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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
------------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2000
[ ] 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)
<TABLE>
<S> <C>
DELAWARE 25-1761898
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
1215 MANOR DRIVE
MECHANICSBURG, PENNSYLVANIA 17055
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
<TABLE>
<CAPTION>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
<S> <C>
COMMON STOCK $.001 PAR VALUE AMERICAN STOCK EXCHANGE
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in the definitive proxy statement incorporated
by reference in Part III of this Form 10-K or any amendment to this Form
10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of September 22, 2000 was approximately $34,172,847 based on
the last reported sales price of $1.00 as reported by the American Stock
Exchange. Shares of common stock known by the registrant to be beneficially
owned by executive officers or directors of the registrant are not included in
the computation; however, shares of common stock reported to be beneficially
owned by holders of 5% or more of the common stock are included in the
computation. The registrant has made no determination whether any of such
persons are "affiliates" within the meaning of Rule 12b-2 under the Securities
Exchange Act of 1934. The number of shares of common stock outstanding
(including shares held by executive officers and directors) on September 22,
2000 was 34,172,847 shares.
DOCUMENTS INCORPORATED BY REFERENCE:
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PART I
ITEM 1--BUSINESS
THE COMPANY
Balanced Care Corporation (the "Company") was formed in April 1995 to
develop senior care continuums, which meet the needs of upper middle, middle and
moderate-income populations in non-urban, secondary markets. The Company
considers upper middle, middle and moderate income populations to consist of
those individuals whose income and assets enable them to afford senior living
and care services at average daily rates of $85, $75 and $65, respectively. The
Company utilizes assisted living facilities in selected markets as the primary
entry point and service platform and has developed a care continuum (the
"Balanced Care Continuum") consisting of various health care and hospitality
services including, where appropriate, physical, occupational and speech
therapy, personal and health care services on an intermittent basis, dementia
and Alzheimer's services and skilled/subacute care delivered in a skilled
nursing setting, which enables residents to age in place. The Company believes
that non-urban, secondary markets have traditionally been underserved, highly
fragmented and less prone to intense competition from larger providers. The
Company believes that focusing on these market factors has enabled it to
establish a leading position as a provider of a market-differentiated,
consumer-preferred continuum of senior care services in such markets. To
maintain its market position, the Company will continue to: (i) provide a range
of high quality, individualized senior care services and programs; (ii) focus on
non-urban, secondary markets; (iii) pursue growth through selective
acquisitions; (iv) achieve the benefits of regional density by clustering; (v)
expand referral networks and strategic alliances; and (vi) strive to become the
operator of choice in its selected markets.
The Company has grown primarily by designing, developing, operating and
managing its Outlook Pointe(R) signature series assisted living facilities and
through acquisitions. The following table summarizes the Company's operating
facilities at June 30, 2000 and 1999 (excluding the former Missouri facilities,
as discussed below):
<TABLE>
<CAPTION>
JUNE 30,
-------------------------------------------------------------------
2000 1999
-------------------------------- --------------------------------
OWNED LEASED MANAGED TOTAL OWNED LEASED MANAGED TOTAL
----- ------ ------- ----- ----- ------ ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Developed Assisted Living
Facilities..................... 12 11 27 50 -- 6 28 34
Acquired Assisted Living
Facilities..................... 5 8 -- 13 5 8 -- 13
Skilled Nursing Facilities....... -- 3 -- 3 -- 3 -- 3
-- -- -- -- -- -- -- --
17 22 27 66 5 17 28 50
== == == == == == == ==
</TABLE>
As of June 30, 2000, the Company had operations in Pennsylvania, Tennessee,
Ohio, Arkansas, Virginia, North Carolina, West Virginia, Florida, Indiana and
Maryland. These operating facilities have a capacity for 4,286 assisted living
residents, 169 skilled nursing patients and 86 independent living residents. In
January 2000, the Company divested its Missouri assets consisting of 10 skilled
nursing facilities with 1,135 beds, nine assisted living and independent living
facilities with 245 beds and a home health agency. The Company has discontinued
its own rehabilitation agencies and now exclusively utilizes independent
agencies to provide therapy services.
In addition to the 50 Outlook Pointe(R) signature series assisted living
facilities opened as of June 30, 2000, the Company has signed agreements to
develop and manage two assisted living facilities currently under construction,
which are scheduled to open in October and November 2000. This will conclude the
Company's initial round of development activity that began three years ago.
Future development may be conducted on a project-by-project basis subject to the
availability of acceptable financing.
The Balanced Care continuum delivers consumer-focused health care and
hospitality services that balance seniors' desire for independence with their
evolving health care needs. The Company's philosophy includes the belief that
providing health care services, coupled with wellness and preventative therapy
will strengthen residents, improve their health and forestall the deterioration
that generally accompanies aging,
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thus extending their lives and lengths of stay in assisted living facilities.
Balanced Gold(R), the Company's wellness-oriented program, has been developed to
proactively address resident care needs, including stabilizing and improving
residents' cognitive, emotional and physical well-being.
Preventative, restorative and rehabilitative services are also available to
residents through outpatient medical rehabilitation, home health care, programs
for residents with Alzheimer's and other services provided by the Company or by
an alliance partner or other third party. By offering services and programs that
are intended to enable residents to stay healthier longer and prolong their stay
at assisted living facilities, the Company believes that its services and
programs address the preferences and needs of seniors, while at the same time
forestalling the need for residents to move to a more costly long-term care
setting, such as a skilled nursing facility. As resident needs mandate migration
into a skilled nursing or subacute program, the Company believes that skilled
nursing facilities will provide a transition for the resident with a focus on
demonstrated outcomes and cost effective care. In north central Pennsylvania,
the Company operates three skilled nursing facilities. In other regions where
the Company does not own or manage skilled nursing facilities, the Company has
formed alliances with skilled nursing providers to transition residents that
require skilled care. The Company believes that its approach to senior care will
enable it to be a leading provider of a continuum of senior care services in
targeted non-urban, secondary markets.
THE SENIOR CARE INDUSTRY
The senior care industry is characterized by a wide range of living
accommodations and health care services. For those who are able to live in a
home setting, home health care and other limited services can be provided.
Community housing or retirement centers, which are commonly referred to as
independent living facilities, are also available to persons who need limited
assistance, such as with meal preparation, housekeeping and laundry. Assisted
living facilities are typically for those persons whose physical or cognitive
frailties have reached a state where other living accommodations can no longer
provide the level of care required but who do not yet need the continuous
medical attention provided in a skilled nursing facility. Generally, assisted
living facilities provide a combination of housing and 24-hour personal support
services designed to assist seniors with activities of daily living ("ADLs"),
which include bathing, eating, personal hygiene, grooming, ambulating and
dressing. Assisted living facilities also provide instrumental activities of
daily living ("IADLs") such as transportation, grocery shopping, preparing meals
and housework. Certain assisted living facilities also offer higher levels of
personal assistance for residents with physical needs, Alzheimer's disease or
other forms of dementia. In contrast, skilled nursing facilities provide care
for those who need non-schedulable nursing care on a daily basis.
The senior care industry, including assisted living, is highly fragmented
and characterized by numerous providers whose services, experience and capital
resources vary widely. The Company believes that few operators of assisted
living facilities, particularly those in secondary markets, focus on providing a
range of senior living and health care services that have been designed to
enable residents to stay in a preferred setting longer.
The Company believes that the assisted living industry is evolving as the
preferred alternative to meet the growing demand for a cost effective setting
for those seniors who cannot live independently due to physical or cognitive
frailties, but who do not require the more intensive medical attention provided
by a skilled nursing facility. As the elderly population increases (an expected
33% between the years 2000 and 2010), the number of elderly requiring ADL/IADL's
will increase as well. According to the United States Bureau of the Census,
approximately 50% of persons aged 85 years and older, approximately 31% of
persons aged 80 to 84 and approximately 20% of persons aged 75-to 79 need
assistance with ADLs. In 1999, according to industry estimates, there were
estimated 586,000-assisted living units, or 778,000 beds, in the United States.
The Company believes that a number of factors will contribute to the
continued growth of the assisted living industry, including:
Consumer Preference. The Company believes that assisted living is
increasingly becoming the preferred setting for prospective residents as well as
their families, who are often the decision makers for seniors. Assisted living
is generally a more attractive, service-oriented and lower-cost alternative to
other types of
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senior care facilities, offering seniors greater independence and allowing them
to age in place in a residential setting.
Cost Effectiveness. Assisted living facilities provide a cost-effective
alternative to other types of facilities that may provide more care than a
senior needs. The average annual cost for a patient in a skilled nursing
facility approaches $40,000 and, in the case of a private pay patient, can
exceed $75,000 per year in certain markets. In contrast, the average annual cost
for a resident of an assisted living facility is generally 30% to 50% lower than
skilled nursing facilities located in the same region. Additionally, the Company
also believes that the cost of assisted living services compares favorably with
home health care, particularly when costs associated with housing, meals and
personal care assistance are taken into consideration.
Changing Income and Family Dynamics. The Company believes that the
increasing income of seniors, as well as changing family dynamics, will increase
the demand for assisted living and health care services. According to the United
States Bureau of the Census, the median income of the elderly population has
been increasing. Accordingly, the Company believes that the number of seniors
who are able to afford high-quality senior residential services such as those
offered by the Company will also increase. Additionally, the number of
two-income households has increased over the last decade and the geographical
separation of senior family members from their adult children has become more
common. As a result, many families that traditionally would have provided the
care and services offered by the Company to senior family members are less able
to do so. The Company believes that assisted living facilities represent an
attractive and independent environment for senior family members.
Demographics. The target market for the Company's services are persons 83
years and older, one of the fastest growing segments of the United States
population. According to the United States Bureau of the Census, the portion of
the United States population aged 80 and older is expected to have increased by
approximately 29%, from approximately 13.0 million in 1990 to approximately 16.8
million in the year 2000, and the number of persons aged 85 and older, as a
segment of the United States population, is expected to increase by 60% from
approximately 3.0 million in 1990 to 5.0 million in the year 2005. Furthermore,
the number of persons requiring memory care assistance is also expected to
increase in the coming years. According to data published by the American
Psychiatric Association, Alzheimer's disease affects approximately 5% to 8% of
individuals over the age 65, 15% to 20% of individuals over the age of 75 and
25% to 50% of individuals over the age of 85.
CARE AND SERVICES PROGRAMS
The Company offers a continuum of services to seniors that includes
assisted living, intermittent healthcare service, rehabilitation services
arranged with third party providers, social and activity programs, memory care,
Alzheimer's services, and skilled nursing services. During the first quarter of
fiscal year 2000, the Company discontinued providing home health care services.
ASSISTED LIVING SERVICES
Admission; Resident Care Plan. The assisted living admission process is
crucial to the proper placement of residents and the development of tailored
resident care plans. A lifestyle assessment is conducted in consultation with
the resident, as well as his or her family and medical consultants, to determine
the resident's preferences. An individualized care plan is developed to ensure
that all staff members rendering services meet the resident's specific needs and
preferences whenever possible. Each resident's care plan is reviewed, at a
minimum, quarterly to determine when a change in services is needed. The Company
seeks to provide assisted living services that allow a resident to maintain a
dignified, independent lifestyle. Residents and their families are encouraged to
be partners in their care and to take as much responsibility as possible for
their well being.
Care and Services. The Company offers a range of assisted living care and
services, which are available 24 hours per day at each of its assisted living
facilities. The core services package offered by the Company includes personal
care, support and certain health care services. Personal care services include
assistance with ADLs, such as ambulating, bathing, dressing, eating, grooming,
personal hygiene, monitoring or assistance with medications and confusion
management. Support services include meal preparation, assistance with
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social and recreational activities, laundry services, general housekeeping,
maintenance services and transportation services. Additional services, which are
offered at an extra charge, include extra transportation services, beauty and
barber services, extra laundry services and non-routine care services. All or
part of the Balanced Gold(R) program is included in the Company's core services
package at each of its signature series assisted living facilities, depending on
the facility's pricing structure. To the extent permitted by state regulatory
requirements, the Company's facilities have been designed to accommodate special
programs including those for residents with Alzheimer's and other forms of
dementia. Currently, fourteen of the Company's Outlook Pointe(R) assisted living
facilities and one skilled nursing facility have units that are specifically
designed to provide care to such residents. Medical rehabilitation services are
also available and are provided by certified physical, occupational and speech
therapists and psychologists, with physician oversight. During the fiscal year
ended June 30, 2000 ("Fiscal Year 2000"), the Company discontinued its own
rehabilitation services and exclusively utilizes independent providers to
deliver therapy services.
Balanced Gold(R). The Company's Balanced Gold(R) program is a wellness
oriented program that is designed to address a variety of factors that adversely
affect the health of assisted living residents, including balance and gait
difficulties, incontinence, cognitive impairment, stress due to pain and chronic
conditions and grieving due to multiple losses in the resident's life. Depending
on the pricing structure for the facility, all or part of the Balanced Gold(R)
program is included in the Company's core services package. Company staff and
the residents determine which activities are best suited to each resident's
needs.
"Treasures(SM)" Memory Care. The Company has developed, with the
assistance of its Health Care Advisory Board, an approach to Alzheimer's and
other forms of dementia that includes specialized assessments and clinical
approaches for early and accurate detection, placement and intervention. To meet
the needs of residents with memory care needs and other related forms of
dementia, the Company has developed its "Treasures(SM)" memory care program, to
maintain familiarity, reduce confusion, and still provide a pleasant and
appropriate living environment for these residents.
The Company's Outlook Pointe(R) signature series assisted living facilities
are designed to permit the delivery of Alzheimer's and other dementia related
services to the extent permitted by state regulatory requirements. Fourteen of
the facilities have units that are specifically designed to provide attention,
care and services needed to help residents with Alzheimer's maintain a higher
quality of life. The facilities also have Alzheimer's team members who are
specially trained to understand behavior, maximize function, promote safety and
encourage resident independence.
The Company currently operates a Treasures(SM) Memory Care program at 14 of
its Outlook Pointe(R) assisted living facilities and at one dedicated unit in
its skilled nursing facilities. The Company has also implemented this program at
three of its acquired assisted living facilities. The Company plans to develop
its Treasures(SM) program at seven of its assisted living facilities located in
Jackson, TN: Medina, OH; Anderson, IN; Washington Twp, OH; Evansville, IN;
Tallahassee, FL; and Chesterfield, VA over the next year.
Medication Management. Each assisted living facility contracts with a
pharmacy to provide prescription drugs to those residents who desire to utilize
the service. Residents are free to use a pharmacy of their choice, but are
required to comply with a pre-designated method of packaging the
pharmaceuticals. Additionally, subject to state regulatory requirements, at the
resident's request, and based on the facility's assessment of the resident's
needs, the assisted living facility may manage a resident's medications by
storing prescription drugs within the facility, delivering the drugs to the
resident and reminding the resident when the medications need to be taken.
Assisted Living Charges. Monthly assisted living resident charges are
based, in part, on the type of living suite selected and are set at rates
designed to be within the means of seniors in the secondary markets served by
the Company. The pricing structure utilized by Balanced Care is driven by local
market characteristics and competition. A competitive analysis is done of each
market and prices are established based on the results of the study. In most
cases, base rates are established reflecting the size of the unit, the view,
access to the dining room, etc. These base rates include three meals, basic
housekeeping, basic laundry services, help with one ADL (activity of daily
living) and access to the Balanced Gold(R) program and basic transportation
services. In addition to its core services package, at certain facilities,
including all newly developed Outlook Pointe(R)
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facilities, the Company offers additional levels of service to residents whose
frailties or medical condition are more acute. Three levels of care are
employed; all contingent upon the total number of points scored on the lifestyle
assessment and re-assessed each quarter at a minimum. Level I is designed for
residents at lower risk for conditional changes and require a monthly assessment
and monitoring or intervention by a licensed nurse. Level II is designed for
residents at high risk for conditional changes requiring daily or weekly
licensed nursing assessments and licensed nursing monitoring and interventions,
while Level III supports residents with demanding needs requiring extremely
elevated care or alternative placement. These extra costs, which can vary from
building to building, generally amount to $300/month for Level I, $600/month for
Level II, and $900/month for Level III. Based on the results of an individual
lifestyle assessment, a point value is assessed for each resident and additional
care needs are determined. Each assessment plan of care is then unique to that
individual.
As of June 30, 2000, approximately 50% of the Company's assisted living
residents received services at levels offering additional services.
Substantially all of the Company's current revenues from the provision of
assisted living services are attributable to private payors.
MEDICAL REHABILITATION SERVICES
The Company's philosophy for addressing seniors' living and care needs
includes the belief that preventative therapy will strengthen residents, improve
their overall health and forestall the deterioration that generally accompanies
aging, thus extending their lives and lengths of stay in assisted living
facilities. The Company has developed specialized medical rehabilitation
programs to address the needs of seniors, including programs to specifically
address balance and gait difficulties, incontinence, lymphodema, pain and
osteoarthritis, as well as specific preventative therapy programs for seniors.
For residents in the Company's Outlook Pointe(R) signature series assisted
living facilities, each rehabilitation program is followed up with specialized
regimens offered as part of the Balanced Gold(R) activities program. Should a
resident's condition warrant additional rehabilitation, contracted therapists
are available.
The Company contracts with third party rehabilitation agencies to provide
physical and occupational therapy, on an outpatient basis to residents at all of
its assisted living facilities. Rehabilitation services are provided through
contract services, outpatient rehabilitation facilities or home health agencies.
As previously discussed, during Fiscal Year 2000 the Company discontinued all of
its own rehabilitation agencies and now utilizes third party agencies to provide
therapy services. Prior to discontinuation of its own medical rehabilitation
services, substantially all of the Company's reported revenues from the
provision of medical rehabilitation services are attributable to federal
government reimbursement programs.
SKILLED NURSING SERVICES
The Company currently provides skilled nursing services at three facilities
in Pennsylvania (169 licensed beds). In January 2000, the Company divested its
Missouri assets consisting of ten skilled nursing facilities (1,135) licensed
beds, nine assisted living and independent living facilities (245 beds) and a
home health agency. The Company's skilled nursing facilities provide traditional
long-term care through 24-hour per day skilled nursing care by registered
nurses, licensed practical nurses and certified nursing aides. The Company also
makes available physical rehabilitation at its skilled nursing facilities,
including physical, occupational and speech therapies. Board certified
physicians direct the skilled nursing services offered at these facilities.
For Fiscal 2000, approximately 72% of the Company's patient services
revenues from skilled nursing facilities were attributable to federal and state
government reimbursement programs.
INDEPENDENT LIVING SERVICES
As a result of the Missouri divestiture discussed previously, the Company
no longer operates stand-alone independent living facilities or a home health
agency. It does, however, provide independent living arrangements at six of its
assisted living facilities. Independent living services provided at such
facilities include: meal
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preparation, housekeeping, laundry and transportation. The Company plans to
discontinue independent living services and no longer offers this service to new
residents, but continues to service existing residents.
All of the Company's current revenues from the provision of independent
living services are attributable to private payors.
THE OUTLOOK POINTE(R) SIGNATURE SERIES ASSISTED LIVING FACILITY MODELS
The architectural and interior design concepts of the Outlook Pointe(R)
signature series assisted living facility models incorporate the Company's
operating philosophy of protecting resident privacy, enabling freedom of choice,
encouraging independence and fostering individuality in a home-like setting. The
buildings are residential in appearance, designed as "neighborhoods" within a
"community." All are constructed to meet institutional health care facility
standards. The building designs incorporate the Company's mission and dedication
to providing a new outlook for seniors, encouraging choice, wellness and
vitality. The Company believes that its residential environment accomplishes:
(i) lessening the trauma of change for residents and their families; (ii)
achieving operational efficiencies; (iii) facilitating resident mobility and
ease of access by caregivers; and (iv) differentiating the Company from other
assisted living and long-term care operators.
The models are freestanding buildings that range in size from 48 units to
106 units and are designed to accommodate the full range of assisted living
services offered by the Company, including the Company's Balanced Gold(R) and
"TreasuresSM" Memory Care programs. The buildings are usually one to two stories
and of incombustible construction, and are designed to accommodate future
expansion. The design of the facilities allows specialized grouping of
residents, including residents receiving care in the "TreasuresSM" program, and
a central core for resident interaction. In addition, the buildings are designed
with fully-equipped therapy gyms and treatment rooms for provision of medical
rehabilitation services. Resident units, including studio, privacy, companion
and one-bedroom suites, are functionally grouped as "neighborhoods" within a
"community" and are configured internally to provide private bath, living area
and sleeping area with emergency call systems and cable television service.
Porches, terraces, gardens and activity areas are designed to fulfill outdoor
interests of residents.
The Company has three basic building plan design prototypes, which provide
it with flexibility in adapting the model to a particular site and to
accommodate the various income and care levels demanded in a particular market.
OPERATING FACILITIES
The following table sets forth certain information as of June 30, 2000 with
respect to the senior living and care facilities operated by the Company.
<TABLE>
<CAPTION>
RESIDENT CAPACITY
OWNED(O)/ BY CARE LEVEL(1) DATE
LEASED(L)/ ----------------- -----------------
FACILITY LOCATION MANAGED(M) ALF SNF ILF OPENED ACQUIRED
----------------- ---------- ----- --- --- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Currently Operated:
PENNSYLVANIA
Allison Park
Outlook Pointe@ at Allison Park......... L 79 -- -- -- 3/96
State College
Outlook Pointe@ at State College(5)..... O 54 -- -- 5/97 --
Altoona
Outlook Pointe@ at Altoona(2)(5)........ O 54 -- -- 10/97 5/99(2)
Harrisburg
Outlook Pointe@ at Harrisburg(2)........ L 57 -- -- 12/97 3/99(2)
Reading
Outlook Pointe@ at Reading(2)(5)........ O 56 -- -- 1/98 5/99(2)
</TABLE>
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<TABLE>
<CAPTION>
RESIDENT CAPACITY
OWNED(O)/ BY CARE LEVEL(1) DATE
LEASED(L)/ ----------------- -----------------
FACILITY LOCATION MANAGED(M) ALF SNF ILF OPENED ACQUIRED
----------------- ---------- ----- --- --- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Bloomsburg
Outlook Pointe@ Commons at Bloomsburg... L 65 -- -- -- 1/97
Darlington
Outlook Pointe@ Commons at South
Beaver................................ O 89 -- -- -- 10/97
Kingston
Outlook Pointe@ Commons at Kingston..... L 78 -- -- -- 1/97
Balanced Care, Kingston................. L -- 65 -- -- 1/97
Peckville
Outlook Pointe@ Commons at Mid Valley... L 71 -- -- -- 1/97
Balanced Care, Mid Valley............... L -- 38 -- -- 1/97
Old Forge
Outlook Pointe@ Commons at Old Forge.... L 49 -- -- -- 1/97
Wyoming
Outlook Pointe@ Commons at Wyoming...... L 50 -- -- -- 1/97
Butler
Outlook Pointe@ at Butler............... O 36 -- -- -- 10/97
Sarver
Outlook Pointe@ Commons at Sarver....... O 36 -- 4 -- 10/97
Saxonburg
Outlook Pointe@ Commons at Saxonburg.... L 107 -- 16 -- 10/97
Bloomsburg
Balanced Care, Eyers Grove.............. L -- 66 -- -- 1/98
Millville
Outlook Pointe@ Commons at Eyers
Grove................................. O 51 -- -- -- 1/98
Peckville
Outlook Pointe@ at Mid Valley(4)(5)..... O 40 -- -- 8/98 --
Scranton
Outlook Pointe@ Commons at
Scranton(4)(5).......................... O 72 -- -- 10/98 --
Berwick
Outlook Pointe@ Commons at
Berwick(4)(5)........................... O 72 -- -- 10/98 --
Reedsville
Outlook Pointe@ Commons at
Lewistown(4)(5)......................... O 72 -- -- 11/98 --
Lewisburg
Outlook Pointe@ Commons at
Lewisburg(3).......................... M 73 -- -- 11/98 --
Mechanicsburg
Outlook Pointe@ at Creekview(3)......... M 103 -- -- 11/98 --
Dillsburg
Outlook Pointe@ at Logan Meadows(3)..... M 62 -- -- 12/98 --
Beaver Falls
Outlook Pointe@ at Chippewa(3).......... M 69 -- -- 2/99 --
York
Outlook Pointe@ at York(4).............. L 66 -- -- 2/99 --
</TABLE>
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<TABLE>
<CAPTION>
RESIDENT CAPACITY
OWNED(O)/ BY CARE LEVEL(1) DATE
LEASED(L)/ ----------------- -----------------
FACILITY LOCATION MANAGED(M) ALF SNF ILF OPENED ACQUIRED
----------------- ---------- ----- --- --- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Bridgeville
Outlook Pointe@ at Lakemont Farms(4).... L 106 -- -- 6/99 --
Shippensburg
Outlook Pointe@ at Shippensburg(3)...... M 66 -- -- 7/99 --
Lebanon
Outlook Pointe@ at Lebanon(3)........... M 62 -- -- 9/99 --
Loyalsock
Outlook Pointe @ Loyalsock(3)........... M 53 0 0 10/99 --
----- --- --
SUBTOTAL........................... 1,848 169 20
ARKANSAS
Sherwood
Outlook Pointe(R) at Sherwood(2)(5)..... O 41 -- 16 9/97 4/99(2)
Mountain Home
Outlook Pointe(R) at Mountain
Home(2)(5)............................ O 41 -- 16 10/97 4/99(2)
Maumelle
Outlook Pointe(R) at Maumelle(4)(5)..... O 41 -- 16 10/97 --
Pocohontas
Outlook Pointe(R) at Pocahontas(3)...... M 41 -- 16 10/97 --
Blytheville
Outlook Pointe(R) at Blytheville(3)..... M 55 -- 2 11/97 --
----- --- --
SUBTOTAL........................... 219 0 66
VIRGINIA
Harrisonburg
Outlook Pointe(R) at Harrisonburg(3).... M 57 -- -- 5/98 --
Roanoke
Outlook Pointe(R) at Roanoke(3)......... M 65 -- -- 5/98 --
Stafford
Outlook Pointe(R) at Stafford........... L 41 -- -- -- 6/98
Danville
Outlook Pointe(R) at Danville(3)........ M 66 -- -- 7/98 --
----- --- --
SUBTOTAL........................... 229 0 0
OHIO
Ravenna
Outlook Pointe@ at Ravenna(3)........... M 57 -- -- 2/98 --
Mansfield
Outlook Pointe@ at Ontario(4)(5)........ O 66 -- -- 8/98 --
Lima
Outlook Pointe@ at Lima(3).............. M 66 -- -- 9/98 --
Xenia
Outlook Pointe@ at Xenia(3)............. M 102 -- -- 1/99 --
Medina
Outlook Pointe@ at Medina(3)............ M 80 -- -- 2/99 --
Hilliard
Outlook Pointe@ at Heritage Lakes(4).... L 106 -- -- 12/99 --
</TABLE>
9
<PAGE> 10
<TABLE>
<CAPTION>
RESIDENT CAPACITY
OWNED(O)/ BY CARE LEVEL(1) DATE
LEASED(L)/ ----------------- -----------------
FACILITY LOCATION MANAGED(M) ALF SNF ILF OPENED ACQUIRED
----------------- ---------- ----- --- --- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Centerville
Outlook Pointe@ at Washington
Township(3)........................... M 106 -- -- 4/00 --
Sagamore
Outlook Pointe@ at Sagamore Hills(3).... M 105 -- -- 6/00 --
----- --- --
SUBTOTAL........................... 688 0 0
NORTH CAROLINA
Raleigh
Outlook Pointe@ at Northridge........... O 116 -- -- -- 12/97
Greensboro
Outlook Pointe@ at Greensboro(3)........ M 47 -- -- 10/98 --
----- --- --
SUBTOTAL........................... 163 0 0
WEST VIRGINIA
Martinsburg
Outlook Pointe@ at Martinsburg(4)(5).... O 63 -- -- 1/99 --
Teays Valley
Outlook Pointe@ at Teays Valley(4)...... L 66 -- -- 12/99 --
----- --- --
SUBTOTAL........................... 129 0 0
TENNESSEE
Jackson
Outlook Pointe@ at Jackson(3)........... M 66 -- -- 1/99 --
Bristol
Outlook Pointe@ at Bristol(4)........... L 66 -- -- 2/99 --
Murfreesboro
Outlook Pointe@ at Murfreesboro(4)...... L 66 -- -- 3/99 --
Johnson City
Outlook Pointe@ at Johnson City(4)...... L 66 -- -- 6/99 --
Kingsport
Outlook Pointe@ at Kingsport(3)......... M 60 -- -- 9/99 --
Hendersonville
Outlook Pointe@ at Hendersonville(3).... M 62 -- -- 10/99 --
Oak Ridge
Outlook Pointe@ at Oak Ridge(3)......... M 50 -- -- 10/99 --
Morristown
Outlook Pointe @ at Morristown(3)....... M 66 -- -- 11/99 --
Knoxville
Outlook Pointe@ at Knoxville(3)......... M 106 -- -- 6/00 --
----- --- --
SUBTOTAL........................... 608 0 0
FLORIDA
Pensacola
Outlook Pointe(R) at Pensacola(4)....... L 66 -- -- 6/99 --
Tallahassee
Outlook Pointe@ at Tallahassee(4)....... L 106 -- -- 12/99 --
----- --- --
SUBTOTAL........................... 172 0 0
</TABLE>
10
<PAGE> 11
<TABLE>
<CAPTION>
RESIDENT CAPACITY
OWNED(O)/ BY CARE LEVEL(1) DATE
LEASED(L)/ ----------------- -----------------
FACILITY LOCATION MANAGED(M) ALF SNF ILF OPENED ACQUIRED
----------------- ---------- ----- --- --- ------ --------
<S> <C> <C> <C> <C> <C> <C>
INDIANA
Anderson
Outlook Pointe@ at Anderson(3).......... M 66 -- -- 7/99 --
Evansville
Outlook Pointe@ at Evansville(3)........ M 106 -- -- 4/00 --
----- --- --
SUBTOTAL........................... 172 0 0
MARYLAND
Hagerstown
Outlook Pointe@ at Hagerstown(4)........ L 58 -- -- 8/99 --
----- --- --
TOTAL.............................. 4,286 169 86
===== === ==
</TABLE>
---------------
(1) "ALF" means assisted living facility, "SNF" means skilled nursing facility
and "ILF" means independent living facility
(2) During the fiscal year ended June 30, 1999 ("Fiscal Year 1999"), the Company
exercised its option to acquire the stock of the Operator/Lessee of the
facilities. As a result, the Company acquired the leasehold interest in the
named facility. See "Business -- Development."
(3) The Company manages the facility for the Operator/Lessee and has an option
to acquire the stock of the Operator/Lessee. See "Business -- Development."
(4) During Fiscal 2000, the Company exercised its option to acquire the stock of
the Operator/Lessee of the facilities. As a result, the Company acquired the
leasehold interest in the named facility. See "Business -- Development."
(5) In the second quarter of Fiscal 2000, the Company purchased the real
property, improvements, furniture, fixtures and equipment of these
facilities from the lessor.
DEVELOPMENT
An integral element of the Company's growth to date has been the design,
development and opening of the Outlook Pointe(R) signature series assisted
living facilities which are, or were initially, owned by independent
Operators/Lessees and managed by the Company. The Company believes that the
signature series assisted living facilities meet the needs of the upper middle,
middle and moderate income populations in its markets and are designed to
provide the broad range of services contemplated by its Balanced Care Continuum
strategy over a range of pricing options. The Company has opened 50 of its
Outlook Pointe(R) signature series assisted living facilities as of June 30,
2000.
The Company's development projects have generally involved entering into
development agreements with third party owners, which are typically Real Estate
Investment Trusts or REITs (each, an "Owner"). An independent third party
company, or special purpose entity ("SPE" or "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". (Refer to
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" for discussion regarding recent
changes to the financing structure.) Over the past two years, the Company's
development activities have been 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 REIT's and other
lenders.
In February 1999, the Company determined to discontinue development and
focus on operations. Since discontinuing its active development activities with
respect to new sites and projects in the past year,
11
<PAGE> 12
management has focused the Company's efforts on the operations of existing
facilities and newly constructed facilities which were opened during Fiscal
2000. Management has taken these steps to focus on building market share in
existing markets, to channel its financial and human resources into meeting
facility occupancy goals, and to build brand recognition throughout the Balanced
Care system. The Company had two assisted living facilities under construction
at June 30, 2000, which the Company expects to open in October and November
2000. This will conclude the Company's initial round of development activity
initiated nearly three years ago. Future development will be conducted on a
project-by-project basis.
The following table sets forth certain information as of June 30, 2000
regarding the two Outlook Pointe(R) signature series assisted living facilities
for which the construction process has commenced and which the Company is
developing for other independent Operators/Lessees. The Company has an agreement
to manage each facility for an Operator/Lessee under the Black-Box Structure.
<TABLE>
<CAPTION>
ESTIMATED
CONSTRUCTION ESTIMATED
RESIDENT START DATE COMPLETION DATE
ASSISTED LIVING FACILITY LOCATION CAPACITY (QUARTER END) (MONTH END)
--------------------------------- -------- ------------- ---------------
<S> <C> <C> <C>
OHIO
Westerville........................................ 106 Commenced Nov. 2000
VIRGINIA
Chesterfield....................................... 80 Commenced Oct. 2000
---
TOTAL...................................... 186
</TABLE>
ACQUISITIONS AND STRATEGIC ALLIANCES
Since its inception, the Company has acquired (excluding its former
Missouri operations) 13 assisted living facilities, 22 Outlook Pointe(R)
signature series assisted living facilities from Operator/Lessees, and three
skilled nursing facilities. While the Company is focusing management's efforts
on the operations of existing facilities and newly constructed facilities which
opened in Fiscal 2000 it may consider selective acquisitions in the future
through joint ventures or other alliances.
For development projects that utilize the Black-Box Structure, the Company
has the option to purchase the equity or assets of the Operator/Lessee pursuant
to 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. During Fiscal 2000, the Company exercised its option to purchase
the Operator/Lessees equity interests on 17 projects which were managed by the
Company, bringing the total number of options exercised to 22 at June 30, 2000.
The Company plans to purchase the equity interests in eight projects managed
during the second quarter of Fiscal Year 2001 and to purchase the equity
interests in the remaining 21 managed projects based on capital availability.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital resources."
OPERATIONS
CENTRALIZED CORPORATE MANAGEMENT
The Company's corporate and other administrative functions are centralized
so that the facility-based management and staff can focus on resident care. The
Company's corporate office, located in Mechanicsburg, Pennsylvania, is generally
responsible for: (i) establishing Company-wide policies and procedures relating
to, among other things, resident care and operations; (ii) performing accounting
and finance functions; (iii) developing and implementing employee training
programs and materials; (iv) coordinating human resources; (v) food services and
environmental functions; (vi) designing sales and marketing programs and
coordinating sales and marketing functions; and (vii) providing strategic
direction.
12
<PAGE> 13
The Company manages the operations of each of its facilities through
standardized management reporting and centralized control of capital
expenditures and the purchase of larger and more frequently used supplies.
Facility expenditures are monitored by regional operations teams headed by one
of the Company's Regional Vice Presidents who are responsible for the financial
performance of the facilities in their region. The operational activities of the
Company's assisted living facilities are directed by the Company's Chief
Operating Officer who, along with the Regional Vice Presidents, is responsible
for the opening and operation of these facilities.
COMMUNITY--BASED MANAGEMENT
An assisted living Community Director or skilled nursing Facility
Administrator manages the operations at each assisted living or skilled nursing
facility, including oversight of the quality of care, delivery of resident
services, and monitoring of financial performance, and is responsible for all
personnel, including assisted living, food service, maintenance, activities,
security, housekeeping, and, where applicable, nursing. Directors and
Administrators are compensated based on attaining certain quality service goals
and on the financial goals of the facility. In most cases, each facility also
has department managers that direct nursing or care services, dining services,
activities, transportation, environmental, housekeeping and marketing functions.
In its assisted living communities, the Company has adopted the concept of
a multi-task work environment whereby each employee's responsibilities span a
number of traditional job descriptions. For example, an employee may, during the
course of a day, provide housekeeping, food delivery service, activities, and
assistance with ADLs to residents. On-site care managers and residents'
assistants provide most of the actual resident care in conjunction with a small
support team consisting of a nurse, a housekeeper, a maintenance helper, an
administrative coordinator and a small dining service team.
The Company actively recruits personnel to maintain adequate staffing
levels at its existing facilities, as well as additional staff for new or
acquired facilities, prior to opening. The Company has adopted comprehensive
recruiting and screening programs for management for positions that utilize
personnel profiling, corporate office interviews, and background checks. The
Company offers system-wide training and orientation for its resident care
employees, department managers, and executive staff at the facility level
through Company-sponsored programs.
QUALITY ASSURANCE AND TRAINING
The Company's quality assurance program is designed to achieve, maintain
and enhance high performance in the area of resident and family satisfaction,
employee development, fiscal responsibility and corporate integrity, along with
continuous internal quality improvement. Corporate office staff oversees the
implementation of the quality assurance program at each of the Company's
facilities. Resident and family participation is encouraged and feedback is
sought through satisfaction surveys, focus groups, resident councils and
discussions with family members. The Company provides intensive training
programs to ensure that its quality standards are achieved by its employees at
each facility, and strives to meet employees' needs and provide a respectful and
cooperative environment. Employees are responsible for handling finances with
efficiency and integrity and adhere to an ethical code of conduct. Internal
standards for all areas of service have been established which the Company
believes meet or exceed those of regulatory agencies. Monitoring and improving
internal performance in regard to these standards is facilitated by
cross-functional performance improvement teams. Additionally, inspections of
each facility are conducted regularly by corporate staff who review all aspects
of operations, care and services provided.
MARKETING
The Company's sales and marketing program has been developed by the
corporate sales and marketing staff under the direction of the Company's Sr.
Vice President of Sales and Marketing and is modified in accordance with the
needs of each community. The Marketing Department focuses on creating awareness
of the Company and its services among prospective residents, their families,
medical and professional referral sources and other key decision makers. The
Sales Department focuses on recruiting, hiring, and training sales
13
<PAGE> 14
personnel, and monitors their performance against census plans. Sales and
marketing efforts are implemented on a regional and local level under the
supervision of Regional Sales and Marketing Directors and facility Community
Directors.
Before opening a new assisted living facility, the Company contacts
referral sources and conducts marketing programs that generate public awareness
beginning with the start of construction and intensify several months prior to
opening of the facility. An on-site Marketing Coordinator and Community Director
are at the facility approximately four and six months, respectively, prior to
the opening of the facility and are supported by the Company's corporate
marketing department. The Company generally expects occupancy of newly developed
assisted living facilities to reach a pre-opening goal of 20%, and expects to
add an additional two to three new residents monthly reaching a targeted
occupancy of 92% within 10 to 21 months after opening, depending on the size of
the facility.
Once a facility opens, the Company believes that satisfied residents and
their families are its most important referral sources. The Company's emphasis
on high quality services and resident satisfaction create a strong referral base
in the surrounding community. In addition, the Company focuses on developing the
reputation of the facilities for quality care and its full array of excellent
service programs among potential referral sources.
MANAGEMENT INFORMATION SYSTEMS
The Company's Information Systems department, under the direction of the
Company's Sr. Vice President of Corporate Services, develops, implements and
maintains management and financial systems which enable the Company to closely
monitor operating costs and quickly distribute financial and operating
information to appropriate levels of management in a cost efficient manner. The
Company uses flexible input methods and communications to allow for distributed
data collection and analysis. Management believes that its current data systems
are adequate for current operations and provide the flexibility to accommodate
its operations without disruption or significant modification to existing
systems through Fiscal 2001.
COMPETITION
The health care industry is highly competitive and the Company believes
that competition in its current and targeted markets will continue to increase.
There are currently few regulatory and other barriers to entry in the assisted
living industry. The Company faces competition for residents from numerous
local, regional and national providers of facility-based assisted living and
long-term care, including skilled nursing facilities. The Company believes the
primary competitive factors in the senior care industry are: (i) reputation for,
and commitment to, high quality care; (ii) quality of support services offered
(such as home health care and food services); (iii) price of services; (iv)
physical appearance and amenities associated with the facilities; and (v)
location. Because seniors tend to choose senior living facilities near their
homes, the Company's principal competitors are other senior living and long-term
care facilities in the same geographic areas as the Company's facilities. The
Company also competes with other health care businesses with respect to
attracting and retaining nurses, technicians, aides, and other high quality
professional and non-professional employees and managers.
GOVERNMENT REGULATION
The health care industry is subject to extensive federal, state and local
regulation. The various layers of governmental regulation affect the Company's
business by controlling its growth, requiring licensure or certification of its
facilities, regulating the use of its facilities and controlling reimbursement
to the Company for services provided. Licensing, certification and other
applicable governmental regulations vary from jurisdiction to jurisdiction and
are revised periodically. It is not possible to predict the content or impact of
future legislation and regulations affecting the health care industry.
Laws and regulations governing skilled nursing facilities are particularly
extensive and establish minimum standards in a variety of areas, including
physical plant specifications; personnel training and education; the level of
nursing, physician, rehabilitation, social, dietary and recreational services to
be provided; and safety
14
<PAGE> 15
and evacuation plans. The Omnibus Budget Reconciliation Act of 1987 ("OBRA")
significantly redefined the scope and nature of federal regulations governing
skilled nursing facilities certified to participate in the Medicare and Medicaid
programs, with an emphasis on resident rights and quality of care. Skilled
nursing facilities are also generally subject to and must comply with state
and/or local building and fire codes. In addition, some states, including
Missouri, have certificate of need laws applicable to skilled nursing
facilities. Certificate of need laws require that a state agency determine that
a sufficient need exists for a facility before it may be opened. These laws may
also regulate permitted capital expenditures and expansion of services and beds.
Skilled nursing facilities, like other health care providers, are
periodically inspected by governmental agencies with authority over licensing
and certification for participation in the Medicare and Medicaid programs. New
survey and certification requirements under OBRA for participation in the
Medicare and Medicaid programs became effective in 1995, significantly changing
the process of surveying long-term care facilities. These requirements
established a graduated system of penalties and remedies to match the severity
of the deficiency. Facility deficiencies may result in the imposition of fines
and penalties, a need to undertake corrective actions, a temporary moratorium on
admissions pending correction of deficiencies, and could result in
decertification from the Medicare and Medicaid programs or loss of licensure and
closure of the facility. To date, these regulations have not had a material
adverse effect on the Company's operations. On March 25, 1999, President Clinton
signed the Nursing Home Resident Protections Amendments of 1999, which require
nursing facilities that voluntarily withdraw from the Medicaid program to
continue to accept Medicaid reimbursement and remain subject to Medicaid
requirements with respect to residents who were eligible for Medicaid
immediately preceding the voluntary withdrawal. In addition, the federal
government, through the Health Care Financing Administration ("HCFA") has issued
new instructions to state agencies that are responsible for surveys of nursing
facilities. In March 1999, HCFA sent a letter to state survey agencies regarding
the need to timely and comprehensively investigate complaints in nursing
facilities and take appropriate action where warranted. In July 1999, HCFA
substantially revised survey procedures in nursing facilities to include a
presurvey analysis of the facility's compliance record based upon resident and
facility data that facilities must report to the federal government on a
continual basis. The Company believes it is in substantial compliance with
applicable federal and state laws, rules and regulations governing nursing
facilities, but it is unable to predict the extent to which these changes in
procedure will have an impact on the Company's business.
The Company's assisted living facilities are subject to regulation by
various state and local agencies. Currently, federal health care laws do not
have a significant impact on the care and services provided by the Company's
assisted living facilities because the federal government is not responsible for
licensing facilities and Medicaid provides only limited reimbursement for some
services provided in some of the Company's assisted living facilities. State
requirements relating to the licensing and operation of assisted living
facilities vary from state to state; however, most states regulate many aspects
of a facility's operations, including physical plant requirements; resident
rights; personnel training and education; requisite levels of resident
independence; administration of medications; safety and evacuation plans; and
the level and nature of services to be provided, including dietary and
housekeeping. In most states, assisted living facilities must also comply with
state and local building and fire codes and certain other licenses or
certifications, such as a food service license, may be required. In addition, in
several states, including Arkansas, Missouri, Kentucky and New Jersey
certificate of need laws apply to assisted living facilities. Assisted living
facilities are subject to periodic survey by governmental agencies with
licensing authority. In certain circumstances, failure to satisfy survey
standards could result in a loss of licensure and closure of a facility.
Because assisted living facilities historically have not been considered as
traditional health care entities and government and private insurers generally
have not reimbursed providers for assisted living services, these facilities
have not been subject to the degree of regulation, which governs nursing homes
and other health care providers. The United States Congress and the United
States Department of Health and Human Services are studying assisted living as
an alternative to or extension of nursing facility care. As a result, a number
of federal health laws are under consideration that could have an impact on the
Company's operations in the future. The content of such laws, the extent of any
increased regulation and the impact of any such regulation
15
<PAGE> 16
on the Company cannot be predicted at this time and there can be no assurance
that such regulations will not adversely affect the Company's business. Assisted
living facilities may be eligible to participate as Medicaid providers and
receive reimbursement through Medicaid waiver programs and managed care plans.
The Company has elected to participate in Medicaid programs in Arkansas,
Virginia and North Carolina.
In addition to other federal and state employment laws, Pennsylvania
recently enacted a law that requires the Company's skilled nursing facilities
and assisted living facilities in Pennsylvania to obtain a report of criminal
history record information for all prospective employees. The Company has
established procedures to assure that its facilities in Pennsylvania are in
compliance with this state law, and the Company believes that its facilities are
in compliance with the law. Failure to comply with this law could subject the
facility administrator and facility owner to civil and criminal penalties and
could result in loss of the facility's license.
As a Medicare and Medicaid provider with respect to its skilled nursing
facilities, the Company is subject to a variety of laws regulating relationships
among health care facilities, providers and physicians. In addition, when the
Company's assisted living facilities contract with health care providers whose
services are reimbursed by Medicare or Medicaid, e.g., physicians, the Company
is subject to these anti-remuneration laws. Among these laws is the federal
"Stark Act" legislation which prohibits, with some exceptions, a physician from
referring patients for certain designated health care services, including home
health care and certain rehabilitation services, to entities in which the
physician or a member of his or her family has a financial interest. In early
1998, proposed regulations relating to the Stark Act were issued. In addition,
several legislative reforms of the Stark Act have been introduced in Congress in
1999. The Company is not able to predict at this time what the content of final
regulations may be or whether the Stark Act will be revised. Therefore, the
Company also cannot predict the impact revised legislation or final regulations
may have on the Company's business and operations. The Company is also subject
to federal anti-kickback laws, which prohibit the payment or receipt of any
remuneration in return for, or to induce, the referral of patients for items or
services that are paid for, in whole or in part, by Medicare or Medicaid.
Violation of these provisions could result in civil or criminal penalties, as
well as exclusion from participation in the Medicare and Medicaid programs.
There are currently a number of federal initiatives being undertaken to increase
enforcement of the federal anti-kickback law and other antifraud and abuse
provisions. The federal government, through the Office of Inspector General,
recently released a model compliance plan for nursing facilities. The model plan
identifies a number of risk areas where nursing facilities need to pay
particular attention to their practices. The Company has established a corporate
compliance code of conduct relating to, among other things, resident and patient
care, and fraud and abuse/legal policy and procedures. Additionally, the
Balanced Budget Act of 1997 (the "Budget Act"), signed into law on August 5,
1997, contains a number of antifraud provisions designed to further fight abuse
and enhance program integrity. Certain states have also enacted anti-kickback
laws patterned on the federal law. The Company believes that its operations are
in substantial compliance with the laws applicable to Medicare and Medicaid
providers, including antifraud and abuse provisions; however, there can be no
assurance that the administrative or judicial interpretation of such laws or the
regulations promulgated there under will not in the future have a material
adverse impact on the Company's operations or that the Company will not be
subject to an investigation which would require a significant investment of time
and manpower by the Company.
As a result of the Missouri divestiture in January 2000, the Company no
longer derives a significant portion of its revenues from federal and state
reimbursement programs. The remaining three skilled nursing facilities operated
by the Company are certified to receive benefits under Medicare and Medicaid.
The reimbursement methodology for a variety of health care providers has changed
significantly as a result of provisions contained in the Budget Act, which
provisions materially impacted the Company's operations and financial condition.
The Budget Act provides for the establishment of a prospective payment system
("PPS") for skilled nursing services (rather than the retrospective cost-based
methodology in place prior to July 1, 1998). The PPS for skilled nursing
facilities is being phased in over three cost reporting periods, commencing on
or after July 1, 1998. During the transition period, the payment rate is based
on a percentage blend of a facility-specific rate and a federal per diem rate.
Once the PPS is fully implemented, skilled nursing facilities will be paid a
federal per diem rate for covered services, which include routine and ancillary
services and most capital-related costs. In conjunction with PPS, consolidated
billing for Medicare Part A Services is required
16
<PAGE> 17
for skilled nursing facilities. Under consolidated billing for Medicare Part A
Services, facilities must bill Medicare for all of the services residents
receive, including all therapy services. The Company's skilled nursing
facilities began utilizing this new rate methodology on July 1, 1998. On
November 29, 1999, the Balanced Budget Retirement Act ("BBRA") became law
providing some relief from various provisions of the Budget Act. With respect to
skilled nursing facilities, the BBRA provides a temporary increase in Medicare
payment for some patients in certain high cost categories and made other
adjustments to the consolidated billing and PPS provisions of the Budget Act. To
maximize operating results under the new regulations the Company embarked upon a
program to reduce costs and manage acuity levels. These steps included: (i) a
renegotiation of therapy service contracts; (ii) a reduction of nursing costs
through managing hours worked to patient acuity; (iii) evaluation of the need
for high-cost programs; and (iv) consolidating and eliminating certain non-
patient related services. The financial impact of these operational changes and
the new Medicare reimbursement rates are reflected in the Fiscal Year 2000 and
1999 operating results and further discussed in "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Results of
Operations."
State Medicaid programs currently apply to all of the Company's skilled
nursing facilities. In some of the states where the Company has assisted living
facilities, Medicaid programs apply to the facilities through Medicaid waiver
programs or other Medicaid rules. While these programs differ in certain aspects
from state to state, they are all subject to requirements imposed by the federal
government, which provides approximately 50% of the funds available under these
programs. In Missouri, where the Company operated skilled nursing facilities in
fiscal year 1998, 1999, and part of Fiscal Year 2000, payments are based upon
specific cost reimbursement formulas established by that state, which are
generally based on historical costs with adjustment for inflation. Pennsylvania
instituted a case mix reimbursement system in 1996, which reimburses skilled
nursing facilities based upon a combination of resident acuity and cost data.
For Fiscal 2000, including the divested Missouri operations, the Company
derived approximately 19% of its gross patient revenues from Medicare and
approximately 53% of its gross patient revenues from Medicaid. For the years
ended June 30, 1999 and 1998, the Company derived approximately 26% and 43% of
its gross patient revenues from Medicare, respectively, and approximately 48%
and 37% of its gross patient revenues from Medicaid, respectively. Excluding the
Missouri operations, the Company derived approximately 22% and 41% of its gross
patient revenues from Medicare and Medicaid, respectively, in Fiscal 2000.
Both governmental and private-payor sources have instituted cost
containment measures designed to limit payments made to long-term health which
adversely affect reimbursements to the Company. Furthermore, although federal
regulations do not recognize state budget deficiencies as a legitimate ground to
curtail funding of their Medicaid cost reimbursement programs, states have
nevertheless curtailed such funding in the past. No assurance can be given that
states will not do so in the future or that the future funding of Medicaid
programs will remain at levels comparable to present levels.
Government reimbursement programs are also subject to statutory and
regulatory changes, administrative rulings and interpretations, determinations
by reimbursement intermediaries, and governmental funding restrictions, all of
which may materially increase or decrease the rate of program payments to health
care providers operated by the Company. In addition, there can be no assurance
that facilities or other providers owned, leased or managed by the Company, now
or in the future, will initially meet or continue to meet the requirements for
participation in such programs.
The Company believes the structure and composition of government regulation
of health care will continue to change and, as a result, it regularly monitors
developments in the law. The Company expects to modify its agreements and
operations from time to time as the business and regulatory environment changes.
While the Company believes it will be able to structure all its agreements and
operations in accordance with applicable law, there can be no assurance that its
arrangements will not be successfully challenged.
Under the Americans with Disabilities Act of 1990, all places of public
accommodation are required to meet certain federal requirements related to
access to the services provided by the Company and use of the facilities of the
Company by disabled persons. To the extent that the Company is a recipient of
federal funds through the Medicaid program, it is subject to additional federal
laws such as the Rehabilitation Act of 1973.
17
<PAGE> 18
Other federal, state and local laws which prohibit discrimination by places of
public accommodation also may require modifications to existing and planned
properties to create access by disabled persons. While the Company believes that
its properties are substantially in compliance with present requirements or are
exempt therefrom, if required changes involve a greater expenditure than
anticipated or must be made on a more accelerated basis than anticipated,
additional costs would be incurred by the Company. Further, future new or
changes to existing federal, state or local legislation may impose additional
burdens or restrictions with respect to access by disabled persons, the costs of
compliance with which could be substantial.
The Company is subject to various federal, state and local environmental
laws and regulations. Such laws and regulations often impose liability whether
or not the owner or operator knew of, or was responsible for, the presence of
hazardous or toxic substances on its property. The costs of any required
remediation or removal of these substances could be substantial and the
liability of an owner or operator as to any property is generally not limited
under such laws and regulations and could exceed the property's value and the
aggregate assets of the owner or operator. The presence of these substances, or
failure to remediate such contamination properly, may also affect adversely the
owner's ability to sell or rent the property, or to borrow using the property as
collateral.
Under these laws and regulations, an entity that arranges for the disposal
of hazardous or toxic substances at a disposal site may also be liable for the
costs of any required remediation or removal of the hazardous or toxic
substances at the disposal site. In connection with the ownership or operation
of its properties, the Company could be liable for these costs, as well as
certain other costs, including governmental fines and injuries to persons or
properties arising from the handling or disposal of hazardous or toxic
substances.
In connection with the operation of its properties, the Company operates
public water systems that are subject to regulation under federal law and
required to comply with certain standards pertaining to the quality of the water
supplied and with certain monitoring and reporting requirements. The Company
could be liable for costs, including governmental fines and injuries to persons,
in the event of violations of the law or regulatory standards arising from the
operation of its water systems.
LIABILITY AND INSURANCE
Providing health care services involves an inherent risk of liability.
Participants in the senior living and health care services industry are subject
to lawsuits alleging negligence or related legal theories, many of which may
involve large claims and result in the incurrence of significant defense costs.
The Company currently maintains property, liability and professional medical
malpractice insurance policies for the Company's owned, leased and managed
facilities with such coverages and deductibles which management believes are
prudent, adequate and in keeping with industry practice. The Company also has
umbrella excess liability protection policies in the amount of $5.0 million to
$10.0 million per location. In addition, the Company maintains policies for
employee practices and officers and directors liability in the amounts of $1.0
million and $10.0 million respectively. There can be no assurance that a claim
in excess of the Company's insurance will not be asserted. A claim against the
Company not covered by, or in excess of, the Company's insurance, could have a
material adverse affect on the Company. The Company's insurance policies are
reviewed annually.
Based on poor loss experience arising from medical malpractice claims and
claims arising under the patient bill of rights, insurers for the long term care
industry have become increasingly wary of liability exposures. A number of
insurance carriers have stopped writing coverage to this market, and those
remaining have increased premiums and deductibles substantially. While nursing
homes have been the primary targets of these insurers, assisted living
companies, including Balanced Care, have seen premium and deductible increases.
In certain states, including Florida and Texas, many long-term care providers
are facing very difficult renewals. There can be no assurance that the Company
will be able to obtain liability insurance in the future or that, if such
insurance is available, it will be available on acceptable terms.
18
<PAGE> 19
EMPLOYEES
As of June 30, 2000, the Company had approximately 2,400 employees. None of
the Company's employees is represented by a union. The Company considers its
employee relations to be good. Although the Company believes it is able to
employ sufficient skilled personnel to staff the facilities it operates or
manages, a shortage of skilled personnel in any of the geographic areas in which
it operates could adversely affect the Company's ability to recruit and retain
qualified employees and its operating expenses.
RISK FACTORS
This Annual Report on Form 10-K contains various "forward looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. These statements, which represent the Company's expectations or beliefs
concerning various future events, include the following: statements concerning
anticipated effects on earnings, cost savings and operations of the Company; net
cash flow; industry trends; certain expected capital expenditures; computer
software modification and replacement; the outcome of any government inquiries,
litigation or other proceedings; the impact of government regulation; and future
environmental costs. These statements are based on current expectations that
involve a number of risks and uncertainties, including the following:
Limited Operating History. The Company was formed in April 1995 and has a
limited operating history. The Company had net income (loss) of ($909,000),
($4,492,000), $3,575,000 and ($23,637,000) for its fiscal years ended June 30,
1996, 1997, 1998, and 1999 respectively, and had a net loss of ($21,589,000) for
Fiscal Year 2000. As of June 30, 2000, the Company had an accumulated deficit of
$47,062,000. The Company's newly developed assisted living facilities are
expected to incur operating losses until they achieve break-even occupancy
levels of approximately 70%-85%. The Company expects to achieve targeted
stabilized occupancy levels of approximately 92% approximately 10 to 24 months
after opening, depending on the size of the facility. In addition, the Company's
acquired operations, even if profitable when acquired, may incur operating
losses pending their integration into the Company's business. Several of the
facilities that have been acquired by the Company have continued to experience
operating losses. See "Selected Financial Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations". Accordingly, there
can be no assurance that the Company will not continue to incur losses. Failure
to achieve profitability could have a material adverse effect on the Company's
business, results of operations and financial condition.
Implementation of Strategies. To date, the Company's growth has been
primarily attributable to development of assisted living facilities and
acquisitions of assisted living and skilled nursing facilities. The Company's
first Outlook Pointe(R) signature series assisted living facility opened in May
1997. The Company has opened 49 additional Outlook Pointe(R) signature series
assisted living facilities through June 30, 2000. As discussed previously, the
Company has focused management's efforts on the operations of existing
facilities and newly constructed facilities, while substantially reducing its
development activities with respect to new sites and projects. Management is
focused on building market share in existing markets, channeling its financial
and human resources into meeting facility occupancy goals and building brand
recognition throughout the Balanced Care system. If, and when, capital becomes
available to the Company on acceptable terms, the Company may begin incremental
development of its signature series assisted living facilities on a limited
basis. Any future growth strategies may place a significant burden on the
Company's management resources and require the development, implementation and
continual enhancement of sufficient operational, resident care, financial and
management information systems. Successful implementation of the Company's
strategies will also depend on its ability to raise capital and carry out its
strategic plans and to attract, motivate and retain management, professional,
marketing and other key personnel. There can be no assurance that its strategies
can be implemented successfully or that sufficient management resources and
operational, resident or patient care, financial and management information
systems will be available. If the Company is unable to manage its growth or to
implement its strategies effectively, its business, results of operations and
financial condition could be materially and adversely affected.
Need for Additional Capital. The Company has financing to fund the
completion of the remaining two projects under construction at June 30, 2000.
The Company will need additional capital resources to fund any
19
<PAGE> 20
new development projects or acquisitions, including the working capital required
to fund any new development projects during the start-up phase until a
break-even point is attained. For the 27 communities managed and two projects
under construction at June 30, 2000, the Company estimates that it will be
required to make future working capital shortfall contributions in connection
with certain of these projects through Fiscal 2002. The Company also estimates
that it will require approximately $13-16 million in cash if it exercises its
options to purchase the stock or assets of Operators/Lessees for the 27 projects
currently managed and the two to be managed which are under construction. The
Company expects to exercise these options for eight of these facilities during
Fiscal 2001 and the remaining 21 over the next 2-3 years based upon available
cash. The Company's future growth will depend on its ability to obtain capital
financing on acceptable terms to exercise its purchase options and to fund any
future development and acquisition transactions. The Company may seek additional
financing through public or private financing sources, including equity, debt or
lease financing, or through the sale of certain assets. Financing transactions
effected through the issuance of securities could result in substantial dilution
to holders of Common Stock. There can be no assurance that adequate funding will
be available as needed or on terms acceptable to the Company. Insufficient
financial resources could result in the Company delaying or eliminating its
plans to exercise purchase options, thereby slowing the growth of its
operations, which could have a material adverse effect on the Company's
business, results of operations and financial condition. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
Assisted Living Facility Construction and Occupancy Risks. To date, the
Company has developed, built and opened 50 of its Outlook Pointe(R) signature
series assisted living facilities. By November 30, 2000, the Company plans to
open an additional two Company-designed assisted living facilities under
construction with an aggregate capacity of 186 residents. This will bring the
total of developed Outlook Pointe(R) facilities to 52, with a capacity of 3,604
residents and will conclude the Company's initial round of development activity
initiated three years ago. Achievement of this goal will depend upon a number of
factors, including the Company's ability to obtain adequate occupancy, licensing
and other required governmental permits on a timely basis, and to control
construction costs and project completion schedules for the projects currently
under construction. In addition, numerous factors outside the Company's control
will impact the successful completion of its development projects, including
shortages of, or the inability to obtain, labor or materials, changes in
applicable laws or regulations or in the method of applying such laws and
regulations, the failure of general contractors or subcontractors to perform
under their contracts, strikes and adverse weather. There can be no assurance
that the Company will not encounter delays in completing its existing
development program or that it will be successful in developing and constructing
any other assisted living facilities. Also, there can be no assurance that
completed facilities will achieve targeted occupancy rates or otherwise be
economically successful. The Company's inability to complete its existing
development plans or the delay of those plans could have a material adverse
effect on its business, results of operations and financial condition.
Substantial Fixed Charges; Pledge of Assets. The Company leases most of
its facilities under long-term operating leases. Lease and debt service
obligations of the Company for Fiscal Year 2000 aggregated approximately
$22,300,000. Leases generally provide for rent increases and require the Company
to pay taxes, utilities and insurance obligations. All of the Company's managed
facilities (including the two under construction) are financed by operating
leases. The Company intends to continue to acquire the leasehold interests of
facilities financed under the Black-Box Structure and thus expects that the
amount of its lease-related obligations will increase as the Company pursues
this strategy. As a result, an increasing portion of the Company's cash flow
will be devoted to lease payments and debt service, which will reduce the amount
of cash flow otherwise available to support the Company's growth. Such leases
and mortgages also typically contain rent coverage and other financial
covenants. There can be no assurance that the Company will generate sufficient
cash flow from operations to cover required lease and debt service payments or
that the financial performance of the Company or of particular subsidiaries or
facilities will be adequate to meet applicable financial covenants. Any payment
or other default could cause a lender to foreclose upon any collateral securing
the indebtedness or, in the case of an operating lease, could terminate the
lease, resulting in a loss of revenue and asset value to the Company. In certain
cases, indebtedness secured by real estate of a facility is also secured by a
pledge of the Company's operating interest in the facility and, in certain other
cases, indebtedness and facility leases are secured by a pledge of stock of
certain of the Company's subsidiaries.
20
<PAGE> 21
Since most of the Company's leases and financing agreements contain
cross-default and cross-collateralization provisions, a default by the Company
on one of its payment obligations could adversely affect a significant number of
the Company's other obligations and properties. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
Acquisition Risks; Difficulties of Integration. To date, the Company's
growth rate has been significantly increased by acquisitions. Based on capital
availability, the Company may continue to expand its business through strategic
acquisitions. Pursuit of an acquisition strategy entails the risks inherent in
assessing the value, strengths, weaknesses, contingent or other liabilities and
potential profitability of acquisition candidates and in integrating the
operations of acquired businesses. The Company's success in effecting
acquisitions will depend on numerous factors, including its ability to identify
suitable acquisition candidates and negotiate acceptable purchase terms, the
competition for acquisitions, the Company's ability to finance acquisitions, and
the availability of appropriate government licenses and approvals. Successful
integration of acquired businesses will depend on the Company's ability to
effect any required changes in operations or personnel, and may require
renovation or other capital expenditures or the funding of unforeseen
liabilities. There can be no assurance that the Company will consummate future
acquisitions, that operations of acquired facilities can be successfully
integrated or that acquired operations will be profitable.
Geographic Concentration of Business. Historically, a substantial portion
of the Company's facilities were located in Missouri and Pennsylvania. Operating
revenues attributable to the Company's business in these states accounted for
approximately 94%, 92% and 83% of the Company's total operating revenues for the
years ended June 30, 1998, 1999, and 2000, respectively. Currently a substantial
portion of the Company's business is located in Pennsylvania, as a result of the
divestiture of the Missouri operations. In fiscal year 2000 operating revenues
attributable to the Company's business in Pennsylvania accounted for
approximately 74% of total operating revenues excluding the Missouri operations.
Until the Company's operations become more geographically diverse, the Company
will be more susceptible to downturns in local and regional economies and
changes in state or local regulation because such conditions and events could
affect a relatively high percentage of the total number of facilities currently
in operation. As a result of such factors, there can be no assurance that such
geographic concentration will not have a material adverse effect on the
Company's business, results of operations or financial condition.
Government Regulation. The health care industry is subject to extensive
federal and state regulation and frequent regulatory change. Federal, state and
local laws governing long-term care and other services provided to seniors
address, among other things, adequacy of medical care, distribution of
pharmaceuticals, operating policies, licensing and certificate of need
requirements. Long-term care facilities are also periodically inspected to
assure continued compliance with various standards and licensing requirements
under state law. While many states have not yet enacted specific assisted living
laws or regulations, the Company's assisted living facilities are subject to
state regulation, licensing, approvals by state and local health, welfare and
social service agencies and other regulatory authorities and compliance with
building codes and environmental laws. In addition, in several states, including
Arkansas, Missouri, New Jersey, Kentucky and North Carolina, certificate of need
laws apply to assisted living facilities. Certificate of need or similar laws
require that a state agency approve certain acquisitions and determine that a
need exists for certain services, the addition of beds and capital expenditure
or other changes. When the issuance or renewal of certificates of need or other
similar government approvals are required, changes in existing laws or adoption
of new laws could adversely affect the Company's development or acquisition
strategy and/or its operations if it is unable to obtain such certificates of
need approvals or renewals thereof. Also, health care providers have been
subjected to increasing scrutiny under anti-trust laws as the integration and
consolidation of the health care industry increases and affects competition.
Regulation of the assisted living industry is evolving. The Company cannot
predict the content of new regulations and their effect on its business. There
can be no assurance that regulatory or other legal developments will not affect
adversely the Company's business, results of operations and financial condition.
Federal and state anti-remuneration laws, such as the Medicare/Medicaid
anti-kickback law, govern certain financial arrangements (including employment
or service contracts) between health care providers and others who may be in a
position to refer or recommend patients or services to such providers. These
laws prohibit, among other things, certain direct and indirect payments that are
intended to induce the referral of
21
<PAGE> 22
patients to, the arranging for services by, or the recommending of a particular
provider of health care items or services. The Medicare/Medicaid anti-kickback
law has been broadly interpreted to apply to certain contractual relationships
between health care providers and sources of patient referral. A number of
similar state laws exist which often have not been interpreted by courts or
regulatory agencies. The Department of Health and Human Services periodically
issues "special fraud alerts" which address specific areas of concern. The
federal government, through the Office of Inspector General, recently released a
model compliance plan for nursing facilities. The model plan identifies a number
of risk areas that need to be addressed by such facilities. Federal "Stark"
legislation prohibits, with limited exceptions, the referral of patients for
certain services, including home health care services, physical therapy and
occupational therapy, by a physician to entities in which they have an ownership
or financial interest. Violation of these laws can result in loss of licensure,
civil and criminal penalties, and exclusion of health care providers or
suppliers from participating in the Medicare and Medicaid programs.
Additionally, the Budget Act signed into law on August 5, 1997, contains a
number of anti-fraud provisions designed to further fight abuse and enhance
program integrity. Furthermore, some states restrict certain business or fee
relationships between physicians and other providers of health care services.
The Company believes that its operations are in substantial compliance with the
laws applicable to Medicare and Medicaid providers, including anti-fraud and
abuse provisions; however, there can be no assurance that the administrative or
judicial interpretation of such laws or the regulations promulgated thereunder
will not in the future have a material adverse impact on the Company's
operations or that the Company will not be subject to an investigation which
would require a significant investment of time and manpower by the Company.
Assisted living facilities may be eligible to participate as Medicaid providers
and receive reimbursement through Medicaid waiver programs and managed care
plans. The Company has elected to become a Medicaid provider in several states
with respect to its assisted living facilities. Such entities are subject to all
of the requirements applicable to Medicaid providers, including the anti-fraud
and abuse legislation. Although the Company believes that it complies with
federal and state anti-remuneration statutes at all times, there can be no
assurance that such laws will be interpreted in a manner consistent with the
practices of the Company.
The Americans with Disabilities Act of 1990 requires all places of public
accommodation to meet certain federal requirements related to access to the
services provided by the Company and use of the facilities of the Company by
disabled persons. To the extent that the Company is a recipient of federal funds
through the Medicaid program, it is subject to additional federal laws such as
the Rehabilitation Act of 1973. Other federal, state and local laws which
prohibit discrimination by places of public accommodation may require
modifications to existing and planned properties to create access to the
properties by disabled persons. While the Company believes that its properties
comply with present requirements or are exempt there from, if required changes
involve a greater expenditure than anticipated or must be made more quickly than
anticipated, additional costs will be incurred by the Company. Further, future
new or changes to existing, federal, state or local legislation may impose
additional burdens or restrictions relating to access by disabled persons. The
failure to comply with federal, state and local antidiscrimination laws could
subject the Company to civil fines or damages from private legal actions.
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. 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.
Health Care Reform. In addition to extensive existing government health
care regulation, there are many initiatives on the federal and state levels for
comprehensive reforms affecting the payment for and availability of health care
services. It is not clear what proposals, if any, will be adopted, or what
effect such
22
<PAGE> 23
proposals would have on the Company's business. Various aspects of these health
care proposals, such as reductions in funding of the Medicare and Medicaid
programs, potential changes in reimbursement regulations by HCFA, enhanced
pressure to contain health care costs by Medicare, Medicaid and other payors and
permitting greater state flexibility in the administration of Medicaid, could
adversely affect the Company's business, results of operations and financial
condition. The Company's skilled nursing facilities that participate in
applicable state Medicaid programs are subject to the risk of changes in
Medicaid reimbursement and payment delays resulting from budgetary shortfalls of
state Medicaid programs. The Company's current concentration of skilled nursing
facilities in Pennsylvania exposes it to the risk of changes in Medicaid
reimbursement programs in those states. Medicare and Medicaid certification is a
critical factor contributing to the revenues and profitability of long-term care
facilities. Changes in certification and participation requirements of the
Medicare and Medicaid programs have restricted, and are likely to further
restrict, eligibility for reimbursement under those programs. For example, HCFA
released a study in July 2000 relating to staffing levels in nursing facilities.
As a result, new requirements for minimum staffing levels in nursing facilities
are being considered by the federal government. Failure to obtain and maintain
Medicare and Medicaid certification at the Company's long-term care facilities
could result in a significant loss of revenue. In addition, private payors,
including managed care payors, increasingly are demanding that providers accept
discounted fees or assume all or a portion of the financial risk for delivery of
health care services, including capitated payments where the provider is
responsible, for a fixed fee, for providing all services needed by certain
patients. Capitated payments can result in significant losses when patients
require expensive treatments not adequately covered by the capitated rate.
Efforts to impose reduced payments, greater discounts and more stringent cost
controls by government and other payors are expected to continue. The Company
cannot predict what reform proposals or reimbursement limitations will be
adopted in the future or the effect any such changes will have on its
operations. There can be no assurance that currently proposed legislation,
future health care legislation, reforms or changes in the administration or
interpretation of governmental health care programs or regulations will not have
a material adverse effect on the Company's business, results of operations and
financial condition. Concern about the potential effect of various proposed
health care reforms has contributed to volatility of prices of securities of
health care companies and could similarly affect the price of the Common Stock
in the future.
Liability and Insurance. Providing health care services involves an
inherent risk of liability. Participants in the senior living and health care
industry are subject to lawsuits alleging negligence or related legal theories,
many of which may involve large claims and significant legal costs. The Company
currently maintains liability insurance intended to cover medical malpractice,
wrongful death and other claims which it believes is adequate and in keeping
with industry practice. However, claims in excess of the Company's insurance
coverage or claims not covered by the Company's insurance (e.g., claims for
punitive damages) may arise. A successful claim against the Company not covered
by or in excess of the Company's insurance coverage could have a material
adverse effect on the Company's business, results of operations and financial
condition. Claims against the Company, regardless of their merit or eventual
outcome, may also have a material adverse effect upon the Company's reputation
and its ability to attract residents or expand its business. The Company's
insurance policies generally must be renewed annually, and there can be no
assurance that the Company will be able to obtain liability insurance coverage
in the future on acceptable terms, if at all. See "Business -- Liability and
Insurance."
Competition. The senior living and health care industry is highly
competitive and the Company believes that competition in its current and
targeted markets will continue to increase. The Company faces current and
prospective competition for residents and patients and for employees from
numerous local, regional and national providers of facility-based assisted
living and long-term care. Many of the Company's current and potential
competitors are significantly larger and have greater financial and marketing
resources than the Company. There are currently few regulatory and other
barriers to entry into the assisted living industry. If the development of new
assisted living facilities surpasses the demand for such facilities in
particular markets, such markets could become saturated. Competition could limit
the Company's ability to attract residents and patients and expand its business
and could have a material adverse effect on the Company's business, results of
operations and financial condition.
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<PAGE> 24
Environmental Risks. The Company is subject to various federal, state and
local environmental laws and regulations. Such laws and regulations often impose
liability whether or not the owner or operator knew of, or was responsible for,
the presence of hazardous of toxic substances on its property. The costs of any
required remediation or removal of these substances could be substantial and the
liability of an owner or operator as to any property is generally not limited
under such laws and regulations and could exceed the property's value and the
aggregate assets of the owner or operator. The presence of these substances, or
failure to remediate such contamination properly, may also affect adversely the
owner's ability to sell or rent the property, or to borrow using the property as
collateral. Under these laws and regulations, an entity that arranges for
disposal of hazardous or toxic substances, at a disposal site, may also be
liable for the costs of any required remediation or removal of the hazardous or
toxic substances at the disposal site. In connection with the ownership or
operation of its properties, the Company could be liable for these costs, as
well as certain other costs, including governmental fines and injuries to
persons or properties arising from the handling or disposal of hazardous or
toxic substances.
Change of Control. Under certain circumstances unless waived, the
acquisition by one or more related persons of 50% or more of the Common Stock of
the Company constitutes a default under certain leases pertaining to the
facilities leased or managed by the Company and could result in the termination
of such leases or the exercise of other remedies thereunder by the lessor. See
"Certain Relationships and Related Transactions". Other financing arrangements
of the Company contain similar change of control provisions which could result
in the termination of such arrangements or the exercise of other remedies
thereunder upon a change of control of the Company (as defined in such
arrangements). During Fiscal Year 2000, the Company entered into two separate
transactions which, when combined, constituted a change in control. The Company
has obtained waivers of default, as a result of the change in control, from the
applicable lessors. (See "Management's Discussion and Analysis of Financial
Conditions and Results of Operation -- Recent Developments.")
Dependence on Key Personnel. The Company's success to date has been
significantly dependent on the contributions of Brad E. Hollinger, the Company's
Chairman of the Board, President and Chief Executive Officer and one of its
founders, and the loss of his services could have a material adverse effect on
the Company's business, results of operations and financial condition. The
Company's success also depends to a significant extent upon a number of other
key employees of the Company. The Company is party to employment agreements with
Mr. Hollinger and several other key employees. The loss of the services of one
or more other key employees also could have a material adverse effect on the
Company. In addition, the Company believes that its future success will depend
in part upon its ability to attract and retain additional highly-skilled
professional, managerial, sales and marketing personnel. Competition for such
personnel is intense. There can be no assurance that the Company will be
successful in attracting and retaining the personnel that it requires for its
business and planned growth.
Labor Costs. The Company competes with various health care providers and
other employers for limited qualified and skilled personnel in the markets that
it serves. The Company expects that its labor costs will increase over time. The
current economic condition, with its resulting low unemployment rates, has also
created a tremendous challenge for the Company. Finding, training and retaining
good personnel is a major objective of the Company. Currently, none of the
Company's employees is represented by a labor union. If employees of the Company
were to unionize, the Company could incur labor costs higher than those of
competitors with non-union employees. The Company's business, results of
operations and financial condition could be adversely affected if the Company is
unable to control its labor costs.
Potential Volatility of Stock Price. The stock market has experienced
extreme price and volume fluctuations which have particularly affected the
market price for many health care companies and which have often been unrelated
to the operating performance of these companies. The trading price of the Common
Stock could also be subject to significant fluctuations in response to
variations in periodic operating results, changes in management, future
announcements concerning the Company, legislative or regulatory changes, general
trends in the industry and other events or factors. See
"Business -- Competition" and "Business -- Government Regulation."
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<PAGE> 25
Anti-Takeover Provisions. Certain provisions of the Company's Certificate
of Incorporation and Bylaws and Delaware law could have the effect of making it
more difficult for a third party to acquire, or of discouraging a third party
from attempting to acquire, control of the Company. Such provisions could limit
the price that certain investors might be willing to pay in the future for
shares of the Company's Common Stock. Certain of such provisions allow the
Company to issue preferred stock with rights senior to those of the Common Stock
and impose various procedural and other requirements which could make it more
difficult for stockholders to effect certain corporate actions. Furthermore, the
Company has entered into certain leases, and may enter into additional financing
arrangements in the future, which provide that the Company will be in default
under such leases in the event of a change of control of the Company. See
"Change of Control."
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<PAGE> 26
PART II
ITEM 5-- MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER'S
MATTERS
PRICE RANGE AND HOLDERS OF COMMON STOCK
The Common Stock of the Company has been listed on the American Stock
Exchange and traded under the symbol "BAL" since February 12, 1998. The
following table sets forth for the fiscal periods indicated the high and low
sales prices of the Common Stock as reported on the American Stock Exchange. No
cash dividends were paid on the Common Stock during such periods.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
Fiscal year ended June 30, 2000:
1st Quarter............................................... $2 3/16 $1 1/8
2nd Quarter............................................... 1 15/16 7/8
3rd Quarter............................................... 2 7/8 1 3/16
4th Quarter............................................... 2 1/8 1 7/16
Fiscal year ended June 30, 1999:
1st Quarter............................................... $7 3/4 $4 3/8
2nd Quarter............................................... 8 1/4 4 3/4
3rd Quarter............................................... 8 1/2 2
4th Quarter............................................... 2 3/4 1 7/8
</TABLE>
On September 22, 2000, the last reported sales price for the Common Stock
as reported on the American Stock Exchange was $1.00 per share. The number of
holders of record of the Common Stock on September 22, 2000 was approximately
117.
DIVIDENDS
The Company has not paid or declared any dividends on its capital stock
since its inception. The Company intends to retain earnings for support of its
operations and future development of its business and will not distribute them
to stockholders as dividends. The declaration and payment by the Company of any
future dividends and the amount thereof will depend upon the Company's results
of operations, financial condition, cash requirements, future prospects,
limitations imposed by credit agreements or senior securities and other factors
deemed relevant by the Board of Directors. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations-Liquidity and Capital
Resources."
PRIVATELY PLACED SECURITIES
The Company issued warrants to purchase shares of Common Stock, as follows,
in transactions intended to be exempt from the registration requirements of the
Securities Act of 1993, as amended (the "Securities Act"), by virtue of Section
4(2) thereof. The warrants were issued in consideration for certain services and
financing arrangements with the Company.
<TABLE>
<CAPTION>
NUMBER OF EXERCISE
DATE OF ISSUANCE WARRANT HOLDER WARRANTS PRICE TERM EXERCISABLE
---------------- --------------- --------- -------- ------- ------------------------
<S> <C> <C> <C> <C> <C>
July 7, 1999 Hakman & Co 3,650 $1.94 3 years 1 yr. from date of grant
July 14, 1999 Hakman & Co 250 $2.00 3 years 1 yr. from date of grant
July 23, 1999 Hakman & Co 1,500 $2.00 3 years 1 yr. from date of grant
July 29, 1999 Hakman & Co 4,000 $1.94 3 years 1 yr. from date of grant
September 27, 1999 Hakman & Co 2,500 $1.19 3 years 1 yr. from date of grant
October 5, 1999 Hakman & Co 500 $1.03 3 years 1 yr. from date of grant
December 21, 1999 Raymond James & 334,000 $1.50 5 years Vested Immediately
Associates,
Inc.
</TABLE>
26
<PAGE> 27
ITEM 6--SELECTED FINANCIAL DATA
The following tables summarize certain selected consolidated financial
data, which should be read in conjunction with the Company's Consolidated
Financial Statements and related Notes and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included elsewhere herein. The
selected consolidated financial data set forth below for each of the years in
the five-year period ended June 30, 2000 and as of the end of each of such
periods have been derived from the Consolidated Financial Statements of the
Company which have been audited by KPMG LLP, independent certified public
accountants. The consolidated financial statements as of June 30, 1999 and 2000
and for each of the years in the three year period ended June 30, 2000 and the
independent auditors' report thereon, are included elsewhere herein.
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- ------- ------- ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenues................................ $ 60,749 $ 78,446 $88,888 $49,480 $ 811
Operating Income (Loss)................. $(16,924) $(24,023) $ 2,480 $(3,787) $ (814)
Net Income (Loss)....................... $(21,589) $(23,637) $ 3,575 $(4,492) $ (909)
Net Income (Loss) Per Diluted Share..... $ (.81) $ (1.41) $ 0.28 $ (0.66) $ (.34)
Weighted Average Shares -- Diluted...... 26,517 16,713 12,928 6,763 2,696
Cash and Cash Equivalents............... $ 5,722 $ 8,160 $15,481 $ 7,908 $ 567
Total Assets............................ $119,994 $ 71,055 $85,972 $33,017 $7,292
Long-term Obligations................... $ 66,668 $ 16,535 $ 8,847 $12,117 $5,121
Redeemable Preferred Stock.............. $ -- $ -- $ -- $13,249 $ --
Stockholders' Equity (Deficit).......... $ 36,306 $ 38,358 $61,859 $(1,444) $1,124
</TABLE>
ITEM 7-- 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 years ended June 30, 2000, 1999 and
1998 and liquidity and capital resources of the Company. This information should
be read in conjunction with the Company's consolidated financial statements, and
related notes thereto, 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 the "Risk Factors," section in Part I of this
report.
OVERVIEW
The Company was incorporated in April 1995 and is engaged in the operation
and selective development and acquisition of assisted living facilities and
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.
The Company has grown primarily by designing, developing, operating and
managing its Outlook Pointe(R) signature series assisted living facilities and
through acquisitions. The following table summarizes the Company's operating
facilities at June 30, 2000 and 1999 (excluding the former Missouri facilities):
<TABLE>
<CAPTION>
JUNE 30,
-------------------------------------------------------------------
2000 1999
-------------------------------- --------------------------------
OWNED LEASED MANAGED TOTAL OWNED LEASED MANAGED TOTAL
----- ------ ------- ----- ----- ------ ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Developed Assisted Living
Facilities..................... 12 11 27 50 -- 6 28 34
Acquired Assisted Living
Facilities..................... 5 8 -- 13 5 8 -- 13
Skilled Nursing Facilities....... -- 3 -- 3 -- 3 -- 3
-- -- -- -- -- -- -- --
17 22 27 66 5 17 28 50
== == == == == == == ==
</TABLE>
27
<PAGE> 28
As of June 30, 2000, the Company has operations in Pennsylvania, Arkansas,
Ohio, Virginia, North Carolina, Tennessee, West Virginia, Florida, Maryland and
Indiana. These operating facilities have a capacity for 4,286 assisted living
residents and 169 skilled nursing patients. In January 2000, the Company
divested its Missouri assets consisting of 10 skilled nursing facilities with
1,135 beds, nine assisted living and independent living facilities with 245 beds
and a home health agency. The Company has discontinued its own rehabilitation
agencies and now exclusively utilizes third party agencies to provide therapy
services.
In addition to the 50 Outlook Pointe(R) signature series assisted living
facilities opened as of June 30, 2000, the Company has signed agreements to
develop and manage an additional two assisted living facilities currently under
construction, which are scheduled to open in October and November 2000. This
will conclude the Company's initial round of development activity initiated
three years ago. Future development may be conducted on a project-by-project
basis subject to available financing on acceptable terms.
The Company generates revenue from four primary sources: resident services,
patient services, development fees and management fees. 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 were, prior to the discontinuation of
these services, included in patient services revenues. Patient services revenues
include charges for room and board, rehabilitation therapies, pharmacy, medical
supplies, sub acute 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 prior to discontinuation of these
services. Development fees and management fees are earned for developing and
managing assisted living facilities for real estate investment trusts ("REITs")
and other owners or lessees. As a result of the divestiture of the Missouri
operations, the acquisition of the operations of developed facilities (both
discussed under "Strategic Changes and Business Developments" below), and the
wind-down of development activity, the mix of the Company's revenues will
continue to change, and revenues from assisted living resident services is
expected to increase as a percentage of total revenues.
The Company classifies its operating expenses into the following
categories: (i) facility operating expenses which include labor, food,
marketing, rehabilitation therapy costs and other direct facility expenses; (ii)
development, general and administrative expenses, which primarily include
corporate office expenses, regional office expenses, development expenses and
other overhead costs; (iii) provisions for losses, which include losses relating
to the curtailment of development activities which were previously capitalized,
losses relating to working capital advances made under shortfall funding
agreements, and losses from severance agreements; (iv) lease expense which
includes rent for the facilities operated by the Company as well as corporate
office and other rent; and (v) depreciation and amortization.
RECENT DEVELOPMENTS
CHANGE IN CONTROL
On July 31, 2000, HR Investments Limited, a Cayman Islands corporation
("HR"), RH Investments Limited, a Cayman Islands corporation ("RH"), and VXM
Investments Limited, a Cayman Islands corporation ("VXM" and together with HR
and RH, collectively, the "Holders"), each purchased at par from the Company,
9.5% Unsecured Convertible Grid Debentures (collectively, the "Debentures"), as
amended by Amendment No. 1 to 9.5% Unsecured Convertible Grid Debentures dated
as of July 31, 2000 (the "Amendment", and together with the Debentures,
collectively, the "Amended Debentures"), in an aggregate principal amount equal
to $14,000,000. The Amended Debentures were purchased in accordance with the
terms and conditions of three Purchase Agreements dated as of June 30, 2000
between the Company and each of the Holders. The Purchase Agreements and the
form of the Debentures were filed as exhibits to the Company's Current Report on
Form 8-K dated June 30, 2000.
Under the Amended Debentures, the Holders have the right, at any time up to
and including the earlier to occur of the Early Termination Date (as defined
below) and July 1, 2005 (the "Maturity Date"), to convert all or any part of the
Amended Debentures into Common Stock of the Company at the conversion rate of
$2.00 per share (subject to adjustment as provided in the Amended Debentures,
the "Conversion Rate"). The Amended Debentures mature on the Maturity Date.
Interest under the Amended Debentures accrues at an
28
<PAGE> 29
annual rate of 9.5% and is due and payable quarterly. The Company, at its
option, may pay the interest in cash or in lieu of payment, may add the interest
amount payable to the outstanding principal amount of the Amended Debentures,
subject to certain conditions precedent. The Company may terminate the Holders'
conversion rights at any time after December 31, 2002 if the average closing
price per share of Common Stock of the Company on the American Stock Exchange
for the 20 consecutive trading days ending five trading days preceding the date
on which the notice of termination is given to the Holders by the Company is not
less than 200% of the Conversion Rate (the "Early Termination Date").
Depending on when (and if) the Amended Debentures are converted and how the
Company elects to pay interest, the Holders could have the right to convert the
Amended Debentures into shares of Common Stock equal to approximately 17% to
24.7% of the issued and outstanding shares of Common Stock of the Company after
giving effect to the transactions.
The Holders and IPC Advisors S.a.r.l., a Luxembourg company ("IPC"), may be
deemed to be an affiliated group within the meaning of Section 13 (d)(3) of the
Exchange Act. In December 1999, IPC acquired 49.8% of the issued and outstanding
shares of Common Stock of the Company. See "Equity Transaction" discussed below.
As a result of the Equity Transaction and certain open market purchases
subsequent to fiscal year-end, IPC presently beneficially owns 17,972,400 shares
of Common Stock of the Company, representing approximately 52.6% of the
outstanding shares of Common Stock of the Company. As of September 15, 2000, on
a combined basis, IPC and the Holders (directly or indirectly) may be deemed to
beneficially own 60.6% of the Common Stock of the Company. If the Amended
Debentures are outstanding until the Maturity Date and the Company elects, in
lieu of payment, to add the interest amount payable to the outstanding principal
amount of the Amended Debentures until the Maturity Date, on a combined basis,
IPC and the Holders (directly or indirectly) may be deemed to beneficially own
64.3% of the Common Stock of the Company.
OTHER FINANCING
In June 2000, the Company issued two discounted promissory notes (the "RCW
Notes") totaling $10,000,000 in favor of RCW Overseas Limited ("RCW") each
bearing an annual yield of 11%. The outstanding principal balance plus
accumulated interest in the amount of $10,102,767 was paid to RCW on August 1,
2000, which fully discharged the Company's obligations under the RCW Notes. The
Company repaid the RCW Notes with a portion of the proceeds from the issuance of
the Debentures discussed above.
STRATEGIC CHANGES AND BUSINESS DEVELOPMENTS
EQUITY TRANSACTION
In October 1999, the Company entered into a Subscription Agreement (the
"Subscription Agreement") with IPC, under which IPC agreed to make an equity
investment of approximately $21,000,000 in the Company (the "Equity
Transaction"). Under the first tranche of the Equity Transaction, which closed
on October 11, 1999, the Company issued to IPC 3,300,000 shares of Series C
Convertible Preferred Stock, par value $.001 (the "Series C Preferred Stock"),
at a price per share of $1.25, for an aggregate purchase price of $4,125,000.
Under the second tranche of the Equity Transaction, which was approved by the
stockholders of the Company on December 15, 1999 and closed on December 21,
1999, the Company issued to IPC 13,400,000 shares of Common Stock, at a price
per share of $1.25, for an aggregate purchase price of $16,750,000, and the
outstanding shares of Series C Preferred Stock automatically converted into
3,300,000 shares of Common Stock. Upon closing of the Equity Transaction, IPC
directly owned approximately 49.8% of the outstanding shares of Common Stock of
the Company.
PROPERTY ACQUISITION
On December 30, 1999, the Company and 12 of its subsidiaries (collectively
the "Subsidiaries"), IPC and New Meditrust Company LLC ("Meditrust"), entered
into a Memorandum of Understanding (the "Memorandum of Understanding"), under
which the Subsidiaries acquired the real property, improvements, furniture,
fixtures and equipment of twelve Outlook Pointe(R) assisted living facilities
(the Tranche One
29
<PAGE> 30
Properties). The aggregate purchase price for the Tranche One Properties was
$52,231,911 (the "Tranche One Purchase Price"), which was determined based on
arms' length negotiations. The Tranche One Purchase Price was paid as follows:
(a) $44,420,857 in cash by the Company (the "Cash Portion") and (b) $7,811,054
pursuant to a Promissory Note dated as of December 30, 1999, as amended (the
"Meditrust Note") made jointly by the Company and IPC in favor of Meditrust.
The Cash Portion of the Tranche One Purchase Price was funded as follows:
(a) $5,420,857 in cash by the Company, (b) $32,000,000 in the form of a loan (as
the same may be amended or increased from time to time, the "Heller Loan") with
Heller Healthcare Finance, Inc. ("Heller"), and (c) a $7,000,000 discount note
(the "FRR Note") with FRR Investments Limited ("FRR").
In conjunction with the Tranche One purchase, the Company entered into a
loan agreement (the "Heller Loan Agreement") with Heller and obtained the
$32,000,000 Heller Loan. The Heller Loan has a maturity date of December 31,
2001. Interest on the Heller Loan accrues at a floating rate per annum equal to
the Base Rate (as defined in the Heller Loan Agreement) plus 3.75%. Commencing
on February 1, 2000, the Company will pay interest monthly in arrears. In
addition, commencing on November 20, 2000, the Company will pay 100% of the
Excess Cash Flow (as defined in the Heller Loan Agreement), which will be
applied to the principal balance. Although the Heller Loan has a two-year term,
the exit fee due upon pay off increases from 1% to 3% after September 30, 2000.
The Company's obligations under the Heller Loan are cross-defaulted with its
obligations under the Line of Credit.
On April 27, 2000, the Company and Heller agreed to increase the Heller
Loan by $5,000,000, which increased the loan amount from $32,000,000 to
$37,000,000. The $37,000,000 Heller Loan is on the same terms and conditions,
and uses the same collateral, as the original Heller Loan. The proceeds from the
$5,000,000 increase provided the ongoing working capital required for operations
of the Company.
In September 2000, the Company and Heller again agreed to increase the
Heller Loan by $5,000,000, which increased the loan amount from $37,000,000 to
$42,000,000. The $5,000,000 increase was made to the Company by Heller on
substantially the same terms and conditions, and using the same collateral as
the original Heller Loan, except that the additional $5,000,000 is due and
payable on November 15, 2000 and is subject to an additional exit fee of
$600,000 if not repaid by October 31, 2000. Interest on the additional
$5,000,000 accrues at prime plus 2%, and is due and payable in arrears on
November 15, 2000. Approximately $2,500,000 of the proceeds from the $5,000,000
increase will provide working capital required for operations until the Company
raises the additional capital discussed in the section under the heading
entitled "Liquidity and Capital Resources." The remaining $2,500,000 will be
placed into an interest bearing reserve account to be used by Heller, at its
discretion, to cure any past due interest or other defaults that may arise from
time to time while the Heller Loan is still outstanding. In addition, so long as
there are no defaults, the $2,500,000 reserve may be used by the Company to
repay the $5,000,000 increase by November 15, 2000. As a result of the two
$5,000,000 increases, the Company's indebtedness to Heller under the Heller Loan
increased from $32,000,000 to $42,000,000.
As an inducement for IPC to enter into the Meditrust Note, IPC, Meditrust
Mortgage Investments, Inc. ("MMI") and Meditrust Corporation ("MC", and together
with MMI, the "Meditrust Parties") entered into a Right of First Refusal
Agreement dated as of December 30, 1999 (the "Right of First Refusal
Agreement"). Under the Right of First Refusal Agreement, in the event the
Meditrust Parties desire to sell, give or otherwise transfer the 1,081,312
shares of Common Stock of the Company (the "Stock") owned by the Meditrust
Parties to any party other than an entity that is a direct or indirect
subsidiary of MC, the Meditrust Parties are obligated to offer in writing to
sell the Stock to IPC on the same terms. The Right of First Refusal Agreement,
unless sooner terminated in accordance with the terms thereof, will remain in
effect until December 31, 2009.
As a further inducement for IPC to enter into the Meditrust Note, the
Company entered into an Indemnification, Defense, Hold Harmless and
Reimbursement Agreement dated as of December 29, 1999 (the "Indemnification
Agreement") in favor of IPC, under which the Company has agreed to indemnify,
defend and hold harmless IPC and certain other Indemnified Parties (as defined
in the Indemnification Agreement") from any Losses (as defined in the
Indemnification Agreement") arising under or otherwise related to or in
connection with the Meditrust Note (including, without limitation, all payments
made or to be
30
<PAGE> 31
made by IPC under the Meditrust Note), except for any Losses that arise as a
result of the gross negligence or willful misconduct of any Indemnified Party or
a breach of a fiduciary duty of IPC or any affiliate of IPC to the Company.
As additional security for the Company's obligations under the
Indemnification Agreement and the FRR Note (which has been fully repaid), the
Company and the Subsidiaries entered into a Stock Pledge Agreement dated as of
April 18, 2000 (the "Stock Pledge Agreement") with IPC and FRR, under which the
Company pledged the stock of each of the Subsidiaries to IPC and FRR.
Notwithstanding the foregoing, the Company, the Subsidiaries, IPC, FRR and
Heller entered into a Subordination Agreement in favor of Heller. Under the
Subordination Agreement, IPC and FRR agreed to subordinate their respective
rights under the Stock Pledge Agreement, the FRR Note and the Indemnification
Agreement in favor of Heller and agreed to refrain from taking any action
against the collateral pledged under the Stock Pledge Agreement until the
obligations under the Heller Loan Agreement, as amended, are paid in full;
provided, however, the Subordination Agreement permits IPC, FRR and the Company,
so long as no event of default exists under the Heller Loan Agreement, as
amended, to pay and to collect such sums that are owed under the FRR Note and
the Indemnification Agreement in accordance with the respective terms thereof.
The Company, IPC and Meditrust also entered into an Option Agreement dated
as of December 30, 1999, as amended (the "Option Agreement"), pursuant to which
the Company and IPC have the right, but not the obligation (the "Option"), to
designate various nominees to acquire the real property, improvements,
furniture, fixtures and equipment of an additional twelve Outlook Pointe(R)
assisted living facilities located in Pennsylvania (3), Arkansas (2), Ohio (2),
Virginia (2), and Tennessee (3) (collectively, the "Tranche Two Properties").
The Option is jointly exerciseable by the Company and IPC.
With respect to eight of the 12 Tranche Two Properties (the "First Group"),
the Company may exercise the Option from and including January 2, 2000 through
and including October 13, 2000. The Company may only exercise the Option with
respect to three or more of the First Group of properties. The aggregate
purchase price for the First Group is approximately $30,600,000, which was
determined based on arms' length negotiations. The purchase price is allocated
among the First Group of properties as more specifically set forth in the Option
Agreement. Closing on the Option for the First Group must occur within thirty
days after the date on which the Option is exercised by the Company. The
Company's ability to exercise the Option on the First Group of Tranche Two
Properties on or before October 13, 2000 is dependent on the Company obtaining
financing on acceptable terms.
With respect to the four remaining Tranche Two Properties (the "Second
Group"), the Company may exercise the Option from and including January 2, 2000
through and including March 3, 2001. The Company may only exercise the Option
with respect to all of the Second Group. The aggregate purchase price of the
Second Group is approximately $14,900,000, which was determined based on arms'
length negotiations. The purchase price is allocated among the Second Group of
properties as more specifically set forth in the Option Agreement. Closing on
the Option for the Second Group must occur within thirty days after the date on
which the Option is exercised by the Company. The Company's ability to exercise
the Option on the Second Group of Tranche Two Properties on or before March 3,
2000 is dependent on the Company obtaining financing on acceptable terms.
The Company is currently negotiating with several financing sources;
however, there can be no assurance that the Company will be able to obtain
adequate financing on acceptable terms to acquire either the First or Second
Group of Tranche Two Properties before respective Options expire.
If the Company exercises its Options with respect to either the First Group
or the Second Group of Tranche Two Properties, the exercise is irrevocable. If
the Company exercises but fails to close, Meditrust may (i) accelerate the
amount due under the Meditrust Note, (ii) receive reimbursement of all
reasonable out-of-pocket expenses (including attorneys' fees and expenses) and
(iii) terminate the Option Agreement.
31
<PAGE> 32
DIVESTITURE OF MISSOURI ASSETS
On January 12, 2000, the Company completed the sale of its Missouri assets
to Christian Health Care of Missouri, Inc. and certain of its affiliates
(collectively, "CHM") pursuant to an Asset Purchase Agreement dated October 15,
1999 (as amended, the "Asset Purchase Agreement"). The Company sold its
leasehold interests in eight skilled nursing facilities and nine assisted and
independent living facilities, together with the operations of those facilities
including a home health agency. The Company sold its real property interests and
operations in two skilled nursing facilities.
The aggregate consideration paid by CHM to the Company for the assets was
(i) $51,000,000 in assumed lease obligations, (ii) $6,675,000 in cash, (iii)
$525,000 pursuant to a First Promissory Note dated January 12, 2000 that has a
maturity date of January 1, 2004 (the "First Promissory Note"), and (iv)
$2,000,000 pursuant to a Second Promissory Note dated January 12, 2000 that has
a maturity date of July 1, 2001 (the "Second Promissory Note"). The aggregate
consideration was determined based on arms' length negotiations.
Due to the Company's existing commitments and guarantees as further
described below, the Company has recorded a net deferred gain on the Missouri
Divestiture in the amount of $2.0 million. The net deferred gain will be
amortized into income as the Company's continuing commitments in the
transaction, in the form of notes receivable and guaranties, expire.
In 1996, Meditrust Mortgage Investments, Inc. (together with its
affiliates, "MT") loaned $41,385,000 (the "Hawthorn Loan") to Hawthorn Health
Properties, Inc. and its subsidiaries (collectively, "HHP") pursuant to a Loan
Agreement dated August 30, 1996 (the "Hawthorn Loan Agreement") for HHP to
purchase seven skilled nursing facilities and three assisted/independent living
facilities (which constitute a portion of the facilities whose leasehold
interests were transferred to CHM). HHP simultaneously leased the facilities to
certain wholly-owned subsidiaries of the Company pursuant to those certain
Facility Lease Agreements dated August 30, 1996 (collectively, the "Facility
Lease Agreements").
MT required the following as conditions to its consent to the transfer of
the leasehold interests in the HHP facilities to CHM:
- The Company, CHM, HHP and MT enter into an Omnibus Assignment and
Assumption Agreement, Amendment to Loan Documents, Amendment to Lease
Documents, Termination of Lease Documents, Consent to Assignment and
Confirmation of Guaranties dated as of January 12, 2000 (the "Omnibus
Agreement").
- The Company and Dixon Management, Inc., a wholly owned subsidiary of the
Company ("DM"), remain as guarantors of CHM's lease obligations pursuant
to the Guaranties previously given by the Company and DM in August 1996
(the "Existing Guaranties") with respect to the Facility Lease
Agreements.
- The Company enter into a Guaranty dated as of January 12, 2000 (the "BCC
Guaranty") in favor of MT to guaranty the obligations of HHP under the
Hawthorn Loan.
- The Company, Balanced Care at Stafford, Inc., a wholly-owned subsidiary
of the Company ("Stafford"), and MT enter into a Cross-Default Agreement
dated as of January 12, 2000 (the "Cross-Default Agreement") that
provides that an "Event of Default" under the Hawthorn Loan Agreement
will constitute an "Event of Default" under the Facility Lease Agreement
dated June 30, 1998 (the "Stafford Facility Lease Agreement") between MT
and Stafford.
- CHM pay a $4,000,000 payment on the Hawthorn Loan on January 12, 2000
(without any prepayment penalty or premium).
- The Existing Guaranties, the BCC Guaranty and the Cross-Default Agreement
will terminate in accordance with the Termination Agreement dated as of
January 12, 2000 (the "Termination
32
<PAGE> 33
Agreement") entered into by and among the Company, HHP, MT and the other
parties referred to therein. Subject to the provisions of the Termination
Agreement:
(1) The Existing Guaranties and the BCC Guaranty will terminate on the
earlier to occur of (a) the complete payment and performance of
the obligations under the Hawthorn Loan or (b) the Termination
Date (as defined below).
(2) The Cross-Default Agreement will terminate on the earlier to occur
of (a) the Termination Date or (b) such time, if any, as the
Leased Property (as defined in the Stafford Facility Lease
Agreement) is transferred in accordance with the provisions of the
Option Agreement dated as of December 30, 1999 by and among MT,
the Company and the other parties thereto.
As used herein, "Termination Date" means the later to occur of (a) December
31, 2000 or (b) the date upon which the HHP facilities have achieved a combined
Debt Coverage Ratio (as defined in the Termination Agreement) for the prior
fiscal quarter equal to or greater than 1.1 to 1. The Termination Date has not
yet occurred.
In May and August 1997, the Company entered into Lease and Security
Agreements (collectively, the "Lease and Security Agreements") with Health Care
Realty Trust (together with its affiliates, "HCRT") for four
assisted/independent living facilities (which constitute a portion of the
facilities whose leasehold interests were transferred to CHM). In order to
induce HCRT to consent to the transfer of the leasehold interests of these four
facilities to CHM, the Company was required to remain as guarantor of CHM's
lease obligations pursuant to the Guaranties previously given by the Company in
1997 with respect to the Lease and Security Agreements.
OPERATING AND CENSUS TRENDS
The Company's core business improved during fiscal year 2000 as a result of
ongoing operating and marketing changes.
The following table sets forth, for the periods indicated, certain resident
capacity and occupancy data for the periods indicated (excluding the Missouri
facilities):
<TABLE>
<CAPTION>
JUNE 30, 2000 JUNE 30, 1999
--------------------------------- ---------------------------------
STABLE STABLE STABLE STABLE
FACILITIES(1) BEDS(1) TOTAL FACILITIES(1) BEDS(1) TOTAL
------------- ------- ----- ------------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
End of Period Capacity:
Owned........................... 17 1,052 1,052 5 332 332
Leased.......................... 18 980 1,554 17 1,060 1,060
Managed......................... 12 742 1,935 4 228 1,905
-- ----- ----- -- ----- -----
Total........................... 47 2,774 4,541 26 1,620 3,297
== ===== ===== == ===== =====
End of Period Occupancy:
Owned........................... 92% 92% 87% 87%
Leased.......................... 87% 71% 89% 89%
Managed......................... 80% 59% 68% 38%
----- ----- ----- -----
Total........................... 84% 71% 87% 53%
===== ===== ===== =====
</TABLE>
---------------
(1) Includes communities or expansions thereof that have (i) achieved 90%
occupancy; (ii) have been opened at least 15 months for 75 bed or less
communities; 18 months for 75 to 100 bed communities; and 24 months for 100+
bed communities; or (iii) were acquired as mature properties. The above data
does not include divested communities.
33
<PAGE> 34
To provide information on facility operating performance, the following
table summarizes the operations of all Balanced Care facilities in operation as
of the dates indicated, including facilities owned, leased and managed for
special purpose entities and excluding the recently divested Missouri
operations:
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1999 1999 1999 2000 2000
-------- ------------- ------------ --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
AT QUARTER END:
Facilities in Operation........... 50 55 62 64 66
Resident Capacity................. 3,297 3,609 4,118 4,330 4,541
Census............................ 1,946 2,278 2,655 2,972 3,199
FOR THE THREE MONTH PERIOD ENDED:
Revenue........................... $11,432 $13,209 $15,587 $17,321 $18,860
EBITDAR........................... $ 206 $ 1,624 $ 2,335 $ 2,888 $ 3,337
</TABLE>
Operating highlights of improvements for the year ended June 30, 2000
compared to June 30, 1999 include: (i) a net census increase of 1,253, a 64%
improvement; (ii) "same store" portfolio census increased by 38%; (iii)
quarterly revenues increased by 65% in owned, leased, and managed facilities for
the comparative quarter ended June 30, 1999 to the quarter ended June 30, 2000;
and (iv) quarterly EBITDAR increased by 1500% in owned, leased, and managed
facilities from the quarter ended June 30, 1999 to the quarter ended June 30,
2000.
The above summary is presented for the purpose of demonstrating the
operating trends of the Company's overall portfolio of facilities and is not
necessarily indicative of the Company's reported consolidated results of
operations under Generally Accepted Accounting Principles (GAAP). The results of
operations for the managed facilities are not included in the Company's
consolidated financial statements presented in this Annual Report in accordance
with the guidance under GAAP.
Although the Company experienced overall improvement in operating
performance for its existing portfolio of owned, leased and managed facilities
as of June 30, 2000, there was a decline in the consolidated GAAP results for
the fourth quarter. The decline resulted from the consolidation of the operating
results for the 10 special purpose entities ("SPEs") which the Company acquired,
as further discussed in this section under the heading entitled "Liquidity and
Capital Resources." Seven of these 10 SPE operations are in various stages of
the lease-up phase and are currently incurring losses. The Company also incurred
additional GAAP losses due to increased shortfall funding losses in the fourth
quarter. This was the result of the timing of depletion of SPE working capital
reserve funds. Management expects the working capital shortfalls to decrease
significantly by the December 31, 2000 quarter end.
34
<PAGE> 35
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain data as
a percentage of total revenue:
<TABLE>
<CAPTION>
2000 1999 1998
----- ----- -----
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue............................................... 100.0% 100.0% 100.0%
Operating expenses:
Facility operating expenses............................... 75.4 73.3 70.8
Development, general and administrative expenses.......... 16.4 16.3 13.4
Provision for losses on termination of development
activities............................................. 2.7 16.6 --
Provision for losses under shortfall funding agreements... 9.5 6.0 --
Provision for losses under severance agreements........... -- 2.0 --
Lease expense............................................. 17.0 13.7 10.6
Depreciation and amortization............................. 6.8 2.7 2.4
----- ----- -----
Income (loss) from operations............................... (27.8) (30.6) 2.8
Other income (expense):
Interest and other income................................. 0.7 1.0 0.8
Interest expense.......................................... (6.2) (0.8) (2.0)
Purchase option payments.................................. (1.0) -- --
Gain (loss) on sale of assets............................. -- (0.4) 3.2
----- ----- -----
Income (loss) before income taxes and extraordinary
charge.................................................... (34.3) (30.8) 4.8
Provision for income taxes.................................. 0.1 (0.7) 0.8
----- ----- -----
Loss before extraordinary charge.......................... (34.4) (30.1) 4.0
Extraordinary charge for early retirement of debt......... (1.2) -- --
----- ----- -----
Net income (loss)........................................... (35.6) (30.1) 4.0
===== ===== =====
</TABLE>
YEAR ENDED JUNE 30, 2000 COMPARED TO THE YEAR ENDED JUNE 30, 1999
Total Revenue. Total revenue for Fiscal 2000 decreased by $17,697,000 to
$60,749,000 compared to $78,446,000 for Fiscal 1999. This decrease was the
result of: (i) a decrease in patient service revenues of $20,197,000, which
resulted from the divestiture of the Missouri operations; (ii) decreased
development fees of $5,546,000 related to the Company's curtailment of new
development; and (iii) a decrease of $1,058,000 resulting from the divestiture
of the Wisconsin facilities in Fiscal 1999. These decreases were partially
offset by additional resident service revenues of $8,866,000, primarily from SPE
facilities acquired during fiscal years 2000 and 1999. Resident services
comprised 52% and 29% of total revenues for Fiscal 2000 and 1999, respectively.
The increase in this percentage of total revenues was due to the Company's
implementation of its business plan, which focuses on assisted living
development and acquiring the operations of assisted living facilities from the
SPEs, coupled with the decrease in patient service revenues in Fiscal 2000 due
to the divestiture of the Missouri operations.
Operating Expenses. Total operating expenses decreased by $24,796,000 to
$77,673,000 for Fiscal 2000 from $102,469,000 for Fiscal 1999. This decrease was
attributed to: (i) decreased expenses of $20,307,000 resulting from the
divestiture of the Missouri operations; (ii) a decrease of $11,400,000 in the
provision for losses on termination of development activities; and (iii) a
$2,817,000 decrease in development, general and administrative expenses
primarily resulting from staff reductions resulting from the curtailment of
development activities and other cost saving initiatives. These decreases were
partially offset by increased expenses of $9,541,000 from SPE facilities
acquired during fiscal years 2000 and 1999.
Facility operating expenses for Fiscal 2000 decreased by $11,686,000 to
$45,832,000 from $57,518,000 for Fiscal 1999. The decrease was the result of:
(i) a decrease of $16,609,000 resulting from the divestiture of the Missouri
operations and a decrease of $1,001,000 resulting from the divestiture of the
Wisconsin facilities and
35
<PAGE> 36
(ii) a decrease of $713,000 resulting from the discontinuation of the Company's
own rehabilitation agencies, which were phased out in the first quarter of
Fiscal 2000. These decreases were offset primarily by an increase of $7,839,000
from SPE facilities acquired during fiscal years 2000 and 1999.
Development, general and administrative expenses decreased by $2,817,000 to
$9,964,000 for Fiscal 2000 from $12,781,000 for Fiscal 1999 as a result of cost
saving initiatives and the elimination of regional office costs for the Missouri
operations. As a percentage of total revenue, these expenses remained level for
Fiscal 2000 compared to Fiscal 1999.
The provision for losses on termination of development activities decreased
by $11,400,000 to $1,650,000 for Fiscal 2000 from $13,050,000 in Fiscal 1999.
The prior year charge was the result of the announced curtailment of the
Company's development activities. The current year provision was the result of
construction and licensing delays on certain projects and the breach of contract
by one contractor who filed for bankruptcy protection prior to the completion of
three development projects.
The provision for losses under shortfall funding agreements increased by
$1,090,000 to $5,750,000 for Fiscal 2000 from $4,660,000 in Fiscal 1999. The
increase is primarily the result of the depletion of SPE working capital for
managed operations. The Company reports its losses under these shortfall funding
agreements using the modified equity accounting approach. Information concerning
the provision for losses under shortfall funding agreements is discussed below
under "Liquidity and Capital Resources -- Operations."
The Company recorded a provision for severance losses of $1,600,000 in
Fiscal 1999 as a result of staff reductions necessitated by the curtailment of
development activities. No provision was reported in Fiscal 2000.
Lease expense decreased by $391,000 to $10,324,000 in Fiscal 2000 from
$10,715,000 in Fiscal 1999. This decrease was primarily the net result of: (i)
decreased rents of $2,700,000 for the divested Missouri operations; (ii)
increased rents of $1,414,000 from SPEs acquired in 1999 and 2000; (iii)
increased rents of $691,000 as a result of the sale/leaseback in March 1999 of
two owned facilities, and (iv) general increases in annual rents.
Depreciation and amortization increased by $2,008,000 to $4,153,000 for
Fiscal 2000 from $2,145,000 for Fiscal 1999. The increase resulted from an
increase of: (i) $1,065,000 relating to the properties purchased in December
2000; (ii) $318,000 for the acquired SPEs; (iii) $275,000 for furniture and
equipment purchased for the managed operations; and (iv) $290,000 for
depreciation relating to home office capital leases and the amortization of
deferred financing fees.
Other Income (Expense). Interest and other income for Fiscal 2000
decreased by $368,000 to $412,000 from $780,000 in Fiscal 1999. Interest expense
for Fiscal 2000 increased by $3,094,000 to $3,741,000 from $647,000 for Fiscal
1999. This was primarily due to the interest on the Line of Credit, the Heller
Note, and the FRR Note.
In Fiscal 2000 the Company made purchase option payments in the amount of
$592,000 to renew certain options which were due to expire in the current year.
In Fiscal 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.
Also in Fiscal 1999, 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.
Provision for Income Taxes. The provision for income taxes was $5,000 for
Fiscal 2000. The Company established a valuation allowance of approximately
$7,647,000 for Fiscal 2000. In Fiscal 1999, the provision for income taxes
includes an income tax benefit of $555,000. The Company established a valuation
allowance of approximately $8,933,000 for Fiscal 1999.
36
<PAGE> 37
Net Income (Loss). The Company's net loss of $21,589,000 for Fiscal 2000
decreased by $2,048,000 from a net loss of $23,637,000 for Fiscal 1999. This
decrease resulted primarily from: (i) a decrease in the provisions for losses on
termination of development activities and severance agreements of $13,000,000;
(ii) increase in profitability of $1,814,000 from the divested Missouri
operations; and (iii) a reduction in home office overhead expenses of
$2,817,000; and. These decreases were offset by: (i) reduced profitability from
development activities of $5,546,000; (ii) increased depreciation and
amortization of $2,008,000; (iii) reduced profitability of $850,000 from the
divestiture of the Wisconsin facilities; (iv) purchase option payments of
$592,000; (v) increased interest expense of $3,094,000; and (vi) an
extraordinary charge for early retirement of debt of $739,000.
YEAR ENDED JUNE 30, 1999 COMPARED TO THE YEAR ENDED JUNE 30, 1998
Total Revenue. Total revenue for Fiscal 1999 decreased by $10,442,000 to
$78,446,000 compared to $88,888,000 for Fiscal 1998. This decrease was the
result of: (i) decrease in patient service revenues of $10,195,000, which was
primarily the result of PPS and a lower census at the Company's skilled nursing
facilities, offset by a $1,393,000 increase due to a skilled nursing facility
acquisition on January 1, 1998; and (ii) decreased development fees of
$5,486,000 related to the Company's decision to reduce development activities.
These decreases were partially offset by additional resident service revenues of
$4,509,000, primarily from facilities acquired during, or subsequent to, Fiscal
1998. Patient services comprised 61% and 65% of total revenues for Fiscal 1999
and for Fiscal 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 decrease due to
PPS.
Operating Expenses. Total operating expenses increased by $16,061,000 to
$102,469,000 for Fiscal 1999 from $86,408,000 for Fiscal 1998. This increase was
primarily attributable to: (i) the provision for losses on termination of
development activities of $13,050,000; (ii) increased expenses of $6,224,000 at
facilities acquired during or after the year ended June 30, 1998; (iii) the
provision for losses under shortfall funding agreements of $4,660,000; (iv) the
$1,600,000 provision for severance losses; and (v) a $904,000 increase in
development, general and administrative expenses. These increases were partially
offset by the decreased operating expenses of $10,531,000 at the Company's
skilled nursing facilities as a result of cost reduction efforts primarily in
the area of therapy delivery.
Facility operating expenses for Fiscal 1999 decreased by $5,402,000 to
$57,518,000 from $62,920,000 for Fiscal 1998. The decrease is the result of a
cost reduction program and a patient acuity management system put in place at
the Company's skilled nursing facilities, which resulted in a reduction in costs
of approximately $11,089,000, primarily in the area of therapy delivery. These
cost savings were offset by increased costs of $4,674,000 at new assisted living
facilities which were acquired during, or after, the December 1997 quarter and
an increased charge to bad debt expense of $1,322,000 relating to the therapy
receivables at the Company's skilled nursing facilities and rehabilitation
services agencies. As a percentage of total revenue, facility operating expenses
were 73.3% and 70.8% for Fiscal years 1999 and 1998, respectively.
Development, general and administrative expenses increased by $904,000 to
$12,781,000 for Fiscal 1999 from $11,877,000 for Fiscal 1998. As a percentage of
total revenue, these expenses increased to 16.3% for Fiscal 1999 from 13.4% for
Fiscal 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 activities of $13,050,000, the provision for losses under shortfall
funding agreements of $4,660,000 and the provision for severance losses of
$1,600,000 are discussed above under "Strategic Changes" and "Charges to
Operations".
Lease expense increased by $1,273,000 to $10,715,000 for Fiscal 1999 from
$9,442,000 for Fiscal 1998. This increase was primarily the result of rents at
acquired facilities and as a result of the sale/leaseback of two owned assisted
living facilities, as well as rental increases under lease agreements at
existing facilities. As a percentage of total revenue, these expenses totaled
13.7% for Fiscal 1999 and 10.6% for Fiscal 1998.
37
<PAGE> 38
Depreciation and amortization decreased by $24,000 to $2,145,000 for Fiscal
1999 from $2,169,000 for Fiscal 1998. The decrease resulted from the sale of the
Wisconsin facilities and the sale/leaseback of two facilities.
Other Income (Expense). Interest and other income for Fiscal 1999
increased by $65,000 to $780,000 from $715,000 in the Fiscal 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 Fiscal 1999
decreased by $1,151,000 to $647,000 from $1,798,000 for Fiscal 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 Fiscal 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.
Also in Fiscal 1999, 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. The gain on sale of assets in Fiscal 1998 was the result of the
company's sale of principal assets and operations of a pharmacy in October 1997
for approximately $4,700,000, net of transactions costs. This resulted in a
non-recurring gain of $2,858,000.
Provision for Income Taxes. The provision for income taxes includes an
income tax benefit of $555,000 for Fiscal 1999. The Company established a
valuation allowance of approximately $8,933,000 for Fiscal 1999. For Fiscal
1998, income tax expense of $680,000 is based on the company's estimated
effective tax rate of 16%. The effective rate is lower than the statutory rate
due to the reversal of a valuation allowance on deferred tax asset from net
operating losses.
Net Income (Loss). The Company's net loss of $23,637,000 for Fiscal 1999
from a net income of $3,575,000 for Fiscal 1998, is a decrease of $27,212,000.
This decrease in net income resulted primarily from: (i) the provisions for
losses on termination of development activities, under shortfall funding
arrangements and severance of $19,310,000, (ii) reduced profitability from
development activities of $6,569,000, (iii) decreased gain on sale of assets of
$3,160,000, and (iv) reduced profitability in the Company's skilled nursing
facilities of approximately $1,570,000, primarily due to the implementation of
PPS and a lower census. These amounts were partially offset by (i) the
contribution of $1,994,000 from the assisted living facilities and (ii) reduced
income taxes of $1,235,000.
Medicare Reimbursement Changes. The Balanced Budget Act of 1997 (the
"Budget Act") enacted sweeping changes in reimbursement methodology for skilled
nursing facilities. Beginning July 1, 1998, skilled nursing providers with year
ends of June 30, were reimbursed under a fixed payment methodology based upon
the patient's level of care as opposed to a cost-based methodology. The new
methodology assigns patients into Resource Utilization Groupings ("RUG") that
have corresponding fixed per diem rates. The new methodology has a three (3)
year phase-in-program whereby providers will receive a blending of historical
facility-specific cost and national average rates. The facility-specific costs
are based on 1995 audited cost reports. The national average rates are the
Health Care Financing Administration's ("HCFA's") compilation of all skilled
nursing cost reports with adjustments made to reduce or eliminate certain data.
The Company's skilled nursing facilities began utilizing this new rate
methodology on July 1, 1998. To maximize operating results under the new
regulations the Company embarked upon a program to reduce costs and manage
acuity levels. These steps included: (i) a re-negotiation of therapy service
contracts; (ii) a reduction of nursing costs through managing hours worked to
patient acuity; (iii) evaluation of the need for high-cost programs; and (iv)
consolidating and eliminating certain non-patient related services. The
financial impact of these operational changes and the new Medicare reimbursement
rates are reflected in the Fiscal 2000 and 1999 operating results.
38
<PAGE> 39
LIQUIDITY AND CAPITAL RESOURCES
As the Company changed its focus to operations from development during the
prior fiscal year, the Company's capital requirements and sources also changed.
Historically the Company primarily sought development and acquisition capital,
using development fees to support operating losses and corporate overhead. Since
the Company's announcement last year that it was curtailing development
activities and focusing on operations, the Company has entered into various
financing and capital transactions to access liquidity in order to provide the
funds to support operations.
RECENT DEVELOPMENTS
Change in Control of Registrant. On July 31, the Holders purchased at par
from the Company the Amended Debentures, in an aggregate principal amount equal
to $14,000,000. See "Change in Control" above. The Amended Debentures were
purchased in accordance with the terms and conditions of three Purchase
Agreements dated as of June 30, 2000 between the Company and each of the
Holders. The Purchase Agreements and the form of the Debentures were filed as
exhibits to the Company's Current Report on Form 8-K dated June 30, 2000.
Under the Amended Debentures, the Holders have the right, at any time up to
and including the earlier to occur of the Early Termination Date and the
Maturity Date to convert all or any part of the Amended Debentures into Common
Stock at the Conversion Rate. The Amended Debentures mature on July 1, 2005.
Interest under the Amended Debentures accrues at an annual rate of 9.5% and is
due and payable quarterly. The Company, at its option, may pay the interest in
cash or in lieu of payment, may add the interest amount payable to the
outstanding principal amount of the Amended Debentures, subject to certain
conditions precedent. The Company may terminate the Holders' conversion rights
at any time after December 31, 2002 if the average closing price per share of
Common Stock of the Company on the American Stock Exchange for the 20
consecutive trading days ending five trading days preceding the date on which
the notice of termination is given to the Holders by the Company is not less
than 200% of the Conversion Rate.
Depending on when (and if) the Amended Debentures are converted and how the
Company elects to pay interest, the Holders could have the right to convert the
Amended Debentures into shares of Common Stock equal to approximately 17% to
24.7% of the issued and outstanding shares of Common Stock of the Company after
giving effect to the transactions.
The Holders and IPC may be deemed to be an affiliated group within the
meaning of Section 13(d)(3) of the Exchange Act. In December 1999, IPC acquired
49.8% of the issued and outstanding shares of Common Stock of the Company. See
"Equity Transaction" discussed below. As a result of the Equity Transaction and
certain open market purchases subsequent to year-end, IPC presently owns
17,972,400 shares of Common Stock of the Company, representing approximately
52.6% of the outstanding shares of Common Stock of the Company. As of September
15, 2000, on a combined basis, IPC and the Holders (directly or indirectly) may
be deemed to beneficially own 60.6% of the Common Stock of the Company. If the
Amended Debentures are outstanding until the Maturity Date and the Company
elects, in lieu of payment, to add the interest amount payable to the
outstanding principal amount of the Amended Debentures until the Maturity Date,
on a combined basis, IPC and the Holders (directly or indirectly) may be deemed
to beneficially own 64.3% of the Common Stock of the Company.
On August 1, 2000, approximately $10,000,000 of the proceeds from the
issuance of the Debentures was used to repay the RCW Notes, which fully
discharged the Company's obligations thereunder.
EQUITY TRANSACTION
During its second fiscal quarter, the Company received approximately $19.5
million in cash (net of costs) from the $21 million Equity Transaction. The
Company used $6.0 million to acquire the real estate of 12 of its Outlook
Pointe(R) signature series assisted living facilities from Meditrust (see
"Meditrust Transaction" discussed below). The remaining $13.5 million has been
used primarily to support the Company's portfolio of assisted living facilities,
including the acquisition of the leasehold interests of seven of the assisted
living
39
<PAGE> 40
facilities that the Company managed for SPEs. A breakdown of the use of proceeds
from the Equity Transaction over the past nine months follows (in millions of
dollars):
<TABLE>
<S> <C>
- Meditrust Tranche One Property purchase................... $ 6.0
- Closing costs on IPC equity............................... 1.5
- SPE take-out and option payments.......................... 2.0
- Furniture and equipment at facilities..................... 2.5
- Collateral deposits....................................... 1.2
-----
$13.2
- Cash for operations....................................... 7.8
-----
$21.0
=====
</TABLE>
WORKING CAPITAL LINE OF CREDIT
In April 1999, the Company entered into a $15 million revolving Line of
Credit with HCFP Funding, Inc ("HCFP"). The Line of Credit is for a term of
three years, and outstanding borrowings bear interest at a rate per annum of
prime plus 2.75%. In July 1999, the Line of Credit was increased to $20 million.
Prior to July 1999, the Line of Credit was 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.), and the eligible accounts receivable of
the Company's 10 Missouri skilled nursing facilities (the "Accounts Receivable
Borrowers"). In July 1999, the real estate of BCC at Republic Park Care Center,
Inc. and BCC at Nevada Park Care Center, Inc. (the "Skilled Nursing Facility
Borrowers") was added as security to collateralize the Line of Credit. In order
to mortgage the Skilled Nursing Facility Borrowers' real estate in favor of
HCFP, the Company repaid its $3.1 million loan to Meditrust to satisfy the
existing mortgage on this real estate. As a result of this transaction, the
Company reported a loss on the early extinguishment of debt of $739,000 in the
first quarter of Fiscal 2000.
On January 12, 2000, the Company completed the sale of its Missouri assets
(see "Missouri Divestiture" discussed below), which included the real estate,
leasehold interests and operations of the Skilled Nursing Facility Borrowers and
the Accounts Receivable Borrowers (the "Missouri Borrowers"). In order for HCFP
to release the Missouri Borrowers and their respective liens and security
interests under the Line of Credit, the Company agreed to (i) repay $5.4 million
on the Line of Credit attributable to the Missouri Borrowers, (ii) pay a
prepayment fee of approximately $75,000, (iii) reset the availability under the
Line of Credit to $12.0 million as of December 31, 1999 and (iv) cross-default
its obligations under the Line of Credit with future obligations to HCFP,
including the Company's obligations under the Heller Loan, as the same may be
amended from time to time (discussed under the "Meditrust Transaction" section
below).
The primary component of the borrowing base for the Line of Credit consists
of 85% of the product of 8.0 to 8.5 times EBITDA of the Real Estate Borrowers
(as defined in the Line of Credit Agreement). At June 30, 2000, approximately
$10.9 million was borrowed on the Line of Credit.
MEDITRUST TRANSACTION
On December 30, 1999 the Company completed the acquisition of the 12
Tranche One Properties from Meditrust. The Tranche One Properties had a cost
basis of approximately $52.2 million and were acquired for (i) approximately
$44.4 million in cash (plus $2.2 million in closing costs) and (ii)
approximately $7.8 million under the Meditrust Note, including transaction
costs. The $46.6 million (including closing costs) was funded by (i) the Heller
Loan ($32 million), (ii) the FRR Note ($7 million) and (iii) cash ($7.6 million)
from the Company.
The Meditrust Note has a maturity date of April 3, 2001. No interest will
accrue on the Meditrust Note unless there is an event of default thereunder.
40
<PAGE> 41
The Company is currently indebted to Heller under the Heller Loan in the
original principal amount of $42 million. In December 1999, the Company obtained
$32 million from Heller, and in April and September 2000, the Company received
two additional $5 million increases. Of the $42 million, $37 million has a
maturity date of December 31, 2001. Interest on the $37 million accrues at a
floating rate per annum equal to the Base Rate (as defined in the Heller Loan
Agreement, as amended) plus 3.75%. Commencing on February 1, 2000, the Company
will pay interest monthly in arrears. In addition, commencing on November 20,
2000, the Company will pay 100% of the Excess Cash Flow (as defined in the
Heller Loan Agreement, as amended), which will be applied to the principal
balance. (For a discussion on capital requirements, refer to the heading
entitled "Operations" below.) Although the $37 million portion of the Heller
Loan has a two-year term, the exit fee due upon payoff increases from 1% to 3%
after September 30, 2000. The remaining 5 million has a maturity date of
November 15, 2000, and is subject to an additional exit fee of $600,000 if not
repaid by October 31, 2000. Interest on the $5.0 million accrues at prime plus
2%, and is due and payable in arrears on November 15, 2000. Approximately $2.5
million of the proceeds from the $5 million increase will provide working
capital required for operations until the Company raises the additional capital
discussed above. The remaining $2.5 million will be placed into an interest
bearing reserve account to be used by Heller at its discretion to cure any past
due interest and other defaults that may arise from time to time while the $42
million Heller Loan is outstanding. In addition, so long as there are no
defaults, the $2.5 million reserve may be used by the Company to repay the $5.0
million by November 15, 2000. The Company's obligations under the $42 million
Heller Loan are cross-defaulted with its obligations under the Line of Credit.
The FRR Note had a maturity date of June 26, 2000. The FRR Note was a
discount note with an issue price of $7.0 million, a maturity value of $7.4
million, and a yield of 12.68% per annum. The FRR Note was repaid in full on
June 26, 2000.
As part of the Meditrust transaction, the Company obtained an Option to
purchase the real estate of an additional 12 Tranche Two Properties owned by
Meditrust and managed by the Company. With respect to the First Group of eight
properties, the Company may exercise the Option from and including January 2,
2000 through and including October 13, 2000. The Company may only exercise the
Option with respect to three or more of the First Group of properties. The cost
basis for the First Group is approximately $44.8 million. The aggregate purchase
price for the First Group is approximately $30.6 million, which was determined
based on arms' length negotiations. The purchase price is allocated among the
First Group of properties as more specifically set forth in the Option
Agreement. If the Option is exercised for the First Group, a preset payment is
required under the Meditrust Note in the amount of $5.2 million, which will
reduce the outstanding principal balance on the Meditrust Note to $2.6 million.
Closing on the Option for the First Group must occur within thirty days after
the date on which the Option is exercised by the Company. The Company's ability
to exercise the Option on the First Group on or before October 31, 2000 is
dependent on the Company obtaining financing on acceptable terms.
With respect to the Second Group of four properties, the Company may
exercise the Option from and including January 2, 2000 through and including
March 3, 2001. The Company may only exercise the Option with respect to all of
the Second Group. The cost basis for the Second Group is approximately $21.9
million. The aggregate purchase price for the Second Group is approximately
$14.9 million, which was determined based on arms' length negotiations. The
purchase price is allocated among the Second Group of properties as more
specifically set forth in the Option Agreement. If the Option is exercised for
the Second Group, a preset payment is required under the Meditrust Note in the
amount of $2.6 million, which will reduce the outstanding principal balance
under the Meditrust Note to zero. Closing on the Option for the Second Group
must occur within thirty days after the date on which the Option is exercised by
the Company. The Company's ability to exercise the Option on the Second Group of
Tranche Two Properties on or before March 3, 2000 is dependent on the Company
obtaining financing on acceptable terms.
The Company is currently negotiating with several financing sources;
however, there can be no assurance that the Company will be able to obtain
adequate financing on acceptable terms to acquire either the First or Second
Group of Tranche Two Properties before the Option expires.
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<PAGE> 42
MISSOURI SALE
In January 2000 the Company sold certain of its Missouri assets to
Christian Health Care of Missouri Inc. and its affiliates for $6.7 million in
cash, $2.5 million in notes, and $51 million in assumed lease obligations. The
$6.7 million was used primarily to pay down debt and to pay closing and
severance costs associated with the Missouri facilities. The cash received on
the collection of receivables has offset the operating costs to wind down the
business operations, which was completed April 30, 2000. As the notes receivable
are collected, the proceeds are expected to be used for general corporate
purposes.
To facilitate the understanding of the effect of the Missouri sale on the
continuing operations of the Company, the following table summarizes the results
of the Missouri operations over the first six months of the fiscal year while
owned by the Company:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
DECEMBER 31,
1999
---------------
(IN THOUSANDS)
<S> <C>
Revenues:
Patient services.......................................... $17,765
Resident services......................................... 1,832
Other revenues............................................ 39
-------
Total revenues............................................ 19,636
-------
Operating expenses:
Facility operating expenses............................... 16,439
Development, general and administrative expense........... 962
Lease expense............................................. 2,999
Depreciation and amortization expense..................... 172
-------
Total operating expenses.................................... 20,572
-------
Loss from operations........................................ $ (936)
=======
</TABLE>
OTHER FINANCING TRANSACTIONS
In June 2000, the Company executed the RCW Notes totaling $10 million in
favor of RCW, each bearing an annual yield of 11%. Approximately $7.4 million of
these funds was used to repay the FRR Note discussed above under "Meditrust
Transaction." The outstanding principal balance plus accumulated interest under
the RCW Notes in the amount of $10.1 million was paid to RCW on August 1, 2000,
using a portion of the proceeds from the issuance of the $14 million Debentures.
Therefore, the Company's obligations under the FRR Note and the RCW Notes are
fully discharged.
OPERATIONS
The Company has opened 50 of its Outlook Pointe(R) signature series
assisted living facilities as of June 30, 2000. The Company has adequate
financing to complete construction on the remaining two facilities currently
under construction. These projects are expected to open in October and November
2000. This will conclude the Company's initial round of development activity
initiated nearly three years ago.
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 special purpose entity ("SPE") 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 is an
off-balance sheet financing structure.
42
<PAGE> 43
For development projects utilizing the SPE structure, 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 equity owner of the SPE (the "Equity
Owner"). Without the Owner's prior consent, the Equity Owner may not sell the
equity or assets of the SPE to any third party other than the Company. The
Company has closed 51 development projects for which the Company holds or held
the foregoing type of option. To date, the Company has exercised its option to
purchase 22 SPEs financed under the SPE structure for a total purchase price of
approximately $22.9 million, of which $6.4 million was paid in cash and $16.5
was financed by increasing the existing facility lease bases. Eleven of the 22
facilities were part of the property acquisition discussed under "Meditrust
Transaction" of this Report. The Company estimates it will require approximately
$22 - $25 million to buy the equity of the SPEs affiliated with the 29 Outlook
Pointe(R) facilities that remain under the SPE structure through calendar 2003.
The Company has obtained commitments from certain REITs that currently own
developed properties under the SPE 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 $9 million of the estimated
$22 - $25 million capital requirement.
During Fiscal Year 2000, the Company exercised its options to purchase 17
SPEs, which it managed. The capital required to exercise the options for these
17 SPEs was approximately $13 million of which $3.5 million was paid in cash and
$9.5 million was funded by the property owners, Meditrust and Nationwide Health
Properties, Inc. and its affiliates ("NHP"), through an increase in the lease
base, as discussed above. Upon closing, the Company's obligation to pay a return
to the Equity Owners of these 17 SPEs automatically terminated. The Company will
be making option payments in future quarters for other managed properties to
maintain its purchase options for certain Outlook Pointe(R) facilities utilizing
the SPE structure. The Company expects to generate the cash from operations to
begin purchasing these remaining SPEs during calendar year 2003. The following
table summarizes the Company's acquisitions, or planned acquisitions, of black
box operations:
<TABLE>
<S> <C>
- Outlook Pointe operations currently owned by the
Company................................................... 23
- Meditrust SPE Operations to be purchased in conjunction
with Tranche Two.......................................... 8
- Remaining SPE operations to be acquired with cash from
owned operations (March 2002 through December 2003)....... 21
---
52
===
</TABLE>
Based on current forecasts, management estimates that approximately $22
million in capital will be required to fully stabilize the Company's portfolio
of assisted living properties and obtain permanent financing for its Tranche One
and Tranche Two Properties. This estimate assumes the Company exercises its
options to purchase the First Group of eight SPE operations which are part of
the Meditrust Tranche Two Properties and utilizes cash from operations when
available to acquire the remaining SPE operations.
The Company entered into various capital and financing transactions in
Fiscal Year 2000 and subsequent to the fiscal year-end in order to provide the
funds to support operations, as detailed above. The following two tables
summarize these transactions.
43
<PAGE> 44
<TABLE>
<CAPTION>
CAPITAL TRANSACTION DATE AMOUNT RAISED
------------------- ---- -------------
<S> <C> <C>
IPC Equity Transaction..................... October & December 1999 $21,000,000
Additional borrowing on Heller Loan........ April and September $10,000,000
2000
Issuance of Debentures..................... July 2000 $14,000,000
</TABLE>
<TABLE>
<CAPTION>
FINANCING TRANSACTION: DATE: PURPOSE:
---------------------- ----- --------
<S> <C> <C>
Repayment of $3.1 million
mortgage on 2 Missouri skilled
nursing facilities............. July 1999 Added these properties to the
collateral for the Line of Credit
and increased the borrowing base
capacity
Repayment of $5.4 million on Line
of Credit...................... December 1999 Removed 2 skilled nursing
facilities as collateral on the
Line of Credit as a result of the
Missouri Divestiture in January
2000
Meditrust Tranche One Acquisition
of 12 managed properties....... December 1999 Added to portfolio of owned
properties
Divestiture of Missouri
operations..................... January 2000 Divested skilled nursing
facilities from portfolio of
operations to concentrate on
assisted living operations and
remaining 3 skilled nursing
operations
Executed $10 million RCW
discounted promissory notes.... June 2000 Bridged working capital needs
until closing of Debentures in
July 2000
Repayment of $7 million FRR Note
relating to the Meditrust
Tranche One transaction........ June 2000 Reduced balance due from that
transaction
Repayment of $10 million RCW
discounted promissory notes.... August 2000 Per terms of agreement, repayment
was required upon the closing of
the Debentures
</TABLE>
The following is a summary of the sources and uses of capital raised in
Fiscal Year 2000 and subsequent to the fiscal year-end:
<TABLE>
<S> <C>
SOURCE OF NEW CAPITAL:
-------------------------
IPC Equity Transaction...................................... $21,000
Heller Loan Increases....................................... 10,000
Discounted promissory notes with RCW........................ 10,000
Debentures.................................................. 14,000
Draw on Line of Credit...................................... 3,400
-------
Total Source of Funds............................. $58,400
=======
USE OF FUNDS:
--------------
Repayment of mortgage and prepayment penalty on 2 Missouri
skilled nursing facilities................................ 3,200
Meditrust Tranche One property purchase..................... 6,000
Repayment of principal and interest on FRR Note............. 7,400
Repayment of principal and interest on promissory notes with
RCW....................................................... 10,100
Closing costs on equity transaction with IPC and on the
Debentures transaction.................................... 1,700
SPE take-out and option payments............................ 2,600
Furniture and equipment at facilities....................... 2,700
</TABLE>
44
<PAGE> 45
<TABLE>
<S> <C>
Collateral deposits........................................................................... 1,200
Escrow -- $42 million Heller Loan............................................................. 2,500
---------
Subtotal -- Use of Funds............................................................ 37,400
Cash for operations, including SPE shortfall funding of $5,750................................ 18,500
Cash available for working capital............................................................ 2,500
---------
Total -- Use of Funds............................................................... $ 58,400
=========
</TABLE>
The Company is actively negotiating capital funding alternatives to raise
the additional capital required to meet its business plan. While management
believes it can raise adequate capital to meet the Company's business plan,
there is no assurance that is the case, or that the terms will not be dilutive
to existing stockholders. The inability of the Company to raise additional
capital could have a material adverse effect on the Company's business, results
of operations and financial condition.
Many 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 $12,780,000. The lease documents contain financial covenants and
other restrictions which, unless waived by the REIT, (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, (iii) cross-default certain of the Company's obligations
and (iv) prohibit the Company from operating competing facilities within a
designated radius of existing facilities. Management believes the Company is
either in compliance or has obtained the necessary waivers with respect to these
lease covenants.
The Company's lease arrangements are generally for initial terms of 9 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.
OPERATING ACTIVITIES
Cash used by operations increased by $8,849,000 to $19,260,000 for the
twelve months ended June 30, 2000 from cash used by operations of $10,411,000
for the twelve months ended June 30, 1999. The increase in cash used was due to
a decrease in the provision for losses on development activities, a decrease in
accounts payable, accrued payroll and accrued expenses, and partially offset by
a decrease in development contracts in process.
INVESTING AND FINANCING ACTIVITIES
Cash used for investing activities increased by $52,656,000 to $57,186,000
for the twelve months ended June 30, 2000 from $4,530,000 for the twelve months
ended June 30, 1999. Cash provided by financing activities increased by
$66,388,000 to $74,008,000 for the twelve months ended June 30, 2000 from
$7,620,000 for the twelve months ended June 30, 1999. Increases in cash used for
financing activities and provided by investing activities was the result of the
property acquisitions, the equity transaction, and the 17 SPE acquisitions.
YEAR 2000 READINESS DISCLOSURE
In response to concerns that computer software and/or hardware that was
designed to define the year with a two-digit date field rather than a four-digit
field might fail or miscalculate data in the year 2000, causing disruption to
the operations or business activities of the Company. The Company had previously
formed a committee to research and assess the potential risk to the Company's
internal operations systems and to test its hardware and software systems for
compliance. The costs incurred by the Company relating to this
45
<PAGE> 46
project were immaterial. To date, no significant disruptions to the operations
of the Company or computer hardware and software systems have been experienced.
ITEM 7A--QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company did not have any investment securities subject to market risk
as of or during the 12 months ended at June 30, 2000.
ITEM 8--FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTAL SCHEDULES
Consolidated Balance Sheets as of June 30, 2000 and June 30, 1999
Consolidated Statements of Operations for the Years Ended June 30, 2000,
1999 and 1998
Consolidated Statements of Changes in Stockholders' Equity for the Years
Ended June 30, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the Years Ended June 30, 2000,
1999 and 1998
Notes to Consolidated Financial Statements
Independent Auditors' Report
Schedule II -- Valuation and Qualifying Accounts for the Years Ended
June 30, 2000, 1999 and 1998
46
<PAGE> 47
BALANCED CARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
2000 1999
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 5,722 $ 8,160
Receivables (net of allowance for doubtful receivables)
(Note 4)............................................... 5,085 11,912
Development contracts in process (Note 3)................. 336 2,559
Prepaid expenses and other current assets................. 2,329 973
-------- --------
Total current assets.............................. 13,472 23,604
Restricted investments.................................... 3,879 2,714
Property and equipment, net (Note 7)...................... 79,878 24,075
Goodwill, net (Note 2).................................... 14,469 15,293
Purchase option deposits.................................. 4,296 2,974
Other assets.............................................. 4,000 2,395
-------- --------
Total assets...................................... $119,994 $ 71,055
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt (Note 8)................ $ 8,888 $ 450
Accounts payable.......................................... 2,664 10,016
Accrued payroll........................................... 1,045 1,339
Accrued expenses.......................................... 4,423 4,357
-------- --------
Total current liabilities......................... 17,020 16,162
Long-term debt, net of current portion (Note 8)............. 60,881 11,773
Straight-line lease liability............................... 2,784 3,537
Deferred revenue and other liabilities...................... 3,003 1,225
-------- --------
Total liabilities................................. 83,688 32,697
-------- --------
Commitments and contingencies (Notes 2, 3, 10, 11, 14 and
17)
Stockholders' equity (Notes 9 and 15):
Preferred stock, $.001 par value; 5,000,000 authorized;
none outstanding....................................... -- --
Preferred stock, Series A, $.001 par value; 1,150,958
authorized;
none outstanding....................................... -- --
Common stock, $.001 par value; authorized -- 50,000,000
shares; issued and outstanding -- 34,172,847 shares in
2000 and 16,722,847 shares in 1999..................... 35 17
Additional paid-in capital................................ 83,333 63,814
Accumulated deficit....................................... (47,062) (25,473)
-------- --------
Total stockholders' equity........................ 36,306 38,358
-------- --------
Total liabilities and stockholders equity......... $119,994 $ 71,055
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
47
<PAGE> 48
BALANCED CARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-----------------------------
2000 1999 1998
-------- ------- ------
<S> <C> <C> <C>
Revenues:
Resident services......................................... $ 31,614 22,748 18,239
Patient services.......................................... 27,802 47,999 58,194
Development fees.......................................... 742 6,288 11,774
Management fees........................................... 323 1,117 392
Other revenues............................................ 268 294 289
-------- ------- ------
Total revenues.................................... 60,749 78,446 88,888
-------- ------- ------
Operating expenses:
Facility operating expenses:
Salaries, wages and benefits........................... 28,436 32,994 30,756
Other operating expenses............................... 17,396 24,524 32,164
Development, general and administrative expenses.......... 9,964 12,781 11,877
Provision for losses on termination of development
activities
(Note 10).............................................. 1,650 13,050 --
Provision for losses under shortfall funding agreements
(Note 11).............................................. 5,750 4,660 --
Provision for losses under severance agreements (Note
12).................................................... -- 1,600 --
Lease expense (including related parties of $115 in 2000,
$435 in 1999 and $5,042 in 1998)....................... 10,324 10,715 9,442
Depreciation and amortization............................. 4,153 2,145 2,169
-------- ------- ------
Total operating expenses.......................... 77,673 102,469 86,408
-------- ------- ------
Income (loss) from operations..................... (16,924) (24,023) 2,480
Other income (expense):
Interest and other income................................. 412 780 715
Interest expense.......................................... (3,741) (647) (1,798)
Purchase option payments (Note 17)........................ (592) -- --
Gain (loss) on sale of assets (Notes 5 and 6)............. -- (302) 2,858
-------- ------- ------
Income (loss) before income taxes and extraordinary
charge............................................... (20,845) (24,192) 4,255
Provision for income taxes (benefit) (Note 13).............. 5 (555) 680
-------- ------- ------
Income (loss) before extraordinary charge.............. (20,850) (23,637) 3,575
Extraordinary charge for early retirement of debt (Note
8)........................................................ (739) -- --
-------- ------- ------
Net income (loss)...................................... $(21,589) (23,637) 3,575
======== ======= ======
Basic income (loss) per share:
Income (loss) before extraordinary item................ $ (0.79) (1.41) 0.31
======== ======= ======
Net income (loss)...................................... $ (0.81) (1.41) 0.31
======== ======= ======
Diluted income (loss) per share:
Income (loss) before extraordinary item................ $ (0.79) (1.41) 0.28
======== ======= ======
Net income (loss)...................................... $ (0.81) (1.41) 0.28
======== ======= ======
Weighted average shares -- basic.......................... 26,517 16,713 11,616
======== ======= ======
Weighted average shares -- diluted........................ 26,517 16,713 12,928
======== ======= ======
</TABLE>
See accompanying notes to consolidated financial statements.
48
<PAGE> 49
BALANCED CARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS OF DOLLARS AND SHARES)
<TABLE>
<CAPTION>
PREFERRED A STOCK COMMON STOCK
----------------------------- -------------- ADDITIONAL
ISSUED PAR SUBSCRIPTION ISSUED PAR PAID-IN ACCUMULATED
SHARES VALUE RIGHTS SHARES VALUE CAPITAL DEFICIT TOTAL
------ ----- ------------ ------ ----- ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1997.......... 1,151 $ 1 -- 4,025 $ 5 $ 3,961 $ (5,411) $ (1,444)
Issuance of common stock.......... -- -- -- 8,050 8 46,349 -- 46,357
Conversion of series A preferred
stock........................... (1,151) (1) -- 863 1 -- -- --
Accretion of redemption value
attributable to redeemable
preferred stock................. -- -- -- -- -- (1,253) -- (1,253)
Conversion of series B preferred
stock........................... -- -- -- 3,757 3 14,498 -- 14,501
Issuance of common stock purchase
warrants........................ -- -- -- -- -- 123 -- 123
Net income........................ -- -- -- -- -- -- 3,575 3,575
------ --- --- ------ --- ------- -------- --------
Balance at June 30, 1998.......... -- -- -- 16,695 17 63,678 (1,836) 61,859
Issuance of common stock purchase
warrants........................ -- -- -- -- -- 45 -- 45
Options exercised................. -- -- -- 28 -- 91 -- 91
Net loss.......................... -- -- -- -- -- -- (23,637) (23,637)
------ --- --- ------ --- ------- -------- --------
Balance at June 30, 1999.......... -- -- -- 16,723 17 63,814 $(25,473) $ 38,358
Issuance of common stock, less
costs of issuance............... -- -- -- 16,700 17 19,519 -- 19,536
Exercise of common stock purchase
warrants........................ -- -- -- 750 1 -- -- 1
Net loss.......................... -- -- -- -- -- -- (21,589) (21,589)
------ --- --- ------ --- ------- -------- --------
Balance at June 30, 2000.......... -- -- -- 34,173 $35 $83,333 $(47,062) $ 36,306
====== === === ====== === ======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
49
<PAGE> 50
BALANCED CARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, JUNE 30,
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss)......................................... $(21,589) (23,637) 3,575
Adjustments to reconcile net income (loss) to net cash
used for operating activities:
Depreciation and amortization............................. 4,153 2,145 2,169
Deferred income taxes..................................... -- (638) 638
Loss (gain) on sale of assets............................. -- 302 (2,858)
Provision for losses on development activities............ 1,650 13,050 --
Provision for losses under shortfall funding agreements... 5,750 4,660 --
Provision for losses under severance agreements........... -- 1,600 --
Extraordinary charge for early retirement................. 739 -- --
Changes in operating assets and liabilities, excluding
effects of acquisitions:
Decrease (increase) in receivables, net................. 602 (40) (11,175)
Decrease (increase) in development contracts in process,
net.................................................. 2,223 (8,605) (2,242)
Increase (decrease) in prepaid expenses and other
current assets....................................... (531) 341 (516)
(Decrease) increase in accounts payable, accrued payroll
and accrued expenses................................. (12,257) 411 4,317
-------- ------- -------
Net cash used for operating activities............. (19,260) (10,411) (6,092)
-------- ------- -------
Cash Flows from Investing Activities:
Proceeds from sale of assets.............................. 6,675 11,627 7,364
Purchases of property and equipment....................... (58,267) (4,055) (4,111)
(Increase) decrease in restricted investments............. 701 (147) 229
Increase in purchase option deposits and other assets..... (2,758) (5,229) (464)
Business acquisitions (Note 2)............................ (3,537) (6,726) (30,613)
-------- ------- -------
Net cash used for investing activities............. (57,186) (4,530) (27,595)
-------- ------- -------
Cash Flows from Financing Activities:
Proceeds from issuance of long-term debt.................. 66,895 13,156 159
Payments on long-term debt (including extinguishment costs
of $707 in 2000)........................................ (12,001) (5,208) (5,133)
Proceeds from issuance of common stock.................... 19,537 91 46,357
Issuance of notes payable................................. -- -- 29,675
Payments on notes payable................................. -- -- (29,675)
Decrease in straight-line lease liability................. (173) (206) (80)
Decrease in other liabilities............................. (250) (213) (43)
-------- ------- -------
Net cash provided by financing activities.......... 74,008 7,620 41,260
-------- ------- -------
Increase (Decrease) in cash and cash equivalents... (2,438) (7,321) 7,573
Cash and cash equivalents at beginning of year.............. 8,160 15,481 7,908
-------- ------- -------
Cash and cash equivalents at end of year.................... $ 5,722 8,160 15,481
======== ======= =======
Supplemental Cash Flow Information:
Cash paid for interest.................................... $ 3,369 951 1,843
-------- ------- -------
Cash paid for income taxes................................ $ 5 86 66
-------- ------- -------
Supplemental Non-cash Investing and Financing Activities:
Assets and lease obligations capitalized.................. $ 1,945 722 253
======== ======= =======
Fair value of stock purchase warrants granted............. $ -- 45 123
======== ======= =======
Accretion of redemption value of redeemable preferred
stock................................................... $ -- -- 1,253
======== ======= =======
Acquisitions:
Fair value of assets acquired........................... (7,306) (8,345) (32,328)
Liabilities assumed..................................... 3,769 1,619 1,715
Fair value of stock issued.............................. -- -- --
-------- ------- -------
Consideration paid for acquisitions..................... $ (3,537) (6,726) (30,613)
-------- ------- -------
</TABLE>
See accompanying notes to consolidated financial statements.
50
<PAGE> 51
BALANCED CARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) ORGANIZATION AND BACKGROUND
Balanced Care Corporation ("BCC" or the "Company") was incorporated in
April 1995 and utilizes assisted living facilities as the primary service
platform to provide an array of healthcare and hospitality services, including
preventive care and wellness medical rehabilitation, Alzheimer's/dementia care
and, in certain markets, extended care. As of June 30, 2000, the Company owned,
leased or managed 63 assisted living communities and 3 skilled nursing
facilities and had 2 assisted living communities under development contracts
(see Note 3). The Company's operations are located in Pennsylvania, Arkansas,
Virginia, Ohio, North Carolina, Tennessee, West Virginia, Florida, Maryland and
Indiana.
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.
On December 21, 1999 the Company closed on an equity transaction with IPC
Advisors S.A.R.L. ("IPC") in which IPC purchased 16,700,000 shares of Common
Stock at a price per share of $1.25, for an aggregate purchase price of
$20,875,000. As a result of open market purchases subsequent to fiscal year-end,
IPC directly owns 17,972,400 shares of Common Stock of the Company representing
approximately 52.6% of the issued and outstanding shares of the Company's Common
Stock (see Note 19).
(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 inter-company accounts and transactions have been
eliminated in the consolidated financial statements.
(c) CASH AND CASH EQUIVALENTS
Cash equivalents consist of highly liquid instruments with original
maturities of three months or less. The Company maintains its cash and cash
equivalents at financial institutions which management believes are of high
credit quality.
(d) FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash and cash equivalents, receivables, restricted investments and mortgage
notes payable are reflected in the accompanying balance sheet at amounts
considered by management to approximate fair value. Management generally
estimates fair value of its long-term fixed rate notes payable using discounted
cash flow analysis based upon the current borrowing rate for debt with similar
maturities.
(e) RESTRICTED INVESTMENTS
Restricted investments consist of certificates of deposit that have been
pledged as collateral for certain of the Company's lease commitments. The
amounts are equivalent to three months' lease payments and are generally
restricted through the initial lease term.
51
<PAGE> 52
(f) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation or,
where appropriate, the present value of the related capital lease obligations
less accumulated amortization. Depreciation and amortization are computed using
the straight-line method over the estimated useful lives of the assets (see note
7). Expenditures for maintenance and repairs necessary to maintain property and
equipment in efficient operating condition are charged to operations. Cost of
additions and betterments are capitalized.
(g) GOODWILL
Goodwill resulting from business acquisitions accounted for as purchases is
being amortized on a straight-line basis over lives ranging from 15 to 40 years.
Goodwill is reviewed for impairment whenever events or circumstances provide
evidence, which suggests that the carrying amount of goodwill may not be
recoverable. The Company evaluates the recoverability of goodwill by determining
whether the amortization of the goodwill balance can be recovered through
projected undiscounted cash flows. At June 30, 2000 and 1999, accumulated
amortization of goodwill was $1,306,000 and $766,000, respectively.
(h) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company reviews its long-lived assets and certain identifiable
intangible assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to undiscounted future net cash flow expected to be
generated by the asset. This comparison is performed on a facility by facility
basis.
(i) DEFERRED COSTS
Financing and leasing costs have been deferred and are being amortized on a
straight-line basis over the term of the related debt or lease. Accumulated
amortization of deferred financing and leasing costs was $657,000 and $323,000
at June 30, 2000 and 1999, respectively.
(j) REVENUE RECOGNITION
Resident service revenues are recognized when services are rendered and
consist of resident fees and other ancillary services provided to residents of
the Company's assisted living facilities.
Patient service revenues are recorded based on standard charges applicable
to all patients, and include charges for room and board, rehabilitation
therapies, pharmacy, medical supplies, sub-acute care and other programs
provided to patients in skilled nursing facilities. Patient service revenues are
adjusted for differences between such standard rates and estimated amounts
reimbursable by third-party payors when applicable. Estimated settlements under
third-party payor retrospective rate setting programs (primarily Medicare) are
accrued in the period the related services are rendered. Settlements receivable
and related revenues under such programs are based on annual cost reports
prepared in accordance with federal and state regulations, which reports are
subject to audit and retroactive adjustment in future periods. In the opinion of
management, adequate provision has been made for such adjustments and final
settlements will not have a material effect on financial position or results of
operations.
Prior to the Missouri divestiture, discussed in Note 5, the Company derived
a significant portion of its revenues from federal and state reimbursement
programs. All of the skilled nursing facilities operated by the Company are
certified to receive benefits under Medicare and Medicaid. The reimbursement
methodology for a variety of health care providers has changed significantly as
a result of provisions contained in the Balanced Budget Act of 1997 ("Budget
Act"), which provisions materially impacted the Company's operations and
financial condition. The Budget Act provides for a prospective payment system
("PPS") for skilled nursing services (rather than the retrospective cost-based
methodology in place prior to July 1, 1998). During the transition period, the
payment rate is based on a percentage blend of a facility-specific rate and a
federal per diem rate.
52
<PAGE> 53
Once the PPS is fully implemented, skilled nursing facilities will be paid
a federal per diem rate for covered services, which include routine and
ancillary services and most capital-related costs. In conjunction with PPS,
consolidated billing for Medicare Part A Services is required for skilled
nursing facilities. Under consolidated billing for Medicare Part A Services,
facilities must bill Medicare for all of the services residents receive,
including all therapy services. The Company's skilled nursing facilities began
utilizing this new rate methodology on July 1, 1998.
(k) DEVELOPMENT FEE INCOME RECOGNITION AND RELATED COSTS
Development fees are received from facility owners under fixed-price
development contracts, which are recognized on the percentage-of-completion
method measured by the cost-to-cost method. Such contracts are for managing,
supervising and coordinating the activities of other contractors on behalf of
the owners of the assisted living facilities, and revenue is recognized only to
the extent of the fee revenue. On projects where BCC is the lessee, development
fees in excess of related development costs are recorded as deferred revenues
and recognized over the lease term (see Note 3).
Contract costs include direct development salaries, wages and benefits and
related direct costs of development activities, including such costs incurred
prior to execution of the development agreement (precontract costs). Precontract
costs are recorded as development in process until the contract is executed,
whereupon such costs are charged to operations and related development fee
revenues are recognized as described above. Precontract costs are reviewed by
management to assess recoverability based on the progress of each development
project and are charged to operations when a project is abandoned. Changes in
project performance, conditions and estimated profitability may result in
revisions to cost estimates, related revenue recognition and provisions for
estimated losses on uncompleted contracts. Such changes in estimates are
reported in the period in which the revisions are determined.
Reimbursable costs due from facility owners under development contracts in
process represent costs incurred on behalf of the owners of the assisted living
facilities during the construction period, which are reimbursed on a monthly
basis. Accounts payable include $131,000 at June 30, 2000 and $5,864,000 at June
30, 1999 related to such costs.
(l) INCOME TAXES
The Company follows the asset and liability method of accounting for income
taxes. Under this method, deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases.
(m) STRAIGHT-LINE LEASE LIABILITY
Straight-line lease liabilities represent lease deposit funding received
from REITs relating to lease transactions. The Company pays rent on these funds
and amortizes the related straight-line lease liability over the initial lease
term as a reduction of rent expense.
(n) CLASSIFICATION OF EXPENSES
All expenses associated with development, corporate or support functions
are classified as development, general and administrative.
(o) USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions. These assumptions affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these estimates.
53
<PAGE> 54
(p) EARNINGS (LOSS) PER SHARE ("EPS")
Earnings (loss) per share is computed using the weighted average number of
common shares and common equivalent shares outstanding (using the treasury stock
method) assuming the pro forma conversion of preferred shares into common. For
the years ended June 30, 2000 and 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):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------
2000 1999 1998
------ ------ ------
<S> <C> <C> <C>
Weighted average common shares outstanding.................. 26,517 16,713 6,996
Pro forma conversion of preferred shares.................... -- -- 4,620
------ ------ ------
Shares used for pro forma basic EPS......................... 26,517 16,713 11,616
Stock options and warrants converted using the Treasury
stock method.............................................. -- -- 1,312
------ ------ ------
Shares used for pro forma diluted EPS....................... 26,517 16,713 12,928
====== ====== ======
</TABLE>
(q) RECLASSIFICATIONS
Certain amounts for 1999 and 1998 have been reclassified to conform to the
presentation for 2000.
2. BUSINESS ACQUISITIONS
Acquisitions and the manner of payment are summarized as follows (dollars
in thousands):
<TABLE>
<CAPTION>
COMMON
TRANSACTION LEASED CASH STOCK LIABILITIES TOTAL GOODWILL
MONTH DESCRIPTION OR OWNED BUSINESS LOCATION PAID ISSUED INCURRED COST RECORDED
----- ------------------ -------- -------- -------- ------- ------ ----------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
YEAR ENDED JUNE 30, 2000:
December 1999 Stock of 7 leased
Special Purpose
Entities(3) Leased ALF Various $ 1,894 $-- $ -- $ 1,894 $ --
May 2000 Stock of 10 leased
Special Purpose
Entities(3) Leased ALF Various 1,643 -- -- $ 1,643 --
------- -- ------- ------- -------
$ 3,537 $-- $ -- $ 3,537 $ --
======= == ======= ======= =======
</TABLE>
54
<PAGE> 55
<TABLE>
<CAPTION>
COMMON
TRANSACTION LEASED CASH STOCK LIABILITIES TOTAL GOODWILL
MONTH DESCRIPTION OR OWNED BUSINESS LOCATION PAID ISSUED INCURRED COST RECORDED
----- ------------------ -------- -------- -------- ------- ------ ----------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
YEAR ENDED JUNE 30, 1999:
September 1998 Additional
transaction
costs -- Potomac
Point Leased ALF VA $ 45 $-- $ -- $ 45 $ 45
January 1999 Contingent
payment --
Butler(2) Owned ALF PA 2,222 -- -- 2,222 2,222
March 1999 Equity interest of
Extended Care Ops.
at Harrisburg,
LLC(3) Leased ALF PA 865 -- -- 865 --
April 1999 Stock of TC Realty
of Sherwood,
Inc.(3) Leased ALF AR 386 -- -- 386 --
April 1999 Stock of TC Realty
of Mt. Home,
Inc.(3) Leased ALF AR 451 -- -- 451 --
May 1999 Stock of TC Realty
of Reading,
Inc.(3) Leased ALF PA 627 -- -- 627 --
May 1999 Stock of TC Realty
of Altoona,
Inc.(3) Leased ALF PA 558 -- -- 558 --
Various Cash payments of
acquisition
liabilities
accrued in 1998 1,572 -- (1,572) -- --
------- -- ------- ------- -------
$ 6,726 $-- $(1,572) $ 5,154 $ 2,267
======= == ======= ======= =======
YEAR ENDED JUNE 30, 1998:
August 1997 Leasehold interest
of Clark Leased ALF MO $ -- $-- $ -- $ -- $ --
October 1997 Assets of Feltrop Owned ALF PA 5,875 -- -- 5,875 1,597
October 1997 Assets of
Butler(2) Owned ALF PA 9,997 -- 372 10,369 4,046
December 1997 Assets of
Northridge Owned ALF NC 8,600 -- -- 8,600 3,349
January 1998 Assets of
Gethsemane Owned ALF/SNF PA 5,600 -- 1,200 6,800 1,824
February 1998 Contingent
Payment --
Keystone(1) Leased ALF/SNF PA 500 -- -- 500 500
June 1998 Leasehold interest
of Potomac Point Leased ALF VA 41 -- -- 41 41
------- -- ------- ------- -------
$30,613 $-- $ 1,572 $32,185 $11,357
======= == ======= ======= =======
</TABLE>
---------------
(1) Purchase of the operations of Keystone in Fiscal 1997 included the rights to
seven early stage development projects. Additional cash payments of $500,000
were paid in Fiscal 1998 when the first five projects were financed and
recorded as additional goodwill.
(2) The agreement to purchase the assets of Butler Senior Care provided for an
additional payment if an addition (opened in January 1998) attained
occupancy of 90% based upon a multiple of net operating income, and a final
payment, based upon a multiple of Butler's annualized net operating income
for the six months ending December 31, 1998.
(3) Represents the acquisition under a purchase option agreement in which the
Company had the right to acquire the stock of the Operator/Lessee of managed
facilities.
All acquisitions were accounted for under the purchase method. The
acquisitions that took place from October 1997 through January 1998 were
financed with $29,675,000 in bridge financing from a REIT that was repaid with
proceeds of the initial public offering.
In Fiscal 2000 and 1999, the Company exercised its purchase options and
acquired the equity interests of certain Operator/Lessees, representing
primarily the leasehold interests of the special purpose entities formed to
lease and operate assisted living facilities in 17 locations in Fiscal 2000 and
five locations in Fiscal 1999.
55
<PAGE> 56
These facilities were developed and previously managed by the Company. The total
cost of $3,537,000 and $2,887,000 for Fiscal 2000 and 1999 (including prior
purchase option deposits of $1,561,000 and $538,000) has been allocated to the
assets acquired and liabilities assumed of the acquired entities, based on
estimated fair values, as follows (dollars in thousands):
<TABLE>
<CAPTION>
2000 1999
------- ------
<S> <C> <C>
Current assets (less cash acquired of $1,594 and $441)...... $ 1,865 $ 780
Property and equipment...................................... 485 61
Leasehold interests and other intangibles................... 2,916 2,583
Other assets................................................ 2,040 1,082
Current liabilities......................................... (2,045) (765)
Long-term liabilities....................................... (1,724) (854)
------- ------
$ 3,537 $2,887
======= ======
</TABLE>
The following unaudited summary, prepared on a pro forma basis, combines
the results of operations of the acquired and divested businesses (see Note 5)
with those of the Company as if the acquisitions and divestitures had been
consummated as of the beginning of the respective periods and after including
the impact of certain adjustments such as: amortization of goodwill,
depreciation on assets acquired, interest on acquisition financing and lease
payments on the leased facility (in thousands except for EPS):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------
2000 1999
-------- --------
<S> <C> <C>
Revenue..................................................... $ 48,812 $ 43,742
Expenses.................................................... 74,604 72,167
-------- --------
Net income (loss) before extraordinary charge............... $(25,792) $(28,425)
-------- --------
Pro forma diluted EPS before extraordinary charge........... $ (0.97) $ (1.70)
-------- --------
</TABLE>
The unaudited pro forma results are not necessarily indicative of what
actually might have occurred if the acquisitions and divestitures had been
completed as of July 1, 1999 and 1998, respectively. In addition, they are not
intended to be a projection of future results of operations.
3. DEVELOPMENT ACTIVITIES
The Company is an operator, developer and manager of assisted living
facilities. The Company's development projects have generally involved entering
into development agreements with third party owners, which are typically real
estate investment trusts ("REITs") (each, an "Owner"), whereby the Company
receives development fees for the design and development services provided to
the owners. An independent third party company (the "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. These fees are
subordinate to any rent payments made by the operator/lessee to the facility
owner. The Company has the option (but not the obligation) to purchase the stock
or assets of the operator/lessee pursuant to a related option agreement (see
Note 17).
The Company incurs substantial development costs prior to executing the
development agreement (precontract costs). Such costs relate to market analysis
and evaluation, site selection and land control, obtaining architectural and
engineering reports, preparing development plans and obtaining zoning and other
56
<PAGE> 57
governmental approvals and permits relating to the building, sewer, water,
roads, utilities, etc. Development contracts in process at June 30, 2000 and
1999 are summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
2000 1999
---- -------
<S> <C> <C>
Precontract costs.......................................... $ -- $ 8,084
---- -------
Costs and estimated earnings of development contracts in
process.................................................. 336 10,761
Less billings to-date...................................... -- (7,706)
---- -------
336 3,055
---- -------
Less allowance for loss on termination of development
projects
(Note 10)................................................ -- (8,580)
---- -------
$336 $ 2,559
==== =======
</TABLE>
With respect to 11 facilities that have been developed and then leased by
the Company, development fees of $973,000 were deferred and amortized over the
initial term of the lease as a reduction of rent expense. In Fiscal 1998, the
Company sold certain assets and its leasehold rights related to these 11
facilities to newly formed special purpose entities for $2,645,000 and entered
into management agreements with such entities. The Company had options to
acquire the leasehold interests in those facilities. The gain on such sale of
$922,000 has also been deferred and is being amortized to operations over five
years, the term of the management agreement. In Fiscal 2000 and 1999, the
Company exercised its option to acquire leasehold interests of certain
facilities. Deferred gains of $105,000 and $436,000 in Fiscal 2000 and 1999,
respectively, have been applied to reduce the carrying value of such interests
(see Note 2). At June 30, 2000 and 1999, unamortized development fees and gains
were $803,000 and $1,040,000, respectively.
4. RECEIVABLES AND CONCENTRATION OF BUSINESS AND CREDIT RISK
Receivables consist of the following at June 30, 2000 and 1999 (dollars in
thousands):
<TABLE>
<CAPTION>
2000 1999
-------- -------
<S> <C> <C>
Accounts receivable -- patients and residents........... $ 5,866 $ 8,480
-------- -------
Contracts receivable:
Development fees...................................... 666 1,200
Reimbursable costs due from facility owners........... 2,039 3,085
-------- -------
2,704 4,285
-------- -------
Advances to Operator/Lessees............................ 9,973 7,949
-------- -------
Total receivables............................. 18,543 20,714
-------- -------
Less: allowance for doubtful receivables................ (3,411) (2,352)
allowance for losses on development activities and
shortfall funding agreements (Notes 10 and 11).... (10,048) (6,450)
-------- -------
Net receivables............................... $ 5,085 $11,912
======== =======
</TABLE>
Historically, the Company has received payment for a significant portion of
services rendered to patients from the federal government under Medicare and
from the states in which its facilities and/or services are located under
Medicaid. As a result of the divestiture of the Missouri operations in January
2000, coupled with the acquisitions in Fiscal 2000 of 17 assisted living
operations which it previously managed, the Company has experienced a notable
decline in the percentage of revenue's derived from government-reimbursed
programs. For Fiscal 2000, the Company derived approximately 19% its gross
patient revenues from Medicare and approximately 53% of its gross patient
revenues from Medicaid. For the years ended June 30, 1999 and 1998, the Company
derived approximately 26% and 43% of its gross patient revenues from Medicare,
respectively, and approximately 48% and 37% of its gross patient revenues from
Medicaid, respectively.
57
<PAGE> 58
Historically, a substantial portion of the Company's facilities were
located in Pennsylvania and Missouri. Operating revenues attributable to the
Company's business in those states accounted for approximately 83% and 92% of
the Company's total operating revenues for the years ended June 30, 2000 and
1999, respectively. Currently, a substantial portion of the Company's business
is located in Pennsylvania, as a result of the divestiture of the Missouri
operations. In Fiscal 2000, operating revenues attributable to the Company's
business in Pennsylvania accounted for approximately 74% of total operating
revenue, excluding the Missouri operations. Until the Company's operations
become more geographically diverse, the Company will be more susceptible to
downturns in local and regional economies and changes in state or local
regulation because such conditions and events could affect a relatively high
percentage of the total number of facilities currently in operation and under
development. As a result of such factors, there can be no assurance that such
geographic concentration will not have a material adverse effect on the
Company's business, results of operations or financial condition.
5. DIVESTITURES
On January 12, 2000, the Company completed the sale of its Missouri assets
to Christian Health Care of Missouri, Inc. and certain of its affiliates
(collectively, "CHM") pursuant to an Asset Purchase Agreement dated October 15,
1999 (as amended, the "Asset Purchase Agreement"). The Company sold its
leasehold interests in eight skilled nursing facilities and nine assisted and
independent living facilities, together with the operations of those facilities
including a home health agency. The Company sold its real property interests and
operations in two skilled nursing facilities.
The aggregate consideration paid by CHM to the Company for the assets was
(i) $51,000,000 in assumed lease obligations, (ii) $6,675,000 in cash, (iii)
$525,000 pursuant to a First Promissory Note dated January 12, 2000 (the "First
Promissory Note"), and (iv) $2,000,000 pursuant to a Second Promissory Note
dated January 12, 2000 (the "Second Promissory Note"). The aggregate
consideration was determined based on arms' length negotiations.
In 1996, Meditrust Mortgage Investments, Inc. (together with its
affiliates, "MT") loaned $41,385,000 (the "Hawthorn Loan") to Hawthorn Health
Properties, Inc. and its subsidiaries (collectively, "HHP") pursuant to a Loan
Agreement dated August 30, 1996 (the "Hawthorn Loan Agreement") for HHP to
purchase seven skilled nursing facilities and three assisted/independent living
facilities (which constitute a portion of the facilities whose leasehold
interests were transferred to CHM). HHP simultaneously leased the facilities to
certain wholly-owned subsidiaries of the Company pursuant to those certain
Facility Lease Agreements dated August 30, 1996 (collectively, the "Facility
Lease Agreements").
The Company continues to have a contingent liability in connection with the
Hawthorn Loan made by Meditrust to HHP. The Hawthorn Loan is secured by a
guaranty made by the Company in favor of Meditrust (the "Guaranty"). However,
the Company's obligations under the Guaranty will automatically terminate upon
the occurrence of certain events as more specifically set forth in the
Termination Agreement dated as of January 12, 2000 between the Company, HHP and
Meditrust.
In May and August 1997, the Company entered into Lease and Security
Agreements (collectively, the "Lease and Security Agreements") with Health Care
Realty Trust (together with its affiliates, "HCRT") for four
assisted/independent living facilities (which constitute a portion of the
facilities whose leasehold interests were transferred to CHM). In order to
induce HCRT to consent to the transfer of the leasehold interests of these four
facilities to CHM, the Company was required to remain as guarantor of CHM's
lease obligations pursuant to the Guaranties previously given by the Company in
1997 with respect to the Lease and Security Agreements.
Due to the Company's existing commitments and guarantees, the Company has
recorded a net deferred gain on the Missouri Divestiture in the amount of $2.0
million. The net deferred gain will be amortized into income as the Company's
continuing commitments in the transaction, in the form of notes receivable and
guaranties, expire.
58
<PAGE> 59
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 at June 30, 1998. The sale resulted in a loss of $200,000 in Fiscal 1999.
In October 1997, the Company completed the sale of its pharmacy operations
for net proceeds of approximately $4,700,000. The pharmacy was classified as an
asset held for sale at June 30, 1997. The sale resulted in a gain of $2,858,000
in Fiscal 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. The net
proceeds from the sale of the two facilities was $8,901,000. The leases have an
initial term of 15 years with three renewal terms: two of five years and one for
four years 11 months. The annual lease rate is 10.25%. The sale resulted in a
loss of $102,000 in Fiscal 1999.
7. PROPERTY AND EQUIPMENT
Property and equipment are comprised of the following as of June 30
(dollars in thousands).
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIFE 2000 1999
----------- ------- -------
<S> <C> <C> <C>
Land and land improvements........................... 2 - 15 yrs $ 7,741 $ 1,566
Buildings and improvements........................... 2 - 40 yrs 57,396 13,871
Fixed and moveable equipment......................... 3 - 20 yrs 17,743 9,267
Leasehold interests.................................. 20 yrs 1,868 2,149
------- -------
84,748 26,853
Less: accumulated depreciation....................... (4,870) (2,778)
------- -------
$79,878 $24,075
======= =======
</TABLE>
Depreciation expense was $2,986,000 in Fiscal 2000, $1,571,000 in Fiscal
1999 and $1,689,000 in Fiscal 1998. At June 30, 2000 and 1999, property and
equipment include approximately $3,035,000 and $1,090,000 of assets that have
been capitalized under capital leases. Amortization of the leased assets is
included in depreciation and amortization expense.
On December 30, 1999, the Company and 12 of its subsidiaries (collectively
the "Subsidiaries"), IPC and New Meditrust Company LLC ("Meditrust"), entered
into a Memorandum of Understanding (the "Memorandum of Understanding"), under
which the Subsidiaries acquired the real property, improvements, furniture,
fixtures and equipment of twelve Outlook Pointe(R) assisted living facilities
(collectively, the "Tranche One Properties"). The aggregate purchase price for
the Tranche One Properties was $52,231,911 (the "Tranche One Purchase Price"),
which was determined based on arms' length negotiations. The Tranche One
Purchase Price was paid as follows: (a) $44,420,857 in cash by the Company (the
"Cash Portion") and (b) $7,811,054 pursuant to a Promissory Note dated as of
December 30, 1999, as amended (the "Meditrust Note") made jointly by the Company
and IPC in favor of Meditrust.
The Cash Portion of the Tranche One Purchase Price was funded as follows:
(a) $5,420,857 in cash by the Company, (b) $32,000,000 in the form of a loan
with Heller Healthcare Finance, Inc., and (c) a $7,000,000 discount note with
FRR Investments Limited (see Note 8).
In connection with the foregoing, the Company, IPC and Meditrust also
entered into an Option Agreement dated as of December 30, 1999, as amended (the
"Option Agreement"), pursuant to which the Company and IPC have the right, but
not the obligation (the "Option"), to designate various nominees to acquire the
real property, improvements, furniture, fixtures and equipment of an additional
twelve Outlook Pointe(R) assisted living facilities (collectively, the "Tranche
Two Properties"). The Option is jointly exercisable by the Company and IPC.
59
<PAGE> 60
With respect to eight of the 12 Tranche Two Properties (the "First Group"),
the Company may exercise the Option from and including January 2, 2000 through
and including October 13, 2000. The Company may only exercise the Option with
respect to three or more of the First Group of properties. The aggregate
purchase price for the First Group is approximately $30,600,000. Closing on the
Option for the First Group must occur within thirty days after the date on which
the Option is exercised by the Company. The Company's ability to exercise the
Option on the First Group on or before October 13, 2000 is dependent on the
Company obtaining financing on acceptable terms. With respect to the four
remaining Tranche Two properties (the "Second Group"), the Company may exercise
the Option from and including January 2, 2000 through and including March 3,
2001. The Company may only exercise the Option with respect to all of the Second
Group. The aggregate purchase price of the Second Group is approximately
$14,900,000. The Company's ability to exercise the Option on the Second Group of
Tranche Two Properties on or before March 3, 2000 is dependent on the Company
obtaining financing on acceptable terms.
If the Company exercises its Options with respect to either the First Group
or the Second Group of Tranche Two properties, the exercise is irrevocable. If
the Company exercises but fails to close, Meditrust may (i) accelerate the
amount due under the Meditrust Note, (ii) receive reimbursement of all
reasonable out-of-pocket expenses (including attorneys' fees and expenses) and
(iii) terminate the Option Agreement.
8. LONG-TERM DEBT
Long-term debt consisted of the following as of June 30 (dollars in
thousands):
<TABLE>
<CAPTION>
2000 1999
------- -------
<S> <C> <C>
Mortgage payable, interest at 10.7%; principal and interest
due monthly through August 2006 based on 30-year
amortization; unpaid principal and interest due August
2006. Paid in full in July 1999........................... $ -- $ 3,086
Promissory note payable, interest at 12% from November 2,
2000 through December 31, 2000 and 14% January 1, 2001
through April 3, 2001; principal balance due April 3,
2001...................................................... 7,811 --
Discount note payable of $3,159 less unamortized debt
discount of $159; yield at 11.0% per annum; principal and
accumulated interest due and payable on the earlier to
occur of the closing on at least $10,000 in convertible
debentures or December 22, 2000........................... 3,000 --
Discount note payable of $7,378 less unamortized debt
discount of $378; yield at 11.0% per annum; principal and
accumulated interest due and payable on the earlier to
occur of the closing on at least $7,000 in convertible
debentures or December 22, 2000........................... 7,000 --
Revolving line of credit, interest at the prevailing prime
rate plus 2.75%; interest due monthly through July 2002... 10,879 7,421
Promissory notes payable, interest at LIBOR plus 3.75%;
interest due monthly through December 2001; principal and
any accumulated unpaid interest due December 31, 2001..... 37,000 --
Other (including capital lease obligations)................. 4,079 1,716
------- -------
69,769 12,223
Less: current portion....................................... 8,888 450
------- -------
$60,881 $11,773
======= =======
</TABLE>
The mortgage payable was incurred for the acquisition of two Missouri
nursing homes. The mortgage note was collateralized by the facilities' property
and equipment. The Company issued a warrant to purchase approximately 460,000
shares of common stock exercisable at $.001 per share in connection with this
financing. The value of the warrant of approximately $613,676 ($1.33 per share)
had been recorded as a deferred financing cost and a corresponding non-cash
increase in additional paid-in capital. In July 1999, the
60
<PAGE> 61
Company repaid its $3.1 million loan to satisfy the existing mortgage on this
real estate. As a result of this transaction, the Company reported a loss on the
early extinguishment of debt of $739,000.
On December 31, 1999, in conjunction with the Tranche One purchase, the
Company and IPC entered into a $7.8 million promissory note with Meditrust (the
"Meditrust Note"). The Meditrust Note has a maturity date of April 3, 2001.
Interest will accrue as follows: (i) 12% from November 1, 2000 through December
31, 2000 and (ii) 14% from January 1, 2001 through April 3, 2001.
In June 2000 the Company executed two discounted promissory notes (the "RCW
Notes") totaling $10 million in favor of RCW Overseas Limited ("RCW") each
bearing an annual yield of 11%. A portion of the proceeds from the RCW Notes
were used to repay a $7.4 million discount note obtained in connection with the
Tranche One purchase (the "FRR Note"). The outstanding principal balance plus
accumulated interest under the RCW Notes in the amount of $10.1 million was paid
to RCW on August 1, 2000, which fully discharged the Company's obligations
thereunder (see Note 19).
In April 1999, the Company entered into a $15 million revolving Line of
Credit (increased to $20 million in July 1999). The Line of Credit was for a
term of three years, and outstanding borrowings bear interest at a rate per
annum of prime plus 2.75%. Prior to July 1999, the Line of Credit was secured by
the real estate owned by five of the Company's subsidiaries, and the eligible
accounts receivable of the Company's 10 Missouri skilled nursing facilities (the
"Accounts Receivable Borrower"). In July 1999, the real estate of two of the
Company's Missouri skilled nursing facilities (the "Skilled Nursing Facility
Borrowers") was added as security to collateralize the Line of Credit. On
January 12, 2000, the Company completed the sale of its Missouri assets which
included the real estate, leasehold interests and operations of the Skilled
Nursing Facility Borrowers and the Accounts Receivable Borrowers (the "Missouri
Borrowers"). In order for the Line of Credit Lender to release the Missouri
Borrowers and their respective liens and security interests under the Line of
Credit, the Company repaid $5.4 million on the Line of Credit attributable to
the Missouri Borrowers. As a result, the availability under the Line of Credit
was reset to $12.0 million as of December 31, 1999.
On December 31, 1999, in conjunction with the Tranche One purchase
discussed in Note 7, the Company obtained a $32 million loan (the "$32 million
Heller Loan") from Heller under a loan agreement dated December 30, 1999 (the
"Heller Loan Agreement"). The $32 million Heller Loan has a maturity date of
December 31, 2001. Interest on the $32 million Heller Loan accrues at a floating
rate per annum equal to the Base Rate (as defined in the Heller Loan Agreement)
plus 3.75%. Commencing on February 1, 2000, the Company will pay interest
monthly in arrears. In addition, commencing on November 20, 2000, the Company
will pay 100% of the Excess Cash Flow (as defined in the Heller Loan Agreement),
which will be applied to the principal balance. Although the $32 million Heller
Loan has a two-year term, the exit fee due upon pay off increases from 1% to 3%
after September 30, 2000. The Company's obligations under the $32 million Heller
Loan are cross-defaulted with its obligations under the Line of Credit.
On April 27, 2000, the Company and Heller agreed to increase the $32
million Heller Loan by $5 million to $37 million. The $37 million loan is made
to the Company by Heller on the same terms and conditions, and uses the same
collateral, as the original $32 million Heller Loan. The proceeds from the $5
million increase provided the ongoing working capital required for operations of
the Company.
At June 30, 2000, the aggregate maturities of long-term debt for the next
five Fiscal years ending June 30 are as follows (dollars in thousands):
<TABLE>
<S> <C>
2001....................................................... $ 8,888
2002....................................................... 48,761
2003....................................................... 704
2004....................................................... 623
2005....................................................... 144
Thereafter................................................. 10,649
-------
$69,769
=======
</TABLE>
61
<PAGE> 62
9. WARRANTS
The Company has outstanding warrants to purchase common shares as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Balance at June 30, 1997......................... 937,867 $0.62
Granted.......................................... 47,750 8.58
Exercised........................................ -- --
--------- -----
Balance at June 30, 1998......................... 985,617 1.00
Granted.......................................... 33,750 4.59
Exercised........................................ -- --
--------- -----
Balance at June 30, 1999......................... 1,019,367 1.12
Granted.......................................... 346,400 1.51
Exercised........................................ (750,000) 0.00
--------- -----
Balance at June 30, 2000......................... 615,767 $2.70
========= =====
</TABLE>
10. PROVISION FOR LOSSES ON DEVELOPMENT ACTIVITIES
As a result of the volatility in the capital markets and the significant
reduction in REIT financing available for new assisted living construction in
Fiscal 1999, the Company was not able to obtain financing on acceptable terms to
continue development of its Outlook Pointe(R) signature series assisted living
facilities. As a result, the Company decided to substantially reduce its
development activities with respect to new sites and projects and to emphasize
the focus of management's efforts on the operations of existing facilities and
facilities under construction. Consequently, in Fiscal 1999, the Company
recorded a provision for losses on development activities of $13,050,000, which
was based on management's evaluation of assets related to various projects that
were deemed to be inconsistent with the Company's future plans. Such provision
included $3,170,000 primarily related to development fees on abandoned projects
and $9,880,000 primarily related to termination of development projects in the
precontract phase. In Fiscal 2000, the Company recorded a provision for losses
on development activities of $1,650,000. The provision was a result of
unexpected construction and licensing delays on certain projects and the breach
of contract by one contractor who filed for bankruptcy protection prior to the
completion of three development projects.
11. PROVISION FOR LOSSES UNDER SHORTFALL FUNDING AGREEMENTS
As previously discussed, the Company manages certain assisted living
facilities owned by REITs and leased to special purpose entities (the
"Operator/Lessees"), which are owned by independent third parties. In connection
with these transactions, the Company has entered into shortfall funding
agreements, whereby the Company has agreed to make loans to the Operator/Lessees
if the funds provided by the equity and working capital loans of the
Operator/Lessees are depleted by negative cash flows from start-up operations of
the facilities.
During the years ended June 30, 2000 and 1999, the Company recorded losses
of $5,750,000 and $4,660,000, 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 the Company's receivables on advances to the 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.
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<PAGE> 63
12. PROVISION FOR SEVERANCE COSTS
In connection with the downscaling of development activities related to the
Company's Outlook Pointe(R) signature series assisted living facilities
discussed above, management adopted a corporate personnel reduction plan
affecting certain departments and staff positions. This plan was enacted in
February 1999 and resulted in a charge for severance costs of approximately
$1,600,000 in Fiscal 1999, representing the estimated costs of employee
terminations and related costs.
13. INCOME TAXES
The provision for income taxes for the years ended June 30, 2000, 1999 and
1998 consists of the following (dollars in thousands):
<TABLE>
<CAPTION>
2000 1999 1998
---- ----- ----
<S> <C> <C> <C>
Current
Federal................................................... -- -- --
State..................................................... $5 $ 83 $ 42
-- ----- ----
Total Current............................................... $5 $ 83 $ 42
-- ----- ----
Deferred
Federal................................................... -- $(557) $557
State..................................................... -- $ (81) $ 81
-- ----- ----
Total Deferred.............................................. -- $(638) $638
-- ----- ----
Total Income Tax Expense.................................... $5 $(555) $680
== ===== ====
</TABLE>
A reconciliation of income tax expense at the federal statutory rate of 34%
to the Company's effective tax rate is as follows:
<TABLE>
<CAPTION>
2000 1999 1998
----- ----- -----
<S> <C> <C> <C>
Income taxes computed at statutory rate..................... (34.0)% (34.0)% 34.0%
State income taxes, net of federal benefit.................. -- -- 1.9
Basis difference on assets sold............................. 2.6 -- 14.0
Other....................................................... 4.2 (5.2) 15.3
Valuation allowance adjustment.............................. 27.2 36.9 (49.2)
----- ----- -----
Effective tax rate.......................................... 0.0% (2.3)% 16.0%
===== ===== =====
</TABLE>
Temporary differences giving rise to significant deferred tax assets and
liabilities at June 30, 2000 and 1999 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
2000 1999
------- -------
<S> <C> <C>
Excess tax over book basis of fixed assets............... $ 664 $ 995
Development fee income................................... 76 2
Lease proceeds........................................... (494) (236)
Accrued expenses......................................... (2,854) (1,554)
Net operating loss carryover............................. (3,515) (6,888)
Other.................................................... (1,524) (1,252)
------- -------
Net deferred tax liability (asset)..................... (7,647) (8,933)
Valuation allowance...................................... 7,647 8,933
------- -------
Deferred income tax liability............................ $ -- $ --
======= =======
</TABLE>
The Company has net operating loss carryforwards at June 30, 2000 available
to offset future federal and state taxable income, if any, of approximately
$7,811,000, expiring in 2020. The net operating losses may
63
<PAGE> 64
become subject to limits on their future utilization under federal and state tax
laws. A valuation allowance is provided when it is more likely than not that
some portion or all of the deferred tax assets will not be realized. The Company
is in a cumulative pretax loss position since inception. Recognition of deferred
tax assets will require generation of future taxable income. There can be no
assurance that the Company will generate any earnings or any specific level of
earnings in future years. Therefore, the Company established a valuation
allowance on deferred tax assets of approximately $7,647,000 as of June 30,
2000. The change in the valuation allowance for deferred tax assets was a
decrease of $1,286,000 in Fiscal 2000 and an increase of $8,933,000 in Fiscal
1999.
14. RETIREMENT PLAN
On January 1, 1998 the Company formed a 401(k) savings plan which covers
substantially all employees with one year and more than 1,000 hours of service.
The plan allows employees to make tax deferred contributions to the plan. The
Company makes matching contributions based on the amount of employee
contributions; but in an amount that does not exceed 2% of wages. Matching
contributions totaled $138,000, $166,000 and $64,000 for the years ended June
30, 2000, 1999 and 1998, respectively.
15. STOCK OPTIONS
The 1996 Stock Incentive Plan (the "1996 Plan") combines the features of an
incentive and non-qualified stock option plan, a stock appreciation rights
("SAR") plan and a stock award plan (including restricted stock). The 1996 Plan
is a long-term incentive compensation plan and is designed to provide a
competitive and balanced incentive and reward program for participants.
The Company has authorized 3,025,000 shares of common stock to be reserved
for grants under the 1996 Plan. Options generally vest over a four-year period
in cumulative increments of 25% each year beginning one year after the date of
the grant. In Fiscal 1999, the expiration period was increased from not later
than five years to not later than 10 years from the date of grant. The options
are granted at an exercise price at least equal to the fair market value of the
common stock on the date of the grant.
At June 30, 2000, the range of exercise prices, weighted average remaining
contractual life of outstanding options and shares exercisable were as follows:
<TABLE>
<CAPTION>
OUTSTANDING WEIGHTED-AVERAGE SHARES
EXERCISE PRICE OPTIONS CONTRACTUAL LIFE EXERCISABLE
-------------- ----------- ---------------- -----------
<S> <C> <C> <C>
$1.00 - 1.99 209,400 9.25 yrs 80,000
$2.00 - 2.99 1,389,875 7.95 yrs 512,910
$3.00 - 4.99 37,500 7.01 yrs 37,500
$5.00 - 5.99 512,700 4.63 yrs 289,740
$6.00 - 6.99 208,364 5.99 yrs 152,273
$7.00 - 8.99.. 95,375 8.05 yrs 46,313
--------- ---------
2,453,214 1,118,736
========= =========
</TABLE>
64
<PAGE> 65
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED-AVERAGE
STOCK OPTION TRANSACTIONS ARE SUMMARIZED AS FOLLOWS: SHARES EXERCISE PRICE
---------------------------------------------------- --------- ----------------
<S> <C> <C>
Balance at June 30, 1997.......................... 987,175 4.15
Granted......................................... 473,554 6.50
Exercised....................................... -- --
Forfeited....................................... (57,581) (6.15)
--------- ------
Balance at June 30, 1998.......................... 1,403,148 $ 4.85
Granted......................................... 1,560,500 3.75
Exercised....................................... (27,503) (3.32)
Forfeited....................................... (212,397) (5.59)
--------- ------
Balance at June 30, 1999.......................... 2,723,748 $ 4.20
Granted......................................... 692,900 2.13
Exercised....................................... -- --
Forfeited....................................... (963,434) (4.53)
--------- ------
Balance at June 30, 2000.......................... 2,453,214 3.49
========= ======
</TABLE>
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its 1996 Plan and, accordingly, no compensation cost has been
recognized for its stock options in the financial statements. Had the Company
determined compensation cost based on the fair value at the grant date for its
stock options as allowed under SFAS No. 123, Accounting for Stock Based
Compensation, the Company's net income (loss) and per share amounts would have
changed to the pro forma amounts indicated below.
<TABLE>
<CAPTION>
2000 1999 1998
-------- ------- -----
<S> <C> <C> <C>
Net Income (Loss)
As reported.......................................... $(21,589) (23,637) 3,575
Pro forma............................................ (22,493) (24,931) 3,204
Pro forma Basic EPS
As reported.......................................... (0.81) (1.41) 0.31
Pro forma............................................ (0.85) (1.49) 0.28
Pro forma Diluted EPS
As reported.......................................... (0.81) (1.41) 0.28
Pro forma............................................ $ (0.85) (1.49) 0.25
</TABLE>
The fair value of employee options for purposes of the above pro forma
disclosure was estimated on the date of grant using the Black-Scholes Multiple
Pricing Model. Assumptions used for options issued during the year ended June
30, 1999, and all prior options were as follows:
<TABLE>
<CAPTION>
2000 1999 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
Risk-free interest rate.......... 5.5% to 6.0% 5.5% to 6.0% 5.5% to 6.0%
Expected life.................... 1 year after vest 1 year after vest 1 year after vest
Expected volatility.............. .75 .65 .42
Expected dividends............... -- -- --
</TABLE>
These assumptions produced weighted average fair values per option of a
range of $0.39 to $1.71 for options issued in Fiscal 2000 and a range of $0.88
to $3.20 for options issued in Fiscal 1999 and a range of $0.85 to $3.97 for
options issued in Fiscal 1998. All options issued during these periods were
granted at an exercise price at, or in excess of, the fair market value on the
grant date.
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<PAGE> 66
16. RELATED PARTY TRANSACTIONS
The Company had the following related party transactions:
- See Note 19 for related party transactions with IPC.
- 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 was 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 were similar
to the terms of the agreements the Company had entered into with
independent third party Operator/Lessees. Effective September 30, 1999,
FCI redeemed Mr. Hollinger's equity interests for nominal consideration
and sold the equity interests to a group of third party investors.
- Rental payments made to companies owned by a stockholder/director for the
lease of two assisted facilities and a regional headquarters. Management
fees paid to a company owned by the same stockholder/director for
managing ten skilled nursing facilities owned or leased by the Company.
On July 1, 1997, the Company purchased the assets and operations of this
management company for approximately $120,000.
- Respiratory therapy supplies and management fees paid to a company owned
by a stockholder/ director.
- Legal services provided by a relative of a stockholder/officer and
consulting services provided by two stockholders/directors.
- Rental payments to a company owned by two minority stockholders for the
lease of seven skilled nursing facilities.
A summary of those transactions for the periods ended June 30 follows
(dollars in thousands):
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ------
<S> <C> <C> <C>
Rentals..................................................... $115 $435 $ 415
Management fees............................................. -- -- 15
Respiratory therapy......................................... -- -- 152
Legal & consulting services................................. 118 101 227
Skilled nursing facility rentals............................ -- -- 4,627
Interest.................................................... 425 -- --
</TABLE>
17. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases 19 assisted living facilities and three skilled nursing
facilities, as well as certain equipment and office space under noncancellable
operating and capital leases that expire at various times through 2014. Rental
expense on such operating leases for the years ended June 30, 2000, 1999 and
1998 was $10,324,000, $10,715,000 and $9,442,000, respectively.
66
<PAGE> 67
Future annual minimum lease payments for the next five years and thereafter
under noncancellable operating leases with initial terms of one year or more in
effect at June 30, 2000, are as follows (dollars in thousands):
<TABLE>
<CAPTION>
OPERATING
FISCAL YEAR LEASES
----------- ---------
<S> <C>
2001........................................................ $ 12,781
2002........................................................ 12,503
2003........................................................ 12,329
2004........................................................ 12,299
2005........................................................ 12,297
Thereafter.................................................. 54,859
--------
Total Minimum Lease Payments................................ $117,068
========
</TABLE>
The operating lease agreements require the payment of additional rent
commencing in the second lease year utilizing various contingent factors to
calculate the increase. In addition, most of the facility leases have renewal
options for periods ranging from 5 years to 24 years after the initial lease
period. Contingent lease payments made during the year ended June 30, 2000, 1999
and 1998 were $491,000, $236,000 and $104,000, respectively.
MANAGEMENT AGREEMENTS
As discussed in note 3, the Company manages certain assisted living
facilities owned by REITs and leased to special purpose entities owned by
independent third parties. The Company has the option (but not the obligation)
to purchase the stock or assets of the operator/lessee pursuant to an option
agreement at an exercise price based on formulas set forth in the agreements.
Certain option agreements require the Company to make periodic payments to
maintain its option. At June 30, 2000, the Company had purchase option deposits
of $4,296,000, which expire at various dates during Fiscal 2001. In Fiscal 2000,
the Company expensed $592,000 of purchase option payments in connection with the
expiration or renewal of such agreements. Pursuant to shortfall funding
agreements, the Company has agreed to make loans to the operator/ lessees if the
equity and working capital loans of the operator/lessee are depleted by negative
cash flows from start up operations of the facilities. The Company incurred a
charge of $5,750,000 in Fiscal 2000 and $4,660,000 in Fiscal 1999 in connection
with shortfall funding agreements.
GUARANTY
See Note 5 for information concerning the Company's commitment related to
the sale of the Missouri facilities.
LITIGATION
The Company is a party to various claims, legal actions and complaints
arising in the ordinary course of business. In the opinion of management, all
such matters are without merit or are of such a kind, or involve such amounts,
that their unfavorable disposition would not have a material effect on the
financial position, results of operations or the liquidity of the Company.
18. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. This statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. The accounting for changes in the fair value of a derivative
depends on the intended use of the derivative and
67
<PAGE> 68
the resulting designation. If certain conditions are met, a derivative may be
specifically designated as (a) a hedge of exposure to changes in the fair value
of a recognized asset or liability or an unrecognized firm commitment, (b) a
hedge of the exposure to variable cash flows of a forecasted transaction, or (c)
a hedge of foreign currency exposures. In 1999, the Financial Accounting
Standards Board issued SFAS No. 137, Accounting for Derivative Instruments and
Hedging Activities -- Deferral of the Effective Date of SFAS No. 133. The
purpose of this statement is to delay the effective date of SFAS No. 133. SFAS
No. 137 states that SFAS No. 133 will be effective for all fiscal quarters of
all fiscal years beginning after June 15, 2000. The adoption of this statement
is not expected to have a material impact on the Company's financial statements.
19. SUBSEQUENT EVENTS
On July 31, 2000, HR Investments Limited ("HR"), RH Investments Limited
("RH"), and VXM Investments Limited ("VXM" and together with HR and RH,
collectively, the "Holders", affiliates of IPC), each purchased at par from the
Company, 9.5% unsecured convertible grid debentures (as amended, collectively,
the "Debentures"), in an aggregate principal amount equal to $14,000,000. The
Debentures were purchased in accordance with the terms and conditions or
purchase agreements dated as of June 30, 2000 between the Company and each of
the Holders. Under the Debentures, the Holders have the right, at any time up to
and including the earlier to occur of the Early Termination Date and the
Maturity Date (as such terms are defined below), to convert all or any part of
the Debentures into Common Stock of the Company at the conversion rate of $2.00
per share (subject to adjustment as provided in the Debentures, the "Conversion
Rate"). The Debentures mature on July 1, 2005 (the "Maturity Date"). Interest
under the Debentures accrues at an annual rate of 9.5% and is due and payable
quarterly. The Company, at its option, may pay the interest in cash or in lieu
of payment, may add the interest amount payable to outstanding principal amount
of the Debentures, subject to certain conditions precedent. The Company may
terminate the Holders' conversion rights at any time after December 31, 2002 if
the average closing price per share of Common Stock of the Company for the 20
consecutive trading days ending five trading days preceding the date on which
the notice of termination is given to the Holders by the Company is not less
than 200% of the Conversion Rate (the "Early Termination Date"). The Holders
have no rights with respect to the election of the Company's board of directors
unless and until all or any portion of the Debentures are converted into Common
Stock, at which time the Holders will have the same rights, powers and
privileges as the other holders of the Company's Common Stock. Depending on when
(and if) the Debentures are converted and how the Company elects to pay
interest, the Holders could have the right to convert the Debentures into shares
of Common Stock equal to approximately 17% to 24.7% of the issued and
outstanding shares of the Company after giving effect to the transactions.
The Holders and IPC may be deemed to be an affiliated group within the
meaning of Section 13(d)(3) of the Exchange Act. On a combined basis, the
Holders and IPC (directly or indirectly) may be deemed to beneficially own
approximately 60.6% to 64.3% of the Common Stock of the Company depending on
when (and if) the Debentures are converted and how the Company elects to pay
interest.
A portion of the proceeds from the issuance of the Debentures was used to
repay the discount notes with RCW in the amount of $10,102,767.
In September 2000, the Company requested, and Heller agreed, to increase
the $37,000,000 Amended Heller Loan by $5,000,000 (the "Second Heller Loan
Increase") to $42,000,000 (the "$42,000,000 Heller Loan"). The Second Heller
Loan Increase was made to the Company by Heller on substantially the same terms
and conditions, and using the same collateral as the $37,000,000 Heller Loan,
except that the $5,000,000 is due and payable on November 15, 2000 and is
subject to an additional exit fee of $600,000 if not repaid by October 31, 2000.
Interest on the $5,000,000 accrues at prime plus 2%, and is due and payable in
arrears on November 15, 2000. Approximately $2,500,000 of the proceeds from the
Second Heller Loan Increase will provide working capital required for
operations. The remaining $2,500,000 will be placed into an interest bearing
reserve account to be used by Heller, at its discretion, to cure any past due
interest or other defaults that may arise from time to time while the
$42,000,000 Heller Loan is still outstanding. In addition, so long as there are
no defaults, the $2,500,000 reserve may be used by the Company to repay the
$5,000,000 by November 15, 2000.
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<PAGE> 69
20. SEGMENT REPORTING
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information. SFAS No. 131 establishes standards for the
way public business enterprises are to report information about operating
segments in annual and interim financial statements issued to shareholders. It
also establishes standards for related disclosures about products and services,
geographic areas and major customers.
In Fiscal 2000, the Company had three primary reportable segments: (i)
Resident Services which includes all assisted living and independent living
services, and the management of assisted living facilities, (ii) Patient
Services which includes skilled nursing services, home health services, and
medical rehabilitation services, and (iii) Development, General and
Administrative. No other individual business segment exceeds the 10%
quantitative thresholds of SFAS No. 131.
Balanced Care Corporation management evaluates the performance of its
operating segments on the basis of income from continuing operations before
non-recurring items (representing provisions for losses on development
activities and severance agreements and gains and losses on disposition of
assets, including purchase options), lease expense, interest (net), taxes,
depreciation and amortization.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 2000
------------------------------------------------------
DEVELOPMENT,
RESIDENT PATIENT GENERAL AND
SERVICES SERVICES ADMINISTRATIVE CONSOLIDATED
-------- -------- -------------- ------------
<S> <C> <C> <C> <C>
Revenues...................................... $32,205 $27,802 $ 742 $ 60,749
Facility Operating expenses................... 21,734 24,098 -- 45,832
Development, General and administrative
expenses.................................... -- -- 9,964 9,964
Provision for losses under shortfall funding
agreements.................................. 5,750 -- -- 5,750
------- ------- ------- --------
Income (loss) from continuing operations
before non-recurring and extraordinary
items, lease expense, interest (net), taxes,
depreciation and amortization............... $ 4,721 $ 3,704 $(9,222) $ (797)
======= ======= ======= ========
Total Assets.................................. $44,791 $ 121 $75,082 $119,994
======= ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1999
------------------------------------------------------
DEVELOPMENT,
RESIDENT PATIENT GENERAL AND
SERVICES SERVICES ADMINISTRATIVE CONSOLIDATED
-------- -------- -------------- ------------
<S> <C> <C> <C> <C>
Revenues...................................... $24,159 $47,999 $ 6,288 $78,446
Facility Operating expenses................... 15,128 42,390 -- 57,518
Development, General and administrative
expenses.................................... -- -- 12,781 12,781
Provision for losses under shortfall funding
agreements.................................. 4,660 -- -- 4,660
------- ------- ------- -------
Income (loss) from continuing operations
before non-recurring items, lease expense,
interest (net), taxes, depreciation and
amortization................................ $ 4,371 $ 5,609 $(6,493) $ 3,487
======= ======= ======= =======
Total Assets.................................. $41,104 $11,764 $18,187 $71,055
======= ======= ======= =======
</TABLE>
69
<PAGE> 70
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1998
------------------------------------------------------
DEVELOPMENT,
RESIDENT PATIENT GENERAL AND
SERVICES SERVICES ADMINISTRATIVE CONSOLIDATED
-------- -------- -------------- ------------
<S> <C> <C> <C> <C>
Revenues...................................... $18,920 $58,194 $11,774 $88,888
Facility Operating expenses................... 11,819 51,101 -- 62,920
Development, General and administrative
expenses.................................... -- -- 11,877 11,877
Provisions for losses under shortfall funding
agreements.................................. -- -- -- --
------- ------- ------- -------
Income from continuing operations before non-
recurring items, lease expense, interest
(net), taxes, depreciation and
amortization................................ $ 7,101 $ 7093 $ (103) $14,091
======= ======= ======= =======
Total Assets.................................. $36,130 $15,897 $33,945 $85,972
======= ======= ======= =======
</TABLE>
There are no material inter-segment revenues or receivables. The Company
does not evaluate its operations on a geographic basis.
21. QUARTERLY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH FULL
QUARTER QUARTER QUARTER QUARTER YEAR
----------- ----------- ----------- ------------ ------------
(UNAUDITED, IN THOUSANDS EXCEPT FOR DILUTED EARNINGS (LOSS) PER SHARE)
<S> <C> <C> <C> <C> <C>
YEAR ENDED JUNE 30, 2000:
Total revenue.......................... $18,477 $18,465 $12,070 $ 11,737 $ 60,749
======= ======= ======= ======== ========
Total operating expenses............... $21,823 $21,863 $14,343 $ 19,644 $ 77,673
======= ======= ======= ======== ========
Net income (loss)...................... $(4,429) $(3,709) $(3,805) $ (9,646) $(21,589)
======= ======= ======= ======== ========
Pro forma diluted earnings (loss) per
share................................ $ (0.26) $ (0.18) $ (0.11) $ (0.26) $ (0.81)
======= ======= ======= ======== ========
YEAR ENDED JUNE 30, 1999:
Total revenue.......................... $23,871 $18,682 $16,737 $ 19,156 $ 78,446
======= ======= ======= ======== ========
Total operating expenses............... $20,797 $24,932 $21,277 $ 35,463 $102,469
======= ======= ======= ======== ========
Net income (loss)...................... $ 1,940 $(5,163) $(2,769) $(17,645) $(23,637)
======= ======= ======= ======== ========
Pro forma diluted earnings (loss) per
share................................ $ 0.11 $ (0.31) $ (0.17) $ (1.06) $ (1.41)
======= ======= ======= ======== ========
YEAR ENDED JUNE 30, 1998:
Total revenue.......................... $19,138 $21,255 $24,538 $ 23,957 $ 88,888
======= ======= ======= ======== ========
Total operating expenses............... $19,664 $22,681 $22,427 $ 21,636 $ 86,408
======= ======= ======= ======== ========
Net income (loss)...................... $ (657) $ 849 $ 1,347 $ 2,036 $ 3,575
======= ======= ======= ======== ========
Pro forma diluted earnings (loss) per
share................................ $ (0.08) $ 0.09 $ 0.10 $ 0.11 $ 0.28
======= ======= ======= ======== ========
</TABLE>
70
<PAGE> 71
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND STOCKHOLDERS
BALANCED CARE CORPORATION:
We have audited the consolidated financial statements of Balanced Care
Corporation and subsidiaries as listed in the accompanying index. In connection
with our audits of the consolidated financial statements, we also have audited
the financial statement schedule listed in the accompanying index. These
consolidated financial statements and the financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Balanced
Care Corporation and subsidiaries as of June 30, 2000 and 1999, and the results
of their operations and their cash flows for each of the years in the three year
period ended June 30, 2000, in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
KPMG LLP
Baltimore, Maryland
September 1, 2000, except as to Notes 7 and 19
which are as of September 27, 2000
71
<PAGE> 72
BALANCED CARE CORPORATION AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JUNE 30, 2000, 1999 AND 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- ---------- -------- ---------- ---------
ADDITIONS
-------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING OPERATING OTHER AT END
DESCRIPTION OF PERIOD ACCOUNTS ACCOUNTS DEDUCTIONS OF PERIOD
----------- ---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful Accounts
Year ended June 30, 2000...... $ 2,352 $ 419 $1,000(1) $ (360)(2) $ 3,411
======= ======= ====== ========== =======
Year ended June 30, 1999...... $ 916 $ 2,044 $ -- $ (608)(2) $ 2,352
======= ======= ====== ========== =======
Year ended June 30, 1998...... $ 330 $ 722 $ -- $ (136)(2) $ 916
======= ======= ====== ========== =======
Allowance for Loss on
Development Activities
Year ended June 30, 2000...... $11,670(3) $ 1,650 $ -- $ (11,871)(2) $ 1,449
======= ======= ====== ========== =======
Year ended June 30, 1999...... $ -- $13,050 $ -- $ (1,380)(2) $11,670
======= ======= ====== ========== =======
Year ended June 30, 1998...... $ -- $ -- $ -- $ -- $ --
======= ======= ====== ========== =======
Allowance for Losses Under
Shortfall Funding Agreements
Year ended June 30, 2000...... $ 4,660 $ 5,750 $ -- $ (1,811)(2) $ 8,599
======= ======= ====== ========== =======
Year ended June 30, 1999...... $ -- $ 4,660 $ -- $ -- $ 4,660
======= ======= ====== ========== =======
Year ended June 30, 1998...... $ -- $ -- $ -- $ -- $ --
======= ======= ====== ========== =======
</TABLE>
---------------
(1) Net additions as a result of acquisitions and divestitures
(2) Amount represents write-offs charged against allowance
(3) Consists of allowance for losses on development contracts in process,
contracts receivable and purchase option deposits
72
<PAGE> 73
ITEM 9-- CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
PART III
ITEM 10--DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
BOARD OF DIRECTORS
The Company's Certificate of Incorporation and Bylaws provide that the
number of directors shall be determined from time to time by the Board of
Directors (but shall be no less than three and no more than nine) and that the
Board shall be divided into three classes. The terms of office of the three
classes of directors (Class I, Class II and Class III) end in successive years.
The terms of the Class III directors expire this year and their successors are
to be elected at the 2000 annual meeting of stockholders for a three-year term
expiring in 2003. The terms of the Class I and Class II directors do not expire
until 2001 and 2002, respectively.
On October 8, 1999, the Board of Directors increased its size from seven to
nine members. Effective October 11, 1999, Bill R. Foster, Sr. and Raymond
Schultz resigned and the Board of Directors appointed the following individuals
to fill the vacancies resulting from the foregoing:
<TABLE>
<CAPTION>
NAME CLASS
---- ---------
<S> <C>
Paul Reichmann............................................ Class I
Barry Reichmann........................................... Class I
Manfred J. Walt........................................... Class II
George Kuhl............................................... Class III
</TABLE>
CLASS I DIRECTORS
PIER C. BORRA
Age 60
Director since 1998...... Mr. Borra is Chairman, President and Chief
Executive Officer of CORA Health Services, Inc., a
provider of outpatient rehabilitation, which he
founded in December 1997. Previously, he served as
Chairman, President and Chief Executive Officer of
Arbor Health Care Company, a sub-acute care
company, which he founded in 1985 and a Director of
Health Care and Retirement Corporation. Mr. Borra
serves as a director of Health Care REIT (NYSE) and
as a director of Southern Assisted Living, Inc., a
private assisted living company.
PAUL REICHMANN
Age 70
Director since October
1999..................... Since April 1999, Mr. Reichmann has served as the
Executive Chairman of the Canary Wharf Group Plc, a
real estate company listed on the London Stock
Exchange. Since 1994, Mr. Reichmann has served as
the Chief Executive of the Reichmann Group of
Companies. This group includes: International
Property Corporation and affiliates with
investments in office and commercial properties in
the United States; Reichmann International
Development Corporation and affiliates with
investments in real estate projects in Mexico City;
and Central Park Lodges Ltd., a private Canadian
health care company that provides long term care
and assisted living services to seniors in both
Canada and the United States. Mr. Reichmann is the
Chairman of Central Park Lodges Ltd. and a Trustee
of CPL Long Term Care Real Estate Investment Trust,
a real estate investment trust listed on the
Toronto Stock
73
<PAGE> 74
Exchange. Mr. Reichmann is the father of Barry
Reichmann, who is also a director of the Company.
BARRY REICHMANN
Age 34
Director since October
1999..................... Since October 1994, Mr. Reichmann has served as
President and Chief Executive Officer and a
director of Central Park Lodges Ltd., a private
health care company that provides long term care
and assisted living services to seniors in both
Canada and the United States. Mr. Reichmann is also
the Chief Executive Officer and a Trustee of CPL
Long Term Care Real Estate Investment Trust, a real
estate investment trust listed on the Toronto Stock
Exchange. Mr. Reichmann is a Director of Firm
Capital Mortgage Investment Fund, a mortgage
investment fund listed on the Toronto Stock
Exchange. Mr. Reichmann is the son of Paul
Reichmann, who is also a director of the Company.
CLASS II DIRECTORS
EDWARD R. STOLMAN
Age 74
Director since 1997...... Mr. Stolman has owned and operated Stolman
Investments since 1982, specializing in real estate
and health care investments and consulting. He
joined Hospital Affiliates International in 1968
and served as Executive Vice President and Vice
Chairman, and also served as Chairman of Affiliated
Health Corporation from 1984 to 1990. Mr. Stolman
was an original investor in and a member of the
Board of Directors of Dovebar International, Inc.
GEORGE H. STRONG
Age 74
Director since 1996...... Mr. Strong is a private investor with many years of
experience in both director and executive positions
in health care enterprises. Since 1994, Mr. Strong
has served as a director for Integrated Health
Services, HealthSouth Rehabilitation Corporation,
Managed Care USA and Amerisource. Mr. Strong was a
Senior Vice President and founding director of
Universal Health Services, Inc. from 1979 to 1985
and was with American Medicorp for five years prior
to that.
MANFRED J. WALT
Age 47
Director since October
1999..................... Since May 1998, Mr. Walt has served as Executive
Vice President and Chief Financial Officer of
Central Park Lodges Ltd., a private Canadian health
care company that provides long term care and
assisted living services to seniors in both Canada
and the United States. From 1997 until May 1998,
Mr. Walt served as Senior Vice President of Gentra
Inc. (an affiliate of Brascan Corporation), a real
estate merchant bank listed on the Toronto Stock
Exchange. From 1980 until 1998, Mr. Walt served in
various capacities with the Brascan group of
companies including Managing Partner of Financial
Services for Brascan Corporation, a diversified
conglomerate listed on the Toronto Stock Exchange.
Mr. Walt is also a member of the Boards of
Directors of Central Park Lodges Ltd. and Oxford
Automotive Inc., a private company.
74
<PAGE> 75
CLASS III DIRECTORS
DAVID L. GOLDSMITH
Age 52
Director since 1996...... Since March 1999, Mr. Goldsmith has served as
Managing Director for RS Investment Management, an
independent money management firm. Prior to his
service at RS Investment Management, Mr. Goldsmith
was associated with BancAmerica Robertson Stephens
and its predecessors for more than 15 years,
serving as a Managing Director, Health Care for
more than five years. Mr. Goldsmith is also a
member of the Boards of Directors of Apria
Healthcare Group Inc. and selected private
companies.
BRAD E. HOLLINGER
Age 46
Chairman of the Board,
President and Chief
Executive Officer and a
Director since 1995...... Before joining the Company in 1995, Mr. Hollinger
served as Executive Vice President of the Contract
Services Group of Continental Medical Systems
("CMS"), a national provider of medical
rehabilitation services and contract therapy
services from 1992 to 1995. Mr. Hollinger also
served as Senior Vice President/Development of CMS
from 1987 to 1990, leading the development and
financing of eighteen inpatient medical
rehabilitation hospitals in seven states. From 1985
to 1987, Mr. Hollinger served as Vice President of
Development and Chief Development Officer of Rehab
Hospital Service Corporation, a wholly owned
subsidiary of NME, now known as Tenent Healthcare.
GEORGE KUHL
Age 51
Director since October
1999..................... Since October 1994, Mr. Kuhl has served as Vice
Chairman/Chief Operating Officer of Central Park
Lodges Ltd., a private Canadian health care company
that provides long term care and assisted living
services to seniors in both Canada and the United
States. Mr. Kuhl is also a Trustee of CPL Long Term
Care Real Estate Investment Trust, a real estate
investment trust listed on the Toronto Stock
Exchange.
75
<PAGE> 76
EXECUTIVE OFFICERS
The following table sets forth certain information regarding the executive
officers of the Company as of September 22, 2000:
NAME
Brad E. Hollinger
46
Chairman of the Board,
President and Chief
Executive Officer and a
Director................. Mr. Hollinger has served as a director and as
Chairman of the Board, President and Chief
Executive Officer of the Company since its founding
in April 1995. Previously he served as Executive
Vice President of the Contract Service Group of
Continental Medical Systems ("CMS"), a national
provider of medical rehabilitation services and
contract therapy services from 1992 to 1995.
Clint T. Fegan
42
Chief Financial Officer
(Principal Financial
Officer)................. Mr. Fegan has served as Chief Financial Officer of
the Company since February 1999. Mr. Fegan served
as Vice President -- Corporate Controller for the
Company from July 1998 until February 1999 and as
Corporate Controller from July 1997 until June
1998. From 1994 to 1997, he served as Corporate
Controller of Wilmac Corporation, a privately owned
nursing home and assisted living company.
Gary W. Anderson
50
Chief Operating
Officer.................. Mr. Anderson has served as the Chief Operating
Officer for the Company since July 1999. Prior to
joining the Company, Mr. Anderson served as Senior
Vice President of Operations for Alterra Healthcare
Corporation from April 1995 until July 1999, where
he was responsible for over 150 freestanding
assisted living and Alzheimer's-focused facilities.
From 1992 to 1995, he served as General Manager for
Marriott Senior Living Services, a senior care
company and division of Marriott International,
Inc.
Robin L. Barber
37
Senior Vice President --
Legal Counsel,
Assistant Secretary...... Ms. Barber has served as Senior Vice President and
Counsel since February 1999, as Vice
President -- Legal Services from September 1997 to
January 1999, as Director -- Legal Services from
February 1996 to August 1997, and as legal
consultant from October 1995 to January 1996. Prior
to joining the Company, she was in private practice
with the law firm of Eckert Seamans Cherin & Mellot
LLP from June 1993 until August 1995. Ms. Barber is
the sister-in-law of Brad E. Hollinger.
76
<PAGE> 77
Robert J. Sutton
51
Senior Vice President --
Corporate Services,
Secretary................ Mr. Sutton has served as the Company's Senior Vice
President -- Corporate Services since March 2000
and as Secretary of the Company since its founding
in April 1995. From 1993 to 1995, he was Vice
President, Finance and Strategy, of CMS.
Diane M. Borger
44
Vice
President -- Treasurer
(Principal Accounting
Officer)................. Ms. Borger has served as Vice
President -- Treasurer of the Company since May
1998. Ms. Borger was Director of Accounting for the
Company from November 1995 until May 1998. Prior to
joining the Company, she served in various
capacities during four years with CMS, including
Accounting Manager -- Rehab Hospital Group from
July 1993 to November 1995, as Manager of Corporate
Financial Planning from March 1992 to July 1993,
and as Corporate Financial Analyst from July 1991
to March 1992.
ITEM 2--PROPERTIES
The Company's corporate office is located in Mechanicsburg, Pennsylvania.
In addition to its corporate office, as of June 30, 2000, the Company operated a
total of 63 assisted living facilities and three skilled nursing facilities in
Pennsylvania, Arkansas, Ohio, North Carolina, Virginia, Ohio, West Virginia,
Tennessee, Florida, Maryland and Indiana. The buildings range in size from
27,000 square feet to 68,000 square feet and are adaptable to construction on
sites ranging from two to five acres. The Company owns 17, leases 22 and manages
27 senior living and health care facilities in these states. A more detailed
outline of information with regard to the various properties that the Company
owns, manages and leases can be found at "Operating Facilities" in Item 1 of
Part I. In January 2000, the Company divested its Missouri assets consisting of
10 skilled nursing facilities with 1,135 beds, nine assisted living and
independent living facilities with 245 beds and a home health agency.
ITEM 3--LEGAL PROCEEDINGS
The Company is involved in various legal proceedings arising in the
ordinary course of business. However, the Company is not involved in any legal
proceedings that it believes would have a materially adverse effect on its
business, financial condition or results of operations. In addition, lawsuits
may be brought against the Company, including those involving environmental and
safety and health matters. While the amounts claimed may be substantial, the
ultimate liability cannot now be determined because of the considerable
uncertainties that exist. Therefore, it is possible that the Company's course of
business and its liquidity within a particular period may be materially affected
by unforeseen circumstances. Based on facts currently available, management
believes that the disposition of these matters will not have a material adverse
effect on the financial position or results of operations of the Company.
ITEM 4--SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Under the securities laws of the United States, the Company's directors,
its executive officers and any persons beneficially holding more than ten
percent of the Company's Common Stock are required to report their ownership of
the Company's Common Stock and any changes in that ownership to the Commission
and
77
<PAGE> 78
the AMEX. Specific due dates for these reports have been established and the
Company is required to report in this proxy statement any failure to file by
these dates. All of these filing requirements were satisfied, except that Mr.
Strong failed to file a Form 4 by the required due date to reflect an
acquisition of 10,000 shares of Common Stock by Mr. Strong. The acquisition was
subsequently reported by Mr. Strong on a Form 5. In making these statements, the
Company has relied on copies of the reports that its officers, directors and
beneficial owners of more than ten percent of the Company's Common Stock have
filed with the Commission.
ITEM 11--EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth compensation information for the three
fiscal years ended June 30, 2000 ("Fiscal 2000") for the Company's Chief
Executive Officer and for the four other most highly compensated executive
officers of the Company for Fiscal 2000, as well as one additional executive
officer who resigned during Fiscal 2000 (the "Named Executive Officers").
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
---------------
ANNUAL COMPENSATION SECURITIES
FISCAL -------------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION(S) YEAR SALARY ($) BONUS ($)(1) OPTIONS (#S)(2) COMPENSATION ($)
------------------------------ ------ ---------- ------------ --------------- ----------------
<S> <C> <C> <C> <C> <C>
Brad E. Hollinger............ 2000 225,000 --(1)(a) 125,000 --
Chairman of the Board, 1999 225,000 150,000(1)(b) 100,000 --
President and Chief 1998 200,000 116,250(1)(c) -- --
Executive Officer
Gary W. Anderson............. 2000 165,129 --(1)(a) 130,000 --
Chief Operating Officer 1999 -- --(1)(b) -- --
1998 -- --(1)(c) -- --
Clint T. Fegan............... 2000 160,000 --(1)(a) 45,000 --
Chief Financial Officer 1999 110,616 11,880(1)(b) 146,000 10,000(3)
1998 65,027 --(1)(c) 15,000 --
Michael P. Kelly............. 2000 125,983 42,500(1)(a) 12,000 --
Senior Vice President of 1999 85,000 38,750(1)(b) 20,000 --
Operations 1998 77,500 31,250(1)(c) -- --
Robin L. Barber.............. 2000 116,458 --(1)(a) 20,000 --
Senior Vice President and 1999 95,083 20,000(1)(b) 25,000 --
Legal Counsel 1998 77,550 16,000(1)(c) 7,500 --
Stephen G. Marcus(4)......... 2000 100,000 --(1)(a) -- 727,692(5)
Chief Operating Officer 1999 184,900 42,500(1)(b) 60,000 --
1998 83,802 --(1)(c) 150,000 20,000(6)
</TABLE>
---------------
(1) Reflects bonuses paid in (a) Fiscal Year 2000, (b) Fiscal Year 1999 and (c)
the year ended June 30, 1998 ("Fiscal Year 1998"), for services rendered in
(a) Fiscal Year 1999, (b) Fiscal Year 1998 and (c) the year ended June 30,
1997, respectively.
(2) Options granted pursuant to the Company's 1996 Stock Incentive Plan (as
amended from time to time, the "Incentive Plan") to purchase shares of
Common Stock. Options granted during Fiscal 2000 are described in greater
detail below.
(3) Represents a sign-on bonus received by Mr. Fegan in Fiscal 1999.
(4) Mr. Marcus resigned from the Company effective December 31, 1999.
(5) Represents amounts paid to Mr. Marcus for (a) accrued but unused vacation
and (b) severance pursuant to Mr. Marcus' employment agreement dated
November 24, 1997 with the Company.
(6) Represents a sign-on bonus received by Mr. Marcus in Fiscal 1998.
78
<PAGE> 79
OPTION GRANTS IN LAST FISCAL YEAR
The table below sets forth information with respect to stock options
granted to the Named Executive Officers in Fiscal 2000. The options listed below
are included in the Summary Compensation Table above.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
NUMBER OF % OF TOTAL AT ASSUMED RATES OF
SECURITIES OPTIONS STOCK PRICE APPRECIATION
UNDERLYING GRANTED TO FOR OPTION TERM(7)
OPTIONS EMPLOYEES IN EXERCISE EXPIRATION --------------------------
NAME GRANTED(1) FISCAL YEAR PRICE ($/SH) DATE 5% 10%
---- ---------- ------------ ------------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Brad E. Hollinger.... 125,000 % 2.41 2/22/2010(2) $182,328 $468,767
Gary W. Anderson..... 65,000 % 1.88 8/10/2009(3) $ 76,322 $193,912
65,000 % 2.41 2/22/2010(2) $ 94,811 $243,759
Clint T. Fegan....... 45,000 % 2.41 2/22/2010(2) $ 65,638 $168,756
Michael P. Kelly..... 12,000 % 2.41 2/22/2010(2) $ 17,503 $ 45,002
Robin L. Barber...... 20,000 % 2.41 2/22/2010(2) $ 29,172 $ 75,003
Stephen G. Marcus.... -- -- -- -- -- --
</TABLE>
---------------
(1) Options granted pursuant to the Incentive Plan to purchase shares of Common
Stock. Subject to the approval of the Compensation Committee of the Board of
Directors of the Company, the exercise price and applicable withholding
taxes may be paid in cash or in shares of the Company's Common Stock
(whether previously owned or to be acquired upon exercise), or by other
methods which comply with the Incentive Plan and applicable law.
(2) The options granted will vest in equal increments on February 22, 2001,
2001, 2003 and 2004 subject to the provisions of the Incentive Plan.
(3) One quarter of the options vested on August 10, 2000 and the remainder will
vest in equal increments on August 10, 2001, 2002, and 2003 subject to the
provisions of the Incentive Plan.
(4) These assumed "potential realizable values" are mathematically derived from
certain prescribed rates of stock appreciation. The actual value of these
option grants is dependent on the future performance of Company Common Stock
and overall stock market conditions. There is no assurance that the values
reflected in this table will be achieved.
COMPENSATION OF DIRECTORS
Members of the Board of Directors who are also employees of the Company do
not receive cash compensation for their services as directors. Members of the
Board of Directors who are not employees of the Company receive a $5,000 annual
retainer for their services as directors, payable quarterly. Each non-employee
director also receives $1,000 for each meeting attended and $500 for each
telephonic meeting in which he participated. In addition, under the Company's
Incentive Plan, non-employee directors are granted non-qualified stock options
to purchase 15,000 shares of Common Stock upon each director's initial election
to the Board and 5,000 shares of Common Stock at each Annual Meeting of
Stockholders for the duration of his or her term. During Fiscal 2000, Paul
Reichmann, Barry Reichmann, Manfred Walt and George Kuhl received non-qualified
stock options for 15,000 shares of Common Stock and David Goldsmith and George
Strong received non-qualified stock options for 5,000 shares of Common Stock.
All directors are reimbursed for reasonable expenses incurred in attending board
and committee meetings and otherwise carrying out their duties. All share
numbers reflect the 3-for-4 reverse stock split of the Company's Common Stock in
October 1997.
EMPLOYMENT AGREEMENTS
Employment Agreement with the Chief Executive Officer. Mr. Hollinger is a
party to an employment agreement with the Company dated August 1, 1996, as
amended December 21, 1999. The employment agreement expires on July 31, 2001,
subject to annual extensions thereafter. Pursuant to the employment agreement,
for Fiscal 2000 and thereafter, Mr. Hollinger received, and is to receive, an
annual salary of
79
<PAGE> 80
$225,000. For each fiscal year of the Company throughout the term of the
agreement, Mr. Hollinger is also entitled to receive an annual bonus in an
amount not less than 75% of his base salary upon achievement by the Company of
certain levels of pre-tax earnings to be determined by the Board of Directors.
If the level of earnings exceeds the level determined by the Board for a fiscal
year, the Board may award Mr. Hollinger additional bonus compensation. Pursuant
to the employment agreement, the Company granted to Mr. Hollinger as of August
1, 1996 the right to purchase 37,500 shares of Common Stock at a purchase price
of $2.00 per share and, as of June 30, 1997, the right to purchase an additional
37,500 shares of Common Stock at a per share purchase price equal to the fair
market value of a share of Common Stock on June 30, 1997, which was $6.67 per
share. These options are generally to vest in accordance with the Incentive Plan
(including the Change of Control acceleration provision contained in such plan),
provided that if Mr. Hollinger terminates his employment for Good Reason (as
defined in the employment agreement, which includes the occurrence of a Change
in Control as Good Reason), the options are to become fully vested and
exercisable as of the date of such termination and may be exercised within one
year following such termination. In addition, if Mr. Hollinger terminates his
employment for Good Reason (including upon the occurrence of a Change in
Control), he will be entitled to receive a cash payment within 10 days of such
termination equal to three times his annual compensation plus the amount of any
bonus for that year.
Employment Agreements, Change in Control Arrangements and Termination of
Employment with Other Named Executive Officers. Mr. Anderson is a party to a
change in control agreement with the Company dated July 29, 1999 that provides
in the event of a Change in Control (as defined in the agreement) of the Company
that results in Mr. Anderson's position being diminished in scope of authority
and responsibilities or a change in reporting responsibility, or if he is
terminated without cause, in each case within a specified period following the
Change in Control, Mr. Anderson is entitled to receive a cash payment within 30
days of the occurrence of such an event in an amount equal to two times his
annual compensation then in effect. In addition, all outstanding stock options
granted to Mr. Anderson under the Incentive Plan will vest immediately and will
be exercisable subject to the provisions of the Incentive Plan.
Mr. Fegan is a party to an employment agreement with the Company dated
February 11, 1999, as amended December 21, 1999. The employment agreement
expires on February 11, 2002, subject to annual extensions thereafter. Pursuant
to the employment agreement, Mr. Fegan is entitled to receive an annual salary
of $160,000, subject to increase by the Board of Directors. For each fiscal year
of the Company throughout the term of the agreement, Mr. Fegan is also entitled
to receive an annual bonus of up to 50% of his base salary based upon his
performance of stated objectives and the Company's achievement of certain levels
of pre-tax earnings to be determined by the Board of Directors. Pursuant to the
employment agreement, the Company granted Mr. Fegan the right to purchase
125,000 shares of Common Stock at a purchase price of $2.53, the fair market
value of a share of Common Stock on March 3, 1999. These options are generally
to vest in accordance with the Incentive Plan (including the Change of Control
acceleration provision contained in such plan), provided that if the Company
experiences a Change in Control (as defined in the employment agreement), the
options will become fully vested and exercisable in accordance with the
Incentive Plan. If the Company terminates Mr. Fegan's employment without Cause,
other than following a Change in Control (as such terms are defined in the
employment agreement), he will be entitled to receive an amount equal to his
annual compensation plus the amount of any pro-rata bonus accrued for that year
(the "Termination Payment"). At the Company's option, the Termination Payment
may be paid in cash (i) in a lump sum within 45 days or (ii) in 12 equal monthly
installments following such termination. In the event of a Change in Control of
the Company that results in Mr. Fegan's position being diminished in scope of
authority and responsibilities or a change in reporting responsibility, or if he
is terminated without Cause, in each case within a specified period following
the Change in Control, Mr. Fegan is entitled to receive a cash payment within 30
days of the occurrence of such an event in an amount equal to three times his
annual compensation then in effect plus his annual bonus percentage payable for
the year in which the event occurred; provided, however, the bonus is payable
only if the Company's annual operating budget was achieved and Mr. Fegan was
employed for the entire year.
Mr. Kelly is a party to an employment agreement with the Company dated
January 31, 1997, as amended February 6, 1997 and July 20, 1999. The employment
agreement had an initial term of three years and was
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<PAGE> 81
automatically renewed until January 31, 2001. Unless either the Company or Mr.
Kelly gives the other party written notice of the intention not to renew the
employment agreement at least 90 calendar days before the expiration of the
existing term, the employment agreement will be automatically renewed for
successive one-year periods.
During the current term of the employment agreement, Mr. Kelly is entitled
to receive a base salary of $120,000, subject to increases as determined by the
Board of Directors. During Fiscal 2000, Mr. Kelly received a base salary of
$125,983. Throughout the term of the employment agreement, Mr. Kelly is also
entitled to receive an annual bonus in an amount up to 70% of his base salary
upon achievement by the Company of certain levels of pre-tax earnings to be
determined by the Board of Directors. If Mr. Kelly is terminated by the Company
without cause, he is entitled to receive the remainder of his annual
compensation for that year plus the amount of any pro-rata bonus accrued for
that year, together with payment for any accrued and unused vacation.
Ms. Barber is a party to a change in control agreement with the Company
dated November 20, 1998, as amended December 21, 1999 that provides in the event
of a Change in Control (as defined in the agreement) of the Company that results
in Ms. Barber's position being diminished in scope of authority and
responsibilities or a change in reporting responsibility, or if she is
terminated without cause, in each case within a specified period following the
Change in Control, Ms. Barber is entitled to receive a cash payment within 30
days of the occurrence of such an event in an amount equal to two times her
annual compensation then in effect plus the maximum amount of her potential
annual bonus percentage payable for the year in which the event occurred. In
addition, all outstanding stock options granted to Ms. Barber under the
Incentive Plan will vest immediately and will be exercisable subject to the
provisions of the Incentive Plan.
Mr. Marcus resigned from the Company effective December 31, 1999. Mr.
Marcus was a party to an employment agreement with the Company dated November
24, 1997. Pursuant to the employment agreement, for Fiscal 2000, Mr. Marcus was
entitled to receive an annual salary of $200,000 and an annual bonus of up to
60% of his base salary based upon his performance of stated objectives and the
Company's achievement of certain levels of pre-tax earnings to be determined by
the Board of Directors. Pursuant to the employment agreement, the Company
granted Mr. Marcus the right to purchase 150,000 shares of Common Stock at a
purchase price of $6.50, the fair market value of a share of Common Stock on
January 5, 1998. On each anniversary date of the employment agreement, the
Company agreed to grant Mr. Marcus the right to purchase additional shares of
Common Stock in an amount of not less than 30,000 shares annually. These options
are generally to vest in accordance with the Incentive Plan (including the
Change of Control acceleration provision contained in such plan). Pursuant to
the employment agreement, upon Mr. Marcus' resignation, his options became fully
vested and exercisable(1) in accordance with the Incentive Plan and he received
a cash payment of $727,692, an amount equal to three times his annual salary
plus his maximum potential bonus for Fiscal 2000 and his accrued unused
vacation, less applicable state, federal and local tax withholdings. Mr. Marcus
is also entitled to participate in the Company's health care benefits until
December 31, 2001.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None.
ITEM 12--SECURITY OWNERSHIP
The following table sets forth the beneficial ownership of the Company's
Common Stock as of September 15, 2000 by each person or group known by the
Company to beneficially own more than five percent of outstanding Common Stock,
each director, nominee for director and the Named Executive Officers, and by all
directors and executive officers as a group. Beneficial ownership was calculated
on the basis of the amount of outstanding securities, plus securities deemed
outstanding pursuant to Rule 13d-3(d)(1) under the Exchange Act. Unless
otherwise indicated, the holders of all shares shown in the table have sole
---------------
(1) Mr. Marcus' stock options expired under the terms of the plan on May 15,
2000. None were exercised.
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<PAGE> 82
voting and investment power with respect to such shares. As of September 15,
2000, there were 34,172,847 outstanding shares of Common Stock.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF
BENEFICIAL PERCENT OF
TITLE OF CLASS NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP CLASS
-------------- ------------------------------------ ------------ ----------
<S> <C> <C> <C>
Common Stock IPC Advisors S.A.R.L......................... 17,972,400(1)(6) 52.6%
28 rue Jean Baptiste Fresez
L-1542 Luxembourg
Common Stock Crosslink Capital, Inc....................... 2,355,679(2) 6.89%
555 California Street, Suite 2350
San Francisco, CA 94104
Common Stock RH Investments Limited....................... 2,333,333.5(3)(6) 6.39%
C/o Unsworth & Associates
Herengracht 483
1017 BT
Amsterdam
The Netherlands
Common Stock VXM Investments Limited...................... 2,333,333.5(4)(6) 6.39%
C/o Unsworth & Associates
Herengracht 483
1017 BT
Amsterdam
The Netherlands
Common Stock HR Investments Limited....................... 2,333,333(5)(6) 6.39%
C/o Unsworth & Associates
Herengracht 483
1017 BT
Amsterdam
The Netherlands
Common Stock Henry L. Hillman, Elsie Hilliard Hillman and
C.G. Grefenstette, Trustees.................. 1,735,000(7) 5.08%
1900 Grant Building
Pittsburgh, PA 15129
Common Stock Brad E. Hollinger............................ 882,588(8) 2.57%
Common Stock Pier C. Borra................................ 85,000(9) *
Common Stock David L. Goldsmith........................... 55,663(10) *
Common Stock George Kuhl.................................. 15,000(11) *
Common Stock Barry Reichmann.............................. 15,000(12) *
Common Stock Paul Reichmann............................... 15,000(13) *
Common Stock Edward R. Stolman............................ 34,250(14) *
Common Stock George H. Strong............................. 56,250(15) *
Common Stock Manfred J. Walt.............................. 15,000(16) *
Common Stock Gary W. Anderson............................. 16,250(17) *
Common Stock Clint T. Fegan............................... 50,875(18) *
Common Stock Michael P. Kelly............................. 91,875(19) *
Common Stock Robin L. Barber.............................. 116,867(20) *
Common Stock Stephen G. Marcus............................ 0 0
Common Stock All Directors and Executive Officers as
a Group (13 persons)(21)..................... 1,449,618(22) 4.19%
</TABLE>
---------------
* Indicates ownership of less than 1% of the Common Stock.
(1) LXB Investments Limited ("LXB") is the sole shareholder of IPC. The Lillian
Trust (the "Lillian Trust") is the sole shareholder of LXB. The Monument
Trust Company Limited (the "Monument Trust") is the trustee of the Lillian
Trust. LXB, the Lillian Trust and the Monument Trust may each be
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<PAGE> 83
deemed to be beneficial owners of the 17,972,400 shares pursuant to Rule 13d-3
of the Exchange Act. IPC, LXB, the Lillian Trust and the Monument Trust have
shared voting and investment power with respect to the 17,972,400 shares of
Common Stock. This information is based on the stockholder's Schedule 13D
(Amendment No. 1) filed with the SEC on September 15, 2000.
(2) Crosslink Capital, Inc. ("Crosslink") is a registered investment advisor.
Michael Joseph Stark and Seymour Franklin Kaufman are the controlling
stockholders of Crosslink. Messrs. Stark and Kaufman share voting and
investment power with respect to the 2,335,679 shares of Common Stock and
Mr. Kaufman has sole voting and investment power with respect to 271,134
shares of Common Stock. This information is based on the stockholders'
Schedule 13G (Amendment No. 3) filed with the SEC on May 3, 2000.
(3) RH has the right, upon conversion of the Amended Debentures, to acquire
2,333,333.5 shares of Common Stock. See "Certain Transactions and
Relationships with the Company." The Rachel Trust (the "Rachel Trust") is
the sole shareholder of RH. The Monument Trust is the trustee of the Rachel
Trust. The Rachel Trust and the Monument Trust may each be deemed to be
beneficial owners of the 2,333,333.5 shares pursuant to Rule 13d-3 of the
Exchange Act. RH, the Rachel Trust and The Monument Trust have shared
voting and investment power with respect to the 2,333,333.5 shares of
Common Stock. This information is based on the stockholder's Schedule 13D
(Amendment No. 1) filed with the SEC on September 15, 2000.
(4) VXM has the right, upon conversion of the Amended Debentures, to acquire
2,333,333.5 shares of Common Stock. See "Certain Transactions and
Relationships with the Company." The Vivian Trust (the "Vivian Trust") is
the sole shareholder of VXM. The Monument Trust is the trustee of the
Vivian Trust. The Vivian Trust and the Monument Trust may each be deemed to
be beneficial owners of the 2,333,333.5 shares pursuant to Rule 13d-3 of
the Exchange Act. VXM, the Vivian Trust and The Monument Trust have shared
voting and investment power with respect to the 2,333,333.5 shares of
Common Stock. This information is based on the stockholder's Schedule 13D
(Amendment No. 1) filed with the SEC on September 15, 2000.
(5) HR has the right, upon conversion of the Amended Debentures, to acquire
2,333,333 shares of Common Stock. See "Certain Transactions and
Relationships with the Company." The Henry Trust (the "Henry Trust") is the
sole shareholder of HR. The Monument Trust is the trustee of the Henry
Trust. The Henry Trust and the Monument Trust may each be deemed to be
beneficial owners of the 2,333,333 shares pursuant to Rule 13d-3 of the
Exchange Act. HR, the Henry Trust and The Monument Trust have shared voting
and investment power with respect to the 2,333,333 shares of Common Stock.
This information is based on the stockholder's Schedule 13D (Amendment No.
1) filed with the SEC on September 15, 2000.
(6) The Monument Trust, as the trustee for the Lillian Trust, the Rachel Trust,
the Vivian Trust and the Henry Trust, may be deemed to be the beneficial
owner of the shares of Common Stock, held or which may be acquired, by IPC,
RH, VXM and HR in the aggregate amount of 24,972,400, which represents
60.6% of the issued and outstanding shares of Common Stock of the Company
after giving effect to conversion of the Debentures. This information is
based on the stockholder's Schedule 13D (Amendment No. 1) filed with the
SEC on September 15, 2000. See "Certain Transactions and Relationships with
the Company."
(7) Consists of 1,000,000 shares held by trust for the benefit of Henry L.
Hillman (the "HLH Trust") and 525,000 shares owned by Juliet Challenger,
Inc., an indirect wholly-owned subsidiary of The Hillman Company ("THC").
THC is controlled by the HLH Trust. The Trustees of the HLH Trust are Henry
L. Hillman, Elsie Hilliard Hillman and C.G. Grefenstette (the "HLH
Trustees"). The HLH Trustees share voting and investment power with respect
to the shares held of record by the HLH Trust and the assets of THC. Also
includes an aggregate of 210,000 shares held by four trusts for the benefit
of the members of the Hillman family, as to which the HLH Trustees (other
than Mr. Grefenstette, who is one of the trustees of such family trusts)
disclaim beneficial ownership. This information is based on the
stockholders' Schedule 13G (Amendment No. 2) filed with the SEC on February
14, 2000.
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<PAGE> 84
(8) Includes 103,125 shares subject to stock options. Also includes 1,150
shares held jointly by Brad E. Hollinger and his spouse, and 5,250 shares
subject to a third party's right to purchase. Does not include 20,000
shares held by Mr. Hollinger's spouse subject to stock options. Mr.
Hollinger disclaims beneficial ownership as to the 20,000 shares held by
his spouse subject to stock options.
(9) Includes 65,000 shares held subject to stock options.
(10) Includes 34,413 shares owned by the Goldsmith Family Trust. As the
co-trustee, Mr. Goldsmith has voting and investment power with respect to
the shares held by the trust and may be deemed to have indirect beneficial
ownership of them. Also includes 21,250 shares held subject to stock
options.
(11) Includes 15,000 shares held subject to stock options.
(12) Includes 15,000 shares held subject to stock options.
(13) Includes 15,000 shares held subject to stock options.
(14) Includes 18,000 shares owned by The Stolman Family Trust. Also includes
16,250 shares held subject to stock options.
(15) Includes 8,750 shares held subject to stock options.
(16) Includes 15,000 shares held subject to stock options.
(17) Includes 16,250 shares held subject to stock options.
(18) Includes 50,875 shares held subject to stock options.
(19) Includes 78,750 shares held jointly by Michael P Kelly and his spouse. Also
includes 13,125 shares held by Mr. Kelly subject to stock options.
(20) Includes 45,313 shares held subject to stock options. Does not include
8,126 shares held by Ms. Barber's spouse subject to stock options. Ms.
Barber disclaims beneficial ownership as to the 8,126 shares held by her
spouse subject to stock options.
(21) Includes directors and officers as of September 15, 2000. Stephen G. Marcus
resigned as an executive officer effective December 31, 1999.
(22) Includes 399,938 shares held subject to stock options.
ITEM 13--CERTAIN TRANSACTIONS AND RELATIONSHIPS WITH THE COMPANY
Brad Hollinger, President, Chief Executive Officer and Chairman of the
Board, was the sole member of Financial Care Investors, LLC, a Delaware limited
liability company ("FCI"). FCI owns six Operator/ Lessees (collectively, the
"FCI Subsidiaries") that entered into management agreements, option agreements,
and other transaction documents with the Company, and facility lease agreements
with a Real Estate Investment Trust ("REIT") in September 1998. Effective
September 30, 1999, FCI redeemed Mr. Hollinger's equity interests for nominal
consideration and sold the equity interests to a group of third party investors.
Mr. Hollinger, without admitting or denying the allegations, settled a
proposed civil action brought by the SEC contending that he violated certain
federal securities laws in connection with trading in the common stock of
Continental Medical Systems, Inc. prior to its merger with Horizon Healthcare,
Inc. in 1995. The SEC approved the settlement on May 12, 1998, which consisted
of the entry of an order enjoining Mr. Hollinger from future violations of such
securities laws and the payment of $21,625, representing profits allegedly
realized by him and a family member, plus interest, and a civil monetary penalty
in an amount equal to such payment, plus interest.
Bill R. Foster, Sr., a director of the Company until October 1999, received
$114,727 for leasing to the Company two assisted living facilities in
Springfield and Nevada, Missouri and the Company's regional headquarters in
Springfield, Missouri at an annual rental of $197,328, $191,580 and $52,500,
respectively.
Pier Borra, a director of the Company, is a party to a consulting agreement
with the Company to provide investor relations, tactical planning and other
consulting services. In consideration, for each hour of service not to exceed
120 hours per year, Mr. Borra is granted a non-qualified stock option for 250
shares of the
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<PAGE> 85
Company's Common Stock, subject to the terms and conditions pertaining to
"Independent Contractors" under the Company's Incentive Plan. During Fiscal
2000, Mr. Borra was granted a non-qualified stock option for 20,000 shares of
the Company's Common Stock at an exercise price of $2.59 per share.
Robin Barber, sister-in-law of Brad E. Hollinger, has been employed by the
Company as Director of Legal Services since 1996, Vice President and Senior
Counsel since September 1997, and Senior Vice President and Legal Counsel since
February 1999. During Fiscal Year 2000, Ms. Barber received an annual salary of
$116,458.
Scott J. Hollinger, brother of Brad E. Hollinger, has been employed by the
Company as a Construction Project Manager since December 1996 and
Director -- Project Management since July 1998. During Fiscal 2000, Scott J.
Hollinger received an annual salary of $65,000.
Deborah Myers Welsh, spouse of Brad E. Hollinger, entered into a consulting
agreement with the Company on February 3, 1997 to provide legal services at the
rate of $110 per hour not to exceed 30 hours per week for 50 weeks. Ms. Welsh
received $118,120 under such arrangement during Fiscal Year 2000.
IPC Advisors S.A.R.L. ("IPC") entered into a subscription agreement with
the Company on October 8, 1999, as amended and restated on October 11, 1999 (the
"Subscription Agreement"), structured in two phases. In the first phase of the
transaction, on October 11, 1999, IPC purchased 3,300,000 shares of Series C
Convertible Preferred Stock of the Company (the "Preferred Stock") for an
aggregate purchase price of $4,125,000, which was convertible into Common Stock
on a one-to-one basis. In the second phase of the transaction, on December 21,
1999, the stockholders of the Company approved IPC's purchase of 13,400,000
newly issued shares of Common Stock for an aggregate purchase price of
$16,750,000 pursuant to the Subscription Agreement. In connection with the
stockholder approval and in accordance with the Subscription Agreement, the
3,300,000 shares of Preferred Stock automatically converted into 3,300,000 newly
issued shares of Common Stock. Pursuant to the Subscription Agreement, the
Company agreed to nominate or appoint four of the nine members of the Company's
board of directors as selected by IPC on an annual basis. In addition, IPC is
entitled to designate at least 50% of the members of any committee of the board
of directors. The Company cannot increase the size of its board in excess of
nine members without IPC's prior consent. As a result of the foregoing
transactions and certain subsequent open market purchases, IPC presently owns
17,972,400 shares of Common Stock of the Company, representing approximately
52.6% of the outstanding shares of the Company. See also "Security Ownership."
In connection with the Meditrust Transaction discussed above under the
Section entitled "Property Acquisition", IPC also entered into the Option
Agreement with the Company and Meditrust, and has the right to jointly exercise
the Option with the Company to acquire the First and/or Second Group of Tranche
Two Properties from Meditrust. IPC also entered into the Right of First Refusal
Agreement with the Meditrust Parties. Under the Right of First Refusal
Agreement, in the event the Meditrust Parties desire to transfer the 1,081,312
shares of Common Stock of the Company owned by Meditrust to any party other than
a direct or indirect subsidiary, the Meditrust Parties are obligated to offer to
sell the Stock to IPC on the same terms.
On July 31, 2000, HR Investments Limited ("HR"), RH Investments Limited
("RH"), and VXM Investments Limited ("VXM" and together with HR and RH,
collectively, the "Holders"), each purchased at par from the Company, 9.5%
unsecured convertible grid debentures (as amended, collectively, the
"Debentures"), in an aggregate principal amount equal to $14,000,000. The
Debentures were purchased in accordance with the terms and conditions of
purchase agreements dated as of June 30, 2000 between the Company and each of
the Holders. Under the Debentures, the Holders have the right, at any time up to
and including the earlier to occur of the Early Termination Date and the
Maturity Date (as such terms are defined below), to convert all or any part of
the Debentures into Common Stock of the Company at the conversion rate of $2.00
per share (subject to adjustment as provided in the Debentures, the "Conversion
Rate"). The Debentures mature on July 1, 2005 (the "Maturity Date"). Interest
under the Debentures accrues at an annual rate of 9.5% and is due and payable
quarterly. The Company, at its option, may pay the interest in cash or in lieu
of payment, may add the interest amount payable to the outstanding principal
amount of the Debentures, subject to certain conditions precedent. The Company
may terminate the Holders' conversion
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<PAGE> 86
rights at any time after December 31, 2002 if the average closing price per
share of Common Stock of the Company on the AMEX for the 20 consecutive trading
days ending five trading days preceding the date on which the notice of
termination is given to the Holders by the Company is not less than 200% of the
Conversion Rate (the "Early Termination Date"). The Holders have no rights with
respect to the election of the Company's board of directors unless and until all
or any portion of the Debentures are converted into Common Stock, at which time
the Holders will have the same rights, powers and privileges as the other
holders of the Company's Common Stock. Depending on when (and if) the Debentures
are converted and how the Company elects to pay interest, the Holders could have
the right to convert the Debentures into shares of Common Stock equal to
approximately 17% to 24.7% of the issued and outstanding shares of the Company
after giving effect to the transactions. See also "Security Ownership."
See also "Compensation Committee Interlocks and Insider Participation."
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<PAGE> 87
PART IV
ITEM 14--EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a)(1) Financial Statements:
(a)(2) Financial Statement Schedule:
See (d) below.
(a)(3) Exhibits
The following exhibits are filed herewith or are incorporated by reference
herein:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3.1 Amended and Restated Certificate of Incorporation of
Balanced Care Corporation (incorporated by reference to
Exhibit 3.1 to the Registration Statement on Form S-1 (No.
333-37833))
3.2 Certificate of Elimination of Series C Convertible Preferred
Stock of Balanced Care Corporation (incorporated by
reference to Exhibit 3.1 to the Quarterly Report on form
10-Q for the quarter ended March 31, 2000 (No. 001-13845))
3.3 Bylaws of Balanced Care Corporation, as amended
(incorporated by reference to Exhibit 3.2 to the
Registration Statement on Form S-1 (No. 333-37833))
3.4 Amendment to Amended and Restated By-laws of Balanced Care
Corporation dated August 17, 2000 (filed herewith)
3.5 Balanced Care Corporation 1996 Stock Incentive Plan as
Amended and Restated, effective as of November 4, 1999
(filed herewith)
4.1 Form of Capital Stock Purchase Warrant, together with
schedule (incorporated by reference to Exhibit 4.9 to the
Registration Statement on Form S-1 (No. 333-37833))
4.2 Form of Capital Stock Purchase Warrant, together with
schedule (incorporated by reference to Exhibit 4.11 to the
Registration Statement on Form S-1 (No. 333-37833))
4.3 Subscription Agreement dated October 8, 1999, as amended and
restated October 11, 1999 between Balanced Care Corporation
and IPC Advisors S.a.r.l. ("IPC") (incorporated by reference
to Exhibit 4.1 of the Company's Current Report on Form 8-K
dated October 21, 1999 (No. 001-13845))
4.4 Registration Rights Agreement between Balanced Care
Corporation and IPC dated October 8, 1999 (incorporated by
reference to Exhibit 4.2 of the Company's Current Report on
Form 8-K dated October 21, 1999 (No. 001-13845))
4.5 Amendment No. 1 to 9.5% Unsecured Convertible Grid Debenture
(incorporated by reference to Exhibit 4.1 of the Company's
Current Report on Form 8-K dated August 4, 2000 (No.
001-13845))
9.1 Voting Agreement dated October 8, 1999 among IPC, the
Company and certain of its stockholders (incorporated by
reference to Exhibit 9.1 of the Company's Current Report on
Form 8-K dated October 21, 1999 (No. 001-13845))
10.1 Form of Meditrust Facility Lease Agreement, together with
schedule (incorporated by reference to Exhibit 10.46 to the
Registration Statement on Form S-1 (No. 333-37833))
10.2 Form of Meditrust Facility Lease Agreement (incorporated by
reference to Exhibit 10.2 to the Company's Annual Report on
Form 10-K for the year ended June 30, 1998 (No. 001-13845))
10.3 Schedule to Form of Meditrust Facility Lease Agreement
(incorporated by reference 10.3 to the Company's Annual
Report on Form 10-K for the year ended June 30, 1998 (No.
001-13845))
10.4 Form of Meditrust Option Agreement (incorporated by
reference to Exhibit 10.6 to the Company's Annual Report on
Form 10-K for the year ended June 30, 1998 (No. 001-13845))
10.5 Schedule to Form of Meditrust Option Agreement (incorporated
by reference to Exhibit 10.7 to the Company's Annual Report
on Form 10-K for the year ended June 30, 1998 (No.
001-13845))
10.6 Form of Meditrust Shortfall Funding Agreement (incorporated
by reference to Exhibit 10.8 to the Company's Annual Report
on Form 10-K for the year ended June 30, 1998 (No.
001-13845))
</TABLE>
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<PAGE> 88
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.7 Schedule to Form of Meditrust Shortfall Funding Agreement
(incorporated by reference to Exhibit 10.9 to the Company's
Annual Report on Form l0-K for the year ended June 30, 1998
(No. 001-13845))
10.8 Form of Meditrust Working Capital Assurance Agreement
(incorporated by reference to Exhibit 10.10 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1998
(No. 001-13845))
10.9 Schedule to Form of Meditrust Working Capital Assurance
Agreement (incorporated by reference to Exhibit 10.11 to the
Company's Annual Report on Form 10-K for the year ended June
30, 1998 (No. 001-13845))
10.10 Form of American Health Properties, Inc. ("AHP") Lease and
Security Agreement (incorporated by reference to Exhibit
10.32 to the Company's Annual Report on Form 10-K for the
year ended June 30, 1998 (No. 001-13845))
10.11 Schedule to Form of AHP Lease and Security Agreement
(incorporated by reference to Exhibit 10.33 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1998
(No. 001-13845))
10.12 Form of AHP Option Agreement (incorporated by reference to
Exhibit 10.36 to the Company's Annual Report on Form 10-K
for the year ended June 30, 1998 (No. 001-13845))
10.13 Schedule to Form of AHP Option Agreement (incorporated by
reference to Exhibit 10.37 to the Company's Annual Report on
Form 10-K for the year ended June 30, 1998 (No. 001-13845))
10.14 AHP Option Agreement II (incorporated by reference to
Exhibit 10.38 to the Company's Annual Report on Form 10-K
for the year ended June 30, 1998 (No. 001-13845))
10.15 Form of AHP Shortfall Funding Agreement, together with
schedule (incorporated by reference to Exhibit 10.75 to the
Registration Statement on Form S-1 (No. 333-37833))
10.16 Schedule to Form of AHP Shortfall Funding Agreement
(incorporated by reference to Exhibit 10.40 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1998
(No. 001-13845))
10.17 Form of AHP Working Capital Assurance Agreement, together
with schedule (incorporated by reference to Exhibit 10.80 to
the Registration Statement on Form S-1 (No. 333-37833))
10.18 Schedule to Form of AHP Working Capital Assurance Agreement
(incorporated by reference to Exhibit 10.42 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1998
(No. 001-13845))
10.19 Form of Ocwen Financial Corporation ("Ocwen") Lease
Agreement (incorporated by reference to Exhibit 10.43 to the
Company's Annual Report on Form 10-K for the year ended June
30, 1998 (001-13845))
10.20 Schedule to Form of Ocwen Lease Agreement (incorporated by
reference to Exhibit 10.44 to the Company's Annual Report on
Form 10-K for the year ended June 30, 1998 (No. 001-13845))
10.21 Form of Ocwen Option Agreement (incorporated by reference to
Exhibit 10.47 to the Company's Annual Report on Form 10-K
for the year ended June 30, 1998 (No. 001-13845))
10.22 Schedule to Form Option Agreement (incorporated by reference
to Exhibit 10.48 to the Company's Annual Report on Form 10-K
for the year ended June 30, 1998 (No. 001-13845))
10.23 Form of Ocwen Shortfall Funding Agreement(incorporated by
reference to Exhibit 10.49 to the Company's Annual Report on
Form 10-K for the year ended June 30, 1998 (No. 001-13845))
10.24 Schedule to Form of Ocwen Shortfall Funding Agreement
(incorporated by reference to Exhibit 10.50 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1998
(No. 001-13845))
10.25 Ocwen Shortfall Funding Agreement II (incorporated by
reference to Exhibit 10.51 to the Company's Annual Report on
Form 10-K for the year ended June 30, 1998 (No. 001-13845))
10.26 Form of Ocwen Working Capital Assurance Agreement
(incorporated by reference to Exhibit 10.52 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1998
(No. 001-13845))
10.27 Schedule to Form of Ocwen Working Capital Assurance
Agreement (incorporated by reference to Exhibit 10.53 to the
Company's Annual Report on Form 10-K for the year ended June
30, 1998 (No. 001-13845))
</TABLE>
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<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
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<C> <S>
10.28 Ocwen Working Capital Assurance Agreement II (incorporated
by reference to Exhibit 10.54 to the Company's Annual Report
on Form 10-K for the year ended June 30, 1998 (No.
001-13845))
10.29 First Amendment to Option Agreements, Shortfall Funding
Agreements and Stock Pledge Agreements (incorporated by
reference to Exhibit 10.55 to the Company's Annual Report on
Form 10-K for the year ended June 30, 1998 (No. 001-13845))
10.30 Form of Capstone Lease, together with schedule (incorporated
by reference to Exhibit 10.22 to the Registration Statement
on Form S-1 (No. 333-37833))
10.31 Form of Capstone Lease (incorporated by reference to Exhibit
10.57 to the Company's Annual Report on Form 10-K for the
year ended June 30, 1998 (No. 001-13845))
10.32 Schedule to Form of Capstone Lease (incorporated by
reference to Exhibit 10.58 to the Company's Annual Report on
Form 10-K for the year ended June 30, 1998 (No. 001-13845))
10.33 Form of Capstone Option Agreement (incorporated by reference
to Exhibit 10.60 to the Company's Annual Report on Form 10-K
for the year ended June 30, 1998 (No. 001-13845))
10.34 Schedule to Form of Capstone Option Agreement (incorporated
by reference to Exhibit 10.61 to the Company's Annual Report
on Form 10-K for the year ended June 30, 1998 (No.
001-13845))
10.35 Form of Capstone Shortfall Funding Agreement (incorporated
by reference to Exhibit 10.62 to the Company's Annual Report
on Form 10-K for the year ended June 30, 1998 (No.
001-13845))
10.36 Schedule to Form of Capstone Shortfall Funding Agreement
(incorporated by reference to Exhibit 10.63 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1998
(No. 001-13845))
10.37 Form of Capstone Working Capital Assurance Agreement
(incorporated by reference to Exhibit 10.64 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1998
(No. 001-13845))
10.38 Schedule to Form of Capstone Working Capital Assurance
Agreement (incorporated by reference to Exhibit 10.65 to the
Company's Annual Report on Form 10-K for the year ended June
30, 1998 (No. 001-13845))
10.39 Form of Capstone Assignment, Assumption and Amendment
Agreement (incorporated by reference to Exhibit 10.66 to the
Company's Annual Report on Form 10-K for the year ended June
30, 1998 (No. 001-13845))
10.40 Schedule to Form of Capstone Assignment, Assumption and
Amendment Agreement (incorporated by reference to Exhibit
10.67 to the Company's Annual Report on Form 10-K for the
year ended June 30, 1998 (No. 001-13845))
10.41 Lease dated as of March 21, 1996, by and between HCPI Trust
and BCC at Mt. Royal Pines, Inc. (incorporated by reference
to Exhibit 10.34 of the Registration Statement on Form S-1
(No. 333-38733))
10.42 First Amendment dated as of March 31, 1997, to Lease dated
as of March 21, 1996 by and between HCPI Trust and BCC at
Mt. Royal Pines, Inc. (incorporated by reference to Exhibit
10.35 to the Registration Statement on Form S-1 (No.
333-37833))
10.43 Loan and Security Agreement among Balanced Care Corporation
and certain of its wholly-owned subsidiaries and HCFP
Funding, Inc. ("HCFP") (incorporated by reference to Exhibit
10.1 to the Company's Annual Report on Form 10-K for the
year ended June 30, 1999 (No. 001-13845))
10.44 Revolving Credit Note from Balanced Care Corporation and
certain of its wholly-owned subsidiaries in favor of HCFP
(incorporated by reference to Exhibit 10.2 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1999
(No. 001-13845))
10.45 Environmental Indemnity Agreement by Balanced Care
Corporation and certain of its wholly-owned subsidiaries in
favor of HCFP (incorporated by reference to Exhibit 10.3 to
the Company's Annual Report on Form 10-K for the year ended
June 30, 1999 (No. 001-13845))
10.46 Deed of Trust, Assignment of Rents and Leases and Security
Agreement from Balanced Care at North Ridge, Inc. in favor
of HCFP (incorporated by reference to Exhibit 10.4 to the
Company's Annual Report on Form 10-K for the year ended June
30, 1999 (No. 001-13845))
</TABLE>
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<PAGE> 90
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.47 Form of Open-End Mortgage, Assignment of Rents, Leases and
Security Agreement in favor of HCFP (incorporated by
reference to Exhibit 10.5 to the Company's Annual Report on
Form 10-K for the year ended June 30, 1999 (No. 001-13845))
10.48 Schedule to Form of Open-End Mortgage, Assignment of Rents,
Leases and Security Agreement in favor of HCFP (incorporated
by reference to Exhibit 10.6 to the Company's Annual Report
on Form 10-K for the year ended June 30, 1999 (No.
001-13845))
10.49 Amendment No. 1 to Loan and Security Agreement among
Balanced Care Corporation and certain of its wholly-owned
subsidiaries and HCFP dated July 1, 1999 (incorporated by
reference to Exhibit 10.8 to the Company's Annual Report on
Form 10-K for the year ended June 30, 1999 (No. 001-13845))
10.50 Amendment No. 2 to Loan and Security Agreement among
Balanced Care Corporation and certain of its wholly-owned
subsidiaries and HCFP dated July 29, 1999 (incorporated by
reference to Exhibit 10.9 to the Company's Annual Report on
Form 10-K for the year ended June 30, 1999 (No. 001-13845))
10.51 Employment Agreement dated as of August 1, 1996, by and
between Balanced Care Corporation and Brad E. Hollinger
(incorporated by reference to Exhibit 10.37 of the
Registration Statement on Form S-1 (No. 333-37833))**
10.52 Employment Agreement dated as of September 20, 1995, by and
between Balanced Care Corporation and Robert J. Sutton
(incorporated by reference to Exhibit 10.39 to the
Registration Statement on Form S-1 (No. 333-37833))**
10.53 Form of HCRI Lease 1998 (incorporated by reference to
Exhibit 10.1 to the Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998 (No. 001-13845))
10.54 Schedule to Form of HCRI Lease (incorporated by reference to
Exhibit 10.2 to the Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998 (No. 001-13845))
10.55 Form of HCRI Construction Disbursing Agreement (incorporated
by reference to Exhibit 10.3 to the Quarterly Report on Form
10-Q for the quarter ended September 30, 1998 (No.
001-13845))
10.56 Schedule to Form of HCRI Construction Disbursing Agreement
(incorporated by reference to Exhibit 10.4 to the Quarterly
Report on Form 10-Q for the quarter ended September 30, 1998
(No. 001-13845))
10.57 Form of HCRI Option Agreement (incorporated by reference to
Exhibit 10.5 to the Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998 (No. 001-13845))
10.58 Schedule to Form of HCRI Option Agreement (incorporated by
reference to Exhibit 10.6 to the Quarterly Report on Form
10-Q for the quarter ended September 30, 1998 (No.
001-13845))
10.59 Form of HCRI Shortfall Funding Agreement (incorporated by
reference to Exhibit 10.7 to the Quarterly Report on Form
10-Q for the quarter ended September 30, 1998 (No.
001-13845))
10.60 Schedule to Form of HCRI Shortfall Funding Agreement
(incorporated by reference to Exhibit 10.8 to the Quarterly
Report on Form 10-Q for the quarter ended September 30, 1998
(No. 001-13845))
10.61 Form of HCRI Working Capital Assurance Agreement
(incorporated by reference to Exhibit 10.9 to the Quarterly
Report on Form 10-Q for the quarter ended September 30, 1998
(No. 001-13845))
10.62 Schedule to Form of HCRI Working Capital Assurance Agreement
(incorporated by reference to Exhibit 10.10 to the Quarterly
Report on Form 10-Q for the quarter ended September 30, 1998
(No. 001-13845))
10.63 Form of HCRI Management Agreement (incorporated by reference
to Exhibit 10.11 to the Quarterly Report on Form 10-Q for
the quarter ended September 30, 1998 (No. 001-13845))
10.64 Schedule to Form of HCRI Management Agreement (incorporated
by reference to Exhibit 10.12 to the Quarterly Report on
Form 10-Q for the quarter ended September 30, 1998 (No.
001-13845))
10.65 Form of HCRI Guaranty (incorporated by reference to Exhibit
10.13 to the Quarterly Report on Form 10-Q for the quarter
ended September 30, 1998 (No. 001-13845))
10.66 Schedule to Form of HCRI Guaranty (incorporated by reference
to Exhibit 10.14 to the Quarterly Report on Form 10-Q for
the quarter ended September 30, 1998 (No. 001-13845))
10.67 Form of HCRI Loan Agreement (incorporated by reference to
Exhibit 10.15 to the Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998 (No. 001-13845))
</TABLE>
90
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<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.68 Schedule to Form of HCRI Loan Agreement (incorporated by
reference to Exhibit 10.16 to the Quarterly Report on Form
10-Q for the quarter ended September 30, 1998 (No.
001-13845))
10.69 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(No. 001-13845))
10.70 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 (No. 001-13845))
10.71 Consulting Agreement between Pier C. Borra and Balanced Care
Corporation dated March 22, 1999, effective December 8, 1998
(incorporated by reference to Exhibit 10.1 to the Quarterly
Report on Form 10-Q for the Quarter ended March 31, 1999(No.
001-13845))
10.72 Employment Agreement between Clint T. Fegan and Balanced
Care Corporation dated February 11, 1999 (incorporated by
reference to Exhibit 10.2 to the Quarterly Report on Form
10-Q for the quarter ended March 31, 1999(No. 001-13845))**
10.73 Change in Control Agreement between Balanced Care
Corporation and Gary W. Anderson dated July 29, 1999
(incorporated by reference to Exhibit 10.36 to the Company's
Annual Report on Form 10-K for the year ended June 30,
1998(No. 001-13845))**
10.74 Form of Change in Control Agreement (incorporated by
reference to Exhibit 99.1 of the Company's Current Report on
Form 8-K dated March 29, 2000 (No. 001-13845))**
10.75 Schedule to Form of Change in Control Agreement
(incorporated by reference to Exhibit 99.2 of the Company's
Current Report on Form 8-K dated March 29, 1999, 1999(No.
001-13845))**
10.76 First Amendment to Facility Agreement by and between AHP and
Balanced Care Corporation (incorporated by reference to
Exhibit 10.17 to the Quarterly Report on Form 10-Q for the
quarter ended September 30, 1999 (No. 001-13845))
10.77 First Amendment to Option Agreements, Shortfall Funding
Agreements, Management Agreements, Deposit Pledge
Agreements, and Equity Pledge Agreements by and among
Balanced Care Corporation, Balanced Care at Sagamore Hills,
Inc., Balanced Care at Loyalsock, Inc., Balanced Care at
Lebanon, Inc., Balanced Care at Westerville, Inc., Balanced
Care at Oak Ridge, Inc., Balanced Care at Morristown, Inc.,
Financial Care Investors, LLC, Financial Care Investors of
Sagamore Hills, LLC, Financial Care Investors of Loyalsock,
LLC, Financial Care Investors of Lebanon, LLC, Financial
Care Investors of Westerville, LLC, Financial Care Investors
of Oak Ridge, LLC, and Financial Care Investors of
Morristown, LLC (incorporated by reference to Exhibit 10.18
to the Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999 (file No. 001-13845))
10.78 Form of First Amendment to Lease Agreement (incorporated by
reference to Exhibit 10.19 to the Quarterly Report on Form
10-Q for the quarter ended September 30, 1999 (No.
001-13845))
10.79 Schedule to First Amendment to Lease Agreement (incorporated
by reference to Exhibit 10.20 to the Quarterly Report on
Form 10-Q for the quarter ended September 30, 1999 (No.
001-13845))
10.80 Form of First Amendment to Loan Agreement (incorporated by
reference to Exhibit 10.21 to the Quarterly Report on Form
10-Q for the quarter ended September 30, 1999 (No.
001-13845))
10.81 Schedule to First Amendment to Loan Agreement (incorporated
by reference to Exhibit 10.22 to the Quarterly Report on
Form 10-Q for the quarter ended September 30, 1999 (No.
001-13845))
10.82 Form of First Amendment to Working Capital Assurance
Agreement (incorporated by reference to Exhibit 10.23 to the
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999 (No. 001-13845))
10.83 Schedule to First Amendment to Working Capital Agreement
(incorporated by reference to Exhibit 10.24 to the Quarterly
Report on Form 10-Q for the quarter ended September 30, 1999
(No. 001-13845))
10.84 Form of First Amendment to Lease Agreement (incorporated by
reference to Exhibit 10.25 to the Quarterly Report on Form
10-Q for the quarter ended September 30, 1999 (No.
001-13845))
10.85 Schedule to First Amendment to Lease Agreement (incorporated
by reference to Exhibit 10.26 to the Quarterly Report on
Form 10-Q for the quarter ended September 30, 1999 (No.
001-13845))
</TABLE>
91
<PAGE> 92
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.86 Memorandum of Understanding by and among New Meditrust
Company, LLC, IPC, Balanced Care Corporation, and Balanced
Care Realty at Altoona, Inc., Balanced Care Realty at
Berwick, Inc., Balanced Care Realty at Lewistown, Inc.,
Balanced Care Realty at Mansfield, Inc., Balanced Care
Realty at Martinsburg, Inc., Balanced Care Realty at
Maumelle, Inc, Balanced Care Realty at Mountain Home, Inc.,
Balanced Care Realty at Peckville, Inc., Balanced Care
Realty at Reading, Inc., Balanced Care Realty at Scranton,
Inc., Balanced Care Realty at Sherwood, Inc., and Balanced
Care Realty at State College, Inc. (incorporated by
reference to Exhibit 10.1 of the Company's Current Report on
Form 8-K dated January 14, 2000 (No. 001-13845))
10.87 Option Agreement by and among New Meditrust Company LLC,
IPC, and Balanced Care Corporation (incorporated by
reference to Exhibit 10.2 of the Company's Current Report on
Form 8-K dated January 14, 2000 (No. 001-13845))
10.88 Promissory Note made by Balanced Care Corporation and IPC in
favor of New Meditrust Company LLC (incorporated by
reference to Exhibit 10.3 of the Company's Current Report on
Form 8-K dated January 14, 2000 (No. 001-13845))
10.89 Loan Agreement by and among Heller Healthcare Finance, Inc.,
Balanced Care Realty at Berwick, Inc., Balanced Care at
Lewistown, Inc., Balanced Care Realty at Mansfield, Inc.,
Balanced Care Realty at Martinsburg, Inc., Balanced Care
Realty at Maumelle, Inc, Balanced Care Realty at Mountain
Home, Inc., Balanced Care Realty at Peckville, Inc.,
Balanced Care Realty at Reading, Inc., Balanced Care Realty
at Scranton, Inc., Balanced Care Realty at Sherwood, Inc.,
and Balanced Care Realty at State College, Inc.
(incorporated by reference to Exhibit 10.4 of the Company's
Current Report on Form 8-K dated January 14, 2000 (No.
001-13845))
10.90 Indemnification, Defense, Hold Harmless and Reimbursement
Agreement by and between Balanced Care Corporation and IPC
(incorporated by reference to Exhibit 10.6 of the Company's
Current Report on Form 8-K dated January 14, 2000 (No.
001-13845))
10.91 Right of First Refusal Agreement by and among Meditrust
Mortgage Investments, Inc., Meditrust Corporation, and IPC
(incorporated by reference to Exhibit 10.7 of the Company's
Current Report on Form 8-K dated January 14, 2000 (No.
001-13845))
10.92 Asset Purchase Agreement by and between Balanced Care
Corporation and certain subsidiaries and Christian Health
Care of Missouri, Inc. ("CHC") (incorporated by reference to
Exhibit 10.1 of the Company's Current Report on Form 8-K
dated January 27, 2000 (No. 001-13845))
10.93 First Amendment to Asset Purchase Agreement by and between
Balanced Care Corporation and certain subsidiaries and CHC
(incorporated by reference to Exhibit 10.2 of the Company's
Current Report on Form 8-K dated January 27, 2000 (No.
001-13845))
10.94 Second Amendment to Asset Purchase Agreement dated by and
between Balanced Care Corporation and certain subsidiaries
and CHC (incorporated by reference to Exhibit 10.3 of the
Company's Current Report on Form 8-K dated January 27, 2000
(No. 001-13845))
10.95 Third Amendment to Asset Purchase Agreement by and between
Balanced Care Corporation and certain subsidiaries and CHC
(incorporated by reference to Exhibit 10.4 of the Company's
Current Report on Form 8-K dated January 27, 2000 (No.
001-13845))
10.96 Fourth Amendment to Asset Purchase Agreement by and between
Balanced Care Corporation and certain subsidiaries and CHC
(incorporated by reference to Exhibit 10.5 of the Company's
Current Report on Form 8-K dated January 27, 2000 (No.
001-13845))
10.97 Promissory Note (First) made by CHC, Christian Health Care
Terraces, Inc., Regional Care of Nevada, LLC, Regional Care
of Republic, LLC and Cornerstone Health Care, Inc. in favor
of Balanced Care Corporation (incorporated by reference to
Exhibit 10.6 of the Company's Current Report on Form 8-K
dated January 27, 2000 (No. 001-13845))
10.98 Promissory Note (Second) made by CHC, Christian Health Care
Terraces, Inc., Regional Care of Nevada, LLC, Regional Care
of Republic, LLC and Cornerstone Health Care, Inc., in favor
of Balanced Care Corporation (incorporated by reference to
Exhibit 10.7 of the Company's Current Report on Form 8-K
dated January 27, 2000 (No. 001-13845))
</TABLE>
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<PAGE> 93
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.99 Omnibus Assignment and Assumption Agreement, Amendment of
Loan Documents, Termination of Lease Documents, Consent to
Assignment and Confirmation of Guaranties by and among
Hawthorn Health Properties, Inc., National Care Centers of
Hermitage, Inc., National Care Centers, Inc., National Care
Centers of Lebanon, Inc., Springfield Retirement Village,
Inc., National Care Centers of Nixa, Inc., National Care
Centers of Springfield, Inc., Mt. Vernon Park Care Center
West, Inc., BCC at Lebanon Care Center, Inc., BCC at
Springfield Care Center, Inc., BCC at Lebanon Park Manor,
Inc., BCC at Nixa Park Center, Inc., BCC at Springfield Care
Center, Inc., BCC at Mt. Vernon Park Care Center, Inc., BCC
at Mt. Vernon Park Care Center West, Inc., BCC at Hermitage
Park Care Center, Inc., Balanced Care Corporation, Dixon
Management, Inc., Meditrust Mortgage Investments, Inc., CHC,
Cornerstone Properties Investment II, LLC, Cornerstone
Health Care, Inc., Christian Health Care Personnel Services,
Inc., Christian Health Care, Inc., Christian Health Care of
Hermitage, Inc., Christian Health Care of Lebanon North,
Inc., Christian Health Care of Springfield West Park, Inc.,
Christian Health Care of Springfield West, Inc., Christian
Health Care of Lebanon South, Inc., Christian Health Care of
Springfield East, Inc., Christian Health Care of Nixa, Inc.,
and Alington D. Kilgore(incorporated by reference to Exhibit
10.8 of the Company's Current Report on Form 8-K dated
January 27, 2000 (No. 001-13845))
10.100 Guaranty (BCC) given by Balanced Care Corporation in favor
of Meditrust Mortgage Investments, Inc. (incorporated by
reference to Exhibit 10.9 of the Company's Current Report on
Form 8-K dated January 27, 2000 (No. 001-13845))
10.101 Termination Agreement by and among Meditrust Mortgage
Investments, Inc., New Meditrust Company LLC, Hawthorn
Health Properties, Inc., National Care Centers of Hermitage,
Inc., National Care Centers, Inc., National Care Centers of
Lebanon, Inc., Springfield Retirement Village, Inc.,
National Care Centers of Nixa, Inc., National Care Centers
of Springfield, Inc., Mt. Vernon Park Care Center West,
Inc., Balanced Care Corporation, Dixon Management, Inc. and
Balanced Care at Stafford, Inc. (incorporated by reference
to Exhibit 10.10 of the Company's Current Report on Form 8-K
dated January 27, 2000 (No. 001-13845))
10.102 Cross-Default Agreement by and among Balanced Care Stafford,
Inc., New Meditrust Company LLC, Meditrust Mortgage
Investments, Inc. and Balanced Care Corporation
(incorporated by reference to Exhibit 10.11 of the Company's
Current Report on Form 8-K dated January 27, 2000 (No.
001-13845))
10.103 Amendment No. 3 to Loan and Security Agreement among
Balanced Care Corporation and certain of its wholly-owned
subsidiaries and Heller Healthcare Finance, Inc. formerly
known as HCFP Funding, Inc. ("HHF")(incorporated by
reference to Exhibit 10.1 to the Quarterly Report on Form
10-Q for the quarter ended December 31, 1999 (No.
001-13845))
10.104 Senior Housing Rider among HHF, Balanced Care Realty at
State College, Inc., Balanced Care Realty at Altoona, Inc.,
Balanced Care Realty at Lewistown, Inc., Balanced Care
Realty at Reading, Inc., Balanced Care Realty at Berwick,
Inc., Balanced Care Realty at Peckville, Inc., Balanced Care
Realty at Scranton, Inc., Balanced Care Realty at
Martinsburg, Inc., Balanced Care Realty at Maumelle, Inc.,
Balanced Care Realty at Sherwood, Inc., Balanced Care Realty
at Mountain Home, Inc., and Balanced Care Realty at
Mansfield, Inc. (incorporated by reference to Exhibit 10.2
to the Quarterly Report on Form 10-Q for the quarter ended
December 31, 1999 (No. 001-13845))
10.105 Promissory Note A made by Balanced Care Realty at State
College, Inc., Balanced Care Realty at Altoona, Inc.,
Balanced Care Realty at Lewistown, Inc., Balanced Care
Realty at Reading, Inc., Balanced Care Realty at Berwick,
Inc., Balanced Care Realty at Peckville, Inc., Balanced Care
Realty at Scranton, Inc., Balanced Care Realty at
Martinsburg, Inc., Balanced Care Realty at Maumelle, Inc.,
Balanced Care Realty at Sherwood, Inc., Balanced Care Realty
at Mountain Home, Inc., and Balanced Care Realty at
Mansfield, Inc. in favor of HHF (incorporated by reference
to Exhibit 10.3 to the Quarterly Report on Form 10-Q for the
quarter ended December 31, 1999 (No. 001-13845))
10.106 Subordinated Promissory Note B by Balanced Care Realty at
State College, Inc., Balanced Care Realty at Altoona, Inc.,
Balanced Care Realty at Lewistown, Inc., Balanced Care
Realty at Reading, Inc., Balanced Care Realty at Berwick,
Inc., Balanced Care Realty at Peckville, Inc., Balanced Care
Realty at Scranton, Inc., Balanced Care Realty at
Martinsburg, Inc., Balanced Care Realty at Maumelle, Inc.,
Balanced Care Realty at Sherwood, Inc., Balanced Care Realty
at Mountain Home, Inc., and Balanced Care Realty at
Mansfield, Inc. in favor of HHF (incorporated by reference
to Exhibit 10.4 to the Quarterly Report on Form 10-Q for the
quarter ended December 31, 1999 (No. 001-13845))
</TABLE>
93
<PAGE> 94
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.107 Hazardous Materials Indemnity among HHF, Balanced Care
Corporation, Balanced Care Realty at State College, Inc.,
Balanced Care Realty at Altoona, Inc., Balanced Care Realty
at Lewistown, Inc., Balanced Care Realty at Reading, Inc.,
Balanced Care Realty at Berwick, Inc., Balanced Care Realty
at Peckville, Inc., Balanced Care Realty at Scranton, Inc.,
Balanced Care Realty at Martinsburg, Inc., Balanced Care
Realty at Maumelle, Inc., Balanced Care Realty at Sherwood,
Inc., Balanced Care Realty at Mountain Home, Inc., and
Balanced Care Realty at Mansfield, Inc. (incorporated by
reference to Exhibit 10.5 to the Quarterly Report on Form
10-Q for the quarter ended December 31, 1999 (No.
001-13845))
10.108 Guaranty by Balanced Care Corporation in favor of HHF
(incorporated by reference to Exhibit 10.6 to the Quarterly
Report on Form 10-Q for the quarter ended December 31, 1999
(No. 001-13845))
10.109 Form of Open-End Mortgage, Assignment of Rents, Leases and
Security Agreement in favor of HHF (incorporated by
reference to Exhibit 10.7 to the Quarterly Report on Form
10-Q for the quarter ended December 31, 1999 (No.
001-13845))
10.110 Schedule to Form of Open-End Mortgage, Assignment of Rents,
Leases and Security Agreement in favor of HHF (incorporated
by reference to Exhibit 10.8 to the Quarterly Report on Form
10-Q for the quarter ended December 31, 1999 (No.
001-13845))
10.111 Form of Mortgage, Assignment of Rents and Security Agreement
in favor of HHF (incorporated by reference to Exhibit 10.9
to the Quarterly Report on Form 10-Q for the quarter ended
December 31, 1999 (No. 001-13845))
10.112 Schedule to Form of Mortgage, Assignment of Rents and
Security Agreement in favor of HHF (incorporated by
reference to Exhibit 10.10 to the Quarterly Report on Form
10-Q for the quarter ended December 31, 1999 (No.
001-13845))
10.113 A Credit Line Deed of Trust, Assignment of Rents and
Security Agreement in favor of HHF dated as of December 30,
1999 (incorporated by reference to Exhibit 10.11 to the
Quarterly Report on Form 10-Q for the quarter ended December
31, 1999 (No. 001-13845))
10.114 Open-End Mortgage, Assignment of Rents and Security
Agreement in favor of HHF (incorporated by reference to
Exhibit 10.12 to the Quarterly Report on Form 10-Q for the
quarter ended December 31, 1999 (No. 001-13845))
10.115 Letter Agreement by and among New Meditrust Company LLC,
Balanced Care Corporation and IPC (incorporated by reference
to Exhibit 10.33 to the Quarterly Report on Form 10-Q for
the quarter ended December 31, 1999 (No. 001-13845))
10.116 Amendment to Loan Documents by and among HHF, Balanced Care
Realty at Altoona, Inc., Balanced Care Realty at Berwick,
Inc., Balanced Care Realty at Lewistown, Inc., Balanced Care
Realty at Mansfield, Inc., Balanced Care Realty at
Martinsburg, Inc., Balanced Care Realty at Maumelle, Inc.,
Balanced Care Realty at Mountain Home, Inc., Balanced Care
Realty at Peckville, Inc., Balanced Care Realty at Reading,
Inc., Balanced Care Realty at Scranton, Inc., Balanced Care
Realty at Sherwood, Inc., and Balanced Care Realty at State
College, Inc. (incorporated by reference to Exhibit 10.1 of
the Company's Current Report on Form 8-K dated March 31,
2000 (No. 001-13845))
10.117 Amended and Restated Promissory Note A in favor of HHF, by
Balanced Care Realty at Altoona, Inc., Balanced Care Realty
at Berwick, Inc., Balanced Care Realty at Lewistown, Inc.,
Balanced Care Realty at Mansfield, Inc., Balanced Care
Realty at Martinsburg, Inc., Balanced Care Realty at
Maumelle, Inc., Balanced Care Realty at Mountain Home, Inc.,
Balanced Care Realty at Peckville, Inc., Balanced Care
Realty at Reading, Inc., Balanced Care Realty at Scranton,
Inc., Balanced Care Realty at Sherwood, Inc., and Balanced
Care Realty at State College, Inc. (incorporated by
reference to Exhibit 10.2 of the Company's Current Report on
Form 8-K dated March 31, 2000 (No. 001-13845))
10.118 Amended and Restated Promissory Note B in favor of HHF, by
Balanced Care Realty at Altoona, Inc., Balanced Care Realty
at Berwick, Inc., Balanced Care Realty at Lewistown, Inc.,
Balanced Care Realty at Mansfield, Inc., Balanced Care
Realty at Martinsburg, Inc., Balanced Care Realty at
Maumelle, Inc., Balanced Care Realty at Mountain Home, Inc.,
Balanced Care Realty at Peckville, Inc., Balanced Care
Realty at Reading, Inc., Balanced Care Realty at Scranton,
Inc., Balanced Care Realty at Sherwood, Inc., and Balanced
Care Realty at State College, Inc. (incorporated by
reference to Exhibit 10.3 of the Company's Current Report on
Form 8-K dated March 31, 2000 (No. 001-13845))
</TABLE>
94
<PAGE> 95
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.119 First Amendment to Promissory Note by and among IPC,
Balanced Care Corporation, and New Meditrust Company LLC
(incorporated by reference to Exhibit 10.4 of the Company's
Current Report on Form 8-K dated March 31, 2000 (No.
001-13845))
10.120 First Amendment to Option Agreement by and among IPC,
Balanced Care Corporation, and New Meditrust Company LLC
(incorporated by reference to Exhibit 10.5 of the Company's
Current Report on Form 8-K dated March 31, 2000 (No.
001-13845))
10.121 Subordination Agreement by and among FRR Investments
Limited, IPC, HHF,Inc., Balanced Care Corporation, and the
entities listed on Exhibit A and Exhibit D thereto
(incorporated by reference to Exhibit 10.6 of the Company's
Current Report on Form 8-K dated March 31, 2000 (No.
001-13845))
10.122 Stock Pledge Agreement by and among FRR Investments Limited,
IPC, Balanced Care Corporation, and the parties listed on
Schedule 1 and Schedule 2 thereto (incorporated by reference
to Exhibit 10.7 of the Company's Current Report on Form 8-K
dated March 31, 2000 (No. 001-13845))
10.123 Purchase Agreement by and between Balanced Care Corporation
and RH Investments Limited (incorporated by reference to
Exhibit 10.2 of the Company's Current Report on Form 8-k
dated July 19, 2000 (No. 001-13845))
10.124 Purchase Agreement by and between Balanced Care Corporation
and VXM Investments Limited (incorporated by reference to
Exhibit 10.3 of the Company's Current Report on Form 8-k
dated July 19, 2000 (No. 001-13845))
10.125 Purchase Agreement by and between Balanced Care Corporation
and HR Investments Limited (incorporated by reference to
Exhibit 10.1 of the Company's Current Report on Form 8-k
dated July 19, 2000 (No. 001-13845))
10.126 Takeover Agreement by and between BCC Development and
Management Co., St. Paul Fire and Marine Company, and United
States Fidelity & Guaranty Company dated May 15, 2000 (filed
herewith)
10.127 Completion Agreement by and between BCC Development and
Management Company and United States Fidelity Guaranty
Company dated June 2000 (filed herewith)
10.128 Agreement to Enter into Master Leases, Termination of Leases
and Affirmation of Guaranties by and between Landlords,
Tenants, Guarantors, and Managers as identified therein
dated June 26, 2000 (filed herewith)
10.129 Master Lease and Security Agreement (Migratory) by and
between NHP; MLD Delaware Trust; C&G Healthcare at
Tallahassee, L.L.C.; C&G Healthcare at Pensacola, L.L.C.;
Elder Care Operators of York, LLC; Elder Care Operators of
Lakemont Farms, LLC; Elder Care Operators of Hilliard, LLC;
Elder Care Operators of Akron, LLC dated July 1, 2000 (filed
herewith)
10.130 Guaranty of Master Lease and Security Agreement and Letter
of Credit Agreement (Migratory) and Letter of Credit
Agreement (Migratory) by and between Balanced Care
Corporation; NHP; MLD Delaware Trust; Balanced Care at
Tallahassee, Inc.; Balanced Care at Pensacola, Inc.;
Balanced Care at York, Inc.; Balanced Care at Lakemont
Farms, Inc.; Balanced Care at Hilliard, Inc.; and Balanced
Care at Akron, Inc. dated July 1, 2000 (filed herewith)
10.131 Master Lease and Security Agreement (Cumberland) by and
between NHP, C&G Healthcare at Hagerstown, L.L.C., Elder
Care Operators of Bristol, LLC, C&G Healthcare at Johnson
City, L.L.C., Eldercare Operators of Murfreesboro, LLC, and
C&G Healthcare at Teay's Valley, LLC dated July 1, 2000
(filed herewith)
10.132 Guaranty of Master Lease and Security Agreement (Cumberland)
and Letter of Credit Agreement (Cumberland) by and between
Balanced Care Corporation, NHP, Balanced Care at Hagerstown,
Inc., Balanced Care at Bristol, Inc., Balanced Care at
Johnson City, Inc., Balanced Care at Murfreesboro, Inc., and
Balanced Care at Teay's Valley, Inc. dated July 1, 2000
(filed herewith)
10.133 Letter of Credit Agreement (Migratory) by and between NHP,
MLD Delaware Trust, C&G Healthcare at Tallahassee, L.L.C.;
C&G Healthcare at Pensacola, L.L.C.; Elder Care Operators of
York, LLC; Elder Care Operators of Lakemont Farms, LLC;
Elder Care Operators of Hilliard, LLC; Elder Care Operators
of Akron dated , 2000 (filed herewith)
</TABLE>
95
<PAGE> 96
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.134 Letter of Credit Agreement (Cumberland) by and between NHP,
C&G Healthcare at Hagerstown, L.L.C., Elder Care Operators
of Bristol, LLC, C&G Healthcare at Johnson City, L.L.C.,
Eldercare Operators of Murfreesboro, LLC, and C&G Healthcare
at Teay's Valley, LLC dated , 2000 (filed
herewith)
10.135 Amendment and Joinder to Registration Rights Agreement by
and among Balanced Care Corporation, IPC, HR Investments
Limited, RH Investments Limited and VXM Investments Limited
dated as of July 31, 2000 (filed herewith)
10.136 9.5% Unsecured Convertible Grid Debenture issued to HR
Investments Limited by Balanced Care Corporation on July 31,
2000 (filed herewith)
10.137 9.5% Unsecured Convertible Grid Debenture issued to RH
Investments Limited by Balanced Care Corporation on July 31,
2000 (filed herewith)
10.138 9.5% Unsecured Convertible Grid Debenture issued to VXM
Investments limited by Balanced Care Corporation on July 31,
2000 (filed herewith)
10.139 Amendment No. 1 to 9.5% Unsecured Convertible Grid Debenture
(incorporated by reference to Exhibit 4.1 of the Company's
Current Report on Form 8-K dated August 4, 2000 (No.
001-13845))
10.140 Completion Agreement by and between BCC Development and
Management Company, Inc. and United States Fidelity and
Guaranty Company dated August 3, 2000 (filed herewith)
21.1 Schedule of Subsidiaries of Balanced Care Corporation (filed
herewith)
23.1 Independent Auditors' Consent -- KPMG Peat Marwick LLP
(filed herewith)
27.1 Financial Data Schedule (filed herewith)
</TABLE>
---------------
* Certain exhibits and schedules to the Exhibits attached hereto have been
omitted in accordance with Item 601(b)(2) of Regulation S-K. A copy of any
omitted exhibit of schedule will be furnished to the Commission upon request.
** Management contract or compensatory plan or arrangement required to be filed
as an exhibit to this Annual Report on Form 10-K.
(b) Reports on Form 8-K: A Current Report dated July 19, 2000 on Form 8-K
was filed for the quarter ended June 30, 2000.
(c) Exhibits:
See (a)(3) above.
(d) Financial Statement Schedule:
Schedule II -- Valuation and Qualifying Accounts.
All other schedules for which provision is made in the applicable
accounting regulations of the United States Securities and Exchange Commission
have been omitted because such schedules are not required under the related
instructions or are inapplicable or because the information required is included
in the consolidated financial statements or notes thereto.
96
<PAGE> 97
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the United States
Securities Exchange Act of 1934, the Registrant has duly caused this Annual
Report to be signed on its behalf by the undersigned, thereunto duly authorized.
BALANCED CARE CORPORATION
By: /s/ BRAD E. HOLLINGER
------------------------------------
Brad E. Hollinger
Chairman of the Board, President and
Chief Executive Officer
Date: September 28, 2000
Pursuant to the requirements of the United States Securities Exchange Act
of 1934, this report has been signed below by the following on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ BRAD E. HOLLINGER Chairman of the Board, September 28, 2000
--------------------------------------------------- President and Chief
Brad E. Hollinger Executive Officer and a
Director (Principal
Executive Officer)
/s/ CLINT T. FEGAN Chief Financial Officer September 28, 2000
--------------------------------------------------- (Principal Financial
Clint T. Fegan Officer)
/s/ DIANE M. BORGER Vice President, Treasurer September 28, 2000
--------------------------------------------------- (Principal Accounting
Diane M. Borger Officer)
/s/ DAVID L. GOLDSMITH Director September 28, 2000
---------------------------------------------------
David L. Goldsmith
/s/ EDWARD R. STOLMAN Director September 28, 2000
---------------------------------------------------
Edward R. Stolman
/s/ GEORGE H. STRONG Director September 28, 2000
---------------------------------------------------
George H. Strong
/s/ PIER C. BORRA Director September 28, 2000
---------------------------------------------------
Pier C. Borra
/s/ PAUL REICHMANN Director September 28, 2000
---------------------------------------------------
Paul Reichmann
/s/ BARRY REICHMANN Director September 28, 2000
---------------------------------------------------
Barry Reichmann
/s/ MANFRED WALT Director September 28, 2000
---------------------------------------------------
Manfred Walt
/s/ GEORGE KUHL Director September 28, 2000
---------------------------------------------------
George Kuhl
</TABLE>
97
<PAGE> 98
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3.1 Amended and Restated Certificate of Incorporation of
Balanced Care Corporation (incorporated by reference to
Exhibit 3.1 to the Registration Statement on Form S-1 (No.
333-37833))
3.2 Certificate of Elimination of Series C Convertible Preferred
Stock of Balanced Care Corporation (incorporated by
reference to Exhibit 3.1 to the Quarterly Report on form
10-Q for the quarter ended March 31, 2000 (No. 001-13845))
3.3 Bylaws of Balanced Care Corporation, as amended
(incorporated by reference to Exhibit 3.2 to the
Registration Statement on Form S-1 (No. 333-37833))
3.4 Amendment to Amended and Restated By-laws of Balanced Care
Corporation dated August 17, 2000 (filed herewith)
3.5 Balanced Care Corporation 1996 Stock Incentive Plan as
Amended and Restated, effective as of November 4, 1999
(filed herewith)
4.1 Form of Capital Stock Purchase Warrant, together with
schedule (incorporated by reference to Exhibit 4.9 to the
Registration Statement on Form S-1 (No. 333-37833))
4.2 Form of Capital Stock Purchase Warrant, together with
schedule (incorporated by reference to Exhibit 4.11 to the
Registration Statement on Form S-1 (No. 333-37833))
4.3 Subscription Agreement dated October 8, 1999, as amended and
restated October 11, 1999 between Balanced Care Corporation
and IPC Advisors S.a.r.l. ("IPC") (incorporated by reference
to Exhibit 4.1 of the Company's Current Report on Form 8-K
dated October 21, 1999 (No. 001-13845))
4.4 Registration Rights Agreement between Balanced Care
Corporation and IPC dated October 8, 1999 (incorporated by
reference to Exhibit 4.2 of the Company's Current Report on
Form 8-K dated October 21, 1999 (No. 001-13845))
4.5 Amendment No. 1 to 9.5% Unsecured Convertible Grid Debenture
(incorporated by reference to Exhibit 4.1 of the Company's
Current Report on Form 8-K dated August 4, 2000 (No.
001-13845))
9.1 Voting Agreement dated October 8, 1999 among IPC, the
Company and certain of its stockholders (incorporated by
reference to Exhibit 9.1 of the Company's Current Report on
Form 8-K dated October 21, 1999 (No. 001-13845))
10.1 Form of Meditrust Facility Lease Agreement, together with
schedule (incorporated by reference to Exhibit 10.46 to the
Registration Statement on Form S-1 (No. 333-37833))
10.2 Form of Meditrust Facility Lease Agreement (incorporated by
reference to Exhibit 10.2 to the Company's Annual Report on
Form 10-K for the year ended June 30, 1998 (No. 001-13845))
10.3 Schedule to Form of Meditrust Facility Lease Agreement
(incorporated by reference 10.3 to the Company's Annual
Report on Form 10-K for the year ended June 30, 1998 (No.
001-13845))
10.4 Form of Meditrust Option Agreement (incorporated by
reference to Exhibit 10.6 to the Company's Annual Report on
Form 10-K for the year ended June 30, 1998 (No. 001-13845))
10.5 Schedule to Form of Meditrust Option Agreement (incorporated
by reference to Exhibit 10.7 to the Company's Annual Report
on Form 10-K for the year ended June 30, 1998 (No.
001-13845))
10.6 Form of Meditrust Shortfall Funding Agreement (incorporated
by reference to Exhibit 10.8 to the Company's Annual Report
on Form 10-K for the year ended June 30, 1998 (No.
001-13845))
10.7 Schedule to Form of Meditrust Shortfall Funding Agreement
(incorporated by reference to Exhibit 10.9 to the Company's
Annual Report on Form l0-K for the year ended June 30, 1998
(No. 001-13845))
10.8 Form of Meditrust Working Capital Assurance Agreement
(incorporated by reference to Exhibit 10.10 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1998
(No. 001-13845))
10.9 Schedule to Form of Meditrust Working Capital Assurance
Agreement (incorporated by reference to Exhibit 10.11 to the
Company's Annual Report on Form 10-K for the year ended June
30, 1998 (No. 001-13845))
10.10 Form of American Health Properties, Inc. ("AHP") Lease and
Security Agreement (incorporated by reference to Exhibit
10.32 to the Company's Annual Report on Form 10-K for the
year ended June 30, 1998 (No. 001-13845))
</TABLE>
<PAGE> 99
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.11 Schedule to Form of AHP Lease and Security Agreement
(incorporated by reference to Exhibit 10.33 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1998
(No. 001-13845))
10.12 Form of AHP Option Agreement (incorporated by reference to
Exhibit 10.36 to the Company's Annual Report on Form 10-K
for the year ended June 30, 1998 (No. 001-13845))
10.13 Schedule to Form of AHP Option Agreement (incorporated by
reference to Exhibit 10.37 to the Company's Annual Report on
Form 10-K for the year ended June 30, 1998 (No. 001-13845))
10.14 AHP Option Agreement II (incorporated by reference to
Exhibit 10.38 to the Company's Annual Report on Form 10-K
for the year ended June 30, 1998 (No. 001-13845))
10.15 Form of AHP Shortfall Funding Agreement, together with
schedule (incorporated by reference to Exhibit 10.75 to the
Registration Statement on Form S-1 (No. 333-37833))
10.16 Schedule to Form of AHP Shortfall Funding Agreement
(incorporated by reference to Exhibit 10.40 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1998
(No. 001-13845))
10.17 Form of AHP Working Capital Assurance Agreement, together
with schedule (incorporated by reference to Exhibit 10.80 to
the Registration Statement on Form S-1 (No. 333-37833))
10.18 Schedule to Form of AHP Working Capital Assurance Agreement
(incorporated by reference to Exhibit 10.42 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1998
(No. 001-13845))
10.19 Form of Ocwen Financial Corporation ("Ocwen") Lease
Agreement (incorporated by reference to Exhibit 10.43 to the
Company's Annual Report on Form 10-K for the year ended June
30, 1998 (001-13845))
10.20 Schedule to Form of Ocwen Lease Agreement (incorporated by
reference to Exhibit 10.44 to the Company's Annual Report on
Form 10-K for the year ended June 30, 1998 (No. 001-13845))
10.21 Form of Ocwen Option Agreement (incorporated by reference to
Exhibit 10.47 to the Company's Annual Report on Form 10-K
for the year ended June 30, 1998 (No. 001-13845))
10.22 Schedule to Form Option Agreement (incorporated by reference
to Exhibit 10.48 to the Company's Annual Report on Form 10-K
for the year ended June 30, 1998 (No. 001-13845))
10.23 Form of Ocwen Shortfall Funding Agreement(incorporated by
reference to Exhibit 10.49 to the Company's Annual Report on
Form 10-K for the year ended June 30, 1998 (No. 001-13845))
10.24 Schedule to Form of Ocwen Shortfall Funding Agreement
(incorporated by reference to Exhibit 10.50 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1998
(No. 001-13845))
10.25 Ocwen Shortfall Funding Agreement II (incorporated by
reference to Exhibit 10.51 to the Company's Annual Report on
Form 10-K for the year ended June 30, 1998 (No. 001-13845))
10.26 Form of Ocwen Working Capital Assurance Agreement
(incorporated by reference to Exhibit 10.52 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1998
(No. 001-13845))
10.27 Schedule to Form of Ocwen Working Capital Assurance
Agreement (incorporated by reference to Exhibit 10.53 to the
Company's Annual Report on Form 10-K for the year ended June
30, 1998 (No. 001-13845))
10.28 Ocwen Working Capital Assurance Agreement II (incorporated
by reference to Exhibit 10.54 to the Company's Annual Report
on Form 10-K for the year ended June 30, 1998 (No.
001-13845))
10.29 First Amendment to Option Agreements, Shortfall Funding
Agreements and Stock Pledge Agreements (incorporated by
reference to Exhibit 10.55 to the Company's Annual Report on
Form 10-K for the year ended June 30, 1998 (No. 001-13845))
10.30 Form of Capstone Lease, together with schedule (incorporated
by reference to Exhibit 10.22 to the Registration Statement
on Form S-1 (No. 333-37833))
10.31 Form of Capstone Lease (incorporated by reference to Exhibit
10.57 to the Company's Annual Report on Form 10-K for the
year ended June 30, 1998 (No. 001-13845))
10.32 Schedule to Form of Capstone Lease (incorporated by
reference to Exhibit 10.58 to the Company's Annual Report on
Form 10-K for the year ended June 30, 1998 (No. 001-13845))
</TABLE>
<PAGE> 100
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.33 Form of Capstone Option Agreement (incorporated by reference
to Exhibit 10.60 to the Company's Annual Report on Form 10-K
for the year ended June 30, 1998 (No. 001-13845))
10.34 Schedule to Form of Capstone Option Agreement (incorporated
by reference to Exhibit 10.61 to the Company's Annual Report
on Form 10-K for the year ended June 30, 1998 (No.
001-13845))
10.35 Form of Capstone Shortfall Funding Agreement (incorporated
by reference to Exhibit 10.62 to the Company's Annual Report
on Form 10-K for the year ended June 30, 1998 (No.
001-13845))
10.36 Schedule to Form of Capstone Shortfall Funding Agreement
(incorporated by reference to Exhibit 10.63 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1998
(No. 001-13845))
10.37 Form of Capstone Working Capital Assurance Agreement
(incorporated by reference to Exhibit 10.64 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1998
(No. 001-13845))
10.38 Schedule to Form of Capstone Working Capital Assurance
Agreement (incorporated by reference to Exhibit 10.65 to the
Company's Annual Report on Form 10-K for the year ended June
30, 1998 (No. 001-13845))
10.39 Form of Capstone Assignment, Assumption and Amendment
Agreement (incorporated by reference to Exhibit 10.66 to the
Company's Annual Report on Form 10-K for the year ended June
30, 1998 (No. 001-13845))
10.40 Schedule to Form of Capstone Assignment, Assumption and
Amendment Agreement (incorporated by reference to Exhibit
10.67 to the Company's Annual Report on Form 10-K for the
year ended June 30, 1998 (No. 001-13845))
10.41 Lease dated as of March 21, 1996, by and between HCPI Trust
and BCC at Mt. Royal Pines, Inc. (incorporated by reference
to Exhibit 10.34 of the Registration Statement on Form S-1
(No. 333-38733))
10.42 First Amendment dated as of March 31, 1997, to Lease dated
as of March 21, 1996 by and between HCPI Trust and BCC at
Mt. Royal Pines, Inc. (incorporated by reference to Exhibit
10.35 to the Registration Statement on Form S-1 (No.
333-37833))
10.43 Loan and Security Agreement among Balanced Care Corporation
and certain of its wholly-owned subsidiaries and HCFP
Funding, Inc. ("HCFP") (incorporated by reference to Exhibit
10.1 to the Company's Annual Report on Form 10-K for the
year ended June 30, 1999 (No. 001-13845))
10.44 Revolving Credit Note from Balanced Care Corporation and
certain of its wholly-owned subsidiaries in favor of HCFP
(incorporated by reference to Exhibit 10.2 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1999
(No. 001-13845))
10.45 Environmental Indemnity Agreement by Balanced Care
Corporation and certain of its wholly-owned subsidiaries in
favor of HCFP (incorporated by reference to Exhibit 10.3 to
the Company's Annual Report on Form 10-K for the year ended
June 30, 1999 (No. 001-13845))
10.46 Deed of Trust, Assignment of Rents and Leases and Security
Agreement from Balanced Care at North Ridge, Inc. in favor
of HCFP (incorporated by reference to Exhibit 10.4 to the
Company's Annual Report on Form 10-K for the year ended June
30, 1999 (No. 001-13845))
10.47 Form of Open-End Mortgage, Assignment of Rents, Leases and
Security Agreement in favor of HCFP (incorporated by
reference to Exhibit 10.5 to the Company's Annual Report on
Form 10-K for the year ended June 30, 1999 (No. 001-13845))
10.48 Schedule to Form of Open-End Mortgage, Assignment of Rents,
Leases and Security Agreement in favor of HCFP (incorporated
by reference to Exhibit 10.6 to the Company's Annual Report
on Form 10-K for the year ended June 30, 1999 (No.
001-13845))
10.49 Amendment No. 1 to Loan and Security Agreement among
Balanced Care Corporation and certain of its wholly-owned
subsidiaries and HCFP dated July 1, 1999 (incorporated by
reference to Exhibit 10.8 to the Company's Annual Report on
Form 10-K for the year ended June 30, 1999 (No. 001-13845))
10.50 Amendment No. 2 to Loan and Security Agreement among
Balanced Care Corporation and certain of its wholly-owned
subsidiaries and HCFP dated July 29, 1999 (incorporated by
reference to Exhibit 10.9 to the Company's Annual Report on
Form 10-K for the year ended June 30, 1999 (No. 001-13845))
</TABLE>
<PAGE> 101
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.51 Employment Agreement dated as of August 1, 1996, by and
between Balanced Care Corporation and Brad E. Hollinger
(incorporated by reference to Exhibit 10.37 of the
Registration Statement on Form S-1 (No. 333-37833))**
10.52 Employment Agreement dated as of September 20, 1995, by and
between Balanced Care Corporation and Robert J. Sutton
(incorporated by reference to Exhibit 10.39 to the
Registration Statement on Form S-1 (No. 333-37833))**
10.53 Form of HCRI Lease 1998 (incorporated by reference to
Exhibit 10.1 to the Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998 (No. 001-13845))
10.54 Schedule to Form of HCRI Lease (incorporated by reference to
Exhibit 10.2 to the Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998 (No. 001-13845))
10.55 Form of HCRI Construction Disbursing Agreement (incorporated
by reference to Exhibit 10.3 to the Quarterly Report on Form
10-Q for the quarter ended September 30, 1998 (No.
001-13845))
10.56 Schedule to Form of HCRI Construction Disbursing Agreement
(incorporated by reference to Exhibit 10.4 to the Quarterly
Report on Form 10-Q for the quarter ended September 30, 1998
(No. 001-13845))
10.57 Form of HCRI Option Agreement (incorporated by reference to
Exhibit 10.5 to the Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998 (No. 001-13845))
10.58 Schedule to Form of HCRI Option Agreement (incorporated by
reference to Exhibit 10.6 to the Quarterly Report on Form
10-Q for the quarter ended September 30, 1998 (No.
001-13845))
10.59 Form of HCRI Shortfall Funding Agreement (incorporated by
reference to Exhibit 10.7 to the Quarterly Report on Form
10-Q for the quarter ended September 30, 1998 (No.
001-13845))
10.60 Schedule to Form of HCRI Shortfall Funding Agreement
(incorporated by reference to Exhibit 10.8 to the Quarterly
Report on Form 10-Q for the quarter ended September 30, 1998
(No. 001-13845))
10.61 Form of HCRI Working Capital Assurance Agreement
(incorporated by reference to Exhibit 10.9 to the Quarterly
Report on Form 10-Q for the quarter ended September 30, 1998
(No. 001-13845))
10.62 Schedule to Form of HCRI Working Capital Assurance Agreement
(incorporated by reference to Exhibit 10.10 to the Quarterly
Report on Form 10-Q for the quarter ended September 30, 1998
(No. 001-13845))
10.63 Form of HCRI Management Agreement (incorporated by reference
to Exhibit 10.11 to the Quarterly Report on Form 10-Q for
the quarter ended September 30, 1998 (No. 001-13845))
10.64 Schedule to Form of HCRI Management Agreement (incorporated
by reference to Exhibit 10.12 to the Quarterly Report on
Form 10-Q for the quarter ended September 30, 1998 (No.
001-13845))
10.65 Form of HCRI Guaranty (incorporated by reference to Exhibit
10.13 to the Quarterly Report on Form 10-Q for the quarter
ended September 30, 1998 (No. 001-13845))
10.66 Schedule to Form of HCRI Guaranty (incorporated by reference
to Exhibit 10.14 to the Quarterly Report on Form 10-Q for
the quarter ended September 30, 1998 (No. 001-13845))
10.67 Form of HCRI Loan Agreement (incorporated by reference to
Exhibit 10.15 to the Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998 (No. 001-13845))
10.68 Schedule to Form of HCRI Loan Agreement (incorporated by
reference to Exhibit 10.16 to the Quarterly Report on Form
10-Q for the quarter ended September 30, 1998 (No.
001-13845))
10.69 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(No. 001-13845))
10.70 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 (No. 001-13845))
10.71 Consulting Agreement between Pier C. Borra and Balanced Care
Corporation dated March 22, 1999, effective December 8, 1998
(incorporated by reference to Exhibit 10.1 to the Quarterly
Report on Form 10-Q for the Quarter ended March 31, 1999(No.
001-13845))
10.72 Employment Agreement between Clint T. Fegan and Balanced
Care Corporation dated February 11, 1999 (incorporated by
reference to Exhibit 10.2 to the Quarterly Report on Form
10-Q for the quarter ended March 31, 1999(No. 001-13845))**
</TABLE>
<PAGE> 102
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.73 Change in Control Agreement between Balanced Care
Corporation and Gary W. Anderson dated July 29, 1999
(incorporated by reference to Exhibit 10.36 to the Company's
Annual Report on Form 10-K for the year ended June 30,
1998(No. 001-13845))**
10.74 Form of Change in Control Agreement (incorporated by
reference to Exhibit 99.1 of the Company's Current Report on
Form 8-K dated March 29, 2000 (No. 001-13845))**
10.75 Schedule to Form of Change in Control Agreement
(incorporated by reference to Exhibit 99.2 of the Company's
Current Report on Form 8-K dated March 29, 1999, 1999(No.
001-13845))**
10.76 First Amendment to Facility Agreement by and between AHP and
Balanced Care Corporation (incorporated by reference to
Exhibit 10.17 to the Quarterly Report on Form 10-Q for the
quarter ended September 30, 1999 (No. 001-13845))
10.77 First Amendment to Option Agreements, Shortfall Funding
Agreements, Management Agreements, Deposit Pledge
Agreements, and Equity Pledge Agreements by and among
Balanced Care Corporation, Balanced Care at Sagamore Hills,
Inc., Balanced Care at Loyalsock, Inc., Balanced Care at
Lebanon, Inc., Balanced Care at Westerville, Inc., Balanced
Care at Oak Ridge, Inc., Balanced Care at Morristown, Inc.,
Financial Care Investors, LLC, Financial Care Investors of
Sagamore Hills, LLC, Financial Care Investors of Loyalsock,
LLC, Financial Care Investors of Lebanon, LLC, Financial
Care Investors of Westerville, LLC, Financial Care Investors
of Oak Ridge, LLC, and Financial Care Investors of
Morristown, LLC (incorporated by reference to Exhibit 10.18
to the Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999 (file No. 001-13845))
10.78 Form of First Amendment to Lease Agreement (incorporated by
reference to Exhibit 10.19 to the Quarterly Report on Form
10-Q for the quarter ended September 30, 1999 (No.
001-13845))
10.79 Schedule to First Amendment to Lease Agreement (incorporated
by reference to Exhibit 10.20 to the Quarterly Report on
Form 10-Q for the quarter ended September 30, 1999 (No.
001-13845))
10.80 Form of First Amendment to Loan Agreement (incorporated by
reference to Exhibit 10.21 to the Quarterly Report on Form
10-Q for the quarter ended September 30, 1999 (No.
001-13845))
10.81 Schedule to First Amendment to Loan Agreement (incorporated
by reference to Exhibit 10.22 to the Quarterly Report on
Form 10-Q for the quarter ended September 30, 1999 (No.
001-13845))
10.82 Form of First Amendment to Working Capital Assurance
Agreement (incorporated by reference to Exhibit 10.23 to the
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999 (No. 001-13845))
10.83 Schedule to First Amendment to Working Capital Agreement
(incorporated by reference to Exhibit 10.24 to the Quarterly
Report on Form 10-Q for the quarter ended September 30, 1999
(No. 001-13845))
10.84 Form of First Amendment to Lease Agreement (incorporated by
reference to Exhibit 10.25 to the Quarterly Report on Form
10-Q for the quarter ended September 30, 1999 (No.
001-13845))
10.85 Schedule to First Amendment to Lease Agreement (incorporated
by reference to Exhibit 10.26 to the Quarterly Report on
Form 10-Q for the quarter ended September 30, 1999 (No.
001-13845))
10.86 Memorandum of Understanding by and among New Meditrust
Company, LLC, IPC, Balanced Care Corporation, and Balanced
Care Realty at Altoona, Inc., Balanced Care Realty at
Berwick, Inc., Balanced Care Realty at Lewistown, Inc.,
Balanced Care Realty at Mansfield, Inc., Balanced Care
Realty at Martinsburg, Inc., Balanced Care Realty at
Maumelle, Inc, Balanced Care Realty at Mountain Home, Inc.,
Balanced Care Realty at Peckville, Inc., Balanced Care
Realty at Reading, Inc., Balanced Care Realty at Scranton,
Inc., Balanced Care Realty at Sherwood, Inc., and Balanced
Care Realty at State College, Inc. (incorporated by
reference to Exhibit 10.1 of the Company's Current Report on
Form 8-K dated January 14, 2000 (No. 001-13845))
10.87 Option Agreement by and among New Meditrust Company LLC,
IPC, and Balanced Care Corporation (incorporated by
reference to Exhibit 10.2 of the Company's Current Report on
Form 8-K dated January 14, 2000 (No. 001-13845))
10.88 Promissory Note made by Balanced Care Corporation and IPC in
favor of New Meditrust Company LLC (incorporated by
reference to Exhibit 10.3 of the Company's Current Report on
Form 8-K dated January 14, 2000 (No. 001-13845))
</TABLE>
<PAGE> 103
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
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<C> <S>
10.89 Loan Agreement by and among Heller Healthcare Finance, Inc.,
Balanced Care Realty at Berwick, Inc., Balanced Care at
Lewistown, Inc., Balanced Care Realty at Mansfield, Inc.,
Balanced Care Realty at Martinsburg, Inc., Balanced Care
Realty at Maumelle, Inc, Balanced Care Realty at Mountain
Home, Inc., Balanced Care Realty at Peckville, Inc.,
Balanced Care Realty at Reading, Inc., Balanced Care Realty
at Scranton, Inc., Balanced Care Realty at Sherwood, Inc.,
and Balanced Care Realty at State College, Inc.
(incorporated by reference to Exhibit 10.4 of the Company's
Current Report on Form 8-K dated January 14, 2000 (No.
001-13845))
10.90 Indemnification, Defense, Hold Harmless and Reimbursement
Agreement by and between Balanced Care Corporation and IPC
(incorporated by reference to Exhibit 10.6 of the Company's
Current Report on Form 8-K dated January 14, 2000 (No.
001-13845))
10.91 Right of First Refusal Agreement by and among Meditrust
Mortgage Investments, Inc., Meditrust Corporation, and IPC
(incorporated by reference to Exhibit 10.7 of the Company's
Current Report on Form 8-K dated January 14, 2000 (No.
001-13845))
10.92 Asset Purchase Agreement by and between Balanced Care
Corporation and certain subsidiaries and Christian Health
Care of Missouri, Inc. ("CHC") (incorporated by reference to
Exhibit 10.1 of the Company's Current Report on Form 8-K
dated January 27, 2000 (No. 001-13845))
10.93 First Amendment to Asset Purchase Agreement by and between
Balanced Care Corporation and certain subsidiaries and CHC
(incorporated by reference to Exhibit 10.2 of the Company's
Current Report on Form 8-K dated January 27, 2000 (No.
001-13845))
10.94 Second Amendment to Asset Purchase Agreement dated by and
between Balanced Care Corporation and certain subsidiaries
and CHC (incorporated by reference to Exhibit 10.3 of the
Company's Current Report on Form 8-K dated January 27, 2000
(No. 001-13845))
10.95 Third Amendment to Asset Purchase Agreement by and between
Balanced Care Corporation and certain subsidiaries and CHC
(incorporated by reference to Exhibit 10.4 of the Company's
Current Report on Form 8-K dated January 27, 2000 (No.
001-13845))
10.96 Fourth Amendment to Asset Purchase Agreement by and between
Balanced Care Corporation and certain subsidiaries and CHC
(incorporated by reference to Exhibit 10.5 of the Company's
Current Report on Form 8-K dated January 27, 2000 (No.
001-13845))
10.97 Promissory Note (First) made by CHC, Christian Health Care
Terraces, Inc., Regional Care of Nevada, LLC, Regional Care
of Republic, LLC and Cornerstone Health Care, Inc. in favor
of Balanced Care Corporation (incorporated by reference to
Exhibit 10.6 of the Company's Current Report on Form 8-K
dated January 27, 2000 (No. 001-13845))
10.98 Promissory Note (Second) made by CHC, Christian Health Care
Terraces, Inc., Regional Care of Nevada, LLC, Regional Care
of Republic, LLC and Cornerstone Health Care, Inc., in favor
of Balanced Care Corporation (incorporated by reference to
Exhibit 10.7 of the Company's Current Report on Form 8-K
dated January 27, 2000 (No. 001-13845))
10.99 Omnibus Assignment and Assumption Agreement, Amendment of
Loan Documents, Termination of Lease Documents, Consent to
Assignment and Confirmation of Guaranties by and among
Hawthorn Health Properties, Inc., National Care Centers of
Hermitage, Inc., National Care Centers, Inc., National Care
Centers of Lebanon, Inc., Springfield Retirement Village,
Inc., National Care Centers of Nixa, Inc., National Care
Centers of Springfield, Inc., Mt. Vernon Park Care Center
West, Inc., BCC at Lebanon Care Center, Inc., BCC at
Springfield Care Center, Inc., BCC at Lebanon Park Manor,
Inc., BCC at Nixa Park Center, Inc., BCC at Springfield Care
Center, Inc., BCC at Mt. Vernon Park Care Center, Inc., BCC
at Mt. Vernon Park Care Center West, Inc., BCC at Hermitage
Park Care Center, Inc., Balanced Care Corporation, Dixon
Management, Inc., Meditrust Mortgage Investments, Inc., CHC,
Cornerstone Properties Investment II, LLC, Cornerstone
Health Care, Inc., Christian Health Care Personnel Services,
Inc., Christian Health Care, Inc., Christian Health Care of
Hermitage, Inc., Christian Health Care of Lebanon North,
Inc., Christian Health Care of Springfield West Park, Inc.,
Christian Health Care of Springfield West, Inc., Christian
Health Care of Lebanon South, Inc., Christian Health Care of
Springfield East, Inc., Christian Health Care of Nixa, Inc.,
and Alington D. Kilgore(incorporated by reference to Exhibit
10.8 of the Company's Current Report on Form 8-K dated
January 27, 2000 (No. 001-13845))
10.100 Guaranty (BCC) given by Balanced Care Corporation in favor
of Meditrust Mortgage Investments, Inc. (incorporated by
reference to Exhibit 10.9 of the Company's Current Report on
Form 8-K dated January 27, 2000 (No. 001-13845))
</TABLE>
<PAGE> 104
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
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<C> <S>
10.101 Termination Agreement by and among Meditrust Mortgage
Investments, Inc., New Meditrust Company LLC, Hawthorn
Health Properties, Inc., National Care Centers of Hermitage,
Inc., National Care Centers, Inc., National Care Centers of
Lebanon, Inc., Springfield Retirement Village, Inc.,
National Care Centers of Nixa, Inc., National Care Centers
of Springfield, Inc., Mt. Vernon Park Care Center West,
Inc., Balanced Care Corporation, Dixon Management, Inc. and
Balanced Care at Stafford, Inc. (incorporated by reference
to Exhibit 10.10 of the Company's Current Report on Form 8-K
dated January 27, 2000 (No. 001-13845))
10.102 Cross-Default Agreement by and among Balanced Care Stafford,
Inc., New Meditrust Company LLC, Meditrust Mortgage
Investments, Inc. and Balanced Care Corporation
(incorporated by reference to Exhibit 10.11 of the Company's
Current Report on Form 8-K dated January 27, 2000 (No.
001-13845))
10.103 Amendment No. 3 to Loan and Security Agreement among
Balanced Care Corporation and certain of its wholly-owned
subsidiaries and Heller Healthcare Finance, Inc. formerly
known as HCFP Funding, Inc. ("HHF")(incorporated by
reference to Exhibit 10.1 to the Quarterly Report on Form
10-Q for the quarter ended December 31, 1999 (No.
001-13845))
10.104 Senior Housing Rider among HHF, Balanced Care Realty at
State College, Inc., Balanced Care Realty at Altoona, Inc.,
Balanced Care Realty at Lewistown, Inc., Balanced Care
Realty at Reading, Inc., Balanced Care Realty at Berwick,
Inc., Balanced Care Realty at Peckville, Inc., Balanced Care
Realty at Scranton, Inc., Balanced Care Realty at
Martinsburg, Inc., Balanced Care Realty at Maumelle, Inc.,
Balanced Care Realty at Sherwood, Inc., Balanced Care Realty
at Mountain Home, Inc., and Balanced Care Realty at
Mansfield, Inc. (incorporated by reference to Exhibit 10.2
to the Quarterly Report on Form 10-Q for the quarter ended
December 31, 1999 (No. 001-13845))
10.105 Promissory Note A made by Balanced Care Realty at State
College, Inc., Balanced Care Realty at Altoona, Inc.,
Balanced Care Realty at Lewistown, Inc., Balanced Care
Realty at Reading, Inc., Balanced Care Realty at Berwick,
Inc., Balanced Care Realty at Peckville, Inc., Balanced Care
Realty at Scranton, Inc., Balanced Care Realty at
Martinsburg, Inc., Balanced Care Realty at Maumelle, Inc.,
Balanced Care Realty at Sherwood, Inc., Balanced Care Realty
at Mountain Home, Inc., and Balanced Care Realty at
Mansfield, Inc. in favor of HHF (incorporated by reference
to Exhibit 10.3 to the Quarterly Report on Form 10-Q for the
quarter ended December 31, 1999 (No. 001-13845))
10.106 Subordinated Promissory Note B by Balanced Care Realty at
State College, Inc., Balanced Care Realty at Altoona, Inc.,
Balanced Care Realty at Lewistown, Inc., Balanced Care
Realty at Reading, Inc., Balanced Care Realty at Berwick,
Inc., Balanced Care Realty at Peckville, Inc., Balanced Care
Realty at Scranton, Inc., Balanced Care Realty at
Martinsburg, Inc., Balanced Care Realty at Maumelle, Inc.,
Balanced Care Realty at Sherwood, Inc., Balanced Care Realty
at Mountain Home, Inc., and Balanced Care Realty at
Mansfield, Inc. in favor of HHF (incorporated by reference
to Exhibit 10.4 to the Quarterly Report on Form 10-Q for the
quarter ended December 31, 1999 (No. 001-13845))
10.107 Hazardous Materials Indemnity among HHF, Balanced Care
Corporation, Balanced Care Realty at State College, Inc.,
Balanced Care Realty at Altoona, Inc., Balanced Care Realty
at Lewistown, Inc., Balanced Care Realty at Reading, Inc.,
Balanced Care Realty at Berwick, Inc., Balanced Care Realty
at Peckville, Inc., Balanced Care Realty at Scranton, Inc.,
Balanced Care Realty at Martinsburg, Inc., Balanced Care
Realty at Maumelle, Inc., Balanced Care Realty at Sherwood,
Inc., Balanced Care Realty at Mountain Home, Inc., and
Balanced Care Realty at Mansfield, Inc. (incorporated by
reference to Exhibit 10.5 to the Quarterly Report on Form
10-Q for the quarter ended December 31, 1999 (No.
001-13845))
10.108 Guaranty by Balanced Care Corporation in favor of HHF
(incorporated by reference to Exhibit 10.6 to the Quarterly
Report on Form 10-Q for the quarter ended December 31, 1999
(No. 001-13845))
10.109 Form of Open-End Mortgage, Assignment of Rents, Leases and
Security Agreement in favor of HHF (incorporated by
reference to Exhibit 10.7 to the Quarterly Report on Form
10-Q for the quarter ended December 31, 1999 (No.
001-13845))
10.110 Schedule to Form of Open-End Mortgage, Assignment of Rents,
Leases and Security Agreement in favor of HHF (incorporated
by reference to Exhibit 10.8 to the Quarterly Report on Form
10-Q for the quarter ended December 31, 1999 (No.
001-13845))
</TABLE>
<PAGE> 105
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
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<C> <S>
10.111 Form of Mortgage, Assignment of Rents and Security Agreement
in favor of HHF (incorporated by reference to Exhibit 10.9
to the Quarterly Report on Form 10-Q for the quarter ended
December 31, 1999 (No. 001-13845))
10.112 Schedule to Form of Mortgage, Assignment of Rents and
Security Agreement in favor of HHF (incorporated by
reference to Exhibit 10.10 to the Quarterly Report on Form
10-Q for the quarter ended December 31, 1999 (No.
001-13845))
10.113 A Credit Line Deed of Trust, Assignment of Rents and
Security Agreement in favor of HHF dated as of December 30,
1999 (incorporated by reference to Exhibit 10.11 to the
Quarterly Report on Form 10-Q for the quarter ended December
31, 1999 (No. 001-13845))
10.114 Open-End Mortgage, Assignment of Rents and Security
Agreement in favor of HHF (incorporated by reference to
Exhibit 10.12 to the Quarterly Report on Form 10-Q for the
quarter ended December 31, 1999 (No. 001-13845))
10.115 Letter Agreement by and among New Meditrust Company LLC,
Balanced Care Corporation and IPC (incorporated by reference
to Exhibit 10.33 to the Quarterly Report on Form 10-Q for
the quarter ended December 31, 1999 (No. 001-13845))
10.116 Amendment to Loan Documents by and among HHF, Balanced Care
Realty at Altoona, Inc., Balanced Care Realty at Berwick,
Inc., Balanced Care Realty at Lewistown, Inc., Balanced Care
Realty at Mansfield, Inc., Balanced Care Realty at
Martinsburg, Inc., Balanced Care Realty at Maumelle, Inc.,
Balanced Care Realty at Mountain Home, Inc., Balanced Care
Realty at Peckville, Inc., Balanced Care Realty at Reading,
Inc., Balanced Care Realty at Scranton, Inc., Balanced Care
Realty at Sherwood, Inc., and Balanced Care Realty at State
College, Inc. (incorporated by reference to Exhibit 10.1 of
the Company's Current Report on Form 8-K dated March 31,
2000 (No. 001-13845))
10.117 Amended and Restated Promissory Note A in favor of HHF, by
Balanced Care Realty at Altoona, Inc., Balanced Care Realty
at Berwick, Inc., Balanced Care Realty at Lewistown, Inc.,
Balanced Care Realty at Mansfield, Inc., Balanced Care
Realty at Martinsburg, Inc., Balanced Care Realty at
Maumelle, Inc., Balanced Care Realty at Mountain Home, Inc.,
Balanced Care Realty at Peckville, Inc., Balanced Care
Realty at Reading, Inc., Balanced Care Realty at Scranton,
Inc., Balanced Care Realty at Sherwood, Inc., and Balanced
Care Realty at State College, Inc. (incorporated by
reference to Exhibit 10.2 of the Company's Current Report on
Form 8-K dated March 31, 2000 (No. 001-13845))
10.118 Amended and Restated Promissory Note B in favor of HHF, by
Balanced Care Realty at Altoona, Inc., Balanced Care Realty
at Berwick, Inc., Balanced Care Realty at Lewistown, Inc.,
Balanced Care Realty at Mansfield, Inc., Balanced Care
Realty at Martinsburg, Inc., Balanced Care Realty at
Maumelle, Inc., Balanced Care Realty at Mountain Home, Inc.,
Balanced Care Realty at Peckville, Inc., Balanced Care
Realty at Reading, Inc., Balanced Care Realty at Scranton,
Inc., Balanced Care Realty at Sherwood, Inc., and Balanced
Care Realty at State College, Inc. (incorporated by
reference to Exhibit 10.3 of the Company's Current Report on
Form 8-K dated March 31, 2000 (No. 001-13845))
10.119 First Amendment to Promissory Note by and among IPC,
Balanced Care Corporation, and New Meditrust Company LLC
(incorporated by reference to Exhibit 10.4 of the Company's
Current Report on Form 8-K dated March 31, 2000 (No.
001-13845))
10.120 First Amendment to Option Agreement by and among IPC,
Balanced Care Corporation, and New Meditrust Company LLC
(incorporated by reference to Exhibit 10.5 of the Company's
Current Report on Form 8-K dated March 31, 2000 (No.
001-13845))
10.121 Subordination Agreement by and among FRR Investments
Limited, IPC, HHF,Inc., Balanced Care Corporation, and the
entities listed on Exhibit A and Exhibit D thereto
(incorporated by reference to Exhibit 10.6 of the Company's
Current Report on Form 8-K dated March 31, 2000 (No.
001-13845))
10.122 Stock Pledge Agreement by and among FRR Investments Limited,
IPC, Balanced Care Corporation, and the parties listed on
Schedule 1 and Schedule 2 thereto (incorporated by reference
to Exhibit 10.7 of the Company's Current Report on Form 8-K
dated March 31, 2000 (No. 001-13845))
10.123 Purchase Agreement by and between Balanced Care Corporation
and RH Investments Limited (incorporated by reference to
Exhibit 10.2 of the Company's Current Report on Form 8-k
dated July 19, 2000 (No. 001-13845))
</TABLE>
<PAGE> 106
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
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<C> <S>
10.124 Purchase Agreement by and between Balanced Care Corporation
and VXM Investments Limited (incorporated by reference to
Exhibit 10.3 of the Company's Current Report on Form 8-k
dated July 19, 2000 (No. 001-13845))
10.125 Purchase Agreement by and between Balanced Care Corporation
and HR Investments Limited (incorporated by reference to
Exhibit 10.1 of the Company's Current Report on Form 8-k
dated July 19, 2000 (No. 001-13845))
10.126 Takeover Agreement by and between BCC Development and
Management Co., St. Paul Fire and Marine Company, and United
States Fidelity & Guaranty Company dated May 15, 2000 (filed
herewith)
10.127 Completion Agreement by and between BCC Development and
Management Company and United States Fidelity Guaranty
Company dated June 2000 (filed herewith)
10.128 Agreement to Enter into Master Leases, Termination of Leases
and Affirmation of Guaranties by and between Landlords,
Tenants, Guarantors, and Managers as identified therein
dated June 26, 2000 (filed herewith)
10.129 Master Lease and Security Agreement (Migratory) by and
between NHP; MLD Delaware Trust; C&G Healthcare at
Tallahassee, L.L.C.; C&G Healthcare at Pensacola, L.L.C.;
Elder Care Operators of York, LLC; Elder Care Operators of
Lakemont Farms, LLC; Elder Care Operators of Hilliard, LLC;
Elder Care Operators of Akron, LLC dated July 1, 2000 (filed
herewith)
10.130 Guaranty of Master Lease and Security Agreement and Letter
of Credit Agreement (Migratory) and Letter of Credit
Agreement (Migratory) by and between Balanced Care
Corporation; NHP; MLD Delaware Trust; Balanced Care at
Tallahassee, Inc.; Balanced Care at Pensacola, Inc.;
Balanced Care at York, Inc.; Balanced Care at Lakemont
Farms, Inc.; Balanced Care at Hilliard, Inc.; and Balanced
Care at Akron, Inc. dated July 1, 2000 (filed herewith)
10.131 Master Lease and Security Agreement (Cumberland) by and
between NHP, C&G Healthcare at Hagerstown, L.L.C., Elder
Care Operators of Bristol, LLC, C&G Healthcare at Johnson
City, L.L.C., Eldercare Operators of Murfreesboro, LLC, and
C&G Healthcare at Teay's Valley, LLC dated July 1, 2000
(filed herewith)
10.132 Guaranty of Master Lease and Security Agreement (Cumberland)
and Letter of Credit Agreement (Cumberland) by and between
Balanced Care Corporation, NHP, Balanced Care at Hagerstown,
Inc., Balanced Care at Bristol, Inc., Balanced Care at
Johnson City, Inc., Balanced Care at Murfreesboro, Inc., and
Balanced Care at Teay's Valley, Inc. dated July 1, 2000
(filed herewith)
10.133 Letter of Credit Agreement (Migratory) by and between NHP,
MLD Delaware Trust, C&G Healthcare at Tallahassee, L.L.C.;
C&G Healthcare at Pensacola, L.L.C.; Elder Care Operators of
York, LLC; Elder Care Operators of Lakemont Farms, LLC;
Elder Care Operators of Hilliard, LLC; Elder Care Operators
of Akron dated , 2000 (filed herewith)
10.134 Letter of Credit Agreement (Cumberland) by and between NHP,
C&G Healthcare at Hagerstown, L.L.C., Elder Care Operators
of Bristol, LLC, C&G Healthcare at Johnson City, L.L.C.,
Eldercare Operators of Murfreesboro, LLC, and C&G Healthcare
at Teay's Valley, LLC dated , 2000 (filed
herewith)
10.135 Amendment and Joinder to Registration Rights Agreement by
and among Balanced Care Corporation, IPC, HR Investments
Limited, RH Investments Limited and VXM Investments Limited
dated as of July 31, 2000 (filed herewith)
10.136 9.5% Unsecured Convertible Grid Debenture issued to HR
Investments Limited by Balanced Care Corporation on July 31,
2000 (filed herewith)
10.137 9.5% Unsecured Convertible Grid Debenture issued to RH
Investments Limited by Balanced Care Corporation on July 31,
2000 (filed herewith)
10.138 9.5% Unsecured Convertible Grid Debenture issued to VXM
Investments limited by Balanced Care Corporation on July 31,
2000 (filed herewith)
10.139 Amendment No. 1 to 9.5% Unsecured Convertible Grid Debenture
(incorporated by reference to Exhibit 4.1 of the Company's
Current Report on Form 8-K dated August 4, 2000 (No.
001-13845))
10.140 Completion Agreement by and between BCC Development and
Management Company, Inc. and United States Fidelity and
Guaranty Company dated August 3, 2000 (filed herewith)
21.1 Schedule of Subsidiaries of Balanced Care Corporation (filed
herewith)
</TABLE>
<PAGE> 107
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
23.1 Independent Auditors' Consent -- KPMG Peat Marwick LLP
(filed herewith)
27.1 Financial Data Schedule (filed herewith)
</TABLE>
---------------
* Certain exhibits and schedules to the Exhibits attached hereto have been
omitted in accordance with Item 601(b)(2) of Regulation S-K. A copy of any
omitted exhibit of schedule will be furnished to the Commission upon request.
** Management contract or compensatory plan or arrangement required to be filed
as an exhibit to this Annual Report on Form 10-K.
