident services offices, a kitchen, common laundry and housekeeping/
maintenance areas. Resident units, including studio, privacy, companion and one
bedroom suites, are functionally grouped as "neighborhoods" within a "community"
and are configured internally to provide private bath, living area and sleeping
area with emergency call systems and cable television service. Porches,
terraces, gardens and activity areas are designed to fulfill outdoor interests
of residents.
The Company has three basic building plan design prototypes which provide
it with flexibility in adapting the model to a particular site and to
accommodate the various income and care levels demanded in a particular market.
Daily rates at the Prototype A facilities are currently expected to range from
$78.00 to $105.00 and Prototype B from $68.00 to $82.00. Daily rates for a
Prototype C facility, the design of which has not been finalized, are currently
expected to range from $58.00 to $68.00.
OPERATING FACILITIES
The following table sets forth certain information with respect to the
senior living and care facilities (other than its Wisconsin assisted living
facilities which the Company plans to sell) currently operated by the Company.
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<TABLE>
<CAPTION>
RESIDENT CAPACITY
BY CARE LEVEL(1) OCCUPANCY
OWNED (O)/ --------------------- RATE AS OF
FACILITY LOCATION LEASED (L) ALF SNF ILF SEPTEMBER 30, 1997
- --------------------------------------------------------- ---------- ----- ----- --- ------------------
<S> <C> <C> <C> <C> <C>
CURRENTLY OPERATED:
MISSOURI
Dixon
Balanced Care, Dixon(2).............................. L -- 60 -- 92%
Hermitage
Balanced Care, Hermitage(2).......................... L -- 120 -- 87%
Lebanon
Balanced Care, Lebanon North(2)...................... L -- 180 -- 84%
Balanced Care, Lebanon South(2)...................... L 12 106 -- 95%
The Terraces at Lebanon South(2)..................... L -- -- 31 70%
Nixa
Balanced Care, Nixa(2)............................... L -- 82 -- 94%
The Terraces at Nixa(2).............................. L -- -- 30 89%
Republic
Balanced Care, Republic(2)........................... O -- 127 -- 85%
Springfield
Balanced Care, Springfield East(2)................... L -- 120 -- 89%
The Terraces at Springfield East(2).................. L -- -- 31 90%
Balanced Care, Springfield West I(2)................. L -- 180 -- 89%
Balanced Care, Springfield West II(2)................ L -- 90 -- 80%
The Terraces at Springfield(2)....................... L 34 -- -- 71%
Nevada
Balanced Care, Nevada(2)............................. O -- 60 -- 91%
The Terraces at Nevada(2)............................ L -- -- 28 66%
The Terraces of Balanced Care(3)..................... L 27 -- -- 88%
The Terraces of Balanced Care(3)..................... L 25 -- -- 77%
Butler
The Terraces of Balanced Care(3)..................... L 25 -- -- 70%
Lamar
The Terraces of Balanced Care(4)..................... L 25 -- -- 85%
--- ----- ---
Subtotal:........................................ 148 1,125 120
--- ----- ---
PENNSYLVANIA
Allison Park
Outlook Pointe(TM) at Allison Park(5)................ L 85 -- -- 100%
State College
Outlook Pointe(TM) at State College(6)............... L 54 -- -- 40%
Altoona
Outlook Pointe(TM) at Altoona(7)(8)(9)............... L 54 -- -- --
Harrisburg
Outlook Pointe(TM) at Harrisburg(8)(9)............... L 57 -- -- --
Bloomsburg
Bloomsburg Manor(10)................................. L 69 -- -- 96%
Darlington
Feltrop's Personal Care Home(11)..................... O 92 -- -- 96%
Kingston
Kingston Manor(10)................................... L 78 -- -- 94%
Kingston Health Care Center(10)...................... L -- 65 -- 98%
Peckville
Mid Valley Manor(10)................................. L 71 -- -- 98%
Blakely Pine Health Care Center(10).................. L -- 38 -- 100%
Old Forge
Old Forge Manor(10).................................. L 49 -- -- 97%
Wyoming
West View Manor(10).................................. L 50 -- -- 97%
Butler
Silver Haven Summit(12).............................. O 36 -- -- 94%
Sarver
Sterling Care of Sarver(12).......................... O 37 -- 4 93%
</TABLE>
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<TABLE>
<CAPTION>
RESIDENT CAPACITY
BY CARE LEVEL(1) OCCUPANCY
OWNED (O)/ --------------------- RATE AS OF
FACILITY LOCATION LEASED (L) ALF SNF ILF SEPTEMBER 30, 1997
- --------------------------------------------------------- ---------- ----- ----- --- ------------------
<S> <C> <C> <C> <C> <C>
Saxonburg
Sterling Care of Saxonburg(12)....................... O 79 -- 16 99%
Bloomsburg
Gethsemane Retirement Community and Rehabilitation O -- 66 -- 99%
Center(13).........................................
Millville
Gethsemane Assisted Living Community(13)(14)......... O 51 -- -- 49%
----- ----- ---
Subtotal:........................................ 862 169 20
----- ----- ---
ARKANSAS
Sherwood
Outlook Pointe(TM) at Sherwood(8)(9)................. L 50 -- 7 --
Mountain Home
Outlook Pointe(TM) at Mountain Home(8)(9)............ L 57 -- -- --
Maumelle
Outlook Pointe(TM) at Maumelle(8)(9)................. L 50 -- 7 --
Pocohontas
Outlook Pointe(TM) at Pocohontas(8)(9)............... L 57 -- -- --
Blytheville
Outlook Pointe(TM) at Blytheville(9)(15)............. L 57 -- -- --
----- ----- ---
Subtotal:........................................ 271 0 14
----- ----- ---
NORTH CAROLINA
Raleigh
Northridge Retirement Center(16)..................... O 117 -- -- 100%
----- ----- ---
Total.......................................... 1,398 1,294 154
===== ===== ====
</TABLE>
- ---------------
(1) "ALF" means assisted living facility, "SNF" means skilled nursing facility
and "ILF" means independent living facility. The Company's ILFs in Missouri
are licensed as ALFs and may be converted to ALFs as the needs of its
residents so require.
(2) Acquired August 1996.
(3) Acquired May 1997.
(4) Acquired August 1997.
(5) Acquired March 1996, a 33-bed expansion was completed and opened in October
1997.
(6) Opened in May 1997. The occupancy rate reflects such recent opening.
(7) Opened in October 1997.
(8) The occupancy rate is not meaningful as the facilities opened in September
and October 1997.
(9) In January 1998, the Company intends to sell certain of the assets and
assign its leasehold interest in this facility to an Operator/Lessee (as
defined herein). The Company intends to manage the facility for the
Operator/Lessee and expects to have an option to acquire the stock of the
Operator/Lessee. See "Business -- Development."
(10) Acquired January 1997.
(11) Acquired October 1997.
(12) Acquired in October 1997.
(13) Acquired in January 1998.
(14) Opened in March 1997. The occupancy rate reflects such recent opening.
(15) Opened in November 1997.
(16) Acquired in December 1997.
The above table excludes the Company's seven Wisconsin assisted living
facilities which the Company intends to sell. The Wisconsin facilities consist
of seven owned assisted living facilities located in Beloit (23 resident
capacity), Mauston (15 resident capacity), Monroe (23 resident capacity),
Pardeville (nine resident capacity), Portage (30 resident capacity), Tomah (30
resident capacity) and Waupun (15 resident capacity). See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Planned Divestiture." In June 1997, management determined that the
market in which its Wisconsin assisted living facilities are located does not
provide adequate opportunity to achieve the operational efficiencies necessary
for the Company to operate
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profitably. As a result, the Company committed to a plan for the disposal of its
Wisconsin assisted living facilities.
The Company also decided in June 1997 to approach national pharmacy
providers about acquiring the Pharmacy. Management decided to sell the Pharmacy
in order to focus on its assisted living and skilled nursing operations. In
addition, the Pharmacy Divestiture provided some of the working capital needed
to sustain the Company's continued growth.
DEVELOPMENT
An integral element of the Company's growth is the design, development and
opening of its signature assisted living facilities. The Company believes that
its signature assisted living facilities meet the needs of the upper middle,
middle and moderate income populations in its target markets and are designed to
provide the broad range of services contemplated by its Balanced Care Continuum
strategy over a range of pricing options. In addition to the eight signature
assisted living facilities opened to date by the Company, the Company
anticipates opening an additional two assisted living facilities, all of which
are currently under construction, prior to February 1998. The Company currently
plans to develop approximately 75 of its signature assisted living facilities
with a capacity of approximately 6,000 residents over the next three years.
In evaluating a potential market, the Company utilizes an in-house
developed model and a market analysis which considers such factors as bed need,
population, income and age demographics, target site visibility, probability of
obtaining zoning approvals, estimated level of market demand, the opportunity
for the Company to offer a range of services comprising the senior living and
health care continuum and the ability to maximize management resources in a
specific market by clustering its development and operating activities.
The primary milestones in the Company's development process are: (i) site
selection and signing of a land purchase option agreement, (ii) obtaining
permits and approvals necessary to commence construction, (iii) completion of
construction and (iv) operational set-up and training prior to opening. Once a
market has been identified, site selection and signing of a land purchase option
agreement typically take approximately 30 to 90 days and obtaining permits and
approvals takes approximately 60 to 90 days. Architectural design is done
in-house by a Company architect, while hands-on construction functions are
contracted to outside contractors. Construction of an assisted living facility
normally takes six to nine months, depending on geographic location and weather
conditions. Pre-opening operational activities begin approximately one month
after construction begins. After a facility receives a certificate of occupancy,
residents usually begin to move in immediately. The Company generally expects
occupancy of newly developed assisted living facilities to reach targeted
occupancy of 92% within 10 to 21 months after opening, depending on the size of
the facility.
The Company believes that it differentiates itself from many of its
competitors by its senior management's expertise in the development of
rehabilitation hospitals and other health care facilities and operations as well
as its in-house market research and development capabilities. The development
staff is currently comprised of eight professionals with over 100 years of
collective experience in real estate and health care facility development,
including analysts who target potential markets through the use of an in-house
developed bed need model and developers who conduct market analysis to identify
market bed needs, select appropriate building sites, and coordinate all local
and state governmental license and permit approvals. In addition, the design and
construction group is responsible for adapting prototypical facility design to
the selected site, making adjustments to the prototype plans to comply with
local building codes and awarding and monitoring contracts with third-party
architects and general contractors. The Company's design and construction group
also conducts field inspections and construction draw approvals during the
construction life of the project. Project managers and the in-house licensed
architect in the design and construction group collectively have 110 years of
construction management experience.
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The Company's financial analysts generate five year projections for each
anticipated project. These projections are based on all costs associated with a
particular prototype facility chosen for that locale. All projects are subject
to predetermined hurdle rates for return on investment and minimum margins for
net operating income and pretax income. The senior management team and Board of
Directors approve all development projects. The capitalized costs to develop and
construct one of the Company's signature assisted living facilities is generally
projected to range between $44,000 and $85,000 per bed.
To date, the Company has developed assisted living facilities for health
care REITs. The Company has leased the facilities from the REITs when
construction has been completed. The Company's recent and future development
projects involve or are expected to involve entering into development agreements
with third-party owners, which are or are expected to be health care REITs. An
independent third-party company (the "Operator/Lessee") will lease the assisted
living facility from the REIT when construction has been completed. The Company
expects to manage the assisted living facility pursuant to a management
agreement with the Operator/Lessee. Each management agreement provides or is
generally expected to provide for a ten-year period with annual fees
approximating 6.0% of net revenues of the facility. It is anticipated that the
Company will have the option to purchase the stock of the Operator/Lessee for
fair market value at any time during the term of the management agreement. In
January 1998, the Company intends to sell certain assets and assign the
leasehold interests of ten of its operating subsidiaries to Operator/Lessees for
an aggregate price of approximately $2,160,000, which does not represent a
significant disposition of assets. The Company intends to enter into management
agreements with the Operator/Lessees and the Company expects to have the option
to purchase the stock of the Operator/Lessees for fair market value at any time
during the term of the management agreements.
The following table sets forth certain information regarding the Company's
signature assisted living facilities for which the zoning, permitting or
construction process has commenced and which the Company is developing. For each
of the locations, the Company or the prospective third-party owner has, at a
minimum, an option to purchase the real estate on which the facility is to be,
or is being, developed. In addition to facilities listed below, the Company is
also engaged in preliminary development activities with respect to other
possible sites for future facilities.
<TABLE>
<CAPTION>
ESTIMATED ESTIMATED
CONSTRUCTION COMPLETION
ASSISTED LIVING FACILITY RESIDENT START DATE DATE
LOCATION CAPACITY OWNERSHIP (QUARTER END) (QUARTER END)
-------------------------- -------- ---------- ------------- ---------------
<S> <C> <C> <C> <C>
NORTH CAROLINA
Greensboro.................................... 50 Lease(2) Commenced June 1998
-----
OHIO
Hilliard...................................... 106 Manage(1) Mar. 1998 June 1999
Ravenna....................................... 60 Lease(2) Commenced Mar. 1998
Lima.......................................... 66 Manage(1) Commenced Sept. 1998
Xenia......................................... 106 Manage(1) Commenced Dec. 1998
Medina........................................ 80 Manage(1) Dec. 1998 Mar. 1999
Westerville................................... 106 Manage(1) Sept. 1998 Dec. 1999
Steubenville.................................. 80 Manage(1) June 1998 June 1999
Mansfield..................................... 66 Manage(1) Commenced Sept. 1998
Centerville................................... 106 Manage(1) Mar. 1998 June 1999
Akron......................................... 106 Manage(1) June 1998 Sept. 1999
Sagamore Hills................................ 80 Manage(1) Sept. 1998 Sept. 1999
-----
Subtotal: 962
-----
FLORIDA
Tallahassee................................... 80 Manage(1) Sept. 1998 Dec. 1999
</TABLE>
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<PAGE> 67
<TABLE>
<CAPTION>
ESTIMATED ESTIMATED
CONSTRUCTION COMPLETION
ASSISTED LIVING FACILITY RESIDENT START DATE DATE
LOCATION CAPACITY OWNERSHIP (QUARTER END) (QUARTER END)
-------------------------- -------- ---------- ------------- ---------------
<S> <C> <C> <C> <C>
PENNSYLVANIA
Loyalsock..................................... 72 Manage(1) Sept. 1998 Sept. 1999
Reading....................................... 64 Lease(2) Commenced Dec. 1997
Dillsburg..................................... 66 Manage(1) Mar. 1998 Dec. 1998
Hampden....................................... 106 Manage(1) Commenced Dec. 1998
Scranton...................................... 72 Manage(1) Commenced Sept. 1998
Chippewa...................................... 66 Manage(1) Mar. 1998 Dec. 1998
Lewistown..................................... 72 Manage(1) Mar. 1998 June 1998
Mid-Valley.................................... 40 Manage(1) Mar. 1998 Sept. 1998
Lewisburg..................................... 72 Manage(1) Mar. 1998 Sept. 1998
Hazelton...................................... 72 Manage(1) Sept. 1998 Mar. 1999
Bridgeville................................... 106 Manage(1) Mar. 1998 June 1999
Shippensburg.................................. 66 Manage(1) Mar. 1998 Dec. 1998
Berwick....................................... 72 Manage(1) Mar. 1998 Dec. 1998
York.......................................... 66 Manage(1) Mar. 1998 Mar. 1999
Bangor........................................ 72 Manage(1) Sept. 1998 June 1999
--------
Subtotal: 1,084
--------
TENNESSEE
Jackson....................................... 66 Manage(1) Mar. 1998 Dec. 1998
Bristol....................................... 66 Manage(1) June 1998 June 1999
Knoxville..................................... 106 Manage(1) Sept. 1998 Sept. 1999
Bartlett...................................... 66 Manage(1) June 1998 June 1999
Murfreesboro.................................. 66 Manage(1) Mar. 1998 Mar. 1999
Johnson City.................................. 66 Manage(1) Sept. 1998 Sept. 1999
Oak Ridge..................................... 66 Manage(1) Sept. 1998 Sept. 1999
Kingsport..................................... 66 Manage(1) June 1998 June 1999
--------
Subtotal: 568
--------
VIRGINIA
Harrisonburg.................................. 60 Manage(1) Commenced Mar. 1998
Roanoke....................................... 60 Manage(1) Commenced Mar. 1998
Danville...................................... 66 Manage(1) Commenced June 1998
Chesterfield.................................. 80 Manage(1) June 1998 June 1999
--------
Subtotal: 266
--------
MISSOURI
Springfield................................... 64 Manage(1) June 1998 June 1999
--------
INDIANA
Evansville.................................... 106 Manage(1) Mar. 1998 June 1999
Anderson...................................... 66 Manage(1) Mar. 1998 Mar. 1999
--------
Subtotal: 172
MARYLAND
Hagerstown.................................... 80 Manage(1) June 1998 June 1999
WEST VIRGINIA
Martinsburg................................... 66 Manage(1) Mar. 1998 Dec. 1998
--------
Total: 3,392
=========
</TABLE>
- ------------
(1) The Company is expected to manage the facility upon completion for the
Operator/Lessee and is expected to have the option to acquire the stock of
the Operator/Lessee.
(2) The Company intends to sell certain of the assets and assign its leasehold
interests in this facility in January 1998. The Company intends to manage
the facility for the Operator/Lessee and expects to have the option to
acquire the stock of the Operator/Lessee. See "Business--Development."
ACQUISITIONS AND STRATEGIC ALLIANCES
Since its inception, the Company's growth has been substantially
attributable to the acquisition of 24 assisted living facilities with a capacity
for 1,119 residents, 13 skilled nursing facilities with a
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<PAGE> 68
capacity for 1,294 patients, and four independent living facilities with a
capacity for 140 residents, as well as a home health care agency (excluding the
Company's seven Wisconsin assisted living facilities and the Pharmacy). See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Planned Divestiture." The Company intends to continue to pursue
selective acquisitions to enter new markets, to enable the Company to develop
and provide one or more components of the Balanced Care Continuum in its
markets, to create clusters of assisted living facilities in selected markets,
to benefit from operating efficiencies and to develop a leading market position.
The Company believes that clustering facilities geographically will create
opportunities for operating efficiencies such as leveraging existing corporate
office and regional operations and marketing staff, lowering workers'
compensation and other employee benefit costs and lowering food and supplies
costs. In addition, the Company will consider entering into joint ventures or
other alliances with skilled nursing, medical rehabilitation, home health care
and other senior health care providers as a cost effective means of providing a
full range of care to residents of the Company's facilities and a senior care
continuum that eases an individual's transition from one setting to another.
In evaluating a potential acquisition, the Company considers, among other
factors: (i) location, construction quality, condition and design of the
facility, (ii) current and projected facility cash flow, (iii) the ability to
increase revenue, occupancy and cash flows by providing a full range of
services, (iv) cost of facility repositioning (including renovations, if any),
(v) the reputation of the facility in the local market, and (vi) the extent to
which the acquisition will complement the Company's development plans and
strategy. The Company's senior management and its acquisition team have
extensive experience in the acquisition of assisted living and other health care
facilities, including market assessment, identification of targets, due
diligence, negotiating, pricing, structuring, closing and integrating
acquisitions. Additionally, the Company's senior management team has extensive
acquisition experience as well as contacts with a large number of assisted
living, medical rehabilitation, home health care and skilled nursing and
subacute facility owners and operators.
The Company believes that the current fragmentation of the assisted living
industry will continue to create potential acquisition candidates for the
Company and that the competitive nature of the market will increase selling
activity as smaller, less well-capitalized providers face increasing competition
from larger competitors who can offer a broader range of services at more
attractive prices. The Company believes that through the reputation of its
management and the quality of the assisted living facilities it owns, operates
and is currently developing, it will become an attractive acquiror for assisted
living facilities. The Company intends to pursue both strategic and single
portfolio acquisitions that meet its quality standards and present the
opportunity to increase its profitability.
OPERATIONS
Centralized Corporate Management
The Company's corporate and other administrative functions are centralized
so that the facility-based management and staff can focus on resident care. The
Company's corporate office, located in Mechanicsburg, Pennsylvania, is generally
responsible for: (i) establishing Company-wide policies and procedures relating
to, among other things, resident care and operations, (ii) performing accounting
and finance functions, (iii) developing and implementing employee training
programs and materials, (iv) coordinating human resources and food services
functions, (v) coordinating marketing functions, and (vi) providing strategic
direction. In addition, financing, development, construction and acquisition
activities, including feasibility and market studies, facility design,
development and construction management are conducted by the Company's corporate
development and acquisition teams.
The Company manages the operations of each of its facilities through
standardized management reporting and centralized control of capital
expenditures and the purchase of larger and more frequently used supplies.
Facility expenditures are monitored by regional operations teams headed by one
of the Company's Regional Vice Presidents who are responsible for the financial
performance of the facilities in their region. The operational activities of the
Company's assisted living facilities are
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directed by the Company's Vice President of Operations who is responsible, with
the regional Vice Presidents, for the opening and operation of these facilities.
Community-Based Management
An assisted living Community Director or skilled nursing Facility
Administrator manages the operations at each assisted living or skilled nursing
facility, including oversight of the quality of care, delivery of resident
services, and monitoring of financial performance, and is responsible for all
personnel, including assisted living, food service, maintenance, activities,
security, housekeeping, and, where applicable, nursing. Directors and
Administrators are compensated based on attaining certain quality service goals
and on the financial goals of the facility. In most cases, each facility also
has department managers that direct nursing or care services, dining services,
activities, transportation, environmental, housekeeping and marketing functions.
In its assisted living communities, the Company has adopted the concept of
a multi-task work environment whereby each employee's responsibilities span a
number of traditional job descriptions. For example, an employee may, during the
course of a day, provide housekeeping, food delivery service, activities, and
assistance with ADLs to residents. On-site care managers and residents'
assistants provide most of the actual resident care in conjunction with a small
support team consisting of a nurse, a housekeeper, a maintenance helper, an
administrative coordinator and a small dining service team.
The Company actively recruits personnel to maintain adequate staffing
levels at its existing facilities, as well as additional staff for new or
acquired facilities, prior to opening. The Company has adopted comprehensive
recruiting and screening programs for management for positions that utilize
personnel profiling and corporate office interviews, and background checks. The
Company offers system-wide training and orientation for its resident care
employees, department level managers, and executive staff at the facility level
through Company-sponsored programs.
Quality Assurance and Training
The Company's quality assurance program is designed to achieve and maintain
a high degree of resident and family satisfaction with the Company's care and
services. Corporate office staff coordinate the implementation of the quality
assurance program at each of the Company's facilities. The Company encourages
resident and family participation and seeks feedback from families and residents
through surveys, focus groups, resident councils and discussions with family
members. The Company provides training programs to ensure that its quality
standards are achieved by its employees at each assisted living facility. In
addition, inspections of each facility are conducted regularly by corporate
staff. These periodic inspections involve the review of all aspects of
operations, care, and services provided, as well as the overall appearance and
cleanliness of the facility.
Integration of Acquired Facilities
The Company has developed a plan and organization structure to begin a
complete integration of each acquired facility immediately following its
acquisition. An interdisciplinary integration team begins conversion of
financial and information systems at closing, with operations, marketing and
human resource policies and procedures converted during the first six months of
operation.
Marketing
The Company's marketing program has been developed by the corporate
marketing staff under the direction of the Company's Vice President of Sales and
Marketing and is modified in accordance with the needs of each region in which
the Company operates. Marketing focuses on creating awareness of the Company and
its services among prospective residents, their families, professional referral
sources and other key decision makers. Marketing efforts are implemented on a
regional and local level under the supervision of the corporate marketing staff.
Corporate office personnel develop
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<PAGE> 70
the overall marketing strategies for each facility, produce all marketing
materials, maintain marketing databases, oversee direct mailings, place all
media advertising and assist facility personnel in the initial development and
continuing refinement of marketing plans. The Company conducts pre-construction
surveys of age- and income-qualified prospective residents and their families
living within a certain radius of the proposed assisted living construction site
to ensure that the Company understands the needs and demands of a particular
marketplace. Focus groups are organized during the pre-opening phase to collect
data from key community representatives about seniors' needs and to inform them
of the Company's approach to senior care.
Before opening a new assisted living facility, the Company contacts
referral sources and conducts marketing programs that generate public awareness
beginning with the start of construction and intensify several months prior to
opening of the facility. An on-site Marketing Coordinator and Community Director
are at the residence approximately eight months prior to the opening of the
facility and are supported by the Company's corporate marketing department. The
Company generally expects occupancy of newly developed assisted living
facilities to reach targeted occupancy of 92% within 10 to 21 months after
opening, depending on the size of the facility.
Once a facility opens, the Company believes that satisfied residents and
their families are its most important referral sources. The Company's emphasis
on high quality services and resident satisfaction create a strong referral base
in the surrounding community. In addition, the Company focuses on developing the
reputation of the facilities for quality care and its Balanced Gold(SM) program
among potential referral sources.
In markets where the Company offers multiple components of the Balanced
Care Continuum, such as assisted living, outpatient rehabilitation services,
skilled nursing, subacute care, home care and hospice services, a network
approach to sales and marketing is utilized. A community-based sales force that
understands the health care environment of each market, including competitor
positioning, referral patterns and the maturity of managed care, facilitates
cross selling of the Company's services. Direct sales efforts increase referrals
for all services through the account management of professional referral sources
such as physicians, hospitals, and managed care plans.
Management Information Systems
The Company's information systems department, under the direction of the
Company's Vice President of Corporate Services, develops, implements and
maintains management and financial systems which enable the Company to closely
monitor operating costs and quickly distribute financial and operating
information to appropriate levels of management in a cost efficient manner. The
Company uses flexible input methods and communications to allow for distributed
data collection and analysis. Management believes that its current data systems
are adequate for current operations and provide the flexibility to accommodate
the planned growth of its operations without disruption or significant
modification to existing systems through fiscal year 1999. The Company plans to
begin upgrading the existing financial system during fiscal year 1999 to
accommodate future growth. The system upgrade will involve expansion of the
Company's systems staff and a substantial financial commitment.
The Company uses high quality hardware and operating systems from current
and proven technologies to ensure reliability and optimum system performance.
All vendors of the Company's information systems have advised the Company that
such systems accommodate year 2000 calendar changes without modification. All
software systems are commercially licensed with appropriate support and upgrade
options. For its skilled nursing operations, the Company has established on-line
electronic billing with Medicare and state Medicaid programs. In addition, the
facility-based system generates computer-assisted medical records that allow for
the creation of individualized care plans, physician orders and administrative
and observation records. All of the Company's facilities use electronic systems
throughout the marketing, admission and patient management process. Acquired
properties are converted to the Company's information systems after acquisition.
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<PAGE> 71
COMPETITION
The Company is one of the 50 largest providers of assisted living services
in the United States in terms of resident capacity, according to the Largest
Providers Annual Survey 1997, published by KPMG Peat Marwick LLP. The health
care industry is highly competitive and the Company believes that competition in
its current and targeted markets will continue to increase. There are currently
few regulatory and other barriers to entry in the assisted living industry. The
Company faces competition for residents from numerous local, regional and
national providers of facility-based assisted living and long-term care,
including skilled nursing facilities, as well as medical rehabilitation and home
health care providers. Many of the Company's present and potential competitors
are significantly larger or have greater financial resources than those of the
Company. The Company believes the primary competitive factors in the senior care
industry are: (i) reputation for, and commitment to, high quality care; (ii)
quality of support services offered (such as home health care and food
services); (iii) price of services; (iv) physical appearance and amenities
associated with the facilities; and (v) location. Because seniors tend to choose
senior living facilities near their homes, the Company's principal competitors
are other senior living and long-term care facilities in the same geographic
areas as the Company's facilities. The Company also competes with other health
care businesses with respect to attracting and retaining nurses, technicians,
aides, and other high quality professional and non-professional employees and
managers. Additionally, in implementing its growth strategy the Company will
face competition for the development and acquisition of assisted living, skilled
nursing and related senior care facilities.
Management believes that the Company's competitive position in its targeted
markets is enhanced by the disciplined practices applied to market selection.
The Company utilizes an in-house developed model for market analysis to
determine the net bed need expected for each community. This analysis considers
such factors as population, income and age demographics and the number of
competitor beds in the market to arrive at the demonstrated net bed need,
excluding the facility proposed by the Company. A net bed need of at least three
times the size proposed is necessary in order for the Company to proceed to
enter that market. Also considered are the opportunity for the Company to offer
a range of services comprising the senior living and health care continuum, the
sophistication of competitor facilities, and the ability to maximize management
resources in a specific market by clustering its development and operating
activities.
GOVERNMENT REGULATION
The health care industry is subject to extensive federal, state and local
regulation. The various layers of governmental regulation affect the Company's
business by controlling its growth, requiring licensure or certification of its
facilities, regulating the use of its facilities and controlling reimbursement
to the Company for services provided. Licensing, certification and other
applicable governmental regulations vary from jurisdiction to jurisdiction and
are revised periodically. It is not possible to predict the content or impact of
future legislation and regulations affecting the health care industry.
Laws and regulations governing skilled nursing facilities are particularly
extensive and establish minimum standards in a variety of areas, including
physical plant specifications; personnel training and education; the level of
nursing, physician, rehabilitation, social, dietary and recreational services to
be provided; and safety and evacuation plans. The Omnibus Reconciliation Act of
1987 ("OBRA") significantly redefined the scope and nature of federal
regulations governing skilled nursing facilities certified to participate in the
Medicare and Medicaid programs, with an emphasis on resident rights and quality
of care. Skilled nursing facilities are also generally subject to and must
comply with state and/or local building and fire codes. In addition, some
states, including Missouri, have certificate of need laws applicable to skilled
nursing facilities. Certificate of need laws require that a state agency
determine that a sufficient need exists for a facility before it may be opened.
These laws may also regulate permitted capital expenditures and expansion of
services and beds.
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Skilled nursing facilities, like other health care providers, are
periodically inspected by governmental agencies with authority over licensing
and certification for participation in the Medicare and Medicaid programs. New
survey and certification requirements under OBRA for participation in the
Medicare and Medicaid programs became effective in 1995, significantly changing
the process of surveying long term care facilities. These requirements
established a graduated system of penalties and remedies to match the severity
of the deficiency. Facility deficiencies may result in the imposition of fines
and penalties, a need to undertake corrective actions, a temporary moratorium on
admissions pending correction of deficiencies, and could result in
decertification from the Medicare and Medicaid programs or loss of licensure and
closure of the facility. To date, these regulations have not had a material
adverse effect on the Company's operations.
The federal government, through its Department of Health and Human
Services, has recently proposed revisions to the conditions for participation in
the Medicare program applicable to home health care providers. These revised
conditions, as proposed, focus on matters such as patient rights, outcomes of
care, patient assessment, care planning, and quality assessment. The Company is
not able to predict at this time what the content of the final revised
conditions will be or the impact the final conditions may have on the Company's
home health care services. In addition, on September 15, 1997, President Clinton
imposed a six-month moratorium, effective immediately, on the entry of new home
health care providers into the Medicare program. During the moratorium, the
Department of Health and Human Services is expected to implement changes to
Medicare conditions of participation that are applicable to home health care
providers, including re-certification as a Medicare provider every three years,
submission of an independent audit, demonstration of expertise and experience by
serving a minimum number of patients, posting of a $50,000 surety bond prior to
certification and providing information to HCFA concerning ownership of certain
related businesses.
The Company's assisted living facilities are subject to regulation by
various state and local agencies. There are currently no federal laws or
regulations specifically governing assisted living facilities. State
requirements relating to the licensing and operation of assisted living
facilities vary from state to state; however, most states regulate many aspects
of a facility's operations, including physical plant requirements; resident
rights; personnel training and education; requisite levels of resident
independence; administration of medications; safety and evacuation plans; and
the level and nature of services to be provided, including dietary and
housekeeping. In most states, assisted living facilities must also comply with
state and local building and fire codes and certain other licenses or
certifications, such as a food service license, may be required. In addition, in
several states, including Arkansas, Missouri and New Jersey, certificate of need
laws apply to assisted living facilities. North Carolina imposed a 12-month
moratorium, effective August 28, 1997, on the addition of adult care home beds
in the state, subject to certain exceptions. The exceptions include, among
others, an exception for certain development or expansion plans submitted to the
state prior to the date of the moratorium. The Company's development project in
Greensboro, North Carolina is not subject to the moratorium since it meets the
requirements of this exception. Assisted living facilities are subject to
periodic survey by governmental agencies with licensing authority. In certain
circumstances, failure to satisfy survey standards could result in a loss of
licensure and closure of a facility.
Because assisted living facilities historically have not been considered as
traditional health care entities, they have not been subject to the degree of
regulation which governs nursing homes and other health care providers. As
assisted living care emerges as a cost-effective alternative to nursing facility
care, it is anticipated that assisted living facilities could become subject to
more extensive regulation, particularly in the areas of licensure and
reimbursement. The content of such regulations, the extent of any increased
regulation and the impact of any such regulation on the Company cannot be
predicted at this time and there can be no assurance that such regulations will
not adversely affect the Company's business.
As a Medicare and Medicaid provider with respect to its skilled nursing
facilities and rehabilitation and home health care operations, the Company is
subject to a variety of laws regulating relationships among health care
facilities, providers and physicians. Among these laws is the federal "Stark
Act"
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legislation which prohibits, with some exceptions, a physician from referring
patients for certain designated health care services, including home health care
and certain rehabilitation services, to entities in which the physician or a
member of his or her family has a financial interest. The Company, as a Medicare
and Medicaid provider, is also subject to federal anti-kickback laws which
prohibit the payment or receipt of any remuneration in return for, or to induce,
the referral of patients for items or services that are paid for, in whole or in
part, by Medicare or Medicaid. Violation of these provisions could result in
civil or criminal penalties, as well as exclusion from participation in the
Medicare and Medicaid programs. There are currently a number of federal
initiatives being undertaken to increase enforcement of the federal
anti-kickback law and other antifraud and abuse provisions. Additionally, the
Balanced Budget Act of 1997 (the "Budget Act"), signed into law on August 5,
1997, contains a number of anti-fraud provisions designed to further fight abuse
and enhance program integrity. Certain states have also enacted anti-kickback
laws patterned on the federal law. The Company believes that its operations are
in substantial compliance with the laws applicable to Medicare and Medicaid
providers, including antifraud and abuse provisions; however, there can be no
assurance that the administrative or judicial interpretation of such laws or the
regulations promulgated thereunder will not in the future have a material
adverse impact on the Company's operations or that the Company will not be
subject to an investigation which would require a significant investment of time
and manpower by the Company. Assisted living facilities may be eligible to
participate as Medicaid providers and receive reimbursement through Medicaid
waiver programs and managed care plans. If the Company elects to become a
Medicaid provider with respect to its assisted living facilities, such entities
would become subject to all of the requirements applicable to Medicaid
providers, including the anti-fraud and abuse legislation.
The Company derives a significant portion of its revenues from federal and
state reimbursement programs. All of the skilled nursing facilities operated by
the Company are certified to receive benefits under Medicare and Medicaid, and
the Company's home health care agency is certified under Medicare. Medicare
currently utilizes a cost-based reimbursement system for skilled nursing
facilities and home health care agencies which, subject to limits fixed for a
particular geographic area, reimburse skilled nursing facilities and home health
agencies for reasonable direct and indirect allowable costs incurred in
providing routine services (including nursing, room and board and administrative
overhead), as well as ancillary costs (such as physical, occupational and speech
therapy, drugs, supplies and equipment) and capital-related costs.
The reimbursement methodology for a variety of health care providers will
be significantly changed as a result of provisions contained in the Budget Act,
which provisions could materially impact the Company's operations and financial
condition. The Budget Act provides for the establishment of a prospective
payment system ("PPS") for skilled nursing services (rather than the
retrospective cost-based methodology used currently). The PPS for skilled
nursing facilities will be phased in over three cost reporting periods,
commencing on or after July 1, 1998. During the transition period, the payment
rate will be based on a percentage blend of a facility-specific rate and a
federal per diem rate. Once the PPS is fully implemented, skilled nursing
facilities will be paid a federal per diem rate for covered services, which
include routine and ancillary services and most capital-related costs. The
Budget Act additionally establishes a PPS for home health care services pursuant
to which all services which are currently paid on a reasonable cost basis will
be paid on a prospective basis. The PPS for home health care services is to
begin October 1, 1999, with a transition period not to exceed four years. Until
such time as there is full implementation of the PPS for home health care
services, the Budget Act imposes a number of interim modifications on
reimbursement, including a reduction in per visit cost limits. The Budget Act
also modifies reimbursement rates for rehabilitation agencies and outpatient
therapy providers. It is not possible to predict at this time the impact that
any or all these changes in reimbursement methodology may have on the business,
results of operations or financial condition of the Company.
Medicaid programs currently exist in all of the states in which the Company
has skilled nursing facilities and also apply in some of the states where the
Company has assisted living facilities. While
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these programs differ in certain aspects from state to state, they are all
subject to requirements imposed by the federal government, which provides
approximately 50% of the funds available under these programs. In the states in
which the Company operates skilled nursing facilities, payments are based upon
specific cost reimbursement formulas established by that state, which are
generally based on historical costs with adjustment for inflation.
For the year ended June 30, 1997, the Company derived approximately 38% of
its patient services revenues from Medicare and approximately 38% of its patient
services revenues from Medicaid. The Company had no revenues from Medicare or
Medicaid in the periods ended June 30, 1995 and 1996.
Both governmental and private-payor sources have instituted cost
containment measures designed to limit payments made to long-term health which
adversely affect reimbursements to the Company. Furthermore, although federal
regulations do not recognize state budget deficiencies as a legitimate ground to
curtail funding of their Medicaid cost reimbursement programs, states have
nevertheless curtailed such funding in the past. No assurance can be given that
states will not do so in the future or that the future funding of Medicaid
programs will remain at levels comparable to present levels.
Government reimbursement programs are also subject to statutory and
regulatory changes, administrative rulings and interpretations, determinations
by reimbursement intermediaries, and governmental funding restrictions, all of
which may materially increase or decrease the rate of program payments to health
care providers operated by the Company. In addition, there can be no assurance
that facilities or other providers owned, leased or managed by the Company, now
or in the future, will initially meet or continue to meet the requirements for
participation in such programs.
The Company believes the structure and composition of government regulation
of health care will continue to change and, as a result, it regularly monitors
developments in the law. The Company expects to modify its agreements and
operations from time to time as the business and regulatory environment changes.
While the Company believes it will be able to structure all its agreements and
operations in accordance with applicable law, there can be no assurance that its
arrangements will not be successfully challenged.
Under the Americans with Disabilities Act of 1990, all places of public
accommodation are required to meet certain federal requirements related to
access and use by disabled persons. A number of additional federal, state and
local laws exist which also may require modifications to existing and planned
properties to create access by disabled persons. While the Company believes that
its properties are substantially in compliance with present requirements or are
exempt therefrom, if required changes involve a greater expenditure than
anticipated or must be made on a more accelerated basis than anticipated,
additional costs would be incurred by the Company. Further, legislation may
impose additional burdens or restrictions with respect to access by disabled
persons, the costs of compliance with which could be substantial.
The Company is subject to various federal, state and local environmental
laws and regulations. Such laws and regulations often impose liability whether
or not the owner or operator knew of, or was responsible for, the presence of
hazardous or toxic substances. The costs of any required remediation or removal
of these substances could be substantial and the liability of an owner or
operator as to any property is generally not limited under such laws and
regulations and could exceed the property's value and the aggregate assets of
the owner or operator. The presence of these substances, or failure to remediate
such contamination properly, may also affect adversely the owner's ability to
sell or rent the property, or to borrow using the property as collateral. Under
these laws and regulations, an owner, operator or an entity that arranges for
the disposal of hazardous or toxic substances, such as asbestos-containing
materials, at the disposal site, may also be liable for the costs of any
required remediation or removal of the hazardous or toxic substances at the
disposal site. In connection with the ownership or operation of its properties,
the Company could be liable for these costs, as well as certain other costs,
including governmental fines and injuries to persons or properties.
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<PAGE> 75
LIABILITY AND INSURANCE
Providing health care services involves an inherent risk of liability.
Participants in the senior living and health care services industry are subject
to lawsuits alleging negligence or related legal theories, many of which may
involve large claims and result in the incurrence of significant defense costs.
The Company currently maintains property, liability and professional medical
malpractice insurance policies for the Company's owned and leased facilities
with such coverages and deductibles which management believes are prudent,
adequate and in keeping with industry practice. The Company also has an umbrella
excess liability protection policy in the amount of $5.0 million to $10.0
million per location. In addition, the Company maintains policies for employee
practices and officers and directors liability in the amounts of $1.0 million
and $3.0 million respectively. There can be no assurance that a claim in excess
of the Company's insurance will not be asserted. A claim against the Company not
covered by, or in excess of, the Company's insurance, could have a material
adverse effect on the Company. The Company's insurance policies are reviewed
annually. There can be no assurance that the Company will be able to obtain
liability insurance in the future or that, if such insurance is available, it
will be available on acceptable terms.
EMPLOYEES
As of September 30, 1997, the Company had approximately 2,000 employees,
including approximately 1,700 full-time equivalent employees. None of the
Company's employees is represented by a union. The Company considers its
employee relations to be good. Although the Company believes it is able to
employ sufficient skilled personnel to staff the facilities it operates or
manages, a shortage of skilled personnel in any of the geographic areas in which
it operates could affect adversely the Company's ability to recruit and retain
qualified employees and its operating expenses.
LEGAL PROCEEDINGS
The Company may become involved from time to time in legal proceedings in
the ordinary course of its business. The Company is not currently a party to any
legal proceeding that it believes would have a material adverse effect on its
business, financial condition or results of operations.
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<PAGE> 76
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information concerning each of the
executive officers and directors of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------------- --- ------------------------------------------
<S> <C> <C>
Brad E. Hollinger............................ 43 Chairman of the Board, President and Chief
Executive Officer and a Director
Paul A. Kruis................................ 43 Chief Financial Officer
Stephen G. Marcus............................ 45 Chief Operating Officer
Brian L. Barth............................... 37 Chief Development Officer
William T. McCarthy.......................... 45 Vice President -- Mergers and Acquisitions
Russell A. DiGilio........................... 41 Vice President -- Assisted Living Group
Kurt A. Meyer................................ 50 Vice President -- Health Care Group
John D. Foster............................... 47 Vice President -- Long Term Care
Roger A. Breed............................... 48 Vice President -- Development
David K. Barber.............................. 43 Vice President -- Construction and Design
Robert J. Sutton............................. 48 Vice President -- Corporate Services and
Secretary
Mark S. Moore................................ 36 Vice President -- Finance and Treasurer
Kenneth F. Barber............................ 67 Director
John M. Brennan.............................. 41 Director
Bill R. Foster, Sr........................... 70 Director
David L. Goldsmith........................... 49 Director
Edward R. Stolman............................ 71 Director
George H. Strong............................. 71 Director
</TABLE>
Brad E. Hollinger has served as a director and as Chairman of the Board,
President and Chief Executive Officer of the Company since its founding in April
1995. Previously he served as Executive Vice President of the Contract Service
Group of Continental Medical Systems ("CMS"), a national provider of medical
rehabilitation services and contract therapy services from 1990 to 1994. During
his eight years with CMS, Mr. Hollinger also served as Senior Vice
President/Development from 1987 to 1990, leading the development and financing
of eighteen medical rehabilitation hospitals in seven states. From 1985 to 1987,
Mr. Hollinger was Vice President of Development of Rehab Hospital Service
Corporation.
Mr. Hollinger, without admitting or denying the allegations, has agreed to
settle a proposed civil action by the Commission contending that he violated
certain federal securities laws in connection with trading in the common stock
of Continental Medical Systems, Inc. prior to its merger with Horizon
Healthcare, Inc. in 1995. Mr. Hollinger's agreement contemplates his consenting
to the entry of an order enjoining him from future violations of such securities
laws. In addition, Mr. Hollinger has agreed to pay the amount of $21,625,
representing profits allegedly realized by him and a family member, plus
interest, and to pay a civil money penalty in an amount equal to such payment,
plus interest. The proposed settlement is subject to approval by the Commission,
and the Commission staff has advised that it will recommend that the Commission
approve the settlement.
Paul A. Kruis has served as the Chief Financial Officer of the Company
since November 1997. From 1987 through 1993, Mr. Kruis served as Senior Vice
President, Treasurer and Chief Financial Officer of Rehab Systems Company
("RSC"), a company in the business of developing, building and operating
comprehensive medical rehabilitation hospitals. Mr. Kruis was a founding officer
of RSC, which was acquired by Novacare, Inc., in 1991. Mr. Kruis remained with
Novacare, Inc. in the same capacity until 1993. Prior to his employment with
RSC, Mr. Kruis was affiliated with Rehab Hospital
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<PAGE> 77
Services Corporation from 1983 through 1987, serving as Chief Financial Officer
from 1986 through 1987 and as Assistant Corporate Controller from 1983 through
1985. During the period following his departure from Novacare in 1993, Mr. Kruis
explored the formation of two new health care ventures, among other business
activities. Mr. Kruis is a CPA and a graduate of the College of William and
Mary.
Stephen G. Marcus, pursuant to an Employment Agreement with the Company
dated November 24, 1997, will, commencing January 5, 1998, serve as the Chief
Operating Officer of the Company. Prior to joining the Company, he served as
President of SelectRehab, a subsidiary of Horizon/CMS Healthcare Corporation,
from July 1994 to November 1997 and in various capacities during seven years
with CMS, including Senior Vice President -- Unit Management Group from January
1993 through July 1994, as Senior Vice President -- Development from July 1991
through December 1992 and as Vice President -- Development from August 1987
through July 1991. From April 1986 through July 1987, Mr. Marcus was Regional
Vice President -- Operations for the Southeastern Regional Office of Rehab
Hospital Services Corporation ("RHSC") and, from January 1985 through March
1986, Executive Director/Chief Executive Officer of Garden State Rehabilitation
Hospital, an RHSC facility.
Brian L. Barth has served as Chief Development Officer of the Company since
October 1997. Prior to October, Mr. Barth served as Vice
President -- Acquisitions of the Company since its founding in April 1995. He
served as Director of Medical Specialty Unit Development for Integrated Health
Services, Inc. ("IHS"), a post-acute care services company, from 1994 to 1995.
Mr. Barth's duties included oversight of the sub-acute program development for
the Northern Division. Prior to joining IHS, Mr. Barth was Director of
Development for CMS from 1987 to 1994.
William T. McCarthy has served as Vice President -- Mergers and
Acquisitions of the Company since October 1997. Mr. McCarthy has served as Vice
President of the Company since April 1996, and was Vice President and Chief
Financial Officer of the Company from April 1996 until September 1997. From
September 1994 until February 1996, he served as Chief Accounting Officer of
Concord Health Group, Inc., an owner and operator of long-term care facilities.
From 1988 to 1994, he was a partner of Coopers & Lybrand, an independent public
accounting firm.
Russell A. DiGilio has served as Vice President -- Assisted Living Group of
the Company since April 1996. Prior to joining the Company, he served as
Regional Director and as Executive Director of Operations for the Forum Group, a
company engaged in providing assisted living and retirement services, from 1987
to 1995.
Kurt A. Meyer has served as Vice President -- Health Care Group of the
Company since August 1995. From 1994 to 1995, he provided consulting services to
hospitals and skilled nursing facilities in the areas of rehabilitation and
sub-acute care, through Atlantic Rehab, Inc., a company he co-founded. From 1989
to 1994 he was Vice President of Operations for CMS. He was the Chief Executive
Officer of Mechanicsburg Rehabilitation System from 1986 to 1989.
John D. Foster has served as Vice President -- Long Term Care of the
Company since July 1997. From September 1996 to June 1997, Mr. Foster served as
President of Foster Health Care Group ("FHCG"). From 1985 to September 1996, Mr.
Foster served as Vice President of Operations for FHCG. For 14 years prior to
that, he worked in the areas of facility administration and project development
in the long-term care field. Mr. Foster is the son of Bill R. Foster, Sr., a
director of the Company.
Roger A. Breed has served as Vice President -- Development of the Company
since January 1997. Mr. Breed's background in health care includes eight years
with CMS, where he served as Vice President of Corporate Communications from
1991 to 1993 and Vice President of Public Affairs from 1993 to 1996.
David K. Barber has served as Vice President -- Construction and Design of
the Company since June 1996. He previously worked in the health care
construction field as Chief Financial Officer of CCI Construction Company from
1986 to 1995. Mr. Barber is the son of Kenneth F. Barber, a director of the
Company.
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<PAGE> 78
Robert J. Sutton has served as Vice President -- Corporate Services and
Secretary of the Company since its founding in April 1995. From 1993 to 1995, he
was Vice President, Finance and Strategy, of CMS. Mr. Sutton served in a variety
of managerial positions at Marriott Corporation from 1987 to 1993, including
Vice President of Finance and Strategic Planning for Marriott Management
Services and Director of Finance of the Courtyard Hotel Division.
Mark S. Moore has served as Vice President -- Finance and Treasurer of the
Company since July 1997 and as Vice President -- Financial Operations from
January 1997 to June 1997. Prior to joining the Company, he served in various
capacities during eight years with CMS, including Vice President -- Rehab
Hospital Group Controller from September 1996 to December 1996, as Vice
President -- Eastern Division Controller from January 1995 to August 1996 and as
Regional Controller from August 1988 to December 1994.
Kenneth F. Barber has served on the Board of Directors of the Company since
August 1995. He served as a director and as Senior Executive Vice President of
CMS from 1987 to 1994. From 1980 to 1987 , Mr. Barber served as Chief
Development Officer of Rehab Hospital Services Corporation. Mr. Barber is the
father of David K. Barber.
John M. Brennan has been a director of the Company since September 1995. In
1990, Mr. Brennan co-founded Golden Care, Inc., a respiratory therapy company,
and served as its President and a director from 1990 to 1995. From 1987 to 1990,
Mr. Brennan served as Chief Operating Officer of a private respiratory therapy
company headquartered in Indiana. From 1984 to 1987, he operated a chain of
private home care companies in the states of Texas, New Mexico, Illinois and
Indiana. From 1982 to 1984, Mr. Brennan was the Technical Director for two
hospital-based respiratory therapy departments in Texas.
Bill R. Foster, Sr., has served as a director of the Company since 1996. He
is the founder and was Chief Executive Officer of Foster Health Care Group. He
has been involved in the development and operation of skilled nursing,
independent living and assisted living facilities for four decades. Mr. Foster
serves on the State of Missouri Governor's Advisory Council on Aging, has served
as its President for two terms and has been a Delegate to the White House
Conference on Aging. He serves on the Board of Directors of the Missouri Health
Care Association. In February 1997, Mr. Foster was appointed as a Senator to the
Silver-Haired Congress, representing the state of Missouri. Mr. Foster is the
father of John D. Foster.
David L. Goldsmith has been a director since 1996. He has been associated
with BancAmerica Robertson Stephens since 1981 and is currently Managing
Director, Health Care. Mr. Goldsmith is also a member of the Boards of Directors
of Apria Healthcare Group Inc. and selected private companies.
Edward R. Stolman became a member of the Board of Directors of the Company
in 1997. Since 1982, he has owned and operated Stolman Investments, specializing
in real estate and health care investments and consulting. He co-founded
Hospital Affiliates International in 1968 and served as Chairman of Affiliated
Health Corporation from 1984 to 1990. Mr. Stolman was an original investor in
and a member of the Board of Directors of Dovebar International, Inc.
George H. Strong has served as a member of the Board of Directors of the
Company since 1996. He is a private investor with many years of experience in
both director and executive positions in health care enterprises. Mr. Strong was
a Senior Vice President and founding director of Universal Health Services, Inc.
for six years and was with American Medicorp for four years prior to that. He
also serves as a director for Integrated Health Services, HealthSouth
Rehabilitation Corporation, Clinical Partners, Managed Care USA, AmeriSource,
Corefunds Group and Pocantico Development Associates.
The Board of Directors of the Company is divided into three classes, each
class to be as nearly equal in number of directors as possible. At each annual
meeting of stockholders, directors in each class will be elected for three year
terms to succeed the directors of that class whose terms are expiring. Messrs.
Brennan, Foster and Stolman are Class I directors with their terms of office
expiring
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<PAGE> 79
in 1998, Messrs. Barber and Strong will be Class II directors whose terms will
expire in 1999, and Messrs. Goldsmith and Hollinger are Class III directors
whose terms will expire in 2000.
COMMITTEES OF THE BOARD OF DIRECTORS
Audit Committee. The Audit Committee currently consists of David L.
Goldsmith, Kenneth F. Barber and George H. Strong. The Audit Committee makes
recommendations concerning the engagement of independent public accountants,
reviews with the independent public accountants the plans and results of the
audit engagement, approves professional services provided by the independent
public accountants, reviews the independence of the independent public
accountants, considers the range of audit and non-audit fees and reviews the
adequacy of the Company's internal accounting.
Compensation Committee. The members of the Compensation Committee are
currently John M. Brennan, Edward R. Stolman and David L. Goldsmith. The
Compensation Committee establishes a general compensation policy for the Company
and approves increases both in directors' fees and in salaries paid to officers
and senior employees of the Company. The Compensation Committee determines,
subject to the provisions of the Company's plans, the directors, officers and
employees of the Company eligible to participate in any of the plans, the extent
of such participation and terms and conditions under which benefits may be
vested, received or exercised.
Project Financing Committee. The members of the Project Financing
Committee, which was formed on December 18, 1997, are currently Brad E.
Hollinger, Kenneth F. Barber and Edward R. Stolman. The Project Financing
Committee was formed to take the actions necessary to finalize the financial
closings of those projects previously authorized and approved by the Board of
Directors.
HEALTH SERVICES ADVISORY BOARD
The Company has formed a Health Services Advisory Board comprised of
professionals with specialized expertise in the delivery of senior living and
health care services. The Advisory Board meets three times per year to review
the Company's service delivery system and makes recommendations with respect
thereto to the Company's management. The Health Services Advisory Board,
however, has no authority to act on behalf of the Company. Each advisory
director receives $1,000 for each meeting attended and is reimbursed for
expenses incurred in connection therewith. The Company estimates that each
advisory director devotes approximately 40 hours per year on the Company's
affairs. The following table sets forth certain information regarding the
current members of the Health Services Advisory Board.
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<PAGE> 80
<TABLE>
<CAPTION>
NAME SPECIALTY POSITION
- ----------------------------------- ------------------------- ----------------------------
<S> <C> <C>
Michael Blackwood.................. Managed Care President of The Pilot
Group, a managed care
consulting firm,
Pittsburgh, Pennsylvania
Richard J. Carroll, M.D............ Preventative Cardiology Medical Director at the
Center for Clinical
Effectiveness at Loyola
University Medical Center,
Chicago, Illinois
Dennis L. Kodner, Ph.D............. Applied Gerontology Vice President of Research
and Innovation at
Metropolitan Jewish Health
System, Brooklyn, New York
Walter Leutz, Ph.D., MSW........... Health Delivery Systems Associate Research Professor
of Brandeis University
Institute for Health
Policy, Waltham,
Massachusetts
Michael F. Lupinacci, M.D.......... Physical Medicine and Medical Director at
Rehabilitation HealthSouth Rehabilitation
Hospital, Mechanicsburg,
Pennsylvania
Jeffrey A. Miller.................. Hospitality Chairman, Department of
Hotel, Restaurant and
Institutional Management,
Indiana University of
Pennsylvania
Karen A. Powers, M.D............... Geriatric Medicine Associate Medical Director
and Director of the
Geriatric Fellowship
Program, St. Margaret's
Hospital, Pittsburgh,
Pennsylvania
Kenneth M. Sakauye, M.D............ Geriatric Psychiatry Professor of Clinical
Psychiatry of Louisiana
State University Medical
Center, New Orleans,
Louisiana
Rebecca Trella, RN, MSN............ Care Management Director of Care Management
of Advocate Health
Partners, Chicago,
Illinois
</TABLE>
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<PAGE> 81
EXECUTIVE COMPENSATION
The following table sets forth a summary of compensation for services
rendered in all capacities to the Company by the Chief Executive Officer and the
four most highly compensated executive officers of the Company other than the
Chief Executive Officer for the fiscal year ended June 30, 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM
COMPENSATION
-------------------- ------------
STOCK OPTION ALL OTHER
NAME AND PRINCIPAL POSITION(S) SALARY BONUS AWARDS COMPENSATION
- ----------------------------------------- -------- ------- ------------ ------------
<S> <C> <C> <C> <C>
Brad E. Hollinger........................ $152,500 $58,000 75,000 --
Chairman of the Board, President and
CEO
William T. McCarthy...................... 119,495 -- 18,750 $3,600(1)
Vice President -- Mergers and
Acquisitions
Russell A. DiGilio....................... 89,667 3,683 18,750 1,708(2)
Vice President -- Assisted Living Group
Robert J. Sutton......................... 87,333 20,000 25,500 --
Vice President -- Corporate Services
and Secretary
Kurt A. Meyer............................ 83,333 12,000 14,250 --
Vice President -- Health Care Group
</TABLE>
- ------------
(1) Represents travel and lodging reimbursement.
(2) Represents the value received by Mr. DiGilio in connection with personal
usage of a company-owned vehicle.
EMPLOYMENT AGREEMENTS
The Company is party to an employment agreement with Mr. Hollinger that
became effective as of August 1, 1996 and is to expire on July 31, 2001, subject
to extension annually thereafter. Pursuant to the employment agreement, for the
period beginning August 1, 1996 and ending June 30, 1997, Mr. Hollinger was
entitled to receive an annual salary of $150,000; for the period beginning July
1, 1997 and ending June 30, 1998, Mr. Hollinger is to receive an annual salary
of $200,000; for the period beginning July 1, 1998 and for the duration of the
agreement, Mr. Hollinger is to receive an annual salary of $225,000. For each
fiscal year of the Company throughout the term of the agreement, Mr. Hollinger
is also entitled to receive an annual bonus in an amount not less than 75% of
his base salary upon achievement by the Company of certain levels of pre-tax
earnings to be determined by the Board of Directors. If the level of earnings
exceeds the level determined by the Board for a fiscal year, the Board may award
Mr. Hollinger additional bonus compensation. Pursuant to the employment
agreement, the Company granted to Mr. Hollinger as of August 1, 1996 the right
to purchase 37,500 shares of Common Stock at a purchase price of $2.00 per share
and, as of June 30, 1997, the right to purchase an additional 37,500 shares of
Common Stock at a per share purchase price equal to the fair market value of a
share of Common Stock on June 30, 1997. These options are generally to vest in
accordance with the Company's 1996 Stock Incentive Plan (including the Change of
Control acceleration provision contained in such plan), provided that if Mr.
Hollinger terminates his employment for Good Reason (as defined in the
employment agreement, which includes the occurrence of a Change in Control as
Good Reason), the options are to become fully vested and exercisable as of the
date of such termination and may be exercised within one year following such
termination. In addition, if Mr. Hollinger terminates his employment for Good
Reason, he will be entitled to receive a cash payment within 10 days of such
termination equal to three times his annual compensation plus the amount of any
bonus for that year.
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<PAGE> 82
The Company is party to an employment letter with Mr. Kruis which provides
that, in the event of a change of control of the Company that results in his
position being diminished in scope of authority and responsibilities or change
in reporting responsibility, or if he is terminated without cause, Mr. Kruis is
entitled to receive three years compensation. Mr. Kruis is also entitled to
receive a performance bonus of up to 45% of his salary to be paid annually at
the discretion of the CEO and compensation committee of the Company. Mr. Kruis
was also granted the right to purchase 150,000 shares of Common Stock of the
Company, in accordance with the Company's 1996 Stock Incentive Plan at the fair
market value of a share of Common Stock on October 6, 1997.
The Company is party to an employment agreement with Mr. Marcus dated
November 24, 1997, providing for a commencement date of January 5, 1998 and a
three year term expiring on January 4, 2001, subject to three year extensions
thereafter unless either party gives a 180 day notice of nonrenewal prior to the
expiration of the then current term. Pursuant to the employment agreement, Mr.
Marcus for the first year of the agreement is entitled to receive an annual
salary of $170,000, which annual salary is to be increased in year two to
$200,000 and thereafter annually adjusted in an amount equal to 10% per year.
For each fiscal year of the Company throughout the term of the agreement, Mr.
Marcus is also entitled to receive an annual bonus of up to 50% of his base
salary based upon his performance of stated objectives and the Company's
achievement of certain levels of pre-tax earnings to be determined by the Board
of Directors. Pursuant to the employment agreement, the Company granted Mr.
Marcus the right to purchase 150,000 shares of Common Stock at a purchase price
equal to the fair market value of a share of Common Stock on January 5, 1998. On
each anniversary date of the employment agreement, the Company has agreed to
grant Mr. Marcus the right to purchase additional shares of Common Stock in an
amount of not less than 30,000 shares annually. These options are generally to
vest in accordance with the Company's 1996 Stock Incentive Plan (including the
Change of Control acceleration provision contained in such plan), provided that
if the Company terminates Mr. Marcus for reasons other than cause, does not
renew the agreement or if there is a Change in Control (as defined in the
employment agreement) the options are to become fully vested and exerciseable in
accordance with the Company's 1996 Stock Incentive Plan. In addition, in the
event of a change in control, termination by the Company without cause or
nonrenewal of the agreement by the Company, Mr. Marcus will be entitled to
receive a cash payment within 15 days of such termination equal to three times
his annual compensation plus the amount of any bonus for that year and to
participate for one year of such termination in all insurance, accident and
health plans in which he was entitled to participate prior to the termination,
or, at the Company's option receive the cash value of such benefits in a lump
sum payable within 15 days of his termination.
The Company is party to an employment agreement with Mr. Barth that became
effective as of September 1, 1995 and is to expire on August 31, 1998, subject
to automatic renewal unless one party provides written notice to the other not
later than 90 days prior to the next extension date of his or its intention not
to renew. The employment agreement provides that Mr. Barth is to receive an
annual salary of $70,000, subject to increase by the Board of Directors. In
October 1997, Mr. Barth's annual salary was increased to $125,000 in conjunction
with his designation as Chief Development Officer of the Company. Mr. Barth is
also entitled to receive an annual bonus of up to 35% of his base salary subject
to achievement of the Company's annual operating budget as approved by the Board
of Directors. In the event of a termination following a Change of Control (as
defined in the employment agreement) or Mr. Barth's voluntary withdrawal within
one year following such Change of Control, Mr. Barth is entitled to receive a
lump sum payment equal to his base salary and annual bonus for the preceding
three years.
The Company is party to an employment agreement with Mr. McCarthy that
became effective as of May 1, 1996 and is to expire on April 30, 1998, subject
to automatic annual renewal unless one party provides written notice to the
other not later than 60 days prior to the next extension date of his or its
intention not to renew. The employment agreement provides that Mr. McCarthy is
to receive an annual salary of $100,000, subject to increase by the Board of
Directors. Mr. McCarthy is also entitled to receive an annual bonus of up to 40%
of his base salary subject to the terms and conditions as may
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<PAGE> 83
be determined by Mr. Hollinger and approved by the Board. Pursuant to the
employment agreement, the Company granted to Mr. McCarthy an option to purchase
up to 75,000 shares of Common Stock at a per share exercise price of $2.00
vesting in equal installments over two years. In the event of a termination
following a Change of Control (as defined in the employment agreement), Mr.
McCarthy is entitled to receive his base salary at a rate then in effect for the
period equal to one year.
The Company is party to an employment agreement with Mr. Sutton that became
effective as of September 20, 1995 and is to expire on August 31, 1998, subject
to annual extension. The employment agreement provides that Mr. Sutton is to
receive an annual salary of $80,000 subject to increase by the Board of
Directors in its sole discretion. Mr. Sutton is also entitled to receive an
annual bonus of not less than 40% of his base salary upon achievement of the
annual operating budget as approved by the Board of Directors. In the event of a
termination following a Change of Control (as defined in the employment
agreement), Mr. Sutton will be entitled to a lump sum cash payment equal to his
total cash and bonus compensation for the proceeding three years.
STOCK INCENTIVE PLAN
Pursuant to the Company's 1996 Stock Incentive Plan, as amended (the
"Incentive Plan"), the Company may issue up to 2,025,000 shares of Common Stock
to employees of the Company, its affiliates and its subsidiaries for any purpose
or any type of benefit under the Incentive Plan. The number of shares which may
be issued under the Incentive Plan is subject to adjustment by the Board and
will be adjusted in proportion to any increase or decrease in the number of
issued shares of Common Stock resulting from a stock dividend, split or other
capital adjustment.
The Incentive Plan is administered by the Compensation Committee of the
Board of Directors the members of which are each a "disinterested person,"
within the meaning of Rule 16b-3 of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and the regulations promulgated thereunder. The
actions of the Compensation Committee are subject to Board review. The
Compensation Committee is authorized to: (i) select employees for participation
in the Incentive Plan; (ii) make decisions regarding timing, pricing and amounts
of grants or awards under the Incentive Plan, subject to the terms of the
Incentive Plan; (iii) interpret and construe the Incentive Plan; (iv) adopt,
amend or rescind rules and regulations relating to the Incentive Plan; and (v)
make all other determinations necessary or advisable for the administration of
the Incentive Plan.
Each non-employee director is to be granted non-qualified stock options to
purchase 11,250 shares of Common Stock upon election to the Board and additional
non-qualified stock options to purchase 3,750 shares of Common Stock upon
re-election to the Board. Each such non-qualified stock option is exercisable at
a price equal to the fair market value of the underlying Common Stock on the
date of the grant, is fully vested on grant, has a duration for the shorter of
ten years or the director's term as a director and will no longer be exercisable
following the 91st day after the director's term ends. The Compensation
Committee has no authority to amend or vary the terms of these options.
If an incentive stock option, as defined in Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), is granted to a stockholder
owning more than 10% of the total combined voting power of all classes of stock
issued by the Company as of the date an option is granted, the exercise price of
an option granted under the Incentive Plan is to be not less than 110% of the
fair market value of the Common Stock on the date of grant. For all other
options, the price is to be not less than the fair market value of the Common
Stock at the date of grant.
The Compensation Committee may also grant SARs to participants in the
Incentive Plan who have been granted options. A SAR is to expire no later than
the expiration date of the underlying option, and may be for no more than 100%
of the difference between the exercise price of the option and the fair market
value of the Common Stock subject to the option.
The Incentive Plan also provides for awards of restricted stock, including
restricted stock awarded in connection with specified performance targets.
Recipients of such awards are to be determined by
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<PAGE> 84
the Compensation Committee. The Incentive Plan provides that in the event of a
Change of Control (as defined in the 1996 Stock Incentive Plan): (1) any and all
Options and SARs, whether vested or not, will become immediately exercisable;
(2) any restrictions imposed on Restricted Stock will lapse and within 10 days
after the occurrence of a Change in Control will be delivered to the participant
and (3) the target values attainable under all Performance Shares and Units will
be deemed to have been fully earned for the entire award period as of the
effective date of the Change in Control.
The following table sets forth certain information with respect to the
grant of stock options by the Company to the executive officers named in the
Summary Compensation Table to whom stock options were granted for the fiscal
year ended June 30, 1997.
OPTION GRANTS IN YEAR ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------------------- VALUE AT ASSUMED
PERCENT OF ANNUAL RATES OF STOCK
TOTAL OPTIONS PRICE APPRECIATION
GRANTED TO FOR OPTION TERM(1)
OPTIONS EMPLOYEES IN EXERCISE OR ---------------------
NAME GRANTED FISCAL YEAR BASE PRICE EXPIRATION DATE 5% 10%
- ---------------------- ------- ------------- ----------- --------------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Brad E. Hollinger..... 37,500 5.60% $2.00 08/01/01 $353,660 $440,393
37,500 5.57 6.67 06/25/02 198,721 314,656
William T. McCarthy... 3,750 0.56 2.00 08/01/01 35,366 44,039
15,000 2.23 6.67 06/25/02 79,489 125,862
Russell A. DiGilio.... 3,750 0.85 2.00 08/01/01 35,366 44,039
15,000 2.23 6.67 06/25/02 79,489 125,862
Robert J. Sutton...... 15,000 2.23 2.00 08/01/01 141,464 176,157
10,500 1.56 6.67 06/25/02 55,642 88,104
Kurt A. Meyer......... 3,750 0.56 2.00 08/01/01 35,366 44,039
10,500 1.56 6.67 06/25/02 55,642 88,104
</TABLE>
- ------------
(1) Based on an assumed initial public offering price of $9.50 per share, and
assuming that all such options are currently exercisable.
The following table sets forth certain information with respect to the
value of options held at June 30, 1997 by the executive officers named in the
Summary Compensation Table who held options during fiscal 1997. Such executive
officers did not exercise any options to purchase Common Stock for the fiscal
year ended June 30, 1997.
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<PAGE> 85
AGGREGATED OPTION EXERCISES IN YEAR ENDED JUNE 30, 1997
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS OPTIONS AT FISCAL
HELD AT FISCAL YEAR-END YEAR-END(1)
----------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Brad E. Hollinger................... -- 75,000 $ -- $ 175,000
William T. McCarthy................. 37,500 56,250 175,000 192,500
Russell A. DiGilio.................. 37,500 56,250 175,000 192,500
Robert J. Sutton.................... -- 25,500 -- 70,000
Kurt A. Meyer....................... 23,438 84,563 109,375 345,625
</TABLE>
- ------------
(1) Represents the difference between the fair market value (as estimated by the
Company) of the Common Stock underlying the options of $6.67 per share as of
June 30, 1997 and the exercise price of the options.
COMPENSATION OF DIRECTORS
Members of the Board of Directors do not receive compensation for serving
as directors. Each non-employee director is granted a non-qualified option to
acquire 11,250 shares of Common Stock upon election to the Board and an option
to acquire 3,750 shares of Common Stock upon re-election to the Board. See
"-- Stock Incentive Plan." All directors receive reimbursement of reasonable
expenses incurred in connection with attending Board and committee meetings and
otherwise carrying out their duties.
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<PAGE> 86
CERTAIN TRANSACTIONS
Kenneth F. Barber, a director of the Company, is party to a consulting
agreement with the Company to provide financial, development and other
consulting services at the rate of $100 per hour not to exceed 20 hours per week
for 52 weeks. During fiscal 1997, Mr. Barber received $66,000 under such
arrangement. David Barber, Mr. Barber's son, has been employed by the Company as
Vice President of Construction and Design since 1996. For the fiscal year ended
June 30, 1997, David Barber received an annual salary of $75,000. Robin Barber,
Mr. Barber's daughter and sister-in-law of Brad E. Hollinger, Chairman,
President and Chief Executive Officer and a director of the Company, has been
employed by the Company as Director of Legal Services since 1996 and as Vice
President and Senior Counsel since September 1997. For the fiscal year ended
June 30, 1997, Ms. Barber received an annual salary of $67,500 and a bonus of
$10,000.
John M. Brennan, a director of the Company, is President of Respiratory
Resources LLC ("RRI"), an Indiana limited liability company that manages
respiratory therapy services in four skilled nursing facilities owned or leased
by the Company. The Company's payments to RRI for such services were $156,000
for the fiscal year ended June 30, 1997. Mr. Brennan received a warrant in
August 1996 to purchase 138,000 shares of Common Stock of the Company at a
purchase price of $3.00 per share. The warrant has a 10 year term and may be
exercised at any time.
Bill R. Foster, Sr., a director of the Company, is the majority stockholder
of Foster Health Care Group, a corporation that provided management services to
10 skilled nursing facilities, a pharmacy, a home health operation, and three
assisted living facilities and four independent living facilities operated by
the Company for which it received $1,076,000 during fiscal 1997. On July 1,
1997, the Company purchased the assets and operations of Foster Health Care
Group for approximately $120,000. For the fiscal year ended June 30, 1997, Mr.
Foster also leased two assisted living facilities in Springfield and Nevada,
Missouri to the Company at an annual rental of $186,000 and $132,000,
respectively. Mr. Foster is negotiating with the Company to enter a construction
agreement to build an assisted living facility in Springfield, Missouri. The
amount of the contract is not expected to exceed $3,600,000. John Foster, Mr.
Foster's son, became an officer of the Company effective July 1, 1997 and
receives an annual salary of $110,000, with an annual bonus of up to 40% of his
base salary. Susan Foster, Mr. Foster's daughter-in-law, became an officer of
the Company effective July 1, 1997 and receives an annual salary of $80,000,
with an annual bonus of up to 35% of her base salary.
Scott J. Hollinger, brother of Brad E. Hollinger, Chairman, President and
Chief Executive Officer and a director of the Company and son-in-law of Kenneth
F. Barber, a director of the Company, has been employed by the Company as a
Construction Project Manager since 1996. For the fiscal year ended June 30,
1997, Mr. Hollinger received an annual salary of $55,000.
Deborah Myers Welsh, spouse of Brad E. Hollinger, entered into a consulting
agreement with the Company on February 3, 1997 to provide legal services at the
rate of $90 per hour not to exceed 30 hours per week for 50 weeks. Ms. Welsh
received $32,000 under such arrangement during fiscal 1997.
George H. Strong, a director of the Company, provided financial consulting
services to the Company for the fiscal year ending June 30, 1997 for fees
aggregating $40,000. Mr. Strong also received a warrant to purchase 26,250
shares of Common Stock of the Company at a purchase price of $3.33 per share,
which was exercised in March 1997.
F. David Carr is a general partner of SAE Partners ("SAE"), a shareholder
of Hawthorn Health Partners, Inc. (formerly known as Medi-Cap Partners) ("HHP"),
a managing general partner of HCO Partners IV-BCC ("HCO"), a shareholder of
Hawthorn Health Properties, Inc. ("Hawthorn"), and Executive Vice President of
Hakman & Company Incorporated., an investment banking firm ("Hakman"). James A.
Diebold is a general partner of SAE, a shareholder of HHP, a general partner of
HCO and a shareholder of Hawthorn. Prior to the Offering, SAE owns 3.8% of the
Common Stock of the Company. Prior to the Offering, HCO owns 9.6% of the
Company's Series B Convertible Preferred Stock. Hakman has entered a broker's
agreement with the Company to find suitable acquisition
85
<PAGE> 87
properties for the Company. Hakman receives a finder's fee for such
acquisitions, based upon the purchase price, in an amount equal to 2% of the
first $1,000,000 and 1% for any amount in excess of $1,000,000. Hawthorn leases
seven skilled nursing facilities to the Company for annual rentals aggregating
approximately $4,500,000. For the year ended June 30, 1997, Hawthorn received
$3,877,000 in rental payments from the Company. The facility leases provide for
an initial term of 12 years, with four six-year renewal options and a fair
market value purchase option. In August 1996, Hawthorn also received a warrant
to purchase 37,500 shares of Common Stock of the Company at a purchase price of
$3.33 per share. The warrant has a 10 year term and may be exercised at any
time. Hakman received a fee of $250,000 for its assistance in raising
$12,500,000 in a Series B Convertible Preferred Stock Offering in October 1996
and April 1997. Hakman also assisted the Company in arranging a $10,000,000 line
of credit, which is expected to become available in November 1997, and for which
Hakman will receive a fee of up to $62,500.
As of September 30, 1997 Meditrust was the beneficial owner of more than
five percent of the Common Stock of the Company. See "Principal Stockholders."
The Company has entered into a non-binding letter of intent with Meditrust for
$150 million of project financing. Pursuant to this letter of intent, the
Company would develop assisted living facilities for Meditrust and Meditrust
would lease such facilities to an Operator/Lessee when construction is
completed. The Company expects to manage the assisted living facilities pursuant
to management agreements with the Operator/Lessees. See "Business--Development."
Specific development projects and acquisitions require Meditrust's approval
prior to the financing of a transaction. In addition, to date, the Company has
developed, or is developing, 12 assisted living facilities for Meditrust and has
entered into leases in the Meditrust for eight of such facilities, with lease
terms of ten years with three five-year renewal terms. The Company will manage
the remaining four facilities. Meditrust's investment in these facilities is
approximately $50 million. Additionally, in connection with the consummation of
the Foster and Wisconsin acquisitions, the Company incurred indebtedness of
$8,161,000 which was funded with mortgage financing from Meditrust, and which is
expected to be repaid with proceeds from the Offering.
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<PAGE> 88
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information known to the Company
with respect to the beneficial ownership of Common Stock as of September 30,
1997 (after giving effect to the conversion of all Outstanding Preferred Stock
into an aggregate of 4,620,531 shares of Common Stock upon consummation of the
Offering) and as adjusted to reflect the sale of the Common Stock in the
Offering by (i) each person known by the Company to beneficially own more than
five percent of outstanding Common Stock, (ii) each of the Company's directors,
(iii) each executive officer named in the Summary Compensation Table, and (iv)
all directors and officers of the Company as a group. Unless otherwise
indicated, the person or persons named have sole voting and investment power.
<TABLE>
<CAPTION>
PERCENT OWNED
BENEFICIALLY
-----------------------
NUMBER OF PRIOR TO AFTER
NAME SHARES OWNED BENEFICIALLY OFFERING OFFERING
- ----------------------------------------- ------------------------- -------- --------
<S> <C> <C> <C>
Henry L. Hillman, Elsie Hilliard......... 682,500(1) 7.9% 4.4%
Hillman and C.G. Grefenstette,
Trustees(1)
2000 Grant Building
Pittsburgh, PA 15219
Omega Ventures II, L.P................... 503,845(2) 5.8% 3.2%
555 California Street
San Francisco, CA 94104
Omega Ventures II Cayman, L.P............ 130,008(2) 1.5% *
555 California Street
San Francisco, CA 94104
Crossover Fund II, L.P................... 416,051(2) 4.8% 2.7%
555 California Street
San Francisco, CA 94104
Crossover Fund IIA, L.P.................. 122,774(2) 1.4% *
555 California Street
San Francisco, CA 94104
R.S. Pacific Venture, L.P................ 300,000(2) 3.5% 1.9%
555 California Street
San Francisco, CA 94104
KD Investments........................... 640,537 7.4% 4.1%
1540 Fox Hollow Circle
Mechanicsburg, PA 17055
Inter Vivos Trust of Billy Ray Foster.... 767,412 8.9% 4.9%
426 S. Jefferson
Springfield, MO 65806-2351
Meditrust................................ 1,086,179(3) 11.6% 6.6%
197 First Avenue
Needham, MA 02194
SAE Partners............................. 331,312 3.8% 2.1%
735 Markham Court
Lewisberry, PA 17339
HCO Partners IV-BCC...................... 360,000 4.2% 2.3%
c/o F. David Carr,
Hakman & Company, Inc.
1350 Bayshore Highway, Suite 300
Burlingame, CA 94010
F. David Carr............................ 728,812(4) 8.4% 4.6%
c/o Hakman & Company, Inc.
1350 Bayshore Highway, Suite 300
Burlingame, CA 94010
</TABLE>
87
<PAGE> 89
<TABLE>
<CAPTION>
PERCENT OWNED
BENEFICIALLY
-----------------------
NUMBER OF PRIOR TO AFTER
NAME SHARES OWNED BENEFICIALLY OFFERING OFFERING
- ----------------------------------------- ------------------------- -------- --------
<S> <C> <C> <C>
Brad E. Hollinger........................ 787,687(5) 9.1% 5.0%
2850 Ford Farm Road
Mechanicsburg, PA 17055
John M. Brennan.......................... 1,270,801(6) 14.4% 8.0%
Brennan Holdings
11212 Mann Road
Mooresville, IN 46158
Kenneth F. Barber........................ 63,750(7) * *
1540 Fox Hollow Circle
Mechanicsburg, PA 17055
William R. Foster, Sr.................... 778,662(8) 9.0% 5.0%
Foster Health Care Group
426 South Jefferson
Springfield, MO 65801-2351
George H. Strong......................... 37,500 * *
946 Naveskink Road
Locust, NJ 07760
David L. Goldsmith....................... 41,250(9) * *
Robertson, Stephens & Company
555 California Street
San Francisco, CA 94104
Edward R. Stolman........................ 11,250(10) * *
8189 Sonoma Mountain Road
Glen Ellen, CA 94552
William T. McCarthy...................... 38,437(11) * *
386 Penn Road
Wynnewood, PA 19096
Robert J. Sutton......................... 437,587(12) 5.1% 2.8%
1055 Country Club Road
Camp Hill, PA 17011
Russell A. DiGilio....................... 38,437(13) * *
115 Cambridge Road
Landenberg, PA 19096
Kurt A. Meyer............................ 55,312(14) * *
253 Indian Creek Road
Mechanicsburg, PA 17055
David K. Barber.......................... 648,037(15) 7.5% 4.1%
111 Brindle Road
Mechanicsburg, PA 17055
Directors and officers of the Company as
a
group (16 persons)..................... 4,689,235(16) 52.1% 29.3%
</TABLE>
- ---------------
* Less than 1% of the outstanding shares.
(1) Consists of 157,500 shares held by a trust for the benefit of Henry L.
Hillman (the "HLH Trust") and 525,000 shares owned by Juliet Challenger,
Inc., an indirect, wholly-owned subsidiary of The Hillman Company ("THC").
THC is a private company engaged in diversified investments and operations
which is controlled by the HLH Trust. The Trustees of the HLH Trust are
Henry L. Hillman, Elsie Hilliard Hillman and C.G. Grefenstette (the "HLH
Trustees"). The HLH Trustees share voting and investment power with respect
to the shares held of record by the HLH Trust and the assets of THC. Does
not include an aggregate of 210,000 shares held by four trusts for the
benefit of members of the Hillman family, as to which shares the HLH
Trustees (other than Mr. Grefenstette, who is one of the trustees of such
family trusts) disclaim beneficial ownership.
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<PAGE> 90
Also does not include 157,500 shares held by DBH Sec IV, L.P., as to which
shares the HLH Trustees disclaim beneficial ownership. Howard B. Hillman
and Tatnall L. Hillman, the general partners of DBH Sec IV, L.P., are
step-brothers of Henry L. Hillman.
(2) Omega Ventures II, L.P., Omega Ventures II Cayman, L.P., Crossover Fund II,
L.P., Crossover Fund IIA, L.P. and R.S. Pacific Venture, L.P. are funds
managed by, but not beneficially owned by, BancAmerica Robertson Stephens
and all have the same address.
(3) 465,124 shares held subject to warrants are owned by Meditrust Mortgage
Investments, Inc. and 289,743 shares held subject to warrants are owned by
Meditrust Acquisition Corporation II, wholly owned subsidiaries of
Meditrust.
(4) Mr. Carr is a general partner of SAE Partners, a shareholder of HHP, a
managing general partner of HCO Partners IV-BCC ("HCO") and a shareholder
of Hawthorn Health Properties, Inc., a California corporation ("Hawthorn")
that owns 37,500 shares held subject to warrants and may be deemed to have
an indirect pecuniary interest in an indeterminate portion of the shares
beneficially owned by such entities. Mr. Carr disclaims beneficial
ownership of such shares.
(5) Mr. Hollinger is a general partner of HCO and may be deemed to have an
indirect pecuniary interest in 5,250 shares owned by such entity. Mr.
Hollinger disclaims beneficial ownership of such shares. Also includes
9,375 shares held subject to stock options.
(6) Includes 138,000 shares held subject to warrants and 11,250 shares held
subject to stock options.
(7) Kenneth Barber, a director of the Company, is a general partner of HCO and
may be deemed to have an indirect pecuniary interest in 52,500 shares owned
by such entity. Mr. Barber disclaims beneficial ownership of such shares.
Also includes 11,250 shares held subject to stock options. Does not include
640,537 shares owned by KD Investments, a Pennsylvania general partnership,
of which the stockholder's spouse and children are general partners. Mr.
Barber disclaims any beneficial interest in shares owned by KD Investments.
(8) Includes 767,412 shares owned by the Inter Vivos Trust of Billy Ray Foster.
As the trustee, Mr. Foster has voting and investment power with respect to
the shares held by the trust and may be deemed to have indirect beneficial
ownership of them. Mr. Foster disclaims beneficial ownership of such
shares. Also includes 11,250 shares held subject to stock options.
(9) Includes 30,000 shares owned by the Goldsmith Family Trust. As the
co-trustee, Mr. Goldsmith has voting and investment power with respect to
the shares held by the trust and may be deemed to have indirect beneficial
ownership of them. Mr. Goldsmith disclaims beneficial ownership of such
shares. Also includes 11,250 shares held subject to stock options.
(10) Includes 11,250 shares held subject to stock options.
(11) Includes 38,437 shares held subject to stock options.
(12) Includes 3,750 shares held subject to stock options.
(13) Includes 38,437 shares held subject to stock options.
(14) Mr. Meyer is a general partner of HCO and may be deemed to have an indirect
pecuniary interest in 7,500 shares owned by such entity. Mr. Meyer
disclaims beneficial ownership of such shares. Also includes 47,812 shares
held subject to stock options.
(15) David Barber is a general partner of HCO and may be deemed to have an
indirect pecuniary interest in 7,500 shares owned by such entity. Mr.
Barber disclaims beneficial ownership of such shares. Also includes 640,537
shares owned by KD Investments, a Pennsylvania general partnership ("KD").
Mr. Barber is a general partner of KD, and as such, may be deemed to have
an indirect pecuniary interest in an indeterminate portion of the shares
beneficially owned by KD. Mr. Barber disclaims beneficial ownership of such
shares.
(16) Includes 138,000 shares held subject to warrants and 196,873 shares held
subject to stock options.
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<PAGE> 91
DESCRIPTION OF CAPITAL STOCK
The Amended and Restated Certificate of Incorporation of the Company (the
"Certificate"), provides that the authorized capital of the Company consists of
50,000,000 shares of Common Stock, par value $.001 per share, and 11,160,708
shares of Preferred Stock, par value $.001 per share, including 1,150,958 shares
of Series A Convertible Preferred Stock and 5,009,750 shares of Series B
Convertible Preferred Stock.
COMMON STOCK
Based upon shares of Common Stock outstanding as of September 30, 1997 and
after giving effect to the conversion of all Outstanding Preferred Stock into
shares of Common Stock, there will be 15,645,343 shares of Common Stock
outstanding upon completion of the Offering. As of September 30, 1997, warrants
and options to purchase an aggregate of 1,951,292 shares of Common Stock were
outstanding.
Each share of Common Stock entitles its holder of record to one vote for
the election of directors and all other matters to be voted on by the
stockholders. Holders of Common Stock do not have cumulative voting rights, and
therefore the holders of a majority of the shares of Common Stock voting for the
election of directors may elect all of the Company's directors. Subject to the
rights of holders of Preferred Stock, holders of Common Stock are entitled to
receive such dividends, if any, as may be declared from time to time by the
Company's Board of Directors in its discretion from funds legally available for
that use. Subject to the rights of holders of Preferred Stock, holders of Common
Stock are entitled to share on a pro rata basis in any distribution to
stockholders upon liquidation, dissolution or winding up of the Company. All of
the outstanding shares of Common Stock are, and the shares of Common Stock to be
sold in the Offering will be, fully paid and nonassessable. No holder of Common
Stock has any preemptive right to subscribe for any stock or other security of
the Company.
PREFERRED STOCK
All Outstanding Preferred Stock will automatically be converted into an
aggregate of 4,620,531 shares of Common Stock effective upon consummation of the
Offering. The Board of Directors, without further action by the stockholders,
may from time to time authorize the issuance of other shares of Preferred Stock
in one or more series and, within certain limitations, fix the powers,
preferences and rights and the qualifications, limitations or restrictions
thereof and the number of shares constituting any series or designations of such
series. Satisfaction of any dividend preferences of outstanding Preferred Stock
would reduce the amount of funds available for the payment of dividends on
Common Stock. Holders of Preferred Stock would normally be entitled to receive a
preference payment in the event of any liquidation, dissolution or winding up of
the Company before any payment is made to the holders of the Common Stock. In
addition, under certain circumstances, the issuance of such Preferred Stock may
render more difficult or tend to discourage a change in control of the Company.
Although the Company currently has no plans to issue additional shares of
Preferred Stock, the Board of Directors, without stockholder approval, may issue
Preferred Stock with voting and conversion rights which could adversely affect
the rights of holders of Common Shares.
CERTAIN PROVISIONS OF THE COMPANY'S AMENDED AND RESTATED CERTIFICATE OF
INCORPORATION AND BY-LAWS
The Certificate provides that liability of directors of the Company is
eliminated to the fullest extent permitted under Section 102(b)(7) of the
Delaware General Corporation Law. As a result, no director of the Company will
be liable to the Company or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to the Company or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) for any willful or negligent payment of an unlawful
dividend, stock purchase or redemption, or (iv) for any transaction from which
the director derived an improper personal benefit.
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<PAGE> 92
The Certificate divides the Board of Directors of the Company into three
classes, each class to be as nearly equal in number of directors as possible. At
each annual meeting of stockholders, directors in each class will be elected for
three year terms to succeed the directors of that class whose terms are
expiring. Messrs. Brennan, Foster and Stolman are Class I directors with their
terms of office expiring in 1998, Messrs. Barber and Strong are Class II
directors whose terms will expire in 1999, and Messrs. Goldsmith and Hollinger
are Class III directors whose terms will expire in 2000. In accordance with the
Delaware General Corporation Law, directors serving on classified boards of
directors may only be removed from office for cause. The Certificate provides
that stockholders may not take action by written consent, and that a special
meeting of stockholders may be called only by the Board of Directors. The Bylaws
of the Company provide that stockholders must follow an advance notification
procedure for certain stockholder nominations of candidates for the Board of
Directors and for certain other stockholder business to be conducted at an
annual meeting. These provisions could, under certain circumstances, operate to
delay, defer or prevent a change in control of the Company.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock will be American
Stock Transfer & Trust Company.
REGISTRATION RIGHTS
Pursuant to a Registration Rights Agreement, dated as of September 20,
1996, holders of 2,583,333 shares of Common Stock and warrants or options to
acquire 892,867 shares of Common Stock, together with the holders of Outstanding
Preferred Stock that will be converted upon consummation of the Offering into an
aggregate of 462,053 shares of Common Stock have the right to have shares of
Common Stock registered under the Securities Act. See "Principal Stockholders."
Under the Registration Rights Agreement, such stockholders can, beginning six
months after the Registration Statement of which this Prospectus forms a part is
declared effective and subject to certain limitations, require the Company to
file up to two registration statements and an unlimited number of registration
statements on Form S-3 covering the sale of all or any portion of their Common
Stock. The Company must pay registration expenses but not such stockholders'
underwriting commissions or discounts in connection with such registrations. In
addition, whenever the Company proposes to register any of its securities under
the Securities Act, other than pursuant to registrations pursuant to
registration statements on Form S-4 or S-8, any such stockholder may require the
Company, subject to certain limitations, to include all or any portion of its
Common Stock in such registration (a "piggyback registration") and to pay
registration expenses but not such stockholders' underwriting commissions or
discounts in connection with such registrations. All of the stockholder parties
to the Registration Rights Agreement have waived their piggyback registration
rights in connection with the Offering. See "Shares Eligible for Future Sale."
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have outstanding
15,645,343 shares of Common Stock (16,695,343 shares outstanding if the
Underwriters' over-allotment option is exercised in full) including shares of
Common Stock beneficially owned by existing stockholders. The 7,000,000 shares
of Common Stock to be sold pursuant to the Offering (8,050,000 if the
Underwriters' over-allotment option is exercised in full) will be eligible for
sale without restriction under the Securities Act in the public market after the
completion of the Offering. Pursuant to an agreement with the Company and
certain existing stockholders of the Company owning 9,772,586 shares of Common
Stock or securities convertible into or exercisable for shares of Common Stock
have agreed that they will not effect any public sale or distribution of equity
securities of the Company for a period of 180 days after the date of this
Prospectus (other than, in the case of the Company, pursuant to existing
employee stock option plans) without the prior written consent of the
representatives of the Underwriters. To the extent not subject to the
restrictions set forth above, 45,281 shares of Common Stock owned by
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<PAGE> 93
existing stockholders and, following the expiration or waiver of the
restrictions set forth above, 9,772,586 additional shares of Common Stock will
be immediately available for sale into the open market pursuant to Rule 144
under the Securities Act (including the volume and other limitations set forth
therein) and could impair the Company's future ability to raise capital through
an offering of its equity securities.
In general, under Rule 144 as presently in effect, beginning 90 days after
the date of this Prospectus, if a period of at least one year has elapsed since
the later of the date shares of Common Stock that are "restricted securities"
(as that term is defined in Rule 144) were acquired from the Company or the date
they were acquired from an "affiliate" (as that term is defined in Rule 144) of
the Company, as applicable, then the holder of such restricted securities
(including an affiliate) is entitled to sell a number of shares within any
three-month period that does not exceed the greater of 1% of the then
outstanding shares of Common Stock (approximately 156,453 shares immediately
after the consummation of the Offering, assuming that the Underwriters'
over-allotment option is not exercised) or the average weekly trading volume of
the Common Stock on the American Stock Exchange during the four calendar weeks
preceding such sale. Sales under Rule 144 are also subject to certain
requirements pertaining to the manner of such sales, notices of such sales and
the availability of current public information concerning the Company.
Affiliates may sell shares not constituting restricted securities in accordance
with the foregoing volume limitations and other requirements but without regard
to the holding period requirement.
Under Rule 144(k), if a period of at least two years has elapsed since the
later of the date restricted shares were acquired from the Company or the date
they were acquired from an affiliate of the Company, as applicable, then a
holder of such restricted shares who is not an affiliate of the Company at the
time of the sale and who has not been an affiliate of the Company for at least
three months prior to the sale would be entitled to sell the shares immediately
without regard to the volume limitations and other conditions described above.
The Company is party to an agreement pursuant to which certain stockholders
have the right to have shares of Common Stock registered under the Securities
Act. See "Description of Capital Stock -- Registration Rights."
The Company currently has 2,025,000 shares of Common Stock reserved for
issuance upon exercise of stock options granted under its stock option plan,
including 1,013,425 shares reserved for issuance upon exercise of stock options
outstanding as of September 30, 1997. The Company intends to file a registration
statement on Form S-8 under the Securities Act to register the shares of Common
Stock reserved for issuance upon the exercise of options under its stock option
plan. Such registration is expected to become effective as soon as practicable
following the Offering. Shares registered and issued pursuant to such
registration statements will be tradable except to the extent that the holders
thereof are deemed to be "affiliates" of the Company, in which case the
transferability of such shares will be subject to the volume limitations set
forth in Rule 144.
Each officer and director and certain other holders of the Company's Common
Stock have agreed, for a period of 180 days after the date of this Prospectus
(the "Lock-Up Period") not to offer to sell, contract to sell, or otherwise
sell, dispose of, loan, pledge or grant any rights with respect to any shares of
Common Stock, any options or warrants to purchase any shares of Common Stock, or
any securities convertible into or exchangeable for shares of Common Stock owned
as of the date of this Prospectus or thereafter acquired directly by such
holders or with respect to which they have or hereinafter acquire the power of
disposition, without the prior written consent of BancAmerica Robertson
Stephens.
Prior to the Offering there has been no market for the Common Stock of the
Company. The Company can make no predictions as to the effect, if any, that
sales of shares or the availability of shares for sale will have on market
prices prevailing from time to time. Nevertheless, sales of substantial amounts
of the Common Stock of the Company in the public market, or the prospect of such
sales, could adversely affect the market price of the Common Stock.
92
<PAGE> 94
UNDERWRITING
The Underwriters named below, acting through their representatives,
BancAmerica Robertson Stephens, BT Alex. Brown Incorporated and Smith Barney
Inc. (the "Representatives"), have severally agreed subject to the terms and
conditions of the Underwriting Agreement, to purchase from the Company the
number of shares of Common Stock set forth opposite their names below. The
Underwriters are committed to purchase and pay for all such shares, if any are
purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
------------------------------------------------------------------------- ---------
<S> <C>
BancAmerica Robertson Stephens...........................................
BT Alex. Brown Incorporated..............................................
Smith Barney Inc. .......................................................
-------
Total............................................................... 7,000,000
=======
</TABLE>
The Representatives have advised the Company that the Underwriters propose
to offer shares of the Common Stock to the public at the initial public offering
price set forth on the cover page of this Prospectus and to certain dealers at
such price less a concession of not more than $ per share, of which
$ may be reallowed to other dealers. After the initial public offering,
the public offering price, concession and reallowance to dealers may be reduced
by the Representatives. No such reduction shall change the amount of proceeds to
be received by the Company as set forth on the cover page of this Prospectus.
The Company has granted to the Underwriters an option, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to 1,050,000
additional shares of Common Stock at the same price per share as the Company
will receive for the 7,000,000 shares that the Underwriters have agreed to
purchase. To the extent that the Underwriters exercise such option, each of the
Underwriters will have a firm commitment to purchase approximately the same
percentage of such additional shares that the number of shares of Common Stock
to be purchased by it shown in the above table represents as a percentage of the
7,000,000 shares offered hereby. If purchased, such additional shares will be
sold by the Underwriters on the same terms as those on which the 7,000,000
shares are being sold.
The Underwriting Agreement contains covenants of indemnity among the
Underwriters and the Company against certain civil liabilities, including
liabilities under the Securities Act and liabilities arising from breaches of
representations and warranties contained in the Underwriting Agreement.
Each officer and director and certain other holders of the Company's Common
Stock have agreed with the Representatives, for a period of 180 days after the
date of this Prospectus (the "Lock-Up Period") not to offer to sell, contract to
sell, or otherwise sell, dispose of, loan, pledge or grant any rights with
respect to any shares of Common Stock, any options or warrants to purchase any
shares of Common Stock, or any securities convertible into or exchangeable for
shares of Common Stock owned as of the date of this Prospectus or thereafter
acquired directly by such holders or with respect to which they have or
hereinafter acquire the power of disposition, without the prior written consent
of BancAmerica Robertson Stephens. However, BancAmerica Robertson Stephens may,
in its sole
93
<PAGE> 95
discretion at any time from time to time, without notice, release all or any
portion of the securities subject to the lock-up agreements. There are no
agreements between the Representatives and any of the Company's stockholders
providing consent by the Representatives to the sale of shares prior to the
expiration of the Lock-Up Period. The Company has agreed that during the Lock-Up
Period, it will not, without the prior written consent of BancAmerica Robertson
Stephens, issue, sell, contract to sell or otherwise dispose of any shares of
Common Stock, any options or warrants to purchase any shares of Common Stock or
any securities convertible into, exercisable or exchangeable for shares of
Common Stock other than the Company's sale of shares in the Offering, the
issuance of Common Stock upon the exercise of outstanding warrants and options
and under the existing employee stock purchase plans and the Company's issuance
of options under existing stock option plans. See "Shares Eligible for Future
Sale."
The Representatives have advised the Company that they do not intend to
confirm sales to any accounts over which they exercise discretionary authority
in excess of 5% of the number of shares of Common Stock offered hereby.
Each of the Underwriters has represented and, during the period of six
months after the date hereof, agreed that (a) it has not offered or sold and
will not offer or sell any shares of Common Stock in the United Kingdom except
to persons whose ordinary activities involve them in acquiring, holding,
managing or disposing of investments (as principal or agent) for the purpose of
their business or otherwise in circumstances which have not resulted and will
not result in an offer to the public in the United Kingdom within the meaning of
the Public Offers of Securities Regulations (1995) (the "Regulations"); (b) it
has complied and will comply with all applicable provisions of the Financial
Services Act 1986 and the Regulations with respect to anything done by it in
relation to the shares of Common Stock offered hereby in, from or otherwise
involving the United Kingdom; and (c) it has only issued or passed on and will
only issue or pass on to any person in the United Kingdom any document received
by it in connection with the issue of the shares of Common Stock if that person
is of a kind described in Article 11(3) of the Financial Services Act 1986
(Investment Advertisements) (Exemptions) Order 1996, or is a person to whom such
document may otherwise lawfully be issued or passed on.
Prior to this Offering, there has been no public market for the Common
Stock of the Company. Consequently, the initial public offering price for the
Common Stock offered hereby was determined through negotiations between the
Company and the Representatives. Among the factors considered in such
negotiations were prevailing market conditions, certain financial information of
the Company, market valuations of other companies that the Company and the
Representatives believe to be comparable to the Company, estimates of the
business potential of the Company, the present state of the Company's
development and other factors deemed relevant.
The Representatives have advised the Company that, pursuant to Regulation M
under the Securities Act, certain persons participating in the Offering may
engage in transactions, including stabilizing bids, syndicate covering
transactions or the imposition of penalty bids, which may have the effect of
stabilizing or maintaining the market price of the Common Stock at a level above
that which might otherwise prevail in the open market. A "stabilizing bid" is a
bid for or the purchase of the Common Stock on behalf of the Underwriters for
the purpose of fixing or maintaining the price of the Common Stock. A "syndicate
covering transaction" is a bid for or the purchase of the Common Stock on behalf
of the Underwriters to reduce a short position incurred by the Underwriters in
connection with the Offering. A "penalty bid" is an arrangement permitting the
Representatives to reclaim the selling concession otherwise accruing to an
Underwriter or syndicate member in connection with the Offering of the Common
Stock originally sold by such Underwriter or syndicate member is repurchased by
the Representatives in syndicate covering transactions, in stabilizing
transactions or otherwise. The Representatives have advised the Company that
such transactions may be effected on the American Stock Exchange or otherwise
and, if commenced, may be discontinued at any time.
94
<PAGE> 96
Certain investment funds managed by BancAmerica Robertson Stephens own
approximately 17.0% of the Common Stock (9.4% after giving effect to the
Offering) excluding any exercise of the Underwriters' over-allotment option).
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Kirkpatrick & Lockhart LLP, Pittsburgh, Pennsylvania.
Certain legal matters in connection with the validity of the shares of Common
Stock offered hereby will be passed upon for the Underwriters by Shearman &
Sterling, New York, New York.
EXPERTS
The consolidated financial statements and related financial statement
schedule of Balanced Care Corporation as of June 30, 1997 and 1996 and for the
years then ended and the period April 17, 1995 (date of inception) to June 30,
1995 have been included herein in reliance upon the report of KPMG Peat Marwick
LLP, independent certified public accountants, appearing elsewhere herein, and
upon the authority of said firm as experts in accounting and auditing.
The combined financial statements of Foster Health Care Affiliates as of
June 30, 1996 and 1995 and for the years then ended have been included herein in
reliance upon the report of Baird, Kurtz & Dobson, independent certified public
accountants, appearing elsewhere herein and upon the authority of said firm as
experts in accounting and auditing.
The combined financial statements of Keystone Affiliates as of and for the
years ended December 31, 1996, 1995 and 1994 have been included herein in
reliance upon the report of Snyder & Clemente, independent certified public
accountants, appearing elsewhere herein upon the authority of said firm as
experts in accounting and auditing.
The financial statements of Heavenly Health Care, Inc. (d/b/a Joe Clark
Residential Care Homes) as of December 31, 1996 and for the year then ended have
been included herein in reliance upon the report of Baird, Kurtz & Dobson,
independent certified public accountants, appearing elsewhere herein and upon
such report given upon the authority of said firm as experts in accounting and
auditing.
The consolidated balance sheets of Senior Living Centers, Inc. of December
31, 1996 and 1995 and the consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1996 have been audited by Coopers & Lybrand L.L.P., independent accountants,
as set forth in their report appearing elsewhere herein, and are included herein
in reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
The balance sheets of Feltrop's Personal Care Home as of June 30, 1997 and
1996 and the statements of operations, owners' equity and cash flows for each of
the three years in the period ended June 30, 1997 have been audited by Coopers &
Lybrand L.L.P., independent accountants, as set forth in their report appearing
elsewhere herein, and are included herein in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
The balance sheets of Butler Senior Care, Inc. as of June 30, 1997 and 1996
and the statements of operations, shareholders' equity and cash flows for each
of the three years in the period ended June 30, 1997 have been audited by
Coopers & Lybrand L.L.P., independent accountants, as set forth in their report
appearing elsewhere herein, and are included herein in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.
The combined balance sheets of Gethsemane Affiliates as of June 30, 1997
and 1996 and the combined statements of operations, shareholders' equity and
cash flows for each of the three years in
95
<PAGE> 97
the period ended June 30, 1997 have been audited by Coopers & Lybrand L.L.P.,
independent accountants, as set forth in their report appearing elsewhere
herein, and are included herein in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
The balance sheets of Triangle Retirement Services, Inc. d/b/a Northridge
Retirement Center as of December 31, 1996 and 1995 and the statements of
operations, shareholders' equity and cash flows for each of the two years in the
period ended December 31, 1996 have been audited by Hodge, Steward & Company,
P.A., independent accountants, as set forth in their report appearing elsewhere
herein, and are included herein in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
96
<PAGE> 98
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement under
the Securities Act with respect to the shares of Common Stock offered hereby.
This Prospectus, which constitutes part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement and the
exhibits and schedules thereto. The summaries in this Prospectus of additional
information included in the Registration Statement or any exhibit thereto are
qualified in their entirety by reference to such information or exhibit. For
further information with respect to the Company and the Common Stock, reference
is hereby made to such Registration Statement and the exhibits and schedules
thereto, copies of which may be inspected without charge at the public reference
facilities maintained by the Securities and Exchange Commission at Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, or obtained from the
Commission upon payment of the fees prescribed by the Commission. In addition,
registration statements and certain other documents filed with the Commission
through its Electronic Data Gathering, Analysis and Retrieval ("EDGAR") system
are publicly available through the Commission's site on the World Wide Web,
located at http://www.sec.gov. The Registration Statement, including all
exhibits thereto and amendments thereof, has been filed with the Commission
through EDGAR.
The Company was founded as a Delaware corporation in April 1995. The
Company's executive offices are located at 5021 Louise Drive, Suite 200,
Mechanicsburg, Pennsylvania 17055, and its telephone number is (717) 796-6100.
97
<PAGE> 99
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
BALANCED CARE CORPORATION:
Independent Auditors' Report....................................................... F-3
Consolidated Balance Sheets as of September 30, 1997 (unaudited),
June 30, 1997 and 1996.......................................................... F-4
Consolidated Statements of Operations for the three months ended September 30, 1997
and 1996 (unaudited) and the years ended June 30, 1997 and 1996 and the period
April 17, 1995 (date of inception) to June 30, 1995............................. F-5
Consolidated Statements of Stockholders' Equity for the three months ended
September 30, 1997 (unaudited) and the years ended June 30, 1997 and 1996 and
the period April 17, 1995 (date of inception) to June 30, 1995.................. F-6
Consolidated Statements of Cash Flows for the three months ended September 30, 1997
and 1996 (unaudited) and the years ended June 30, 1997 and 1996 and the period
April 17, 1995 (date of inception) to June 30, 1995............................. F-7
Notes to Consolidated Financial Statements......................................... F-8
FOSTER HEALTH CARE AFFILIATES
Independent Accountants' Report.................................................... F-22
Combined Balance Sheets as of June 30, 1996 and 1995............................... F-23
Combined Statements of Income for the years ended June 30, 1996 and 1995........... F-24
Combined Statements of Shareholders' Equity for the years ended June 30, 1996 and
1995............................................................................ F-25
Combined Statements of Cash Flows for the years ended June 30, 1996 and 1995....... F-26
Notes to Combined Financial Statements............................................. F-27
KEYSTONE AFFILIATES
Independent Auditor's Report....................................................... F-39
Combined Balance Sheets as of December 31, 1996 and 1995........................... F-40
Combined Statements of Income for the years ended December 31, 1996, 1995 and
1994............................................................................ F-41
Combined Statements of Changes in Stockholders' Equity for the years ended December
31, 1996, 1995 and 1994......................................................... F-42
Combined Statements of Cash Flows for the years ended December 31, 1996, 1995 and
1994............................................................................ F-43
Notes to Combined Financial Statements............................................. F-44
HEAVENLY HEALTH CARE, INC. D/B/A JOE CLARK RESIDENTIAL CARE HOMES
Independent Accountants' Report.................................................... F-55
Balance Sheet as of December 31, 1996.............................................. F-56
Statement of Income for year ended December 31, 1996............................... F-57
Statement of Shareholders' Equity (Deficit) for the year ended December 31, 1996... F-58
Statement of Cash Flows for the year ended December 31, 1996....................... F-59
Notes to Financial Statements...................................................... F-60
BUTLER SENIOR CARE, INC.
Report of Independent Accountants.................................................. F-62
Balance Sheets as of September 30, 1997 (unaudited), June 30, 1997 and 1996........ F-63
Statements of Operations for the three months ended September 30, 1997 and 1996
(unaudited) and the years ended June 30, 1997, 1996 and 1995.................... F-64
Statements of Shareholders' Equity for the three months ended September 30, 1997
(unaudited) and the years ended June 30, 1997, 1996 and 1995.................... F-65
Statements of Cash Flows for the three months ended September 30, 1997 and 1996
(unaudited) and the years ended June 30, 1997, 1996 and 1995.................... F-66
Notes to Financial Statements...................................................... F-67
</TABLE>
F-1
<PAGE> 100
INDEX TO FINANCIAL STATEMENTS--CONTINUED
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
GETHSEMANE AFFILIATES
Report of Independent Accountants.................................................. F-71
Combined Balance Sheets as of September 30, 1997 (unaudited), June 30, 1997 and
1996............................................................................ F-72
Combined Statements of Income for the three months ended September 30, 1997 and
1996 (unaudited) and years ended June 30, 1997, 1996 and 1995................... F-73
Combined Statements of Shareholders' Equity (Deficit) for the three months ended
September 30, 1997 (unaudited) and the years ended June 30, 1997, 1996 and
1995............................................................................ F-74
Combined Statements of Cash Flows for the three months ended September 30, 1997 and
1996 (unaudited) and the years ended June 30, 1997, 1996 and 1995............... F-75
Notes to Combined Financial Statements............................................. F-76
FELTROP'S PERSONAL CARE HOME
Report of Independent Accountants.................................................. F-82
Balance Sheets as of September 30, 1997 (unaudited), June 30, 1997 and 1996........ F-83
Statements of Operations for the three months ended September 30, 1997 and 1996
(unaudited) and the years ended June 30, 1997, 1996 and 1995.................... F-84
Statements of Owners' Equity for the three months ended September 30, 1997
(unaudited) and the years ended June 30, 1997, 1996 and 1995.................... F-85
Statements of Cash Flows for the three months ended September 30, 1997 and 1996
(unaudited) and the years ended June 30, 1997, 1996 and 1995.................... F-86
Notes to Financial Statements...................................................... F-87
TRIANGLE RETIREMENT SERVICES INC. D/B/A NORTHRIDGE RETIREMENT CENTER
Independent Auditor's Report....................................................... F-91
Balance Sheets as of September 30, 1997 (unaudited) and December 31, 1996 and
1995............................................................................ F-92
Statements of Income for the nine months ended September 30, 1997 and 1996
(unaudited) and the years ended December 31, 1996 and 1995...................... F-93
Statements of Changes in Stockholders' Equity for the nine months ended September
30, 1997 (unaudited) and the years ended December 31, 1996 and 1995............. F-94
Statements of Cash Flows for the nine months ended September 30, 1997 and 1996
(unaudited) and the years ended December 31, 1996 and 1995...................... F-95
Notes to Financial Statements...................................................... F-97
</TABLE>
F-2
<PAGE> 101
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Balanced Care Corporation
We have audited the consolidated balance sheets of Balanced Care
Corporation as of June 30, 1997 and 1996, and the related consolidated
statements of operations, stockholders' equity (deficit) and cash flows for the
years then ended and the period April 17, 1995 (date of inception) to June 30,
1995. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Balanced
Care Corporation as of June 30, 1997 and 1996 and the results of its operations,
and its cash flows for the years then ended and the period April 17, 1995 (date
of inception) to June 30, 1995, in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Philadelphia, Pennsylvania
July 30, 1997, except for Notes 11 and 12
which are as of January 2, 1998
F-3
<PAGE> 102
BALANCED CARE CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30, JUNE 30,
1997 1997 1996
-------------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 2,362 $ 7,908 $ 567
Accounts receivable (net of allowance for doubtful
accounts of $330 in 1997 and $-0- in 1996).............. 7,774 6,679 65
Preferred stock subscription receivable................... -- -- 451
Deferred costs............................................ 2,373 2,062 666
Prepaid expenses and other current assets................. 1,938 945 25
Assets held for sale...................................... 4,801 4,801 --
------- ------- ------
Total current assets............................... 19,248 22,395 1,774
Restricted investments...................................... 2,594 1,825 279
Property and equipment, net................................. 4,841 4,115 4,897
Goodwill, net............................................... 2,290 2,219 315
Other assets................................................ 2,651 2,463 27
------- ------- ------
Total assets....................................... $ 31,624 $33,017 $ 7,292
======= ======= ======
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<S> <C> <C> <C>
Current liabilities:
Current portion of long-term debt......................... $ 98 $ 97 $ 29
Accounts payable.......................................... 4,858 5,929 517
Accrued payroll........................................... 1,154 1,818 201
Accrued expenses.......................................... 2,172 1,251 300
------- ------- ------
Total current liabilities.......................... 8,282 9,095 1,047
Long-term debt, net of current portion...................... 8,354 8,177 5,043
Straight-line lease liability............................... 3,166 3,133 --
Deferred revenues........................................... 604 579 --
Other liabilities........................................... 70 228 78
------- ------- ------
Total liabilities.................................. 20,476 21,212 6,168
------- ------- ------
Redeemable preferred stock:
Series B authorized, issued and outstanding -- 5,009,750
shares at September 30 and June 30, 1997 at redemption
value which includes accretion of $1,893 and $1,267
September 30 and June 30, 1997, respectively............ 13,875 13,249 --
------- ------- ------
Commitments and contingencies (Note 11)
Stockholders' equity (deficit):
Preferred stock, $.001 par value; 5,000,000 authorized;
none outstanding........................................ -- -- --
Preferred stock, Series A authorized -- 1,150,958 shares
at September 30 and June 30, 1997 and 1,500,000 shares
at June 30, 1996; issued and outstanding -- 1,150,958
shares at September 30 and June 30, 1997 and 1,000,000
shares at June 30, 1996................................. 1 1 1
Series A subscription rights -- 250,000 shares at June 30,
1996.................................................... -- -- 451
Common stock, $.001 par value -- authorized -- 50,000,000
shares at September 30 and June 30, 1997 and 7,000,000
shares at June 30, 1996; issued and
outstanding -- 4,024,812 shares at September 30 and June
30, 1997 and 2,583,333 shares at June 30, 1996.......... 5 5 3
Additional paid-in capital................................ 3,335 3,961 1,588
Accumulated deficit....................................... (6,068) (5,411) (919)
------- ------- ------
Total stockholders' equity (deficit)............... (2,727) (1,444) 1,124
------- ------- ------
Total liabilities and stockholders' equity......... $ 31,624 $33,017 $ 7,292
======= ======= ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 103
BALANCED CARE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED JUNE
SEPTEMBER 30, 30, APRIL 17
-------------------- ------------------ TO JUNE 30,
1997 1996 1997 1996 1995
------- ------ ------- ------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Patient services..................... $14,496 $3,304 $41,616 -- --
Resident services.................... 2,998 993 6,778 737 --
Other revenues....................... 1,644 75 1,086 74 --
------- ------ ------- ------ -------
Total revenues............... 19,138 4,372 49,480 811 --
------- ------ ------- ------ -------
Operating expenses:
Facility operating expenses:
Salaries, wages and benefits...... 7,305 1,851 19,186 320 --
Other operating expenses
(including related parties of
$751 in 1997)................... 7,187 1,765 20,727 179 --
General and administrative expense
(including related parties of
$1,210 in 1997)................... 2,679 747 5,653 1,000 10
Lease expense (including related
parties of $4,030 in 1997)........ 2,212 475 5,417 77 --
Depreciation and amortization
expense........................... 281 90 693 49 --
Write-down of long-lived assets...... -- -- 1,591 -- --
------- ------ ------- ------ -------
Total operating expenses........ 19,664 4,928 53,267 1,625 10
------- ------ ------- ------ -------
Loss from operations................. (526) (556) (3,787) (814) (10)
Other income (expense):
Interest income................... 113 13 265 13 --
Interest expense.................. (237) (183) (917) (102) (10)
------- ------ ------- ------ -------
Loss before income taxes............. (650) (726) (4,439) (903) (10)
Provision for income taxes........... 7 3 53 6 --
------- ------ ------- ------ -------
Net loss............................. $ (657) $ (729) $(4,492) $ (909) $ (10)
======= ====== ======= ====== =======
Accretion of redemption value
attributable to redeemable
convertible preferred stock....... 626 -- 1,267 -- --
------- ------ ------- ------ -------
Net loss allocable to common
stockholders...................... $(1,283) $ (729) $(5,759) $ (909) $ (10)
======= ====== ======= ====== =======
Pro forma:
Pro forma net loss per share......... $ (.08) $ (.09) $ (0.57) $(0.30) $ --
======= ====== ======= ====== =======
Shares used in computing pro forma
loss per share.................... 7,962 7,936 7,936 3,070 2,921
======= ====== ======= ====== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 104
BALANCED CARE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED) AND THE YEARS ENDED
JUNE 30, 1997 AND 1996 AND THE PERIOD APRIL 17, 1995 (DATE OF INCEPTION) TO JUNE
30, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREFERRED A STOCK COMMON STOCK
------------------------------- ---------------- ADDITIONAL
ISSUED PAR SUBSCRIPTION ISSUED PAR PAID-IN NET
SHARES VALUE RIGHTS SHARES VALUE CAPITAL LOSS TOTAL
------ ----- ------------ ------ ----- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sale of common stock....... -- -- -- 2,325 $ 3 $ 24 -- $ 27
Net loss for the period.... -- -- -- -- -- -- $ (10) (10)
----- --- ---- ----- --- ------ ------- -------
Balance at June 30, 1995... -- -- -- 2,325 24 (10) 17
3
Sale of preferred stock.... 750 $ 1 -- -- 1,499 -- 1,500
--
Preferred stock
subscription rights...... 250 -- $451 -- -- -- 451
--
Sale of common stock....... -- -- -- 258 3 -- 3
--
Issuance of common stock
purchase warrants........ -- -- -- -- 62 -- 62
--
Net loss for the year...... -- -- -- -- -- (909) (909)
--
----- --- ---- ----- --- ------- ------- -------
Balance at June 30, 1996... 1,000 1 451 2,583 3 1,588 (919) 1,124
Stock dividend............. 151 -- -- -- -- -- -- --
Accretion of redemption
value attributable to
redeemable preferred
stock.................... -- -- -- -- -- (1,267) -- (1,267)
Issuance of common stock... -- -- -- 1,442 2 2,172 -- 2,174
Issuance of preferred
stock.................... -- -- (451) -- -- 451 -- --
Issuance of common stock
purchase warrants........ -- -- -- -- -- 1,017 -- 1,017
Net loss for the year...... -- -- -- -- -- -- (4,492) (4,492)
--- --- ---- ----- --- ------ ------- -------
Balance at June 30, 1997... 1,151 1 0 4,025 5 3,961 (5,411) (1,444)
Unaudited:
Accretion of redemption
value attributable to
redeemable preferred
stock.................... -- -- -- -- -- (626) -- (626)
Net loss for the quarter... -- -- -- -- -- -- (657) (657)
--- --- ---- ----- --- ------ ------- -------
Balance at September 30,
1997..................... 1,151 $ 1 $ 0 4,025 $ 5 $3,335 $(6,068) $(2,727)
=== === ==== ===== === ====== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements
F-6
<PAGE> 105
BALANCED CARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, JUNE 30, APRIL 17
----------------- ----------------- TO JUNE 30,
1997 1996 1997 1996 1995
------- ------- ------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss................................................. $ (657) $ (729) $(4,492) $ (909) $ (10)
Adjustments to reconcile net loss to net used for
operating activities:
Depreciation and amortization.......................... 281 90 693 49 --
Non-cash lease expense................................. 33 -- 1,454 -- --
Write-down of long-lived assets........................ -- -- 1,591 -- --
Changes in operating assets and liabilities, excluding
effects of acquisitions:
Increase in accounts receivable...................... (1,095) (75) (3,066) (65) --
Increase in deferred costs........................... (311) (42) (1,396) (666) --
Increase in prepaid expenses and other current
assets............................................. (1,040) (223) (739) (25) --
Increase (decrease) in accounts payable, accrued
payroll and accrued expenses....................... (814) 794 5,340 1,052 --
Increase in deferred revenues........................ 25 28 579 -- --
------- ------- ------- ------- -----
Net cash used for operating activities.......... (3,578) (157) (36) (564) (10)
------- ------- ------- ------- -----
Cash Flows from Investing Activities:
Purchases of property and equipment.................... (734) (295) (1,822) (157) --
Increase in restricted investments..................... (769) (189) (1,546) (279) --
Increase in goodwill................................... (98) (515) (1,882) (318) --
Increase in other assets............................... (188) (285) (1,462) (26) (1)
Acquisitions, net of cash acquired..................... -- (845) (487) (4,701) --
------- ------- ------- ------- -----
Net cash used for investing activities.......... (1,789) (2,129) (7,199) (5,481) (1)
------- ------- ------- ------- -----
Cash Flows from Financing Activities:
Proceeds from issuance of long-term debt............... -- 311 385 5,094 --
Payments on long-term debt............................. (22) (60) (142) (1) --
Proceeds from issuance of common stock................. -- -- 110 3 27
Proceeds from issuance of Series A preferred stock..... -- 451 451 1,500 --
Proceeds from issuance of Series B preferred stock..... -- 4,955 11,982 -- --
Issuance of notes payable.............................. -- 1,476 1,476 -- --
Payments on notes payable.............................. -- (344) (1,476) -- --
Increase in straight-line lease liability.............. -- 373 1,679 -- --
Increase(decrease) in other liabilities................ (157) -- 111 -- --
------- ------- ------- ------- -----
Net cash provided by financing activities....... (179) 7,162 14,576 6,596 27
------- ------- ------- ------- -----
Increase in cash and cash equivalents.................. (5,546) 4,876 7,341 551 16
Cash and cash equivalents at beginning of period....... 7,908 567 567 16 --
------- ------- ------- ------- -----
Cash and cash equivalents at end of period............... $ 2,362 $ 5,443 $ 7,908 567 16
======= ======= ======= ======= =====
Supplemental Cash Flow Information:
Cash paid during the period for interest............... $ 237 $ 169 $ 927 $ 47 --
======= ======= ======= ======= =====
Cash paid during the period for income taxes........... $ -- $ -- $ 35 $ -- --
======= ======= ======= ======= =====
Supplemental Non-cash Investing and Financing Activities:
Assets and lease obligations capitalized............... $ 197 $ -- $ 75 $ 40 --
======= ======= ======= ======= =====
Fair value of stock purchase warrants granted to a
lender............................................... $ -- $ 465 $ 1,017 $ 62 --
======= ======= ======= ======= =====
Preferred stock subscriptions receivable............... $ -- $ -- $ -- $ 451 --
======= ======= ======= ======= =====
Accretion of preferred B stock......................... $ 626 $ -- $ 1,267 $ -- --
======= ======= ======= ======= =====
Acquisitions:
Fair value of assets acquired........................ $ -- $(8,172) (8,188) (4,745) --
Liabilities assumed.................................. -- 5,512 5,636 44 --
Fair value of stock issued........................... -- 1,815 2,065 -- --
------- ------- ------- ------- -----
Consideration paid for acquisitions.................. $ -- $ (845) $ (487) $(4,701) --
======= ======= ======= ======= =====
</TABLE>
See accompanying notes to consolidated financial statements
F-7
<PAGE> 106
BALANCED CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Organization and Background
Balanced Care Corporation (BCC or the Company) was incorporated in April
1995 and is engaged in the development and acquisition of assisted living
facilities and selective acquisitions of other operations which facilitate
implementation of the Company's balanced care continuum strategy, such as
medical rehabilitation, home health care and skilled nursing. As of June 30,
1997, the Company owned or operated 22 assisted and independent living
communities, 12 skilled nursing facilities, and had 10 assisted living
communities under construction(see Note 3). The Company also operates an
institutional pharmacy, a home health agency and a rehabilitation agency (see
Note 12). The Company's operations are located primarily in Pennsylvania,
Missouri and Wisconsin.
(b) Basis of Presentation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries from their respective acquisition
dates. All significant intercompany accounts and transactions have been
eliminated in the consolidated financial statements.
The financial statements as of and for the three month periods ended
September 30, 1997 and 1996, are unaudited, but, in the opinion of management,
have been prepared on the same basis as the audited financial statements and
reflect all adjustments, consisting of normal recurring accruals, necessary for
a fair presentation of the information set forth therein. The results of
operations for the three months ended September 30, 1997, are not necessarily
indicative of the operating results to be expected for the full year or any
other period.
(c) Cash and Cash Equivalents
Cash equivalents consist of highly liquid instruments with original
maturities of three months or less. The Company maintains its cash and cash
equivalents at financial institutions which management believes are of high
credit quality.
(d) Fair Value of Financial Instruments
Cash and cash equivalents, receivables, restricted investments and mortgage
notes payable are reflected in the accompanying balance sheet at amounts
considered by management to approximate fair value. Management generally
estimates fair value of its long-term fixed rate notes payable using discounted
cash flow analysis based upon the current borrowing rate for debt with similar
maturities.
(e) Restricted Investments
Restricted investments consist of money market mutual funds invested in
government securities which have been deposited as collateral for certain of the
Company's mortgage and lease commitments. The amounts are equivalent to three to
six months debt service or lease payments and are generally restricted until the
related debt is repaid or through the initial lease term.
(f) Property and Equipment
Property and equipment are stated at cost less accumulated depreciation or,
where appropriate, the present value of the related capital lease obligations
less accumulated amortization. Depreciation and amortization are computed using
the straight-line method over the estimated useful lives of the assets ranging
from 2-37 years. Expenditures for maintenance and repairs necessary to maintain
F-8
<PAGE> 107
BALANCED CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
property and equipment in efficient operating condition are charged to
operations. Costs of additions and betterments are capitalized.
(g) Goodwill
Goodwill resulting from acquisitions accounted for as purchases is being
amortized on a straight-line basis over lives ranging from 15 to 25 years.
Goodwill is reviewed for impairment whenever events or circumstances provide
evidence which suggests that the carrying amount of goodwill may not be
recoverable. The Company evaluates the recoverability of goodwill by determining
whether the amortization of the goodwill balance can be recovered through
projected undiscounted cash flows. At June 30, 1997 and 1996, accumulated
amortization of goodwill was $123,000 and $2,000, respectively.
(h) Impairment of Long-lived Assets and Long-lived Assets To Be Disposed Of
The Company adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 121, Accounting for the Impairment of Long-lived Assets and
for Long-lived Assets To Be Disposed Of, on July 1, 1996. SFAS No. 121 requires
that long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of
the carrying amount of an asset to undiscounted future net cash flow expected to
be generated by the asset. This comparison is performed on a facility by
facility basis. If such assets are considered to be impaired, the impairment to
be recognized is measured by the amount by which the carrying amount of the
assets exceed the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs to sell.
Adoption of SFAS No. 121 at July 1, 1996 did not have a material impact on the
Company's financial position, results of operations, or liquidity.
(i) Deferred Costs
Financing and leasing costs have been deferred and are being amortized on a
straight-line basis over the term of the related debt or lease. Accumulated
amortization of deferred financing and leasing costs was $43,000 and $0 at June
30, 1997 and 1996, respectively.
Third-party vendors invoice the Company for development costs which are
reimbursable by the real estate investments trusts (REITs) for whom the Company
develops assisted living facilities. These costs are recorded as current
deferred costs. Costs incurred by the Company for salaries, wages and benefits
and other direct costs of development activities are recorded as current
deferred costs until the related development fee revenue is recognized, at which
time these costs are expensed. The Company reviews deferred development costs to
assess recoverability based on the progress of each development project. When a
project is abandoned, deferred costs related to the project are expensed.
(j) Stock Option Plan
Prior to July 1, 1996 the Company accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, Accounting for Stock Issued to Employees, and related interpretations.
As such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. On
July 1, 1996, the Company adopted SFAS No. 123, Accounting for Stock-Based
Compensation, which permits entities to recognize as expense the fair value of
all stock-based awards on the date of grant over the vesting period.
Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net income and pro forma
earnings per share
F-9
<PAGE> 108
BALANCED CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
disclosures for employee stock option grants as if the fair-value-based-method
defined in SFAS No. 123 had been applied. The Company has elected to continue to
apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure
provisions of SFAS No. 123.
(k) Revenue Recognition
Patient revenues are recorded based on standard charges applicable to all
patients, and include charges for room and board, rehabilitation therapies,
pharmacy, medical supplies, sub-acute care, and other programs provided to
patients in skilled nursing facilities. Under Medicare, Medicaid, and other
cost-based reimbursement programs, each facility is reimbursed for services
rendered to covered program patients as determined by reimbursement formulas.
The differences between established billing rates and the amounts reimbursable
by the programs and patient payments are recorded as contractual adjustments and
deducted from revenues. Revenues from the Medicare and Medicaid programs
represented 31% and 31%, respectively, of total 1997 revenues. The Company had
no Medicaid or Medicare revenues in 1996. At June 30, 1997, accounts receivable
includes approximately $2,037,000 and $108,000 from the Medicaid programs of
Missouri and Pennsylvania, respectively.
Retroactively calculated third-party contractual adjustments are accrued on
an estimated basis based on cost reimbursement formulas in effect in the period
the related services are rendered. At June 30, 1997 the Company had accrued
estimated settlements receivable of $539,000 from Medicare and $79,000 from
Medicaid. Revisions to estimated contractual adjustments are recorded based upon
audits by third-party payors, as well as other communications with third-party
payors such as desk reviews, regulation changes and policy statements. These
revisions are made in the year such amounts are determined. Management is not
aware of any material claims or disputes with third-party payors. There were no
material settlements with third-party payors during the years ended June 30,
1997 and 1996.
Resident revenues are recognized when services are rendered and consist of
resident fees and other ancillary services provided to residents of the
Company's assisted living facilities.
Other revenues consist of management fees and development fees. Management
fees are recognized when services are rendered. On projects where BCC is the
lessee, development fees in excess of related development costs are recorded as
deferred revenues and recognized as earned over the lease term. On projects
developed for others development fees are recognized over the development
period. Prepaid expenses and other current assets include development fees
receivable of $6,000 and $-0- at June 30, 1997 and 1996, respectively.
(l) Income Taxes
The Company follows the asset and liability method of accounting for income
taxes. Under this method, deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases.
(m) Straight-line Lease Liability
Straight-line lease liabilities represent lease deposit funding received
from REITs relating to lease transactions. The Company pays rent on these funds
and amortizes the related straight-line lease liability over the initial lease
term as a reduction of rent expense.
F-10
<PAGE> 109
BALANCED CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(n) Classification of Expenses
All expenses associated with corporate or support functions are classified
as general and administrative.
(o) Use of Estimates
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions. These assumptions affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these estimates.
(p) New Accounting Pronouncements
In February 1997 the Financial Accounting Standards Board issued SFAS No.
128, Earnings Per Share. SFAS No. 128 replaces the presentation of primary
earnings per share (EPS) with a presentation of basic EPS. Basic EPS excludes
dilution and is computed by dividing income available to common stockholders by
the weighted average number of common shares outstanding for the period. SFAS
No. 128 also requires dual presentation of basic and diluted EPS on the face of
the income statement and other reconciliations and disclosures. The Company is
required to adopt SFAS No. 128 in fiscal year ending in 1998. There is no
difference between the loss per share calculated under SFAS No. 128 and the loss
per share presented in these financial statements.
(q) Net Loss Per Share
Pro Forma Net Loss Per Share
Pro forma net loss per share is computed using the weighted average number
of common shares and common equivalent shares (using the treasury stock method)
outstanding and gives effect to certain adjustments described below. Common
equivalent shares from stock options and warrants and convertible preferred
stock are excluded from the computation as their effect is antidilutive, except
that, pursuant to Securities and Exchange Commission (SEC) Staff Accounting
Bulletins and SEC staff policy, common and common equivalent shares issued
during the 12-month period prior to the proposed Initial Public Offering
(Offering) at prices below the anticipated Offering price are presumed to have
been issued in contemplation of the Offering and have been included in the
calculations as if they were outstanding for all periods presented (using the
treasury stock method and a proposed Offering price of $9.50). In the
computation of pro forma net loss per share, accretion of the redemption value
attributable to redeemable preferred stock is not included as an increase to net
loss.
Pursuant to the policy of the SEC staff, the calculation of shares used in
computing pro forma net loss per share also includes the Series B redeemable
convertible preferred stock that will convert into shares of common stock upon
completion of the Offering (using the if-converted method) from their original
date of issuance.
F-11
<PAGE> 110
BALANCED CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth the calculation of total number of shares
used in the computation of pro forma net loss per common share:
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Weighted average common shares outstanding.......................... 3,583 2,474 2,325
Additional shares assuming exercise of:
Convertible preferred stock....................................... 3,757 -- --
Common stock...................................................... 242 242 242
Stock options..................................................... 478 478 478
Warrants.......................................................... 240 240 240
Shares assumed repurchased.......................................... (364) (364) (364)
----- ----- -----
Weighted average common and common equivalent shares used in the
computation of pro forma net loss per common share................ 7,936 3,070 2,921
===== ===== =====
</TABLE>
Supplementary Net Loss Per Share
As required by APB 15 the pro forma net loss per share presented above has
been further adjusted to reflect the retirement of debt with the proceeds of the
offering (using a proposed offering price of $9.50).
<TABLE>
<CAPTION>
1997
-------
<S> <C>
Net loss........................................................................... $(4,492)
Interest savings on debt retirement................................................ 806
-------
Adjusted net loss.................................................................. $(3,686)
=======
Weighted average common and common equivalent shares used in the computation of pro
forma net loss per common share.................................................. 7,936
Incremental shares issued for retirement of debt................................... 855
-------
Adjusted shares.................................................................... 8,791
=======
Supplementary net loss per common share............................................ $ (.42)
=======
</TABLE>
2. ACQUISITIONS
In May 1997, the Company completed the Clark acquisition of leasehold
interests in three assisted living facilities with 77 operating beds (171
licensed beds) from Heavenly Healthcare Inc. in Nevada, Missouri. In August
1997, the Company closed on the acquisition of a fourth leasehold interest in an
assisted living community with 25 beds (57 licensed beds) from the same seller.
The facilities were acquired by Capstone Capital Corporation (Capstone), a
health care REIT, for approximately $5,335,000 including transaction costs. The
Company has entered into a 10-year lease with three 5-year renewal options with
the REIT. The Company entered into a lease obligation but made no payments and
recorded no goodwill in this acquisition since the total costs of acquiring the
facilities were borne by Capstone.
In January 1997, the Company consummated the Keystone acquisition which
involved the operations of five assisted living facilities (317 beds) and two
skilled nursing facilities (103 beds) located in Pennsylvania. Capstone acquired
the facilities and certain other assets for approximately $21,600,000 including
transaction costs from Keystone Affiliates, a group of commonly controlled "S
Corporations", and leases them to the Company pursuant to an 11-year lease
agreement with three 5-year renewal options. The Company paid a total purchase
price of approximately $2,050,000 comprised of $1,800,000 in cash 187,500 shares
of its common stock valued at $1.33 per share for the
F-12
<PAGE> 111
BALANCED CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
operations of the existing facilities and the rights to seven early stage
development projects. The agreement provides for additional cash payments of up
to $500,000. These payments are to be made in five installments of $100,000 when
financing closes for each of the first five development projects. Goodwill of
approximately $1,800,000 was recorded for this acquisition, which is being
amortized over 25 years. When made, the contingent payments will be recorded as
additional goodwill and amortized over 25 years. This acquisition was accounted
for using the purchase method of accounting.
In August 1996, the Company acquired the operations of seven skilled
nursing facilities and a facility based home health agency as well as the stock
of three skilled nursing facilities and a pharmacy company, all in Missouri
(Missouri acquisition) from Foster Health Care Affiliates, a group of commonly
controlled "C" corporations. The total purchase price of approximately
$8,691,000 was comprised of 1,200,000 shares of its common stock valued at $1.33
per share, the issuance of notes payable aggregating $1,476,000, mortgage
financing of $3,115,000 funded by Meditrust, a health care REIT, liabilities
assumed of approximately $1,800,000 and transaction costs of approximately
$700,000. Goodwill of approximately $1,851,000 relating to the Pharmacy was
recorded. The Pharmacy has been reclassified as an asset held for sale as of
June 30, 1997 (see Note 3). The real estate assets of these seven skilled
nursing facilities were purchased by Hawthorn Health Properties, Inc. (HHP), a
related party, for approximately $39,100,000 including transaction costs with
mortgage financing provided by Meditrust. The Company has leased these seven
facilities from HHP pursuant to a 12-year lease agreement which commenced in
August 1996 and has four 6-year renewal options. This acquisition was accounted
for as a purchase. The notes payable were paid in January 1997. In February
1997, the Company leased two additional assisted living facilities in Missouri
from the same seller. The facilities have a capacity for 61 residents. The
initial lease term is for three years with two 1-year renewal options.
In May 1996, the Company acquired Harmony Manor which is comprised of seven
assisted living facilities in Wisconsin with 158 licensed beds for $5,046,000
including transaction costs which was funded with mortgage financing provided by
a health care REIT (Wisconsin Acquisition). This acquisition was accounted for
using the purchase method of accounting. (See Note 3).
In March 1996, the Company acquired the operations of Outlook Pointe at
Allison Park (formerly Mt. Royal Pines) a 68-bed assisted living community in
Pennsylvania for cash of approximately $318,000, which has been recorded as
goodwill and is being amortized over 25 years. Health Care Property Investors,
Inc. (HCPI), a health care REIT, acquired the facility for $2,350,000 and leases
it to the Company pursuant to a 15-year lease agreement with three five-year
renewal options. This acquisition was accounted for using the purchase method of
accounting.
The following unaudited summary, prepared on a pro forma basis, combines
the results of operations of the acquired businesses with those of the Company
as if the acquisitions and leases had been consummated as of the beginning of
the respective periods after including the impact of certain adjustments such
as: amortization of goodwill, depreciation on assets acquired, interest on
acquisition financing and lease payments on the leased facility (in thousands
except for net loss per common share):
<TABLE>
<CAPTION>
1997 1996
-------- -------
<S> <C> <C>
Revenue......................................................... $ 63,882 $ 3,868
Expenses........................................................ (68,262) (4,305)
-------- -------
Net Loss........................................................ $ (4,380) $ (437)
======== =======
Net Loss per common share....................................... $ (0.55) $ (0.14)
======== =======
</TABLE>
F-13
<PAGE> 112
BALANCED CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The unaudited pro forma results are not necessarily indicative of what
actually might have occurred if the acquisitions had been completed as of July
1, 1996 and 1995, respectively. In addition, they are not intended to be a
projection of future results of operations.
3. ASSETS HELD FOR SALE
In June 1997, management determined that the Wisconsin market does not
provide adequate opportunity to achieve the operational efficiencies necessary
to operate profitably. As a result, the Company committed to a plan for the
disposal of its Wisconsin assisted living facilities. Management also decided to
sell the Pharmacy in order to focus on its assisted living and skilled nursing
operations. As a result of the planned Wisconsin disposition, a non-cash charge
of $1,591,000 has been recorded to write these assets down to their estimated
fair value of approximately $3,150,000 based on the present value of expected
discounted future cash flows less estimated costs of disposal. For the year
ended June 30, 1997, the Wisconsin operations experienced a pre-tax loss of
$381,000 and the Pharmacy experienced pretax income of $240,000 (see Note 12).
The Company plans to dispose of the Wisconsin assisted living facilities as soon
as practicable.
4. PROPERTY AND EQUIPMENT
Property and equipment are comprised of the following as of June 30
(dollars in thousands).
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIFE 1997 1996
----------- ------ ------
<S> <C> <C> <C>
Land and land improvements............................ 2-15 yrs $ 418 $ 194
Buildings and improvements............................ 2-37 yrs 2,059 4,081
Fixed and moveable equipment.......................... 3-20 yrs 2,119 671
------
4,596 4,946
Less: accumulated depreciation........................ (481) (49)
------
$4,115 $4,897
======
</TABLE>
Depreciation expense was $477,000, $47,000 and $-0-, the years, ended June
30, 1997, 1996, and 1995.
5. LONG-TERM DEBT
Long-term debt consisted of the following as of June 30 (dollars in
thousands):
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Mortgages payable to Meditrust, interest at rates ranging from
10.6% to 10.7%; principal and interest due monthly through August
2008 based on 30-year amortization; unpaid principal and interest
due May 2006 and August 2008. ................................... $8,159 $4,986
Other (including capital lease obligations)........................ 115 86
------ ------
8,274 5,072
Less: current portion.............................................. 97 29
------ ------
$8,177 $5,043
====== ======
</TABLE>
The mortgage notes payable were incurred for the acquisitions in Wisconsin
and Missouri. Commencing in the second year of the loans and thereafter, the
Company will pay additional interest of up to 2.0% of the total principal and
interest payments in the prior year based contingently on 20%
F-14
<PAGE> 113
BALANCED CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of the increase in revenues of the facilities over the prior year. The mortgage
note is collateralized by the facilities property and equipment which had a
carrying amount of approximately $10,000,000 at June 30, 1997. Meditrust was
issued approximately 460,000 common stock warrants exercisable at a nominal
value of $.001 per share in connection with these financings. The value of the
underlying shares of common stock of approximately $613,676 has been recorded as
deferred financing cost and a corresponding non-cash increase in additional
paid-in capital. The interest cost and discount are being recognized as interest
expense over the life of the mortgages using the effective interest method.
At June 30, 1997, the aggregate maturities of long-term debt for the next
five fiscal years ending June 30 are as follows (dollars in thousands):
<TABLE>
<S> <C>
1998............................................ $ 97
1999............................................ 97
2000............................................ 49
2001............................................ 54
2002............................................ 60
Thereafter...................................... 7,917
------
$8,274
======
</TABLE>
6. REDEEMABLE PREFERRED STOCK
In September 1996 and March 1997, the Company completed a two-stage private
offering of Series B Convertible Preferred Stock (Series B Stock) at $2.50 per
share to a group of venture capital funds and certain other private investors
who purchased 5,009,750 shares for proceeds of approximately $12.2 million net
of related transaction costs.
Dividends of 8% per year are payable when and if declared by the Board of
Directors. The Series B Stock participates in any dividends on common stock on
an as-converted basis. The Series B stockholders are entitled to a liquidation
preference payment equal to $2.50 per share plus 8% accrued dividends from the
date of issue. The Series B stockholders can redeem their Series B Stock at the
fifth anniversary for $5.00 per share and on each subsequent anniversary of
their purchase date for an additional $0.50 per share per year. Each share of
Series B Stock is convertible into one share of the Company's common stock.
However, the conversion ratio increases if the Company issues shares at a price
less then $2.50 per share except for the granting of employee stock options. The
Company has the right to require conversion in the event of an initial public
offering of its common stock of $25 million or more at a per share price of at
least $8.00 per share. The Series B stockholders have separate class of voting
rights on certain matters such as dividends on common stock, repurchases of
common stock, creation of any senior equity security, changes to the Series B
Stock rights and increases in the size of the Board of Directors. There are no
redemption requirements on the Series B Stock during the next five years. There
are 3,757,313 authorized shares of common stock reserved for the conversion of
the Series B Stock. Hakman & Company Incorporated, a related party, was paid a
fee of $250,000 in connection with this capital raising. The value of Series B
stock includes $1,267,000 for the accretion of redemption value with a
corresponding charge to additional paid-in capital.
7. STOCKHOLDERS' EQUITY
The Series A stockholder purchased 1,000,000 shares of Series A Convertible
Preferred Stock (Series A Stock) and 344,444 shares of common stock for net
proceeds to the Company of approximately $2,000,000. These shares were purchased
in stages over a one year period from September 1995 through September 1996.
F-15
<PAGE> 114
BALANCED CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Series A Stock is junior to the Series B Stock. Dividends on the Series
A Stock were payable annually at the rate of $0.24 per share in cash or Series A
Shares based on a $2.00 per share value. On September 6, 1996, the Company paid
a stock dividend of 50,958 Series A shares. The Company had the option to make a
payment of 100,000 Series A shares to terminate the dividend on Series A shares.
On September 6, 1996, the Company exercised its option and issued 100,000 Series
A shares to terminate this dividend provision. The Series A Stock is also
entitled to share in any dividend on common shares on a prorata basis as though
the Series A Stock has been converted. The Series A stockholders are entitled to
a liquidation preference payment equal to $2.00 per share. This preference right
is subordinate to the Series B preferential liquidation payment. Each share of
Series A Stock is convertible into one share of the Company's common stock. The
Series A Stock automatically converts in the event of an initial public offering
of the Company's common stock. The Company can redeem the Series A Stock at any
time at $2.00 per share. The Series A stockholders have the right to vote with
the common stockholders on a prorata basis as though the Series A Stock has been
converted. There are 863,218 authorized shares of common stock reserved for the
conversion of the Series A Stock. There are no redemption requirements on the
Series A Stock during the next five years.
Common Stock
As of June 30, 1997, the Company had 937,867 outstanding warrants to
purchase shares of its common stock. Of these warrants, 141,827 are exercisable
at $3.00 per share, 46,040 are exercisable at $3.33 per share and 750,000 are
exercisable at $.001 per share.
Other
The Company's mortgage loan and lease agreements place restrictions on the
ability of certain of its subsidiaries to transfer funds to the parent or other
affiliates in the form of loans, advances or cash dividends. Any such transfers
are subordinated to payment of lease or debt service and other payments required
under the agreements. However, such transfers are permissible if all required
lease or debt service payments are being made. In addition, the stock of certain
of the Company's subsidiaries is pledged as collateral for certain of its lease
and debt obligations. The Company's payments under its lease and debt agreements
are current.
8. INCOME TAXES
The provision for income tax expense for the years ended June 30, 1997 and
1996, and the period April 17, 1995 (date of inception) through June 30, 1995
consists of the following (dollars in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
--- --- ---
<S> <C> <C> <C>
Current
Federal................................................................. -- -- --
State................................................................... $53 $ 6 --
--- -- ---
Total Income Tax Expense.................................................. $53 $ 6 --
=== == ===
</TABLE>
F-16
<PAGE> 115
BALANCED CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of income tax expense at the federal statutory rate of 34%
to the Company's effective tax rate is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Income taxes computed at statutory rate............................. (34.0)% (34.0)% (34.0)%
State income taxes, net of federal benefit.......................... (6.0) (6.6) (6.0)
Other............................................................... 1.3 2.0 40.0
Valuation allowance adjustment...................................... 39.9 39.3 --
----- ----- -----
1.2% 0.7% --
===== ===== =====
</TABLE>
Temporary differences giving rise to a significant amount of deferred tax
assets and liabilities at June 30, 1997 and 1996 are as follows (dollars in
thousands):
<TABLE>
<CAPTION>
6/30/97 6/30/96
------- -------
<S> <C> <C>
Excess tax over book basis of fixed assets............................... $ (365) $ 22
Development fee income................................................... 347 --
Lease acquisition proceeds............................................... (146) --
Accrued expense.......................................................... (99) (20)
Net operating loss....................................................... (1,721) (357)
Other.................................................................... (108) --
------- -----
Net deferred tax asset................................................. (2,092) (355)
Valuation allowance...................................................... 2,092 355
------- -----
Deferred income tax liability (asset).................................... $ -- $ --
======= =====
</TABLE>
The Company has net operating loss carryforwards at June 30, 1997 available
to offset future federal and state taxable income, if any, of approximately
$4,300,000 expiring through 2012 for federal tax purposes and $6,000,000
expiring through 2000 for state income tax purposes. The net operating losses
are subject to limits on their future utilization under federal and state tax
laws. A valuation allowance is provided when it is more likely than not that
some portion or all of the deferred tax assets will not be realized. The Company
is in a cumulative pretax loss position since inception. Recognition of deferred
tax assets will require generation of future taxable income. There can be no
assurance that the Company will generate any earnings or any specific level of
earnings in future years. Therefore, the Company established a valuation
allowance on deferred tax assets of approximately $2,092,000 as of June 30,
1997.
9. STOCK OPTIONS
The 1996 Stock Option Plan combines the features of an incentive and
non-qualified stock option plan, a stock appreciation rights ("SAR") plan and a
stock award plan (including restricted stock). The 1996 Plan is a long-term
incentive compensation plan and is designed to provide a competitive and
balanced incentive and reward program for participants.
The Company has authorized 2,025,000 shares of common stock to be reserved
for grants under the 1996 Plan. Options generally vest over a four-year period
in cumulative increments of 25% each year beginning one year after the date of
the grant and expire not later than five years from the date of grant. The
options are granted at an exercise price at least equal to the fair market value
of the common stock on the date of the grant.
F-17
<PAGE> 116
BALANCED CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company applies APB Opinion No. 25 in accounting for its 1996 Plan and,
accordingly, no compensation cost has been recognized for its stock options in
the financial statements. Had the Company determined compensation cost based on
the fair value at the grant date for its stock options under SFAS No. 123, the
Company's net loss and net loss per share would have been increased to the pro
forma amounts indicated below.
For SFAS 123 purposes options were valued using the Black-Scholes Multiple
Option Model. Assumptions used were as follows:
<TABLE>
<S> <C>
Risk free interest rate.................................. 5.5% to 6.0%
Expected life............................................ 1 year after vest
Expected volatility...................................... .30
Expected dividends....................................... 0
</TABLE>
These assumptions produced weighted average fair values per option of $.41
and $.001 for options issued during the years ended June 30, 1997 and 1996. All
options issued during these periods were at an exercise price in excess of the
fair market value on the grant date.
<TABLE>
<CAPTION>
PRO FORMA NET
NET LOSS LOSS PER
IN THOUSANDS EXCEPT ----------------- -----------------
PER SHARE DATA 1997 1996 1997 1996
- ------------------- ------- ----- ------ ------
<S> <C> <C> <C> <C>
As reported $(4,492) $(909) $(0.57) $(0.30)
Pro forma $(4,511) $(910) $(0.57) $(0.30)
</TABLE>
<TABLE>
<CAPTION>
STOCK OPTION ACTIVITY DURING THE WEIGHTED-AVERAGE
PERIODS INDICATED NUMBERS OF SHARES EXERCISE PRICE
--------------------------------------------------- ----------------- ----------------
<S> <C> <C>
Balance at July 1, 1995............................ -- --
Granted.......................................... 340,125 $ 2.00
Exercised........................................ -- --
Forfeited........................................ -- --
Expired.......................................... -- --
----------------- -------
Balance at June 30, 1996........................... 340,125 2.00
Granted.......................................... 673,300 5.16
Exercised........................................ (11,250) (2.00)
Forfeited........................................ (15,000) (2.84)
Expired.......................................... -- --
----------------- -------
Balance at June 30, 1997........................... 987,175 $ 4.15
================ ===============
</TABLE>
At June 30, 1997, the range of exercise prices, weighted-average remaining
contractual life of outstanding options and shares exercisable were as follows:
<TABLE>
<CAPTION>
EXERCISE OUTSTANDING WEIGHTED AVERAGE SHARES
PRICE OPTIONS CONTRACTUAL LIFE EXERCISABLE
- -------- ----------- ---------------- -----------
<S> <C> <C> <C>
$ 2.00 464,250 3.77 yrs. 127,687
$ 3.33 45,000 9.21 yrs. 45,000
$ 5.33 135,250 5.09 yrs. 11,250
$ 6.67 342,675 4.96 yrs. 0
------- -------
987,175 183,937
======= =======
</TABLE>
There were no options exercisable at June 30, 1996.
F-18
<PAGE> 117
BALANCED CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. RELATED PARTY TRANSACTIONS
The Company had the following related party transactions:
- Fees paid to an investment banking firm for finding acquisition targets
and for raising private equity. A minority stockholder of the Company is
an officer of this firm.
- Rental payments made to companies owned by a stockholder/director for the
lease of two facilities and other items. Management fees paid to a
company owned by the same stockholder/director for managing ten skilled
nursing facilities owned or leased by the company. On July 1, 1997, the
Company purchased the assets and operations of this management company
for approximately $120,000.
- Respiratory therapy supplies and management fees paid to a company owned
by a stockholder/director.
- Legal services provided by a relative of a stockholder/officer and
consulting services provided by two stockholders/directors.
- Rental payments to a company owned by two minority stockholders for the
lease of seven skilled nursing facilities.
A summary of those transactions for the periods ended June 30 follows
(dollars in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- --------------
<S> <C> <C> <C>
Finder's fees.................................... $ 250 35 --
Rentals.......................................... 175 -- --
Management fees.................................. 1,076 -- --
Respiratory therapy.............................. 731 -- --
Legal & consulting services...................... 134 -- --
Skilled nursing facility rentals................. 3,877 -- --
</TABLE>
Accounts payable include approximately $648,000 and $0 related to these
services at June 30, 1997 and 1996, respectively.
11. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases 16 assisted living facilities and 12 skilled nursing
facilities, as well as certain equipment and office space under noncancellable
operating and capital leases that expire at various times through 2011. Rental
expense on such operating leases for the years ended June 30, 1997, 1996 and
1995 was $5,417,000, $77,000, and $-0-. At June 30, 1997 and 1996, property and
equipment includes approximately $115,000 and $45,000 of assets that have been
capitalized under capital leases. Amortization of the leased assets is included
in depreciation and amortization expense.
F-19
<PAGE> 118
BALANCED CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future annual minimum lease payments for the next five years and thereafter
under capital leases and noncancellable operating leases with initial terms of
one year or more in effect at June 30, 1997, are as follows (dollars in
thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
FISCAL YEAR LEASES LEASES
---------------------------------------------------------------- ------- ---------
<S> <C> <C>
1998............................................................ $54 $ 8,040
1999............................................................ 37 7,940
2000............................................................ -- 7,915
2001............................................................ -- 7,896
2002............................................................ -- 7,786
Thereafter...................................................... -- 37,077
--- -------
Total Minimum Lease Payments.................................... 91 $76,654
=======
Amount Representing Interest.................................... 9
---
Present value of net minimum lease payments (including current $82
portion of $45)............................................... ===
</TABLE>
The operating lease agreements require the payment of additional rent
commencing in the second lease year of up to 2% of prior year rent based
contingently upon increases in facility gross revenues. In addition, most of the
facility leases have renewal options for periods ranging from 5 years up to 24
years after the initial lease period. There were no contingent lease payments
made during the year ended June 30, 1997.
Development Arrangements
The Company has recently entered into non-binding letters of intent
aggregating $365 million with the following health care REITs and others (the
"Owners") (i) Meditrust for $150 million, (ii) Nationwide Health Properties,
Inc. ("NHP") for $100 million, (iii) Capstone Capital Corporation ("Capstone")
for $50 million, (iv) American Health Properties, Inc. ("AHP") for $35 million
and (v) Ocwen Financial Corporation ("Ocwen") for $30 million. These letters of
intent represent arrangements whereby the REITs will fund development projects
or acquisitions and the Company will develop assisted living facilities for the
Owners or the Owners will acquire existing facilities identified by the Company
and lease them to the Company. Initial lease rates under these arrangements are
expected to range from 3.2% to 3.4% over the 10-year Treasury rate. Specific
development projects and acquisitions require approval of the REITs prior to the
financing of a transaction.
Litigation
The Company is a party to various claims, legal actions and complaints
arising in the ordinary course of business. In the opinion of management, all
such matters are without merit or are of such a kind, or involve such amounts,
that their unfavorable disposition would not have a material effect on the
financial position, results of operations or the liquidity of the Company.
12. SUBSEQUENT EVENTS
Line of Credit
On July 7, 1997, the Company executed a commitment letter with a commercial
bank for a $10 million line of credit which will be collateralized by the
accounts receivable of its skilled nursing facilities. The Company expects
borrowings under this credit arrangement to be available during January 1998.
F-20
<PAGE> 119
BALANCED CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stockholders' Equity
Effective October 14, 1997, the Company amended its certificate of
incorporation to increase the authorized common stock to 50,000,000 shares, to
increase the authorized preferred stock to 11,160,708 and to effect a
three-for-four reverse stock split. As a result, all share and per share data in
the accompanying consolidated financial statements have been restated to reflect
the stock split.
Completed Acquisitions
On October 9, 1997, the Company purchased a 92-bed assisted living facility
from Feltrop's Personal Care Home which will be accounted for as a purchase. The
total purchase price of approximately $5,842,000, including transaction costs,
was paid in cash and funded with by bridge financing from Capstone at the prime
rate plus 2.0%. The Company estimates that goodwill of approximately $1,550,000
will be recorded for this acquisition and amortized over 40 years.
On October 30, 1997, the Company purchased three assisted living facilities
from Butler Senior Care with an aggregate of approximately 172 residents which
will be accounted for as a purchase. The total purchase price of approximately
$9,554,000, including transaction costs, was paid in cash and funded by bridge
financing from Capstone at the prime rate plus 2.0%. The Company estimates that
goodwill of approximately $3,093,000 (excluding future contingent payments) will
be recorded for this acquisition and amortized over 40 years. A 29-bed addition
(the "Addition") which was completed in December 1997 at one of the facilities
which is expected to open in January 1998. The agreement provides for additional
cash payments as follows: (i) a $450,000 payment when the Addition becomes
operational, which has been paid, (ii) payments during 1998 when the Addition
becomes 80% occupied and 90% occupied based on a multiple of Butler's net
operating income (NOI), and (iii) a final payment in January 1999 based on a
multiple of Butler's annualized NOI for the six months ended December 31, 1998.
Based on estimates of Butler's 1998 NOI, the Company estimates that additional
payments of approximately $4,100,000 will be made. Except for the initial
payment of $450,000 which has been recorded, the contingent payments will be
recorded as additional goodwill when the NOI targets have been achieved.
On December 1, 1997, the Company purchased a 117-bed assisted living
facility from Triangle Retirement Services, Inc. which will be accounted for as
a purchase. The total purchase price of approximately $8,549,000, including
transaction costs, was paid in cash and funded by bridge financing from Capstone
at the prime rate plus 2.0%. The Company estimates that goodwill of
approximately $3,349,000 will be recorded for this acquisition and amortized
over 40 years.
On January 2, 1998, the Company acquired a 66-bed skilled nursing facility
(Gethsemane Retirement Community, Inc.--"GRCI") and a 51-bed assisted living
facility (Gethsemane Assisted Living, Inc.--"GALI"). The purchase price of
approximately $5,528,000, including transaction costs, for GRCI was paid in cash
and funded with bridge financing from Capstone at the prime rate plus 2%. The
Company estimates that goodwill of approximately $535,000 (excluding any
contingent payment) will be recorded for this acquisition and amortized over 40
years. The asset purchase agreement for GALI provides for a purchase price of up
to $1,200,000 based upon a multiple (5.80 times) of GALI's annualized net
operating income for the period from the closing date through June 30, 1998.
This payment is expected to be made during the quarter ending September 30, 1998
and will be recorded as additional goodwill.
Sale of Pharmacy Operations
The Company completed the sale of the assets of its pharmacy operations on
October 16, 1997 for net proceeds of approximately $4,700,000. A gain of
approximately $2,900,000 before tax effects will be recorded in the quarter
ending December 31, 1997.
F-21
<PAGE> 120
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors
Balanced Care Corporation
Mechanicsburg, Pennsylvania
We have audited the accompanying combined balance sheets of Foster Health
Care Affiliates (detailed in Note 1) as of June 30, 1996 and 1995, and the
related combined statements of income, shareholders' equity and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Foster Health Care
Affiliates as of June 30, 1996 and 1995, and the results of their operations and
their cash flows for the years then ended in conformity with generally accepted
accounting principles.
BAIRD, KURTZ & DOBSON
Springfield, Missouri
July 17, 1997
F-22
<PAGE> 121
FOSTER HEALTH CARE AFFILIATES
COMBINED BALANCE SHEETS
JUNE 30, 1996 AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................................. $ 2,964 $ 755
Certificates of deposit................................................ 350 1,343
Accounts receivable, less allowance for uncollectible accounts of $414
and $305, respectively.............................................. 3,550 3,546
Estimated settlements from third-party payors.......................... 983 471
Prepaid expenses, inventory and other assets........................... 270 247
Due from related parties............................................... 176 374
Deferred income taxes.................................................. 280 233
------- -------
Total Current Assets........................................... 8,573 6,969
Investments.............................................................. 192 392
Assets limited as to use................................................. 1,188 1,721
Property, plant and equipment, net....................................... 16,483 14,636
Other assets............................................................. 538 689
------- -------
Total Assets................................................... $26,974 $24,407
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term notes payable to banks...................................... $ 2,456 $ 525
Current maturities of long-term debt................................... 997 964
Accounts payable....................................................... 1,510 1,190
Accrued expenses....................................................... 565 835
Income taxes payable................................................... 385 237
Accrued salaries and payroll taxes..................................... 848 792
Due to related parties................................................. 1,244 980
Estimated settlements due third-party payors........................... 162 187
------- -------
Total Current Liabilities...................................... 8,167 5,710
Long-term debt........................................................... 14,958 13,765
Deferred income taxes.................................................... 452 388
------- -------
Total Liabilities.............................................. 23,577 19,863
------- -------
Shareholders' equity:
Common stock........................................................... 20 20
Retained earnings...................................................... 5,888 4,524
Less: Treasury stock, at cost; 1996 -- 2,067 shares.................... (2,511) --
------- -------
Total Shareholders' Equity..................................... 3,397 4,544
------- -------
Total Liabilities and Shareholders' Equity..................... $26,974 $24,407
======= =======
</TABLE>
See accompanying notes to combined financial statements.
F-23
<PAGE> 122
FOSTER HEALTH CARE AFFILIATES
COMBINED STATEMENTS OF INCOME
FOR THE YEARS ENDED JUNE 30, 1996 AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Net patient service revenue.............................................. $35,220 $29,186
Pharmacy................................................................. 1,135 949
Rental income............................................................ 822 594
Other income............................................................. 132 45
------- -------
Total operating revenues....................................... 37,309 30,774
------- -------
Operating expenses:
Facility operating expenses:
Salaries, wages and benefits........................................ 15,942 14,787
Other operating expenses, including related parties of $1,854 and
$1,407............................................................. 8,349 7,065
Medical supplies, drugs and therapies expense, including related
parties of $61 in 1996............................................. 8,194 4,907
Provision for uncollectible accounts................................... 379 199
Interest expense, net, including related parties of $37 and $43........ 1,499 1,403
Depreciation and amortization.......................................... 1,055 934
------- -------
Total operating expenses....................................... 35,418 29,295
------- -------
Income from operations................................................... 1,891 1,479
Nonoperating income...................................................... 213 200
------- -------
Income before provision for income taxes................................. 2,104 1,679
Provision for income taxes............................................... 705 485
------- -------
Net income............................................................... $ 1,399 $ 1,194
======= =======
</TABLE>
See accompanying notes to combined financial statements.
F-24
<PAGE> 123
FOSTER HEALTH CARE AFFILIATES
COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1996 AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON RETAINED TREASURY
STOCK EARNINGS STOCK TOTAL
------ -------- -------- -------
<S> <C> <C> <C> <C>
Balance at July 1, 1994............................. $ 20 $3,330 $ -- $ 3,350
Net income........................................ -- 1,194 -- 1,194
--- ------ ------- -------
Balance at June 30, 1995............................ 20 4,524 -- 4,544
Net income........................................ -- 1,399 -- 1,399
Distribution to shareholders...................... -- (35) -- (35)
Purchase of treasury stock........................ -- -- (2,511) (2,511)
--- ------ ------- -------
Balance at June 30, 1996............................ $ 20 $5,888 $ (2,511) $ 3,397
=== ====== ======= =======
</TABLE>
See accompanying notes to combined financial statements.
F-25
<PAGE> 124
FOSTER HEALTH CARE AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1996 AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Cash flows from operating activities
Net income............................................................. $ 1,399 $ 1,194
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization....................................... 1,055 935
Deferred income taxes............................................... 17 (15)
Changes in operating assets and liabilities:
Increase in accounts receivable..................................... (4) (575)
Increase in estimated third-party payor settlements................. (537) (90)
Decrease in prepaid expenses, inventory and other assets............ 66 59
Increase in accounts payable and accrued expenses................... 50 458
Increase (decrease) in accrued salaries and payroll................. 56 (25)
Increase in income tax payable...................................... 148 45
------- -------
Net cash provided by operating activities...................... 2,250 1,986
------- -------
Cash flows from investing activities
Purchases of property and equipment.................................... (1,797) (1,602)
Net maturities (purchases) of investments.............................. 1,193 (633)
Repayments from related parties........................................ 198 52
Change in assets limited as to use..................................... 533 (101)
------- -------
Net cash provided by (used in) investing activities............ 127 (2,284)
------- -------
Cash flows from financing activities
Payments on short-term notes payable................................... (179) (191)
Proceeds from short-term notes payable................................. 2,110 72
Net borrowings from (to) related parties............................... 264 (34)
Proceeds from issuance of long-term debt............................... 1,096 2,774
Payments on long-term debt............................................. (921) (1,956)
Payments of deferred financing costs................................... (27) (32)
Purchase of treasury stock............................................. (2,511) --
------- -------
Net cash provided by (used in) financing activities............ (168) 633
------- -------
Increase in cash and cash equivalents.................................... 2,209 335
Cash and cash equivalents, beginning of year............................. 755 420
------- -------
Cash and cash equivalents, end of year................................... $ 2,964 $ 755
======= =======
</TABLE>
See accompanying notes to combined financial statements.
F-26
<PAGE> 125
FOSTER HEALTH CARE AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
1. COMPANY BACKGROUND AND SIGNIFICANT ACCOUNTING POLICIES
Foster Health Care Affiliates (the "Affiliates") are a group of commonly
controlled corporations engaged in the ownership and management of facilities
which provide subacute, skilled, rehabilitative and intermediate nursing care,
residential care and personalized services to the elderly in independent living
units. The Affiliates own and operate nine skilled nursing facilities with an
aggregate of 1,065 beds and lease one 60-bed facility. The Affiliates also own
and operate three facilities which provide residential care and independent
living units. In addition, the Affiliates own and operate a pharmacy which
serves nine of the facilities and a home health agency which operates in 22
counties in Missouri.
(a) Principles of Combination and Basis of Presentation
The combined financial statements include only the accounts of the
companies sold on August 30, 1996 (see Note 15) which are as follows:
- National Care Centers of Lebanon, Inc. (Lebanon Park)
- National Care Centers, Inc. (Lebanon)
- Springfield Retirement Village, Inc. (Mt. Vernon Park)
- National Care Centers of Hermitage, Inc. (Hermitage)
- Dixon Management, Inc. (Dixon)
- National Care Centers of Nevada, Inc. (Nevada)
- National Care Centers of Nixa, Inc. (Nixa)
- National Care Centers of Republic, Inc. (Republic)
- National Care Centers of Springfield, Inc. (Springfield)
- Mt. Vernon Park Care Center West, Inc. (West Park)
- Long Term Pharmaceutical Care, Inc. (Pharmacy)
All of the above companies are included in the combined financial
statements for the two-year period ended June 30, 1996. All significant
intercompany accounts and transactions have been eliminated in the combined
financial statements.
(b) Cash and Cash Equivalents:
Cash and cash equivalents consist of cash and certificates of deposit
purchased with original maturities of three months or less.
(c) Property and Equipment
Property and equipment are stated at cost and depreciated using the
straight-line method over estimated useful lives ranging from three years to
forty years. Expenditures for maintenance and repairs necessary to maintain
property and equipment in efficient operating condition are charged to
operations. Costs of additions and betterments are capitalized. Interest costs
associated with construction or renovations are capitalized in the period in
which they are incurred.
(d) Inventory
Inventories of pharmaceuticals and supplies are stated at the lower of cost
or market. Cost is determined on the first-in, first-out (FIFO) method.
F-27
<PAGE> 126
FOSTER HEALTH CARE AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(e) Patient Service Revenues
Revenues are recorded at the estimated net realizable amounts from
residents, third-party payors (e.g. Medicare, Medicaid, managed care companies
and insurers) and others for services rendered. Revenues under third-party payor
agreements are subject to audit and retroactive adjustment. Provisions for
estimated third-party payor settlements are provided in the period the related
services are rendered. Differences between the estimated amounts accrued and the
interim or final settlements are reported in operations in the year of
settlement.
(f) Deferred Financing Costs
Costs incurred in connection with the arrangement of certain financings
have been capitalized and are being amortized over the term of the related debt
using the effective interest method. Accumulated amortization as of June 30,
1996 and 1995, was $111,000 and $90,000 respectively. Amortization expense
related to deferred financing costs for the years ended June 30, 1996 and 1995,
was $21,000 and $20,000 respectively. Financing fees increased $27,000 and
$32,000 during the years ended June 30, 1996 and 1995, respectively.
(g) Income Taxes
Deferred tax liabilities and assets are recognized for the tax effect of
differences between the financial statement and tax bases of assets and
liabilities. A valuation allowance is established to reduce deferred tax assets
if it is more likely than not a deferred tax asset will not be realized.
(h) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(i) Concentrations
A significant portion of the Affiliates' revenues are derived from the
Medicare and Medicaid programs. There have been, and the Affiliates expect that
there will continue to be, a number of proposals to limit reimbursements to
long-term care facilities under these programs. The Affiliates cannot predict
whether any of the proposals will be adopted, or if adopted and implemented,
what effect such proposals would have on the Affiliates. Approximately 76% of
the Affiliates' net patient service revenues in the years ended June 30, 1996
and 1995, are from the Medicare and Medicaid programs. All of the Affiliates'
facilities are located in Missouri.
(j) Facility Operating Expenses
Facility operating expenses include direct operating costs at the facility
level. The majority of these costs consist of payroll and employee benefits
related to nursing, housekeeping, laundry and dietary services provided to
patients, as well as maintenance and administration of the facilities. Other
significant facility operating expenses include the cost of rehabilitation
therapies, medical and pharmacy supplies, food and utilities.
F-28
<PAGE> 127
FOSTER HEALTH CARE AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(k) Assessment of Long-lived Assets
The Affiliates periodically review the carrying values of their long-lived
assets whenever events or circumstances provide evidence that suggest that the
carrying amount of long-lived assets may not be recoverable. If this review
indicates that long-lived assets may not be recoverable, the Affiliates review
the expected undiscounted future net operating cash flows from their facilities,
as well as valuations obtained in connection with various refinancings. Any
permanent impairment in value is recognized as a charge against earnings in the
statement of income. As of June 30, 1996, the Affiliates do not believe there is
any indication that the carrying value or the amortization period of their
long-lived assets need to be adjusted.
(l) Shareholders' Equity
The Affiliates outstanding common stock is summarized below:
<TABLE>
<CAPTION>
NUMBER OF
NUMBER OF SHARES
PAR VALUE SHARES ISSUED AND
PER SHARE AUTHORIZED OUTSTANDING
--------- --------- -----------
<S> <C> <C> <C>
Dixon............................................. $ 1.00 30,000 3,000
Hermitage......................................... $ 1.00 30,000 3,000
Pharmacy.......................................... $ 1.00 30,000 2,000
Lebanon........................................... None 2,000,000 100
Lebanon Park...................................... $ 1.00 30,000 1,000
Nevada............................................ $ 1.00 30,000 1,000
Nixa.............................................. None 30,000 999
Republic.......................................... $ 1.00 30,000 3,250
Springfield....................................... $ 1.00 30,000 1,000
Mt. Vernon Park................................... $ 1.00 100,000 1,500
West Park......................................... $100.00 300 30
</TABLE>
2. MEDICARE AND MEDICAID REIMBURSEMENT ADJUSTMENTS
The Affiliates have been reimbursed for services rendered to patients
covered by the Federal Medicare program on the basis of estimated per diem
rates. During fiscal years 1996 and 1995, the Affiliates were reimbursed either
at historical costs or prospectively for the routine and capital-related costs
of services and at historical costs for ancillary services provided to patients
covered under the Federal Medicare Program. Provisions for adjustment of the per
diem rates to actual reimbursements have been included in the accompanying
financial statements. The Medicare cost reports are subject to audit and
retroactive adjustment under the terms of the Affiliates' Medicare reimbursement
agreements which may affect the actual reimbursement for the year.
The Affiliates have also been reimbursed for services rendered to Title XIX
Medicaid patients on the basis of estimated per diem rates. The Medicaid
reimbursement plan is on a prospective basis. Any provisions for adjustments of
the per diem rates to actual reimbursement have been included in the
accompanying financial statements.
The home health agency has agreements with third-party payors that provide
for payments to the agency at amounts different from its established rate. A
summary of the payment arrangements with major third-party payors follows:
- Medicare. Services rendered to Medicare program beneficiaries are
reimbursed under a cost reimbursement methodology. The agency is
reimbursed at an interim rate with final settlement
F-29
<PAGE> 128
FOSTER HEALTH CARE AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
determined after submission of annual cost reports by the agency and
audits thereof by the Medicare fiscal intermediary.
- Medicaid. Services rendered to Medicaid program beneficiaries are
reimbursed prospectively at the lesser of the Medicaid periodic interim
payment rate or the Medicaid ceiling rate in effect.
3. RESIDENT PATIENTS' PERSONAL FUNDS
The Affiliates are the trustee of $98,000 and $127,000 at June 30, 1996 and
1995, respectively, in funds received on behalf of various residents. The
Affiliates have fiduciary responsibility for the administration of the bank
accounts and the distribution of the funds to residents.
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30,
ESTIMATED -------------------
USEFUL LIVES 1996 1995
------------ ------- -------
<S> <C> <C> <C>
Land................................................ N/A $ 849 $ 789
Land improvements................................... 5-25 years 283 283
Buildings and improvements.......................... 5-40 years 19,255 18,193
Furniture and equipment............................. 3-25 years 3,799 3,115
Vehicles............................................ 4 years 117 79
Construction in progress............................ N/A 1,042 28
------- -------
25,345 22,487
Less: Accumulated depreciation...................... 8,862 7,851
------- -------
$16,483 $14,636
======= =======
</TABLE>
Depreciation expense related to property and equipment for the years ended
June 30, 1996 and 1995, was $1,001,000 and $872,000 respectively. Interest costs
capitalized during the years ended June 30, 1996 and 1995, totaled $45,000 and
$77,000 respectively.
Construction in progress related to the construction of a 28-unit apartment
complex to open in August 1996. Estimated total construction should be
approximately $1,150,000.
5. ASSETS LIMITED AS TO USE
The Affiliates' Boards of Directors had designated $1,188,000 and
$1,721,000 as of June 30, 1996 and 1995, respectively, to be set aside for the
future replacement of capital assets. These investments consist of certificates
of deposit, recorded at cost which approximates fair value.
F-30
<PAGE> 129
FOSTER HEALTH CARE AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
6. INVESTMENTS
Investments consisted of the following (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30,
---------------
1996 1995
------ ----
<S> <C> <C>
Certificates of deposit(a).......................................... $ -- $200
Land(b)............................................................. 192 192
---- ----
$ 192 $392
==== ====
</TABLE>
- ---------------
(a) The certificates of deposit, which were purchased through various commercial
banks, are recorded at cost which approximates fair value and bear interest
at rates ranging from 4.72% to 7.0%.
(b) Land held for investment includes approximately 61 acres of land in Lebanon,
Missouri.
7. NOTES PAYABLE
Notes payable consisted of the following (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30,
---------------
1996 1995
------ ----
<S> <C> <C>
Notes payable to banks at rates ranging from 6.0% to 8.25% and due
dates ranging from August 1996 to December 1996(a)................ $2,000 $ 5
Line of credit borrowings at rates ranging from 5.625% to 10.25%,
due on demand(b).................................................. 456 520
------ ----
$2,456 $525
====== ====
</TABLE>
- ---------------
(a) At June 30, 1996, the note payable was collateralized by deeds of trust. The
proceeds were used to purchase treasury stock (see Note 10). The notes
payable were collateralized by land and land improvements at June 30, 1995.
(b) The lines of credit included unsecured notes payable and one note payable
guaranteed by stockholders of the Affiliates.
The weighted average interest rate on short-term debt was 8.37% and 8.58%
at June 30, 1996 and 1995, respectively.
The aggregate unused lines of credit were $179,000 at June 30, 1996. All
notes payable and line of credit borrowings were repaid in connection with the
merger transaction (see Note 15).
F-31
<PAGE> 130
FOSTER HEALTH CARE AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
8. LONG-TERM DEBT
Long-term debt consisted of the following (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30,
-------------------
1996 1995
------- -------
<S> <C> <C>
Mortgages payable(a)............................................. $15,914 $14,664
Notes payable to banks(b)........................................ 41 53
Other(c)......................................................... -- 12
------- -------
15,955 14,729
Less current maturities.......................................... 997 964
------- -------
$14,958 $13,765
======= =======
</TABLE>
- ---------------
(a) At June 30, 1996, the mortgage loans payable to banks were at rates ranging
from 7.75% to 10.25% and mature at various dates from 1997 to 2022.
Aggregate monthly payments are approximately $82,000. The mortgage loans are
collateralized by a first or second deed of trust on the buildings and
rental property along with equipment, furniture and fixtures and land.
Mortgages payable includes a loan endorsed for insurance by the U.S.
Department of Housing and Urban Development (HUD) under authority of
Section 232 of the National Housing Act. Under the terms of its financing
arrangement, the Affiliates were required to make monthly escrow deposits
of approximately $5,000 for insurance premiums and tax requirements. Also,
monthly deposits to a plant replacement reserve of approximately $1,000
were required.
Mortgages payable includes loans guaranteed by the Small Business
Administration, the Missouri Industrial Development Board and loans
personally guaranteed by certain shareholders of the Affiliates.
Mortgages payable includes a construction line of credit amortized over 15
years to be permanently financed upon completion of the project.
(b) The notes payable to banks bore interest at rates ranging from 7.75% to 9.5%
at June 30, 1996. Aggregate monthly payments were approximately $1,000. The
notes were collateralized by vehicles.
All long-term debt was repaid in connection with the merger transaction
(see Note 15).
Aggregate annual maturities of long-term debt at June 30, 1996, are
(dollars in thousands):
<TABLE>
<S> <C>
1997............................................................... $ 997
1998............................................................... 968
1999............................................................... 1,055
2000............................................................... 1,115
2001............................................................... 1,102
Thereafter......................................................... 10,718
-------
$15,955
=======
</TABLE>
9. INCOME TAXES
The Affiliates are members of a controlled group for income tax purposes.
The effect of this controlled group membership is that the Affiliates must share
the corporate surtax exemption with the
F-32
<PAGE> 131
FOSTER HEALTH CARE AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
other members of the controlled group. The allocation of the graduated rates is
subject to the annual discretion of management.
The provision for income taxes includes these components (dollars in
thousands):
<TABLE>
<CAPTION>
1996 1995
------ ----
<S> <C> <C>
Taxes currently payable..................................................... $ 688 $500
Deferred income taxes....................................................... 17 (15)
---- ----
$ 705 $485
==== ====
</TABLE>
The tax effects of temporary differences related to deferred taxes shown on
the June 30, 1996 and 1995, balance sheets were (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995
----- -----
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts........................................... $ 157 $ 116
Accrued vacation pay...................................................... 76 68
Accrued professional fees................................................. 39 38
Contribution carryover.................................................... 19 14
Accumulated depreciation.................................................. 7 6
Net operating loss carryforwards.......................................... 292 325
Alternative minimum tax credits........................................... 48 34
General business credits.................................................. 9 9
Other..................................................................... 4 10
----- -----
651 620
----- -----
Deferred tax liabilities:
Accumulated depreciation.................................................. (655) (662)
Other..................................................................... (14) (12)
----- -----
(669) (674)
----- -----
Net deferred tax liability before valuation allowance............. (18) (54)
----- -----
Valuation allowance:
Beginning balance...................................................... (101) (262)
(Increase) decrease during the year.................................... (53) 161
----- -----
Ending balance......................................................... (154) (101)
----- -----
Net deferred tax liability........................................ $(172) $(155)
===== =====
</TABLE>
The above net deferred tax liability is presented on the balance sheets as
follows (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995
----- -----
<S> <C> <C>
Deferred tax assets -- current.............................................. $ 280 $ 233
Deferred tax liability -- long-term......................................... (452) (388)
----- -----
$(172) $(155)
===== =====
</TABLE>
F-33
<PAGE> 132
FOSTER HEALTH CARE AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of income tax at the statutory rate to income tax expense
at the Affiliates' effective rate is shown below (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Computed at the statutory rate............................................... 34.0% 34.0%
Increase (decrease) in taxes resulting from:
State income taxes -- net of federal tax benefits.......................... 2.6 3.3
Change in deferred tax valuation allowance................................. 2.5 (9.6)
Other...................................................................... (5.6) 1.2
---- ----
Actual tax provision......................................................... 33.5% 28.9%
==== ====
</TABLE>
As of June 30, 1996, the Affiliates had approximately $768,000 of unused
net operating loss carryforwards. The carryforwards will expire as follows
(dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------------------------------------------
<S> <C>
2009............................................................. $ 79
2010............................................................. 533
2011............................................................. 156
----
$768
====
</TABLE>
The Affiliates also have approximately $48,000 of alternative minimum tax
credits with no expiration period available to offset future federal income
taxes and approximately $9,000 of general business credits which will expire in
2006.
10. RELATED PARTY TRANSACTIONS
The amounts due (to) from related parties consisted of the following
(dollars in thousands):
<TABLE>
<CAPTION>
1996 1995
------- -----
<S> <C> <C>
National Care Centers of America, Inc.(a)................................. $ (73) $ (79)
Foster Health Care Group, Inc.(a)......................................... (464) (241)
B. R. Foster, Inc.(a)..................................................... 15 65
Elder Care Facilities Development Co., Inc.(a)............................ 5 36
Elder Care Facilities Equipment Company, Inc.(a).......................... -- 2
Ozark Mobile(a)........................................................... -- (2)
Mid-Continental Marco(a).................................................. -- 18
National Care Centers of Licking, Inc.(a)................................. 22 --
Country Club Condominiums -- A Partnership(a)............................. -- 32
John D. Foster, Stockholder............................................... 2 (39)
Robert A. Foster, Stockholder............................................. 2 2
Mark Foster, Stockholder.................................................. -- 93
Bill R. Foster, Stockholder............................................... (83) (398)
Bill R. Foster, Jr., Stockholder.......................................... 6 7
</TABLE>
F-34
<PAGE> 133
FOSTER HEALTH CARE AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1996 1995
------- -----
<S> <C> <C>
Todd Spence, Stockholder.................................................. -- (25)
Paul F. Rich, Stockholder................................................. (500) (77)
------- -----
$(1,068) $(606)
======= =====
</TABLE>
- ---------------
(a) These corporations/partnerships are related to the Affiliates through common
ownership.
The Affiliates entered into management contracts with Foster Health Care
Group, Inc., a corporation owned by the Affiliates' majority stockholder and his
family, to supervise, direct and control the management and operation of its
nursing and other facilities. Management fees paid to the management company
during the years ended June 30, 1996 and 1995, totaled $1,394,000 and
$1,165,000.
The Affiliates paid B. R. Foster, Inc. $54,000 for rental of their nurse
aide training building during the years ended June 30, 1996 and 1995.
The Affiliates paid Foster Health Care Group, Inc. $36,000 and $34,000 for
training and education during the years ended June 30, 1996 and 1995,
respectively.
The Affiliates' stockholders have personally guaranteed the obligations of
the Affiliates in regard to certain prepayment provisions of the HUD-insured
mortgage (see Note 8).
The Affiliates acquired computer equipment from Foster Health Care Group,
Inc. in the amount of $184,000. The equipment is recorded at the cost paid by
Foster Health Care Group, Inc.
The Affiliates wrote off $27,000 due from Elder Care Facilities
Development, Inc. determined to be uncollectible during the fiscal year 1996.
During the fiscal year ended June 30, 1996, the Affiliates purchased
treasury stock from stockholders of Hermitage, Mt. Vernon Park, Nixa, West Park
and Dixon totaling $2,511,000 of which $2,000,000 was financed through a
short-term note payable (see Note 7).
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Affiliates in
estimating the fair value of its financial instruments:
Cash, Certificates of Deposit and Assets Limited as to Use The
carrying amount reported in the balance sheet for these instruments
approximates their fair value.
Estimated Third-Party Payor Settlements The carrying amount reported
on the balance sheet for estimated third-party payor settlements
approximates its fair value.
Notes Payable to Banks For these short-term instruments, the carrying
amount is a reasonable estimate of fair value.
Long-term Debt Fair values of the Affiliates' long-term debt are
estimated using discounted cash flow analysis, based on the Affiliates'
current incremental borrowing rates for similar types of borrowing
arrangements.
Due to/due From Related Parties It was not practicable to estimate
the fair value of amounts due to/due from related parties. The terms and
amounts outstanding at June 30, 1996, are described in Note 10.
F-35
<PAGE> 134
FOSTER HEALTH CARE AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The carrying amounts and fair values of the Affiliates' financial
instruments at June 30, 1996, are as follows (dollars in thousands):
<TABLE>
<CAPTION>
CARRYING FAIR
AMOUNT VALUE
-------- -------
<S> <C> <C>
Financial Assets:
Cash and cash equivalents.............................................. $ 2,964 $ 2,964
Certificates of deposit and asset limited as to use.................... 1,538 1,538
Estimated third-party payor settlements................................ 983 983
Financial Liabilities:
Short-term note payable to bank........................................ 2,456 2,456
Long-term debt......................................................... 15,955 15,955
Estimated third-party payor settlements................................ 162 162
</TABLE>
12. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1996 1995
------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Noncash Investing and Financing Activities
Financing of construction-in-progress with long-term note payable...... $1,051 $ -0-
Property distributed to shareholder.................................... 35 -0-
Additional Cash Payment Information
Interest paid (net of amount capitalized).............................. 1,535 1,362
Income taxes paid...................................................... 524 399
</TABLE>
13. COMMITMENTS AND CONTINGENCIES
Workers' Compensation Insurance
The Affiliates have obtained workers' compensation insurance through
membership in the Missouri Nursing Home Insurance Trust (the Trust), a trust
formed for the benefit of qualified nursing homes in the state of Missouri who
wish to pool their resources to qualify as a group self-insurer as permitted
under the Workmen's Compensation Law, Chapter 287 of the Revised Statutes of
Missouri, as amended. As of June 30, 1996, approximately 75 Missouri nursing
homes are participating in the Trust. The Trust and its members jointly and
severally agree to assume and discharge, by payment, any lawful awards entered
against any member of the Trust. Workers' compensation expense through
participation in the Trust was $476,000 and $413,000 for the years ended June
30, 1996 and 1995, respectively.
Professional Liability Coverage and Claims
The Affiliates pay fixed premiums for annual professional liability
coverage under an occurrence-basis policy. For covered claims, in general, the
Affiliates bear the risk of (1) the excess, if any, over individual claim costs
of $1,000,000 and (2) the excess, if any, over aggregate claims costs of
$3,000,000 for claims occurring during the policy year. In the opinion of
management, there are no material liabilities which are probable and estimable
for claims relating to professional liability.
F-36
<PAGE> 135
FOSTER HEALTH CARE AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Leases
The Affiliates lease a 60-bed skilled nursing facility located in Dixon,
Missouri, from an unrelated party under a noncancelable operating lease. In June
1997, the lease term was extended seven years to January 2007, and the rent
payments were renegotiated.
Future minimum lease payments for the next five years and thereafter under
noncancelable operating leases with initial terms of one year or more in effect
at June 30, 1996, are as follows (dollars in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR
-----------
<S> <C>
1997................................................................ $ 307
1998................................................................ 307
1999................................................................ 307
2000................................................................ 307
2001................................................................ 307
Thereafter.......................................................... 1,714
------
Total minimum lease payments.............................. $3,249
======
</TABLE>
Total rental expense for the years ended June 30, 1996 and 1995, was
approximately $316,000 and $289,000, respectively.
Litigation
The Affiliates were a party to various claims, legal actions and complaints
arising in the ordinary course of business. In the opinion of management, all
such matters are without merit or are of such a kind, or involve such amounts,
that their unfavorable disposition would not have a material effect on the
financial position or results of operation of the Affiliates.
14. DEFINED CONTRIBUTION PLAN
Foster Health Care Group, Inc., a related company, provides the Affiliates
a non-contributory defined contribution retirement savings plan (401k plan)
covering all of its eligible employees. Eligibility for this plan requires an
employee to be at least 21 years of age with one year of service (full-time or
at least thirty hours per week). Under the plan, employees may contribute up to
10% of their salaries.
15. SUBSEQUENT EVENTS
Sale of the Company
On August 30, 1996, the Affiliates' owners sold their stock in eight
skilled nursing companies (Lebanon Park, Lebanon, Mt. Vernon Park, Hermitage,
Dixon, Springfield, West Park and Nixa) and the Pharmacy. The majority of the
stock was sold to Hawthorne Health Properties (HHP) with the remainder redeemed
by the respective companies for certain liquid assets, land and rental property
included in these financial statements. At the same time, the Affiliates' owners
exchanged their stock in Republic and Nevada for 1,600,000 shares of Balanced
Care Corporation (BCC) common stock. HHP simultaneously sold the stock of Dixon
and the Pharmacy to BCC as well as the operations and nonreal estate assets of
the other seven skilled nursing facilities and leased these nursing facilities
to BCC pursuant to ten-year lease agreements.
F-37
<PAGE> 136
FOSTER HEALTH CARE AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Debt
All of the Affiliates' outstanding indebtedness was paid off by HHP in
connection with the above transactions.
16. CONCENTRATION OF CREDIT RISK
The Affiliates are located in Missouri and grant credit without collateral
to their residents, most of whom are covered by third-party payor agreements.
The mix of receivables from residents and third-party payors at June 30,
1996 and 1995, was as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Medicare....................................................... 18% 22%
Medicaid....................................................... 39 41
Other third-party payors....................................... 1 2
Private........................................................ 42 35
--- ---
100% 100%
=== ===
</TABLE>
17. SIGNIFICANT ESTIMATES AND CONCENTRATIONS
Generally accepted accounting principles require disclosure of certain
significant estimates and current vulnerability due to certain concentrations.
Estimates of allowances for adjustments included in net patient revenues are
described in Note 2. Estimates related to the accrual for workers' compensation
self-insurance claims are described in Note 13.
F-38
<PAGE> 137
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
of Balanced Care Corporation
We have audited the accompanying combined balance sheets of Keystone
Affiliates ("S" corporations) as of December 31, 1996, and 1995, and the related
combined statements of income, retained earnings, and cash flows for each of the
years ended December 31, 1996, 1995 and 1994.. These combined financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these combined 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 combined financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the combined financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of the Keystone
Affiliates as of December 31, 1996 and 1995 , and the results of their
operations and their cash flows for each of the years ended December 31, 1996,
1995 and 1994 in conformity with generally accepted accounting principles.
SNYDER & CLEMENTE
Kingston, Pennsylvania
May 13, 1997
F-39
<PAGE> 138
KEYSTONE AFFILIATES
COMBINED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995
------- ------
<S> <C> <C>
ASSETS
Current assets:
Cash.................................................................... $ 561 $ 511
Residents' trust account................................................ 19 16
Accounts receivable..................................................... 1,006 782
Inventory -- food and supplies.......................................... 19 13
Prepaid expenses........................................................ 5 9
------- ------
Total current assets............................................ 1,610 1,331
Property and equipment, net............................................... 10,540 8,107
Prepaid financing costs................................................... 135 114
Certificate of Need, Net of Amortization.................................. 66 71
Security deposit -- lease................................................. -- 13
------- ------
Total assets.................................................... $12,351 $9,636
======= ======
LIABILITIES
Current liabilities:
Line of Credit.......................................................... $ 134 $ 99
Current Maturities of Long-term Debt...................................... 551 568
Resident prepayments.................................................... 36 13
Short-term borrowing.................................................... 39 39
Accounts payable........................................................ 1,247 809
Residents' trust account payable........................................ 18 16
Accrued expenses........................................................ 470 252
Accrued management fee.................................................. 51 67
Cost settlement payable................................................. -- 55
------- ------
Total current liabilities....................................... 2,546 1,918
Long-term debt............................................................ 8,005 6,346
------- ------
Total liabilities............................................... 10,551 8,264
------- ------
STOCKHOLDERS' EQUITY
Common stock.............................................................. 216 216
Additional paid-in capital................................................ 1,150 812
Retained earnings......................................................... 434 343
------- ------
Total stockholders' equity...................................... 1,800 1,372
------- ------
Total liabilities and stockholders' equity...................... $12,351 $9,636
======= ======
</TABLE>
See Notes to Combined Financial Statements.
F-40
<PAGE> 139
KEYSTONE AFFILIATES
COMBINED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995 1994
------- ------ ------
<S> <C> <C> <C>
Resident revenues............................................... $10,000 $7,247 $4,331
------- ------ ------
Operating expenses:
Facility operating expenses:
Salaries, wages and benefits............................... 3,700 2,529 1,828
Other operating expenses................................... 3,743 2,671 1,072
Management fees............................................ 384 279 168
Depreciation and amortization................................. 436 299 251
Rent.......................................................... -- 163 288
------- ------ ------
Total operating expenses.............................. 8,263 5,941 3,607
------- ------ ------
Income from operations.......................................... 1,737 1,306 724
------- ------ ------
Other income (expenses):
Interest expense.............................................. (771) (540) (312)
Bad debts..................................................... (70) (53) (5)
Miscellaneous and interest income............................. 63 13 6
------- ------ ------
Total other income and (expenses)..................... (778) (580) (311)
------- ------ ------
Net income............................................ $ 959 $ 726 $ 413
======= ====== ======
PRO FORMA INCOME DATA (UNAUDITED):
Income before income taxes.................................... $ 959 $ 726 $ 413
Pro forma income tax provision................................ 389 295 173
------- ------ ------
Net income after pro forma tax provision.............. $ 570 $ 431 $ 240
======= ====== ======
</TABLE>
See Notes to Combined Financial Statements.
F-41
<PAGE> 140
KEYSTONE AFFILIATES
COMBINED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS
------ ---------- --------
<S> <C> <C> <C>
Balance at January 1, 1994................................... $209 $ 224 $ 182
Additional contributions by Stockholder.................... -- 348 --
Net income................................................. -- -- 413
Stockholder distributions.................................. -- -- (430)
---- ------ ----
Balance at December 31, 1994................................. 209 572 165
Stock issued, Bloomsburg Manor Personal Care and Retirement
Center.................................................. 7 -- --
Additional contributions by Stockholder.................... -- 240 --
Net income................................................. -- -- 726
Stockholder distributions.................................. -- -- (548)
---- ------ ----
Balance at December 31, 1995................................. 216 812 343
Additional contributions by Stockholder.................... -- 338 --
Net income................................................. -- -- 959
Stockholder distributions.................................. -- -- (868)
---- ------ ----
Balance at December 31, 1996................................. $216 $1,150 $ 434
==== ====== ====
</TABLE>
See Notes to Combined Financial Statements.
F-42
<PAGE> 141
KEYSTONE AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995 1994
------- ------ -------
<S> <C> <C> <C>
Cash flows from operating activities
Net income................................................... $ 959 $ 726 $ 413
Adjustments to reconcile net income to net income to net cash
provided by operating activities:
Depreciation and amortization............................. 436 299 251
(Increase) decrease in:
Residents' trust account.................................. (3) (7) 8
Accounts receivable....................................... (223) (540) (81)
Prepaid expenses.......................................... 4 (8) (1)
Deposits.................................................. 13 -- 12
Inventory................................................. (6) (4) --
Other receivables......................................... -- -- 15
Increase (decrease) in:
Resident prepayments...................................... 23 (19) (3)
Accounts payable.......................................... 437 675 (14)
Residents' trust payable.................................. 2 7 (8)
Accrued expenses.......................................... 189 145 4
Cost settlement payable................................... (55) (1) 44
Emergency evacuation liability............................ 13 -- --
Due to affiliate.......................................... -- (1) 1
------- ------ -------
Net cash provided by operating activities.................... 1,789 1,272 641
------- ------ -------
Cash flows from investing activities:
Purchase of property and equipment........................... (2,852) (2,264) (2,581)
Certificate of need.......................................... -- -- (75)
Proceeds from affiliate receivable........................... -- 10 --
------- ------ -------
Net cash used by investing activities.......................... (2,852) (2,254) (2,656)
------- ------ -------
Cash flows from financing activities:
Stock issuance............................................... -- 7 --
Repayment of borrowings...................................... (850) (474) (1,056)
Proceeds from related party loan............................. 30 -- 42
Stockholder distributions.................................... (868) (548) (430)
Proceeds from borrowings..................................... 2,496 1,969 3,246
Additional paid-in capital contributed....................... 338 241 348
Payment for debt issue costs................................. (33) (35) (50)
------- ------ -------
Net cash provided by financing activities................. $ 1,113 $1,160 $ 2,100
------- ------ -------
Net increase in cash...................................... 50 178 85
Cash at beginning of year...................................... 511 333 248
------- ------ -------
Cash at end of year............................................ $ 561 $ 511 $ 333
======= ====== =======
Supplemental disclosures of cash flow information:
Interest paid (net of capitalized interest).................. $ 752 $ 541 $ 311
======= ====== =======
</TABLE>
See Notes to Combined Financial Statements.
F-43
<PAGE> 142
KEYSTONE AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS, ORGANIZATION AND CONCENTRATION
Keystone Affiliates (the "Company") is a group of commonly controlled
subchapter "S" corporations which own and operate two nursing homes and five
personal care homes. The nursing homes provide therapy services and skilled
nursing care and the personal care facilities provide assisted living services
to seniors. The facilities are located in northeastern Pennsylvania and service
residents in that region.
The combined financial statements include the accounts of the following
companies. Blakely Pine Health Care Center, Inc. is a thirty-eight bed nursing
home which was incorporated September 17, 1990. Kingston Healthcare Center, Inc.
is a sixty-five bed nursing home which was incorporated on April 12, 1993 and
commenced operations April 11, 1995. Kingston Manor Personal Care and Retirement
Center, Inc. was incorporated on July 12, 1991 as a personal care and retirement
facility which now has seventy-eight beds. Old Forge Manor Personal Care and
Retirement Center, Inc. is a forty-nine bed personal care facility incorporated
in November 1990. Keystone Health Ventures, Inc. D/B/A MidValley Manor Personal
Care Center is a seventy-one bed personal care facility incorporated January 25,
1989. West Side Manor Personal Care and Retirement Center, Inc. T/A West View
Personal Care and Retirement Center is a fifty bed personal care facility which
was incorporated on November 1, 1993. Bloomsburg Manor Personal Care and
Retirement Center, Inc. was incorporated September 11, 1995 and commenced
operations in April 1996 as a sixty-nine bed personal care facility.
The Company maintains cash accounts at a variety of banks. At various times
throughout the year, the balances on deposit exceeded the Federal Deposit
Insurance Corporation's ("FDIC") insured limit of $100,000 per depositor,
thereby creating a possible loss to the Company of the amounts in excess of the
insured limit.
The nursing homes extend credit to various parties in the form of accounts
receivable, which are essentially collected from the patient, third party
payors, federal and state agencies. These receivables are not collateralized.
The personal care homes collect rent from the residents in advance, however, on
occasion due to unusual circumstances, the Company will extend credit to
residents. These resident receivables are minimal and uncollateralized.
Revenue from private pay residents accounted for 54% of the Company's
revenue while 28% originated from Medicare and coinsurance and 17% from Medical
Assistance during 1996. During 1995, 55% of revenue originated from private pay
residents, 17% from Medical Assistance and 27% from Medicare. During 1994, 71%
of revenue originated from private pay residents, 21% of revenue from Medical
Assistance and 7% from Medicare. The personal care home revenues are solely from
private pay residents.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Combination
The combined financial statements do not contain any intercompany accounts
and transactions because none existed therefore eliminations were not necessary.
(b) Basis of Accounting
The Company uses the accrual basis of accounting, that is, it recognizes
income in the period when services are rendered and recognizes costs and
expenses in the period they are incurred. This method is used for both financial
statements and the Company's state and federal tax returns.
F-44
<PAGE> 143
KEYSTONE AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(c) Patient Accounts Receivable from Third Party Payors
The Company records patient accounts receivable and recognizes as patient
revenue the amount that is going to be paid by the patient, the patient's
insurance carrier, or a state agency for Medical Assistance. These amounts are
predetermined prior to invoicing; any differences are minor and are resolved
when they occur. As such, the Companies do not record any allowance, or contra
accounts, for third party settlements or adjustments.
(d) Inventory
Inventory is valued at the lower of cost or market value using the
first-in, first-out method.
(e) Property and Equipment
Property and equipment are recorded at cost. Any improvements which enhance
the value or extend the life of the assets are capitalized and depreciated over
the expected life of the asset. Those items which do not enhance the value or
extend the life of the asset are expensed in the period they are incurred.
Depreciation of property and equipment is being taken using an accelerated
method which does not differ materially from the straight-line method.
(f) Other Assets
Other assets are recorded at cost and are being amortized using the
straight-line method. Financing fees are amortized over the life of the related
loans and the certificate of need is amortized over 15 years.
(g) Income Taxes
1. The Company has elected by unanimous consent of the respective
stockholders to be taxed under the provisions of Subchapter "S" status of the
Internal Revenue Code and for state tax purposes. Under these provisions, the
Company does not pay federal or state corporate income taxes on their taxable
income and are not allowed a net operating loss carryover or carryback as a
deduction. Instead, the stockholders are liable for individual federal and state
income taxes on their respective shares of the Company's taxable income or
include their respective shares of the Company's net operating loss in their
individual income tax return.
2. A pro forma provision for income taxes is presented as if the Company
were taxed as a "C" corporation. The pro forma income tax provisions for the
years ended December 31, 1996, 1995 and 1994 have been calculated using the
financial net income.
(h) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
3. RESIDENTS' TRUST ACCOUNT
Residents' trust account represents the patients' personal money being held
by the nursing homes and is used only for the individual patients' personal use.
A corresponding liability is also recognized by the nursing homes.
F-45
<PAGE> 144
KEYSTONE AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
4. PATIENT ACCOUNTS RECEIVABLE
Patient accounts receivable are due from the following payors (dollars in
thousands):
<TABLE>
<CAPTION>
1996 1995
------ ----
<S> <C> <C>
Private paying patients............................................. $ 30 $ 33
Pa. Medicaid........................................................ 377 119
N.Y. Medicaid....................................................... 78 34
Medicare A.......................................................... 362 299
Medicare B.......................................................... 159 124
Other............................................................... -- 173
------ ----
Total..................................................... $1,006 $782
====== ====
</TABLE>
5. PROPERTY AND EQUIPMENT
Property and equipment and accumulated depreciation consist of the
following (dollars in thousands):
<TABLE>
<CAPTION>
ESTIMATED
USEFUL
LIFE 1996 1995
----------- ------- ------
<S> <C> <C> <C>
Construction-in-progress............................. N/A $ 160 $ 687
Land and improvements................................ 15 yrs 846 716
Building and improvements............................ 5 - 40 yrs 9,250 6,466
Equipment............................................ 5 - 15 yrs 1,584 1,140
Vehicles............................................. 5 yrs 33 13
------- ------ ------
Total property and equipment....................... 11,873 9,022
Less: Accumulated depreciation..................... 1,333 915
------ ------
Property and equipment, net........................ $10,540 $8,107
====== ======
Depreciation expense for the year.................... $ 419 $ 287
====== ======
</TABLE>
6. CERTIFICATE OF NEED
Kingston Healthcare Center:
The balance consists of the following (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Certificate of Need.................................................... $75 $75
Less: Amortization................................................... 9 4
--- ---
Total........................................................ $66 $71
=== ===
</TABLE>
Amortization expense for the years ended December 31, 1996, 1995 and 1994
is $5,000, $3,750 and $0, respectively.
7. PREPAID FINANCING COSTS
Prepaid financing costs are reported net of accumulated amortization.
Accumulated amortization at December 31, 1996 and 1995 was $29,000 and $17,000,
respectively. Amortization expense for the years ended 1996, 1995 and 1994 was
$12,000, $8,000 and $5,000 respectively.
F-46
<PAGE> 145
KEYSTONE AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
8. ACCRUED EXPENSES
Accrued expenses consist of the following items (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Accrued pension.................................................... $ 5 $ 4
Accrued insurance.................................................. 49 20
Accrued payroll and taxes.......................................... 171 115
Accrued annual leave............................................... 72 46
Accrued PA capital stock tax....................................... 20 8
Accrued fees....................................................... 38 29
Accrued interest................................................... 46 28
Accrued property taxes............................................. 48 --
Accrued other expenses............................................. 21 2
---- ----
Total accrued expenses................................... $470 $252
==== ====
</TABLE>
9. SHORT-TERM DEBT
Credit line notes (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995
---- ---
<S> <C> <C>
Kingston Healthcare Center, Inc. maintains a line of credit at a
commercial bank in the amount of $100,000. This line of credit is
secured by the real and personal property of the debtor. Interest
is charged at 1% above prime. The rate at December 31, 1996 was
9.25%............................................................ $ 99 $99
West View Manor Personal Care and Retirement Center, Inc. maintains
a line of credit at a commercial bank in the amount of $35,000.
Interest is charged at 1% above the highest prime rate as
published by the Wall Street Journal. The interest rate at
December 31, 1996 was 9.25%...................................... 35 --
---- ---
Total short-term debt.................................... $134 $99
==== ===
</TABLE>
10. NOTES PAYABLE
The following is a summary of notes payable of the Company (dollars in
thousands):
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Short-term Borrowing:
Old Forge Manor Personal Care and Retirement Center, Inc.:
KISS Realty, Ltd., short-term loan originally due 10-01-93,
deferred to an unspecified period................................ $ 39 $ 39
====== ======
Long-term Debt:
Blakely Pine Health Care Center, Inc.:
First National Community Bank:
Note payable, $500,000, interest at 1 1/4% over Fidelity Bank of
Philadelphia, PA, prime, monthly payments of interest only
until July 21, 1992, thereafter $5,593 monthly including
interest, final payment due in full, 8-21-07, secured by land
and building in Peckville, PA................................. 366 397
</TABLE>
F-47
<PAGE> 146
KEYSTONE AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Amresco (MTGLQLP):
Note payable, construction phase loan to $500,000, interest at
approximately 8.0615%, monthly payments of interest only until
project completion or 6-21-92, whichever occurs first.
Thereafter, $4,291 monthly, including principal and interest.
Final payment due in full, 8-01-11. Secured with second lien
mortgages after the First National Community Bank on land and
buildings in Peckville, Lackawanna County, PA. Also, second
lien on all equipment, furnishings, fixtures, accounts
receivable and inventory...................................... $ 438 $ 455
Blakely Pine Health Care Center, Inc.:
Chrysler Financial Corporation:
Note payable, interest at 4.8%, monthly payments of $470, final
payment due May 2000, secured by vehicle of the Company....... 18 --
Shareholder:
Note payable, interest at 8.5%, monthly payments of $1,152, final
payment due June 1999, secured by personal guarantee of
certain shareholders.......................................... -- 41
Kingston Healthcare Center, Inc.:
Keystone Management Services:
Note payable, (original amount $75,000), note written at $59,078,
interest at 8%, monthly interest payments only, principal
payments will vary with cash availability. Unsecured.......... 24 59
Note payable, $173,000, interest payments at 8%, only until
January 1, 1997 then payments of $2,000 principal plus 8%
interest for two years. On January 1, 1999 the Company will
make balloon payment on the outstanding balance. Unsecured.... 173 173
Mellon Bank:
Mortgage payable, $1,547,700, interest at 9.07%, 119 monthly
payments of $15,762 plus interest beginning July 23, 1995.
Final payment due in full, June 23, 2005. Secured with all
property of the Company as first lien......................... 1,264 1,453
Kingston Healthcare Center, Inc.:
Mellon Bank:
Note payable, $122,500, interest at 9.49%, 59 monthly payments of
$2,002 including interest beginning January 23, 1995. Final
payment due December 23, 1999. Secured by all property of the
Company....................................................... 103 116
Luzerne National Bank:
Note payable, $80,000, interest at 10.25%, 24 payments of $3,072
beginning November 10, 1995. Final payment due October 10,
1997 for all unpaid principal and accrued interest. Secured by
a second lien on the real property of the Company............. -- 74
Kingston Manor Personal Care and Retirement Center, Inc.:
Mellon Bank:
Note payable, interest at 9.3%, 59 monthly principal and interest
payments of $15,088 with balance of indebtedness due and
payable on the 60th month from closing date, final payment due
07-99. Secured by lien on property located in Kingston, PA and
all equipment, furnishings, inventory and accounts receivable
and personal guarantees of majority stockholders.............. 993 1,076
</TABLE>
F-48
<PAGE> 147
KEYSTONE AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Keystone Management Services:
Demand note payable, term 7 years at 7%, with a balloon payment
of $55,279 after 36 months, monthly payments of $1,707,
including interest, related party transaction................. -- $ 71
Old Forge Manor Personal Care and Retirement Center, Inc.:
Old Forge Bank:
Note payable, monthly payment of $11,150, including interest at
10.0%, final payment 09-17-07, secured by a mortgage on 246
South Main Street, Old Forge, PA and personal guarantees of
the shareholders.............................................. $ 881 924
Keystone Management Services:
Loans to the Company with no stated interest rates or repayment
terms. The loans are to be available to the Company on a
long-term basis............................................... 66 66
Mid-Valley Manor Personal Care Center:
First National Community Bank:
Note payable, initial rate of 8.5% to be adjusted every 36 months
to a rate of prime plus 1 1/4%, monthly payment of $10,512,
final payment due September 2009, secured by property and
equipment..................................................... 984 1,023
Shareholders:
Notes payable, initial rate of 8.5% to be adjusted every 36
months to a rate of prime plus 1 1/4%, monthly payments of
interest only, principal due September 2009, secured by
property and equipment........................................ 250 250
West View Manor Personal Care and Retirement Center:
Keystone Management Services:
Loans to the Company with no stated interest rates or repayment
terms. The loans are to be available to the Company on a
long-term basis............................................... 41 41
First National Community Bank:
Note payable, interest at 9% for initial 60 month period then
adjusted by bank every 5 years, monthly payments of $13,496,
including interest, final payment date 01-2016. Loan includes
a call provision by bank for 180 months after closing. Secured
by real estate of the Company, real estate of Old Forge Manor
(an affiliate of the Company), all inventory, machinery and
equipment, furniture and fixtures and personal guarantee of
the majority shareholders, Old Forge Manor and Keystone
Management Services (Related Party)........................... 1,378 --
First Valley Bank:
Note payable, interest at 2% over Wall Street prime, monthly
principal payment of $2,619 plus interest, final payment
6-2002, secured by the personal guarantees of the
shareholders, accounts receivable, inventory, furniture and
fixtures and assignment of life insurance..................... -- 163
Bloomsburg Manor Personal Care and Retirement Center, Inc.:
First Columbia Bank and Trust:
Note payable, initial rate of 9.0% to be adjusted every 60 months
to a rate of prime plus 1 1/2%, monthly payment of $11,516,
final payment due May 2011, secured by property and equipment
and personal guarantees of two shareholders................... 1,266 439
</TABLE>
F-49
<PAGE> 148
KEYSTONE AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Note payable, initial rate of 9.0% to be adjusted every 60 months
to a rate of prime plus 1 1/2%, monthly payment of $3,218,
final payment due May 2003, secured by equipment and personal
guarantees of two shareholders................................ $ 188 --
Keystone Management Services:
Loans to the Company with no stated interest rates or repayment
terms. The loans are to be available to the Company on a
long-term basis............................................... 123 $ 93
------ ------
Total long-term debt..................................... $8,556 $6,914
Less: Current Portion.................................... 551 568
------ ------
Long-term debt........................................... $8,005 $6,346
====== ======
</TABLE>
The aggregate amount of required future principal payments at December 31,
1996 are estimated as follows (dollars in thousands):
<TABLE>
<S> <C>
1997........................................................ $ 551
1998........................................................ 578
1999........................................................ 1,443
2000........................................................ 484
2001........................................................ 509
Later Years................................................. 4,991
------
Total notes payable............................... $8,556
======
</TABLE>
11. RELATED PARTY TRANSACTIONS
A. The Company paid Keystone Management Services management fees in the
amount of $385,000, $279,000 and $168,000 for the years ended December
31, 1996, 1995 and 1994, respectively. The principals of Keystone
Management Services own the majority of the outstanding stock in all
companies as follows:
<TABLE>
<S> <C>
Blakely Pine Healthcare Center.............................. 50%
Kingston Healthcare Center.................................. 55.1%
Kingston Manor.............................................. 58%
Old Forge Manor............................................. 66.67%
Mid-Valley Manor............................................ 66.67%
West View Manor............................................. 67%
Bloomsburg Manor............................................ 60%
</TABLE>
B. The following companies are indebted to Keystone Management Services
for working capital advances as follows (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Kingston Healthcare Center.................... $197 $232 $180
Kingston Manor................................ -- 71 86
Old Forge Manor............................... 66 66 59
West View Manor............................... 41 41 41
Bloomsburg Manor.............................. 123 93 --
</TABLE>
F-50
<PAGE> 149
KEYSTONE AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
C. Blakely Pine Healthcare has notes payable to Eugene and Antoinette
Pazzaglia a 12.5% shareholder in the amount of $0, $41,000 and $97,000
at December 31, 1996, 1995 and 1994, respectively.
D. Kingston Healthcare Center owed Keystone Management Services $50,934,
$67,000 and $0 at December 31, 1996, 1995 and 1994, respectively, for
management services accrued.
E. Mid-Valley Manor has notes payable to two stockholders, Robert and Jane
Strony and Eugene and Antoinette Pazzaglia, each an 8.33% stockholder.
Both notes are in the amount of $125,000 for each of the periods ending
December 31, 1996, 1995 and 1994. Interest paid on these notes totaled
$21,000 during 1996 and 1995.
F. Mid-Valley Manor advanced funds to Harrison House Personal Care Center
during 1992 for insurance bills in the amount of $10,000. The Company's
majority stockholders also own controlling interest in this company.
This amount was repaid during 1995.
G. During part of 1994, Mid-Valley Manor leased its facilities from Omni
Enterprises, Inc. whose stockholders own shares of the outstanding stock
of this company. Rent expense for 1994 was $141,000. This facility was
purchased in 1994 for $1,306,000.
H. West View Manor was indebted to Keystone Management Services at December
31, 1994 in the amount of $1,000 for expenses.
I. The 401(k) plan for the Company is a plan administered by and under the
name of Keystone Management Services, Inc. making the Company's
participation a related party activity, as the principals of Keystone
Management Services, Inc., Michael Kelly and James Blumer own
controlling interest in the Company's stock.
12. COMPANY SAVINGS PLAN
The Company participates in a 401(k) Savings Plan. All employees who have
attained age 21 and completed one year of service are eligible to participate in
the plan. The plan allows all employees to defer up to 15% of their income on a
pre-tax basis through contributions from earnings each pay period, subject to
limitations established by the Internal Revenue Service. Nondeductible
contributions may be made at the option of the employee. The Company will match
salary reduction contributions at a rate of 100% on the first 2% of
compensation. In 1996, 1995 and 1994, the Company made contributions in the
amounts of $5,000, $5,000 and $5,000, respectively.
13. COMMON CONTROL
The Companies are under the same controlling interest. Patients from a
facility under this common control are at times referred to another facility for
nursing or physical therapy care. The Company bills either the patient or the
patients' third-party payor for the services provided. There are no transactions
involving billings or reimbursement for these referral situations between the
companies under common control.
14. MEDICAL ASSISTANCE AND MEDICARE COST SETTLEMENTS
Blakely Pine Healthcare Center and Kingston Healthcare Center have
residents who are approved Pennsylvania Medicare or Medicaid patients. As such,
the Company is paid at an established rate per day under the Medicare or Medical
Assistance Programs. However, the rate per day is subject to final determination
based on cost reports submitted by the Company. After the cost reports have been
reviewed, the final cost settlement amount is determined by the Medicare or
Medical Assistance Programs.
F-51
<PAGE> 150
KEYSTONE AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The nursing homes can negotiate or appeal the final cost settlement. The
settlement can result in either additional payments to the Company or a return
of funds to the Medicare or Medical Assistance Program. This settlement process
can occur up to several years after the year end report is submitted.
The estimated settlements receivable or (payable) are as follows (dollars
in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Blakely Pine Healthcare Center................................ $ 70 $(55) $(55)
Kingston Healthcare Center.................................... 267 50 --
</TABLE>
15. CAPITALIZED INTEREST
KINGSTON HEALTHCARE CENTER:
Interest costs charged to operations for the year ended December 31, 1995
consists of the following (dollars in thousands):
<TABLE>
<S> <C>
Interest cost incurred................................................ $144
Decrease as a result of capitalizing interest as a cost of
construction........................................................ 30
----
Interest charged to operations as an expense.......................... $114
====
</TABLE>
16. OPERATING LEASES
BLAKELY PINE HEALTHCARE CENTER:
The Company has entered into an agreement to lease a copier effective
February 6, 1995. This agreement is for a 60 month term with payments of $333
beginning March 1995. The Company entered into a vehicle lease agreement
effective June 1, 1996. The terms of the agreement are for monthly payments of
$424, beginning June 1, 1996 for a 24 month period. The Company has the option
to purchase this vehicle for $15,797 at the end of the lease period. The payment
schedule for these leases at December 31, 1996 is as follows (dollars in
thousands):
<TABLE>
<CAPTION>
DUE DATE AMOUNT
-------------------------------------------------------------------- ------
<S> <C>
1997................................................................ $ 9
1998................................................................ 6
1999................................................................ 4
2000................................................................ 1
---
Total..................................................... $ 20
===
</TABLE>
F-52
<PAGE> 151
KEYSTONE AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
KINGSTON HEALTHCARE CENTER:
The Company has entered into an agreement to lease equipment effective
April 25, 1995. The terms of this agreement are for monthly payments of $302 for
a 60 month period. The payment schedule for this lease at December 31, 1996 is
as follows (dollars in thousands):
<TABLE>
<CAPTION>
DUE DATE AMOUNT
------------------------------------------------------------------ ------
<S> <C>
1997.............................................................. $ 4
1998.............................................................. 4
1999.............................................................. 3
2000.............................................................. 1
---
Total................................................... $ 12
===
</TABLE>
Total lease payments for the year ended December 31, 1996 and 1995 was
$4,000 and $3,000.
WEST VIEW MANOR:
The Company leased its facility from KISS Realty, Ltd. During the first 60
months of the lease, the monthly rent was to be $13,000. Rent expense for the
years ended December 31, 1995 and 1994 was $163,000 and $146,000. The Company
purchased the facility on January 11, 1996.
17. ADDITIONAL PAID-IN CAPITAL
A. The stockholders of West View Manor contributed $338,000 to the Company
during 1996 to assist with the purchase of the property and the
financing of the purchase of the facility.
B. The stockholders of Bloomsburg Manor contributed $240,000 for the year
ended December 31, 1995.
C. The stockholders of Kingston Healthcare Center contributed $348,000 for
the year ended December 31, 1994.
18. OUTSTANDING COMMON STOCK
The Keystone Affiliates outstanding stock is summarized below:
<TABLE>
<CAPTION>
PAR VALUE NUMBER OF SHARES NUMBER OF SHARES
PER SHARE AUTHORIZED OUTSTANDING
--------- ---------------- ----------------
<S> <C> <C> <C>
Kingston Healthcare Center...................... None 1,000 1,000
Blakely Pine Health Care Center................. None 1,000 500
Kingston Manor.................................. None 10,000 1,000
Old Forge Manor................................. None 1,000 150
Mid-Valley Manor................................ None 1,000 90
West View Manor................................. None 1,000 150
Bloomsburg Manor................................ None 1,000 200
</TABLE>
19. PRO FORMA INCOME TAX INFORMATION (UNAUDITED)
The pro forma tax data is based on the assumption that the Companies were
taxable as a "C" corporation for the years ended December 31, 1996, 1995 and
1994. Income tax provisions have been computed by multiplying the net income of
the combined company by the statutory tax rates for
F-53
<PAGE> 152
KEYSTONE AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
federal and state tax purposes. There are no significant timing differences
which would necessitate applying SFAS 109 "Accounting for Income Taxes."
20. PENDING LITIGATION
Kingston Healthcare Center is being sued by another nursing home for
approximately $13,000 for temporary accommodations given during January 1996
when there was an emergency evacuation of the facility. During this emergency,
all patients and staff were given accommodations at another nursing home and
charged the semi-private rate plus expenses. The Company has accrued $13,000 to
meet this liability.
21. SUBSEQUENT EVENT
The fixed assets of the Companies were sold on January 31, 1997 and all
notes payable were subsequently paid off and the majority of the remaining sale
proceeds were distributed to the stockholders. The existing accounts receivable
of the Company will continue to be collected and the existing accounts payable
and other liabilities of the Company will be paid during 1997.
F-54
<PAGE> 153
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors
Heavenly Health Care, Inc.
d/b/a Joe Clark Residential Care Homes
Nevada, Missouri
We have audited the accompanying balance sheet of Heavenly Health Care,
Inc, d/b/a Joe Clark Residential Care Homes, as of December 31, 1996, and the
related statements of income, shareholders' equity (deficit) and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Heavenly Health Care, Inc.,
d/b/a Joe Clark Residential Care Homes, as of December 31, 1996, and the results
of its operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
BAIRD, KURTZ & DOBSON
Springfield, Missouri
September 12, 1997
F-55
<PAGE> 154
HEAVENLY HEALTH CARE, INC.
D/B/A/ JOE CLARK RESIDENTIAL CARE HOMES
BALANCE SHEET
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
ASSETS
Cash.................................................................................. $ 1
Accounts receivable, less allowance for uncollectible accounts $5..................... 27
Prepaid expenses...................................................................... 13
----
Total Assets................................................................ $ 41
====
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Liabilities:
Accounts payable.................................................................... $ 22
Accrued expenses.................................................................... 6
Accrued salaries and payroll taxes.................................................. 25
----
Total liabilities........................................................... 53
----
Shareholders' equity (deficit):
Common stock, $1 par value; authorized 30,000 shares, issued and outstanding 500
shares........................................................................... 1
Retained earnings (deficit)......................................................... (13)
----
Total shareholders' equity (deficit)........................................ (12)
----
Total liabilities and shareholders' equity.................................. $ 41
====
</TABLE>
See accompanying notes to financial statements.
F-56
<PAGE> 155
HEAVENLY HEALTH CARE, INC.
d/b/a JOE CLARK RESIDENTIAL CARE HOMES
STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
Resident service revenue.............................................................. $995
----
Expenses:
Facility operating expenses:
Salaries, wages and benefits..................................................... 326
Other operating expenses......................................................... 200
Lease expense....................................................................... 148
----
Total operating expenses.................................................... 674
----
Net income............................................................................ $321
====
PRO FORMA INCOME TAX DATA (UNAUDITED)
Income before income taxes.......................................................... $321
Pro forma income tax provision...................................................... 122
----
Net income after pro forma tax provision.................................... $199
====
</TABLE>
See accompanying notes to financial statements.
F-57
<PAGE> 156
HEAVENLY HEALTH CARE, INC.
d/b/a CLARK RESIDENTIAL CARE HOMES
STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
YEAR ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
RETAINED
COMMON EARNINGS
STOCK (DEFICIT) TOTAL
------ -------- -----
<S> <C> <C> <C>
Balance at January 1, 1996...................................... $ 1 $ 14 $ 15
Net income.................................................... -- 321 321
Distributions to shareholders................................. -- (348) (348)
--- ----- -----
Balance at December 31, 1996.................................... $ 1 $ (13) $ (12)
=== ===== =====
</TABLE>
See accompanying notes to financial statements.
F-58
<PAGE> 157
HEAVENLY HEALTH CARE, INC.
d/b/a JOE CLARK RESIDENTIAL CARE HOMES
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
Cash Flows From Operating Activities:
Net income......................................................................... $ 321
Changes in operating assets and liabilities:
Increase in accounts receivable................................................. (1)
Increase in prepaid expenses.................................................... (8)
Increase in accounts payable and accrued expenses............................... 17
Increase in accrued salaries and payroll........................................ 16
-----
Net cash provided by operating activities.................................. 345
-----
Cash Flows From Financing Activities:
Distributions to shareholders...................................................... (348)
-----
Net cash used in financing activities...................................... (348)
-----
Decrease in cash..................................................................... (3)
Cash, beginning of year.............................................................. 4
-----
Cash, end of year.................................................................... $ 1
=====
</TABLE>
See accompanying notes to financial statements.
F-59
<PAGE> 158
HEAVENLY HEALTH CARE, INC.
d/b/a JOE CLARK RESIDENTIAL CARE HOMES
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Nature of Operations
Heavenly Health Care, Inc., d/b/a Joe Clark Residential Care Homes,
operates four 57-bed residential care facilities licensed with the Missouri
Department of Social Services, Division of Aging as Residential Care Facility II
facilities. Two of the facilities are located in Nevada, Missouri. These
facilities opened in October 1993 and July 1995. The third facility is located
in Butler, Missouri, and opened in March 1996. The fourth facility opened in
April 1996 and is located in Lamar, Missouri.
(b) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(c) Income Taxes
The Company, with the consent of its stockholders, has elected under
sec.1362 of the Internal Revenue Code and a similar section of the Missouri
income tax law to have the stockholder recognize their proportionate share of
the Company's income or loss on their personal income tax returns in lieu of
corporate income taxes. Therefore, the financial statements do not include any
provision for income taxes.
A pro forma provision for income taxes is presented as if the Company were
taxed as a "C" corporation. The pro forma income tax provision for the year
ended December 31, 1996, has been calculated using the financial net income.
(d) Patient Service Revenue
Patient service revenue is reported at the estimated net realizable amounts
from residents, third-party payors and others for services rendered.
2. MEDICAL MALPRACTICE COVERAGE AND CLAIMS
The Company pays fixed premiums for annual medical malpractice coverage
under occurrence-basis policies. The Company accrues the expense of its share of
asserted and unasserted claims occurring during the year by estimating the
probable ultimate cost of any such claim. Management does not expect any claims
to exceed malpractice insurance coverage limits; therefore, the financial
statements include no accrual for loss.
3. CONCENTRATIONS OF CREDIT RISK
The Company operates facilities located in Butler, Lamar and Nevada,
Missouri. The Company grants credit without collateral to its residents, most of
whom are local residents. The mix of revenues from residents and third-party
payors for 1996 was as follows:
<TABLE>
<S> <C>
Medicaid..................................................................... 37%
Private-pay.................................................................. 63
---
100%
===
</TABLE>
F-60
<PAGE> 159
HEAVENLY HEALTH CARE, INC.
d/b/a JOE CLARK RESIDENTIAL CARE HOMES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. RELATED PARTY TRANSACTIONS
The four residential care facilities are leased from the sole shareholders
under operating leases with month-to-month terms. These triple net leases
require the Company to pay respective executory costs (property taxes,
insurance, utilities and maintenance) in addition to the basic rent. The monthly
lease payments for the facilities range from $3,395 to $3,625. The total lease
expense for all four facilities for the year ended December 31, 1996, was
$148,000.
5. SIGNIFICANT ESTIMATES AND CONCENTRATIONS
Generally accepted accounting principles require disclosure of certain
significant estimates and current vulnerability due to certain concentrations.
Estimates related to the accrual for medical malpractice claims are described in
Note 2.
6. SUBSEQUENT EVENT
During 1997 the facilities at all of the Company's operating locations were
sold to an unrelated party. Following the sale, the Company ceased operating the
facilities.
F-61
<PAGE> 160
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Butler Senior Care, Inc.:
We have audited the accompanying balance sheets of Butler Senior Care, Inc.
(the Company) as of June 30, 1997 and 1996, and the related statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended June 30, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of June 30,
1997 and 1996, and the results of its operations and cash flows for each of the
three years in the period ended June 30, 1997, in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND, L.L.P.
Pittsburgh, Pennsylvania
September 12, 1997
F-62
<PAGE> 161
BUTLER SENIOR CARE, INC.
BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30,
SEPTEMBER ----------------------
1997 1997 1996
--------- ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 100 $ 125 $ 51
Accounts receivable....................................... 9 17 19
Prepaid expenses.......................................... 20 24 12
------ ------ -------
Total current assets.............................. 129 166 82
Property and equipment, net................................. 3,704 3,655 3,714
Other assets................................................ 6 8 13
------ ------ -------
Total assets...................................... $ 3,839 $3,829 $ 3,809
====== ====== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 77 $ 63 $ 70
Accrued payroll and related expenses...................... 52 52 48
Other accrued liabilities................................. 13 57 32
Current portion of long-term debt......................... 148 148 156
Notes payable -- related parties.......................... 118 131 --
------ ------ -------
Total current liabilities......................... 408 451 306
Long-term debt.............................................. 2,284 2,323 2,214
Notes payable -- related parties............................ -- -- 240
------ ------ -------
Total liabilities................................. 2,692 2,774 2,760
------ ------ -------
Contingencies (Note 5)
Shareholders' equity:
Common stock, $1 par value; 1,000,000 shares authorized;
22,059 shares issued and outstanding................... 22 22 22
Paid-in capital........................................... 844 844 844
Retained earnings......................................... 281 189 183
------ ------ -------
Total shareholders' equity........................ 1,147 1,055 1,049
------ ------ -------
Total liabilities and shareholders' equity...... $ 3,839 $3,829 $ 3,809
====== ====== =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-63
<PAGE> 162
BUTLER SENIOR CARE, INC.
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED JUNE 30,
------------------ ------------------------------
1997 1996 1997 1996 1995
------ ------ ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Resident services....................... $ 673 $ 628 $2,617 $2,426 $1,499
Office rentals.......................... 56 42 159 163 166
Other................................... 8 7 23 17 16
------ ------ ------ ------ ------
Total revenues.................. 737 677 2,799 2,606 1,681
------ ------ ------ ------ ------
Operating expenses:
Facility operating expenses:
Salaries, wages and benefits......... 267 254 1,017 950 635
Other operating expenses............. 103 116 467 491 400
General and administrative.............. 70 62 282 261 178
Depreciation and amortization........... 35 34 135 131 112
------ ------ ------ ------ ------
Total operating expenses........ 475 466 1,901 1,833 1,325
------ ------ ------ ------ ------
Operating income................ 262 211 898 773 356
Other income (expense):
Interest income......................... 7 1 17 1 2
Interest expense........................ (51) (54) (183) (245) (192)
Other................................... (1) (7) (25) (11) (46)
------ ------ ------ ------ ------
Net income...................... $ 217 $ 151 $ 707 $ 518 $ 120
====== ====== ====== ====== ======
PRO FORMA INCOME TAX DATA (UNAUDITED):
Income before income taxes.............. $ 217 $ 151 $ 707 $ 518 $ 120
Pro forma income tax provision.......... 87 60 283 208 48
------ ------ ------ ------ ------
Net income after pro forma tax
provision..................... $ 130 $ 91 $ 424 $ 310 $ 72
====== ====== ====== ====== ======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-64
<PAGE> 163
BUTLER SENIOR CARE, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1997, 1996, AND 1995
AND THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 1997 (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
------ -------- -------- ------
<S> <C> <C> <C> <C>
Balance at June 30, 1994.............................. $ 22 $844 $ 98 $ 964
Distributions paid.................................. -- -- (130) (130)
Net income.......................................... -- -- 120 120
--- ---- ----- ------
Balance at June 30, 1995.............................. 22 844 88 954
Distributions paid.................................. -- -- (423) (423)
Net income.......................................... -- -- 518 518
--- ---- ----- ------
Balance at June 30, 1996.............................. 22 844 183 1,049
Distributions paid.................................. -- -- (701) (701)
Net income.......................................... -- -- 707 707
--- ---- ----- ------
Balance at June 30, 1997.............................. 22 844 189 1,055
Distributions paid (unaudited)...................... -- -- (125) (125)
Net income (unaudited).............................. -- -- 217 217
--- ---- ----- ------
Balance at September 30, 1997 (unaudited)............. $ 22 $844 $ 281 $1,147
=== ==== ===== ======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-65
<PAGE> 164
BUTLER SENIOR CARE, INC.
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
SEPTEMBER 30, YEAR ENDED JUNE 30,
--------------- ---------------------------
1997 1996 1997 1996 1995
----- ----- ----- ----- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income................................... $ 217 $ 151 $ 707 $ 518 $ 120
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization............. 35 34 135 131 112
Increase (decrease) from changes in:
Accounts receivable....................... 8 7 2 (3) (1)
Prepaid expenses.......................... 4 (8) (12) 5 (10)
Accounts payable.......................... 14 (8) (7) (3) 41
Accrued payroll and related expenses...... -- -- 4 5 25
Other accrued liabilities................. (44) 40 25 (28) 33
----- ----- ----- ----- -------
Cash provided by operating
activities......................... 234 216 854 625 320
----- ----- ----- ----- -------
Cash flows from investing activities:
Purchase of property and equipment........... (82) (5) (71) (117) (1,719)
----- ----- ----- ----- -------
Cash used in investing activities.... (82) (5) (71) (117) (1,719)
----- ----- ----- ----- -------
Cash flows from financing activities:
Proceeds from issuance of long-term debt..... -- 790 790 -- 1,900
Repayment of long-term debt.................. (39) (587) (688) (99) (593)
Proceeds from notes payable to
shareholders.............................. -- -- 131 115 175
Repayment of notes payable to shareholders... (13) (240) (240) (50) --
Distributions paid........................... (125) (125) (702) (423) (130)
----- ----- ----- ----- -------
Cash (used in) provided by financing
activities......................... (177) (162) (709) (457) 1,352
----- ----- ----- ----- -------
Net increase (decrease) in cash and cash
equivalents.................................. (25) 49 74 51 (47)
Cash and cash equivalents at beginning of
year......................................... 125 51 51 -- 47
----- ----- ----- ----- -------
Cash and cash equivalents at end of year....... $ 100 $ 100 $ 125 $ 51 $ --
===== ===== ===== ===== =======
Supplemental disclosure of cash flows
information:
Cash paid for interest....................... $ 51 $ 54 $ 183 $ 245 $ 192
===== ===== ===== ===== =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-66
<PAGE> 165
BUTLER SENIOR CARE, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Organization and Background
Butler Senior Care, Inc. (the Company) is incorporated as an S-Corporation
and operates assisted living communities and office buildings. As of June 30,
1997, the Company owned and operated three assisted living communities with a
total of 176 beds and two office buildings with 19,000 square feet in total
rental space.
(b) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from these estimates.
(c) Cash and Cash Equivalents
All unrestricted, highly liquid investments purchased with an original
maturity of three months or less are considered to be cash equivalents. The
Company maintains its cash and cash equivalents at financial institutions which
management believes are of high credit quality.
(d) Property and Equipment
Property and equipment are recorded at cost and depreciated using the
straight-line method over their estimated useful lives. Expenditures for
maintenance and repairs are expensed as incurred. The cost and related
accumulated depreciation applicable to property no longer in service are
eliminated from the accounts and any gain or loss thereon is included in
operations.
(e) Other Assets
Other assets consist of organizational costs and are being amortized using
the straight-line method over five years.
(f) Revenue Recognition
Resident fees are recognized when services are rendered and consist of
resident fees and other ancillary services provided to residents of the
Company's assisted living communities. Office rentals are recognized ratably
over the life of the tenant lease agreements.
(g) Income Tax Status
The Company has elected to be taxed under the provisions of Subchapter S of
the Internal Revenue Code. Under these provisions, the Company does not pay
federal or state corporate income taxes on its taxable income. Instead, the
shareholders are liable for individual taxes on their respective shares of the
Company's taxable income. Accordingly, no provision has been made for federal or
state income tax in the accompanying statements of operations.
A pro forma provision for income taxes is presented as if the Company had
been subject to federal and state income taxes as a C-Corporation based on a tax
rate of 40%. The pro forma tax provision for the years ended June 30, 1997, 1996
and 1995 have been calculated using financial net income.
F-67
<PAGE> 166
BUTLER SENIOR CARE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(h) Interim Financial Statements (Unaudited)
The unaudited balance sheet as of September 30, 1997 and the unaudited
statements of operations, shareholders' equity and cash flows for the three
months ended September 30, 1997 and 1996, in the opinion of management, have
been prepared on the same basis as the audited financial statements and include
all significant adjustments (consisting primarily of normal recurring
adjustments) considered necessary for a fair presentation of the results of
these interim periods. Operating results for the three-month period ended
September 30, 1997 are not necessarily indicative of the results for the entire
year.
2. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following as of June 30 (dollars in
thousands):
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Land..................................................... $ 124 $ 124
Buildings and improvements (10 to 40 years).............. 3,554 3,504
Furniture, fixtures and equipment (5 to 15 years)........ 359 347
Construction in progress................................. 8 --
------ ------
4,045 3,975
Less accumulated depreciation............................ 390 261
------ ------
$3,655 $3,714
====== ======
</TABLE>
Depreciation expense was approximately $130,000, $125,000 and $104,000 for
the years ended June 30, 1997, 1996 and 1995, respectively.
3. LONG-TERM DEBT
Long-term debt consisted of the following as of June 30 (dollars in
thousands):
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Construction loan........................................ $1,708 $1,829
Refinancing note......................................... 763 --
Other notes payable...................................... -- 541
------ ------
2,471 2,370
Less current portion..................................... 148 156
------ ------
$2,323 $2,214
====== ======
</TABLE>
In April 1994, the Company entered into a $1,900,000 Construction Loan
Agreement (the Loan), the proceeds of which were used to construct an assisted
living community that opened in September 1994. The Loan is payable in varying
monthly principal installments with a final balloon payment in May 2005.
In August 1996, the Company entered into a $790,000 Refinancing Note
Agreement (the Note), the proceeds of which were used to retire the then
outstanding indebtedness from two bank notes and a note payable to a related
party (see Note 4). The Note is payable in varying monthly principal
installments with a final balloon payment in July 2001.
Interest on both the Loan and the Note is payable subject to the Company's
election of a floating or fixed rate option, as defined in the agreements. As of
June 30, 1997, the Company elected the fixed rate option to be in effect for
both the Loan and the Note, which was approximately 7.5% and 7.6%, respectively.
F-68
<PAGE> 167
BUTLER SENIOR CARE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company has pledged substantially all of the assets of the Company as
collateral for the Loan and the Note.
Aggregate scheduled maturities of long-term debt for each of the five years
ending June 30 and thereafter are as follows (dollars in thousands):
<TABLE>
<S> <C>
1998................................................................ $ 148
1999................................................................ 160
2000................................................................ 172
2001................................................................ 186
2002................................................................ 773
Thereafter.......................................................... 1,032
------
$2,471
======
</TABLE>
4. NOTES PAYABLE -- RELATED PARTIES
In May 1995, the Company borrowed $175,000 from a shareholder, the proceeds
of which were used to aid in the financing of the construction of an additional
wing to an existing assisted living community. In addition, the Company borrowed
an additional $115,000 in 1996 from this shareholder for the same purpose.
Interest only payments were made monthly at the prime rate plus 1%, which was
9.25% at June 30, 1996 and 9.50% at June 30, 1997, with a $50,000 principal
payment being made in 1996. The remaining unpaid balance from these loans was
retired with the proceeds from the Refinancing Note discussed in Note 3.
Interest paid and expensed by the Company for the years ended June 30, 1997,
1996 and 1995 was approximately $2,000, $24,000 and $1,000, respectively.
In June 1997, the Company entered into a non-interest bearing demand note
payable with an entity affiliated with the shareholders in the amount of
$131,000, the proceeds of which are being used for the construction discussed in
Note 8. The note will be repaid concurrently with the sale of certain assets of
the Company discussed in Note 8.
5. CONTINGENCIES
In the ordinary course of business, various lawsuits, claims and
proceedings have been or may be instituted or asserted against the Company.
Based on currently available facts, management is not aware of any matters that
are pending or asserted that would have a material adverse effect on the
financial position, results of operations or liquidity of the Company.
6. RELATED PARTY TRANSACTIONS
In addition to the notes payable disclosed in Note 4, the Company has a
management agreement with an entity affiliated with certain shareholders. The
management agreement provides for a base fee of 2% of certain revenues earned
from the assisted living communities and 5% of certain revenues earned from the
office buildings. Management fees paid and expensed by the Company for the years
ended June 30, 1997, 1996 and 1995 were approximately $62,000, $60,000 and
$49,000, respectively.
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
determining the estimated fair value for financial instruments for which it is
practicable to estimate that value:
Cash and Cash Equivalents -- The carrying amount reported in the balance
sheets for cash and cash equivalents approximates its fair value.
F-69
<PAGE> 168
BUTLER SENIOR CARE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Long-term Debt and Notes Payable -- Related Parties -- The fair value of
long-term debt and notes payable -- related parties is estimated using a
discounted cash flow analysis, based on the Company's currently available
incremental borrowing rate.
The carrying amounts and the estimated fair values of the financial
instruments as of June 30 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
1997 1996
------------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------ -------- ------
<S> <C> <C> <C> <C>
Cash and cash equivalents............................. $ 125 125 $ 51 51
Long-term debt........................................ 2,471 2,471 2,370 2,370
Notes payable -- related parties...................... 131 131 240 240
</TABLE>
8. SUBSEQUENT EVENTS
In July 1997, the Company closed one of the office buildings and began
construction that will convert the facility to an additional wing of an existing
assisted living community. The conversion will add 28 beds at a projected cost
of approximately $450,000 with an anticipated opening date of November 1997.
On July 21, 1997, the Company entered into a Letter of Intent (Agreement)
pursuant to which Balanced Care Corporation, a Delaware Corporation, will
acquire only the business, licenses and other intangibles and property and
equipment of the Company's assisted living communities for approximately $12
million, subject to certain terms and conditions as outlined in the Agreement.
F-70
<PAGE> 169
REPORT OF INDEPENDENT ACCOUNTANTS
The Shareholders of Gethsemane Affiliates:
We have audited the combined balance sheets of Gethsemane Affiliates as of
June 30, 1997 and 1996, and the related combined statements of income,
shareholders' equity and cash flows for each of the three years in the period
ended June 30, 1997. These financial statements are the responsibility of the
Companies' 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, the financial statements referred to above present fairly,
in all material respects, the combined financial position of Gethsemane
Affiliates as of June 30, 1997 and 1996 and the results of their operations and
their cash flows for each of the three years in the period ended June 30, 1997
in conformity with generally accepted accounting principles.
COOPERS & LYBRAND, L.L.P.
One South Market Street
Harrisburg, Pennsylvania
September 23, 1997
F-71
<PAGE> 170
GETHSEMANE AFFILIATES
COMBINED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30,
SEPTEMBER 30, -----------------
1997 1997 1996
------------- ------ ------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 25 $ 3 $ 1
Restricted cash -- resident funds......................... 18 19 23
Accounts receivable -- residents (net of allowance for
doubtful accounts of $2 and $2)........................ 61 159 117
Receivable from third-party............................... 144 147 150
Prepaid expenses.......................................... 89 34 37
------ ------ ------
Total current assets.............................. 337 362 328
Organizational costs........................................ 11 11 --
Property and equipment, net................................. 3,902 3,924 1,690
------ ------ ------
Total assets...................................... $ 4,250 $4,297 $2,018
====== ====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Demand notes payable -- bank.............................. $ 374 $ 376 $ 394
Current portion of long-term debt......................... 82 120 23
Notes payable to shareholder.............................. 343 390 380
Accounts payable.......................................... 269 382 131
Accrued expenses.......................................... 121 115 114
Deferred revenue.......................................... -- 18 17
Resident funds............................................ 18 19 23
------ ------ ------
Total current liabilities......................... 1,207 1,420 1,082
Long-term debt.............................................. 2,356 2,293 637
------ ------ ------
Total liabilities................................. 3,563 3,713 1,719
------ ------ ------
Commitments and Contingencies (Note 8)
Shareholders' equity:
Common stock, $1 par value -- authorized -- 100,100
shares; issued and outstanding -- 10,100............... 10 10 10
Additional paid-in capital................................ 240 240 240
Retained earnings......................................... 437 334 49
------ ------ ------
Total shareholders' equity........................ 687 584 299
------ ------ ------
Total liabilities and shareholders' equity........ $ 4,250 $4,297 $2,018
====== ====== ======
</TABLE>
See accompanying notes to combined financial statements.
F-72
<PAGE> 171
GETHSEMANE AFFILIATES
COMBINED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED SEPTEMBER
30, YEAR ENDED JUNE 30,
--------------- ----------------------------
1997 1996 1997 1996 1995
---- ---- ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Patient services............................. $853 $570 $2,876 $1,864 $1,705
Other revenues............................... -- -- 1 2 5
---- ---- ------ ------ ------
Total revenues....................... 853 570 2,877 1,866 1,710
---- ---- ------ ------ ------
Expenses:
Facility operating expenses:
Salaries, wages and benefits.............. 354 289 1,227 1,181 1,013
Other operating, including related parties
$45, $0, and $45........................ 261 167 856 308 339
General and administrative expense, including
related parties of $65, $119 and $65...... 39 40 198 235 171
Depreciation and amortization expense........ 36 13 120 64 49
---- ---- ------ ------ ------
Total operating expenses............. 690 509 2,401 1,788 1,572
---- ---- ------ ------ ------
Income from operations......................... 163 61 476 78 138
Other expense:
Interest expense............................. (60) (13) (191) (68) (85)
---- ---- ------ ------ ------
Net income..................................... $103 $ 48 $ 285 $ 10 $ 53
==== ==== ====== ====== ======
Pro forma income data (unaudited):
Income before income taxes................... $103 $ 48 $ 285 $ 10 $ 53
Pro forma income tax provision............... (41) (19) (114) (4) (21)
---- ---- ------ ------ ------
Net income after pro forma tax
provision.......................... $ 62 $ 29 $ 171 $ 6 $ 32
==== ==== ====== ====== ======
</TABLE>
See accompanying notes to combined financial statements.
F-73
<PAGE> 172
GETHSEMANE AFFILIATES
COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995
AND THE THREE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
---------------- ADDITIONAL RETAINED
ISSUED PAR PAID-IN EARNINGS
SHARES VALUE CAPITAL (DEFICIT) TOTAL
------ ----- ---------- --------- -----
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1994..................... 10,000 $10 $ 84 $ (14) $ 80
Capital contributed........................ -- -- 156 -- 156
Net income................................. -- -- -- 53 53
------ --- ---- ---- ----
Balance at June 30, 1995..................... 10,000 10 240 39 289
Net income................................. -- -- -- 10 10
------ --- ---- ---- ----
Balance at June 30, 1996..................... 10,000 10 240 49 299
Shares issued.............................. 100 -- -- --
Net income................................. -- -- -- 285 285
------ --- ---- ---- ----
Balance at June 30, 1997..................... 10,100 $10 $240 $ 334 $ 584
Net income (unaudited)..................... 103 103
------ --- ---- ---- ----
Balance at September 30, 1997................ 10,100 $10 $240 $ 437 $ 687
====== === ==== ==== ====
</TABLE>
See accompanying notes to combined financial statements.
F-74
<PAGE> 173
GETHSEMANE AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
SEPTEMBER 30, YEAR ENDED JUNE 30,
--------------- ---------------------------
1997 1996 1996 1995 1997
----- ----- ------- ----- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income................................... $ 100 $ 48 $ 285 $ 10 $ 53
Adjustments to reconcile net income to net
cash provided by operating activities:
Gain on disposal of assets................ -- -- -- -- (1)
Depreciation and amortization............. 39 13 120 64 49
Changes in operating assets and
liabilities:
(Increase) in accounts receivable....... 76 (101) (42) (35) (17)
(Increase) decrease in cost rate
adjustment receivable................ 3 4 3 (3) 35
(Increase) decrease in prepaid
expenses............................. (55) 14 3 (6) 3
Increase in accounts payable............ (144) 87 251 67 1
Increase (decrease) in accrued
expenses............................. 6 (2) 1 26 (3)
Increase (decrease) in deferred
revenue.............................. 4 -- 1 4 14
----- ----- ------- ----- -----
Net cash provided by operating
activities......................... 59 63 622 127 134
----- ----- ------- ----- -----
Cash flows from investing activities:
Organizational costs......................... (11)
Purchase of property and equipment, net...... (14) (4) (2,354) (838) (27)
----- ----- ------- ----- -----
Net cash used for investing
activities......................... (14) (4) (2,365) (838) (27)
----- ----- ------- ----- -----
Cash flows from financing activities:
Proceeds from borrowings on demand notes..... -- -- 84 71 523
Repayments on demand notes................... (2) (21) (102) (16) (460)
Proceeds from long-term borrowings........... 51 -- 1,796 482 (134)
Repayments of long-term borrowings........... (25) (42) (43) (205) --
Proceeds of borrowings from shareholder...... -- -- 386 380 --
Repayments of borrowings from shareholder.... (47) -- (376) -- (36)
----- ----- ------- ----- -----
Net cash provided (used by) financing
activities......................... (23) (63) 1,745 711 (107)
----- ----- ------- ----- -----
Increase in cash and cash equivalents.......... 22 (4) 2 -- --
Cash and cash equivalents at beginning of
period....................................... 3 1 1 1 1
----- ----- ------- ----- -----
Cash and cash equivalents at end of period..... $ 25 $ (3) $ 3 $ 1 $ 1
===== ===== ======= ===== =====
Supplemental Cash Flow Information:
Cash paid during the period for interest..... -- -- $ 179 $ 53 $ 86
===== ===== ======= ===== =====
During 1995, the shareholders paid $271,000 of
the Company's long-term debt. This
transaction reduced the balance of a note
receivable from shareholders by $115,000 and
increased additional paid-in capital by
$156,000.
</TABLE>
See accompanying notes to combined financial statements.
F-75
<PAGE> 174
GETHSEMANE AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Organization and Background
Gethsemane Affiliates (the "Company") consists of two corporations under
common control, Gethsemane Retirement Community, Inc. ("GRCI") -- formerly
operated as Boone Nursing Home, Inc. and Gethsemane Assisted Living, Inc.
("GALI"). The Company operates a 66-bed skilled nursing facility located in
Bloomsburg, Pennsylvania and a 51-bed assisted living facility located in
Millville, Pennsylvania which commenced operations in April, 1997.
(b) Basis of Presentation
The accompanying combined financial statements for the year ended June 30,
1997 include the accounts of GRCI and GALI, from the date operations were
commenced through June 30, 1997. The financial statements for the years ended
June 30, 1996 and 1995 include only the accounts of the GRCI. All significant
intercompany accounts and transactions have been eliminated in the combined
financial statements.
(c) Fair Value of Financial Instruments
Cash and mortgage notes payable are reflected in the accompanying balance
sheets at amounts considered by management to approximate fair value. Management
generally estimates fair value of its long-term fixed rate notes payable using
discounted cash flow analysis based upon its current borrowing rate for debt
with similar maturities.
(d) Restricted Cash -- Resident Funds
GRCI is the trustee for these funds which are held on behalf of the
residents. The Company has fiduciary responsibility for the administration of
the bank accounts and the distribution of funds to the residents.
(e) Property and Equipment
Property and equipment are stated at cost less accumulated depreciation or,
where appropriate, the present value of the related capital lease obligations
less accumulated amortization. Depreciation and amortization are computed using
the straight-line method over the estimated useful lives of the assets ranging
from 5 to 40 years. Expenditures for maintenance and repairs necessary to
maintain property and equipment in efficient operating condition are charged to
operations. Costs of additions and betterments are capitalized.
(f) Impairment of Long-Lived Assets and Long-Lived Assets To Be Disposed of
The Company adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 121, "Accounting for the Impairment of long-lived Assets
and for long-lived Assets To Be Disposed of," on July 1, 1996. This Statement
requires that long-lived assets and certain identifiable intangibles be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to undiscounted future net cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceed the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell.
F-76
<PAGE> 175
GETHSEMANE AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Adoption of this Statement did not have a material impact on the Company's
financial position, results of operations, or liquidity.
(g) Patient Service Revenue/Third Party Payor
The Company records patient service revenue at its full charge rates. For
services provided to patients under agreements with its third-party cost payors
(Medicare and Medicaid), the Company records contractual adjustments which are
the difference between its full charge rates and the allowable costs incurred to
render such services. The Company receives interim payments under the
third-party cost payor agreements based upon its estimated allowable costs.
Estimated allowable costs are subject to audit and retroactive adjustment by the
third-party cost payors. Revenues from the Medicare and Medicaid programs
represented 19% and 50% respectively of total 1997 revenues. Revenues from the
Medicaid program represented 70% and 69% of total 1996 and 1995 revenues,
respectively.
Retroactively calculated third-party contractual adjustments are accrued on
an estimated basis in the period the related services are rendered. Revisions to
estimated contractual adjustments are recorded based upon audits by third-party
payors, as well as other communications with third-party payors such as desk
reviews, regulation changes and policy statements. These revisions are made in
the year such amounts are determined. Patient service revenues were increased by
$63,000 in 1997 for changes in estimates due to settlements with third-party
payors.
Resident services are recognized when services are rendered and consist of
resident fees and other ancillary services provided to residents of the
Company's assisted living communities.
(h) Income Taxes
The Company has elected to be taxed under the provisions of Subchapter S of
the Internal Revenue Code and Laws of the Commonwealth of Pennsylvania. Under
those provisions, the Company does not pay federal or state corporate income
taxes on its taxable income. Instead, the stockholders are liable for individual
federal and state income taxes on their respective shares of the Company's
taxable income. Accordingly, no provision has been made for federal or state
income tax in the accompanying statements of income.
A pro forma provision for income taxes is presented as if the Company were
taxed as a C corporation based on a tax rate of 40%. The pro forma tax
provisions for the years ended June 30, 1997, 1996 and 1995 have been calculated
using financial net income.
(i) Use of Estimates
The preparation of the combined financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions. These assumptions affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these estimates.
(j) Interim Financial Statements (unaudited)
The unaudited balance sheet as of September 30, 1997 and the unaudited
statements of operations, shareholders' equity and cash flows for the three
months ended September 30, 1997 and 1996, in the opinion of management, have
been prepared on the same basis as the audited financial statements and include
all significant adjustments (consisting primarily of normal recurring
adjustments) considered
F-77
<PAGE> 176
GETHSEMANE AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
necessary for a fair presentation of the results of these interim periods.
Operating results for the three-month period ended September 30, 1997 are not
necessarily indicative of the results for the entire year.
2. PROPERTY AND EQUIPMENT
Property and equipment are comprised of the following as of June 30
(dollars in thousands):
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Land............................................................... $ 136 $ 136
Buildings and improvements......................................... 3,791 975
Fixed and moveable equipment....................................... 482 238
Construction-in-progress........................................... -- 707
------ ------
4,409 2,056
Less: accumulated depreciation..................................... (485) (366)
------ ------
$3,924 $1,690
====== ======
</TABLE>
Depreciation expense was $119,000, $53,000 and $48,000 for the years ended
June 30, 1997, 1996 and 1995, respectively.
3. DEMAND NOTES PAYABLE
Demand notes payable, bank consists of the following (dollars in
thousands):
<TABLE>
<CAPTION>
1997 1996
------ ----
<S> <C> <C>
Line of credit, to a maximum of $300,000 bearing interest at a rate
of 1% above prime (10% at June 30, 1997). The note is
collateralized by accounts receivable from residents and
third-party payors, estimated third-party payor settlements, a
second mortgage on substantially all property and equipment and
personal guarantees of the shareholders........................... $ 298 $299
Line of credit, to a maximum of $75,000 bearing interest at rate of
1% above prime 10% at June 30, 1997. The note is collateralized by
accounts receivable from residents and third-party payors,
estimated third-party payor settlements, and personal guarantees
of the shareholders............................................... 15 20
Note payable, bank -- interest at 10.5% with the principal due on
demand. The note is collateralized by a Company vehicle........... -- 4
Note payable, bank -- interest at 9.75% with the principal due on
demand. The note is collateralized by a Company vehicle........... -- 6
Note payable, bank -- interest at a rate of 1% above prime adjusted
annually (10.0% at June 30, 1997) with the principal due on
demand. The note is collateralized by a first lien on 19 acres of
land.............................................................. 63 65
------ ----
$ 376 $394
====== ====
</TABLE>
F-78
<PAGE> 177
GETHSEMANE AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
4. LONG-TERM DEBT
Long-term debt consisted of the following as of June 30 (dollars in
thousands):
<TABLE>
<CAPTION>
1997 1996
------ ----
<S> <C> <C>
Fixed 6% third mortgage note requiring monthly principal and
interest payments of $2,867 through December 2002. The note is
collateralized by a third mortgage on substantially all property
and equipment and the personal guarantees of the shareholders..... $ 147 $169
Adjustable rate first mortgage note (current rate 8.37%) requiring
monthly principal and interest payments of $144 (as currently
calculated based on the 8.37% current rate) through November 1997.
Thereafter, the interest rate is adjustable every three years and
monthly payments will be adjusted to fully amortize the
indebtedness by October 2003. The note is collateralized by a
first mortgage on land and the personal guarantees of the
shareholders...................................................... 9 9
Adjustable rate first mortgage (current rate 8.75%) requiring
monthly principal interest payments of $17,990 (as currently
calculated on the 8.75% current rate) through March 2012. The note
is collateralized by a first lien position on the new nursing
facility; personal guarantees of the shareholders; a security
interest in stock of the company; a first lien on all inventory
and equipment; assignment of life insurance; and assignment of
rents............................................................. 1,786 482
Adjustable rate loan (current rate 9.0%) requiring monthly principal
and interest payments ($3,805 (as currently calculated on the 9.0%
current rate) through January 2000. Thereafter, the interest rate
is adjustable every three years and monthly payments will be
adjusted to fully amortize the indebtedness by January 2007. The
note is collateralized by a lien on the nursing home property; a
lien on the assisted living property; and the personal guarantees
of the shareholders............................................... 292 --
Fixed rate loan at 9.25% requiring monthly principal and interest
payments of $2,368 through November 2006.......................... 175 --
The note is collateralized by a lien on the assisted living
facility property and personal guarantees of the shareholders.
Capital lease -- monthly payments of $75 for 60 months with a lease
end buy out of $1. This lease is collateralized by a dishwasher... 4 --
------ ----
2,413 660
Less current maturities............................................. 120 23
------ ----
$2,293 $637
====== ====
</TABLE>
At June 30, 1997, the aggregate maturities of long-term debt for the next
five fiscal years ending June 30 are $120,000 in 1998, $117,000 in 1999,
$127,000 in 2000, $137,000 in 2001, $148,000 in 2002 and $1,601,000 thereafter.
5. NOTES PAYABLE -- SHAREHOLDER
The Company has received advances from shareholders for payments on the
Company's mortgage. These advances bear interest at 8% per annum and are due on
demand. The Company has received $390,000 and $380,000 from shareholders as of
June 30, 1997 and 1996, respectively.
6. PROFIT SHARING PLAN
The Company has a profit-sharing retirement plan covering substantially all
employees. Contributions are made to the plan at the matching contribution equal
to 50% of the employees' contributions
F-79
<PAGE> 178
GETHSEMANE AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
with a maximum matching contribution of $350 per employee. Additional amounts
can be contributed at the discretion of the Company's Board of Directors.
Company policy is to fund currently the costs accrued. The profit-sharing
contribution amounted to $7,000, $7,000 and $4,000 for the years ended June 30,
1997, 1996 and 1995, respectively.
7. RELATED PARTY TRANSACTIONS
The Company had the following related party transactions:
Salary paid to shareholder as administrator
Salary paid to shareholder in operations
A summary of those transactions follows for the years ended June 30
(dollars in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Salaries, wages, and benefits.......................... $65 $119 $65
Other operating costs.................................. $45 $ 0 $45
</TABLE>
In addition, a shareholder sold a parcel of land purchased in 1995 for
$90,000 to the Company in 1996 for $90,000.
8. COMMITMENTS AND CONTINGENCIES
(j) Medical Malpractice Claims Coverage
The Company's professional liability insurance provides for coverage with a
limit of $1 million per occurrence. The Company believes it has adequate
coverage for all asserted claims and it has no knowledge of unasserted claims
which would exceed its insurance coverage. The Company is not aware of
additional premiums, if any, it may be charged or credits it may receive under
the terms of the policy and it has, therefore, expensed only its billed premium
costs ratably over the term of the policy.
(k) Litigation
The Company is a party to various claims, legal actions and complaints
arising in the ordinary course of business. In the opinion of management, all
such matters are adequately covered by insurance or, if not so covered, are
without merit or are of such a kind, or involve such amounts, that their
unfavorable disposition would not have a material effect on the financial
position, results of operations or the liquidity of the Company.
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate fair value of
each class of financial instruments for which is practicable to estimate that
value.
CASH AND EQUIVALENTS: The carrying amount approximates fair value because
of the short maturity of those instruments.
DEMAND NOTES PAYABLE -- BANK: The carrying amount approximate fair value
since the interest rate fluctuates with the lending bank's prime rate.
LONG-TERM DEBT: The fair value of long-term debt is estimated based on
interest rates for the same or similar debt offered to the Company having the
same or similar remaining maturity and collateral requirements.
F-80
<PAGE> 179
GETHSEMANE AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTES PAYABLE -- SHAREHOLDER: The fair value of notes
payable -- shareholder is estimated based on interest rates for the same or
similar debt offered to the Company by a lending institution having the same or
similar remaining maturities.
Estimated fair values of the Company's financial instruments are as follows
at June 30, 1997 (dollars in thousands):
<TABLE>
<CAPTION>
CARRYING FAIR
AMOUNT VALUE
-------- ------
<S> <C> <C>
Assets:
Cash............................................................ $ 3 $ 3
Restricted cash, resident funds................................. 19 19
Liabilities:
Demand notes payable, bank...................................... 376 376
Long-term debt.................................................. 2,413 2,395
Notes payable -- shareholder.................................... 390 390
</TABLE>
10. SUBSEQUENT EVENT
Pending Sale of the Company
On August 8, 1997, the Company signed a letter of intent for the sale of
the assets of GRCI and GALI to Balanced Care Corporation for $5.5 million plus
additional consideration of up to $1.2 million which is contingent upon the
Company achieving certain future targeted operating results. The Company expects
the sale to be completed in the fall of 1997.
11. SHAREHOLDERS' EQUITY
Outstanding Common Stock
Gethsemane Affiliates outstanding common stock at June 30, 1997 is
summarized below:
<TABLE>
<CAPTION>
PAR VALUE NUMBER OF SHARES NUMBER OF SHARES
PER SHARE AUTHORIZED ISSUED AND OUTSTANDING
--------- ---------------- ----------------------
<S> <C> <C> <C>
Gethsemane Retirement Community............. $1.00 100,000 10,000
Gethsemane Assisted Living Community........ $1.00 100 100
</TABLE>
F-81
<PAGE> 180
REPORT OF INDEPENDENT ACCOUNTANTS
To the Owners of
Feltrop's Personal Care Home:
We have audited the accompanying balance sheets of Feltrop's Personal Care
Home (the Company) as of June 30, 1997 and 1996, and the related statements of
operations, owners' equity and cash flows for each of the three years in the
period ended June 30, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of June 30,
1997 and 1996, and results of its operations and cash flows for each of the
three years in the period ended June 30, 1997, in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND, L.L.P.
Pittsburgh, Pennsylvania
September 29, 1997
F-82
<PAGE> 181
FELTROP'S PERSONAL CARE HOME
BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
JUNE 30,
SEPTEMBER 30, -----------------
1997 1997 1996
------------- ------ ------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents................................... $ 6 $ 24 $ 25
Accounts receivable......................................... 28 7 9
Inventories................................................. 14 14 15
Prepaid expenses............................................ 3 3 7
----- ----- ------
Total current assets................................ 51 48 56
Property and equipment, net................................... 1,232 1,245 1,278
----- ----- ------
Total assets................................................ $ 1,283 $1,293 $1,334
===== ===== ======
LIABILITIES AND OWNERS' EQUITY
Current liabilities:
Accounts payable............................................ $ 40 $ 47 $ 53
Accrued liabilities......................................... 39 42 40
Deferred revenue............................................ 44 72 81
Current portion of long-term debt........................... 117 117 106
----- ----- ------
Total current liabilities........................... 240 278 280
Long-term debt................................................ 944 976 1,050
----- ----- ------
Total liabilities................................... 1,184 1,254 1,330
----- ----- ------
Contingencies (Note 4)
Owners' equity................................................ 99 39 4
----- ----- ------
Total liabilities and owners' equity................ $ 1,283 $1,293 $1,334
===== ===== ======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-83
<PAGE> 182
FELTROP'S PERSONAL CARE HOME
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
SEPTEMBER 30, YEAR ENDED JUNE 30,
------------- ----------------------------
1997 1996 1997 1996 1995
---- ---- ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Resident services................................ $472 $490 $1,980 $1,812 $1,788
---- ---- ------ ------ ------
Operating expenses:
Facility operating expenses:
Salaries, wages and benefits.................. 237 253 1,041 1,049 920
Other operating expenses...................... 124 89 372 329 370
General and administrative....................... 56 25 119 115 124
Depreciation..................................... 14 18 73 68 71
---- ---- ------ ------ ------
Total operating expenses................. 431 385 1,605 1,561 1,485
---- ---- ------ ------ ------
Operating income................................. 41 105 375 251 303
Other income (expense):
Interest income.................................. -- -- 1 1 1
Interest expense................................. (29) (25) (119) (120) (83)
---- ---- ------ ------ ------
Net income............................... $ 12 $ 80 $ 257 $ 132 $ 221
==== ==== ====== ====== ======
Pro forma income tax data (unaudited):
Income before income taxes....................... $ 12 $ 80 $ 257 $ 132 $ 221
Pro forma income tax provision................... 5 32 103 53 88
---- ---- ------ ------ ------
Net income after pro forma tax
provision.............................. $ 7 $ 48 $ 154 $ 79 $ 133
==== ==== ====== ====== ======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-84
<PAGE> 183
FELTROP'S PERSONAL CARE HOME
STATEMENTS OF OWNERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995
AND THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 1997
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
-----
<S> <C>
Balance at June 30, 1994............................................................. $ 45
Capital contributions.............................................................. 136
Distributions paid to owners....................................................... (359)
Net income......................................................................... 221
-----
Balance at June 30, 1995............................................................. 43
Capital contributions.............................................................. 158
Distributions paid to owners....................................................... (329)
Net income......................................................................... 132
-----
Balance at June 30, 1996............................................................. 4
Capital contributions.............................................................. 35
Distributions paid to owners....................................................... (257)
Net income......................................................................... 257
-----
Balance at June 30, 1997............................................................. 39
Capital contributions (unaudited).................................................. 160
Distributions paid to owners (unaudited)........................................... (112)
Net income (unaudited)............................................................. 12
-----
Balance at September 30, 1997 (unaudited)............................................ $ 99
=====
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-85
<PAGE> 184
FELTROP'S PERSONAL CARE HOME
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
SEPTEMBER 30, YEAR ENDED JUNE 30,
--------------- -------------------------
1997 1996 1997 1996 1995
----- ----- ----- ----- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income..................................... $ 12 $ 80 $ 257 $ 132 $ 221
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation................................ 14 18 73 68 71
Increase (decrease) from changes in:
Accounts receivable......................... (21) (24) 2 1 (5)
Inventory................................... -- -- 1 (1) (2)
Prepaid expenses............................ -- 1 4 8 (6)
Accounts payable............................ (7) (27) 1(6) (21) 14
Accrued liabilities......................... (3) 23 2 (17) 2
Deferred revenues........................... (28) 4 (9) (9) 27
----- ----- ----- ----- -----
Cash provided by operating
activities........................... (33) 75 324 161 322
----- ----- ----- ----- -----
Cash flows from investing activities:
Proceeds from sale of property and equipment... -- -- 19 -- 37
Purchase of property and equipment............. (1) (26) (59) (103) (18)
----- ----- ----- ----- -----
Cash (used in) provided by investing
activities........................... (1) (26) (40) (103) 19
----- ----- ----- ----- -----
Cash flows from financing activities:
Proceeds from issuance of long-term debt....... -- 21 16 152 10
Repayment of long-term debt.................... (32) (20) (79) (78) (90)
Capital contributions from owners.............. 160 13 35 158 136
Distributions paid to owners................... (112) (44) (257) (329) (360)
----- ----- ----- ----- -----
Cash used in financing activities...... 16 (30) (285) (97) (304)
----- ----- ----- ----- -----
Net (decrease) increase in cash and cash
equivalents.................................... (18) 19 (1) (39) 37
Cash and cash equivalents at beginning of year... 24 25 25 64 27
----- ----- ----- ----- -----
Cash and cash equivalents at end of year......... $ 6 $ 44 $ 24 $ 25 $ 64
===== ===== ===== ===== =====
Supplemental disclosure of cash flow information:
Noncash investing activities:
Capital expenditures included in accounts
payable................................... $ -- $ -- $ -- $ -- $ 27
===== ===== ===== ===== =====
Other:
Cash paid for interest...................... $ 27 $ 23 $ 117 $ 107 $ 86
===== ===== ===== ===== =====
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-86
<PAGE> 185
FELTROP'S PERSONAL CARE HOME
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Organization and Background
Feltrop's Personal Care Home (the Company) is a 92-bed assisted living
facility located in Darlington, Pennsylvania.
(b) Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from these estimates.
(c) Cash and Cash Equivalents
All unrestricted, highly liquid investments purchased with an original
maturity of three months or less are considered to be cash equivalents. The
Company maintains its cash and cash equivalents at financial institutions which
management believes are of high credit quality.
(d) Inventories
Inventories consist of fuel, food and supplies and are stated at the lower
of cost (first-in, first-out) or market value.
(e) Property and Equipment
Property and equipment are recorded at cost and depreciated using the
straight-line method over their estimated useful lives. Expenditures for
maintenance and repairs are expensed as incurred. The cost and related
accumulated depreciation applicable to property no longer in service are
eliminated from the accounts and any gain or loss thereon is included in
operations.
(f) Deferred Revenue
Deferred revenue represents amounts received from patients before services
have been performed. These amounts represent a liability of the Company until
the service has been provided.
(g) Revenue Recognition
Resident fees are recognized when services are rendered and consist of
resident fees and other ancillary services provided to residents of the
Company's personal care home.
(h) Income Tax Status
The Company is a pass-through entity and does not pay federal or state
corporate income taxes on its taxable income. Instead the owners are liable for
individual federal and state income taxes on the taxable income. Accordingly, no
provision has been made for federal or state income tax in the accompanying
statements of operations.
A pro forma provision for income taxes is presented as if the Company had
been subject to federal and state income taxes as a C-Corporation based on an
effective tax rate of 40%. The pro forma tax provision for the years ended June
30, 1997, 1996 and 1995 have been calculated using financial net income.
F-87
<PAGE> 186
FELTROP'S PERSONAL CARE HOME
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(i) Interim Financial Statements (unaudited)
The unaudited balance sheet as of September 30, 1997 and the unaudited
statements of operations, cash flows and changes in owners' equity for the three
months ended September 30, 1997 and 1996, in the opinion of management, have
been prepared on the same basis as the audited financial statements and include
all significant adjustments (consisting primarily of normal recurring
adjustments) considered necessary for a fair presentation of the results of
these interim periods. Operating results for the three month period ended
September 30, 1997, is not necessarily indicative of the results for the entire
year.
2. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at June 30 (dollars in
thousands):
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Land............................................................... $ 126 $ 126
Buildings and improvements (20 to 40 years)........................ 1,283 1,267
Fixed and movable equipment (5 to 10 years)........................ 437 428
------ ------
1,846 1,821
Less accumulated depreciation...................................... (601) (543)
------ ------
$1,245 $1,278
====== ======
</TABLE>
Depreciation expense was $73,000, $68,000 and $71,000 for the years ended
June 30, 1997, 1996 and 1995, respectively.
3. LONG-TERM DEBT
Long-term debt consisted of the following at June 30 (dollars in
thousands):
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Line of credit(a).................................................. $ 23 $ 21
Mortgage payable(b)................................................ 923 965
Construction loan(c)............................................... 121 142
Installment notes(d)............................................... 26 28
------ ------
1,093 1,156
Less current portion............................................... 117 106
------ ------
$ 976 $1,050
====== ======
</TABLE>
- ---------------
(a) In November 1994, the Company entered into an agreement for an
uncollateralized line of credit for $25,000. The line of credit requires
monthly interest payments with the outstanding borrowings due on demand. The
interest rate in effect on the line of credit was 8.5% and 8.25% at June 30,
1997 and 1996, respectively.
(b) On August 20, 1993, the Company entered into an agreement to borrow
$1,085,000, a portion of which was used to refinance $726,000 of previously
held debt. The mortgage note provides for monthly principal and interest
payments through July 2008. The interest rate is the bank's prime rate plus
2%, which was 8% on the date of the note. The interest rate is fixed and
adjusted every three years thereafter on the anniversary date to the then
existing bank's prime rate plus 2%, until
F-88
<PAGE> 187
FELTROP'S PERSONAL CARE HOME
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
the next adjustment date. In no event will the interest rate change by more
than 2% at each adjustment date. The interest rate in effect at June 30,
1997, and 1996 was 10.25%. The note is collateralized by substantially all
real and personal property of the Company.
(c) On December 20, 1995, the Company entered into an agreement to borrow
$150,000 for construction purposes. The loan provides for monthly
installments of $3,192 including interest at the bank's prime rate plus 1%.
The interest rate in effect was 9.5% and 9.25% at June 30, 1997 and 1996,
respectively. The note is collateralized by real property and is guaranteed
by the owners of the Company.
(d) The installment notes are payable in monthly installments through June 2001.
Interest on these notes ranges from 6.50% to 8.25%. The notes are
collateralized by certain equipment.
Aggregate scheduled maturities of long-term debt for each of the five years
ending June 30 and thereafter are as follows (dollars in thousands):
<TABLE>
<S> <C>
1998................................................ $ 117
1999................................................ 85
2000................................................ 89
2001................................................ 152
2002................................................ 74
Thereafter.......................................... 576
------
$1,093
======
</TABLE>
4. CONTINGENCIES
In the ordinary course of business, various lawsuits, claims and
proceedings have been or may be instituted or asserted against the Company.
Based on currently available facts, management is not aware of any matters that
are pending or asserted that would have a material adverse effect on the
financial position, results of operations or liquidity of the Company.
5. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
determining the estimated fair value for financial instruments for which it is
practicable to estimate that value.
Cash and Cash Equivalents -- The carrying amount reported in the balance
sheets for cash and cash equivalents approximates its fair value.
Long-term Debt -- The fair value of long-term debt is estimated using
discounted cash flow analysis, based on the Company's current available
incremental borrowing rate.
The carrying amounts and the estimated fair values of the financial
instruments as of December 31 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995
----------------- -----------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------ -------- ------
<S> <C> <C> <C> <C>
Cash and cash equivalents......................... $ 24 $ 24 $ 25 $ 25
Long-term debt.................................... 1,093 1,025 1,156 1,108
</TABLE>
F-89
<PAGE> 188
FELTROP'S PERSONAL CARE HOME
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. RELATED PARTIES
The Company's owners received distributions earnings of approximately
$257,600, $328,600 and $360,000 in 1997, 1996 and 1995, respectively. One owner
of the Company was paid a salary for management services of approximately
$200,400, $201,900 and $114,300, and a related party of the owners was paid a
salary for management services of approximately $25,500, $25,400 and $32,500 in
1997, 1996 and 1995, respectively.
The Company paid ZAF Construction, a related entity of the owners,
approximately $71,900, $89,700 and $15,000 for construction and maintenance in
1997, 1996 and 1995, respectively.
7. SUBSEQUENT EVENTS
On September 3, 1997, the Company entered into an Asset Purchase Agreement
(Agreement), pursuant to which Balanced Care Corporation, a Delaware
Corporation, will acquire only the business, licenses and other intangibles and
the property and equipment of the Company as outlined in the Agreement, for
approximately $5.7 million, subject to certain terms and conditions.
F-90
<PAGE> 189
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
Triangle Retirement Services, Inc.
We have audited the accompanying balance sheets of Triangle Retirement
Services, Inc. d/b/a Northridge Retirement Center (an S Corporation) as of
December 31, 1996 and 1995, and the related statements of income, changes in
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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, the financial statements referred to above present fairly,
in all material respects, the financial position of Northridge Retirement Center
as of December 31, 1996 and 1995, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
Our audits were conducted for the purpose of forming an opinion on the
basic financial statements taken as a whole. The information for September 30,
1997 and 1996, is presented for purposes of additional analysis and is not a
required part of the basic financial statements. Such information has not been
subjected to the auditing procedures applied in the audit of the basic financial
statements and accordingly, we express no opinion on it.
HODGE, STEWARD & COMPANY, P.A.
Raleigh, North Carolina
October 20, 1997
F-91
<PAGE> 190
TRIANGLE RETIREMENT SERVICES, INC.
d/b/a/ NORTHRIDGE RETIREMENT CENTER
BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -----------------
1997 1996 1995
------------- ------ ------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 210 $ 205 $ 150
Marketable securities, available for sale................. 302 63 42
Accounts receivable -- other.............................. 1 -- --
Inventory................................................. 5 6 3
Note receivable -- stockholder............................ 16 15 14
------ ------ ------
Total current assets.............................. 534 289 209
Properties and equipment, net............................... 3,044 3,158 1,243
Deposits.................................................... 4 4 1
Note receivable -- stockholder.............................. 132 144 158
Loan fees................................................... 20 23 26
Other investments........................................... 30 4 --
------ ------ ------
Total assets...................................... $ 3,764 $3,622 $1,637
====== ====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of installment notes payable........... $ 193 $ 178 $ 104
Short-term construction loan payable...................... -- -- 183
Accounts payable -- trade................................. 28 39 33
Accrued salaries and wages................................ 47 48 32
Other accrued expenses.................................... 40 32 13
------ ------ ------
Total current liabilities......................... 308 297 365
Long-term portion of installment notes payable.............. 2,819 2,999 1,041
------ ------ ------
Total liabilities................................. 3,127 3,296 1,406
------ ------ ------
Stockholders' equity:
Common stock, authorized 100,000 shares with $1 stated
value; 3,000 shares issued and outstanding............. 3 3 3
Paid-in capital........................................... 50 50 50
Unrealized gain on securities available for sale.......... 43 6 2
Retained earnings......................................... 541 267 176
------ ------ ------
Total stockholders' equity........................ 637 326 231
------ ------ ------
Total liabilities and stockholder's equity........ $ 3,764 $3,622 $1,637
====== ====== ======
</TABLE>
See accompanying notes to financial statements.
F-92
<PAGE> 191
TRIANGLE RETIREMENT SERVICES, INC.
d/b/a/ NORTHRIDGE RETIREMENT CENTER
STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
----------------- -----------------
1997 1996 1996 1995
------ ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C>
Resident services revenue............................... $2,072 $1,334 $1,967 $1,536
------ ---- ------ ------
Expenses:
Facility operating expenses:
Salaries, wages and benefits....................... 955 664 983 766
Other operating expenses........................... 365 284 396 314
Depreciation and amortization......................... 110 68 97 66
------ ---- ------ ------
Total operating expenses...................... 1,430 1,015 1,476 1,146
------ ---- ------ ------
Income from operations........................ 642 320 491 390
Other income (expense):
Interest income....................................... 12 13 17 16
Interest expense...................................... (206) (95) (172) (94)
Other income.......................................... 11 11 22 17
------ ---- ------ ------
Net income.............................................. $ 459 $ 247 $ 358 $ 329
====== ==== ====== ======
PRO FORMA INCOME TAX DATA (UNAUDITED):
Net earnings before income taxes...................... $ 459 $ 247 $ 358 $ 329
Pro forma income tax provision........................ 169 84 127 127
------ ---- ------ ------
Net income after pro forma income tax provision....... $ 290 $ 163 $ 231 $ 202
====== ==== ====== ======
</TABLE>
See accompanying notes to financial statements.
F-93
<PAGE> 192
TRIANGLE RETIREMENT SERVICES, INC.
d/b/a NORTHRIDGE RETIREMENT CENTER
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
UNREALIZED GAIN ON
COMMON PAID-IN SECURITIES AVAILABLE RETAINED
STOCK CAPITAL FOR SALE EARNINGS
------ ------- -------------------- --------
<S> <C> <C> <C> <C>
Balance at December 31, 1994................. $3 $50 $ -- $ 55
Net income for 1995.......................... -- -- -- 329
Provision for unrealized gains on securities
available for sale......................... -- -- 2 --
Distributions to stockholders................ -- -- -- (208)
--- --- --- -----
Balance at December 31, 1995................. 3 50 2 176
Net income for 1996.......................... -- -- -- 358
Provision for unrealized gains on securities
available for sale......................... -- -- 4 --
Distributions to stockholders................ -- -- -- (267)
--- --- --- -----
Balance at December 31, 1996................. 3 50 6 267
Net income for 1997 (unaudited).............. -- -- -- 459
Provision for unrealized gains on securities
available for sale (unaudited)............. -- -- 37 --
Distributions to stockholders (unaudited).... -- -- -- (185)
--- --- --- -----
Balance at September 30, 1997................ $3 $50 $ 43 $ 541
=== === === =====
</TABLE>
See accompanying notes to financial statements.
F-94
<PAGE> 193
TRIANGLE RETIREMENT SERVICES, INC.
d/b/a NORTHRIDGE RETIREMENT CENTER
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
----------------- -----------------
1997 1996 1996 1995
----- ------- ------- -----
(UNAUDITED)
<S> <C> <C> <C> <C>
Net cash flows from operating activities:
Net earnings......................................... $ 459 $ 247 $ 358 $ 329
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation...................................... 107 67 93 64
Amortization...................................... 3 1 3 1
Interest income not received in cash.............. (7) (8) (10) (11)
Gain on sale of properties and equipment.......... (5) (5) (5) --
Changes in operating assets and liabilities:
(Increase) decrease in accounts
receivable -- other.......................... (1) (1) -- --
(Increase) decrease in inventory................ 1 -- (3) (1)
(Increase) decrease in prepaid expenses......... -- -- 1 --
Increase (decrease) in accounts payable and
accrued expenses............................. (4) 27 39 6
----- ------ ------ -----
Net cash provided by operating activities.... 553 329 476 388
----- ------ ------ -----
Cash flows from investing activities:
Purchases of properties and equipment................ (21) (1,920) (2,022) (204)
Proceeds from sale of properties and equipment....... 34 51 50 --
Investment in marketable securities, available for
sale.............................................. (204) (7) (17) (36)
Increase in deposits and loan fees................... -- (3) (3) (15)
Increase in other investments........................ (24) -- (4) --
----- ------ ------ -----
Net cash used in investing activities........ (215) (1,879) (1,996) (255)
----- ------ ------ -----
Cash flows from financing activities:
Increase in construction loan payable................ -- 1,963 -- 183
Increase in installment notes payable................ -- -- 1,967 --
Repayments on installment notes payable.............. (166) (101) (149) (98)
Distributions to stockholders........................ (167) (219) (243) (184)
----- ------ ------ -----
Net cash provided by (used in) financing
activities................................. (333) 1,643 1,575 (99)
----- ------ ------ -----
Increase (decrease) in cash and cash equivalents....... 5 93 55 34
Cash and cash equivalents, beginning of period......... 205 150 150 116
----- ------ ------ -----
Cash and cash equivalents, end of period............... $ 210 $ 243 $ 205 $ 150
===== ====== ====== =====
</TABLE>
See accompanying notes to financial statements.
F-95
<PAGE> 194
TRIANGLE RETIREMENT SERVICES, INC.
d/b/a NORTHRIDGE RETIREMENT CENTER
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
--------------- ---------------
1997 1996 1996 1995
---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C>
Supplemental Disclosures of Cash Flow Information:
Cash paid during period for interest..................... $205 $95 $183 $95
==== === ==== ===
Non-cash Investing and Financing Activities:
Property and equipment acquired through installment notes
payable............................................... $ -- $32 $ 32 $28
==== === ==== ===
Repayment of note receivable -- stockholder, funded by
distribution to stockholder........................... $ 11 $10 $ 14 $13
==== === ==== ===
Net change in unrealized holding gains on marketable
securities -- available for sale...................... $ 37 $-- $ 4 $ 2
==== === ==== ===
</TABLE>
See accompanying notes to financial statements.
F-96
<PAGE> 195
TRIANGLE RETIREMENT SERVICES, INC.
d/b/a NORTHRIDGE RETIREMENT CENTER
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting policies of the Corporation described below have been followed
consistently during the years.
(a) Nature of Business
Triangle Retirement Services, Inc. d/b/a Northridge Retirement Center is a
domiciliary care facility. The Company is a North Carolina corporation, which
was established in 1984.
(b) Interim Financial Information (unaudited)
The financial statements as of and for the nine month periods ended
September 30, 1997 and 1996, are unaudited, but, in the opinion of management,
have been prepared on the same basis as the audited financial statements and
reflect all adjustments, consisting of normal recurring accruals, necessary for
a fair presentation of the information set forth therein. The results of
operations for the nine months ended September 30, 1997, are not necessarily
indicative of the operating results to be expected for the full year or any
other period.
(c) Cash and Cash Equivalents
The Company considers all checking accounts, sweep accounts and money
market accounts to be cash and cash equivalents.
The Company's checking and sweep accounts are located with various banking
institutions. The amount on hand at any one time in any of these institutions
may exceed the $100,000 federally insured limit.
(d) Inventory
Inventory, which consists of a food reserve, is stated at cost, with cost
determined using the average cost method.
(e) Properties and Equipment
Properties and equipment are stated at cost. Expenditures for maintenance,
repairs, and other renewals of items are expensed currently. When items are
disposed of or replaced, the cost and accumulated depreciation amounts are
removed from the accounts, and any gain or loss is included in other income.
(f) Depreciation
Depreciation is computed using the straight line method over the following
useful lives:
<TABLE>
<S> <C>
Vehicles....................................................... 5 years
Office furniture and equipment................................. 3 - 10 years
Buildings...................................................... 30 years
</TABLE>
Depreciation expense amounted to $93,000 and $64,000 for the years ended
December 31, 1996 and 1995, respectively.
F-97
<PAGE> 196
TRIANGLE RETIREMENT SERVICES, INC.
d/b/a NORTHRIDGE RETIREMENT CENTER
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(g) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(h) Advertising
The Company expenses advertising costs as incurred. Advertising expense of
$30,000 and $15,000 has been included in the statement of income for the years
ended December 31, 1996 and 1995, respectively.
2. MARKETABLE SECURITIES -- AVAILABLE FOR SALE
The Company has elected to classify its investments in equity securities as
available-for-sale securities and report them at fair value, with unrealized
gain or loss excluded from earnings and reported as a separate component of
equity. The investments classified as available-for-sale securities are as
follows (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Mutual funds at cost................................................... $34 $26
Other securities....................................................... 23 14
Net change in unrealized gains......................................... 6 2
--- ---
Marketable securities at fair value.................................... $63 $42
=== ===
</TABLE>
The change in the unrealized holding gains on marketable securities
available for sale during the years ended December 31, 1996 and 1995, are
reported as a separate component of stockholders' equity is as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Beginning balance...................................................... $ 2 $--
Unrealized gains....................................................... 4 2
-- --
Ending balance......................................................... $ 6 $ 2
== ==
</TABLE>
3. NOTE RECEIVABLE -- STOCKHOLDER
Note receivable from stockholder of $158,000 (1996) and $172,000 (1995) is
an unsecured note dated February 24, 1994, payable in monthly installments of
$2,000 including interest at 6.17%, through October 2005.
During the year ended December 31, 1996, the stockholder repaid the Company
principal of $14,000 and also paid the Company interest of $10,000. During the
year ended December 31, 1995, the stockholder repaid the Company principal of
$13,000 and interest of $11,000.
F-98
<PAGE> 197
TRIANGLE RETIREMENT SERVICES, INC.
d/b/a NORTHRIDGE RETIREMENT CENTER
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. PROPERTY AND EQUIPMENT LEASE
Property and equipment consisted of the following as of December 31
(dollars in thousands):
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Land............................................................... $ 181 $ 181
Buildings.......................................................... 3,222 1,356
Furniture and equipment............................................ 327 199
Vehicles........................................................... 44 40
------- -------
3,774 1,776
Less accumulated depreciation...................................... (616) (533)
------- -------
$3,158 $1,243
======= =======
</TABLE>
5. INSTALLMENT NOTES PAYABLE
The Company's installment notes payable as of December 31, 1996 and 1995,
consists of the following (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Note payable to a bank in monthly installments of $524 including
interest at 9.10% through October 1998, collateralized by a
vehicle.......................................................... $ 31 $ --
Note payable to a bank in monthly installments of $522 including
interest at 9.25% through March 1998, collateralized by a
vehicle.......................................................... -- 25
Note payable to a bank in monthly installments of $15,572 plus
interest at 7.75% until February 2004, collateralized by
properties and equipment and personally guaranteed by the
stockholders of the Company...................................... 1,017 1,120
Note payable to a bank in average monthly principal payments of
$6,667 plus interest at the 30 day London Interbank offering rate
plus 2.00% through August 2001, collateralized by properties and
equipment and personally guaranteed by the stockholders of the
Company (See note 7 for information about an interest rate swap
agreement related to this note).................................. 2,129 --
------- -------
3,177 1,145
Less current portion............................................. 178 104
------- -------
Long-term portion................................................ $2,999 $1,041
======= =======
</TABLE>
F-99
<PAGE> 198
TRIANGLE RETIREMENT SERVICES, INC.
d/b/a NORTHRIDGE RETIREMENT CENTER
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Scheduled principal repayments of installment notes payable assuming no
changes in their terms are as follows (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, AMOUNT
-------------------------------------------------------------------- ------
<S> <C>
1997................................................................ $ 178
1998................................................................ 218
1999................................................................ 207
2000................................................................ 226
2001................................................................ 1,954
Thereafter.......................................................... 394
------
$3,177
======
</TABLE>
6. CONSTRUCTION LOAN PAYABLE
In October 1995, the Company entered into a short term construction loan
agreement with a bank to finance an expansion of the existing facility. Under
the terms of this agreement, the Company borrowed funds as needed to pay
contractor's progress billings.
The total amount available to the Company under this construction loan
agreement was $2,150,000. Interest is payable monthly at the bank's prime rate.
As of December 31, 1995, the total amount borrowed under this construction loan
agreement was $183,000 and the total interest paid amounted to $1,000.
In 1996, the Company completed the construction project and this loan was
converted by a bank to a term loan (see note 5).
7. INTEREST RATE SWAP
In 1996, the Company began utilizing an interest rate swap agreement to
effectively convert a portion of its variable interest rate exposure to a fixed
rate basis. Under the agreement, the Company receives a fixed rate of 9.12% on
its $2,129,000 note payable to a bank.
This agreement which expires on August 15, 2001, effectively increased the
Company's interest expense on its long-term debt for the year ended December 31,
1996, by $17,000. The Company believes that future changes in interest rates
will not have a material impact on the Company's financial position or results
of operations. All gains or losses on interest rate swaps are recognized when
realized.
8. INCOME TAXES
The stockholders of the Company have elected for income tax purposes to be
taxed as an S Corporation under the of the Internal Revenue Code and laws of the
State of North Carolina. Accordingly, taxable income is passed through directly
to the shareholders rather than being taxed at the corporate level. Therefore,
no provision for federal or state income taxes has been recorded.
A pro forma provision for income taxes is presented as if the Company were
taxed as a C Corporation. The pro forma tax provisions for the years ended
December 31, 1996 and 1995, have been calculated using recorded taxable income.
F-100
<PAGE> 199
TRIANGLE RETIREMENT SERVICES, INC.
d/b/a NORTHRIDGE RETIREMENT CENTER
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
9. EQUIPMENT OPERATING LEASES
The Company leases properties and equipment under operating lease
agreements. Future minimum rental payments required under operating leases that
have an initial or remaining noncancellable lease term in excess of one year, as
of December 31, 1996, are as follows (dollars in thousands):
<TABLE>
<CAPTION>
PERIOD ENDING
DECEMBER 31
-----------------------------------------------------------------------
<S> <C>
1997................................................................... $ 10
1998................................................................... 9
1999................................................................... 3
---
$ 22
===
</TABLE>
Lease expenses for property and equipment operating leases of $8,000 and
$7,000 have been included in total operating expenses for the period ended
December 31, 1996 and 1995, respectively.
10. CAPITALIZED INTEREST
The Company has capitalized interest paid in connection with the
construction of a new facility as a part of the cost of the facility. All
interest paid after the facility was completed and placed in service has been
expensed to operations.
<TABLE>
<CAPTION>
1996 1995
---- ----
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Interest costs capitalized................................ $ 17 $ 1
Interest expense charged to operations.................... 172 94
---- ---
Total interest expense incurred........................... $189 $95
==== ===
</TABLE>
11. SUBSEQUENT EVENT
The Company has signed a letter of intent to sell its assets to an
unrelated third party.
F-101
<PAGE> 200
BALANCED CARE CORPORATION LOGO
SENIOR CARE FOR LIFE
<PAGE> 201
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth estimated expenses expected to be incurred
in connection with the issuance and distribution of the securities being
registered.
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee...................... $ 26,824
NASD Fee................................................................. 9,306
American Stock Exchange Listing Fee...................................... 50,000
Printing and Engraving Expenses.......................................... 295,000
Accounting Fees and Expenses............................................. 710,000
Legal Fees and Expenses.................................................. 390,000
Blue Sky Qualification Fees and Expenses................................. 5,000
Transfer Agent Fees and Expenses......................................... 10,000
Miscellaneous............................................................ 3,870
-------
Total.......................................................... $1,500,000
=======
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 102(b)(7) of the Delaware General Corporation Law (the "DGCL")
permits a corporation, in its certificate of incorporation, to limit or
eliminate, subject to certain statutory limitations, the liability of directors
to the corporation or its stockholders for monetary damages for breaches of
fiduciary duty, except for liability (a) for any breach of the director's duty
of loyalty to the corporation or its stockholders, (b) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (c) under Section 174 of the DGCL, or (d) for any transaction from which
the director derived an improper personal benefit. Article Ninth of the
Company's Certificate of Incorporation provides that the personal liability of
directors of the Company is eliminated to the fullest extent permitted by
Section 102(b)(7) of the DGCL.
Under Section 145 of the DGCL, a corporation has the power to indemnify
directors and officers under certain prescribed circumstances and subject to
certain limitations against certain costs and expenses, including attorneys'
fees actually and reasonably incurred in connection with any action, suit or
proceeding, whether civil, criminal, administrative or investigative, to which
any of them is a party by reason of his being a director or officer of the
corporation if it is determined that he acted in accordance with the applicable
standard of conduct set forth in such statutory provision. Article V of the
Company's By-Laws provides that the Company will indemnify any person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding by reason of the fact that he is or was a
director, officer, employee or agent of the Company, or is or was serving at the
request of the Company as a director, officer, employee or agent of another
entity, against certain liabilities, costs and expenses. Article V further
permits the Company to maintain insurance on behalf of any person who is or was
a director, officer, employee or agent of the Company, or is or was serving at
the request of the Company as a director, officer, employee or agent of another
entity against any liability asserted against such person and incurred by such
person in any such capacity or arising out of his status as such, whether or not
the Company would have the power to indemnify such person against such liability
under the DGCL. The Company maintains directors' and officers' liability
insurance.
The Underwriting Agreement filed as an exhibit hereto contains provisions
pursuant to which each Underwriter severally agrees to indemnify the Company,
any person controlling the Company
II-1
<PAGE> 202
within the meaning of Section 15 of the Securities Act of 1933, as amended, or
Section 20 of the Securities Exchange Act of 1934, as amended, each director of
the Company, and each officer of the Company who signs this registration
statement with respect to information relating to such Underwriter furnished in
writing by or on behalf of such Underwriter expressly for use in this
registration statement.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Within the past three years, the Company sold shares of its capital stock
in the following transactions, each of which was intended to be exempt from the
registration requirements of the Securities Act of 1933, as amended, by virtue
of Section 4(2) thereof.
Common Stock
On September 20, 1995, the Company issued 773,062 shares of Common Stock to
Brad E. Hollinger, 463,837 shares of Common Stock to Robert J. Sutton, 116,250
shares of Common Stock to Brian L. Barth, 640,538 shares of Common Stock to KD
Investment and 331,312 shares of Common Stock to SAE Partners, in each case at a
price of $.0129 per share.
From September 1995 through January 1996, the Company issued an aggregate
of 258,333 shares of Common Stock to John Brennan at a price of $.0129 per
share.
On or prior to September 11, 1996 the Company issued an aggregate of
767,412 shares of Common Stock to Billy Ray Foster, Trustee, the Inter Vivos
Trust of Billy Ray Foster, as partial consideration in connection with the
Company's acquisition of Foster Health Care Group.
On or prior to September 11, 1996, the Company issued an aggregate of
337,484 shares of Common Stock to John D. Foster as partial consideration in
connection with the Company's acquisition of Foster Health Care Group.
On September 11, 1996, the Company issued 95,104 shares of Common Stock to
Bill R. Foster, Jr. as partial consideration in connection with the Company's
acquisition of Foster Health Care Group.
On January 31, 1997, the Company issued 93,750 shares of Common Stock to
James J. Blumer, Jr. and 93,750 shares of Common Stock to Michael P. Kelly, in
each case at a price of $1.33 per share in connection with the Company's
acquisition of Keystone.
On March 26, 1997, the Company issued 26,250 shares of Common Stock at a
price of $1.33 per share and 11,250 shares of Common Stock at a price of $2.00
per share to George Strong.
On April 1, 1997, the Company issued 16,479 shares of Common Stock to Roger
Breed at a price of $3.33 per share.
Series A Convertible Preferred Stock
From September 1995 through September 1996, the Company issued an aggregate
of 1,150,958 shares of Series A Convertible Preferred Stock to John Brennan at a
price of $2.00 per share.
Series B Convertible Preferred Stock
From September 1996 through March 1997, the Company issued an aggregate of
5,009,750 shares of Series B Convertible Preferred Stock as follows: 441,750
shares to Meditrust Mortgage Investments, Inc., 671,794 shares to Omega Ventures
II, L.P., 173,344 shares to Omega Ventures II Cayman, L.P., 109,928 shares to
Bayview Investors, Ltd., 554,735 shares to Crossover Fund II, L.P., 163,699
shares to Crossover Fund IIA, L.P., 40,000 shares to David L. Goldsmith and
Diane D. Goldsmith, Trustees, Goldsmith Family Trust, 394,875 shares to Boston
Safe Deposit and Trust Company, Trustee, US WEST Pension Trust, 131,625 shares
to Boston Safe Deposit and Trust Company, Trustee, US WEST Benefit Assurance
Trust, 700,000 shares to Juliet Challenger, Inc., 210,000 shares to Henry L.
Hillman, Elsie Hilliard Hillman and C.G. Grefenstette, Trustees, Henry L.
Hillman Trust, 70,000 shares to Thomas G. Bigley and C.G. Grefenstette,
Trustees, Trust for the Children of Juliet Lea Hillman Simonds, 70 shares to
Thomas G. Bigley and C. G. Grefenstette, Trustees, Trust for the Children of
Audrey Hillman Fisher,
II-2
<PAGE> 203
70,000 shares to Thomas G. Bigley and C. G. Grefenstette, Trustees, the Trust
for the Children of William Talbott Hillman, 70,000 shares to Thomas G. Bigley
and C. G. Grefenstette, Trustees, the Trust for the Children of Henry L.
Hillman, Jr., 210,000 shares to DBH Sec IV, L.P., 400,000 shares to RS Pacific
Venture L.P., 480,000 shares to HCO Partners IV-BCC, 8,000 shares to Mal Serure,
8,000 shares to Stanley Cayre, 8,000 shares to Frieda Cayre, Trustee (Jack S.
Cayre), 8,000 shares to Frieda Cayre, Trustee (Amin Cayre), 8,000 shares to
Frieda Cayre, Trustee (David Cayre), and 8,000 shares to Frieda Cayre, Trustee
(Robert Cayre), in each case at a price of $2.50 per share.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) The following exhibits are filed as part of this registration
statement:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement (filed herewith)
2.1 Stock Purchase Agreement, dated as of July 26, 1996, by and among Billy Ray Foster,
Sr., both individually and as Trustee of the Revocable Inter-Vivos Trust Agreement of
Billy Ray Foster dated February 4, 1988, John Douglas Foster, Billy Ray Foster, Jr.,
J. Kaye Foster-Gibson, Robert Anthony Foster, Mark Bradley Foster and Hawthorn Health
Properties, Inc.*
2.2 Stock Purchase Agreement, dated as of August 30, 1996, by and between Hawthorn Health
Properties, Inc. and Balanced Care Corporation*
2.3 Merger Agreement, dated as of July 26, 1996, by and among Billy Ray Foster, Sr., both
individually and as Trustee of the Revocable Inter-Vivos Trust Agreement of Billy Ray
Foster dated February 4, 1988, John Douglas Foster, Billy Ray Foster, Jr., J. Kaye
Foster-Gibson, Robert Anthony Foster, Mark Bradley Foster, Balanced Care Corporation,
BCC at Republic Park Center, Inc. and National Care Centers of Republic, Inc.*
2.4 Merger Agreement, dated as of July 26, 1996, by and among Billy Ray Foster, Sr., both
individually and as Trustee of the Revocable Inter-Vivos Trust Agreement of Billy Ray
Foster dated February 4, 1988, John Douglas Foster, Billy Ray Foster, Jr., J. Kaye
Foster-Gibson, Robert Anthony Foster, Mark Bradley Foster, National Care Centers of
Nevada, Inc., Balanced Care Corporation, BCC at Nevada Park Care Center, Inc. and
National Care Centers of Nevada, Inc.*
2.5 Agreement of Sale, dated as of February 23, 1996, by and between Balanced Care
Corporation and Mount Royal Pines, L.P.*
2.6 Asset Purchase Agreement, dated as of February 28, 1996, by and between Balanced Care
Corporation and Senior Care of Wisconsin, Inc.*
2.7 Asset Purchase Agreement, dated as of December 27, 1996, by and between Balanced Care
Corporation and Bloomsburg Manor Personal Care and Retirement Center, Inc.*
2.8 Asset Purchase Agreement, dated as of December 27, 1996, by and between Balanced Care
Corporation and Kingston Health Care Center, Inc.*
2.9 Asset Purchase Agreement, dated as of December 27, 1996, by and between Balanced Care
Corporation and Kingston Manor Personal Care and Retirement Center, Inc.*
2.10 Asset Purchase Agreement, dated as of December 27, 1996, by and between Balanced Care
Corporation and Keystone Health Ventures, Inc.*
2.11 Asset Purchase Agreement, dated as of December 27, 1996, by and between Balanced Care
Corporation and Blakely-Pine Health Care Center, Inc.*
2.12 Asset Purchase Agreement, dated as of December 27, 1996, by and between Balanced Care
Corporation and West Side Manor Personal Care and Retirement Center, Inc.*
</TABLE>
II-3
<PAGE> 204
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -------------------------------------------------------------------------------------
<C> <S>
2.13 Asset Purchase Agreement, dated as of December 27, 1996, by and between Balanced Care
Corporation and Old Forge Manor Personal Care and Retirement Center, Inc.*
2.14 Purchase and Sale Agreement, dated as of December 27, 1996, by and between Balanced
Care Corporation and Keystone Development Group, Inc.*
2.15 Agreement of Amendment, dated as of February 6, 1997, to Purchase and Sale Agreement
dated as of December 27, 1996 by and between Balanced Care Corporation and Keystone
Development Group, Inc.*
2.16 Asset Purchase Agreement, dated as of April 8, 1997, by and among Balanced Care
Corporation, Barry G. Clark and Karen R. Clark, husband and wife, and Heavenly Health
Care, Inc. d/b/a Joe Clark Residential Care Homes*
2.17 Asset Purchase Agreement, dated as of September 18, 1997, by and between Balanced
Care Corporation and Butler Senior Care, Inc.*
2.18 Asset Purchase Agreement, dated as of September 3, 1997, by and among Balanced Care
Corporation, Delores Feltrop Nahar, with the joinder of Albert L. Nahar and Kenneth
A. Feltrop, with the joinder of Lori L. Feltrop, individually and d/b/a Feltrop
Personal Care Home*
2.19 Asset Purchase Agreement by and among Managed Healthcare, Inc., Long Term
Pharmaceutical Care, Inc., Balanced Care Corporation and Omnicare, Inc. dated as of
October 16, 1997*
2.20 Asset Purchase Agreement by and between Balanced Care Corporation and Triangle
Retirement Services, Inc. dated as of October 24, 1997*
2.21 Asset Purchase Agreement by and between Balanced Care Corporation and Gethsemane
Retirement Community and Rehabilitation Center, Inc. dated as of November 26, 1997*
2.22 Asset Purchase Agreement by and between Balanced Care Corporation and Gethsemane
Assisted Living, Inc. dated as of November 26, 1997*
3.1 Amended and Restated Certificate of Incorporation of Balanced Care Corporation*
3.2 Bylaws of Balanced Care Corporation, as amended*
4.1 Commitment Letter, dated as of September 20, 1995, by and between Balanced Care
Corporation and John Brennan in connection with Convertible Series A Preferred Stock*
4.2 Series B Stock Purchase Agreement, dated as of September 20, 1996, by and among
Balanced Care Corporation and certain investors listed on Schedule 1.1 thereto*
4.3 Agreement of Amendment to Series B Stock Purchase Agreement, dated as of October 25,
1996, by and among Balanced Care Corporation and certain persons*
4.4 Stock Restriction Agreement, dated as of September 20, 1996, by and among Balanced
Care Corporation, Brad E. Hollinger, Robert Sutton, Brian Barth, Kurt Meyer, William
McCarthy and Russell DiGilio and certain other persons listed thereto*
4.5 Registration Rights Agreement, dated as of September 20, 1996, by and among Balanced
Care Corporation and certain holders of shares, or rights to purchase shares, of
various classes of Common Stock and Preferred Stock of Balanced Care Corporation*
4.6 Termination and Release Agreement, dated as of September 20, 1996, by and among the
holders of Common Stock or Preferred Stock of Balanced Care Corporation*
4.7 Waiver of John Brennan, dated as of August 30, 1996, in connection with that certain
Capital Stock Purchase Warrant to be executed in favor of Hawthorn Health Properties,
Inc.*
</TABLE>
II-4
<PAGE> 205
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -------------------------------------------------------------------------------------
<C> <S>
4.8 Waiver of John Brennan, dated as of August 30, 1996, in connection with that certain
Capital Stock Purchase Warrant to be executed in favor of Meditrust Mortgage
Investments, Inc.*
4.9 Form of Capital Stock Purchase Warrant, together with schedule*
4.10 Form of Capital Stock Purchase Warrant, together with schedule*
4.11 Form of Capital Stock Purchase Warrant, together with schedule*
4.12 First Amendment to Capital Stock Purchase Warrant, dated as of April 15, 1997, by and
between Balanced Care Corporation and Meditrust Acquisition Corporation II*
5.1 Opinion of Kirkpatrick & Lockhart LLP as to the legality of the securities being
registered*
10.1 Balanced Care Corporation 1996 Stock Option Plan as Amended and Restated, effective
July 25, 1997*
10.2 Master Distribution Agreement, dated as of March 3, 1997, between Sysco Corporation
and Balanced Care Corporation*
10.3 Sublease, dated as of January 16, 1997, by and between Ryder Truck Rental, Inc. and
Balanced Care Corporation*
10.4 Sublease, dated as of June 26, 1996, by and between Liberty Mutual Insurance Company
and Balanced Care Corporation*
10.5 Lease, dated as of January 16, 1997, by and among Cherokee Assisted Living, L.L.C.,
Nevada Independent Living, L.L.C. and Balanced Care Corporation*
10.6 Lease, dated as of January 25, 1990, by and between Dixon Care Centre, Inc. and Dixon
Oaks Health Center, Inc.*
10.7 Amendment to Lease and Assignment, dated as of October 1, 1990, by and among Noble
House of Dixon, Inc., Dixon Management, Inc. and Dixon Oaks Health Center, Inc.*
10.8 Second Lease Amendment, dated as of July 1, 1997, by and between Noble House of
Dixon, Inc. and Dixon Management, Inc.*
10.9 Sublease, dated as of October 1, 1996, by and between BCC at Mt. Royal Pines, Inc.
and BCC Therapies of Pennsylvania, Inc.*
10.10 Sublease, dated as of June 1, 1997, by and between BCC at State College, Inc. and BCC
Therapies of Pennsylvania, Inc.*
10.11 Form of Meditrust Leasehold Improvement Agreement, together with schedule*
10.12 Form of Meditrust Facility Lease Agreement, together with schedule*
10.13 Form of Meditrust Security Agreement, together with schedule*
10.14 Mortgage and Security Agreement, dated as of May 2, 1996, by BCC of Wisconsin, Inc.
and Meditrust Mortgage Investments, Inc.*
10.15 Form of Meditrust Deed of Trust and Security Agreement, together with schedule*
10.16 Form of Meditrust Guaranty, together with schedule*
10.17 Form of Meditrust Guaranty, together with schedule*
10.18 Form of Meditrust Guaranty (Development), together with schedule*
10.19 Form of Meditrust Loan Agreement, together with schedule*
10.20 Form of Meditrust Promissory Note, together with schedule*
10.21 Form of Meditrust Environmental Indemnity Agreement, together with schedule*
10.22 Form of Capstone Lease, together with schedule*
10.23 Form of Capstone Assignment and Security Agreement, together with schedule*
</TABLE>
II-5
<PAGE> 206
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -------------------------------------------------------------------------------------
<C> <S>
10.24 Form of Capstone Assignment Agreement, together with schedule*
10.25 Form of Capstone Assignment of Rents and Leases, together with schedule*
10.26 Form of Capstone Guaranty, together with schedule*
10.27 Form of Capstone Guaranty, together with schedule*
10.28 Form of Capstone Indemnity Agreement, together with schedule*
10.29 Form of Capstone Management Agreement, together with schedule*
10.30 Form of Capstone Assignment and Pledge of Deposit Account, together with schedule*
10.31 Form of Capstone Loan Agreement, together with schedule*
10.32 Form of Capstone Promissory Note, together with schedule*
10.33 Form of Capstone Mortgage, Security Agreement and Fixture Filing, together with
schedule*
10.34 Lease, dated as of March 21, 1996, by and between HCPI Trust and BCC at Mt. Royal
Pines, Inc.*
10.35 First Amendment, dated as of March 31, 1997, to Lease dated as of March 21, 1996 by
and between HCPI Trust and BCC at Mt. Royal Pines, Inc.*
10.36 Guaranty of Obligations, dated as of March 21, 1996, by and between HCPI Trust and
Balanced Care Corporation*
10.37 Employment Agreement, dated as of August 1, 1996, by and between Balanced Care
Corporation and Brad E. Hollinger*
10.38 Employment Agreement, dated as of May 1, 1996, by and between Balanced Care
Corporation and William T. McCarthy*
10.39 Employment Agreement, dated as of September 20, 1995, by and between Balanced Care
Corporation and Robert J. Sutton*
10.40 Employment Agreement, dated as of September 20, 1995, by and between Balanced Care
Corporation and Brian L. Barth*
10.41 Employment Agreement, dated as of September 1, 1996, by and among Foster Health Care
Group, Inc., John D. Foster and Balanced Care Corporation*
10.42 Assignment, Assumption and Consent Agreement, dated as of June 30, 1997, by and among
Foster Health Care Group, Inc., BCC Management Company at Missouri, Inc. and John
Foster*
10.43 Employment Agreement, dated as of November 24, 1997, by and between Balanced Care
Corporation and Stephen G. Marcus*
10.44 Consulting Agreement, dated as of October 3, 1996, by and between Balanced Care
Corporation and Kenneth F. Barber*
10.45 First Amendment, dated as of March 13, 1997, to the Consulting Agreement dated as of
October 3, 1996 by and between Balanced Care Corporation and Kenneth F. Barber*
11.1 Statement Regarding Computation of Earnings Per Share*
11.2 Statement Regarding Computation of Supplementary Earnings Per Share*
21.1 Schedule of Subsidiaries*
23.1 Consent of Kirkpatrick & Lockhart LLP (included in opinion filed as Exhibit 5.1)*
23.2 Consent of KPMG Peat Marwick LLP (filed herewith)
23.3 Consents of Coopers & Lybrand LLP (filed herewith)
23.4 Consent of Baird, Kurtz & Dobson (filed herewith)
</TABLE>
II-6
<PAGE> 207
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -------------------------------------------------------------------------------------
<C> <S>
23.5 Consent of Snyder & Clemente (filed herewith)
23.6 Consent of Hodge, Steward & Company, P.A. (filed herewith)
24.1 Power of Attorney*
27.1 Financial Data Schedule 3 months 9/30/97*
27.2 Financial Data Schedule Y/E 6/30/97*
</TABLE>
- ------------
* Previously filed.
The registrant hereby agrees to furnish supplementally to the Commission, upon
request, a copy of any omitted schedule to any of the agreements filed as
exhibits hereto.
(b) The following financial statement schedule has been filed as part of
this registration statement, accompanied by a report of independent accountants
on such schedule:
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
for the years ended June 30, 1997 and 1996 and the period
April 17, 1995 (date of inception) to June 30, 1997
Financial statement schedules not listed above have been omitted because
they are inapplicable, are not required under applicable provisions of
Regulation S-X, or the information that would otherwise be included in such
schedules is contained in the registrant's financial statements or accompanying
notes.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-7
<PAGE> 208
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this amendment to be signed on its behalf by the undersigned,
thereunto duly authorized, in the Borough of Mechanicsburg, Commonwealth of
Pennsylvania, on January 14, 1998.
BALANCED CARE CORPORATION
By: /s/ BRAD E. HOLLINGER
------------------------------------
Brad E. Hollinger
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this amendment
has been signed by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
- ------------------------------------------ ----------------------------- -------------------
<C> <S> <C>
/s/ BRAD E. HOLLINGER Chairman of the Board, January 14, 1998
- ------------------------------------------ President and Chief Executive
Brad E. Hollinger Officer (Principal Executive
Officer) and a Director
/s/ PAUL A. KRUIS Chief Financial Officer January 14, 1998
- ------------------------------------------ (Principal Financial Officer)
Paul A. Kruis
* Vice President--Finance and
- ------------------------------------------ Treasurer (Principal
Mark S. Moore Accounting Officer)
* Director
- ------------------------------------------
Kenneth F. Barber
* Director
- ------------------------------------------
John M. Brennan
* Director
- ------------------------------------------
Bill R. Foster
* Director
- ------------------------------------------
David L. Goldsmith
* Director
- ------------------------------------------
Edward R. Stolman
* Director
- ------------------------------------------
George H. Strong
*By: /s/ MARK S. MOORE January 14, 1998
- ------------------------------------------
Mark S. Moore
Attorney-in-Fact
</TABLE>
<PAGE> 209
The Board of Directors and Stockholders
Balanced Care Corporation:
Under date of July 30, 1997 except for Notes 11 and 12 which are as of
January 2, 1998, we reported on the consolidated balance sheets of Balanced Care
Corporation as of June 30, 1997 and 1996, and the related consolidated
statements of operations, stockholders' equity (deficit) and cash flows for the
years then ended and the period April 17, 1995 (date of inception) to June 30,
1995. In connection with our audits of the aforementioned consolidated financial
statements, we also audited the related financial statement schedule in the
Registration Statement. This financial statement schedule is the responsibility
of the Company's management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits.
In our opinion such financial statement schedule when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
KMPG Peat Marwick LLP
Philadelphia, Pennsylvania
July 30, 1997
S-1
<PAGE> 210
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
- ------- ------------------------------------------------------------------------- ------------
<C> <S> <C>
1.1 Form of Underwriting Agreement
23.2 Consent of KPMG Peat Marwick LLP
23.3 Consents of Coopers & Lybrand LLP
23.4 Consent of Baird, Kurtz & Dobson
23.5 Consent of Snyder & Clemente
23.6 Consent of Hodge, Steward & Company, P.A.
</TABLE>
<PAGE> 1
Exhibit 1.1
S & S DRAFT
01/13/98
7,000,000 SHARES(1)
BALANCED CARE CORPORATION
COMMON STOCK
UNDERWRITING AGREEMENT
January__, 1998
BANCAMERICA ROBERTSON STEPHENS
SMITH BARNEY INC.
BT ALEX. BROWN INCORPORATED
As Representatives of the several Underwriters
c/o BancAmerica Robertson Stephens
555 California Street
Suite 2600
San Francisco, California 94104
Ladies/Gentlemen:
Balanced Care Corporation, a Delaware corporation (the
"Company"), addresses you as the Representatives of each of the persons, firms
and corporations listed in Schedule A hereto (herein collectively called the
"Underwriters") and hereby confirms its agreement with the several Underwriters
as follows:
1. Description of Shares. The Company proposes to issue
and sell 7,000,000 shares of its authorized and unissued common stock, par
value $0.001 per share (the "Firm Shares") to the several Underwriters. The
Company also proposes to grant to the Underwriters an option to purchase up to
1,050,000 additional shares of the Company's common stock, par value $0.001
per share (the "Option Shares"), as provided in Section 7 hereof. As used in
this Agreement, the term "Shares" shall include the Firm Shares and the Option
Shares. All shares of common stock, par value $0.001 per share, of the Company
to be outstanding after giving effect to the sales of the Shares contemplated
hereby, are hereinafter referred to as "Common Stock."
2. Representations, Warranties and Agreements of the
Company. The Company represents and warrants to and agrees with each
Underwriter that:
- ----------------------------------
(1) Plus an option to purchase up to 1,050,000 additional shares from the
Company to cover over-allotments.
<PAGE> 2
2
(a) A registration statement on Form S-1 (File No.
333-37833) with respect to the Shares, including a prospectus subject
to completion, has been prepared by the Company in conformity with the
requirements of the Securities Act of 1933, as amended (the "Act"),
and the applicable rules and regulations (the "Rules and Regulations")
of the Securities and Exchange Commission (the "Commission") under the
Act and has been filed with the Commission; amendments to such
registration statement, amended prospectuses subject to completion and
abbreviated registration statements pursuant to Rule 462(b) of the
Rules and Regulations as may have been required prior to the date
hereof have been similarly prepared and filed with the Commission; and
the Company will file additional amendments to such registration
statement, such amended prospectuses subject to completion and such
abbreviated registration statements as may hereafter be required.
Copies of such registration statement and amendments, of each related
prospectus subject to completion (the "Preliminary Prospectuses") and
of any abbreviated registration statement pursuant to Rule 462(b) of
the Rules and Regulations have been delivered to you.
If the registration statement relating to the Shares
has been declared effective under the Act by the Commission, the
Company will prepare and promptly file with the Commission the
information omitted from the registration statement pursuant to Rule
430A(a) or, if BancAmerica Robertson Stephens, on behalf of the
several Underwriters, shall agree to the utilization of Rule 434 of
the Rules and Regulations, the information required to be included in
any term sheet filed pursuant to Rule 434(b) or (c), as applicable, of
the Rules and Regulations pursuant to subparagraph (1), (4) or (7) of
Rule 424(b) of the Rules and Regulations or as part of a
post-effective amendment to the registration statement (including a
final form of prospectus). If the registration statement relating to
the Shares has not been declared effective under the Act by the
Commission, the Company will prepare and promptly file an amendment to
the registration statement, including a final form of prospectus, or,
if BancAmerica Robertson Stephens, on behalf of the several
Underwriters, shall agree to the utilization of Rule 434 of the Rules
and Regulations, the information required to be included in any term
sheet filed pursuant to Rule 434(b) or (c), as applicable, of the
Rules and Regulations. The term "Registration Statement" as used in
this Agreement shall mean such registration statement, including
financial statements, schedules and exhibits, in the form in which it
became or becomes, as the case may be, effective (including, if the
Company omitted information from the registration statement pursuant
to Rule 430A(a) or files a term sheet pursuant to Rule 434 of the
Rules and Regulations, the information deemed to be a part of the
registration statement at the time it became effective pursuant to
Rule 430A(b) or Rule 434(d) of the Rules and Regulations) and, in the
event of any amendment thereto or the filing of any abbreviated
registration statement pursuant to Rule 462(b) of the Rules and
Regulations relating thereto after the effective date of such
registration statement, shall also mean (from and after the
effectiveness of such amendment or the filing of such abbreviated
registration statement) such registration
<PAGE> 3
3
statement as so amended, together with any such abbreviated
registration statement. The term "Prospectus" as used in this
Agreement shall mean the prospectus relating to the Shares as included
in such Registration Statement at the time it becomes effective
(including, if the Company omitted information from the Registration
Statement pursuant to Rule 430A(a) of the Rules and Regulations, the
information deemed to be a part of the Registration Statement at the
time it became effective pursuant to Rule 430A(b) of the Rules and
Regulations); provided, however, that if in reliance on Rule 434 of
the Rules and Regulations and with the consent of BancAmerica
Robertson Stephens, on behalf of the several Underwriters, the Company
shall have provided to the Underwriters a term sheet pursuant to Rule
434(b) or (c), as applicable, prior to the time that a confirmation is
sent or given for purposes of Section 2(10)(a) of the Act, the term
"Prospectus" shall mean the "prospectus subject to completion" (as
defined in Rule 434(g) of the Rules and Regulations) last provided to
the Underwriters by the Company and circulated by the Underwriters to
all prospective purchasers of the Shares (including the information
deemed to be a part of the Registration Statement at the time it
became effective pursuant to Rule 434(d) of the Rules and
Regulations). Notwithstanding the foregoing, if any revised
prospectus shall be provided to the Underwriters by the Company for
use in connection with the offering of the Shares that differs from
the prospectus referred to in the immediately preceding sentence
(whether or not such revised prospectus is required to be filed with
the Commission pursuant to Rule 424(b) of the Rules and Regulations),
the term "Prospectus" shall refer to such revised prospectus from and
after the time it is first provided to the Underwriters for such use.
If in reliance on Rule 434 of the Rules and Regulations and with the
consent of BancAmerica Robertson Stephens, on behalf of the several
Underwriters, the Company shall have provided to the Underwriters a
term sheet pursuant to Rule 434(b) or (c), as applicable, prior to the
time that a confirmation is sent or given for purposes of Section
2(10)(a) of the Act, the Prospectus and the term sheet, together, will
not be materially different from the prospectus in the Registration
Statement.
(b) The Commission has not issued any order preventing or
suspending the use of any Preliminary Prospectus or instituted
proceedings for that purpose, and each such Preliminary Prospectus
has, as of its date, conformed in all material respects to the
requirements of the Act and the Rules and Regulations and, as of its
date, has not included any untrue statement of a material fact or
omitted to state a material fact necessary to make the statements
therein, in the light of the circumstances under which they were made,
not misleading; and at the time the Registration Statement became or
becomes, as the case may be, effective and at all times subsequent
thereto up to and on the Closing Date (hereinafter defined) and on any
later date on which Option Shares are to be purchased, (i) the
Registration Statement and Prospectus, and any amendments or
supplements thereto, contained and will contain all material
information required to be included therein by the Act and the Rules
and Regulations and will in all material respects conform to the
requirements of the Act and the Rules and Regulations, (ii) the
<PAGE> 4
4
Registration Statement, and any amendments or supplements thereto, did
not and will not include any untrue statement of a material fact or
omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, and (iii) the
Prospectus, and any amendments or supplements thereto, did not and
will not include any untrue statement of a material fact or omit to
state a material fact necessary to make the statements therein, in the
light of the circumstances under which they were made, not misleading;
provided, however, that none of the representations and warranties
contained in this subparagraph (b) shall apply to information
contained in or omitted from the Registration Statement or the
Prospectus, or any amendment or supplement thereto, in reliance upon,
and in conformity with, written information relating to any
Underwriter furnished to the Company by such Underwriter specifically
for use in the preparation thereof.
(c) Each of the Company and its subsidiaries has been
duly incorporated and is validly existing as a corporation in good
standing under the laws of the jurisdiction of its incorporation with
full corporate power and authority to own, lease and operate its
properties and conduct its business as described in the Prospectus;
except as set forth on Annex I attached hereto, the Company owns all
of the outstanding capital stock of its subsidiaries free and clear of
any pledge, lien, security interest, encumbrance, claim or equitable
interest; each of the Company and its subsidiaries is duly qualified
to do business as a foreign corporation and is in good standing in
each jurisdiction in which the ownership or leasing of its properties
or the conduct of its business requires such qualification, except
where the failure to be so qualified or be in good standing would not
have a material adverse effect on the condition (financial or
otherwise), earnings, operations, business or business prospects of
the Company and its subsidiaries considered as one enterprise; no
proceeding has been instituted in any such jurisdiction, revoking,
limiting or curtailing, or seeking to revoke, limit or curtail, such
power and authority or qualification; each of the Company and its
subsidiaries is in possession of and operating in compliance with all
authorizations, licenses, certificates, consents, orders and permits
from state, federal and other regulatory authorities which are
material to the conduct of its business, all of which are valid and in
full force and effect; neither the Company nor any of its subsidiaries
is in violation of its respective charter or bylaws or in default in
the performance or observance of any material obligation, agreement,
covenant or condition contained in any material bond, debenture, note
or other evidence of indebtedness, or in any material lease, contract,
indenture, mortgage, deed of trust, loan agreement, joint venture or
other agreement or instrument to which the Company or any of its
subsidiaries is a party or by which it or any of its subsidiaries or
their respective properties may be bound; and neither the Company nor
any of its subsidiaries is in material violation of any law, order,
rule, regulation, writ, injunction, judgment or decree of any court,
government or governmental agency or body, domestic or foreign, having
jurisdiction over the Company or any of its subsidiaries or over their
respective properties of which it has knowledge. The Company does not
own or control, directly
<PAGE> 5
5
or indirectly, any corporation, association or other entity other than
as set forth on Annex II attached hereto.
(d) The Company has full legal right, power and authority
to enter into this Agreement and perform the transactions contemplated
hereby. This Agreement has been duly authorized, executed and
delivered by the Company and is a valid and binding agreement on the
part of the Company, enforceable in accordance with its terms, except
as rights to indemnification hereunder may be limited by applicable
law and except as the enforcement hereof may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other similar
laws relating to or affecting creditors' rights generally or by
general equitable principles; the performance of this Agreement and
the consummation of the transactions herein contemplated will not
result in a material breach or violation of any of the terms and
provisions of, or constitute a default under, (i) any bond, debenture,
note or other evidence of indebtedness, or under any lease, contract,
indenture, mortgage, deed of trust, loan agreement, joint venture or
other agreement or instrument to which the Company or any of its
subsidiaries is a party or by which it or any of its subsidiaries or
their respective properties may be bound, (ii) the charter or bylaws
of the Company or any of its subsidiaries, or (iii) any law, order,
rule, regulation, writ, injunction, judgment or decree of any court,
government or governmental agency or body, domestic or foreign, having
jurisdiction over the Company or any of its subsidiaries or over their
respective properties. No consent, approval, authorization or order
of or qualification with any court, government or governmental agency
or body, domestic or foreign, having jurisdiction over the Company or
any of its subsidiaries or over their respective properties is
required for the execution and delivery of this Agreement and the
consummation by the Company or any of its subsidiaries of the
transactions herein contemplated, except such as may be required under
the Act or under state or other securities or Blue Sky laws, all of
which requirements have been satisfied in all material respects.
(e) There is no pending or, to the best of the Company's
knowledge, threatened action, suit, claim or proceeding against the
Company, any of its subsidiaries or any of their respective officers
or any of their respective properties, assets or rights before any
court, government or governmental agency or body, domestic or foreign,
having jurisdiction over the Company or any of its subsidiaries or
over their respective officers or properties or otherwise which, if
determined adversely to the Company, such subsidiary or such officer,
(i) would likely result in any material adverse change in the
condition (financial or otherwise), earnings, operations, business or
business prospects of the Company and its subsidiaries considered as
one enterprise or would likely materially and adversely affect their
properties, assets or rights, (ii) would likely prevent consummation
of the transactions contemplated hereby or (iii) is required to be
disclosed in the Registration Statement or Prospectus and is not so
disclosed; and there are no agreements, contracts, leases or documents
of the Company or any of its subsidiaries of
<PAGE> 6
6
a character required to be described or referred to in the
Registration Statement or Prospectus or to be filed as an exhibit to
the Registration Statement by the Act or the Rules and Regulations
which have not been accurately described in all material respects in
the Registration Statement or Prospectus or filed as exhibits to the
Registration Statement.
(f) All outstanding shares of capital stock of the
Company have been duly authorized and validly issued and are fully
paid and nonassessable, have been issued in compliance with all
federal and state securities laws, were not issued in violation of or
subject to any preemptive rights or other rights to subscribe for or
purchase securities, and the authorized and outstanding capital stock
of the Company is as set forth in the Prospectus under the caption
"Capitalization" and conforms in all material respects to the
statements relating thereto contained in the Registration Statement
and the Prospectus (and such statements correctly state the substance
of the instruments defining the capitalization of the Company); the
Firm Shares and the Option Shares have been duly authorized for
issuance and sale to the Underwriters pursuant to this Agreement and,
when issued and delivered by the Company against payment therefor in
accordance with the terms of this Agreement, will be duly and validly
issued and fully paid and nonassessable, and will be sold free and
clear of any pledge, lien, security interest, encumbrance, claim or
equitable interest; and no preemptive right, co-sale right,
registration right, right of first refusal or other similar right of
shareholders exists with respect to any of the Firm Shares or Option
Shares or the issuance and sale thereof other than those that have
been expressly waived prior to the date hereof and those that will
automatically expire upon and will not apply to the consummation of
the transactions contemplated on the Closing Date. No further
approval or authorization of any shareholder, the Board of Directors
of the Company or others is required for the issuance and sale or
transfer of the Shares except as may be required under the Act or
under state or other securities or Blue Sky laws. All issued and
outstanding shares of capital stock of each subsidiary of the Company
have been duly authorized and validly issued and are fully paid and
nonassessable, and were not issued in violation of or subject to any
preemptive right, or other rights to subscribe for or purchase shares
and are owned by the Company free and clear of any pledge, lien,
security interest, encumbrance, claim or equitable interest. Except
as disclosed in the Prospectus, neither the Company nor any subsidiary
has outstanding any options to purchase, or any preemptive rights or
other rights to subscribe for or to purchase, any securities or
obligations convertible into, or any contracts or commitments to issue
or sell, shares of its capital stock or any such options, rights,
convertible securities or obligations. The description of the
Company's stock option, stock bonus and other stock plans or
arrangements, and the options or other rights granted and exercised
thereunder, set forth in the Prospectus accurately and fairly presents
the information required to be shown with respect to such plans,
arrangements, options and rights.
<PAGE> 7
7
(g) KPMG Peat Marwick LLP, which has examined the
consolidated financial statements of the Company, together with the
related schedule and notes, as of June 30, 1997 and 1996 and for each
of the years then ended and for the period April 17, 1995 (date of
inception) to June 30, 1995 filed with the Commission as a part of the
Registration Statement, which are included in the Prospectus, are
independent accountants within the meaning of the Act and the Rules
and Regulations; the audited consolidated financial statements of the
Company, together with the related schedule and notes, and the
unaudited consolidated financial information, forming part of the
Registration Statement and the Prospectus, fairly present the
financial position and the results of operations of the Company and
its subsidiaries at the respective dates and for the respective
periods to which they apply; and all audited consolidated financial
statements of the Company, together with the related schedule and
notes, and the unaudited consolidated financial information, filed
with the Commission as part of the Registration Statement, have been
prepared in accordance with generally accepted accounting principles
consistently applied throughout the periods involved except as may be
otherwise stated therein. The selected and summary financial data
included in the Registration Statement present fairly the information
shown therein and have been compiled on a basis consistent with the
audited consolidated financial statements presented therein. Except
as set forth in paragraphs (h), (i), (j) and (k) below, no other
financial statements or schedules are required to be included in the
Registration Statement. The pro forma financial statements and the
related notes thereto included in the Registration Statement and
Prospectus present fairly the information shown therein, have been
prepared in accordance with the Commission's rules and guidelines with
respect to pro forma financial statements and have been properly
compiled on the bases described therein, and the assumptions used in
the preparation thereof are reasonable and the adjustments used
therein are appropriate to give effect to the transactions and
circumstances referred to therein.
(h) Baird, Kurtz & Dobson, which has examined (i) the
combined financial statements of Foster Healthcare Affiliates ("Foster
Healthcare"), together with the related notes, as of June 30, 1996 and
1995 and for each of the two (2) years ended June 30, 1996 and (ii)
the combined financial statements of Heavenly Health Care, Inc. d/b/a
Joe Clark Residential Homes ("Joe Clark"), together with the related
notes as of December 31, 1996 for the year ended December 31, 1996,
filed with the Commission as a part of the Registration Statement,
which are included in the Prospectus, are independent accountants
within the meaning of the Act and the Rules and Regulations; the
audited combined financial statements of Foster Healthcare and of Joe
Clark, together with the respective related notes, forming part of the
Registration Statement and Prospectus fairly present the respective
financial positions and the results of operations of Foster Healthcare
and its affiliates and Joe Clark and its subsidiaries at the
respective dates and for the respective periods to which they apply;
and all audited combined financial statements of Foster Healthcare and
of Joe Clark, together with the respective related
<PAGE> 8
8
schedules and notes, and the unaudited combined financial information,
filed with the Commission as part of the Registration Statement, have
been prepared in accordance with generally accepted accounting
principles consistently applied throughout the periods involved except
as may be otherwise stated therein.
(i) Snyder & Clemente, which has examined the combined
financial statements of Keystone Affiliates, together with the related
notes, as of December 31, 1996 and 1995 and for the three (3) years
ended December 31, 1996 filed with the Commission as a part of the
Registration Statement, which are included in the Prospectus, are
independent accountants within the meaning of the Act and the Rules
and Regulations; the audited combined financial statements of Keystone
Affiliates, together with the related notes, forming part of the
Registration Statement and Prospectus, fairly present the financial
position and the results of operations of Keystone Affiliates and its
affiliates at the respective dates and for the respective periods to
which they apply; and all audited combined financial statements of
Keystone Affiliates, together with the related notes, filed with the
Commission as part of the Registration Statement, have been prepared
in accordance with generally accepted accounting principles
consistently applied throughout the periods involved except as may be
otherwise stated therein.
(j) Coopers & Lybrand, L.L.P., which has examined (i) the
combined financial statements of Gethsemane Affiliates, together with
the related notes, as of June 30, 1997 and 1996 and for the three (3)
years ended June 30, 1997, (ii) the financial statements of Butler
Senior Care, Inc. ("Butler"), together with the related notes, as of
June 30, 1997 and 1996 and for each of the three (3) years ended June
30, 1997 and (iii) the financial statements of Feltrop's Personal Care
Home ("Feltrop"), together with the related notes, as of June 30, 1997
and 1996 and for the three (3) years ended June 30, 1997, filed with
the Commission as a part of the Registration Statement, which are
included in the Prospectus, are independent accountants within the
meaning of the Act and the Rules and Regulations; the respective
combined financial statements of Gethsemane Affiliates, Butler and
Feltrop, together with the related notes, forming part of the
Registration Statement and Prospectus, fairly present the respective
financial positions and the results of operations of Gethsemane
Affiliates, Butler and Feltrop and their respective subsidiaries at
the respective dates and for the respective periods to which they
apply; and all financial statements of Gethsemane Affiliates, Butler
and Feltrop together with the related notes, filed with the Commission
as part of the Registration Statement, have been prepared in
accordance with generally accepted accounting principles consistently
applied throughout the periods involved except as may be otherwise
stated therein.
(k) Hodge, Steward & Company, P.A., which has examined
the financial statements of Triangle Retirement Services, together
with the related notes, as of December 31, 1997 and 1996 and for the
two (2) years ended December 31, 1997, filed
<PAGE> 9
9
with the Commission as a part of the Registration Statement, which are
included in the Prospectus, are independent accountants within the
meaning of the Act and the Rules and Regulations; the financial
statements of Triangle Retirement Services, together with the related
notes, forming part of the Registration Statement and Prospectus,
fairly present the financial position and the results of operations of
Triangle Retirement Services and its subsidiaries at the respective
dates and for the respective periods to which they apply; and all
financial statements of Triangle Retirement Services together with the
related notes, filed with the Commission as part of the Registration
Statement, have been prepared in accordance with generally accepted
accounting principles consistently applied throughout the periods
involved except as may be otherwise stated therein.
(l) Subsequent to the respective dates as of which
information is given in the Registration Statement and Prospectus,
there has not been (i) any material adverse change in the condition
(financial or otherwise), earnings, operations, business or business
prospects of the Company and its subsidiaries considered as one
enterprise, (ii) any transaction that is material to the Company and
its subsidiaries considered as one enterprise, except transactions
entered into in the ordinary course of business, (iii) any obligation,
direct or contingent, that is material to the Company and its
subsidiaries considered as one enterprise, incurred by the Company or
its subsidiaries, except obligations incurred in the ordinary course
of business, (iv) any change in the capital stock or outstanding
indebtedness of the Company or any of its subsidiaries that is
material to the Company and its subsidiaries considered as one
enterprise, (v) any dividend or distribution of any kind declared,
paid or made on the capital stock of the Company or any of its
subsidiaries, or (vi) any loss or damage (whether or not insured) to
the property of the Company or any of its subsidiaries which has been
sustained or will have been sustained which has a material adverse
effect on the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company and its
subsidiaries considered as one enterprise.
(m) Except as set forth in the Registration Statement and
Prospectus, (i) each of the Company and its subsidiaries has good and
marketable title to all properties and assets described in the
Registration Statement and Prospectus as owned by it free and clear of
any pledge, lien, security interest, encumbrance, claim or equitable
interest, other than such as would not have a material adverse effect
on the condition (financial or otherwise), earnings, operations,
business or business prospects of the Company and its subsidiaries
considered as one enterprise, (ii) the agreements to which the Company
or any of its subsidiaries is a party described in the Registration
Statement and Prospectus are valid agreements, enforceable by the
Company and its subsidiaries (as applicable), except as the
enforcement thereof may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws relating
to or affecting creditors' rights generally or by general equitable
principles and, to the best of the Company's knowledge, the other
contracting party or parties thereto are not in material
<PAGE> 10
10
breach or material default under any of such agreements, and (iii)
each of the Company and its subsidiaries has valid and enforceable
leases for all properties described in the Registration Statement and
Prospectus as leased by it, except as the enforcement thereof may be
limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to or affecting creditors'
rights generally or by general equitable principles. Except as set
forth in the Registration Statement and Prospectus, the Company owns
or leases all such properties as are necessary to its operations as
now conducted or as proposed to be conducted.
(n) The Company and its subsidiaries have timely filed
all necessary federal, state and foreign income and franchise tax
returns and have paid all taxes shown thereon as due, and there is no
tax deficiency that has been or, to the best of the Company's
knowledge, might be asserted against the Company or any of its
subsidiaries that might have a material adverse effect on the
condition (financial or otherwise), earnings, operations, business or
business prospects of the Company and its subsidiaries considered as
one enterprise; and all tax liabilities are adequately provided for on
the books of the Company and its subsidiaries.
(o) The Company and its subsidiaries maintain insurance
with insurers of recognized financial responsibility of the types and
in the amounts generally deemed adequate for their respective
businesses and consistent with insurance coverage maintained by
similar companies in similar businesses, including, but not limited
to, insurance covering real and personal property owned or leased by
the Company or its subsidiaries against theft, damage, destruction,
acts of vandalism and all other risks customarily insured against, all
of which insurance is in full force and effect; neither the Company
nor any such subsidiary has been refused any insurance coverage sought
or applied for; and neither the Company nor any such subsidiary has
any reason to believe that it will not be able to renew its existing
insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue
its business at a cost that would not materially and adversely affect
the condition (financial or otherwise), earnings, operations, business
or business prospects of the Company and its subsidiaries considered
as one enterprise.
(p) To the best of Company's knowledge, no labor
disturbance by the employees of the Company or any of its subsidiaries
exists or is imminent. No collective bargaining agreement exists with
any employees of the Company or any of its subsidiaries and, to the
best of the Company's knowledge, no such agreement is imminent.
(q) The Common Stock has been approved for quotation on
The American Stock Exchange, Inc. subject to official notice of
issuance.
<PAGE> 11
11
(r) The Company has been advised concerning the
Investment Company Act of 1940, as amended (the "1940 Act"), and the
rules and regulations thereunder, and conducts, and has in the past
conducted, and intends in the future to conduct, its affairs in such a
manner as to ensure that it will not become an "investment company" or
a company "controlled" by an "investment company" within the meaning
of the 1940 Act and such rules and regulations.
(s) The Company has not distributed and will not
distribute prior to the later of (i) the Closing Date, or any date on
which Option Shares are to be purchased, as the case may be, and (ii)
completion of the distribution of the Shares, any offering material in
connection with the offering and sale of the Shares other than any
Preliminary Prospectuses, the Prospectus, the Registration Statement
and other materials, if any, permitted by the Act.
(t) Neither the Company nor any of its subsidiaries has
at any time during the last five (5) years (i) made any unlawful
contribution to any candidate for foreign office or failed to disclose
fully any contribution in violation of law, or (ii) made any payment
to any federal or state governmental officer or official, or other
person charged with similar public or quasi-public duties, other than
payments required or permitted by the laws of the United States or any
jurisdiction thereof.
(u) The Company has not taken and will not take, directly
or indirectly, any action designed to or that might reasonably be
expected to cause or result in stabilization or manipulation of the
price of the Common Stock to facilitate the sale or resale of the
Shares.
(v) Each officer and director of the Company and each
beneficial owner of shares of Common Stock or warrants or options to
purchase Common Stock set forth on Annex III attached hereto has agreed
in writing that such person will not, for a period of 180 days from
the date that the Registration Statement is declared effective by the
Commission (the "Lock-up Period"), offer to sell, contract to sell, or
otherwise sell, dispose of, loan, pledge or grant any rights with
respect to (collectively, a "Disposition") any shares of Common Stock,
any options or warrants to purchase any shares of Common Stock or any
securities convertible into or exchangeable for shares of Common Stock
(collectively, "Securities") now owned or hereafter acquired directly
by such person or with respect to which such person has or hereafter
acquires the power of disposition, otherwise than (i) as a bona fide
gift or gifts, provided the donee or donees thereof agree in writing
to be bound by this restriction, (ii) as a distribution to partners or
shareholders of such person, provided that the distributees thereof
agree in writing to be bound by the terms of this restriction, or
(iii) with the prior written consent of BancAmerica Robertson
Stephens. The foregoing restriction has been expressly agreed to
preclude the holder of the Securities from engaging in any hedging or
other transaction
<PAGE> 12
12
which is designed to or reasonably expected to lead to or result in a
Disposition of Securities during the Lock-up Period, even if such
Securities would be disposed of by someone other than such holder.
Such prohibited hedging or other transactions would include, without
limitation, any short sale (whether or not against the box) or any
purchase, sale or grant of any right (including, without limitation,
any put or call option) with respect to any Securities or with respect
to any security (other than a broad-based market basket or index) that
includes, relates to or derives any significant part of its value
from, Securities. Furthermore, such person has also agreed and
consented to the entry of stop transfer instructions with the
Company's transfer agent against the transfer of Securities held by
such person except in compliance with this restriction. The Company
has provided to counsel for the Underwriters a complete and accurate
list of all security holders of the Company and the number and type of
securities held by each security holder. The Company has provided to
counsel for the Underwriters true, accurate and complete copies of all
of the agreements pursuant to which its officers, directors and
shareholders have agreed to such or similar restrictions (the "Lock-up
Agreements") presently in effect or effected hereby.
(w) Except as set forth in the Registration Statement and
Prospectus, (i) the Company is in compliance in all material respects
with all rules, laws and regulations relating to the use, treatment,
storage and disposal of toxic substances and protection of health or
the environment ("Environmental Laws") which are applicable to its
business, (ii) the Company has received no notice from any
governmental authority or third party of an asserted claim under
Environmental Laws, which claim is required to be disclosed in the
Registration Statement and Prospectus, (iii) the Company will not be
required to make future material capital expenditures to comply with
Environmental Laws and (iv) no property which is owned, leased or
occupied by the Company has been designated as a Superfund site
pursuant to the Comprehensive Response, Compensation, and Liability
Act of 1980, as amended (42 U.S.C. Section 9601, et seq.), or
otherwise designated as a contaminated site under applicable state or
local law.
(aa) The Company and each of its subsidiaries maintain a
system of internal accounting controls sufficient to provide
reasonable assurances that (i) transactions are executed in accordance
with management's general or specific authorizations, (ii)
transactions are recorded as necessary to permit preparation of
financial statements in conformity with generally accepted accounting
principles and to maintain accountability for assets, (iii) access to
assets is permitted only in accordance with management's general or
specific authorization, and (iv) the recorded accountability for
assets is compared with existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.
(bb) There are no outstanding loans, advances (except
normal advances for business expenses in the ordinary course of
business) or guarantees of indebtedness by
<PAGE> 13
13
the Company to or for the benefit of any of the officers or directors
of the Company or any of the members of the families of any of them,
except as disclosed in the Registration Statement and the Prospectus
and with respect to a loan to Brian Barth of less than $60,000.
(cc) The Company has complied with all provisions of
Section 517.075, Florida Statutes applicable to it relating to doing
business with the Government of Cuba or with any person or affiliate
located in Cuba.
3. Purchase, Sale and Delivery of Shares. On the basis
of the representations, warranties and agreements herein contained, but subject
to the terms and conditions herein set forth, the Company agrees to sell to the
Underwriters, and each Underwriter agrees, severally and not jointly, to
purchase from the Company, at a purchase price of $_____ per share, the
respective number of Firm Shares as hereinafter set forth. The obligation of
each Underwriter to the Company shall be to purchase from the Company that
number of Firm Shares which is set forth opposite the name of such Underwriter
in Schedule A hereto (subject to adjustment as provided in Section 10).
Delivery of definitive certificates for the Firm Shares to be
purchased by the Underwriters pursuant to this Section 3 shall be made against
payment of the purchase price therefor by the several Underwriters by certified
or official bank check or checks drawn in next-day funds, payable to the order
of the Company (and the Company agrees not to deposit any such check in the
bank on which it is drawn, and not to take any other action with the purpose or
effect of receiving immediately available funds, until the business day
following the date of its delivery to the Company, and, in the event of any
breach of the foregoing, the Company shall reimburse the Underwriters for the
interest lost and any other expenses borne by them by reason of such breach),
at the offices of Shearman & Sterling, 599 Lexington Avenue, New York, New York
10022 (or at such other place as may be agreed upon among the Representatives
and the Company), at 7:00 A.M., San Francisco time (a) on the third (3rd) full
business day following the first day that Shares are traded, (b) if this
Agreement is executed and delivered after 1:30 P.M., San Francisco time, the
fourth (4th) full business day following the day that this Agreement is
executed and delivered or (c) at such other time and date not later than seven
(7) full business days following the first day that Shares are traded as the
Representatives and the Company may determine (or at such time and date to
which payment and delivery shall have been postponed pursuant to Section 10
hereof), such time and date of payment and delivery being herein called the
"Closing Date"; provided, however, that if the Company has not made available
to the Representatives copies of the Prospectus within the time provided in
Section 4(d) hereof, the Representatives may, in their sole discretion,
postpone the Closing Date until no later than two (2) full business days
following delivery of copies of the Prospectus to the Representatives. The
certificates for the Firm Shares to be so delivered will be made available to
you at such office or such other location including, without limitation, in New
York City, as you may reasonably request for checking at least one (1) full
business day prior to the Closing
<PAGE> 14
14
Date and will be in such names and denominations as you may request, such
request to be made at least two (2) full business days prior to the Closing
Date. If the Representatives so elect, delivery of the Firm Shares may be made
by credit through full fast transfer to the accounts at The Depository Trust
Company designated by the Representatives.
It is understood that you, individually, and not as the
Representatives of the several Underwriters, may (but shall not be obligated
to) make payment of the purchase price on behalf of any Underwriter or
Underwriters whose check or checks shall not have been received by you prior to
the Closing Date for the Firm Shares to be purchased by such Underwriter or
Underwriters. Any such payment by you shall not relieve any such Underwriter
or Underwriters of any of its or their obligations hereunder.
After the Registration Statement becomes effective, the
several Underwriters intend to make an initial public offering (as such term is
described in Section 11 hereof) of the Firm Shares at an initial public
offering price of $_____ per share. After the initial public offering, the
several Underwriters may, in their discretion, vary the public offering price.
The information set forth in the last paragraph on the front
cover page (insofar as such information relates to the Underwriters), on the
inside front cover concerning stabilization and over-allotment by the
Underwriters, and under the _____ and _____ paragraphs under the caption
"Underwriting" in any Preliminary Prospectus and in the Prospectus constitutes
the only information furnished by the Underwriters to the Company for inclusion
in any Preliminary Prospectus, the Prospectus or the Registration Statement,
and you, on behalf of the respective Underwriters, represent and warrant to the
Company that the statements made therein do not include any untrue statement of
a material fact or omit to state a material fact required to be stated therein
or necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading.
4. Further Agreements of the Company. The Company
agrees with the several Underwriters that:
(a) The Company will use its best efforts to cause the
Registration Statement and any amendment thereof, if not effective at
the time and date that this Agreement is executed and delivered by the
parties hereto, to become effective as promptly as possible; the
Company will use its best efforts to cause any abbreviated
registration statement pursuant to Rule 462(b) of the Rules and
Regulations as may be required subsequent to the date the Registration
Statement is declared effective to become effective as promptly as
possible; the Company will notify you, promptly after it shall receive
notice thereof, of the time when the Registration Statement, any
subsequent amendment to the Registration Statement or any abbreviated
registration statement has become effective or any supplement to the
Prospectus has been filed; if the Company omitted information from the
Registration Statement at the time it was originally declared
effective in reliance
<PAGE> 15
15
upon Rule 430A(a) of the Rules and Regulations, the Company will
provide evidence satisfactory to you that the Prospectus contains such
information and has been filed, within the time period prescribed,
with the Commission pursuant to subparagraph (1) or (4) of Rule 424(b)
of the Rules and Regulations or as part of a post-effective amendment
to such Registration Statement as originally declared effective which
is declared effective by the Commission; if the Company files a term
sheet pursuant to Rule 434 of the Rules and Regulations, the Company
will provide evidence satisfactory to you that the Prospectus and term
sheet meeting the requirements of Rule 434(b) or (c), as applicable,
of the Rules and Regulations, have been filed, within the time period
prescribed, with the Commission pursuant to subparagraph (7) of Rule
424(b) of the Rules and Regulations; if for any reason the filing of
the final form of Prospectus is required under Rule 424(b)(3) of the
Rules and Regulations, it will provide evidence satisfactory to you
that the Prospectus contains such information and has been filed with
the Commission within the time period prescribed; it will notify you
promptly of any request by the Commission for the amending or
supplementing of the Registration Statement or the Prospectus or for
additional information; promptly upon your request, it will prepare
and file with the Commission any amendments or supplements to the
Registration Statement or Prospectus which, in the opinion of counsel
for the several Underwriters ("Underwriters' Counsel"), may be
necessary or advisable in connection with the distribution of the
Shares by the Underwriters; it will promptly prepare and file with the
Commission, and promptly notify you of the filing of, any amendments
or supplements to the Registration Statement or Prospectus which may
be necessary to correct any statements or omissions, if, at any time
when a prospectus relating to the Shares is required to be delivered
under the Act, any event shall have occurred as a result of which the
Prospectus or any other prospectus relating to the Shares as then in
effect would include any untrue statement of a material fact or omit
to state a material fact necessary to make the statements therein, in
the light of the circumstances under which they were made, not
misleading; in case any Underwriter is required to deliver a
prospectus nine (9) months or more after the effective date of the
Registration Statement in connection with the sale of the Shares, it
will prepare promptly upon request, but at the expense of such
Underwriter, such amendment or amendments to the Registration
Statement and such prospectus or prospectuses as may be necessary to
permit compliance with the requirements of Section 10(a)(3) of the
Act; and it will file no amendment or supplement to the Registration
Statement or Prospectus which shall not previously have been submitted
to you a reasonable time prior to the proposed filing thereof or to
which you shall reasonably object in writing, subject, however, to
compliance with the Act and the Rules and Regulations and the
provisions of this Agreement.
(b) The Company will advise you, promptly after it shall
receive notice or obtain knowledge, of the issuance of any stop order
by the Commission suspending the effectiveness of the Registration
Statement or of the initiation or threat of any proceeding for that
purpose; and it will promptly use its best efforts to prevent the
issuance of any
<PAGE> 16
16
stop order or to obtain its withdrawal at the earliest possible moment
if such stop order should be issued.
(c) The Company will use its best efforts to qualify the
Shares for offering and sale under the securities laws of such
jurisdictions as you may designate and to continue such qualifications
in effect for so long as may be required for purposes of the
distribution of the Shares, except that the Company shall not be
required in connection therewith or as a condition thereof to qualify
as a foreign corporation or to execute a general consent to service of
process in any jurisdiction in which it is not otherwise required to
be so qualified or to so execute a general consent to service of
process. In each jurisdiction in which the Shares shall have been
qualified as above provided, the Company will make and file such
statements and reports in each year as are or may be required by the
laws of such jurisdiction.
(d) The Company will furnish to you, as soon as
available, and, in the case of the Prospectus and any term sheet or
abbreviated term sheet under Rule 434, in no event later than the
first (1st) full business day following the first day that Shares are
traded, copies of the Registration Statement (three of which will be
signed and which will include all exhibits), each Preliminary
Prospectus, the Prospectus and any amendments or supplements to such
documents, including any prospectus prepared to permit compliance with
Section 10(a)(3) of the Act, all in such quantities as you may from
time to time reasonably request. Notwithstanding the foregoing, if
BancAmerica Robertson Stephens, on behalf of the several Underwriters,
shall agree to the utilization of Rule 434 of the Rules and
Regulations, the Company shall provide to you copies of a Preliminary
Prospectus updated in all respects through the date specified by you
in such quantities as you may from time to time reasonably request.
(e) The Company will make generally available to its
security holders as soon as practicable, but in any event not later
than the forty-fifth (45th) day following the end of the fiscal
quarter first occurring after the first anniversary of the effective
date of the Registration Statement, an earnings statement (which will
be in reasonable detail but need not be audited) complying with the
provisions of Section 11(a) of the Act and covering a twelve (12)
month period beginning after the effective date of the Registration
Statement.
(f) During a period of five (5) years after the date
hereof, the Company will furnish to its shareholders as soon as
practicable after the end of each respective period, annual reports
(including financial statements audited by independent certified
public accountants) and unaudited quarterly reports of operations for
each of the first three quarters of the fiscal year, and will furnish
to you and the other several Underwriters hereunder, upon request (i)
concurrently with furnishing such reports to its shareholders,
statements of operations of the Company for each of the first three
(3) quarters in the
<PAGE> 17
17
form furnished to the Company's shareholders, (ii) concurrently with
furnishing to its shareholders, a balance sheet of the Company as of
the end of such fiscal year, together with statements of operations,
of shareholders' equity, and of cash flows of the Company for such
fiscal year, accompanied by a copy of the certificate or report
thereon of independent certified public accountants, (iii) as soon as
they are available, copies of all reports (financial or other) mailed
to shareholders, (iv) as soon as they are available, copies of all
reports and financial statements furnished to or filed with the
Commission, any securities exchange or the National Association of
Securities Dealers, Inc. ("NASD"), (v) every material press release
and every material news item or article in respect of the Company or
its affairs which was generally released to shareholders or prepared
by the Company or any of its subsidiaries, and (vi) any additional
information of a public nature concerning the Company or its
subsidiaries, or its business which you may reasonably request.
During such five (5) year period, if the Company shall have active
subsidiaries, the foregoing financial statements shall be on a
consolidated basis to the extent that the accounts of the Company and
its subsidiaries are consolidated, and shall be accompanied by similar
financial statements for any significant subsidiary which is not so
consolidated.
(g) The Company will apply the net proceeds from the sale
of the Shares being sold by it in the manner set forth under the
caption "Use of Proceeds" in the Prospectus.
(h) The Company will maintain a transfer agent and, if
necessary under the jurisdiction of incorporation of the Company, a
registrar (which may be the same entity as the transfer agent) for its
Common Stock.
(i) If the transactions contemplated hereby are not
consummated by reason of any failure, refusal or inability on the part
of the Company to perform any agreement on its parts to be performed
hereunder or to fulfill any condition of the Underwriters' obligations
hereunder, or if the Company shall terminate this Agreement pursuant
to Section 11(a) hereof, or if the Underwriters shall terminate this
Agreement pursuant to Section 11(b)(i), the Company will reimburse the
several Underwriters for all out-of-pocket expenses (including fees
and disbursements of Underwriters' Counsel) incurred by the
Underwriters in investigating or preparing to market or marketing the
Shares.
(j) If at any time during the ninety (90) day period
after the Registration Statement becomes effective, any rumor,
publication or event relating to or affecting the Company shall occur
as a result of which in your opinion the market price of the Common
Stock has been or is likely to be materially affected (regardless of
whether such rumor, publication or event necessitates a supplement to
or amendment of the Prospectus), the Company will, after written
notice from you advising the Company to the effect set forth above,
forthwith prepare, consult with you concerning the substance
<PAGE> 18
18
of and disseminate a press release or other public statement,
reasonably satisfactory to you, responding to or commenting on such
rumor, publication or event.
(k) During the Lock-up Period, the Company will not,
without the prior written consent of BancAmerica Robertson Stephens,
effect the Disposition of, directly or indirectly, any Securities
other than the sale of the Firm Shares and the Option Shares hereunder
and the Company's issuance of options or Common Stock under the
Company's presently authorized 1996 Stock Option Plan (the "Option
Plan").
(l) During a period of ninety (90) days from the
effective date of the Registration Statement, the Company will not
file a registration statement registering shares under the Option Plan
or other employee benefit plan.
5. Expenses. The Company agrees with each Underwriter
that:
(a) The Company will pay and bear all costs and expenses
in connection with the preparation, printing and filing of the
Registration Statement (including financial statements, schedules and
exhibits), Preliminary Prospectuses and the Prospectus and any
amendments or supplements thereto; the printing of this Agreement, the
Agreement Among Underwriters, the Selected Dealer Agreement, the
Preliminary Blue Sky Survey and any Supplemental Blue Sky Survey, the
Underwriters' Questionnaire and Power of Attorney, and any instruments
related to any of the foregoing; the issuance and delivery of the
Shares hereunder to the several Underwriters, including transfer
taxes, if any, the cost of all certificates representing the Shares
and transfer agents' and registrars' fees; the fees and disbursements
of counsel for the Company; all fees and other charges of the
Company's independent certified public accountants; the cost of
furnishing to the several Underwriters copies of the Registration
Statement (including appropriate exhibits), Preliminary Prospectus and
the Prospectus, and any amendments or supplements to any of the
foregoing; NASD filing fees and the cost of qualifying the Shares
under the laws of such jurisdictions as you may designate (including
filing fees and fees and disbursements of Underwriters' Counsel in
connection with such NASD filings and Blue Sky qualifications); and
all other expenses directly incurred by the Company in connection with
the performance of their obligations hereunder.
(b) In addition to its other obligations under Section
8(a) hereof, the Company agrees that, as an interim measure during the
pendency of any claim, action, investigation, inquiry or other
proceeding described in Section 8(a) hereof, it will reimburse the
Underwriters on a monthly basis for all reasonable legal or other
expenses incurred in connection with investigating or defending any
such claim, action, investigation, inquiry or other proceeding,
notwithstanding the absence of a judicial determination as to the
propriety and enforceability of the Company's obligation to reimburse
the Underwriters for such expenses and the possibility that such
payments
<PAGE> 19
19
might later be held to have been improper by a court of competent
jurisdiction. To the extent that any such interim reimbursement
payment is so held to have been improper, the Underwriters shall
promptly return such payment to the Company together with interest,
compounded daily, determined on the basis of the prime rate (or other
commercial lending rate for borrowers of the highest credit standing)
listed from time to time in The Wall Street Journal which represents
the base rate on corporate loans posted by a substantial majority of
the nation's thirty (30) largest banks (the "Prime Rate"). Any such
interim reimbursement payments which are not made to the Underwriters
within thirty (30) days of a request for reimbursement shall bear
interest at the Prime Rate from the date of such request.
(c) In addition to their other obligations under Section
8(c) hereof, the Underwriters severally and not jointly agree that, as
an interim measure during the pendency of any claim, action,
investigation, inquiry or other proceeding described in Section 8(c)
hereof, they will reimburse the Company on a monthly basis for all
reasonable legal or other expenses incurred in connection with
investigating or defending any such claim, action, investigation,
inquiry or other proceeding, notwithstanding the absence of a judicial
determination as to the propriety and enforceability of the
Underwriters' obligation to reimburse the Company for such expenses
and the possibility that such payments might later be held to have
been improper by a court of competent jurisdiction. To the extent
that any such interim reimbursement payment is so held to have been
improper, the Company shall promptly return such payment to the
Underwriters together with interest, compounded daily, determined on
the basis of the Prime Rate. Any such interim reimbursement payments
which are not made to the Company within thirty (30) days of a request
for reimbursement shall bear interest at the Prime Rate from the date
of such request.
(d) It is agreed that any controversy arising out of the
operation of the interim reimbursement arrangements set forth in
Sections 5(a) and 5(b) hereof, including the amounts of any requested
reimbursement payments, the method of determining such amounts and the
basis on which such amounts shall be apportioned among the reimbursing
parties, shall be settled by arbitration conducted under the
provisions of the Constitution and Rules of the Board of Governors of
the New York Stock Exchange, Inc. or pursuant to the Code of
Arbitration Procedure of the NASD. Any such arbitration must be
commenced by service of a written demand for arbitration or a written
notice of intention to arbitrate, therein electing the arbitration
tribunal. In the event the party demanding arbitration does not make
such designation of an arbitration tribunal in such demand or notice,
then the party responding to said demand or notice is authorized to do
so. Any such arbitration will be limited to the operation of the
interim reimbursement provisions contained in Sections 5(a) and 5(b)
hereof and will not resolve the ultimate propriety or enforceability
of the obligation to indemnify for expenses which is created
<PAGE> 20
20
by the provisions of Sections 8(a) and 8(c) hereof or the obligation
to contribute to expenses which is created by the provisions of
Section 8(e) hereof.
6. Conditions of Underwriters' Obligations. The
obligations of the several Underwriters to purchase and pay for the Shares as
provided herein shall be subject to the accuracy, as of the date hereof and the
Closing Date and any later date on which Option Shares are to be purchased, as
the case may be, of the representations and warranties of the Company herein,
to the performance by the Company of its obligations hereunder and to the
following additional conditions:
(a) The Registration Statement shall have become
effective not later than 2:00 P.M., San Francisco time, on the date
following the date of this Agreement, or such later date as shall be
consented to in writing by you; and no stop order suspending the
effectiveness thereof shall have been issued and no proceedings for
that purpose shall have been initiated or threatened by the
Commission, and any request of the Commission for additional
information (to be included in the Registration Statement or the
Prospectus or otherwise) shall have been complied with to the
satisfaction of Underwriters' Counsel.
(b) All corporate proceedings and other legal matters in
connection with this Agreement, the form of Registration Statement and
the Prospectus, and the registration, authorization, issue, sale and
delivery of the Shares, shall have been reasonably satisfactory to
Underwriters' Counsel, and such counsel shall have been furnished with
such papers and information as they may reasonably have requested to
enable them to pass upon the matters referred to in this Section.
(c) Subsequent to the execution and delivery of this
Agreement and prior to the Closing Date, or any later date on which
Option Shares are to be purchased, as the case may be, there shall not
have been any change in the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company
and its subsidiaries considered as one enterprise from that set forth
in the Registration Statement or Prospectus, which, in your sole
judgment, is material and adverse and that makes it, in your sole
judgment, impracticable or inadvisable to proceed with the public
offering of the Shares as contemplated by the Prospectus.
(d) You shall have received on the Closing Date and on
any later date on which Option Shares are to be purchased, as the case
may be, the following opinion of counsel for the Company, dated the
Closing Date or such later date on which Option Shares are to be
purchased addressed to the Underwriters and with reproduced copies or
signed counterparts thereof for each of the Underwriters, to the
effect that:
<PAGE> 21
21
(i) The Company and each subsidiary listed on
Annex IV attached hereto (each a "Significant Subsidiary")
has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the
jurisdiction of its incorporation;
(ii) The Company and each Significant Subsidiary
has the corporate power and authority to own, lease and
operate its properties and to conduct its business as
described in the Prospectus;
(iii) The Company and each Significant Subsidiary
is duly qualified to do business as a foreign corporation and
is in good standing in each jurisdiction, if any, in which it
owns or leases real property or in which its employees report
to work on a regular basis, except where the failure to be so
qualified or be in good standing, individually or in the
aggregate, would not have a material adverse effect on the
condition (financial or otherwise), earnings, operations or
business of the Company and its subsidiaries considered as one
enterprise. To such counsel's knowledge, the Company does not
own a majority of the voting power of or directly or
indirectly possess majority voting control over, any
corporation, association or other entity other than those
identified in Section 2(b) of this Agreement (collectively,
the "Subsidiaries");
(iv) The authorized, issued and outstanding
capital stock of the Company is as set forth in the Prospectus
under the caption "Capitalization" as of the dates stated
therein. All of the issued and outstanding shares of capital
stock of the Company (a) have been authorized and are duly and
validly issued, fully paid and nonassessable, and (b) to such
counsel's knowledge, have not have been issued in violation of
or subject to any preemptive right, co-sale right,
registration right, right of first refusal or other similar
right existing under statute, the Company's charter or
by-laws, or the terms of any agreement or informant to which
the Company is a party;
(v) (a) The Company is the record holder of all
issued and outstanding shares of capital stock of each
Significant Subsidiary of the Company, (b) all the issued and
outstanding stock of each Significant Subsidiary has been
authorized and are duly and validly issued, fully paid and
nonassessable, and (c) to such counsel's knowledge, such
shares have not been issued in violation of or subject to any
preemptive right, co-sale right, registration right, right of
first refusal or other similar right, existing under statute,
such subsidiary's charter or by-laws or any agreement or
instrument to which the Company or any such subsidiary is a
party, and, except as set forth in Schedule B to this
Agreement, are owned by the Company free and clear of any
pledge, lien, security interest, encumbrance, claim or
equitable interest;
<PAGE> 22
22
(vi) The Firm Shares or the Option Shares, as the
case may be, to be issued by the Company pursuant to the terms
of this Agreement have been duly authorized and, upon issuance
and delivery against payment therefor in accordance with the
terms hereof, will be duly and validly issued and fully paid
and nonassessable, and will not have been issued in violation
of or subject to any preemptive right, co-sale right,
registration right, right of first refusal or other similar
right, existing under statute, the Company's charter or
by-laws or any agreement or instrument to which the Company is
a party; the capital stock of the Company conforms as to legal
matters to the descriptions thereof contained in the
Prospectus under the caption "Description of Capital Stock";
and the forms of certificates evidencing the Common Stock and
filed as exhibits to the Registration Statement comply with
Delaware law;
(vii) The Company has the corporate power and
authority to enter into this Agreement and to issue, sell and
deliver to the Underwriters the Shares to be issued and sold
by it hereunder;
(viii) This Agreement has been duly authorized by
all necessary corporate action on the part of the Company and
has been duly executed and delivered by the Company and,
assuming due authorization, execution and delivery by you, is
a valid and binding agreement of the Company, enforceable in
accordance with its terms, except insofar as indemnification
provisions may be limited by applicable law and except as
enforceability may be limited by bankruptcy, insolvency,
fraudulent transfer, reorganization, receivership, moratorium
and similar laws relating to or affecting creditors' rights or
remedies generally or by general equitable principles;
(ix) The Registration Statement and all
post-effective amendments (if any) have become effective under
the Act. To such counsel's knowledge, no stop order
suspending the effectiveness of the Registration Statement has
been issued and no proceedings for that purpose have been
instituted or are pending or threatened under the Act. Any
required filings of the Prospectus pursuant to Rule 424(b)
have been made in accordance with Rule 424(b);
(x) The Registration Statement and the Prospectus
and any further amendment or supplement thereto (other than
the financial statements (including supporting schedules) and
financial data derived therefrom as to which such counsel need
express no opinion), as of the effective date of the
Registration Statement, complied as to form in all material
respects with the requirements of the Act and the applicable
Rules and Regulations;
<PAGE> 23
23
(xi) The description in the Registration Statement
and the Prospectus of the charter and bylaws of the Company
and of statutes, legal and governmental proceedings, contracts
and other documents are accurate and fairly present the
information required to be disclosed with respect thereto
pursuant to the Act and the applicable Rules and Regulations;
and such counsel does not know of any statutes or legal or
governmental proceedings required to be described in the
Prospectus that are not described as required, or of any
contracts or documents of a character required to be described
or referred to or be filed as an exhibit to the Registration
Statement or the Prospectus that has not been described or
referred to therein or filed as required;
(xii) The statements under the captions "Risk
Factors--Government Regulation," "Risk Factors--Health Care
Reform," "Risk Factors--Shares Eligible for Future Sale,"
"Management--Certain Relationships and Related Transactions,"
"Description of Capital Stock" and "Shares Eligible for Future
Sale" in the Prospectus and in items 14 and 15 of the
Registration Statement, insofar as such statements constitute
a summary of documents referred to therein or of matters of
law, are accurate summaries and fairly and correctly present
the information called for with respect to such documents and
matters;
(xiii) The performance of this Agreement and the
consummation of the transactions herein contemplated (other
than performance of the Company's indemnification obligations
hereunder concerning which no opinion need be expressed) do
not (a) violate the Company's charter or bylaws or (b)
constitute a material breach or violation of any existing
obligation of the Company, or constitute a default under, any
bond, debenture, note or other evidence of indebtedness, or
any lease, contract, indenture, mortgage, deed of trust, loan
agreement, joint venture or other agreement or instrument
known to such counsel to which the Company is a party or by
which its properties are bound, or any applicable statute,
rule or regulation known to such counsel or, to such counsel's
knowledge, any order, writ or decree of any court, government
or governmental agency or body having jurisdiction over the
Company or any of its subsidiaries, or over any of their
properties or operations;
(xiv) No consent, approval, authorization or order
of or qualification with any court, government or governmental
agency or body having jurisdiction over the Company or any of
its Subsidiaries, or over any of their properties or
operations is necessary as a condition to the performance by
the Company of its obligations under this Agreement, except
such as have been obtained under the Act such as may be
required under state or other securities or Blue Sky laws in
connection with the purchase and the distribution of the
Shares by the Underwriters;
<PAGE> 24
24
(xv) To such counsel's knowledge, no legal or
governmental proceedings are pending or threatened against the
Company or any of its Subsidiaries, of a character required to
be described in the Registration Statement or the Prospectus
by the Act or the Rules and Regulations, other than those
described therein;
(xvi) To such counsel's knowledge, none of the
Company or any of its subsidiaries is presently (a) in
violation of its respective charter or bylaws or (b) in breach
of any applicable statute, rule or regulation known to such
counsel or, to such counsel's knowledge, any order, writ or
decree of any court or governmental agency or body having
jurisdiction over the Company or any of its respective
subsidiaries, or over any of their properties or operations,
in each case except as would not likely result in any material
adverse change in the condition (financial or otherwise),
earnings, operations or business of the Company and its
subsidiaries considered as one enterprise (this opinion may be
give by in-house counsel);
(xvii) The Company is not an "investment company"
within the meaning of the Investment Company Act of 1940, as
amended, and the rules and regulations thereunder; and
(xviii) To such counsel's knowledge, except as set
forth in the Registration Statement and Prospectus, no holders
of Common Stock or other securities of the Company have
registration rights with respect to securities of the Company
pursuant to the terms of any agreement or instrument to which
the Company is a party and, except as set forth in the
Registration Statement and Prospectus, all holders of
securities of the Company having rights known to such counsel
to registration of such shares of Common Stock or other
securities, because of the filing of the Registration
Statement by the Company have, with respect to the offering
contemplated thereby, waived such rights or such rights have
expired by reason of lapse of time following notification of
the Company's intent to file the Registration Statement or
have included securities in the Registration Statement
pursuant to the exercise of and in full satisfaction of such
rights.
In addition, such counsel shall state that such counsel has
participated in conferences with officials and other representatives
of the Company, the Representatives, Underwriters' Counsel and the
independent certified public accountants of the Company, at which such
conferences the contents of the Registration Statement and Prospectus
and related matters were discussed, and although they have not
verified the accuracy or completeness of the statements contained in
the Registration Statement or the Prospectus, nothing has come to the
attention of such counsel which leads them to believe that, at the
<PAGE> 25
25
time the Registration Statement became effective and at all times
subsequent thereto up to and on the Closing Date and on any later date
on which Option Shares are to be purchased, as the case may be, the
Registration Statement and any amendment or supplement thereto (other
than the financial statements, including supporting schedules and
other financial and statistical data or information derived therefrom,
as to which such counsel need express no comment) contained any untrue
statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading, or at the Closing Date or any later date on
which the Option Shares are to be purchased, as the case may be, the
Registration Statement, the Prospectus and any amendment or supplement
thereto (except as aforesaid) contained any untrue statement of a
material fact or omitted to state a material fact necessary to make
the statements therein, in the light of the circumstances under which
they were made, not misleading.
Counsel rendering the foregoing opinion may rely as to
questions of fact upon representations or certificates of officers of
the Company and of government officials, in which case their opinion
is to state that they are so relying and that they have no knowledge
of any material misstatement or inaccuracy in any such representation
or certificate. Copies of any representation or certificate so relied
upon shall be delivered to you, as Representatives of the
Underwriters, and to Underwriters' Counsel.
(e) You shall have received on the Closing Date and on
any later date on which Option Shares are to be purchased, as the case
may be, an opinion of Shearman & Sterling, in form and substance
satisfactory to you, with respect to the sufficiency of all such
corporate proceedings and other legal matters relating to this
Agreement and the transactions contemplated hereby as you may
reasonably require, and the Company shall have furnished to such
counsel such documents as they may have requested for the purpose of
enabling them to pass upon such matters.
(f) You shall have received on the Closing Date and on
any later date on which Option Shares are to be purchased, as the case
may be, a letter from KPMG Peat Marwick LLP addressed to the
Underwriters, dated the Closing Date or such later date on which
Option Shares are to be purchased, as the case may be, confirming that
they are independent certified public accountants with respect to the
Company within the meaning of the Act and the applicable published
Rules and Regulations and based upon the procedures described in such
letter delivered to you concurrently with the execution of this
Agreement (herein called the "KPMG Original Letter"), but carried out
to a date not more than five (5) business days prior to the Closing
Date or such later date on which Option Shares are to be purchased, as
the case may be, (i) confirming, to the extent true, that the
statements and conclusions set forth in the KPMG Original Letter are
accurate as of the Closing Date or such later date on which Option
Shares are to be purchased, as the case may be, and (ii) setting forth
any revisions and additions to the
<PAGE> 26
26
statements and conclusions set forth in the KPMG Original Letter which
are necessary to reflect any changes in the facts described in the
KPMG Original Letter since the date of such letter, or to reflect the
availability of more recent financial statements, data or information.
The letter shall not disclose any change in the condition (financial
or otherwise), earnings, operations, business or business prospects of
the Company and its subsidiaries considered as one enterprise from
that set forth in the Registration Statement or Prospectus, which, in
your sole judgment, is material and adverse and that makes it, in your
sole judgment, impracticable or inadvisable to proceed with the public
offering of the Shares as contemplated by the Prospectus. The KPMG
Original Letter shall be addressed to or for the use of the
Underwriters in form and substance satisfactory to the Underwriters
and shall (i) represent, to the extent true, that they are independent
certified public accountants with respect to the Company within the
meaning of the Act and the applicable published Rules and Regulations,
(ii) set forth their opinion with respect to their examination of the
consolidated balance sheet of the Company as of June 30, 1997 and 1996
and related consolidated statements of operations, shareholders'
equity, and cash flows for the years then ended and for the period
from April 17, 1995 (date of inception) to June 30, 1995 and (iii)
address other matters agreed upon by KPMG Peat Marwick LLP and you.
In addition, you shall have received from KPMG Peat Marwick LLP a
letter addressed to the Company and made available to you for the use
of the Underwriters stating that their review of the Company's system
of internal accounting controls, to the extent they deemed necessary
in establishing the scope of their audit of the Company's consolidated
financial statements as of June 30, 1997, did not disclose any
weaknesses in internal controls that they considered to be material
weaknesses.
(g) You shall have received on the Closing Date and on
any later date on which Option Shares are to be purchased, as the case
may be, a letter from Baird, Kurtz & Dobson addressed to the
Underwriters, dated the Closing Date or such later date on which
Option Shares are to be purchased, as the case may be, confirming that
they are independent certified public accountants with respect to
Foster Healthcare and Joe Clark within the meaning of the Act and the
applicable published Rules and Regulations and based upon the
procedures described in such letter delivered to you concurrently with
the execution of this Agreement (herein called the "Baird Original
Letter"), but carried out to a date not more than five (5) business
days prior to the Closing Date or such later date on which Option
Shares are to be purchased, as the case may be, (i) confirming, to the
extent true, that the statements and conclusions set forth in the
Baird Original Letter are accurate as of the Closing Date or such
later date on which Option Shares are to be purchased, as the case may
be, and (ii) setting forth any revisions and additions to the
statements and conclusions set forth in the Baird Original Letter
which are necessary to reflect any changes in the facts described in
the Baird Original Letter since the date of such letter, or to reflect
the availability of more recent financial statements, data or
information. The letter shall not disclose any change in the
condition (financial or otherwise), earnings, operations, business or
business prospects of the Company and its
<PAGE> 27
27
subsidiaries considered as one enterprise from that set forth in the
Registration Statement or Prospectus, which, in your sole judgment, is
material and adverse and that makes it, in your sole judgment,
impracticable or inadvisable to proceed with the public offering of
the Shares as contemplated by the Prospectus. The Baird Original
Letter shall be addressed to or for the use of the Underwriters in
form and substance satisfactory to the Underwriters and shall (i)
represent, to the extent true, that they are independent certified
public accountants with respect to Foster Healthcare and Joe Clark
within the meaning of the Act and the applicable published Rules and
Regulations, (ii) set forth their opinion with respect to their audits
of: (A) the combined balance sheets of Foster Healthcare as of June
30, 1996 and 1995 and related combined statements of operations,
shareholders' equity, and cash flows for the two (2) years ended June
30, 1996 and (B) the balance sheet of Joe Clark as of December 31,
1996 and related statements of income, shareholders' equity and cash
flows for the year ended December 31, 1996, and (iii) address other
matters agreed upon by Baird, Kurtz & Dobson and you.
(h) You shall have received on the Closing Date and on
any later date on which Option Shares are to be purchased, as the case
may be, a letter from Snyder & Clemente addressed to the Underwriters,
dated the Closing Date or such later date on which Option Shares are
to be purchased, as the case may be, confirming that they are
independent certified public accountants with respect to Keystone
Affiliates within the meaning of the Act and the applicable published
Rules and Regulations and based upon the procedures described in such
letter delivered to you concurrently with the execution of this
Agreement (herein called the "Snyder Original Letter"), but carried
out to a date not more than five (5) business days prior to the
Closing Date or such later date on which Option Shares are to be
purchased, as the case may be, (i) confirming, to the extent true,
that the statements and conclusions set forth in the Snyder Original
Letter are accurate as of the Closing Date or such later date on which
Option Shares are to be purchased, as the case may be, and (ii)
setting forth any revisions and additions to the statements and
conclusions set forth in the Snyder Original Letter which are
necessary to reflect any changes in the facts described in the Snyder
Original Letter since the date of such letter, or to reflect the
availability of more recent financial statements, data or information.
The letter shall not disclose any change in the condition (financial
or otherwise), earnings, operations, business or business prospects of
the Company and its subsidiaries considered as one enterprise from
that set forth in the Registration Statement or Prospectus, which, in
your sole judgment, is material and adverse and that makes it, in your
sole judgment, impracticable or inadvisable to proceed with the public
offering of the Shares as contemplated by the Prospectus. The Snyder
Original Letter shall be addressed to or for the use of the
Underwriters in form and substance satisfactory to the Underwriters
and shall (i) represent, to the extent true, that they are independent
certified public accountants with respect to Keystone Affiliates
within the meaning of the Act and the applicable published Rules and
Regulations, (ii) set forth their opinion with respect to their audit
of the combined financial statements of Keystone Affiliates, together
with
<PAGE> 28
28
the related notes, as of December 31, 1996 and 1995 and for the three
(3) years ended December 31, 1996 and (iii) address other matters
agreed upon by Snyder & Clemente and you.
(i) You shall have received on the Closing Date and on
any later date on which Option Shares are to be purchased, as the case
may be, a letter from Hodge, Steward & Company, P.A. addressed to the
Underwriters, dated the Closing Date or such later date on which
Option Shares are to be purchased, as the case may be, confirming that
they are independent certified public accountants with respect to
Triangle Retirement Services within the meaning of the Act and the
applicable published Rules and Regulations and based upon the
procedures described in such letter delivered to you concurrently with
the execution of this Agreement (herein called the "Hodge Original
Letter"), but carried out to a date not more than five (5) business
days prior to the Closing Date or such later date on which Option
Shares are to be purchased, as the case may be, (i) confirming, to the
extent true, that the statements and conclusions set forth in the
Hodge Original Letter are accurate as of the Closing Date or such
later date on which Option Shares are to be purchased, as the case may
be, and (ii) setting forth any revisions and additions to the
statements and conclusions set forth in the Hodge Original Letter
which are necessary to reflect any changes in the facts described in
the Hodge Original Letter since the date of such letter, or to reflect
the availability of more recent financial statements, data or
information. The letter shall not disclose any change in the
condition (financial or otherwise), earnings, operations, business or
business prospects of the Company and its subsidiaries considered as
one enterprise from that set forth in the Registration Statement or
Prospectus, which, in your sole judgment, is material and adverse and
that makes it, in your sole judgment, impracticable or inadvisable to
proceed with the public offering of the Shares as contemplated by the
Prospectus. The Hodge Original Letter shall be addressed to or for
the use of the Underwriters in form and substance satisfactory to the
Underwriters and shall (i) represent, to the extent true, that they
are independent certified public accountants with respect to Triangle
Retirement Services within the meaning of the Act and the applicable
published Rules and Regulations, (ii) set forth their opinion with
respect to their audit of the combined balance sheet of Triangle
Retirement Services as of December 31, 1996 and 1995 and related
combined statements of operations, shareholders' equity, and cash
flows for the two (2) years ended December 31, 1996 and (iii) address
other matters agreed upon by Hodge, Steward & Company, P.A, and you.
(j) You shall have received on the Closing Date and on
any later date on which Option Shares are to be purchased, as the case
may be, letters from Coopers & Lybrand, L.L.P. addressed to the
Underwriters, dated the Closing Date or such later date on which
Option Shares are to be purchased, as the case may be, confirming that
they are independent certified public accountants with respect to
Gethsemane Affiliates, Butler and Feltrop within the meaning of the
Act and the applicable published Rules and
<PAGE> 29
29
Regulations and based upon the procedures described in such letter
delivered to you concurrently with the execution of this Agreement
(herein called the "Coopers Original Letters"), but carried out to a
date not more than five (5) business days prior to the Closing Date or
such later date on which Option Shares are to be purchased, as the
case may be, (i) confirming, to the extent true, that the statements
and conclusions set forth in the Coopers Original Letters are accurate
as of the Closing Date or such later date on which Option Shares are
to be purchased, as the case may be, and (ii) setting forth any
revisions and additions to the statements and conclusions set forth in
the Coopers Original Letters which are necessary to reflect any
changes in the facts described in the Coopers Original Letters since
the date of such letter, or to reflect the availability of more recent
financial statements, data or information. The letters shall not
disclose any change in the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company
and its subsidiaries considered as one enterprise from that set forth
in the Registration Statement or Prospectus, which, in your sole
judgment, is material and adverse and that makes it, in your sole
judgment, impracticable or inadvisable to proceed with the public
offering of the Shares as contemplated by the Prospectus. The Coopers
Original Letters shall be addressed to or for the use of the
Underwriters in form and substance satisfactory to the Underwriters
and shall (i) represent, to the extent true, that they are independent
certified public accountants with respect to Gethsemane Affiliates,
Butler and Feltrop within the meaning of the Act and the applicable
published Rules and Regulations, (ii) set forth their opinion with
respect to their audits of: (A) the combined financial statements of
Gethsemane Affiliates, together with the related notes, as of June 30,
1997 and 1996 and for the three (3) years ended June 30, 1997, (B) the
financial statements of Butler, together with the related notes, as of
June 30, 1997 and for each of the three (3) years ended June 30, 1997
and (C) the financial statements of Feltrop, together with the related
notes, as of June 30, 1997 and for the three (3) years ended June 30,
1997 and (iii) address other matters agreed upon by Coopers & Lybrand,
L.L.P. and you.
(k) You shall have received on the Closing Date and on
any later date on which Option Shares are to be purchased, as the case
may be, a certificate of the Company, dated the Closing Date or such
later date on which Option Shares are to be purchased, as the case may
be, signed by the Chief Executive Officer and Chief Financial Officer
of the Company, to the effect that, and you shall be satisfied that:
(i) The representations and warranties of the
Company in this Agreement are true and correct, as if made on
and as of the Closing Date or any later date on which Option
Shares are to be purchased, as the case may be, and the
Company has complied with all the agreements and satisfied all
the conditions on its part to be performed or satisfied at or
prior to the Closing Date or any later date on which Option
Shares are to be purchased, as the case may be:
<PAGE> 30
30
(ii) No stop order suspending the effectiveness of
the Registration Statement has been issued and no proceedings
for that purpose have been instituted or are pending or
threatened under the Act;
(iii) When the Registration Statement became
effective and at all times subsequent thereto up to the
delivery of such certificate, the Registration Statement and
the Prospectus, and any amendments or supplements thereto,
contained all material information required to be included
therein by the Act and the Rules and Regulations and in all
material respects conformed to the requirements of the Act and
the Rules and Regulations, the Registration Statement, and any
amendment or supplement thereto, did not and does not include
any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to
make the statements therein not misleading, the Prospectus,
and any amendment or supplement thereto, did not and does not
include any untrue statement of a material fact or omit to
state a material fact necessary to make the statements
therein, in the light of the circumstances under which they
were made, not misleading, and, since the effective date of
the Registration Statement, there has occurred no event
required to be set forth in an amended or supplemented
Prospectus which has not been so set forth; and
(iv) Subsequent to the respective dates as of
which information is given in the Registration Statement and
Prospectus, there has not been (a) any material adverse change
in the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company and
its subsidiaries considered as one enterprise, (b) any
transaction that is material to the Company and its
subsidiaries considered as one enterprise, except transactions
entered into in the ordinary course of business, (c) any
obligation, direct or contingent, that is material to the
Company and its subsidiaries considered as one enterprise,
incurred by the Company or its subsidiaries, except
obligations incurred in the ordinary course of business, (d)
any change in the capital stock or outstanding indebtedness of
the Company or any of its subsidiaries that is material to the
Company and its subsidiaries considered as one enterprise, (e)
any dividend or distribution of any kind declared, paid or
made on the capital stock of the Company or any of its
subsidiaries, or (f) any loss or damage (whether or not
insured) to the property of the Company or any of its
subsidiaries which has been sustained or will have been
sustained which has a material adverse effect on the condition
(financial or otherwise), earnings, operations, business or
business prospects of the Company and its subsidiaries
considered as one enterprise.
(l) The Company shall have obtained and delivered to you
an agreement from each officer and director of the Company and each
beneficial owner shares of Common
<PAGE> 31
31
Stock or warrants or options to acquire shares of Common Stock (set
forth on Annex III attached hereto) in writing prior to the date hereof
that such person will not, during the Lock-up Period, effect the
Disposition of any Securities now owned or hereafter acquired directly
by such person or with respect to which such person has or hereafter
acquires the power of disposition, otherwise than (i) as a bona fide
gift or gifts, provided the donee or donees thereof agree in writing
to be bound by this restriction, (ii) as a distribution to partners or
shareholders of such person, provided that the distributees thereof
agree in writing to be bound by the terms of this restriction, or
(iii) with the prior written consent of BancAmerica Robertson
Stephens. The foregoing restriction shall have been expressly agreed
to preclude the holder of the Securities from engaging in any hedging
or other transaction which is designed to or reasonably expected to
lead to or result in a Disposition of Securities during the Lock-up
Period, even if such Securities would be disposed of by someone other
than the such holder. Such prohibited hedging or other transactions
would including, without limitation, any short sale (whether or not
against the box) or any purchase, sale or grant of any right
(including, without limitation, any put or call option) with respect
to any Securities or with respect to any security (other than a
broad-based market basket or index) that includes, relates to or
derives any significant part of its value from Securities.
Furthermore, such person will have also agreed and consented to the
entry of stop transfer instructions with the Company's transfer agent
against the transfer of the Securities held by such person except in
compliance with this restriction.
(m) The Company shall have furnished to you such further
certificates and documents as you shall reasonably request (including
certificates of officers of the Company), as to the accuracy of the
representations and warranties of the Company herein, as to the
performance by the Company of its obligations hereunder and as to the
other conditions concurrent and precedent to the obligations of the
Underwriters hereunder.
All such opinions, certificates, letters and documents will be
in compliance with the provisions hereof only if they are reasonably
satisfactory to Underwriters' Counsel. The Company will furnish you
with such number of conformed copies of such opinions, certificates,
letters and documents as you shall reasonably request.
7. Option Shares.
(a) On the basis of the representations, warranties and
agreements herein contained, but subject to the terms and conditions
herein set forth, the Company hereby grants to the several
Underwriters, for the purpose of covering over-allotments in
connection with the distribution and sale of the Firm Shares only, a
nontransferable option to purchase up to an aggregate of 1,050,000
Option Shares at the purchase price per share for the Firm Shares set
forth in Section 3 hereof. Such option may be
<PAGE> 32
32
exercised by the Representatives on behalf of the several Underwriters
on one (1) or more occasions in whole or in part during the period of
thirty (30) days after the date on which the Firm Shares are initially
offered to the public, by giving written notice to the Company. The
number of Option Shares to be purchased by each Underwriter upon the
exercise of such option shall be the same proportion of the total
number of Option Shares to be purchased by the several Underwriters
pursuant to the exercise of such option as the number of Firm Shares
purchased by such Underwriter (set forth in Schedule A hereto) bears
to the total number of Firm Shares purchased by the several
Underwriters (set forth in Schedule A hereto), adjusted by the
Representatives in such manner as to avoid fractional shares.
Delivery of definitive certificates for the Option Shares to
be purchased by the several Underwriters pursuant to the exercise of
the option granted by this Section 7 shall be made against payment of
the purchase price therefor by the several Underwriters by certified
or official bank check or checks drawn in next-day funds, payable to
the order of the Company (and the Company agrees not to deposit any
such check in the bank on which it is drawn, and not to take any other
action with the purpose or effect of receiving immediately available
funds, until the business day following the date of its delivery to
the Company). In the event of any breach of the foregoing, the
Company shall reimburse the Underwriters for the interest lost and any
other expenses borne by them by reason of such breach. Such delivery
and payment shall take place at the offices of Shearman & Sterling,
599 Lexington Avenue, New York, New York 10022 or at such other place
as may be agreed upon among the Representatives and the Company (i) on
the Closing Date, if written notice of the exercise of such option is
received by the Company at least two (2) full business days prior to
the Closing Date, or (ii) on a date which shall not be later than the
third (3rd) full business day following the date the Company receives
written notice of the exercise of such option, if such notice is
received by the Company less than two (2) full business days prior to
the Closing Date.
The certificates for the Option Shares to be so delivered will
be made available to you at such office or such other location
including, without limitation, in New York City, as you may reasonably
request for checking at least one (1) full business day prior to the
date of payment and delivery and will be in such names and
denominations as you may request, such request to be made at least two
(2) full business days prior to such date of payment and delivery. If
the Representatives so elect, delivery of the Option Shares may be
made by credit through full fast transfer to the accounts at The
Depository Trust Company designated by the Representatives.
It is understood that you, individually, and not as the
Representatives of the several Underwriters, may (but shall not be
obligated to) make payment of the purchase price on behalf of any
Underwriter or Underwriters whose check or checks shall not have been
received by you prior to the date of payment and delivery for the
Option Shares to
<PAGE> 33
33
be purchased by such Underwriter or Underwriters. Any such payment by
you shall not relieve any such Underwriter or Underwriters of any of
its or their obligations hereunder.
(b) Upon exercise of any option provided for in Section
7(a) hereof, the obligations of the several Underwriters to purchase
such Option Shares will be subject (as of the date hereof and as of
the date of payment and delivery for such Option Shares) to the
accuracy of and compliance with the representations, warranties and
agreements of the Company herein, to the accuracy of the statements of
the Company and officers of the Company made pursuant to the
provisions hereof, to the performance by the Company of its
obligations hereunder, to the conditions set forth in Section 6
hereof, and to the condition that all proceedings taken at or prior to
the payment date in connection with the sale and transfer of such
Option Shares shall be satisfactory in form and substance to you and
to Underwriters' Counsel, and you shall have been furnished with all
such documents, certificates and opinions as you may request in order
to evidence the accuracy and completeness of any of the
representations, warranties or statements, the performance of any of
the covenants or agreements of the Company or the satisfaction of any
of the conditions herein contained.
8. Indemnification and Contribution.
(a) The Company agrees to indemnify and hold harmless
each Underwriter against any losses, claims, damages or liabilities,
joint or several, to which such Underwriter may become subject
(including, without limitation, in its capacity as an Underwriter or
as a "qualified independent underwriter" within the meaning of
Schedule E of the Bylaws of the NASD), under the Act, the Exchange Act
or otherwise, specifically including, but not limited to, losses,
claims, damages or liabilities (or actions in respect thereof) arising
out of or based upon (i) any breach of any representation, warranty,
agreement or covenant of the Company herein contained, (ii) any untrue
statement or alleged untrue statement of any material fact contained
in the Registration Statement or any amendment or supplement thereto,
or the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements
therein not misleading, or (iii) any untrue statement or alleged
untrue statement of any material fact contained in any Preliminary
Prospectus or the Prospectus or any amendment or supplement thereto,
or the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made,
not misleading, and agrees to reimburse each Underwriter for any legal
or other expenses reasonably incurred by it in connection with
investigating or defending any such loss, claim, damage, liability or
action; provided, however, that the Company shall not be liable in any
such case to the extent that any such loss, claim, damage, liability
or action arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in the
Registration Statement, such Preliminary Prospectus or the
<PAGE> 34
34
Prospectus, or any such amendment or supplement thereto, in reliance
upon, and in conformity with, written information relating to any
Underwriter furnished to the Company by such Underwriter, directly or
through you, specifically for use in the preparation thereof and,
provided further , that the indemnity agreement provided in this
Section 8(a) with respect to any Preliminary Prospectus shall not
inure to the benefit of any Underwriter from whom the person asserting
any losses, claims, damages, liabilities or actions based upon any
untrue statement or alleged untrue statement of material fact or
omission or alleged omission to state therein a material fact
purchased Shares, if a copy of the Prospectus in which such untrue
statement or alleged untrue statement or omission or alleged omission
was corrected had not been sent or given to such person within the
time required by the Act and the Rules and Regulations, unless such
failure is the result of noncompliance by the Company with Section
4(d) hereof.
(b) Each Underwriter, severally and not jointly, agrees
to indemnify and hold harmless the Company against any losses, claims,
damages or liabilities, joint or several, to which the Company may
become subject under the Act or otherwise, specifically including, but
not limited to, losses, claims, damages or liabilities (or actions in
respect thereof) arising out of or based upon (i) any breach of any
representation, warranty, agreement or covenant of such Underwriter
herein contained, (ii) any untrue statement or alleged untrue
statement of any material fact contained in the Registration Statement
or any amendment or supplement thereto, or the omission or alleged
omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, or
(iii) any untrue statement or alleged untrue statement of any material
fact contained in any Preliminary Prospectus or the Prospectus or any
amendment or supplement thereto, or the omission or alleged omission
to state therein a material fact necessary to make the statements
therein, in the light of the circumstances under which they were made,
not misleading, in the case of subparagraphs (ii) and (iii) of this
Section 8(b) to the extent, but only to the extent, that such untrue
statement or alleged untrue statement or omission or alleged omission
was made in reliance upon and in conformity with written information
furnished to the Company by such Underwriter, directly or through you,
specifically for use in the preparation thereof, and agrees to
reimburse the Company for any legal or other expenses reasonably
incurred by the Company in connection with investigating or defending
any such loss, claim, damage, liability or action.
The indemnity agreement in this Section 8(b) shall extend upon
the same terms and conditions to, and shall inure to the benefit of,
each officer of the Company who signed the Registration Statement and
each director of the Company, and each person, if any, who controls
the Company within the meaning of the Act or the Exchange Act. This
indemnity agreement shall be in addition to any liabilities which each
Underwriter may otherwise have.
<PAGE> 35
35
(c) Promptly after receipt by an indemnified party under
this Section 8 of notice of the commencement of any action, such
indemnified party shall, if a claim in respect thereof is to be made
against any indemnifying party under this Section 8, notify the
indemnifying party in writing of the commencement thereof but the
omission so to notify the indemnifying party will not relieve it from
any liability which it may have to any indemnified party otherwise
than under this Section 8. In case any such action is brought against
any indemnified party, and it notified the indemnifying party of the
commencement thereof, the indemnifying party will be entitled to
participate therein and, to the extent that it shall elect by written
notice delivered to the indemnified party promptly after receiving the
aforesaid notice from such indemnified party, to assume the defense
thereof, with counsel reasonably satisfactory to such indemnified
party; provided, however, that if the defendants in any such action
include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded that there may be
legal defenses available to it and/or other indemnified parties which
are different from or additional to those available to the
indemnifying party, the indemnified party or parties shall have the
right to select separate counsel to assume such legal defenses and to
otherwise participate in the defense of such action on behalf of such
indemnified party or parties. Upon receipt of notice from the
indemnifying party to such indemnified party of the indemnifying
party's election so to assume the defense of such action and approval
by the indemnified party of counsel, the indemnifying party will not
be liable to such indemnified party under this Section 8 for any legal
or other expenses subsequently incurred by such indemnified party in
connection with the defense thereof unless (i) the indemnified party
shall have employed separate counsel in accordance with the proviso to
the next preceding sentence (it being understood, however, that the
indemnifying party shall not be liable for the expenses of more than
one separate counsel (together with appropriate local counsel)
approved by the indemnifying party representing all the indemnified
parties under Section 8(a), 8(b) or 8(c) hereof who are parties to
such action), (ii) the indemnifying party shall not have employed
counsel satisfactory to the indemnified party to represent the
indemnified party within a reasonable time after notice of
commencement of the action or (iii) the indemnifying party has
authorized the employment of counsel for the indemnified party at the
expense of the indemnifying party. In no event shall any indemnifying
party be liable in respect of any amounts paid in settlement of any
action unless the indemnifying party shall have approved the terms of
such settlement; provided that such consent shall not be unreasonably
withheld. No indemnifying party shall, without the prior written
consent of the indemnified party, effect any settlement of any pending
or threatened proceeding in respect of which any indemnified party is
or could have been a party and indemnification could have been sought
hereunder by such indemnified party, unless such settlement includes
an unconditional release of such indemnified party from all liability
on all claims that are the subject matter of such proceeding.
<PAGE> 36
36
(d) In order to provide for just and equitable
contribution in any action in which a claim for indemnification is
made pursuant to this Section 8 but it is judicially determined (by
the entry of a final judgment or decree by a court of competent
jurisdiction and the expiration of time to appeal or the denial of the
last right of appeal) that such indemnification may not be enforced in
such case notwithstanding the fact that this Section 8 provides for
indemnification in such case, all the parties hereto shall contribute
to the aggregate losses, claims, damages or liabilities to which they
may be subject (after contribution from others) in such proportion so
that the Underwriters severally and not jointly are responsible pro
rata for the portion represented by the percentage that the
underwriting discount bears to the initial public offering price, and
the Company is responsible for the remaining portion, provided,
however, that (i) no Underwriter shall be required to contribute any
amount in excess of the amount by which the underwriting discount
applicable to the Shares purchased by such Underwriter exceeds the
amount of damages which such Underwriter has otherwise required to pay
and (ii) no person guilty of a fraudulent misrepresentation (within
the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who is not guilty of such fraudulent
misrepresentation. The contribution agreement in this Section 8(d)
shall extend upon the same terms and conditions to, and shall inure to
the benefit of, each person, if any, who controls any Underwriter or
the Company within the meaning of the Act or the Exchange Act and each
officer of the Company who signed the Registration Statement and each
director of the Company.
(e) The parties to this Agreement hereby acknowledge that
they are sophisticated business persons who were represented by
counsel during the negotiations regarding the provisions hereof
including, without limitation, the provisions of this Section 8, and
are fully informed regarding said provisions. They further
acknowledge that the provisions of this Section 8 fairly allocate the
risks in light of the ability of the parties to investigate the
Company and its business in order to assure that adequate disclosure
is made in the Registration Statement and Prospectus as required by
the Act and the Exchange Act.
9. Representations, Warranties, Covenants and Agreements
to Survive Delivery. All representations, warranties, covenants and agreements
of the Company and the Underwriters herein or in certificates delivered
pursuant hereto, and the indemnity and contribution agreements contained in
Section 8 hereof shall remain operative and in full force and effect regardless
of any investigation made by or on behalf of any Underwriter or any person
controlling any Underwriter within the meaning of the Act or the Exchange Act,
or by or on behalf of the Company or any of its officers, directors or
controlling persons within the meaning of the Act or the Exchange Act, and
shall survive the delivery of the Shares to the several Underwriters hereunder
or termination of this Agreement.
<PAGE> 37
37
10. Substitution of Underwriters. If any Underwriter or
Underwriters shall fail to take up and pay for the number of Firm Shares agreed
by such Underwriter or Underwriters to be purchased hereunder upon tender of
such Firm Shares in accordance with the terms hereof, and if the aggregate
number of Firm Shares which such defaulting Underwriter or Underwriters so
agreed but failed to purchase does not exceed 10% of the Firm Shares, the
remaining Underwriters shall be obligated, severally in proportion to their
respective commitments hereunder, to take up and pay for the Firm Shares of
such defaulting Underwriter or Underwriters.
If any Underwriter or Underwriters so defaults and the
aggregate number of Firm Shares which such defaulting Underwriter or
Underwriters agreed but failed to take up and pay for exceeds 10% of the Firm
Shares, the remaining Underwriters shall have the right, but shall not be
obligated, to take up and pay for (in such proportions as may be agreed upon
among them) the Firm Shares which the defaulting Underwriter or Underwriters so
agreed but failed to purchase. If such remaining Underwriters do not, at the
Closing Date, take up and pay for the Firm Shares which the defaulting
Underwriter or Underwriters so agreed but failed to purchase, the Closing Date
shall be postponed for twenty- four (24) hours to allow the several
Underwriters the privilege of substituting within twenty-four (24) hours
(including non-business hours) another underwriter or underwriters (which may
include any nondefaulting Underwriter) satisfactory to the Company. If no such
underwriter or underwriters shall have been substituted as aforesaid by such
postponed Closing Date, the Closing Date may, at the option of the Company, be
postponed for a further twenty-four (24) hours, if necessary, to allow the
Company the privilege of finding another underwriter or underwriters,
satisfactory to you, to purchase the Firm Shares which the defaulting
Underwriter or Underwriters so agreed but failed to purchase. If it shall be
arranged for the remaining Underwriters or substituted underwriter or
underwriters to take up the Firm Shares of the defaulting Underwriter or
Underwriters as provided in this Section 10, (i) the Company shall have the
right to postpone the time of delivery for a period of not more than seven (7)
full business days, in order to effect whatever changes may thereby be made
necessary in the Registration Statement or the Prospectus, or in any other
documents or arrangements, and the Company agrees promptly to file any
amendments to the Registration Statement, supplements to the Prospectus or
other such documents which may thereby be made necessary, and (ii) the
respective number of Firm Shares to be purchased by the remaining Underwriters
and substituted underwriter or underwriters shall be taken as the basis of
their underwriting obligation. If the remaining Underwriters shall not take up
and pay for all such Firm Shares so agreed to be purchased by the defaulting
Underwriter or Underwriters or substitute another underwriter or underwriters
as aforesaid and the Company shall not find or shall not elect to seek another
underwriter or underwriters for such Firm Shares as aforesaid, then this
Agreement shall terminate.
In the event of any termination of this Agreement pursuant to
the preceding paragraph of this Section 10, neither the Company shall be liable
to any Underwriter (except as provided in Sections 5 and 8 hereof) nor shall
any Underwriter (other than an Underwriter who
<PAGE> 38
38
shall have failed, otherwise than for some reason permitted under this
Agreement, to purchase the number of Firm Shares agreed by such Underwriter to
be purchased hereunder, which Underwriter shall remain liable to the Company,
and the other Underwriters for damages, if any, resulting from such default) be
liable to the Company (except to the extent provided in Sections 5 and 8
hereof).
The term "Underwriter" in this Agreement shall include any
person substituted for an Underwriter under this Section 10.
11. Effective Date of this Agreement and Termination.
(a) This Agreement shall become effective at the earlier
of (i) 6:30 A.M., San Francisco time, on the first full business day
following the effective date of the Registration Statement, or (ii)
the time of the initial public offering of any of the Shares by the
Underwriters after the Registration Statement becomes effective. The
time of the initial public offering shall mean the time of the release
by you, for publication, of the first newspaper advertisement relating
to the Shares, or the time at which the Shares are first generally
offered by the Underwriters to the public by letter, telephone,
telegram or telecopy, whichever shall first occur. By giving notice
as set forth in Section 12 before the time this Agreement becomes
effective, you, as Representatives of the several Underwriters, or the
Company, may prevent this Agreement from becoming effective without
liability of any party to any other party, except as provided in
Sections 4(j), 5 and 8 hereof.
(b) You, as Representatives of the several Underwriters,
shall have the right to terminate this Agreement by giving notice as
hereinafter specified at any time on or prior to the Closing Date or
on or prior to any later date on which Option Shares are to be
purchased, as the case may be, (i) if the Company shall have failed,
refused or been unable to perform any agreement on its part to be
performed, or because any other condition of the Underwriters'
obligations hereunder required to be fulfilled is not fulfilled,
including, without limitation, any change in the condition (financial
or otherwise), earnings, operations, business or business prospects of
the Company and its subsidiaries considered as one enterprise from
that set forth in the Registration Statement or Prospectus, which, in
your sole judgment, is material and adverse, or (ii) if additional
material governmental restrictions, not in force and effect on the
date hereof, shall have been imposed upon trading in securities
generally or minimum or maximum prices shall have been generally
established on the New York Stock Exchange or on the American Stock
Exchange or in the over the counter market by the NASD, or trading in
securities generally shall have been suspended on either such exchange
or in the over the counter market by the NASD, or if a banking
moratorium shall have been declared by federal, New York or California
authorities, or (iii) if the Company shall have sustained a loss by
strike, fire, flood, earthquake, accident or other calamity of such
character as to
<PAGE> 39
39
interfere materially with the conduct of the business and operations
of the Company regardless of whether or not such loss shall have been
insured, or (iv) if there shall have been a material adverse change in
the general political or economic conditions or financial markets as
in your reasonable judgment makes it inadvisable or impracticable to
proceed with the offering, sale and delivery of the Shares, or (v) if
there shall have been an outbreak or escalation of hostilities or of
any other insurrection or armed conflict or the declaration by the
United States of a national emergency which, in the reasonable opinion
of the Representatives, makes it impracticable or inadvisable to
proceed with the public offering of the Shares as contemplated by the
Prospectus. In the event of termination pursuant to subparagraph (i)
above, the Company shall remain obligated to pay costs and expenses
pursuant to Sections 4(j), 5 and 8 hereof. Any termination pursuant
to any of subparagraphs (ii) through (v) above shall be without
liability of any party to any other party except as provided in
Sections 5 and 8 hereof.
If you elect to prevent this Agreement from becoming effective
or to terminate this Agreement as provided in this Section 11, you
shall promptly notify the Company by telephone, telecopy or telegram,
in each case confirmed by letter. If the Company shall elect to
prevent this Agreement from becoming effective, the Company shall
promptly notify you by telephone, telecopy or telegram, in each case,
confirmed by letter.
12. Notices. All notices or communications hereunder,
except as herein otherwise specifically provided, shall be in writing and if
sent to you shall be mailed, delivered, telegraphed (and confirmed by letter)
or telecopied (and confirmed by letter) to you c/o BancAmerica Robertson
Stephens, 555 California Street, Suite 2600, San Francisco, California 94104,
telecopier number (415) 781-0278, Attention: General Counsel; if sent to the
Company, such notice shall be mailed, delivered, telegraphed (and confirmed by
letter) or telecopied (and confirmed by letter) to Balanced Care Corporation,
5020 Louise Drive, Suite 200, Mechanicsburg, Pennsylvania 17055, telecopier
number (717) 796-6150, Attention: Brad E. Hollinger, Chief Executive Officer.
13. Parties. This Agreement shall inure to the benefit
of and be binding upon the several Underwriters and the Company and their
respective executors, administrators, successors and assigns. Nothing
expressed or mentioned in this Agreement is intended or shall be construed to
give any person or entity, other than the parties hereto and their respective
executors, administrators, successors and assigns, and the controlling persons
within the meaning of the Act or the Exchange Act, officers and directors
referred to in Section 8 hereof, any legal or equitable right, remedy or claim
in respect of this Agreement or any provisions herein contained, this Agreement
and all conditions and provisions hereof being intended to be and being for the
sole and exclusive benefit of the parties hereto and their respective
executors, administrators, successors and assigns and said controlling persons
and said officers and directors, and for the benefit of no other person or
entity. No purchaser of any of the Shares
<PAGE> 40
40
from any Underwriter shall be construed a successor or assign by reason merely
of such purchase.
In all dealings with the Company under this Agreement, you
shall act on behalf of each of the several Underwriters, and the Company shall
be entitled to act and rely upon any statement, request, notice or agreement
made or given by you jointly or by BancAmerica Robertson Stephens on behalf of
you.
14. Applicable Law. This Agreement shall be governed by,
and construed in accordance with, the internal laws of the State of New York.
15. Counterparts. This Agreement may be signed in
several counterparts, each of which will constitute an original.
<PAGE> 41
If the foregoing correctly sets forth the understanding among
the Company and the several Underwriters, please so indicate in the space
provided below for that purpose, whereupon this letter shall constitute a
binding agreement among the Company and the several Underwriters.
Very truly yours,
BALANCED CARE CORPORATION
By
-------------------------------------
Accepted as of the date first above written:
BANCAMERICA ROBERTSON STEPHENS
SMITH BARNEY INC.
BT ALEX. BROWN INCORPORATED
On their behalf and on behalf of each of the
several Underwriters named in Schedule A hereto.
By BANCAMERICA ROBERTSON STEPHENS
By
------------------------------------
Authorized Signatory
<PAGE> 42
SCHEDULE A
<TABLE>
<CAPTION>
Number of Firm Shares
Underwriters To Be Purchased
------------ ---------------------
<S> <C>
BancAmerica Robertson Stevens
Smith Barney Inc.
BT Alex. Brown Incorporated
</TABLE>
<PAGE> 43
ANNEX I
SUBSIDIARIES OF BALANCED CARE CORPORATION
BCC of Wisconsin, Inc.
BCC at Mt. Royal Pines, Inc.
BCC at Altoona, Inc.
BCC at State College, Inc.
BCC Development and Management Co.
BCC at Missouri, Inc.
BCC Therapies, Inc.
Balanced Care Therapies of PA, Inc.
Balanced Care Therapies of AR, Inc.
BCC at Hermitage Park Center, Inc.
BCC at Lebanon Care Center, Inc.
BCC at Lebanon Park Manor, Inc.
BCC at Mt. Vernon Park Care Center, Inc.
BCC at Mt. Vernon Park Care Center West, Inc.
BCC at Nevada Park Care Center, Inc.
BCC at Nixa Park Center, Inc.
BCC at Republic Park Center, Inc.
BCC at Springfield Care Center, Inc.
BCC Investment Corp., Inc.
BCC at Reading, Inc.
BCC at Greensboro, Inc.
BCC at Cherokee Residential Care Center, Inc.
BCC at Nevada Park Terrace Apartments, Inc.
BCC at Blakely, Inc.
BCC at Kingston II, Inc.
BCC at Bloomsburg, Inc.
BCC at Kingston I, Inc.
BCC at Mid-Valley, Inc.
BCC at Old Forge, Inc.
BCC at West View, Inc.
BCC at Richmond, Inc.
BCC at Scranton, Inc.
BCC at Harrisburg, Inc.
BCC at Ravenna, Inc.
BCC at Danville, Inc.
BCC at Camdenton, Inc.
BCC at Roanoke, Inc.
BCC at Harrisonburg, Inc.
BCC at Pennswood, Inc.
BCC at Lamar, Inc.
<PAGE> 44
ANNEX I (CONT.)
BCC Management Company at Missouri, Inc.
BCC at Lima, Inc.
BCC at Chippewa, Inc.
BCC at Darlington, Inc.
Balanced Care at Blytheville, Inc.
Balanced Care at Maumelle, Inc.
Balanced Care at Mountain Home, Inc.
Balanced Care at Pocohontas, Inc.
Balanced Care at Sherwood, Inc.
Dixon Management, Inc.
Long Term Pharmaceutical Care, Inc.
Balanced Care at Butler, Inc.
Balanced Care at Sarver, Inc.
Balanced Care at Saxonburg, Inc.
Balanced Care at Eyers Grove, Inc.
Balanced Care at Bloomsburg II, Inc.
Balanced Care at North Ridge, Inc.
Balanced Care at Xenia, Inc.
Balanced Care at Westerville, Inc.
Balanced Care at Dillsburg, Inc.
Balanced Care at Mechanicsburg, Inc.
Balanced Care at Mansfield, Inc.
Balanced Care at Bowling Green, Inc.
Balanced Care at Danville, Inc.
Balanced Care at Florence, Inc.
Balanced Care at Frankfort, Inc.
Balanced Care at Henderson, Inc.
Balanced Care at Berwick, Inc.
Balanced Care at Lewisburg, Inc.
Balanced Care at Peckville, Inc.
Balanced Care at Martinsburg, Inc.
Balanced Care at Jackson, Inc.
Balanced Care at York, Inc.
Balanced Care at Lakemont, Inc.
Balanced Care at Medina, Inc.
Balanced Care at Lewistown, Inc.
Balanced Care at Evansville, Inc.
Balanced Care at Shippensburg, Inc.
Balanced Care at Centerville, Inc.
Balanced Care at Hillard, Inc.
Balanced Care at Anderson, Inc.
Balanced Care at Murfreesboro, Inc.
<PAGE> 45
ANNEX II
PLEDGED STOCK
<TABLE>
<CAPTION>
Subsidiary Total No. of Shares Shares Pledged(1)
---------- ------------------- -----------------
<S> <C> <C>
BCC at Hermitage Park Center, Inc. 1,000 1,000
BCC at Lebanon Care Center 1,000 1,000
BCC at Lebanon Park Manor, Inc. 1,000 1,000
BCC at Mt. Vernon Park Care Center, Inc. 1,000 1,000
BCC at Nevada Park Care Center, Inc. 1,000 1,000
BCC at Nixa Park Center, Inc. 1,000 1,000
BCC at Republic Park Center, Inc. 1,000 1,000
BCC at Springfield Care Center, Inc. 1,000 1,000
Balanced Care at Blytheville, Inc. 1,000 1,000
Balanced Care at Maumelle, Inc. 1,000 1,000
Balanced Care at Mountain Home, Inc. 1,000 1,000
Balanced Care at Pocahontas, Inc. 1,000 1,000
Balanced Care at Sherwood, Inc. 1,000 1,000
BCC at State College, Inc. 1,000 1,000
BCC at Altoona, Inc. 1,000 1,000
BCC at Reading, Inc. 1,000 1,000
BCC of Wisconsin 1,000 1,000
Dixon Management, Inc. 1,000 1,000
BCC Development and Management Co., Inc. 1,000 1,000
</TABLE>
- ----------------------------------
(1) All shares have been pledged to Meditrust
<PAGE> 46
ANNEX III
LOCKUP AGREEMENTS
<PAGE> 47
ANNEX IV
SIGNIFICANT SUBSIDIARIES
<TABLE>
<CAPTION>
Subsidiary Jurisdiction of Incorporation
---------- -----------------------------
<S> <C>
</TABLE>
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
Balanced Care Corporation
We consent to the use of our reports included herein and to the reference to
our Firm under the headings "Selected Consolidated Financial Data" and
"Experts" in the prospectus.
/s/ KPMG Peat Marwick LLP
- --------------------------
KPMG PEAT MARWICK LLP
Philadelphia, Pennsylvania
January 14, 1998
<PAGE> 1
EXHIBIT 23.3
Page 1 of 2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Registration Statement on Form S-1 of our
report dated September 12, 1997 on our audits of the financial statements of
Butler Senior Care, Inc. and our report dated September 29, 1997 on our audits
of the financial statements of Feltrop's Personal Care Home. We also consent to
the references to our firm under the caption "Experts".
/s/ Coopers & Lybrand LLP
- ------------------------------
COOPERS & LYBRAND LLP
Pittsburgh, Pennsylvania
January 14, 1998
<PAGE> 2
Page 2 of 2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Registration Statement on Form S-1 of our
report dated September 23, 1997, on our audits of the financial statements of
Gethsemane Affiliates. We also consent to the references to our firm under the
caption "Experts".
/s/ Coopers & Lybrand LLP
- --------------------------------
COOPERS & LYBRAND LLP
Harrisburg, Pennsylvania
January 14, 1998
<PAGE> 1
EXHIBIT 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in the Registration Statement on Form S-1 of our
report dated July 17, 1997, on our audits of the financial statements of Foster
Health Care Affiliates and our report dated September 12, 1997 on our audit of
the financial statements of Heavenly Health Care, Inc., d/b/a Joe Clark
Residential Care Homes. We also consent to the references to our firm under the
caption "Experts."
/s/ Baird, Kurtz & Dobson
- ---------------------------
Springfield, MO
January 14, 1998
<PAGE> 1
EXHIBIT 23.5
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in the Registration Statement on Form S-1 of our
report dated May 13, 1997 on our audits of the financial statements of Keystone
Affiliates. We also consent to the reference to our firm under the caption
"Experts."
/s/ Snyder & Clemente
SNYDER & CLEMENTE
Kingston, Pennsylvania
January 14, 1998
<PAGE> 1
EXHIBIT 23.6
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in the Registration Statement on Form S-1 of our
report dated October 20, 1997 on our audits of the financial statements of
Triangle Retirement Services, Inc. d/b/a Northridge Retirement Center. We also
consent to the reference to our firm under the caption "Experts."
/s/ Hodge, Steward & Company, P.A.
- ----------------------------------
3120 Highwoods Blvd., Suite 207
Raleigh, North Carolina
January 14, 1998