<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended March 31, 1999
or
( ) Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____ to _____.
COMMISSION FILE NUMBER: 1-13845
BALANCED CARE CORPORATION
-------------------------
(Exact name of Registrant as specified in its charter)
DELAWARE 25-1761898
-------- ----------
(State of other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5021 LOUISE DRIVE, SUITE 200, MECHANICSBURG, PA 17055
-----------------------------------------------------
(Address of principal executive offices) (Zip Code)
(717) 796-6100
--------------
(Registrant's Telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT MAY 12, 1999
----- ---------------------------
Common Stock, $.001 par value 16,722,847
<PAGE> 2
BALANCED CARE CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
ITEM 1:
FINANCIAL STATEMENTS Page
----
<S> <C>
Consolidated Balance Sheets as of March 31, 1999 3
and June 30, 1998
Consolidated Statements of Operations for the three months ended 4
March 31, 1999 and 1998
Consolidated Statements of Operations for the nine months ended 5
March 31, 1999 and 1998
Consolidated Statement of Stockholders' Equity for the nine months 6
ended March 31, 1999
Consolidated Statements of Cash Flows for the nine months ended 7
March 31, 1999 and 1998
Notes to Consolidated Financial Statements 8
ITEM 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF 13
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 3:
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 24
MARKET RISK
PART II - OTHER INFORMATION
ITEM 6:
EXHIBITS AND REPORTS ON FORM 8-K 25
(A) Exhibits
(B) Reports on Form 8-K
</TABLE>
2
<PAGE> 3
ITEM 1: FINANCIAL STATEMENTS
BALANCED CARE CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
March 31 June 30
1999 1998
(unaudited)
----------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 15,132 15,481
Accounts receivable (net of allowance for doubtful
accounts of $1,067 and $916, respectively) 14,798 19,630
Development contracts in process (net of allowance for losses) 6,893 2,534
Prepaid expenses and other current assets 1,621 1,203
Assets held for sale -- 2,800
-------- --------
Total current assets 38,444 41,648
Restricted investments 1,668 1,596
Property and equipment, net 21,014 27,862
Goodwill, net 15,448 13,466
Other assets 7,011 1,400
-------- --------
Total assets $ 83,585 85,972
======== ========
LIABILITIES AND STOCKHOLDERS EQUITY
Current liabilities:
Current portion of long-term debt $ 209 177
Accounts payable 6,057 7,982
Accrued payroll 2,160 2,243
Accrued expenses 5,884 4,864
-------- --------
Total current liabilities 14,310 15,266
Deferred income taxes -- 638
Long-term debt, net of current portion 8,820 3,376
Straight-line lease liability 2,934 3,053
Deferred revenues and other liabilities 1,518 1,780
-------- --------
Total liabilities 27,582 24,113
-------- --------
Stockholders' equity:
Preferred stock, $.001 par value; 5,000,000 shares
authorized; none issued and outstanding -- --
Common stock, $.001 par value - authorized - 50,000,000
shares; issued and outstanding - 16,722,847 shares at
March 31, 1999 and 16,695,343 shares at June 30, 1998 17 17
Additional paid-in capital 63,814 63,678
Deficit (7,828) (1,836)
-------- --------
Total stockholders' equity 56,003 61,859
-------- --------
Total liabilities and stockholders' equity $ 83,585 85,972
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
BALANCED CARE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three months ended March 31
1999 1998
(unaudited) (unaudited)
----------- -----------
<S> <C> <C>
Revenues:
Patient services $ 10,993 14,848
Resident services 5,000 5,202
Development fees 258 4,162
Management fees 354 877
Other revenues 132 197
-------- --------
Total revenues 16,737 25,286
-------- --------
Operating expenses:
Facility operating expenses:
Salaries, wages and benefits 7,820 8,753
Other operating expenses 5,163 8,584
Development, general and administrative expense 3,143 3,042
Provision for losses under shortfall funding agreements (note 9) 1,400 --
Provision for losses under severance agreements (note 8) 600 --
Lease expense 2,581 2,258
Depreciation and amortization expense 570 538
-------- --------
Total operating expenses 21,277 23,175
-------- --------
Income (loss) from operations: (4,540) 2,111
Other income (expense):
Interest and other income 154 235
Interest expense (127) (727)
Loss on sale of assets (note 6) (102) --
-------- --------
Income (loss) before income taxes (4,615) 1,619
Provision for income taxes (benefit) (1,846) 272
-------- --------
Net income (loss) $ (2,769) 1,347
======== ========
Basic earnings (loss) per share $ (0.17) 0.11
======== ========
Diluted earnings (loss) per share $ (0.17) 0.10
======== ========
Weighted average shares - basic 16,722 12,554
======== ========
Weighted average shares - diluted 16,722 13,897
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
BALANCED CARE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Nine months ended March 31
1999 1998
(unaudited) (unaudited)
----------- -----------
<S> <C> <C>
Revenues:
Patient services $ 35,615 43,999
Resident services 16,517 12,769
Development fees 5,932 7,724
Management fees 960 898
Other revenues 266 289
-------- --------
Total revenues 59,290 65,679
-------- --------
Operating expenses:
Facility operating expenses:
Salaries, wages and benefits 24,457 23,438
Other operating expenses 16,696 24,713
Development, general and administrative expense 10,103 8,664
Provision for losses on termination of development projects (note 7) 2,400 --
Provision for losses under shortfall funding agreements (note 9) 3,760 --
Provision for losses under severance agreements (note 8) 600 --
Lease expense 7,377 7,162
Depreciation and amortization expense 1,613 1,543
-------- --------
Total operating expenses 67,006 65,520
-------- --------
Income (loss) from operations: (7,716) 159
Other income (expense):
Interest and other income 633 410
Interest expense (345) (1,579)
Gain (loss) on sale of assets (302) 2,858
-------- --------
Income (loss) before income taxes (7,730) 1,848
Provision for income taxes (benefit) (1,738) 309
-------- --------
Net income (loss) $ (5,992) 1,539
======== ========
Basic earnings (loss) per share $ (0.36) 0.16
======== ========
Diluted earnings (loss) per share $ (0.36) 0.14
======== ========
Weighted average shares - basic 16,709 9,929
======== ========
Weighted average shares - diluted 16,709 11,187
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
BALANCED CARE CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED MARCH 31, 1999 (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
------------------------- ADDTL.
ISSUED PAR PAID-IN
SHARES VALUE CAPITAL DEFICIT TOTAL
------ ----- ------- ------- -----
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1998 16,695 $ 17 $ 63,678 $ (1,836) $ 61,859
Exercise of options 28 -- 136 -- 136
Net loss -- -- -- (5,992) (5,992)
------ -------- -------- -------- --------
Balance at December 31, 1998 16,723 $ 17 $ 63,814 $ (7,828) $ 56,003
====== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE> 7
BALANCED CARE CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Nine months ended March 31
1999 1998
(unaudited) (unaudited)
-----------------------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) $ (5,992) $ 1,539
Adjustments to reconcile net income (loss) to net cash used for
operating activities:
Depreciation and amortization 1,613 1,543
Deferred income taxes (1,833) 274
Loss (gain) on sale of assets 302 (2,858)
Changes in operating assets and liabilities, excluding
effects of acquisitions:
(Increase) decrease in receivables, net 4,854 (8,541)
(Increase) decrease in development contracts in process, net (4,359) 436
Increase in prepaid expenses and other current assets (406) (440)
Increase in accounts payable, accrued payroll and
accrued expenses 608 858
-------- --------
Net cash used for operating activities (5,213) (7,189)
-------- --------
Cash Flows from Investing Activities:
Proceeds from sale of assets 11,630 7,029
Purchases of property and equipment (3,154) (2,402)
Increase in restricted investments (72) (50)
Increase in deferred financing costs -- (1,108)
Increase in other assets (4,416) 686
Business acquisitions (note 11) (4,355) (30,678)
-------- --------
Net cash used for investing activities (367) (26,523)
-------- --------
Cash Flows from Financing Activities:
Proceeds from issuance of long-term debt 5,682 174
Payments on long-term debt (206) (111)
Proceeds from issuance of common stock 136 46,356
Issuance of notes payable -- 29,675
Payments on notes payable -- (29,675)
Decrease in other liabilities (381) (304)
-------- --------
Net cash provided by financing activities 5,231 46,115
-------- --------
Decrease in cash and cash equivalents (349) 12,403
Cash and cash equivalents at beginning of period 15,481 7,908
-------- --------
Cash and cash equivalents at end of period $ 15,132 $ 20,311
======== ========
Supplemental Cash Flow Information:
Cash paid during the period for interest $ 345 $ 1,576
======== ========
Cash paid during the period for income taxes $ 86 $ 85
======== ========
Supplemental Non-cash Investing and Financing Activities:
Assets and lease obligations capitalized $ -- $ 238
======== ========
Accretion of preferred B stock $ -- $ 1,253
======== ========
Acquisitions:
Fair value of assets acquired $ (4,377) $(30,821)
Liabilities assumed 22 143
-------- --------
Consideration paid for acquisitions $ (4,355) $(30,678)
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE> 8
BALANCED CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Organization and Background
Balanced Care Corporation (the "Company") was incorporated in April
1995 and is engaged in the operation, 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, dementia and Alzheimer's services, home health
care and skilled nursing. As of March 31, 1999, the Company owned, leased or
managed 53 assisted and independent living communities and 13 skilled nursing
facilities. Also at March 31, 1999, the Company had 21 assisted living
communities under construction.
(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 and nine month periods
ended March 31, 1999 and 1998 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 and nine month periods ended March 31, 1999 are not
necessarily indicative of the operating results to be expected for the full year
or any other period. These financial statements and notes should be read in
conjunction with the financial statements and notes included in the audited
consolidated financial statements of the Company for the year ended June 30,
1998 as contained in the Company's annual report on Form 10-K.
2. INITIAL PUBLIC OFFERING
On February 18, 1998, the Company closed its initial public offering
for 7,000,000 shares of its common stock, par value $.001 per share ("Common
Stock") at a price of $6.50 per share (the "Offering"). Concurrent with the
Offering, 5,009,750 shares of Series B Preferred Stock and 1,150,958 shares of
Series A Preferred Stock were converted into 4,620,532 shares of Common Stock
(reflective of the three-for-four reverse split of Common Stock effective
October 14, 1997).
In connection with the Offering, the Company granted the underwriters
an option to purchase 1,050,000 additional shares of Common Stock at $6.50 per
share. The closing for this option was on March 17, 1998. After the consummation
of the Offering, the conversion of the preferred stock and the exercise of the
underwriters' option, the Company had 16,695,343 shares of Common Stock
outstanding. The Company's stock is traded on the American Stock Exchange under
the symbol BAL.
8
<PAGE> 9
3. INCOME STATEMENT
Pursuant to Section 11(a) of the Securities Act of 1933 (the "Act") and
Rule 158 thereunder, the information contained herein, and similar statement of
income information contained in the Company's Quarterly Report on Form 10-Q for
the Quarter ended March 31, 1998, Annual Report on Form 10-K for the year ended
June 30, 1998, Quarterly Report on Form 10-Q for the quarters ended September
30, 1998 and December 31, 1998 collectively satisfies the "earning statement"
requirement of Section 11(a) under the Act and Rule 158 thereunder.
4. PRO FORMA RESULTS OF OPERATIONS
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 period. The acquired businesses and their respective
acquisition dates were Heavenly Health Care, Inc. d/b/a Joe Clark Residential
Care Homes in August 1997, Feltrop's Personal Care Home and Butler Senior Care
in October 1997, Triangle Retirement Services, Inc. d/b/a Northridge Retirement
Center in December 1997, Gethsemane Affiliates in January 1998, Potomac Point in
June 1998 and Extended Care Operators of Harrisburg, LLC d/b/a Harrisburg
Outlook Pointe in March 1999. The pro forma results include the impact of
certain adjustments such as: amortization of goodwill, depreciation of assets
acquired, interest on acquisition financing and lease payments on the leased
facility (in thousands, except for per share amounts):
NINE MONTHS ENDED
MARCH 31
--------------------------
1999 1998
---- ----
Revenue .................................... $ 60,071 $ 70,159
Expense .................................... (66,233) (68,995)
-------- --------
Net income (loss) .......................... $ (6,162) $ 1,164
======== ========
Net income (loss) per common share - diluted $ (0.37) $ 0.10
======== ========
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, 1998 and 1997. In addition, they are not intended to be a projection of
future results of operations.
5. ASSETS HELD FOR SALE
In December 1998, the Company completed the sale of the assets of its
Wisconsin assisted living facilities for net proceeds of approximately
$2,726,000. The Wisconsin facilities had been classified as an asset held for
sale since June 30, 1997. The sale resulted in a loss of $200,000 in the period
ended December 31, 1998.
6. SALE/LEASE-BACK
In March 1999, the Company completed the sale and subsequent leaseback
of two of its facilities in Bloomsburg and Saxonburg, Pennsylvania with an
unrelated third party (the "Purchaser"). The net proceeds from the sale of the
two facilities was $8,901,000, which was paid to the Company in cash. In
connection with the sale, the Company entered into "triple net leases" with the
Purchaser to lease the facilities, under which the Company is responsible for
all expenses incurred in the use and maintenance
9
<PAGE> 10
of the buildings including property taxes and insurance. The leases have an
initial term of 15 years, with three renewal terms: two for five years and one
for four years, 11 months. The annual lease rate is 10.25%. The sale to
Purchaser resulted in a loss of $102,000.
7. PROVISION FOR TERMINATION OF DEVELOPMENT PROJECTS
As discussed in the prior quarterly report, the Company's development
activities are significantly affected by volatility in the capital markets and
specific transaction terms which affect the Company's ability to utilize
non-binding financing commitments from real estate investment trusts ("REITs")
and other lenders. More specifically, the availability of REIT financing has
become substantially limited for new assisted living construction. Furthermore,
the ability of the Company to negotiate acceptable transaction terms and to
currently recognize income on development fees has become increasingly difficult
due to accounting pronouncements and guidance issued by the Emerging Issues Task
Force ("EITF") and the Securities and Exchange Commission staff. Finally, the
Company's leverage (i.e. debt and other financial commitments in relation to
equity) has increased due to its extensive use of operating leases to finance
the construction of its Outlook Pointe(R) signature series assisted living
facilities.
As a direct result of the foregoing, in the quarter ended December 31,
1998, the Company was not able to obtain financing on acceptable terms to
continue development of its Outlook Pointe(R) signature series assisted living
facilities. In recognition of the aforementioned events and circumstances
occurring in the second fiscal quarter, the Company: (i) concluded that
development fees on new projects scheduled to close in the second fiscal quarter
did not qualify for income recognition under contract terms considered
acceptable by management; (ii) decided to emphasize the focus of management's
efforts on the operations of existing facilities and facilities which are now
under construction; (iii) decided to substantially reduce its development
activities with respect to new sites and projects; and (iv) recorded a provision
for losses on termination of development projects of $2,400,000. This provision
is based on management's evaluation of capitalized costs, including land option
payments, on various projects that are not now consistent with the Company's
future plans.
8. PROVISION FOR SEVERANCE
Due to the downscaling of development activities related to the
Company's Outlook Pointe(R) signature series assisted living facilities
discussed above, management adopted a corporate restructuring plan affecting
certain departments and staff positions. This restructuring plan, which was
enacted in February 1999 resulted in a one-time charge of approximately $600,000
in the Company's third fiscal quarter ended March 31, 1999, representing the
estimated costs of employee terminations and related costs.
9. WORKING CAPITAL SHORTFALL OBLIGATIONS
As previously disclosed, the Company manages certain assisted living
facilities owned by REITs and leased to special purpose entities owned by
independent third parties (the "Operator/Lessees"). As part of these
transactions, the Company has entered into shortfall funding agreements, whereby
the Company has agreed to make loans to the Operator/Lessees if the equity and
working capital loans provided to the Operator/Lessees are depleted by negative
cash flows from start-up operations of the facilities.
10
<PAGE> 11
During the three and nine months ended March 31, 1999, the Company
recorded losses of $1,400,000 and $3,760,000, respectively, related to its
obligations under the shortfall funding agreements to fund the additional
working capital needs of these managed facilities. This amount has been charged
to operations as a provision for losses under the shortfall funding agreements
and recorded as an allowance against receivables on advances to
Operator/Lessees. The Company records its losses on shortfall funding agreements
using the "modified equity accounting" approach. Under this approach, the
operating losses of the Operator/Lessees are allocated first to the capital of
the investors, and the losses in excess of such capital are allocated to the
Company to the extent of the Company's commitment under the shortfall funding
agreement.
10. BUSINESS ACQUISITIONS
In March 1999, the Company purchased the equity interests of Extended
Care Operators of Harrisburg, LLC d/b/a Outlook Pointe at Harrisburg, a 57-bed
assisted living facility located in Harrisburg, Pennsylvania, for net cash of
approximately $516,000 including transaction costs. This facility was previously
developed and managed by the Company. The acquisition has been accounted for
using the purchase method of accounting and the related lease acquisition costs
of approximately $436,000 is being amortized over the estimated term of the
lease.
11. BUSINESS ACQUISITIONS - STATEMENT OF CASH FLOWS
The $4,355,000 cash used for business acquisitions in the statement of
cash flows for the nine months ended March 31, 1999 consists of the following:
<TABLE>
<CAPTION>
DATE OF DATE RECORDED DATE
ACQUISITIONS ACQUISITION DESCRIPTION AS GOODWILL PAID AMOUNT
------------ ----------- ----------- ----------- ---- ------
<S> <C> <C> <C> <C> <C>
Gethsemane Affiliates 1/98 Contingent purchase 3/98 7/98 $ 1,200,000
price payment
Butler Senior Care 10/97 Contingent purchase 6/98 7/98 372,000
price payment
Potomac Point 6/98 Additional transaction 9/98 9/98 45,000
costs
Butler Senior Care 10/97 Contingent purchase 1/99 2/99 & 2,222,000
price payment 3/99
Outlook Pointe at 3/99 Purchase price payment 3/99 3/99 516,000
Harrisburg Leasehold -----------
Interest $ 4,355,000
===========
</TABLE>
12. EARNINGS PER SHARE
Earnings (loss) per share ("EPS") is computed using the weighted
average number of common shares and common equivalent shares outstanding (using
the treasury stock method). For the three and nine month periods ended March 31,
1999, common equivalent shares from stock options and warrants are excluded from
the computation, as their effect is antidilutive.
A reconciliation of the weighted average shares used in the computation
of earnings per share follows (in thousands):
11
<PAGE> 12
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average common shares outstanding 16,722 12,554 16,709 9,929
Stock options and warrants computed using the
Treasury stock method -- 1,343 -- 1,258
------ ------ ------ ------
Shares used for diluted EPS 16,722 13,897 16,709 11,187
====== ====== ====== ======
</TABLE>
13. CREDIT FACILITY/SUBSEQUENT EVENT
In April 1999, the Company entered into a $15 million revolving line of
credit (the "Line of Credit"), which will be used for working capital and other
general corporate purposes. The Line of Credit is secured by the real estate of
five of the Company's owned assisted living facilities, four located in
Pennsylvania and one located in North Carolina and the eligible accounts
receivable of 10 of the Company's skilled nursing facilities located in
Missouri. The Line of Credit is for a term of three years, and outstanding
borrowings will bear interest at a rate per annum of prime plus 2.75%.
The Company made an initial draw in the amount of $5,225,000 under the
Line of Credit and used the proceeds to repay all of the outstanding principal
and interest due under an interim $5 million bridge loan consummated with the
Line of Credit lender in March 1999. The bridge loan was evidenced by a 60-day
secured term note that accrued interest at a floating rate per annum equal to
prime plus 4%. The bridge loan was secured by real estate of four of the
Company's owned assisted living facilities and the eligible accounts receivable
of 12 of the Company's skilled nursing facilities. The Company has no
outstanding obligations under the bridge loan.
In a separate transaction effective as of April 30, 1999, the Company
completed the acquisition of the equity interests of the Operator/Lessees for
two of its managed assisted living operations in Mountain Home and Sherwood,
Arkansas. As a result of this transaction, the Company transitioned from manager
to Operator/Lessee for these assisted living operations. The purchase price for
the equity interests of Mountain Home and Sherwood was approximately $748,000
and $920,000, respectively. A portion of the purchase price (the "Working
Capital Component") was financed by the REIT that owns and leases the Arkansas
facilities. The Working Capital Component for Mountain Home and Sherwood was
approximately $742,000 and $565,000, respectively. Under the financing
arrangement, the lease base for each facility was increased by the respective
amount of the Working Capital Component. The Company will recognize
approximately $172,000 of lease acquisition costs from this transaction.
12
<PAGE> 13
ITEM 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis addresses the Company's results
of operations on a historical basis for the three and nine month periods ended
March 31, 1999 and 1998, and the Company's liquidity and capital resources. This
information should be read in conjunction with the Company's consolidated
financial statements contained elsewhere in this report. This report 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 disclosed in "Risk Factors" in the Company's Annual Report on
Form 10-K for the year ended June 30, 1998.
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 continuums 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 care delivered
in a skilled nursing setting.
On February 18, 1998, the Company completed its initial public offering
for 7,000,000 shares of its Common Stock, par value $.001 per share at a price
of $6.50 per share (the "Offering"). Concurrent with the Offering, 5,009,750
shares of Series B Preferred Stock and 1,150,958 shares of Series A Preferred
Stock were converted into 4,620,532 shares of Common Stock (reflective of the
three-for-four reverse split of Common Stock effective October 14, 1997). In
connection with the Offering, the Company granted the underwriters an option to
purchase 1,050,000 additional shares of Common Stock at $6.50 per share. The
closing for this option was on March 17, 1998. After the Offering, the
conversion of the preferred stock and the exercise of the underwriters' option,
the Company had 16,695,343 shares of Common Stock outstanding. The Offering,
including the exercise of the underwriters' option, generated proceeds to the
Company of approximately $46,357,000, net of costs and underwriting discounts
and commissions. The proceeds were used to repay indebtedness of approximately
$29,675,000 incurred to fund the purchase of four acquisitions (seven
facilities) completed from October 1997 through January 1998, and to pay off
indebtedness of $5,019,000 related to the Company's Wisconsin assisted living
facilities in anticipation of their sale. The balance of the Offering has been
used for general corporate purposes.
The Company has grown primarily through acquisitions and by designing,
developing, operating and managing its Outlook Pointe(R) signature series
assisted living facilities. The following table summarizes the Company's
operating facilities at March 31, 1999 and 1998:
13
<PAGE> 14
<TABLE>
<CAPTION>
MARCH 31,
---------------------------------------------------------------------------------
1999 1998
--------------------------------------- --------------------------------------
Owned Leased Managed Total Owned Leased Managed Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Developed Assisted Living Facilities -- 2 29 31 -- 1 9 10
Acquired Assisted Living Facilities 5 13 -- 18 13 11 -- 24
Skilled Nursing Facilities 2 11 -- 13 3 10 -- 13
Independent Living Facilities -- 4 -- 4 -- 4 -- 4
--- --- --- --- --- --- --- ---
7 30 29 66 16 26 9 51
=== === === === === === === ===
</TABLE>
In December 1998, the Company sold its seven owned assisted living
facilities in Wisconsin, which had been carried as an asset held for sale since
June 30, 1997. As of March 31, 1999, the Company has operations in Pennsylvania,
Missouri, Arkansas, Ohio, Virginia, North Carolina, Tennessee and West Virginia.
These operating facilities have a capacity for 3,028 assisted living residents,
1,294 skilled nursing patients and 117 independent living residents. The Company
also operates a home health care agency in Missouri and rehabilitation therapy
operations in Pennsylvania and Arkansas.
In addition to the 31 Outlook Pointe(R) signature series assisted
living facilities opened as of March 31, 1999, the Company has signed agreements
to develop and manage an additional 21 assisted living facilities currently
under construction (excluding 2 previously reported projects for which the
construction has been temporarily postponed), which are scheduled to open
through December 1999. In addition to increasing the depth of the Company's
operations in existing states, the construction will add operations in Indiana,
Florida, and Maryland. At March 31, 1999, the Company had land options to
acquire an additional 22 sites after terminating or allowing 15 land options to
expire during the third quarter. The land options generally give the Company, or
its assignee, the right to purchase the land at an agreed-upon price for a
specified period of time in exchange for option payments. In general, the option
payments are credited towards the purchase price if the option is exercised. A
portion of the option payments (usually $15-$30,000 or less) may be
non-refundable if the option is not exercised. In general, the land options may
be assigned by the Company to a third party without the land owners' consent.
(See "Liquidity and Capital Resources.") Of the remaining 22 land options under
control by the Company, the Company intends to pursue financing on acceptable
terms to complete the projects or selectively divest the projects to third
parties.
The Company generates revenues from four primary sources: patient
services, resident services, development fees and management fees. Patient
services revenues include charges for room and board, rehabilitation therapies,
pharmacy, medical supplies, subacute care, home health, and other programs
provided to patients in skilled nursing facilities as well as rehabilitation and
home health services provided to assisted living facility residents. Resident
services include all revenues earned from services provided to assisted living
facility residents except revenues for therapies and home health care services
provided by the Company's licensed agencies which are included in patient
services revenues. Development fees and management fees are earned for
developing and managing assisted living facilities for REITs and other owners or
lessees. As the Company implements its business plan, management believes that
the mix of the Company's revenues will continue to change and that revenues from
assisted living resident services will increase as a percentage of total
revenues.
The Company classifies its recurring operating expenses into the
following categories: (i) facility operating expenses which include labor, food,
marketing, rehabilitation therapy costs and other direct facility expenses; (ii)
development, general and administrative expenses, which primarily include
corporate office expenses, regional office expenses, development expenses and
other overhead costs; (iii)
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<PAGE> 15
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.
CENSUS TRENDS
Operationally, the Company has begun to see the results of the
Company's emphasis on operations and marketing implemented in February 1999.
During the quarter, the Company improved its average quarterly census absorption
rate at the Outlook Pointe(R) signature series assisted living communities from
6.28 residents per building for the September 30, 1998, quarter to 8.89
residents per building for the December 31, 1998 quarter, to 10.75 residents per
building for the March 31, 1999 quarter. We attribute this improvement to the
Company's increased investment in marketing, a new professionally trained and
managed sales team, and a focused community outreach initiative over the past 6
months. We believe the positive effects of the marketing and sales training
program and the refined positioning of the product in the marketplace will
continue to increase the Company's average quarterly census absorption rate.
CHARGES TO OPERATIONS
Due to the downscaling of development activity of the Company's Outlook
Pointe(R) signature series assisted living facilities (as reported in the second
fiscal quarter), management adopted a corporate restructuring plan affecting
certain departments and staff positions. This restructuring plan, which was
enacted in February 1999, resulted in a one-time charge of approximately
$600,000 in the Company's third fiscal quarter, representing the estimated costs
of employee terminations and related costs to exit these activities. The Company
expects this plan to reduce development, general and administrative expenses by
approximately $2,000,000 annually. The cost savings will be partially offset by
incremental increases in development, general and administrative expenses
related to the Company's increased investment in marketing and regional
operating positions.
Of the 52 Outlook Pointe(R) signature series assisted living facilities
under construction, managed or leased by the Company at March 31, 1999 (21 under
construction and 31 opened ), the Company estimates it may be required to make
future working capital shortfall contributions in connection with 26 managed
projects. In addition to the $1,400,000 of shortfall contributions incurred
during the third fiscal quarter and the $3,760,000 of cumulative shortfalls
funded through March 31, 1999, the Company estimates that it may be required to
fund an additional $4 million of shortfall contributions through June 30, 2000
(a reduction from the $8 to $12 million total previously estimated in the second
fiscal quarter report). This estimate is based on the conservative assumption
that the ramp-up timetable experienced with initial projects will continue on
all projects currently open and under construction. The additional working
capital needs relate primarily to projects that closed on construction financing
on or before March 31, 1998.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain data
as a percentage of total revenue:
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<PAGE> 16
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
---------------------------- ---------------------
STATEMENT OF OPERATIONS DATA: 1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Patient services 65.7% 58.7% 60.1% 67.0%
Resident services 29.9 20.6 27.9 19.4
Development fees 1.5 16.4 10.0 11.8
Management fees 2.1 3.5 1.6 1.4
Other 0.8 0.8 0.4 0.4
----- ----- ----- -----
Total revenue 100.0 100.0 100.0 100.0
Operating expenses:
Facility operating expenses 77.6 68.6 69.4 73.3
Development, general and administrative expense 18.8 12.0 17.1 13.2
Charge for termination of development projects -- -- 4.1 --
Charges under shortfall funding agreements 8.3 -- 6.3 --
Charges for severance losses 3.6 -- 1.0 --
Lease expense 15.4 8.9 12.4 10.9
Depreciation and amortization expense 3.4 2.1 2.7 2.4
----- ----- ----- -----
Income (loss) from operations (27.1) 8.4 (13.0) .2
Other income (expense) (0.4) (2.0) -- 2.6
----- ----- ----- -----
Income (loss) before income taxes (27.5) 6.4 (13.0) 2.8
Provision for income taxes (benefit) (11.0) 1.1 (2.9) 0.5
----- ----- ----- -----
Net income (loss) (16.5) 5.3 (10.1) 2.3
===== ===== ===== =====
</TABLE>
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
1998
Total Revenue. Total revenue for the three months ended March 31, 1999
decreased by $8,549,000 to $16,737,000 compared to $25,286,000 for the three
months ended March 31, 1998. This decrease is primarily attributable to: (i)
decreased patient service revenues of $3,855,000 resulting from a combination of
the new Medicare reimbursement methodology and rates, the Prospective Payment
System ("PPS") and a lower census at many of the Company's skilled nursing
facilities; and (ii) a $3,904,000 decrease in development fees due to the
Company's decision to reduce its development activities. Patient services
comprised 66% and 59% of total revenues for the three months ended March 31,
1999 and 1998, respectively.
Operating Expenses. Total operating expenses decreased by $1,898,000 to
$21,277,000 for the three months ended March 31, 1999 from $23,175,000 for the
three months ended March 31, 1998. This decrease is primarily attributable to:
(i) decreased operating expenses of $3,386,000 at the Company's skilled nursing
facilities as a result of cost reduction efforts primarily in the area of
therapy delivery; (ii) decreased expenses of $682,000 at the Company's managed
facilities primarily due to a change in accounting procedures relating to the
recognition of expenses for pass-through costs; and (iii) decreased expenses of
$633,000 related to the sale of the Wisconsin assisted living facilities in the
December 31, 1998 quarter. These decreases were partially offset by: (i) the
previously discussed provision for losses under the shortfall funding agreements
of $1,400,000 and the provision for severance losses of $600,000; (ii) increased
facility operating expenses of $378,000 from facilities acquired subsequent to
the three months ended March 31, 1998; and (iii) rent increases of $323,000.
Facility operating expenses for the three months ended March 31, 1999
decreased by $4,354,000 to $12,983,000 from $17,337,000 for the three months
ended March 31, 1998. This decrease is primarily attributable to: (i) a cost
reduction program and a patient acuity management system put in place at the
Company's skilled nursing facilities, which resulted in cost reductions of
approximately $3,406,000, primarily in the area of therapy delivery; (ii) The
previously discussed change in accounting procedures relating to the recognition
of expenses for pass-through costs which resulted in a decrease of $784,000;
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<PAGE> 17
and (iii) the sale of the Wisconsin assisted living facilities in the December
1998 quarter. The decrease was partially offset by the increase to facility
expenses of $424,000 from facilities acquired subsequent to the three months
ended March 31, 1998. As a percentage of total revenue, facility operating
expenses were 77.6% for the three months ended March 31, 1999, and 68.6% for the
three months ended March 31, 1998. This percentage increase was due to the lower
revenue base.
Development, general and administrative expenses increased by $101,000
to $3,143,000 for the three months ended March 31, 1999 from $3,042,000 for the
three months ended March 31, 1998. As a percentage of total revenue, these
expenses increased to 18.8% for the three months ended March 31, 1999 from 12.0%
for the three months ended March 31, 1998. The increase in expense was
attributable to the Company's facility growth. The disproportionate increase in
the expense as a percentage of revenue was due to the lower revenue base.
Information concerning the provision for losses under shortfall funding
agreements of $1,400,000 and the provision for severance losses of $600,000
during the three months ended March 31, 1999 are discussed above under the
heading "Charges to Operations".
Lease expense increased to $2,581,000 for the three months ended March
31, 1999 from $2,258,000 for the three months ended March 31, 1998, an increase
of $323,000. This increase was primarily the result of additional lease expense
from facilities acquired subsequent to March 31, 1998 and as a result of
additional rent provisions in the Company's leases. As a percentage of total
revenue, these expenses totaled 15.4% for the three months ended March 31, 1999
and 8.9% for the three months ended March 31, 1998.
Depreciation and amortization increased by $32,000 to $570,000 for the
three months ended March 31, 1999 from $538,000 for the three months ended March
31, 1998. This increase resulted from depreciation and amortization related to
the purchase of fixed assets for managed communities in the development stage of
$80,000. This increase was offset by depreciation and amortization of $61,000
related to the sale of the Wisconsin assisted living facilities, which were sold
in the December 1998 quarter.
Other Income (Expense). Interest and other income for the three months
ended March 31, 1999 decreased by $81,000 to $154,000 from $235,000 in the three
months ended March 31, 1998. Interest expense for the three months ended March
31, 1999 decreased by $600,000 to $127,000 from $727,000 for the three months
ended March 31, 1998. This was primarily due to the repayment of debt with
proceeds of the Offering in February 1998.
In March 1999, the Company sold and subsequently leased all the fixed
assets including land and buildings of two of its facilities: a skilled nursing
facility located in Bloomsburg, Pennsylvania and an assisted living facility
located in Saxonburg, Pennsylvania for net proceeds of approximately $8,901,000.
The sale leaseback resulted in a loss of $102,000 in the three months ended
March 1999.
Provision for Income Taxes (Benefit). Income tax benefit of $1,846,000
for the three months ended March 31, 1999 is the result of the Company's
estimated fiscal 1999 tax position. Income tax expense of $272,000 for the March
31, 1998 quarter was based on the Company's estimated tax rate of 16% for the
1998 fiscal year.
Net Income (Loss). The Company's net loss of ($2,769,000) for the three
months ended March 31, 1999 from net income of $1,347,000 for the three months
ended March 31, 1998, is a decrease of
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<PAGE> 18
$4,116,000. This decrease was the result of: (i) decreased profitability from
development fees of $3,975,000; (ii) the provision for losses under shortfall
funding agreements of $1,400,000 and the provision for losses from severance
agreements of $600,000; and (iii) reduced profitability in the Company's skilled
nursing facilities of approximately $315,000, primarily due to the
implementation of PPS and a lower census. These amounts were partially offset by
decreased income taxes of $2,118,000.
The Company continues to evaluate the impact of the Balanced Budget Act
of 1997 (the "Budget Act") upon future operating results. While the Budget Act
was passed in August 1997, specifics relating to each business line will
continue to be released until the year 2000. The assumptions used by the Company
to evaluate the impact of the Budget Act are based upon the most accurate
information available at this time. At present, the Company believes it is
responding to all of the known changes created by the Budget Act; however, it
cannot predict the impact of unforeseen reductions in anticipated rates issued
by the federal government.
The Company is also evaluating the impact of the recent report issued
by the United States General Accounting Office in April, 1999 entitled
"Assisted Living Quality-of-Care and Consumer Protection Issues in Four States"
(the "GAO Report") on its methods of delivery. Generally, the GAO Report found
that assisted living facilities do not routinely provide prospective residents
with key information they need so they can compare what several facilities
offer and determine whether a facility is appropriate for their needs. The GAO
Report also found that some assisted living residents are encountering quality
of care and consumer protection problems. Due to the recent nature of the GAO
Report, the Company cannot predict the impact on its methods of delivery. On a
forward going basis, the Company will continue to evaluate the issues raised by
the GAO Report and will take what actions, if any, are required to provide
adequate quality of care and consumer protections to its residents.
NINE MONTHS ENDED MARCH 31, 1999 COMPARED TO THE NINE MONTHS ENDED MARCH 31,
1998
Total Revenue. Total revenue for the nine months ended March 31, 1999
decreased by $6,389,000 to $59,290,000 compared to $65,679,000 for the nine
months ended March 31, 1998. This decrease was the result of: (i) decrease in
patient service revenues of $8,384,000, which was primarily the result of PPS
and a lower census at the Company's skilled nursing facilities, offset by a
$1,478,000 increase due to a skilled nursing facility acquisition on January 1,
1998; and (ii) decreased development fees of $1,792,000 related to the Company's
decision to reduce development activities. These decreases were partially offset
by additional resident service revenues of $3,748,000, primarily from facilities
acquired during, or subsequent to, the nine months ended March 31, 1998. Patient
services comprised 60% and 67% of total revenues for the nine months ended March
31, 1999 and 1998, respectively. The decrease in this percentage of total
revenues was due to the Company's implementation of its business plan which
focuses on assisted living development and operations, and the aforementioned
decrease due to PPS.
Operating Expenses. Total operating expenses increased by $1,486,000 to
$67,006,000 for the nine months ended March 31, 1999 from $65,520,000 for the
nine months ended March 31, 1998. This increase was primarily attributable to:
(i) increased expenses of $4,966,000 at facilities acquired during or after the
nine months ended March 31, 1998; (ii) a $1,439,000 increase in development,
general and administrative expenses; (iii) the provision for losses on
termination of development projects of $2,400,000; (iv) the provision for losses
under shortfall funding agreements of $3,760,000; (v) the $600,000 provision for
severance losses; and (vi) a $473,000 increase in operating expenses related to
volume increases at the Company's rehabilitation therapy operations in
Pennsylvania and Arkansas. These increases were partially offset by: (i)
decreased operating expenses of $9,376,000 at the Company's skilled nursing
facilities as a result of cost reduction efforts primarily in the area of
therapy delivery; (ii) decreased operating expenses of $2,249,000 at newly
developed assisted living facilities that were leased during the three months
ended December 31, 1997, but managed effective January 1, 1998 as a result of
the sale of the leasehold interests to an independent Operator/Lessee and (iii)
a decrease in operating expenses of $541,000 for leased assisted living
operations primarily as the result of the divestiture of the Wisconsin
facilities in the December 1998 quarter.
Facility operating expenses for the nine months ended March 31, 1999
decreased by $6,998,000 to $41,153,000 from $48,151,000 for the nine months
ended March 31, 1998. The decrease is the result of a cost reduction program and
a patient acuity management system put in place at the Company's
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<PAGE> 19
skilled nursing facilities, which resulted in a reduction in costs of
approximately $9,420,000, primarily in the area of therapy delivery. Facility
operating expenses also decreased by approximately $1,770,000 at newly developed
assisted living facilities that were leased until December 31, 1997, but managed
subsequent to that date, as a result of the Company's sale of the leasehold
interests to an Operator/Lessee on January 1, 1998. These cost savings were
offset by increased costs of $4,280,000 at new assisted living facilities which
were acquired during, or after, the December 1997 quarter. As a percentage of
total revenue, facility operating expenses were 69.4% for the nine months ended
March 31, 1999, and 73.3% for the nine months ended March 31, 1998.
Development, general and administrative expenses increased by
$1,439,000 to $10,103,000 for the nine months ended March 31, 1999 from
$8,664,000 for the nine months ended March 31, 1998. As a percentage of total
revenue, these expenses increased to 17.1% for the nine months ended March 31,
1999 from 13.2% for the nine months ended March 31, 1998. The increase was
attributable to the growth in the number of facilities owned, leased or managed.
Information concerning the provision for losses on termination of
development projects of $2,400,000, the provision for losses under shortfall
funding agreements of $3,760,000 and the provision for severance losses of
$600,000 for the nine months ended March 31, 1999 are discussed above under the
heading "Charges to Operations".
Lease expense increased by $215,000 to $7,377,000 for the nine months
ended March 31, 1999 from $7,162,000 for the nine months ended March 31, 1998.
This increase was primarily the result of rents at newly opened and acquired
facilities and rental increases under lease agreements at existing facilities.
As a percentage of total revenue, these expenses totaled 12.4% for the nine
months ended March 31, 1999 and 10.9% for the nine months ended March 31,1998.
Depreciation and amortization increased by $70,000 to $1,613,000 for
the nine months ended March 31, 1999 from $1,543,000 for the nine months ended
March 31, 1998. The increase resulted from depreciation and amortization taken
on assets acquired during, and after, the three months ended December 31, 1997,
offset by the decrease as a result of the sale of the Wisconsin facilities in
the quarter ended December 1997.
Other Income (Expense). Interest and other income for the nine months
ended March 31, 1999 increased by $223,000 to $633,000 from $410,000 in the nine
months ended March 31, 1998. The increase is primarily attributable to the
higher level of invested funds from the proceeds of the Offering in February
1998. Interest expense for the nine months ended March 31, 1999 decreased by
$1,234,000 to $345,000 from $1,579,000 for the nine months ended March 31, 1998.
This was primarily due to the repayment of $29,675,000 in bridge financing
borrowed for the purchase of six assisted living facilities and one nursing home
between October 1997 and January 1998, and the repayment of $5,019,000 in debt
on the Company's Wisconsin assisted living facilities in June 1998. Both loans
were repaid from proceeds of the Offering in February 1998.
In March 1999, the Company sold all the fixed assets including land and
buildings of two of its facilities: a skilled nursing facility in Bloomsburg,
Pennsylvania and an assisted living facility located in Saxonburg, Pennsylvania
for net proceeds of approximately $8,901,000 under a sale/leaseback transaction.
In December 1998, the Company completed the sale of the assets of its Wisconsin
assisted living facilities for net proceeds of approximately $2,726,000. The
Wisconsin facilities had been classified as an asset held for sale since June
30, 1997. The sale of the above assets resulted in a loss of $302,000 in the
nine months ended March 31, 1999. In October 1997 the Company sold the
inventory,
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<PAGE> 20
furniture and equipment, certain prepaid assets and the operations of a pharmacy
for approximately $4,700,000, net of transaction costs. This resulted in a gain
of $2,858,000 during the nine months ended March 31, 1998.
Provision for Income Taxes. Income tax benefit of $1,738,000 for the
nine months ended March 31, 1999 is the result of the Company's estimated fiscal
1999 tax position. Income tax expense of $309,000 for the nine months ended
March 31, 1998 was based on the Company's estimated tax rate of 16% for the 1998
fiscal year.
Net Income (Loss). The Company's net loss of $(5,992,000) for the nine
months ended March 31, 1999 from a net income of $1,539,000 for the nine months
ended March 31, 1998, is a decrease of $7,531,000. This decrease in net income
resulted primarily from: (i) decreased gain on sale of assets of $3,160,000;
(ii) the provision for losses on termination of development projects, under
shortfall funding arrangements and severance provision of $6,760,000, (iii)
reduced profitability in the Company's skilled nursing facilities of
approximately $3,164,000, primarily due to the implementation of PPS and a lower
census; and (iv) reduced profitability from development activities of
$3,219,000. These amounts were partially offset by (i) the contribution of
$2,048,000 from the leased assisted living facilities; (ii) the reduction in
start up losses and increased management fees of $1,903,000 at assisted living
facilities where the Company manages or has sold the leasehold interests to an
independent Operator/Lessee on January 1, 1998; and (iii) reduced income taxes
of $2,047,000.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
In March 1999, the Company received approximately $9 million in cash
through the sale/leaseback of two of its owned facilities located in Bloomsburg
and Saxonburg, Pennsylvania with an independent third party (the "Sale/Leaseback
Transaction") under a fifteen-year lease agreement at an annual lease rate of
10.25%.
Also in March 1999, the Company secured a $5 million bridge loan from a
financing company to support working capital needs while the Sale/Leaseback
Transaction was being negotiated and until a permanent credit facility could be
obtained. The bridge loan was secured by real estate of four of the Company's
owned assisted living facilities and the accounts receivable of 12 of the
Company's skilled nursing facilities. The bridge loan was evidenced by a 60-day
secured term note with interest accruing at a floating rate per annum equal to
prime plus 4%. This bridge loan was repaid in full subsequent to the quarter-end
with the proceeds obtained from the first draw on the Company's Line of Credit
as discussed below.
In April, 1999, the Company entered into a $15 million revolving Line
of Credit. The Line of Credit is secured by the real estate owned by five of the
Company's subsidiaries (BCC at Darlington, Inc., Balanced Care at Eyers Grove,
Inc., Balanced Care at Butler, Inc., Balanced Care at Sarver, Inc. and Balanced
Care at North Ridge, Inc. (collectively, the "Real Estate Borrowers")) and the
eligible accounts receivable of the Company's 10 Missouri skilled nursing
facilities. The Line of Credit is for a term of three years, and outstanding
borrowings will bear interest at a rate per
20
<PAGE> 21
The primary component of the borrowing base for the Line of Credit
that the Company intends to utilize consists of 80% of the product of 8.0 times
EBITDA of the Real Estate Borrowers, which was approximately $8.5 million at
March 31, 1999. Under the Line of Credit, the Company has the ability to add
seven of its wholly-owned subsidiaries to the current Real Estate Borrowers,
and to pledge their respective leasehold interests in the facilities they
operate as additional collateral. The foregoing is contingent upon the Company
successfully negotiating an intercreditor agreement with the facilities' owner
and first lien holder. The Company is attempting to obtain the intercreditor
agreement to increase the borrowing base.
The Company has opened 31 of its Outlook Pointe(R) signature series
assisted living facilities as of March 31, 1999. In addition, the Company had 21
Outlook Pointe(R) signature series assisted living facilities under construction
and 22 sites under land options. As previously discussed, the Company has
stopped seeking additional sites for Outlook Pointe(R) facilities. The Company
has adequate financing to complete construction on the 21 facilities under
construction at March 31, 1999. These facilities are expected to open by
December 31, 1999. With respect to the 22 sites under land option, the Company
is continuing to evaluate each site to determine its strategic benefit to the
Company's focus on clustering new projects. Those projects that meet these
criteria will be purchased under the land options and developed when, and if,
financing can be obtained under suitable terms. The land options for those
projects that do not meet the Company's long term objectives will be assigned or
left to expire. During the third fiscal quarter, the Company either terminated,
or allowed the expiration of, the land options on 15 previously secured sites.
The Company's costs associated with these cancelled land options are reflected
in the provisions for estimated losses on development projects. The Company had
previously disclosed its expectations to develop more than 40 facilities during
its June 30, 1999 fiscal year. As a result of the Company's revised development
strategy, and the ongoing difficulty in obtaining development and working
capital on acceptable terms, the Company has closed on construction financing
for six development projects as of March 31, 1999. If, and when, capital
becomes available to the Company on acceptable terms, the Company will
implement a program of limited development consisting of approximately four to
five projects per quarter that meet the Company's development standards.
The Company's development projects have generally involved entering
into development agreements with third party owners, which are typically REITs
(each, an "Owner"). A third party Operator/Lessee leases the assisted living
facility from the Owner when construction has been completed and provides
funding for the working capital during the initial occupancy period. The Company
manages the assisted living facility pursuant to a management agreement for a
term of two to nine years in return for a management fee approximating 6% of the
net revenue of the facility. The foregoing off-balance sheet financing structure
is referred to as the "Black-Box Structure".
For development projects utilizing the Black-Box Structure that were
committed to prior to September 24, 1998, the Company has the option to purchase
the equity or assets of the Operator/Lessee at a purchase price based on a
formula set forth in an Option Agreement and a Shortfall Funding Agreement,
respectively. As consideration for the option, which is exercisable by the
Company at any time during the term of the Option Agreement, the Company pays
option payments to the Operator/Lessee. Without the Owner's prior consent, the
Operator/Lessee may not sell its equity or assets to any third party other than
the Company. The Company has closed 52 development projects for which the
Company holds the foregoing type of option. In March 1999, the Company exercised
its option to purchase the Operator/Lessee's equity interests in the Harrisburg,
Pennsylvania project financed under the Black Box Structure for a purchase price
of $516,000. The Company also acquired the equity interests in the Mountain Home
and Sherwood, Arkansas projects as of April 30, 1999 for a total purchase price
of approximately $1,668,000. The Company plans to exercise options to purchase
the equity interests on two additional projects through the end of its fiscal
year. The Company estimates it will require approximately $40 - $45 million to
buy the equity of the 49 Outlook Pointe facilities that remain
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<PAGE> 22
under the Black Box Structure over the next three years. The Company has
obtained commitments from certain REITs that currently own and lease developed
properties under the Black Box Structure to finance the Company's capital
requirements to exercise its purchase options under the aforementioned option
agreements. Generally, this take-out financing will be structured as an increase
to the existing facility lease base at a blended annual lease rate. This
financing structure will provide approximately $30 million of the estimated $40
- - $45 million capital requirement. The balance will be funded with cash raised
from financing transactions discussed above, possible asset divestitures and
cash to be provided from operations.
As reported in the section titled "Charges to Operations," the Company
has incurred a cumulative charge of $3,760,000 representing advances made for
the operations of facilities financed under the Black Box Structure ($1,400,000
in the third fiscal quarter) under existing Shortfall Funding Agreements. The
Company has revised and reduced its estimate of additional shortfall funding
requirements through June 30, 2000 to be approximately $4 million (estimated in
the second fiscal quarter report to be approximately $8 to $12 million) as the
result of additional black box working capital financing.
The Company believes with its current financing arrangements to
facilitate the acquisition of projects financed through the Black Box Structure
(the "Black Box Operations") and the potential sale of assets, that it will
generate the cash needed (i) to maintain existing operations; (ii) acquire all
Black Box Operations upon breakeven and (iii) make the required purchase option
payments under these commitments. Notwithstanding the foregoing, there can be no
assurance that any additional financing needed to fund the Company's liquidity
and growth will be available, should the Company not achieve its operational
forecasts.
In September 1998, the Company entered into management agreements,
option agreements and other transaction documents with six Operator/Lessees that
are owned by Financial Care Investors, LLC, a Delaware limited liability company
("FCI"). FCI is owned by Brad E. Hollinger, Chairman of the Board, President and
Chief Executive Officer of the Company. FCI and its six wholly owned
Operator/Lessees also entered into lease agreements with a REIT. The terms of
the agreements among the parties are similar to the terms of the agreements the
Company has entered into with independent third party Operator/Lessees. The
Company has not made any payments to the aforementioned parties in connection
with these transactions.
Most of the facilities operated or managed by the Company are leased
under long-term operating leases. Lease obligations for the next 12 months are
approximately $11,000,000. The lease documents contain financial covenants and
other restrictions which: (i) require the Company to meet certain financial
tests and maintain certain escrow funds, (ii) limit, among other things, the
ability of the Company and certain of its subsidiaries to borrow additional
funds, dispose of assets or engage in mergers or other business combinations,
and (iii) prohibit the Company from operating competing facilities within a
designated radius of existing facilities. Management believes the Company is in
compliance with these lease covenants.
The Company's lease arrangements are generally for initial terms of
nine to 15 years with aggregate renewal terms 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% to 3% of the prior year's total rent
and is based on either the annual increase in gross revenues of the facility or
the increase in the consumer price index. The Company's lease arrangements
generally contain an option to purchase the facility at its fair market value at
the end of the initial lease term and each renewal term.
22
<PAGE> 23
Operating Activities
Cash used by operations decreased by $1,976,000 to $5,213,000 for the
nine months ended March 31, 1999 from cash used by operations of $7,189,000 for
the nine months ended March 31, 1998. The decrease in the cash used was due to a
reduction in losses on the sale of assets and prepaids and other current assets,
offset by an increase in accounts payable accrued expenses, and reported losses
for the quarter increases in accounts receivable, and prepaid expenses and other
current assets and decreases in accounts payable and accrued liabilities.
Investing and Financing Activities
Cash used for investing activities decreased by $26,156,000 to $367,000
for the nine months ended March 31, 1999 from $26,523,000 for the nine months
ended March 31, 1998. Cash provided by financing activities decreased by
$40,884,000 to $5,231,000 for the nine months ended March 31, 1999 from
$46,115,000 for the nine months ended March 31, 1998. The decreases in cash
provided by financing activities and cash used for investing activities from the
1998 quarter to the 1999 quarter was a result of the Offering in the 1998
quarter and a reduction in the Company's acquisition activities. During the nine
months ended March 31, 1999, the Company used the cash remaining from the
Offering for general corporate purposes.
YEAR 2000 READINESS DISCLOSURE
Computer software and/or hardware that was designed to define the year
with a two digit date field rather than a four digit field may fail or
miscalculate data in the year 2000, causing disruption to the operations or
business activities of the Company.
State of Readiness. The Company uses high quality hardware and
operating systems from current and proven technologies to ensure reliability and
optimum system performance. In order to evaluate these systems and other
electronic systems not related to information technology ("Non-IT Systems"), the
Company formed an oversight committee comprised of information systems,
operations, legal and accounting professionals.
Phases. The committee has performed an inventory and risk assessment of
the Company's internal operating systems, as well as an inventory of third party
relationships and their impact on the Company. In response to requests, the
committee has already received certification of year 2000 readiness from key
hardware and software providers, including suppliers of critical data processing
and financial systems. Internal testing of all critical electronic systems began
in early 1999.
The committee also oversees the testing of certain non-IT Systems. The
testing of these systems is under way. The testing is expected to be completed
by November 1, 1999. For those non-critical systems that cannot be readily
tested, the Company will inquire of third party vendors as to the status of year
2000 compliance within these systems.
Material Third Parties. Based on the committee's review, the Company
has determined that third party relationships provide the highest risk related
to year 2000 issues. The third party relationships deemed most critical are the
Company's banking relationships and its relationships with third party
intermediaries for skilled nursing facility reimbursement under Medicare and
Medicaid programs. The Company's third party reimbursement intermediaries have
been proactive in testing for year 2000 compliance. Some intermediaries are
requiring the submission of test billings that demonstrate year
23
<PAGE> 24
2000 compatibility with their payment software. Where required, the Company
completed these tests by December 31, 1998. The committee's is continuing to
evaluate the year 2000 compliance of the Company's financial institutions to
gain assurance regarding their year 2000 readiness.
Costs. Based upon the Company's progress to date in addressing year
2000 issues, management does not expect these issues to have a material impact
on financial position, results of operations or cash flows in future periods,
including the cost of remediation. Costs incurred to date are internal staff
costs of salary, benefits and nominal administrative expenses associated with
the activities of the oversight committee. The Company expects future costs to
be of a similar nature.
Risks and Contingency Plans. At this time the Company is unable to
determine its most reasonably likely worst case scenarios as a result of year
2000 issues. The committee continues to analyze possible scenarios as part of
its inventory and risk assessment process, and will develop and modify its
contingency plans as more information becomes available. Based on the outcomes
of inquiries and testing, the oversight committee is currently coordinating the
preparation of contingency plans.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company did not have any investment securities subject to market
risk as of, or during the nine months ended, March 31, 1999.
24
<PAGE> 25
PART II - OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
10.1 Consulting Agreement between Pier C. Borra and
Balanced Care Corporation dated March 22, 1999,
effective December 8, 1998 (filed herewith)
10.2 Employment Agreement between Clint T. Fegan and
Balanced Care Corporation dated February 11, 1999
(filed herewith)
10.3 Lease Agreement between Pennsylvania BCC Properties,
Inc. and Balanced Care at Saxonburg, Inc.
(incorporated by reference to Exhibit 10.1 of the
Company's Current Report on Form 8-K dated March 18,
1999 [File No. 1-13845])
10.4 Lease Agreement between Pennsylvania BCC Properties,
Inc. and Balanced Care at Bloomsburg II, Inc.
(incorporated by reference to Exhibit 10.2 of the
Company's Current Report on Form 8-K dated March 18,
1999 [File No. 1-3845]
</TABLE>
(B) Reports on Form 8-K
The Company filed one current report on Form 8-K during the quarter
ended March 31, 1999, as follows:
(1) March 29, 1999, reporting certain Change in Control Agreements
entered into between the Company and certain of its executive employees.
(2) April 1, 1999, reporting (i) the sale-leaseback of two Pennsylvania
properties to a subsidiary of Health Care REIT, Inc. and (ii) the
execution of a $5,000,000 Secured Term Note in favor of HCFP Funding,
Inc.
SIGNATURES
Pursuant to the requirements of Section 13 or Section 15(d) of the
Securities and Exchange Act of 1934, as amended, the Registrant has duly caused
this Report to be signed on its behalf by the undersigned, thereunto duly
authorized.
BALANCED CARE CORPORATION
Date: May 14, 1999 By: /s/ Clint T. Fegan
-------------------------
Clint T. Fegan
Chief Financial Officer
25
<PAGE> 26
EXHIBIT INDEX
Exhibit
Number Description
------ -----------
10.1 Consulting Agreement between Pier C. Borra and
Balanced Care Corporation dated March 22, 1999,
effective December 8, 1998 (filed herewith)
10.2 Employment Agreement between Clint T. Fegan and
Balanced Care Corporation dated February 11, 1999
(filed herewith)
10.3 Lease Agreement between Pennsylvania BCC Properties,
Inc. and Balanced Care at Saxonburg, Inc.
(incorporated by reference to Exhibit 10.1 of the
Company's Current Report on Form 8-K dated March 18,
1999 [File No. 1-13845])
10.4 Lease Agreement between Pennsylvania BCC Properties,
Inc. and Balanced Care at Bloomsburg II, Inc.
(incorporated by reference to Exhibit 10.2 of the
Company's Current Report on Form 8-K dated March 18,
1999 [File No. 1-3845]
26
<PAGE> 1
Exhibit 10.1
CONSULTING AGREEMENT
THIS CONSULTING AGREEMENT (the "Agreement") is made and entered into
this 22nd day of March, 1999, to be effective on and as of December 8, 1998, by
and between PIER BORRA, an individual (the "Consultant"), and BALANCED CARE
CORPORATION, a Delaware corporation (together with any related, affiliated or
subsidiary corporation, the "Company").
WITNESSETH:
WHEREAS, the Company desires to engage the Consultant to provide
certain services to the Company, and the Consultant is willing to provide such
services to the Company; and
WHEREAS, because of the Consultant's existing knowledge of the plans,
operations, employees and customers of the Company, and the knowledge to be
obtained by the Consultant of the plans, operations, employees and customers of
the Company, it is important to the Company that the Consultant shall not
disclose any confidential or proprietary information of the Company during or
after the term of this Agreement; and
WHEREAS, the Consultant is willing to enter into this Agreement upon
the terms and conditions herein set forth.
NOW, THEREFORE, for the consideration set forth in this Agreement, and
intending to be legally bound hereby, the Consultant and the Company mutually
promise and agree as follows:
1. Consulting Duties, Term. The Company agrees to and does hereby
engage the Consultant in a consulting capacity as an independent contractor to
provide certain services, including, but not limited to, the services set forth
on Exhibit A attached hereto and incorporated herein, and the Consultant does
hereby agree to serve the Company in such capacity. Unless earlier terminated as
provided in Paragraph 4, this Agreement shall have a term of two (2) years,
commencing on December 8, 1998 and expiring on December 8, 2000.
1
<PAGE> 2
2. Time Required. The Consultant shall devote his best efforts and
such time as shall be reasonably necessary to perform the services pursuant to
this Agreement up to a maximum of 120 hours per year, which maximum may be
adjusted from time to time upon the mutual consent of the parties hereto.
3. Compensation; Billing.
(a) On a quarterly basis, on or before June 30, September 30,
December 31 and March 31, as applicable, the Consultant shall submit
an invoice to the Company setting forth the number of hours spent by
the Consultant providing services hereunder for the applicable time
period. The invoice shall be in a form and content reasonably
acceptable to the Company. As consideration, for each hour that the
Consultant provides services hereunder, the Company shall grant the
Consultant a non-qualified stock option for 250 shares of the
Company's common stock, par value $0.001 (the "Common Stock"), subject
to the terms and conditions pertaining to "Independent Contractors"
under the Company's 1996 Stock Incentive Plan, as amended and restated
(as the same may be modified from time to time, the "Plan"). Each
option will be granted pursuant to the form of Independent Contractor
Stock Option Award Agreement (the "Award Agreement") attached hereto
as Exhibit B (as the same may be modified from time to time). The
grant date of each option shall be the date on which the Board of
Directors of the Company approves the grant. The exercise price of
each option shall be the fair market value of the Common Stock on the
grant date. The Company will use its best efforts to submit the
Consultant's invoice for approval at the next regularly scheduled
meeting of the Board of Directors following receipt of the invoice.
(b) Based on the compensation formula set forth in Paragraph 3(a)
above (i.e., the number of service hours multiplied by 250 shares of
Common Stock), the maximum amount of compensation that the Consultant
could receive hereunder is the grant of stock options to purchase
60,000 shares of Common Stock; provided, however, the Company is only
obligated to grant that number of stock options that the Consultant
has earned based on the actual number of service hours provided by the
Consultant during the term hereof.
2
<PAGE> 3
(c) The Company will reimburse the Consultant for reasonable
travel, lodging and other expenses arising in connection with the
services to be provided pursuant to this Agreement. Such expenses
shall be approved by the Chief Executive Officer of the Company in
advance. All travel arrangements for Consultant shall be made by the
appropriate Company personnel.
The compensation set forth in this Paragraph 3 shall be considered as full
payment to the Consultant for all such services rendered under this Agreement.
4. Termination.
(a) Either party may terminate this Agreement without cause by
giving the other party thirty (30) calendar days? prior written
notice.
(b) This Agreement shall automatically terminate upon the death
or disability of the Consultant.
(c) The Company may terminate this Agreement with cause
immediately upon written notice to the Consultant upon the beach by
Consultant of any of the terms or conditions of this Agreement,
including but not limited to the confidentially and nondisclosure
provisions set forth in Paragraph 5.
(d) As of the date of termination of this Agreement, the
Company's obligation to grant, and the Consultant's right to be
awarded, stock options shall cease and neither party shall have any
further rights or obligations hereunder except for the rights and
obligations accruing prior to the date of termination or arising as a
result of any breach of this Agreement. Any stock options granted to
the Consultant as compensation under Paragraph 3 as of the date of
termination shall be governed by the terms and conditions of the Award
Agreement and the Plan. Notwithstanding the foregoing, the following
provisions shall survive the termination or expiration of this
Agreement, regardless of the cause of such termination: Paragraph 5
and Paragraph 6(b).
3
<PAGE> 4
5. Confidentiality; Nondisclosure.
(a) The Consultant recognizes and acknowledges that during the
term of this Agreement, the Consultant will have access to, be
provided with and, in some cases, will prepare and create, certain
confidential and proprietary information and trade secrets of the
Company arising in connection with the plans, operations, employees
and customers of the Company (collectively, the "Information"), all of
which is of substantial value to the Company and its business.
(b) The Consultant agrees to keep the Information confidential
and that the Information shall not, without the prior written consent
of the Company, be copied, divulged, disclosed, provided or otherwise
made available by the Consultant or any of Consultant's employees,
contractors, agents or representatives (collectively, the
"Representatives"), and shall not be used by the Consultant or any of
the Representatives other than as provided in this Agreement.
Moreover, the Consultant agrees to transmit the Information only to
such of the Representatives who need to know the Information for the
sole purpose of assisting the Consultant in providing the services
pursuant to this Agreement, who are informed of this Agreement and who
agree to be bound by the terms hereof as if a party hereto.
(c) The Consultant acknowledges and agrees that all of the
documents, instruments, reports, memoranda or other materials prepared
by the Consultant or the Representatives and any other materials
containing or otherwise reflecting the Information (together with all
copies of the foregoing) are and shall be the sole and exclusive
property of the Company.
(d) The Consultant agrees that, upon the Company's request, all
of the furnished Information, any documents, instruments, reports,
memoranda or other materials prepared by the Consultant or the
Representatives and any other materials containing or otherwise
reflecting the Information (together with all copies of the
foregoing), shall, at the Company's option, be (1) returned to the
Company or (2) destroyed at the Company's direction.
4
<PAGE> 5
(e) The Consultant further acknowledges and agrees that U.S.
securities laws prohibit any person or entity that has material
non-public information about a company from trading in the securities
of such company or from communicating such information to any other
third party under circumstances in which it is reasonably foreseeable
that such third party is likely to trade in the securities of such
company. The Consultant agrees not to use such information in the
trading of securities of the Company or to communicate such
information to others who so trade in the securities of the Company.
(f) Notwithstanding anything herein to the contrary, no
obligation or liability shall accrue hereunder with respect to any of
the matters contained in the Information to the extent that such
Information (1) is or becomes publicly available other than as a
result of acts by the Consultant or the Representatives in violation
of this Agreement, (2) is in the possession of the Consultant or the
Representatives prior to disclosure by the Company or (3) is, on the
advice of counsel, required to be disclosed by law.
(g) The Consultant acknowledges and agrees that the Information
is a valuable and unique asset of the Company and that the provisions
of this Agreement are made for the benefit of the Consultant and for
the benefit of the Company, and that in the event of any breach of
this Agreement, the Company will be harmed and unable to be made whole
by monetary damages. It is accordingly agreed that the Company, in
addition to any other remedy to which it may be entitled in law or at
equity, shall be entitled to an injunction or injunctions to remedy
breaches of this Agreement and/or compel specific performance of this
Agreement.
The provisions of this Paragraph 5 shall survive termination or expiration of
this Agreement and shall remain in full force and effect until the expiration of
two (2) years following the date of termination or expiration, as the case may
be.
6. Independent Contractor. The Consultant is and shall at all times be
an independent contractor and shall not hold herself out as an employee of the
Company. Nothing in this Agreement is
5
<PAGE> 6
intended, nor shall it be construed, to create an employer/employee
relationship, a joint venture relationship, a lease or landlord/tenant
relationship, or to allow the Company to exercise control over the manner or
method by which the Consultant performs the services which are the subject of
this Agreement, except that the Company shall have an interest in ensuring that
the Consultant's services shall be performed in a competent, efficient and
satisfactory manner. Furthermore:
(a) The Consultant shall be liable for his own debts,
obligations, acts and omissions, including the payment of all required
withholding, social security, income tax, unemployment insurance and
other taxes or benefits pursuant to any law or requirement of any
governmental body.
(b) The Company shall not withhold on behalf of the Consultant
any sums for income tax, unemployment insurance, social security or
other withholding or benefit pursuant to any law or regulation of any
governmental body. The Consultant will indemnify and hold harmless the
Company from any loss or liability arising from the Company's failure
to make such payments or withholdings. The provisions of this
Paragraph 6(b) shall survive termination or expiration of this
Agreement.
(c) If the Internal Revenue Service or any other governmental
body shall, at any time, question or challenge the independent
contractor status of the Contractor, the Company and/or the
Consultant, upon receipt by either of them of notice from the Internal
Revenue Service or any other governmental body, shall promptly notify
the other party and afford the other party the opportunity to
participate in any discussions or negotiations with the party that
received notice from the Internal Revenue Service or other
governmental body as such party that received notice may reasonably
request. Each party shall bear its respective costs in the event of
such inquiry.
(d) The Consultant hereby agrees that the Company shall not be
obligated to provide the Consultant with vacation pay, health and
disability insurance or workers' compensation insurance.
6
<PAGE> 7
7. Scope. In the event that any provision of this Agreement is deemed
by a court of competent jurisdiction to be excessively broad as to duration,
scope, activity or subject, such provision shall be construed and enforced to
the fullest extent permitted by law.
8. Notices. All notices, requests, demands or other communications
provided for in this Agreement shall be in writing and shall be deemed to have
been given at the time when personally delivered, or mailed in a registered or
certified prepaid envelope, return receipt requested, or sent by overnight
courier that regularly provides receipts and is addressed to the address below:
If to the Consultant to:
Pier Borra
825 South Cable Road
Lima, Ohio
If to the Company to:
Balanced Care Corporation
5021 Louise Drive, Suite 200
Mechanicsburg, PA 17055
Attn: Brad Hollinger, President & CEO
or at such other address as hereafter may be notified in writing by one party to
the other.
9. Entire Agreement. This Agreement contains the entire agreement of
the parties with respect to the subject matter hereof and shall not be modified
or changed in any respect except in writing duly signed by the parties hereto.
10. Interpretation of Provisions. Wherever possible, each provision of
this Agreement shall be interpreted in such manner as to be effective and valid
under applicable law, but if any provision of this Agreement shall be prohibited
by or invalid under applicable law, such provision shall be ineffective to the
extent of such prohibition or invalidity, without invalidating the remainder of
such provision or the remaining provisions of this Agreement.
7
<PAGE> 8
11. Captions. Captions in this Agreement are solely for purposes of
identification and shall not in any manner alter or vary the interpretation or
construction of this Agreement.
12. Assignment. All the terms and provisions of this Agreement shall
be binding upon and shall inure to the benefit of the parties hereto and their
respective heirs, personal representatives, transferees, successors and assigns.
This Agreement shall be assignable by the Company to a subsidiary, affiliate or
successor corporation. The Consultant shall not have the right to assign this
Agreement without the prior written consent of the Company, which consent may be
withheld in the Company's sole discretion; provided, however, that the
Consultant shall have the right to subcontract or assign work under this
Agreement to the Consultant's employees or other independent contractors so long
as any such subcontractee or assignee agrees to be bound by the provisions of
Paragraph 5 (Confidentiality; Non-Disclosure) and Paragraph 6 (Independent
Contractor) of this Agreement, and further provided that the Consultant shall
provide written notice to the Company prior to any such assignment.
13. Counterparts. This Agreement may be executed in one (1) or more
counterparts. Each full counterpart shall be deemed an original, but all such
counterparts together shall constitute one and the same instrument
14. Governing Law. This Agreement shall be governed by, interpreted,
construed and enforced in accordance with the laws
8
<PAGE> 9
of the Commonwealth of Pennsylvania, including its statutes of limitation
but without regard to its conflict of laws rules.
IN WITNESS WHEREOF, and intending to be legally bound, the parties
hereto have executed and delivered this Agreement to be effective on and as of
December 8,1998.
WITNESS: CONSULTANT
/s/ Tonya C. San Chez /s/ PIER C. BORRA
- ---------------------------------- ------------------------------------
Pier Borra
ATTEST/WITNESS: BALANCED CARE CORPORATION, a
Delaware corporation
/s/ Robin L. Barber By: /s/ BRAD HOLLINGER
- ---------------------------------- ------------------------------------
Brad Hollinger
President and CEO
9
<PAGE> 10
EXHIBIT A
Description of Consulting Services
1. Advise on Investor Relations.
2. Advise on Skilled Nursing Operations and PPS Issues.
3. Advise on Tactical Planning of Continuum Concept.
4. Advise on Corporate Organizational Matters.
5. Provide such other services as shall be mutually agreed between the parties
hereto.
Note: This Agreement specifically excludes any and all services provided by Pier
Borra in his capacity as a member of the Board of Directors of Balanced Care
Corporation or any Committee thereof.
10
<PAGE> 1
Exhibit 10.2
EMPLOYMENT AGREEMENT
THIS AGREEMENT (the "Agreement"), made as of the 11th day of February,
1999 by and between Balanced Care Corporation, a Delaware corporation with a
principal office at 5021 Louise Drive, Suite 200, Mechanicsburg, PA, 17055 (the
"Company") and Clint T. Fegan, an individual business executive residing at 2
East Green Street, Shiremanstown, PA 17011 (the "Executive").
WITNESSETH:
WHEREAS, the Company desires to retain the services and employment of
Executive as Chief Financial Officer for the benefit of itself and each of its
subsidiaries throughout the term of this Agreement, and Executive is willing to
be employed by the Company in the foregoing capacity for such period, upon the
terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, and intending to be legally bound, the parties hereto agree as
follows:
1. Employment. The Company hereby employs Executive and Executive hereby
accepts employment by the Company subject to all of the terms and
conditions hereafter set forth.
2. Capacity. Executive shall serve as Chief Financial Officer of the Company
("CFO") and, in such capacity, shall report directly to the Chief Executive
Officer (the "CEO") of the Company.
3. Duties. During the term of this Agreement and any extension thereof,
Executive shall and agrees to devote his business attention and best
efforts to the performance of the customary duties of the office of CFO of
the Company, including supervisory responsibility for the financial
function of the Company, including financial reporting and controls,
accounting policy and procedures, financial forecasting and budgeting,
treasury
<PAGE> 2
operation, tax reporting and external financial reporting. Executive agrees
to perform such other or additional duties not inconsistent with the
customary position of CFO, all as may be assigned from time to time by the
Board of Directors of the Company (the "Board") and the CEO of the Company.
4. Term of Employment and Renewal. The duties of Executive under this
Agreement shall commence on the date hereof. Unless earlier terminated as
hereafter provided, this Agreement shall expire three (3) years from the
date hereof (the "Term"); provided, however, that upon expiration of such
Term, this Agreement shall be extended for an additional one year term and
thereafter shall extend on each one year anniversary of the date of this
Agreement for an additional one year term (each, an "Extension Term")
without further action on the part of the parties hereto, unless either
party gives written notice of termination to the other party at least
ninety (90) days prior to the expiration of the then current Term or any
Extension Term that such party does not desire to renew the Agreement. The
date upon which the Term hereof, as extended from time to time pursuant to
an Extension Term, shall expire is hereinafter referred to as the
"Expiration Date".
5. Compensation.
(a) Cash Compensation. During the Term of this Agreement, as compensation
for services to the Company, Company shall pay to Executive a base
salary in the amount of $160,000 per year (the "Base Salary"), payable
in equal installments in accordance with the Company's payroll
practices then applicable to Executive officers. Additionally, the
Board of Directors of the Company may, in its sole discretion from
time to time, increase the Base Salary to be paid to Executive under
this paragraph, or provide additional compensation to Executive,
including but not limited to, the annual bonus provided in Section
5(b) below, whether permanently or for a limited period of time, based
upon the performance of Executive, the financial performance of the
Company, compensation paid to comparable officers by other companies
in the
2
<PAGE> 3
industry and such other factors as the Board may deem relevant.
(b) Annual Bonus. The Executive shall be eligible to receive an annual
bonus (the "Annual Bonus") of up to 50% of his then current Base
Salary based upon (1) Executive's performance as determined pursuant
to written annual performance objectives mutually agreed upon by
Executive and the CEO, as the case may be, and approved by the Board,
which approval will not be unreasonably withheld and (2) the Company's
achievement of its annual pre-tax earnings level (determined in
accordance with generally accepted accounting principles and after
giving effect, to the extent appropriate, to minority interests)
approved by the Board in the annual operating budget for a particular
year.
(c) Stock Options. The Executive will be eligible to participate in the
Company's 1996 Stock Incentive Plan, as such plan may be amended from
time to time (the "Plan"). Executive shall be granted an option to
purchase 125,000 shares of the Company's common stock at a price equal
to the fair market value (based on the lowest price of the day) on the
date of grant, which for purposes of this Agreement is the date of
Board approval of the grant (the "Grant Date"). Such stock options
shall vest over four (4) years at the rate of 25% per year.
(d) Vacation. The Executive shall be entitled to a vacation of four (4)
weeks annually in accordance with the policies of the Company
applicable to comparable executives of the Company. Any time spent by
the Executive at professional meetings and other similar meetings so
as to better enable the Executive to perform his professional services
on behalf of the Company shall not be considered vacation time.
(e) Fringe Benefits. The Executive shall enjoy and benefit under all
fringe benefit plans, programs or arrangements sponsored by the
Company for employees generally or for executive officers in
accordance with the respective terms and conditions thereof, as the
same may be amended from time to time.
3
<PAGE> 4
(f) Signing Bonus. The Executive shall be entitled to receive a signing
bonus in the amount of $10,000 (the "Signing Bonus") upon the
execution of this Agreement by the parties hereto. The Signing Bonus
shall be due and payable by the Company to the Executive within 15
calendar days of the date of this Agreement.
Notwithstanding the foregoing, the Company may, without breaching the
terms of this Agreement, amend any employee benefit plan and/or fringe
benefit plan in which the Executive participates or any policy
applicable to vacations or other terms and conditions of employment
generally applicable to executive officers of the Company provided
that such amendment is applicable to and proportionately affects all
executive employees of the Company in positions comparable to the
Executive's.
6. Confidentiality.
Commencing immediately upon the signing of this Agreement and during
Executive's employment with the Company and for any subsequent period with
respect to which he is entitled to receive Severance Rights under this
Agreement, the Executive shall keep secret and confidential all matters of
the Company or relating to the Company, its operations and businesses which
are not, as of the time immediately preceding disclosure, in the public
domain and generally known by the public (the "Confidential Information").
Executive shall not intentionally or through gross negligence disclose
Confidential Information to any third party without the express written
consent of the Company and may only utilize such information during the
normal course of performing his duties for the Company and solely for the
Company's benefit.
Executive acknowledges and agrees that any breach of this Section 6 will
cause the Company irreparable injury to which the Company shall have no
adequate remedy at law. Therefore, Executive agrees that the Company shall
be entitled, in addition to any remedies it may have under this Agreement
or at law, to injunctive and other equitable relief to prevent or curtail
any breach of the provisions of this Section 6 by Executive.
4
<PAGE> 5
7. Termination of Employment.
Except as otherwise specifically set forth in this Section 7, this
Agreement, the Term hereof, as extended by any Extension Term, and the
Executive's employment and right to receive salary and other benefits set
forth in Section 5 hereof, shall terminate on the earlier of the events
described below:
(a) Death. The employment, salary and benefits of the Executive hereunder
shall immediately terminate upon the Executive's date of death and the
Executive shall not be entitled to receive any pro-rata portion of any
Annual Bonus payment which may be accrued for the year in which the
Executive's death occurred. Any stock options granted to the Executive
on or before the date of death will be governed by the provisions of
the Plan. Nothing contained herein shall be deemed to prevent the
receipt by the Executive or his spouse or estate, as the case may be,
of any benefit payable to or with respect to such death under any
plan, program or arrangement then sponsored by the Company, if
applicable.
(b) Disability. The Company may terminate the Executive's employment if,
in the reasonable opinion of the Board acting in the best interest of
the Company, the Executive is unable for any reason to perform the
duties to be performed by the Executive hereunder for a period of 120
consecutive calendar days (the ""Disability Period"). The Board may
terminate the Executive's employment upon expiration of the Disability
Period upon written notice by the Company to the Executive.
Termination of employment under this Section 7(b) shall be effective
on and as of the date that the Company provides written notice to the
Executive. In the event of termination under this Section 7(b), the
Executive shall be entitled to receive salary and other benefits
(excluding the right to receive any pro-rata portion of any Annual
Bonus payment which may be accrued for the year in which such
termination occurred), for the 8-month period following the
termination date in accordance with the terms and conditions of the
Company's applicable plans, to the
5
<PAGE> 6
extent permitted thereunder. Any stock options granted to the
Executive on or before the termination date will be governed by the
provisions of the Plan.
(c) Voluntary Resignation by the Executive. The employment, salary and
benefits of the Executive hereunder shall immediately terminate on the
effective date of the Executive's voluntary resignation and the
Executive shall not be entitled to receive any pro-rata portion of any
Annual Bonus payment which may be accrued for the year in which such
resignation occurred
or any Severance Rights unless such voluntary resignation is made
after and as a consequence of a Change in Control of the Company (as
defined in subsection (g) (II) below. Any stock options granted to the
Executive on or before the resignation date will be governed by the
provisions of the Plan.
(d) Cause. The Company may terminate the Executive's employment, salary
and benefits for Cause (as defined in subsection (g) (I) below). In
the event of termination under this Section 7(d), the employment,
salary and benefits of the Executive hereunder shall immediately
terminate on the effective date of termination (determined in
accordance with the provisions of Section g(I)) and the Executive
shall not be entitled to receive any pro-rata portion of any Annual
Bonus payment which may be accrued for the year in which such
termination occurred or any Severance Rights. Any stock options
granted to the Executive on or before the effective termination date
will be governed by the provisions of the Plan.
(e) Termination by the Company without Cause. The Company may terminate
the Executive's employment without Cause upon 90 days prior written
notice to the Executive. Termination under this Section 7(e) shall be
effective 90 days after the date of the Company's written notice to
the Executive. If the Company terminates the Executive's employment
without Cause, the Executive shall be entitled to receive an amount
equal to the sum of (A) the Executive's annual Base Salary for the
year in which the termination occurred and (B) the pro-rata portion of
any Annual Bonus payment which may be accrued for the year in which
the
6
<PAGE> 7
termination occurred (the sum of (A) and (B) may hereinafter be
referred to as the "Termination Payment"). At the Company's option,
the Termination Payment may be payable in (A) a lump sum due within 45
days of the date of termination or (B) 12 equal monthly installments
due on the 1st day of each month for the 12 consecutive months
immediately following the date of termination. Any stock options
granted to the Executive on or before the termination date will be
governed by the provisions of the Plan. The Executive will also be
entitled to participate in the Company's other benefit programs for
the 12-month period following the termination date subject to the
terms and conditions of such plans and to the extent permitted
thereunder.
(f) Termination Following a Change of Control. The Executive shall be
entitled to receive a Severance Payment (as defined in Section
(g)(III) below) if, within two (2) years following a Change in
Control, there occurs any of the following events:
(I) any termination of the Executive except for Cause;
(II) any material reduction in the Executive's
responsibilities (including reporting responsibilities)
or authority, including as such responsibilities or
authority may be increased from time to time;
(III) the assignment to the Executive of duties inconsistent
with the Executive's office on the date of a Change in
Control or as the same may be increased from time to time
after a Change in Control:
(IV) any reassignment of the Executive to a location greater
than sixty (60) miles from the principal executive
offices of the Company before the Change in Control;
7
<PAGE> 8
(V) any material reduction (including, after a Change in
Control, proportional reductions affecting all employees
or executive employees) in the Executive's annual Base
Salary in effect on the date of a Change in Control or as
same may be increased from time to time after a Change in
Control;
(VI) any failure (including, after a Change in Control,
proportional failures affecting all executive employees)
to continue the Executive's participation on
substantially similar terms in the Plan or any bonus plan
in which the
Executive participated at the time of the Change in
Control or any change or amendment to any substantive
provisions of any such plan which would materially
decrease the potential benefits to the Executive under
any of such plans;
(VII) any failure (including, after a Change in Control, a
proportional failure affecting all executive employees)
to provide the Executive with benefits at least as
favorable as those enjoyed by the Executive under any of
the Company's pension, life insurance, medical, health
and accident or other employee plans in which the
Executive participated at the time of the Change in
Control, unless such reduction relates to a reduction in
benefits applicable to all employees generally; AND
(VIII) in the event of any of the events described in (II)
through (VII) above, the Executive voluntarily terminates
his employment under this Agreement as a result of such
event(s).
(g) Definitions. As used in this Section 7, the following terms shall have
the meanings set forth below:
8
<PAGE> 9
(I) "Cause" shall mean willful misconduct, intentional and
material failure to perform duties under this Agreement
by the Executive or the Executive's conviction of a
felony. No termination for cause shall be effective
unless and until the Executive is given written notice
that the act or omission constitutes "Cause" under this
Agreement and the Executive is given an opportunity to
correct or cure the particular act or omission within
thirty (30) days after receipt by the Executive of such
written notice from the Company.
(II) A "Change in Control" shall be deemed to have taken place
if: (A) any person, including a group but not excluding
the Company or any current stockholder of the Company who
beneficially owns five percent (5%) or more of the
Company's outstanding shares, becomes the beneficial
owner of shares of the Company having twenty percent
(20%) or more of the total number of votes that may be
cast for the election of directors or (B) there occurs
any cash tender or exchange offer for shares of the
Company, merger or other business combination, sale of
assets or contested election, or any combination of the
foregoing transactions, and as a result of or in
connection with any such event persons who were directors
of the Company before the event shall cease to constitute
a majority of the Board of the Company or any successor
to the Company. As used herein, the terms "person" and
"beneficial owner" have the same meaning as under Section
13(d) of the Securities Exchange Act of 1934 and the
rules and regulations thereunder.
9
<PAGE> 10
(III) A "Severance Payment" shall include the following: (1)
all outstanding stock options granted to the Executive,
if any, under the Plan, shall immediately become vested
and shall be exercisable in accordance with the
provisions of the Plan and (2) a lump sum cash payment
shall be payable within thirty (30) days of termination
of employment, equal to the sum of (A) the amount
determined by multiplying by three (3) the Executive's
annual Base Salary then in effect on the date of
termination and (B) the amount of the Executive's Annual
Bonus percentage payable under Section 5(b) for the year
in which the termination took place if (i) the annual
operating budget was achieved and (ii) the Executive was
employed for the full year. For example, if at the time
of such termination the Executive's Base Salary was
$160,000, and provided the conditions in clauses (i) and
(ii) above were satisfied so that the Executive was
entitled to receive his maximum potential Annual Bonus
percentage of 50%, the lump sum payment would be
$560,000, i.e.$160,000 x 3 plus $80,000.
(h) Notice of Termination. Any notice of termination of Executive shall be
given by the Company in writing and delivered by hand delivery or by
registered or certified mail, return receipt requested, postage
prepaid, at the address first above written for Executive or at such
other address as Executive shall have furnished to the Company in
writing.
8. Non-Competition and Non-Solicitation.
(a) Restrictions on Competition. While employed by the Company under this
Agreement and for a period of one (1) year following termination of
Executive's employment hereunder, Executive agrees that he will not
directly or indirectly own an interest in, manage or control, or
provide consulting services or services as
10
<PAGE> 11
an employee or partner, to a business engaged in managing, leasing,
owning or operating assisted living facilities, nursing homes or
sub-acute operations (the "Business Activities") within a sixty (60)
mile radius of any Company facility existing or under active
development at the time of such termination.
(b) Restriction on Solicitation. While employed by the Company under this
Agreement and for a period of one (1) year following termination of
Executive's employment hereunder, Executive agrees that he will not:
(A) directly or indirectly solicit or encourage Company's customers to
deal with Executive or any other third party other than the Company or
(B) directly or indirectly solicit for Executive's benefit or for the
benefit of any third party the employment or services of any then
current employee of the Company.
(c) Listed Stock Ownership Exception. Nothing in this Section 8 shall
prohibit Executive from owning stock in a publicly traded company as a
passive investor provided that Executive shall not own more than 5% of
the equity of a publicly traded competing enterprise of Company's.
9. Successors.
(a) This Agreement is personal to Executive and shall not be assignable by
the Executive otherwise than by his will or the laws of descent and
distribution. This Agreement shall inure to the benefit of and be
enforceable by the Executive's legal heirs representatives.
(b) This Agreement shall inure to the benefit of and be binding upon the
Company and its successors and assigns.
(c) The Company will require any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially
all of the business and/or assets of the Company to assume expressly
and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such
succession
11
<PAGE> 12
had taken place. As used in this Agreement, the Company shall mean the
Company as hereinbefore defined and any successor to its business
and/or assets as aforesaid which assumes and agrees to perform this
Agreement by operation of law or otherwise.
10. Entire Agreement. This writing represents the entire agreement and
understanding between the parties with respect to the subject matter
contained herein and may not be altered or amended except in a writing
signed by both parties.
11. Unenforceability. If any provision of this Agreement shall be adjudged by
any court of competent jurisdiction to be invalid or unenforceable for any
reason, such judgment shall not affect, impair or invalidate the remainder
of this Agreement.
12. Waiver. The failure of the parties to insist upon strict compliance with
any provision hereof or the failure to assert any right the parties may
have hereunder shall not be deemed to be a waiver of such provision or
right or any other provision or right thereof by the parties.
13. Counterparts. This Agreement may be executed by the parties in two or more
counterparts, each of which shall be deemed to be an original, but all such
counterparts shall constitute one and the same instrument.
14. Headings. The headings of the sections and subsections of this Agreement
are for convenience only and shall not control or affect the meaning or
construction or limit the scope or intent of any of the provisions of this
Agreement.
15. Governing law. This Agreement has been negotiated and executed within the
Commonwealth of Pennsylvania
12
<PAGE> 13
and shall be governed by and construed in accordance with the laws of the
Commonwealth of Pennsylvania.
IN WITNESS WHEREOF, intending to be legally bound hereby, the parties
hereto have executed this Agreement as of the date first above written.
ATTEST: BALANCED CARE CORPORATION
/s/ ROBIN L. BARBER By: /s/ BRAD E. HOLLINGER
Asst. Secretary -----------------------------------
Brad E. Hollinger
Chief Executive
Officer
WITNESS: EXECUTIVE
/s/ ROBIN L. BARBER /s/ CLINT T. FEGAN
-----------------------------------
Clint T. Fegan
13
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