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U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the Fiscal Year ended: June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from:
Commission File No. 1-14114
RETIREMENT CARE ASSOCIATES, INC.
(Exact Name of Registrant as Specified in its Charter)
COLORADO 43-1441789
(State or Other Jurisdiction of (I.R.S. Employer Identi-
Incorporation or Organization) fication Number)
6000 Lake Forrest Drive, Suite 200, Atlanta, Georgia 30328
(Address of Principal Executive Offices, Including Zip Code)
Registrant's telephone number, including area code: (404) 255-7500
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
Common Stock, $.0001 Par Value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: Common Stock
$.0001 Par Value
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 [ ]
As of September 18, 1997, 14,749,441 shares of common stock were outstanding.
The aggregate market value of the common stock of the Registrant held by
nonaffiliates on that date was approximately $84,064,500.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Documents incorporated by reference: None.
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PART I
ITEM 1. BUSINESS.
THE COMPANY
Retirement Care Associates, Inc. is a leading provider in the
southeastern United States of senior residential care services, which include
long-term care, assisted living and independent living services. The Company's
long-term care facilities provide skilled nursing care, specialty care services
and ancillary services to patients, while its assisted/independent living
centers provide services to residents in need of varying degrees of assistance
with the activities of daily living. Its facilities are located primarily in
rural and non-urban areas in the United States, and it is the largest provider
of senior residential care services in Georgia. As of September 19, 1997, the
Company operated 101 facilities which it owned or leased, and managed an
additional nine facilities for others.
The Company's headquarters are located in Atlanta, Georgia. Its
executive offices are located at 6000 Lake Forrest Drive, Suite 200, Atlanta,
Georgia 30328. Its telephone number at that address is (404) 255-7500.
The Company was formed under the laws of the State of Colorado on
March 24, 1986, under the name "New Frontiers Investments, Inc." to create a
corporate vehicle to seek and acquire a business opportunity.
In February 1987, the Company completed a public offering of units
consisting of shares and warrants. The gross proceeds to the Company from the
offering were approximately $236,455.
On April 2, 1987, the Company acquired 100% of the outstanding shares
of Retirement Care Associates, Inc. ("RetireCare") in exchange for shares of the
Company's common stock, $.0001 par value per share (the "Common Stock").
RetireCare is a corporation formed in 1987 to engage in the business of
consulting to, marketing and managing retirement centers. RetireCare eventually
planned to expand its operations to include acquisition and syndication of
retirement centers.
At the time of the acquisition, the Company changed its name to
"Retirement Care Associates, Inc." Also as a result of the acquisition, there
was a complete change in control of the Company.
The Company attempted to operate in several facets of the retirement
industry, including development, contract management, acquisition and
consulting. Although the Company had some success turning around distressed
properties, it was not able to retain long-term management contracts. In
September 1988, the Company narrowed its goals to focus on long-term marketing
and management contracts of distressed properties.
In October 1988, the Company purchased The Paxton Manor, a 250 unit
retirement facility located in Omaha, Nebraska. This property, constituting
essentially all of the assets of the Company at the time, was subsequently sold
on November 12, 1991, with shareholder approval. In September 1991, Christopher
F. Brogdon and Edward E. Lane agreed to become Directors of the Company and the
existing directors and several major shareholders of the Company verbally agreed
that if Messrs. Brogdon and Lane would invest $50,000 in the Company, the
Company would issue to them 1,447,031 shares of the Company's Common Stock. The
$50,000 was used to pay the expenses of preparing and filing the Company's
delinquent SEC
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reports and tax returns, and paying the state and federal taxes owed as a result
of the sale of the Paxton Manor during 1991. During this period of time, the
Company's Officers and Directors resigned and Chris Brogdon and Edward Lane
became Officers and Directors of the Company.
From November 1991 to November 1992, the Company had no significant
activities other than the filing of delinquent SEC reports and tax returns.
In November 1992, the Company merged with Capitol Care Management
Company, Inc. ("CCMC"), a Georgia corporation engaged in the business of
providing management services to retirement facilities, personal care facilities
and nursing homes. In connection with the merger, the Company issued 964,688
shares of the Company's Common Stock and Promissory Notes in the aggregate
amount of $1,000,000 to the CCMC shareholders. Simultaneously with the merger,
all of the assets, liabilities and operations of CCMC were placed into a newly
formed Georgia corporation named Capitol Care Management Company, Inc. ("Capitol
Care") which is a wholly-owned subsidiary of the Company. On December 31, 1992,
the promissory notes aggregating $1 million were novated and in consideration
therefor the holders of the promissory notes were issued 1,000,000 shares of
Series C Convertible Preferred Stock which were subsequently converted into
964,688 shares of Common Stock.
In December 1993, the Company acquired Retirement Management
Corporation, a Nevada corporation engaged in the business of providing
management and marketing services to retirement care facilities, in a merger
transaction whereby it was merged into Capitol Care. Immediately after the
merger, all of the assets, liabilities and operations of Retirement Management
Corporation were transferred into Retirement Management Corporation ("RMC"), a
newly formed Georgia corporation and a subsidiary of Capitol Care.
On September 30, 1994, the Company acquired approximately 63% of the
outstanding capital stock of Contour Medical, Inc., a publicly-held, Nevada
corporation located in Alpharetta, Georgia, which distributes a full line of
disposable medical supplies to nursing homes, home health agencies and other
healthcare providers. The Company currently owns approximately 60% of the
outstanding capital stock of Contour Medical, Inc.
In July, 1993, the Company effected a 1 for 12 reverse stock split of
the shares of the Company's outstanding Common Stock. The Company paid 5%
stock dividends on its outstanding Common Stock in February 1994, February 1995
and May 1996. All financial information and share data in this Report give
retroactive effect to the reverse split and stock dividends.
On February 17, 1997, the Company entered into an Agreement and Plan of
Merger and Reorganization (the "Merger Agreement") by and among Sun Healthcare
Group, Inc. ("Sun"), Peach Acquisition Corporation, a Colorado corporation and
wholly-owned subsidiary of Sun, and the Company, pursuant to which the
subsidiary of Sun would be merged with and into the Company. The Merger
Agreement was subsequently amended on May 27 and August 21, 1997.
Subject to the terms and conditions of the Merger Agreement (including,
without limitation, approval by the stockholders of Sun and the shareholders of
the Company), upon the effective time of the Merger, each outstanding share of
common stock of the Company (other than shares held in the treasury of the
Company, owned by Sun or any subsidiary of Sun, or held by persons who exercise
their dissenter's rights under Colorado law) will be cancelled and extinguished
and converted automatically into the right to receive 0.520 shares of the common
stock of Sun. As a result of the Merger, the Company will become a wholly-owned
subsidiary of Sun.
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On February 17, 1997, Sun also entered into a Stockholders Stock Option
and Proxy Agreement (the "Option Agreement") by and among Sun and Christopher F.
Brogdon, Connie B. Brogdon, Edward E. Lane, Darrell C. Tucker and Winter Haven
Homes, Inc., collectively owners of approximately 36% of the outstanding shares
of common stock of the Company. Pursuant to the Option Agreement, each of these
shareholders granted to Sun an irrevocable option to purchase such shareholder's
shares at a price per share equal to $9.27 under certain circumstances. In
addition, each shareholder agreed to vote, and granted to Sun an irrevocable
proxy to vote, all voting securities of the Company held by such shareholder in
favor of approval of the Merger Agreement and the Merger and against any merger,
consolidation, sale of assets, reorganization or recapitalization of the Company
with any party other than Sun and its affiliates and against any liquidation or
winding up of the Company.
On February 17, 1997, Sun also entered into a merger agreement to
acquire Contour Medical, Inc.
The Company and Sun have filed with the Securities and Exchange
Commission (the "SEC"), on a confidential basis, a preliminary proxy statement
with respect to the Merger, and Sun and Contour Medical, Inc. filed with the
SEC, on a confidential basis, a preliminary information statement with respect
to the proposed merger of a wholly-owned subsidiary of Sun with and into Contour
Medical, Inc.
The Merger is subject to the approval of the shareholders of the
Company and the stockholders of Sun and will be considered at separate meetings
now anticipated to occur in the fourth quarter of calendar year 1997. The Merger
will be effective promptly following shareholder approval, assuming satisfaction
of other conditions to the Merger.
INTRODUCTION
The Company is a leading provider in the southeastern United States of
senior residential care services, which include long-term care, assisted living
and independent living services. The Company's long-term care facilities provide
skilled nursing care, specialty care services and ancillary services to patients
while the Company's assisted/independent living centers provide services to
residents in need of varying degrees of assistance with the activities of daily
living. Most of the Company's facilities are located in rural and non-urban
areas in the southeastern United States, and the Company is the largest provider
of senior residential long term care services in Georgia.
The Company's strategy is to increase the number of facilities that it
operates (i) primarily by acquiring by purchase or lease independently-owned
long-term care facilities and assisted/independent living centers located in the
Southeast and (ii) secondarily by developing assisted/independent living centers
adjacent or complementary to it existing facilities. Upon the acquisition of a
facility, the Company implements its management information and control systems
and provides capital for necessary physical plant improvements to enable its
professionals to increase occupancy and attain the Company's standards for
quality of care.
The Company's operating strategy with respect to its
assisted/independent living centers is to increase its center occupancy rates by
maintaining high quality social and support services for its residents, to
develop relationships with community leaders and other referral sources and to
implement a strong
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marketing program, including direct mail marketing and advertising and special
events. Assisted living is an increasingly popular form of senior housing which
offers seniors who need or desire help with the activities of daily living and
limited health care services a residential alternative which allows them more
independence and is less costly than a long-term care facility. The Company's
independent living centers offer residents complete independence and provide
basic support services as well as customized services to meet their individual
needs.
The Company's operating strategy with respect to its long-term care
facilities is to improve its payer mix by (i) making capital improvements which
the Company believes are necessary to attract more private pay residents, (ii)
aggressively marketing such facilities to prospective private pay residents and
(iii) seeking Medicare certification for newly acquired facilities. The Company
seeks to enhance the revenue of its existing facilities by offering its
long-term care patients physical, speech, occupational and respiratory therapy,
wound care and other ancillary services. At June 30, 1997, all of the Company's
long-term care facilities were Medicare certified.
The following table sets forth the approximate percentage of the
Company's total revenue attributable to each of Medicare, Medicaid and private
payors during each of the last three fiscal years.
<TABLE>
<CAPTION>
FISCAL 1997 FISCAL 1996 FISCAL 1995
<S> <C> <C> <C>
Medicaid 50% 55% 65%
Medicare 10% 10% 10%
Private 40% 35% 25%
--- --- ---
Total 100% 100% 100%
</TABLE>
SENIOR RESIDENTIAL CARE INDUSTRY
GENERAL. The senior residential care industry encompasses a broad range
of residential and health care services provided to the elderly and to patients
who can be cared for outside the acute care hospital environment. The Company
believes that demand for the services provided by long-term care facilities and
assisted/independent living centers will increase substantially during the next
decade primarily due to demographic and social trends and, to a lesser extent,
the growth of private insurance and governmental payment sources for assisted
living services. Other factors which affect the senior residential care industry
are (i) the limited supply of long-term care facilities, (ii) the effects of
government cost containment measures and (iii) the fragmentation of the
long-term care industry. Furthermore, given the cost containment pressure at the
federal, state and local levels, government and private payers are attracted to,
and motivated to support, long-term care facilities as a more cost effective
alternative to subacute care facilities and to hospitals and assisted living
centers as a less expensive and still effective alternative to traditional
long-term care facilities when ongoing care is needed.
DEMOGRAPHIC AND SOCIAL TRENDS. The consumers of the Company's senior
residential care services are persons generally over 65 years of age. In the
United States, the number of individuals over 65 years of age has increased from
approximately 25 million in 1980 to more than 31 million in 1990. The number of
persons 65 years of age and over is expected to grow to approximately 35 million
in 2000.
GROWTH OF LONG-TERM CARE INSURANCE. Numerous insurance companies
currently offer long-term care insurance which provides the beneficiary coverage
for
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expenses associate with long-term care and assisted/independent living services.
Furthermore, the number of long-term care policies in existence is increasing
rapidly. According to the Health Insurance Association of America, approximately
2.4 million long-term care policies were in existence as of December 1991,
representing a compound average annual growth rate of 31.5% from 1987 to 1991.
In calendar 1994, 1.4 million long-term care policies were purchased as compared
to 0.6 million in 1991. In addition, employers have started to offer long-term
care insurance in their "cafeteria plans," and Congress is considering a
proposal to make long-term care insurance premiums tax deductible. Based upon
these factors and the demographic and social trends of the United States
population, the Company expects more people to be covered by long-term care
insurance.
LIMITED SUPPLY OF LONG-TERM CARE BEDS. The Company believes that
certain factors impacting the available supply of long-term care beds will
favorably impact the demand for the services offered by the Company in the
future. All of the states in the southeastern United States, including the
states in which the Company operates, have enacted certificate of need ("CON")
or similar legislation which restricts the supply of licensed long-term care
facility beds. These laws generally limit the construction of long-term care
facilities, and the addition of beds or services to existing long-term care
facilities, and hence tend to limit the available supply of traditional
long-term care beds. In addition, some long-term care facilities have started to
convert traditional long-term care beds into sub-acute beds.
FRAGMENTED INDUSTRY. Market share data indicate that the long-term care
industry is a highly fragmented and competitive industry in which the 30 largest
providers operate approximately 352,000 beds, or 22% of total industry beds.
Competitive dynamics in the industry, including increasing complexity of medical
needs, growing regulatory and compliance requirements and increasingly
complicated reimbursement systems, have resulted in smaller operators (who lack
the sophisticated management information systems, operating efficiencies and
financial resources necessary to compete effectively) selling their businesses
and operations to companies, such as the Company, that have the management
information systems, operating efficiencies and financial resources necessary to
compete effectively.
The result of these factors is a relative increase in the demand for
long-term facility care, which, in turn, increases the demand for residential
options, such as assisted living facilities, to serve patients historically
served by long-term care facilities. In addition, long-term care facility
operators are continuing to focus on expanding services to sub-acute patients
requiring very high levels of nursing care. As such, the supply of long-term
care beds likely will be increasingly occupied by patients with higher acuity
levels, thereby increasing the supply of lower acuity patients who may be served
by assisted living facilities. The Company believes that, as a result of these
trends, there will be opportunities for assisted living to more cost effectively
provide accommodation and service facilities to provide accommodations and
services on a cost-effective basis to residents requiring lower levels of care
than is generally provided to patients in long-term care facilities.
STRATEGY
The Company's strategy is to increase the number of facilities that it
operates primarily by (i) acquiring by purchase or lease independently-owned
long-term care facilities and assisted/independent living centers located in the
southeastern United States and secondarily by (ii) developing
assisted/independent living centers adjacent or complementary to its existing
facilities. Key elements of this strategy include: (i) acquiring and developing
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additional long-term care and assisted/independent living facilities; (ii)
increasing facility occupancy rates; (iii) improving the payer mix at the
Company's long-term care facilities; and (iv) achieving operating efficiencies.
ACQUIRE AND DEVELOP FACILITIES. The Company intends to acquire and
develop additional long-term care facilities and assisted/independent living
facilities in its existing markets and contiguous areas. Management believes
that such expansion will allow the Company to take better advantage of its
existing expertise and organizational resources and improve margins by reducing
overhead costs. As a result of the growing complexity of regulatory requirements
and the continued pressure on reimbursement rates, the Company believes that
other smaller, independent providers may be more willing to consider selling or
leasing their facilities on terms acceptable to the Company. The Company
believes it is well positioned to make acquisitions because of its reputation
and established geographic presence. In addition, the Company intends to offer a
broad range of senior residential care services. Towards that end, the Company
has recently implemented a strategy to develop assisted living centers adjacent
to its long-term care facilities or independent living centers, thereby creating
senior residential care campuses which offer a greater variety of senior
residential care services in one location. At September 17, 1997, the Company
had 11 of these senior residential care campuses.
In evaluating an existing facility for acquisition, the Company
primarily considers the facility's historical occupancy rates and payor mix,
reputation and compliance history, physical condition and appearance, labor
force stability, the availability of financing on acceptable terms and, in the
case of assisted/independent living facilities, the demographics of the
surrounding area. In evaluating a development project, the Company primarily
considers the strength of the market demand for the senior residential care
services.
Upon the acquisition of a facility, the Company implements its
management information and control systems and provides capital for necessary
physical plant improvements to enable its professionals to increase occupancy
and attain the Company's standards for quality of care. The Company's strategy
with respect to its long-term care facilities is to seek Medicare certification
while simultaneously marketing the facility to attract more Medicare and private
pay residents. The Company believes that with effective cost controls, the
Company's facilities can continue to be profitable with a highly concentrated
Medicaid payer mix.
INCREASE FACILITY OCCUPANCY RATES. The Company believes its occupancy
rates in existing assisted/independent living centers should increase primarily
due to three factors: (i) an enhanced emphasis on facility-specific marketing
efforts; (ii) the continued growth of the elderly segment of the population in
the Company's markets; and (iii) the limited supply of long-term care beds and
assisted/independent living units. Increasing occupancy rates will allow the
Company to further reduce its fixed costs per patient day.
IMPROVE PAYOR MIX. The Company seeks to improve its payer mix at its
long-term care facilities by making capital improvements which management
believes are necessary to attract more private pay residents, by aggressively
marketing such facilities to prospective private pay residents and by seeking
Medicare certification for newly acquired facilities. The Company has recently
implemented a strategy to develop assisted living centers adjacent to its
long-term care facilities or independent living centers, thereby creating a
senior residential care campus which offers a greater variety of senior
residential care services in one location. Management believes that providing a
"continuum of care" to its residents enhances the marketing efforts of its
assisted/independent
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living centers and that these centers should provide a referral source to the
other facilities on the same campus. The Company also has intensified efforts to
provide the full range of Medicare services to eligible patients and is
increasingly concentrating its marketing efforts on private third party payers,
such as managed care and insurance companies, as well as hospital discharge
planners, thereby developing referral sources for both its long-term care and
assisted/independent living centers.
ACHIEVE OPERATING EFFICIENCIES. The Company seeks to reduce its ratio
of general and administrative expenses to total operating revenue as a result of
economies of scale resulting from acquisitions and as a result of efforts to
more efficiently control and manage its businesses. The effective operation of
the Company's managerial and financial information and control systems are
fundamental to its performance. These systems allow the Company, among other
things, to assimilate acquisitions and control costs by achieving reductions of
administrative staff, economies in purchasing, efficient management of patient
care personnel and reduced use of nurses from employment agencies.
LONG-TERM CARE SERVICES. Basic resident services are those
traditionally provided to elderly patients in long-term care facilities with
respect to daily living activities and general medical needs. The Company
provides in all of its facilities room and board, 24-hour skilled nursing care
by registered nurses, licensed practical nurses and certified nursing aides, and
a broad range of support services, including dietary services, therapeutic
recreational activities, social services, housekeeping and laundry services,
pharmaceutical and medical supplies, physical, speech, occupational and
respiratory therapy, wound care and other ancillary services.
ASSISTED LIVING SERVICES. The Company's assisted living centers are
designed to assist those persons generally 75 years of age or over who may
require assistance with any of the five basic activities of daily life (i.e.,
bathing, dressing, eating, walking and toileting). The Company assesses incoming
residents and develops an individualized care plan based on their acuity level.
The Company reassesses each of its residents on a regular basis to determine if
they require additional care. Each of the Company's assisted living facilities
offers its residents with private or semi-private accommodations, ongoing health
assessments, three meals per day and snacks approved by a registered dietician,
as well as 24-hour assistance with activities of daily life, housekeeping
service, linen and personal laundry service, organized social activities and
transportation. The Company's assisted living services are provided in
freestanding assisted living centers and in certain units in each of the
Company's independent living centers.
INDEPENDENT LIVING SERVICES. The Company's independent living centers
offer independent living to seniors. Each center offers a standard package of
services that typically include meal service, laundry and linen service,
housekeeping, organized social activities and transportation. In addition, each
of the Company's independent living facilities offers a menu of separately
priced additional services available at the option of the resident.
LONG-TERM CARE OPERATIONS
FACILITY OPERATIONS. The Company's facilities are currently divided
into 10 regions, each of which is supervised by a regional director of
operations and contains four to eight facilities. The regional director of
operations monitors and supervises all aspects of operations of the facilities
in the region and acts as liaison between such facilities and corporate
headquarters. The regional director of operations is responsible for, among
other things, ensuring
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compliance with federal, state and local regulations, reviewing and monitoring
compliance with corporate policies and procedures and monitoring adherence to
budgets. In addition, each region has a quality assurance nurse and a dietary
consultant who meet regularly with their regional director of operations and
report to the vice president of compliance.
The regional and facility personnel are supported by a corporate staff
based at the Company's headquarters. Corporate personnel work with regional
directors of operations and facility administrators with respect to the
establishment of facility goals and strategies; quality assurance oversight;
reimbursement, accounting, cash management and treasury functions; development
of monitoring systems and operational procedures; human resources management;
and development and implementation of new programs.
Each facility is managed by an on-site, state licensed administrator
who is responsible for the overall operation of the facility, including quality
of care, marketing and financial performance. The administrator is assisted by
various professional and nonprofessional personnel (some of whom may be
independent contractors), including a medical director, nurses and nursing
assistants, social workers, dietary personnel, therapeutic recreation staff and
housekeeping, laundry and maintenance personnel.
The medical treatment of residents is the responsibility of the
residents' attending physicians, who are not employed by the Company and bill
their patients directly for services. The support services provided by the
Company, including therapeutic recreation, speech, occupational, respiratory and
physical therapy, wound care and other ancillary services, are provided
primarily by independent providers under contractual commitments with the
facility.
MARKETING. The Company engages in facility-specific marketing efforts
to maintain and improve occupancy rates and to promote the services, including a
full range of medical services offered by the Company's long-term care
facilities. The Company's marketing activities are conducted primarily by each
facility's admissions director and administrator who together seek to establish
relationships with potential referral sources, such as hospital discharge
planners and managed health care organizations. The Company believes that many
of the services and programs provided by its facilities in the normal course of
business supplement formal marketing efforts by promoting the reputation of each
facility in the community as a provider of quality care. Each facility offers a
variety of community programs and activities which are designed primarily as a
service to the community and as a means to enhance the quality of patient life.
QUALITY ASSURANCE. The Company's quality assurance program with respect
to its long-term care facilities involves personnel at all levels. The Company
has established a quality assurance team comprised of the vice president of
compliance and the facility's senior medical professionals that periodically
visits and inspects each of the Company's long-term care facilities and
evaluates all aspects of the facility's operations, including patient care,
physical environment, patients' rights, patient activities and dietary regimen.
The Company's corporate director of nursing receives quarterly quality assurance
reports from each facility, reviews them against prior quarterly reports and
against applicable state survey results for the facility, and works with the
relevant regional director of operations and the facility's quality assurance
committee to address any deficiencies and work toward continual improvement. All
regional directors of operations, medical and other consulting personnel are
required to prepare and submit reports at the end of each scheduled visit
identifying any patient care or other quality related issues.
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ASSISTED/INDEPENDENT LIVING OPERATIONS
CENTER OPERATIONS. The Company's assisted/independent living centers
are currently divided into five regions, each of which is supervised by a
regional director of operations and contains four to seven centers. The regional
director of operations monitors and supervises all aspects of operations of the
centers in the region and acts as liaison between such facilities and corporate
headquarters. The regional director of operations is responsible for, among
other things, ensuring compliance with applicable federal, state and local
regulations, reviewing and monitoring compliance with corporate policies and
procedures and monitoring adherence to budgets.
Each of the Company's assisted/independent living centers is managed by
an executive director who is responsible for monitoring the day-to-day
operations of the center and the resident assistants who provide the personal
care to the center's residents. Each center also has a social activities
coordinator, a community service representative, a kitchen manager and dietary
staff. The regional and center personnel are supported by a corporate staff
based at the Company's headquarters. Corporate personnel work with regional
directors of operations and the executive director of each center with respect
to the establishment of goals and strategies; quality assurance oversight;
budgeting, accounting, cash management and treasury functions; development of
monitoring systems and operational procedures; human resources management; and
development and implementation of new marketing programs.
In connection with the Company's delivery of services to its assisted
living residents, a resident assistant is responsible for the personal care,
medication supervision (when state law so permits), meal service, housekeeping,
laundry and linen service and social activities of a small number of residents.
In addition, management believes that its method of service delivery permits the
care-giver to establish a better relationship with the resident and in some
cases become an extension of the resident's family.
The Company's Extended Care Program reassesses each of its assisted
living residents on a regular basis to develop a daily care plan that provides
each of the residents with the appropriate level of care and assistance. The
Company has adopted an objective assessment system whereby each resident
receives points based upon his or her acuity level. The Company is then able to
determine the appropriate level of care based on this point acuity assessment.
MARKETING. The Company develops a comprehensive marketing plan for each
of its assisted/independent living centers. The marketing plan identifies the
strengths and weaknesses of the center, the demographic and competitive profile
of the geographic area in which the center is located and provides a strategy
for marketing the center in light of these factors. The plan consists of a
combination of advertising, primarily directed to the adult children of
potential residents, special events, direct mail and community networking, all
of which are designed to generate a sufficient number of inquiries to fill the
center.
The Company's marketing effort sets goals for the number of inquiries,
facility tours, deposits and new residents resulting from such efforts on a
monthly basis. With this targeted marketing approach, management believes that
it has been successful in marketing its assisted/independent living centers.
QUALITY ASSURANCE. The Company's quality assurance program with respect
to its assisted independent living centers involves personnel at all levels. The
Company has established a quality assurance team that periodically visits and
inspects each of the Company's assisted/independent living centers and
evaluates
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all aspects of the center's operations, including resident care, physical
environment, staff appearance, residents' rights, resident activities and
dietary regimen. The management receives the reports from the quality assurance
team, reviews them against prior reports, and works with the relevant regional
director of operations and the facility's administrators to address any
deficiencies and work toward continual improvement.
GENERAL FACILITY OPERATION
MANAGEMENT AND FINANCIAL CONTROLS. The Company has developed integrated
management and financial information systems and controls intended to maximize
operating efficiency. These systems enable management to monitor key operations
and financial data on a timely basis. Key operating data, such as payables and
billing data, cash collections and admissions/discharge data, are entered into
the system daily. This information forms the basis for a variety of management
and financial reports, including monthly financial statements, for each
facility.
PURCHASING. The Company's focus in purchasing is to develop national
pricing contracts for nursing supplies and dietary, housekeeping and laundry
products. Each facility, however, is responsible for purchasing the required
supplies and products pursuant to those contracts.
MANAGEMENT AND MARKETING SERVICES
The Company provides management services to all its owned or leased
facilities, as well as to eight facilities owned by its affiliates and one
facility owned by unaffiliated third parties. See "ITEM 2. PROPERTIES."
Pursuant to its management agreements with the owners of each facility,
the Company supervises the management of the facility as to staffing,
accounting, billing, collections, rate setting and general administration, and
provides marketing services, which include identifying target markets,
developing appropriate marketing strategies and procedures, hiring, training and
supervising qualified leasing counselors as employees of the manager and
budgeting and controlling costs. The Company is responsible for hiring, on
behalf of the owner, all staff, including a facility administrator or executive
director. The management agreements provide for management fees of a flat rate
per month, a percentage of net operating revenues (total revenues less
deductions and allowances for contractual adjustments to third party payors and
charitable allowances) or a combination of a flat rate and a percentage of net
operating revenues. For long-term care facilities, which require the greatest
amount of management services, the Company charges management fees of $4,000 to
$24,000 per month, depending primarily on the number of beds, or, in some cases,
6% of net operating revenues. For assisted/independent living centers, which
involve fewer management services, the Company charges $1,000 to $15,000 per
month, depending primarily on the amount of revenues of the center. The
management agreements also provide a separate fee for the marketing services
provided by the Company to assisted/independent living centers.
The obligations to pay management fees to the Company are general
obligations of the owners of the facilities. In many cases the facilities have
incurred substantial debt in the form of municipal bonds, debentures or similar
debt instruments. The payment of management fees to the Company is generally
subordinated to the payment of these obligations.
-11-
<PAGE> 12
SOURCES OF REVENUES
The Company derives its patient service revenue primarily from a
combination of state Medicaid programs, the federal Medicare program and private
payment sources. The Company's revenues are determined by a number of factors,
including the licensed bed capacity of its facilities, occupancy rates at the
facilities and the payer mix. While management believes that it has been
successful in obtaining reimbursement, there can be no assurance that
reimbursement rates will remain at present levels or increase at rates necessary
to offset the effects of inflation. In particular, cost containment proposals at
both the state and federal levels may impact the Company's ability to recover
its costs of providing services to Medicaid and Medicare patients. See "--
Government Regulation."
MEDICAID. Medicaid refers to the various state-administered
reimbursement programs that are eligible for matching federal funds. Each of the
Company's long-term care facilities participates in the Medicaid program of the
state in which it is located. Under the federal Medicaid statute and
regulations, state Medicaid programs must provide reimbursement rates that are
reasonable and adequate to cover the costs that would be incurred by efficiently
and economically-operated facilities in providing services in conformity with
state and federal laws, regulations and quality and safety standards.
Furthermore, payments must be sufficient to enlist enough providers so that
services under the state's Medicaid plan are available to recipients at least to
the extent that those services are available to the general population.
The Medicaid programs in which the Company's facilities participate pay
a per diem rate based on each facility's reasonable allowable costs incurred in
providing services, subject to cost ceilings applicable to both operating and
fixed costs, plus a return on equity. Reimbursement rates are typically
determined by the state, on a prospective or retrospective basis, from cost
reports filed by each facility. Under a prospective system, per diem rates are
established (generally on an annual basis) based on certain historical costs of
providing services during the prior year, adjusted to reflect factors such as
inflation and any additional services required to be performed; no subsequent
adjustment is made to reflect variations in actual costs from the rates
established. All of the Company's long-term care facilities are reimbursed on a
prospective rate system. Providers must accept reimbursement from Medicaid as
payment in full for the services rendered. The Georgia and Tennessee Medicaid
programs currently include incentive allowances for providers whose costs are
less than certain ceilings and who meet other requirements. See "-- Government
Regulation."
All Medicaid programs conduct periodic financial audits of
participating facilities. To date, adjustments from Medicaid audits have not had
a material adverse effect on the Company. While there can be no assurance that
future adjustments will not have such an effect, the Company believes that the
actual reimbursable amounts determined after audit will approximate the
estimated reimbursable amounts at which Medicaid revenue has been recorded.
MEDICARE. Medicare is a federally-funded and administered health
insurance program primarily designed for individuals who are age 65 or over and
are entitled to receive Social Security benefits. The Medicare program consists
of two parts: Part A covers in-patient hospital services and services furnished
by other institutional health care providers, such as long-term care facilities;
Part B covers the services of doctors, suppliers of medical items and services,
and various types of outpatient services. Part B services include physical,
speech and occupational therapy, pharmaceuticals and medical supplies, certain
intensive rehabilitation and psychiatric services and ancillary diagnostic and
other services of the type provided by long-term care or acute care facilities.
-12-
<PAGE> 13
Part A coverage is limited to a specified term (generally 100 days in a
long-term care facility) and requires beneficiaries to share some of the cost of
covered services through the payment of a deductible and a co-insurance payment.
There are no limits on duration of coverage for Part B services, but there is a
co-insurance requirement for most services covered by Part B.
The majority of the Company's long-term care beds are certified for
Medicare services. Generally, the Company's Medicare participating facilities
receive monthly reimbursement payments during the year at interim rates based
on historical costs. These rates are later adjusted to reflect actual allowable
direct and indirect costs of services based on the submission of a cost report
at the end of each year. Actual costs incurred and reported by each facility
are subject to retrospective audits which can result in upward or downward
adjustments of payments received. To date, adjustments from Medicare audits
have not had a material adverse effect on the Company. While there can be no
assurance that future adjustments will not have such an effect, the Company
believes that the actual reimbursable amounts determined after audit will
approximate the estimated reimbursable amounts at which Medicare revenue has
been recorded.
PRIVATE PAY. Private pay revenues include payments from individuals who
pay directly for services without governmental assistance and include payments
from commercial insurers, Blue Cross organizations, health maintenance
organizations, preferred provider organizations, workers' compensation programs
and other similar payment sources. The Company's rates for private pay residents
are typically higher than rates for patients eligible for assistance under
governmental reimbursement programs. The amount the Company charges to private
pay residents is not subject to regulatory control in any state in which the
Company operates. However, the private pay rates charged by the Company are
influenced primarily by the rates charged by other providers in the local market
and by Medicaid and Medicare reimbursement rates.
All of the Company's patient service revenue attributable to its
assisted/independent living centers is derived exclusively from private pay
sources. Monthly resident fees for the Company's independent living centers
typically range from approximately $1,250 to $1,800 and monthly resident fees
for the Company's assisted living centers typically range from $1,500 to $3,000
based upon the resident's level of required care. Government payments for
assisted living services have been limited and are not material to the Company's
assisted/independent living operations.
ANCILLARY BUSINESSES
On September 30, 1994, the Company acquired approximately 63% of the
outstanding capital stock of Contour Medical, Inc. ("Contour") from certain
shareholders of Contour. In exchange for such shares, the Company issued 125,000
shares of the Company Common Stock and 300,000 shares of the Company's Series AA
Convertible Preferred Stock. The Company currently owns approximately 60% of
Contour's outstanding capital stock.
Contour is a publicly-held company based in Alpharetta, Georgia which
distributes a full line of disposable medical supplies to nursing homes, home
health agencies and other healthcare providers. These supplies include
disposable surgical procedure products for outpatient surgery, X-ray, radiology,
and other imaging technology within the hospital, emergency room, integrated
care facilities and clinic markets. These supplies, such as pads, bags,
equipment covers and drapes, are used to protect equipment, patients and
attending personnel in the surgery or emergency room environment, and are
designed to meet
-13-
<PAGE> 14
the requirements of infection control for medical, industrial and institutional
applications. In addition, Contour markets its REDI NURSE SYSTEMS product line,
which provides custom-packaged procedural trays for use in clinics and long-term
care centers as well as by home health care nurses, and distributes medical
supplies and equipment produced by other manufacturers.
In March 1996, Contour acquired AmeriDyne Corporation, a bulk medical
supply company based in Jackson, Tennessee, which has annual sales of
approximately $10 million.
In August 1996, Contour acquired all of the outstanding stock of
Atlantic Medical Supply Company, Inc. ("Atlantic Medical"), a distributor of
disposable medical supplies and a provider of third-party billing services to
the nursing home and home health care markets. Contour paid $1,400,000 in cash
and promissory notes totaling $10,500,000 for the stock of Atlantic Medical. The
promissory notes bore interest at 7% per annum and were paid in full by the
Company on January 10, 1997. In consideration for the Company's payment of such
promissory notes, Contour issued to the Company 1,950,000 shares of the common
stock of Contour
Retirement Care holds approximately 27% of the outstanding capital
stock of In-House Rehab, Inc., a publicly held company based in Louisville,
Kentucky, whose wholly owned subsidiary, In-House Rehab, Inc., provides
rehabilitation services to approximately 36 of the Company's long-term care
facilities.
COMPETITION
The senior residential care industry is highly competitive. The Company
competes with other providers of senior residential care services on the basis
of the breadth and quality of its services, the quality of its facilities and,
with respect to private pay patients or residents, price. The Company also
competes in the acquisition and development of additional facilities. The
Company's current and potential competitors include national, regional and local
operators of long-term care facilities, acute care hospitals and rehabilitation
hospitals, extended care centers, assisted/independent living centers,
retirement communities, home health agencies and similar institutions, many of
which have significantly greater financial and other resources than the Company.
In addition, the Company competes with a number of tax-exempt nonprofit
organizations which can finance capital expenditures on a tax-exempt basis or
receive charitable contributions unavailable to the Company and which are
generally exempt from paying income tax. There can be no assurance that the
Company will not encounter increased competition which could adversely affect
the Company's operating results.
While the Company's competitive standing varies from market to market,
management believes that the Company competes favorably in substantially all of
the markets it serves based on key competitive factors such as the breadth and
quality of services it offers, the quality of its facilities, its recruitment
and retention of qualified health care personnel and its reputation among local
referral sources.
Competition for the acquisition of long-term care facilities has
remained steady in recent years, but is expected to increase as the demand for
long-term care increases. Construction of new long-term care facilities near the
Company's facilities could adversely affect its business. However, state laws
generally require a CON, which is only issued if the applicant proves that the
need for additional long-term care beds exists under the state devised formula,
before a
-14-
<PAGE> 15
new long-term care facility can be built or beds can be added to existing
facilities. The Company believes that these laws reduce the possibility of
overbuilding and promote higher utilization of existing facilities. CON laws are
in place in all states where the Company operates. While such measures may limit
the Company's expansion of current facilities and possible future acquisitions,
they may also reduce competition in the affected service area.
The Company competes with other health care providers for both
professional and nonprofessional employees and with non-health care providers
for non-professional employees. In recent years the health care industry has
experienced a shortage of qualified health care personnel. While the Company has
been able to retain the services of an adequate number of qualified personnel to
staff its facilities appropriately and maintain its standards of quality care,
there can be no assurance that continued shortages will not affect the ability
of the Company to maintain the desired staffing levels. A lack of qualified
personnel at any facility could result in significant increases in labor costs
or otherwise adversely affect the operations at that facility. Any of these
developments could adversely affect the Company's operating results or expansion
plans.
GOVERNMENT REGULATION
The federal government and all states in which the Company operates
regulate various aspects of the Company's business. In addition to the
regulation of rates by governmental payer sources, the development and operation
of long-term care and assisted living facilities and the provision of long-term
care services are subject to federal, state and local licensure and
certification laws which regulate with respect to a facility, among other
matters, the number of beds, the services provided, the distribution of
pharmaceuticals, the condition and use of medical equipment, staffing
requirements, operating policies and procedures, fire prevention measures and
compliance with building and safety codes and environmental laws. There can be
no assurance that federal, state or local governments will not impose additional
restrictions which might impact the Company's business.
LICENSURE AND CERTIFICATION. All of the facilities operated by the
Company are licensed under applicable state laws and have all required CONs
from responsible state authorities. All of the Company's long-term care
facilities are certified or approved as providers under the Medicaid program,
and the majority of its long-term care facilities are certified or approved as
providers under the Medicare program. Both initial and continuing qualification
of a long-term care facility to participate in the Medicaid and Medicare
programs depend on many factors, including accommodations, equipment, services,
non-discrimination policies against indigent patients, patient care, quality of
life, residents' rights, safety, personnel, physical environment and adequacy
of policies, procedures and controls. Licensing, certification and other
applicable standards vary from jurisdiction to jurisdiction and are revised
periodically. State agencies survey or inspect all long-term care facilities on
a regular basis to determine whether such facilities are in compliance with the
requirements for participation in government-sponsored third party payer
programs. In some cases or upon repeat violations, the reviewing agency has the
authority to take various adverse actions against a facility, including the
imposition of fines, temporary suspension of admission of new patients to the
facility, suspension or decertification from participation in the state
Medicaid or the Medicare program, denial of payment under Medicaid for new
admissions, reduction of payments, and, in extreme circumstances, revocation of
a facility's license or closure of a facility. The compliance history of a
prior operator may be used by state or federal regulators in determining
possible action against a successor operator.
-15-
<PAGE> 16
REGULATORY COMPLIANCE AND ENFORCEMENT. The Company believes that its
facilities comply in all material respects with all applicable statutes,
regulations, standards and requirements, including applicable Medicaid and
Medicare regulatory requirements. However, in the ordinary course of its
business, the Company's long-term care facilities are surveyed from time to time
for regulatory compliance and receive notices of deficiencies for failure to
comply with various regulatory requirements. In most cases, the Company and the
reviewing agency will agree upon corrective measures to be taken to bring the
facility into compliance. To date, statements of deficiency received by the
Company have not had any material adverse effect on its operations, and there is
no pending or threatened decertification of or moratorium on admissions at any
of its facilities. While there can be no assurance that future surveys will not
have a material adverse effect on the Company, based on its operating policies
and compliance procedures, quality assurance programs and past experience, the
Company does not expect to receive any statements of deficiency which would,
either individually or in the aggregate, have a material adverse effect on its
operations.
FRAUD AND ABUSE LAWS. Various federal and state laws regulate the
relationship between providers of health care services and physicians, including
employment or service contracts and investment relationships. These laws include
the broadly-worded fraud and abuse provisions of the Medicaid and Medicare
statutes, which prohibit payments for the referral of Medicaid or Medicare
patients. Violations of these provisions may result in civil or criminal
penalties for individuals or entities or exclusion from participation in the
Medicaid and Medicare programs. Management believes that in the past the Company
has been, and in the future it will be, able to arrange its business
relationships so as to comply with these provisions.
OBRA - 87. Effective October 1, 1990, the Omnibus Budget Reconciliation
Act of 1987 ("OBRA") eliminated the different certification standards for
"skilled" and "intermediate care" nursing facilities under the Medicaid program
in favor of a single "nursing facility standard. This standard requires, among
other things, that the Company have at least one registered nurse on each day
shift and one licensed nurse on each other shift and increases training
requirements for nurse's aides by requiring a minimum number of training hours
and a certification test before a nurse's aide can commence work. States must
continue to certify that nursing facilities provide "skilled care" in order to
obtain Medicare reimbursement. Management is unable to predict how individual
state licensure laws win conform to this change but believes that the Company
will not be materially adversely affected.
RESTRICTIONS ON ACQUISITIONS, CONSTRUCTION AND ADDITIONS. All states in
which the Company operates have adopted CON or similar laws which generally
require that, with respect to long-term care facilities, a state agency
determine that a need exists prior to the addition or reduction of beds or
services, the implementation of other changes, the incurrence of certain capital
expenditures or, in certain states, the closure of a facility. State approvals
are generally issued for a specified maximum expenditure and require
implementation of the proposal within a specified period of time. Failure to
obtain the necessary state approval can result in the inability of the facility
to provide the service, operate the facility or complete the acquisition,
addition or other change in a facility and in the imposition of sanctions or
other adverse action on the facility's license and reimbursement eligibility.
GOVERNMENTAL BUDGETARY RESTRAINTS. Both the federal government and
various states are considering imposing limitations on the amount of funding
available for various health care services. Among the proposals being considered
by the
-16-
<PAGE> 17
United States Congress is a "block grant" funding mechanism for the disbursement
of the federal share of Medicaid payments to the individual states. If enacted,
this could cause a reduction in the availability of Medicaid funds in future
years to the states which, in turn, provide reimbursement to Medicaid-certified
long-term care facilities. In addition, various states are themselves
considering reduced levels of spending in various areas which also could affect
the amount of available Medicaid funding. In November 1995, the United States
Senate and House of Representatives passed a budget reconciliation bill which
would establish a framework for balancing the federal budget in seven years.
While the President vetoed the bill, the Administration has agreed to achieve a
balanced budget in this time frame. The bill passed by the Senate and House
would have resulted in a major restructuring of the current Medicaid program.
Rather than operating as an entitlement program, the new "MediGrant" program
would provide federal block grants to the states for medical assistance programs
to low income individuals and families. While the states would be subject to
certain federal requirements, states would also have broad flexibility to
establish their coverage, eligibility and payment standards. Given the fixed
federal funds that would be available to support state MediGrant programs, there
would be no assurance that, if enacted, these provisions would not have a
material adverse effect on the results of operations of the Company. While
Medicare and Medicaid reimbursements may not continue at the current levels or
rates of increase, it is not possible to predict with certainty the effect of
any legislation upon the Company's operations.
EMPLOYEES. As of June 30, 1997, the Company employed in the aggregate
approximately 7,320 employees, including 106 employees at the Company's
executive offices. The Company believes that its relationship with its employees
is satisfactory. The Company has collective bargaining agreements with unions
representing two of the facilities that the Company operates. The Company is
currently negotiating an agreement with the union representing employees at one
other facility operated by the Company. The employees at the remaining
facilities operated by the Company have not elected to be covered by collective
bargaining agreements.
The Company believes that the attraction and retention of dedicated,
skilled and experienced nursing and other professional staff has been and will
continue to be a critical factor in the successful development of its business.
In response to this challenge, a compensation program which provides for regular
merit and cost-of-living reviews and a variety of financial and other incentives
have been implemented to promote facility staff motivation and productivity and
to reduce turnover rates. The Company believes that its wage rates for nursing
and other professional staff are commensurate with market rates.
INSURANCE
Providing health care services entails an inherent risk of liability.
The Company maintains liability insurance providing coverage which it believes
to be adequate. In addition, the Company maintains property, business
interruption and workers' compensation insurance covering all facilities in
amounts deemed adequate by the Company. The Company carries malpractice
insurance coverage for each of the facilities that it owns, operates or manages
in the amount of $1 million per incident per facility and $3 million annual
aggregate per facility. The Company also carries an umbrella excess liability
insurance policy which has a $20 million per incident limit with an aggregate
limit of $20 million. There can be no assurance that any future claims will not
exceed applicable insurance coverage or that the Company will be able to
continue its present insurance coverage on satisfactory terms, if at all.
-17-
<PAGE> 18
ITEM 2. PROPERTIES.
The Company currently leases approximately 20,000 square feet of office
space for its corporate offices at 6000 Lake Forrest Drive, Suite 200, Atlanta,
Georgia, from an unaffiliated party. This lease expires in October 2000, and
currently requires base monthly lease payments of approximately $36,015. The
Company believes that these facilities are suitable and adequate to meet its
present and anticipated needs.
The following table summarizes certain information regarding facilities
leased, owned and managed by the Company as of September 19, 1997. With
regard to facilities leased from or managed for affiliated companies, the name
of the affiliate is indicated using the following abbreviations: Winter Haven
Homes, Inc. - WHH; Gordon Jensen Health Care Associates, Inc. - GJ; National
Assistance Bureau, Inc. - NAB; Southeastern Cottages, Inc. - SCI; Chamber
Health Care Society - CHCS; and Retirement Group, L.L.C. - RG.
<TABLE>
<CAPTION>
Leased/
Owned/ Occupancy
Number Managed As of
Type of of Beds (Name of September 19,
Name Location Facility or Units Affiliate) 1997
- ------------------ ---------- ----------- -------- --------- ----------
GEORGIA
<S> <C> <C> <C> <C> <C>
Twin View Health Twin City Long-Term 110 Leased 96%
Care Center Care (RG)
Griffin Health Griffin Long-Term 148 Owned 99%
Care Center Care
Midway Health Midway Long-Term 169 Managed 94%
Care Center Care (GJ)
Dearfield Nursing Columbus Long-Term 210 Owned 95%
Facility Care
Summer's Landing- Vidalia Assisted/ 24 Managed 100%
Vidalia Independent (SCI)
Living
Summer's Landing- Cordele Assisted/ 36 Owned 89%
Cordele Independent
Living
Summer's Landing- Douglas Assisted/ 58 Leased 95%
Douglas Independent (GJ)
Living
Summer's Landing- Dublin Assisted/ 56 Owned 89%
Dublin Independent
Living
Summer's Landing- Dahlonega Assisted/ 24 Leased 83%
Dahlonega Independent
Living
Summer's Landing- Griffin Assisted/ 30 Owned 31%
Griffin Independent
Living
</TABLE>
-18-
<PAGE> 19
<TABLE>
<S> <C> <C> <C> <C> <C>
Summer's Landing- Plains Assisted/ 40 Owned Under
Plains Independent Construction
Living
Twelve Oaks Health Riverdale Long-term 152 Leased 93%
Care Care
Cedartown Health Cedartown Long-term 116 Leased 97%
Care Center Care
Floyd Health Care Rome Long-term 100 Leased 91%
Center Care
Friendship Health Cleveland Long-term 89 Leased 97%
Care Center Care
Gateway Health Cleveland Long-term 60 Leased 98%
Care Center Care
Gold City Health Dahlonega Long-term 102 Leased 97%
Care Center Care
Mountain View Clayton Long-term 117 Leased 91%
Health Care Center Care
Sandmont Health Trenton Long-term 71 Leased 97%
Care Center Care
Rome Health Care Rome Long-term 100 Leased 97%
Center Care
Sun Mountain Rome Long-term 100 Leased 95%
Health Care Center Care
Arrowhead Nursing Jonesboro Long-term 115 Owned 92%
Center Care
Roberta Nursing Roberta Long-term 100 Leased 93%
Home Care
West View Health Port Long-term 99 Leased 98%
Care Center Wentworth Care
Peachbelt Health Warner Long-term 106 Leased 87%
Care Center Robins Care
Dogwood Retirement Warner Assisted/ 18 Leased 100%
Village Robins Independent
Living
New Beginnings Covington Long-term 158 Managed 96%
Health & Rehab Care (CHCS)
</TABLE>
-19-
<PAGE> 20
<TABLE>
<S> <C> <C> <C> <C> <C>
Springdale Conva- Atlanta Long-term 109 Owned 95%
lescent Center of Care
Atlanta
Springdale Conva- Carters- Long-term 118 Leased 96%
lescent Center ville Care
of Bartow County
Summer's Landing- Carters- Long-term 50 Owned 46%
Springdale ville Care
Brunswick Nursing Brunswick Long-term 204 Leased 97%
Center Care
Tattnall Nurse Reidsville Long-term 92 Leased 87%
Care Center Care
Altamaha Conva- Jesup Long-term 62 Leased 100%
lescent Center Care
Summer's Landing- Rome Assisted/ 60 Owned 95%
Rome Independent
Living
Riverview Health- Rome Long-term 115 Owned 93%
care Center Care
Marietta Health Marietta Long-term 119 Leased 98%
Care Care
Brown's Health- Statesboro Long-term 64 Leased 95%
care Center Care
Clinch Healthcare Homerville Long-term 92 Leased 88%
Center Care
Jeff Davis Health Hazelhurst Long-term 73 Leased 93%
Care Center Care
Charlton Health Folkston Long-term 92 Leased 85%
Care Center Care
Hartley Woods Macon Long-term 147 Leased 92%
Health & Rehab Care (RG)
Center
The Renaissance - Warner Assisted/ 132 Owned Under
Warner Robbins Robbins Independent Construction
Living
Total for Georgia 4,037 (42 facilities)*
- ---------------
* Excludes facilities under construction.
FLORIDA
Renaissance of Sebring Assisted/ 170 Owned 89%
Sebring Independent
Living
</TABLE>
-20-
<PAGE> 21
<TABLE>
<S> <C> <C> <C> <C> <C>
The Garden at Green Cove Assisted/ 28 Leased 39%
Magnolia Manor Springs Independent (RG)
Living
Magnolia Manor Green Cove Long-term 60 Leased 92%
Nursing Center Springs Care (RG)
Lake Forrest Jackson- Long-term 60 Leased 98%
Health Care ville Care (WHH)
Center
Summer's Landing- Lynn Haven Assisted/ 51 Managed 73%
Lynn Haven Independent (NAB)
Living
The Renaissance Titusville Assisted/ 101 Leased 96%
Independent (WHH)
Living
Renaissance of Sanford Assisted/ 94 Managed 86%
Sanford Independent (WHH)
Living
The Atrium Jackson- Assisted/ 178 Managed 95%
ville Independent and 75%
Care Owned
The Atrium Jackson- Long-term 84 Managed 71%
Nursing Home ville Care and 75%
Owned
The Preserve Pompano Assisted/ 297 Managed 99%
Beach Independent
Living
The Renaissance Destin Assisted/ 116 Owned 97%
of Sandestin Independent
Living
The Edwinola Dade City Assisted/ 214 Owned 76%
Independent
Living
Westwood Fort Walton Assisted/ 208 Owned 93%
Retirement Independent
Living
Southside Health Jackson- Long-term 120 Leased 64%
Care Center ville Care
The Renaissance Lakeland Assisted/ 104 Owned 77%
of Lakeland Independent
Living
</TABLE>
-21-
<PAGE> 22
<TABLE>
<S> <C> <C> <C> <C> <C>
Bayou Villa Pensacola Assisted/ 106 Leased 50%
Independent
Living
Westwood Nursing Fort Walton Long-term 60 Owned 97%
Center Care
Summer's Landing- Jackson- Assisted/ 39 Managed 87%
Atrium ville Independent and 75%
Living Owned
Summer's Landing- Titusville Assisted/ 28 Leased Under
of Titusville Independent (WHH) Con-
Living struc-
tion
Orlando Health Orlando Long-term 132 Leased 92%
Care Center Care
Gainesville Health Gainesville Long-term 180 Leased 82%
& Rehab Center Care
Coventry Square Ocala Long-term 132 Leased 89%
Health & Rehab Care
Center
St. Cloud Health St. Cloud Long-term 131 Leased 86%
Care Center Care
North Jacksonville Jackson- Long-term 60 Leased Under
Rehab and Nursing ville Care Con-
Center struc-
tion
Total for Florida 2,753 (24 facilities)*
- ---------------
*Excludes facilities under construction.
TENNESSEE
Marshall C. Voss Harriman Long-term 139 Managed 89%
Health Care Care (NAB)
Trenton Health Trenton Long-term 58 Leased 95%
Care Center Care (RG)
Summer's Landing- Trenton Assisted/ 22 Leased 100%
Trenton Independent (RG)
Living
Jackson Oaks Jackson Assisted/ 178 Owned 97%
Retirement Independent
Living
</TABLE>
-22-
<PAGE> 23
<TABLE>
<S> <C> <C> <C> <C> <C>
Cumberland Green Henderson- Assisted/ 140 Owned 90%
Retirement ville Independent
Living
Winchester Health Winchester Long-term 80 Leased 100%
Care Care
Health Care Ardmore Long-term 79 Leased 99%
Center of Care
Ardmore
Fayetteville Fayetteville Long-term 79 Leased 98%
Health Care Care
Center
River Park Health Nashville Long-term 78 Leased 90%
Care Center Care
Palmyra Inter- Palmyra Long-term 75 Leased 97%
mediate Care Care
Center
Milan Health Milan Long-term 66 Leased 83%
Care Center Care
Pleasant View Bolivar Long-term 67 Leased 100%
Health Care Care
Center
Lauderdale Ripley Long-term 71 Owned 87%
Healthcare Care
Oak Manor Health McKenzie Long-term 66 Leased 99%
Care Center Care
Parkway Health Memphis Long-term 100 Managed 96%
and Rehab Care (CHCS)
Hillview Nursing Dresden Long-term 70 Owned 100%
Home Care
Crestwood Nursing Manchester Long-term 59 Owned 100%
Home Care
Reelfoot Manor Tiptonville Long-term 120 Leased 85%
Care
Maplewood Health Jackson Long-term 172 Leased 87%
Care Center Care (RG)
Laurelwood Health Laurelwood Long-term 74 Leased 85%
Care Center Care (RG)
Total for Tennessee 1,793 (20 facilities)
</TABLE>
-23-
<PAGE> 24
<TABLE>
<S> <C> <C> <C> <C> <C>
ALABAMA
Gardendale Gardendale Long-term 148 Leased 98%
Health Care Care
Center
Summer's Landing- Gardendale Assisted/ 26 Leased 100%
Gardendale Independent
Living
Summer's Landing- Hanceville Assisted/ 46 Leased 70%
Hanceville Independent
Living
Sea Breeze Mobile Long-term 140 Managed 99%
Health Care Care (WHH)
Center
The Renaissance Decatur Assisted/ 120 Leased 99%
of Decatur Independent
Living
Total for Alabama 480 (5 facilities)
NORTH CAROLINA
Wilkinson Health Gastonia Long-term 50 Leased 98%
Care Center Care
Len-Care Fayetteville Assisted/ 152 Leased 92%
Rest Home Independent
Living
East Carolina Greenville Long-term 150 Leased 85%
Care Care
Len-Care Nursing Elizabeth- Long-term 120 Leased 98%
and Convalescent town Care
Center
Carolina Greenville Assisted/ 120 Leased 71%
Care Independent
Living
Maplewood Nursing Reidsville Long-term 110 Leased 97%
Center Care
Willow Springs Carboro Assisted/ 108 Leased 73%
Health Care Independent
Center Living
Fayetteville Fayetteville Long-term 100 Leased 55%
Health Care Care
Center
Pemberton Place Pembrooke Long-term 84 Leased 98%
Nursing Center Care
</TABLE>
-24-
<PAGE> 25
<TABLE>
<S> <C> <C> <C> <C> <C>
Brookshire Health Brookshire Long-term 80 Leased 96%
Care Center
Total for North 1,074 (10 facilities)
Carolina
VIRGINIA
West Hampton Richmond Long-term 195 Owned 83%
Health and Rehab Care
Center
New River Health- Dublin Long-term 132 Leased 74%
care Center Care
Tappahannock Tappahannock Long-term 118 Owned 78%
Health and Rehab Care
Center
Summer's Landing- Tappahannock Assisted/ 42 Owned 97%
Tappahannock Independent
Living
Brentlox Health & Chesapeake Long-term 120 Owned 98%
Rehab Center Care
Lynn Shores Manor Virginia Long-term 242 Leased 83%
Care
Total for Virginia 849 (6 facilities)
OHIO
Hamlet Chagrin Assisted/ 222 Owned 87%
Retirement Falls Independent
Care
Hamlet Nursing Chagrin Long-term 88 Owned 85%
Manor Falls Care
Total for Ohio 310 (2 facilities)
ARIZONA
The Carillons Sun City Assisted/ 76 Owned 90%
Independent
Care
Total for Arizona 76 (1 facility)
</TABLE>
ITEM 3. LEGAL PROCEEDINGS.
As of October 7, 1997 the Company and certain of its officers and
directors have been named as defendants in nine putative class action lawsuits
which were commenced during the period from August 25, 1997 through October 2,
1997. In
-25-
<PAGE> 26
these actions the plaintiffs allege that the Company and the individual
defendants disseminated materially false and misleading information and failed
to disclose material information concerning the Company's operating condition
and future business prospects. Generally each of the complaints seeks
unspecified compensatory damages, pre-judgment and post-judgment interest,
reasonable attorneys' fees, expert witness fees and other costs, equitable and
injunctive relief. Following is a list of these class actions:
1. Solomon Jacob on behalf of himself and all others similarly
situated, Plaintiff v. Retirement Care Associates, Inc., Chris
Brogdon, Darrell C. Tucker and Edward E. Lane, Defendants.
This complaint was filed on August 29, 1997 in the United
States District Court, Northern District Court of Georgia,
Atlanta Division, Civil Action No. 1:97-CV-2529.
2. Joseph Goldstein, on behalf of himself and all others
similarly situated, Plaintiff v. Retirement Care Associates,
Inc., Chris Brogdon and Darrell C. Tucker, Defendants. This
class action complaint was filed on September 28, 1997 in the
United States District Court, Northern District Court of
Georgia, Atlanta Division, Civil Action No. 1:97-CV-2503.
3. Southland Securities, Inc. on behalf of himself and all others
similarly situated, Plaintiff v. Retirement Care Associates,
Inc., Chris Brogdon, Darrell C. Tucker and Edward E. Lane,
Defendants. This class action complaint was filed on August
27, 1997 in the United States District Court, Northern
District Court of Georgia, Atlanta Division, Civil Action No.
1:97-CV-2494-MHS.
4. Pankai Shah, on behalf of himself and all others similarly
situated, Plaintiff v. Retirement Care Associates, Inc., Chris
Brogdon, Darrell C. Tucker, Julian S. Daley and Harlan
Mathews, Defendants. This class action complaint was filed on
September 10, 1997 in the United States District Court,
Central District of California, Case Number CV-97-6768-GHK
(JGx).
5. Israel Shurkin, on behalf of himself and all others similarly
situated, Plaintiff v. Retirement Care Associates, Inc., Chris
Brogdon, Darrell C. Tucker, Julian S. Daley and Harlan
Mathews, Defendants. This class action complaint was filed on
August 25, 1997 in the United States District Court, Northern
District Court of Georgia, Civil Action No. 1:97-CV-2558.
6. Michael Gerber, on behalf of himself and all others similarly
situated, Plaintiff v. Retirement Care Associates, Inc., Chris
Brogdon and Darrell C. Tucker, Defendants. This class action
complaint was filed on September 12, 1997 in the United States
District Court, Northern District Court of Georgia, Atlanta
Division, Civil Action No. 1:97-CV-2680.
7. David Applestein, on behalf of himself and all others
similarly situated, Plaintiff v. Retirement Care Associates,
Inc., Chris Brogdon and Darrell C. Tucker, Defendants. This
class action complaint was filed on September 22, 1997 in the
United States District Court, Northern District Court of
Georgia, Atlanta Division, Civil Action No. 1:97-CV-2850.
8. Jean Poulsen, on behalf of himself and all others similarly
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<PAGE> 27
situated, Plaintiff v. Retirement Care Associates, Inc., Chris
Brogdon and Darrell C. Tucker, Defendants. This class action
complaint was filed on October 2, 1997 in the United States
District Court, Northern District Court of Georgia, Atlanta
Division, Civil Action No. 1:97-CV-3009.
9. Tim Semple, on behalf of himself and all others similarly
situated, Plaintiff v. Retirement Care Associates, Inc., Chris
Brogdon and Darrell C. Tucker, Defendants. This class action
complaint was filed on October 1, 1997 in the United States
District Court, Northern District Court of Georgia, Atlanta
Division, Civil Action No. 1:97-CV-2998.
The Company intends to defend the above actions vigorously. The Company
cannot predict the financial impact of the costs of defending these actions, or
their settlement, with any certainty, but believes that the costs to the Company
could have a material adverse effect on the Company and its operations.
On April 30, 1997 a complaint was filed by Theratx, Inc. against the
Company, Darrell C. Tucker, Capitol Care Management Company, Inc. et. al. in the
Superior Court of Fulton County, Georgia (Civil Action File No. E-59089). The
complaint seeks approximately $1,600,000 in damages plus interest of
approximately $239,000 and costs and fees of approximately $24,500 in connection
with past due accounts for therapy services and rehabilitation services. The
Company is attempting to settle this matter and has submitted a settlement offer
to Theratx. The amount at issue is attributable to seven (7) facilities, six (6)
of which are operated by the Company and one (1) of which is operated by Chamber
Health Care Society, Inc. The amount claimed relating to the six facilities
operated by the Company is less than $500,000.
On July 1, 1997 a complaint was filed by CMS Therapies, Inc. against
the Company in the Superior Court of Mecklenburg County, North Carolina (Civil
Action File No. 97-CVS-8434). The complaint seeks approximately $1,277,000 plus
interest and fees in connection with therapy services agreements.
On July 1, 1997, a complaint was filed by CMS Therapies, Inc. against
the Company's subsidiary, Capitol Care Management Company, Inc. in the Superior
Court of Mecklenburg County, North Carolina (Civil Action File No. 97-CVS-8435).
The complaint seeks $597,553.80 in damages plus interest and fees in connection
with the alleged breach of a settlement agreement relating to the payment for
therapy services.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
-27-
<PAGE> 28
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(a) MARKET INFORMATION. Since December 18, 1995, the Company's
Common Stock has been listed on the New York Stock Exchange under the symbol
"RCA". The Company's Common Stock was previously traded in the
over-the-counter market, and from April 7, 1994 through December 15, 1995, it
was quoted on the NASDAQ National Market System. Prior to April 7, 1994,
quotations were carried on the NASD's OTC Bulletin Board.
The following table sets forth the high and low sale prices for the
Company's Common Stock as reported on the NASDAQ National Market System through
December 15, 1995, and on the New York Stock Exchange after that date, for the
periods indicated:
<TABLE>
<CAPTION>
QUARTER ENDED HIGH* LOW*
<S> <C> <C>
September 30, 1995 $16.65 $10.12
December 31, 1995 $12.74 $ 8.15
March 31, 1996 $11.31 $ 9.46
June 30, 1996 $13.25 $10.00
September 30, 1996 $11.125 $ 7.00
December 31, 1996 $10.00 $ 5.25
March 31, 1997 $10.375 $ 7.625
June 30, 1997 $12.375 $ 8.125
</TABLE>
- ----------------------
* As adjusted to give retroactive effect to a 5% stock dividend that was
effected on May 1, 1996.
(b) APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK. The number of
record holders of the Company's Common Stock at October 3, 1997, was 320, and
the number of beneficial holders is estimated to be approximately 4,500.
(c) DIVIDENDS. The Company has paid no cash dividends on its Common
Stock and has no present intention of paying cash dividends in the foreseeable
future. In February 1994, the Company declared a 5% stock dividend on its
outstanding Common Stock, in January 1995, the Company declared an additional
5% stock dividend on its outstanding Common Stock, and in April 1996, the
Company declared an additional 5% stock dividend on its outstanding Common
Stock. It is the present policy of the Board of Directors to retain all
earnings to provide for the growth of the Company. Payment of cash dividends
in the future will depend, among other things, upon the Company's future
earnings, requirements for capital improvements and financial condition. The
Company does, however, intend to consider additional stock dividends in the
future. The Company's ability to pay any cash dividends on the Company's
Common Stock in the future will be limited by the dividend and redemption
requirements of the Company's Series AA Convertible Preferred Stock.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial information for the fiscal years ended
June 30, 1996 and 1997, is derived from financial statements of the Company
audited by Cherry, Bekaert & Holland, L.L.P., independent certified public
accountants. The selected financial information for the fiscal years ended June
30, 1995, 1994 and 1993, is derived from financial statements of the Company
audited by BDO Seidman, LLP, independent certified public accountants. As
described more fully in the Company's financial statements, financial
information prior to the date of the Company's merger with Capitol Care
Management Company, Inc.
-28-
<PAGE> 29
reflects the financial information of Capitol Care Management Company, Inc.
BALANCE SHEET DATA (in thousands):
<TABLE>
<CAPTION>
AT JUNE 30,
1997(1)(2) 1996(1)(2) 1995(1)(2) 1994(1)(2) 1993(1)
<S> <C> <C> <C> <C> <C>
Current Assets $ 64,911 $ 29,479 $25,783 $12,450 $1,404
Total Assets 255,371 177,492 80,258 31,230 2,453
Current Liabili-
ties 75,401 30,975 22,857 9,329 1,677
Working Capital
(Deficit) (10,490) (1,496) 2,925 3,121 (273)
Long-Term Debt 141,674 108,481 32,426 8,200 -0-
Redeemable Pre-
ferred Stock 1,800 2,400 3,000 -0- -0-
Shareholders'
Equity 30,695 30,866 19,733 13,400 776
</TABLE>
- ---------------------
(1) Effective November 30, 1992, the Company acquired the stock of CCMC in a
reverse acquisition in which CCMC's stockholders acquired voting control of the
Company. The transaction was accounted for as a purchase with CCMC as the
acquiring company because CCMC's stockholders acquired a majority of the voting
rights in the combined company. Accordingly, the results of operations prior
to November 30, 1992, are those of CCMC. See Note 2 to the Company's financial
statements.
(2) On May 1, 1993, the Company entered into operating lease agreements for
seven licensed nursing homes and one personal care facility. Prior to May 1,
1993, the Company and its predecessor, Capitol Care Management Company, Inc.,
were engaged exclusively in the management of retirement facilities and nursing
homes. Subsequent to May 1, 1993, the Company, through the operating leases on
such facilities, began to operate facilities resulting in the recognition of
$2,399,906 of patient service revenues and $222,610 of other revenues for the
year ended June 30, 1993. During the year ended June 30, 1993, such facilities
incurred $2,037,694 of operating expenses resulting in an operating margin of
$584,822. During the year ended June 30, 1994, the Company continued its
expansion into the operation of facilities, with the acquisition of two
retirement facilities and two nursing home facilities accounted for using the
purchase method of accounting and new operating lease commitments for eleven
nursing homes and one retirement facility. The addition of these 16 facilities
either through direct acquisition or operating leases increased patient service
revenues by $16,520,401, total revenues by $136,124 and operating expenses by
$12,774,764. During the year ended June 30, 1995, the Company purchased three
nursing homes and two retirement facilities and leased seven more nursing
homes. During the fiscal year ended June 30, 1996, the Company purchased seven
nursing homes and four retirement facilities and leased eight nursing homes and
three retirement facilities. During the fiscal year ended June 30, 1997, the
Company purchased three retirement homes and leased 21 nursing homes and 14
retirement homes.
-29-
<PAGE> 30
STATEMENT OF INCOME DATA (in thousands, except per share data):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE 30,
1997 1996 1995 1994 1993
------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
Revenues $253,228 $134,011 $79,616 $37,971 $4,554
Operating Expenses 249,527 124,631 70,599 32,994 3,615
Net Income (Loss) (7,536) (520) 5,059 2,918 574
Net Income (Loss)
Per Common and
Common Equivalent
Share(1) $ (.71) $ (.05) $ .38 $ .30 $ .11
Weighted Average
Shares(1) 13,710 11,325 12,617 9,840 5,010
Cash Dividends Per
Common Share $ -0- $ -0- $ -0- $ -0- $ -0-
- -----------------
</TABLE>
The Company has retroactively restated net income per share and weighted
average shares outstanding for the effect of stock dividends, stock splits and
reverse stock splits. See "Notes to Financial Statements."
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
YEAR ENDED JUNE 30, 1997 COMPARED TO YEAR ENDED JUNE 30, 1996
The Company's total revenues for the year ended June 30, 1997 were
$253,227,861 compared to $134,011,369 for the year ended June 30, 1996.
Management fee revenue decreased from $3,781,433 in the year ended
June 30, 1996, to $2,629,329 in the year ended June 30, 1997. The Company
purchased or leased nine facilities in the year ended June 30, 1997, that it
managed in the year ended June 30, 1996. Included in the Company's management
fee revenue is $2,212,500 and $3,472,900 from affiliates during the year ended
June 30, 1997 and 1996, respectively.
Due to the increased number of facilities owned or leased by the
Company, patient service revenue increased from $119,499,849 for the year ended
June 30, 1996 to $202,603,841 for the year ended June 30, 1997. The cost of
patient services in the amount of $148,520,849 for the year ended June 30,
1997, represent 73% of patient service revenue, as compared to $81,082,972 or
68%, of patient service revenue during the year ended June 30, 1996. The
increase in the percentage is attributed to an increase in the number of
nursing facilities to retirement facilities operated during the current year.
Nursing facilities require more skilled patient services than retirement homes.
Owning or leasing a facility is distinctly different from managing a
facility with respect to operating results and cash flows. For an owned or
leased facility, the entire revenue/expense stream of the facility is recorded
on the Company's income statement. In case of a management agreement, only the
management fee is recorded. The expenses associated with management revenue
are somewhat indirect as the infrastructure is already in place to manage the
facility. Therefore, the profitability of managing a facility appears more
lucrative on a margin basis than that of an owned/leased facility. However,
the risk of managing a facility is that the contract generally can be canceled
on a relatively short notice, which results in loss of all revenue attributable
to the contract. Furthermore, with an owned or leased property the Company
benefits from the increase in value of the facility as its performance
increases. With a management contract, the owner of the facility maintains the
equity value. From a cash flow standpoint, a management contract is more
lucrative because the
-30-
<PAGE> 31
Company does not have to support the ongoing operating cash flow of the
facility.
The Company owned or leased 35 additional facilities during fiscal
year ended June 30, 1997 compared to fiscal year ended June 30, 1996, which
resulted in a corresponding increase in net revenues of $36 million during the
fiscal year ended June 30, 1997. The number of leased or owned properties at
year end are presented in the following table (which does not include managed
facilities):
<TABLE>
<CAPTION>
Type Fiscal 1995 Fiscal 1996 Fiscal 1997
<S> <C> <C> <C>
Nursing 30 48 69
Retirement 8 18 32
Total 38 66 101
</TABLE>
For facilities that were in place for the entire year ended June 30,
1996 and June 30, 1997, revenue increased approximately $1 million, or 2%,
during the year ended June 30, 1997. For these same facilities, average rates
increased approximately 4% while patient-days decreased approximately 2%.
During the year ended June 30, 1997, the Company had revenue from
medical supply sales of $45,500,712, an approximately $35 million increase
compared to fiscal year ended June 30, 1996. The Company had cost of goods
sold of $31,832,734 for the fiscal year ended June 30, 1997 as compared to
$5,773,934 for the fiscal year ended June 30, 1996. The increase in sales
reflects the acquisition of AmeriDyne Corporation on April 1, 1996 and Atlantic
Medical, Inc. on July 1, 1996 by Contour Medical, Inc.
Lease expense increased from $8,442,671 in the year ended June 30,
1996, to $14,117,392 in the year ended June 30, 1997. This increase is
primarily attributable to the increased numbers of facilities leased during the
year, as well as the full year effect of leased facilities that started during
the year ended June 30, 1996.
General and administrative expenses for the year ended June 30, 1997
were $46,346,051, representing 18% of total revenues, as compared to
$23,192,250 representing 17% of total revenues, for the year ended June 30,
1996.
During the year ended June 30, 1997, the Company recorded a $2,982,063
provision for bad debts. The amount of the provision for bad debts was based
upon the aging and estimated collectibility of receivables from Medicare,
Medicaid and private payors. During the year ended June 30, 1997, the aging of
receivables increased compared with the aging of receivables at June 30, 1996.
During the year ended June 30, 1997, the Company had $673,655 in
interest income and financing fees as compared to $1,847,868 in interest income
and financing fees for the year ended June 30, 1996. The decrease in interest
income is a result of the decreased amount of advances to related parties
during the current year.
Interest expense increased from $7,948,091 in the year ended June 30,
1996 to $14,111,843 in the year ended June 30, 1997. This increase is
primarily attributable to the increased numbers of facilities acquired by the
Company during the year, as well as the full year effect of facilities that
were acquired by the Company during the year ended June 30, 1996.
For the year ended June 30, 1997, the Company incurred benefits for
income taxes of $2,343,256 which represents an effective tax benefit rate of
25% as compared to expenses for income taxes of $1,307,091, which represents an
effective tax rate of 48% for the year ended June 30, 1996.
The net loss of $7,535,810 for the year ended June 30, 1997 is lower
than the net income of $1,746,808 for the year ended June 30, 1996, due to the
fact that the Company's operations have deteriorated due to the delay in the
-31-
<PAGE> 32
consummation of the merger transaction with Sun Healthcare Group, Inc. Turnover
of the Company's personnel, such as nursing home administrators, regional
administrators, as well as all staff functions within the Company's nursing
homes and the assisted living facilities has been higher than normal because of
the uncertainty of the Company's future.
Occupancy rates have also impacted the Company's profitability this
fiscal year versus fiscal year 1996. Occupancy rates have declined because of
the turnover of administrators, social workers, and nurses. With both the
expansion of the number of facilities the Company operated during fiscal year
1997 and the higher than normal staff turnover, the Company's existing
management staff was spread very thin.
Most of the revenue from the management services division of the
Company's business is received pursuant to management agreements with entities
controlled by Messrs. Brogdon and Lane, two of the Company's officers and
directors. These management agreements have five year terms, however, they are
all subject to termination on 60 days notice, with or without cause, by either
the Company or the owners. Therefore, Messrs. Brogdon and Lane have full
control over whether or not these management agreements, and thus the
management services revenue, continue in the future. These fees represent .87%
and 2.82% of the total revenues of the Company for the years ended June 30,
1997 and 1996, respectively.
YEAR ENDED JUNE 30, 1996 COMPARED TO YEAR ENDED JUNE 30, 1995
The Company's total revenues for the year ended June 30, 1996, were
$134,011,369 compared to $79,616,053 for the year ended June 30, 1995.
Management fee revenue decreased from $4,169,694 in the year ended
June 30, 1995, to $3,781,433 in the year ended June 30, 1996. The Company
purchased or leased six facilities in the year ended June 30, 1996, that it
managed in the year ended June 30, 1995. Included in the Company's management
fee revenue is $3,472,900 and $3,517,500 from affiliates during the years ended
June 30, 1996 and 1995, respectively.
Due to the increased number of facilities owned or leased by the
Company, patient service revenue increased from $69,949,822 for the year ended
June 30, 1995 to $119,499,849 for the year ended June 30, 1996. The cost of
patient services in the amount of $81,082,972 for the year ended June 30, 1996,
represents 68% of patient service revenue, as compared to $47,778,410, or 68%,
of patient service revenue during the year ended June 30, 1995. The decrease
in the percentage is attributed to an increase in the ratio of retirement
facilities to nursing facilities operated during the current year. Retirement
facilities require less patient services than nursing homes. The ratio of
nursing facilities to retirement facilities decreased to 2.7 from 3.8 during
the year ended June 30, 1996.
Owning or leasing a facility is distinctly different from managing a
facility with respect to operating results and cash flows. For an owned or
leased facility, the entire revenue/expense stream of the facility is recorded
on the Company's income statement. In the case of a management agreement, only
the management fee is recorded. The expenses associated with management
revenue are somewhat indirect as the infrastructure is already in place to
manage the facility. Therefore, the profitability of managing a facility
appears more lucrative on a margin basis than that of an owned/leased facility.
However, the risk of managing a facility is that the contract generally can be
canceled on a relatively short notice, which results in loss of all revenue
attributable to the contract. Furthermore, with an owned or leased property
the Company benefits from the increase in value of the facility as its
performance increases. With a management contract, the owner of the facility
maintains the equity value. From a cash flow standpoint, a management contract
is more lucrative because the Company does not have to support the ongoing
operating cash flow of the facility.
-32-
<PAGE> 33
The Company converted four managed properties to leased properties
during the fiscal year ended June 30, 1996, which resulted in an increase in
net revenues of $1 million during the fiscal year ended June 30, 1996 compared
to the fiscal year ended June 30, 1995. The number of leased or owned
properties at year-end are presented in the table below (the table does not
included managed facilities):
<TABLE>
<CAPTION>
TYPE FISCAL 1994 FISCAL 1995 FISCAL 1996
---- ----------- ----------- -----------
<S> <C> <C> <C>
Nursing 20 30 48
Retirement 6 8 18
----- ----- ------
Total 26 38 66
</TABLE>
For facilities that were in place for the entire year ended June 30,
1995 and June 30, 1996, revenue increased approximately $3 million, or 5%,
during the year ended June 30, 1996. For these same facilities, average rates
increased approximately 3% while patient-days increased approximately 2%.
During the year ended June 30, 1996, the Company had revenue from
medical supply sales of $14,542,421, an approximately $6.2 million increase
compared to fiscal year ended June 30, 1995, of which $4,717,169 was
intercompany sales which were eliminated in consolidation. These sales reflect
the operations of Contour Medical, Inc., of which the Company acquired a
majority interest on September 30, 1994. Because the Company acquired Contour
on September 30, 1994, only nine months of activity were recorded for fiscal
year ended June 30, 1995. Sales for those nine months of $3,617,439 have been
annualized and recorded for the year ended June 30, 1995 and comprise $1.2
million of the $6.2 million increase in medical supplies revenue for the fiscal
year ended June 30, 1995. Sales for the nine month period following the
Contour acquisition have been annualized so as not to distort the net increase
in revenues from the fiscal year ended June 30, 1995 to the fiscal year ended
June 30, 1996. Moreover, Contour acquired AmeriDyne on March 1, 1996, which
contributed $3.6 million of revenue for the fiscal year ended June 30, 1996
(see Contour 6/30/96 10-K, page 16). While AmeriDyne contributed $3.6 million
of revenue for the fiscal year ended June 30, 1996 (as set forth correctly in
Contour's 6/30/96 10-K), Contour's $4.7 million in sales should not have been
labeled intercompany because this amount was not attributable to sales to RCA.
The remaining $1.4 million increase in sales increase is attributable to the
internal growth of the business. The change in costs of goods sold as a
percentage of sales during fiscal year ended June 30, 1996 versus fiscal year
ended June 30, 1995 is not meaningful because the method of recording
intercompany elimination changed during the fiscal year ended June 30, 1996.
During the fiscal year ended June 30, 1995, intercompany sales of $4,995,346
were recorded as an elimination of medical supply revenue and an elimination of
routine and ancillary costs. During the fiscal year ended June 30, 1996,
intercompany sales of $4,717,169 was recorded as an elimination of medical
supply revenue and an elimination of medical supply costs of goods sold. If
fiscal year ended June 30, 1996 is treated identically to fiscal year ended
June 30, 1995, the costs of goods sold margin would be 107% of sales as
compared to 87% of sales during fiscal year ended June 30, 1995. The increase
in costs of goods sold margin is primarily attributable to the fact that sales
to RCA comprised 32% of Contour's sales during fiscal year ended June 30, 1996
(representing costs without associated revenues), while sales to RCA comprised
only 22% of Contour's sales during fiscal year ended June 30, 1995. The Cost
of Goods Sold for the year ended June 30, 1996, was $5,773,934.
Lease expense increased from $5,769,232 in the year ended June 30,
1995, to $8,442,671 in the year ended June 30, 1996. This increase is
primarily attributable to the increased numbers of facilities leased during the
year, as well as the full year effect of leased facilities that started during
the year ended June 30, 1995. There were ten new facilities leased during the
fiscal year ended June 30, 1996.
-33-
<PAGE> 34
General and administrative expenses for the year ended June 30, 1996,
were $23,192,250, representing 17% of total revenues, as compared to
$12,769,582 representing 16% of total revenues, for the year ended June 30,
1995.
During the year ended June 30, 1996, the Company recorded a $3,423,117
provision for bad debts. The amount of the provision for bad debts was based
upon the aging and estimated collectibility of receivables from Medicare,
Medicaid and private payors. During the year ended June 30, 1996, the aging of
receivables increased compared with the aging of receivables at June 30, 1995.
In addition, at June 30, 1996, a larger amount of the receivables was deemed to
be uncollectible than at June 30, 1995. As of June 30, 1995, the estimated
allowance for bad debts was immaterial to the financial statements and was,
therefore, not recorded. The Company's consideration of several factors
related to the current accounts receivable balance for fiscal year 1996
resulted in the Company recording a $2.7 million bad debt reserve. The Company
considered the overall increase in patient account balances (approximately 80%)
resulting from the Company's acquisitions during fiscal year 1996, the
deterioration in the aging categories due to untimely collection practices by
individual facilities which in several cases resulted in the expiration of
allowable time periods to bill accounts, the significant rise in accounts
receivable net days, the growth in self-pay balances and the lack of timely
write-off of uncollectible accounts throughout the fiscal year.
During the year ended June 30, 1996, the Company had $1,847,868 in
interest income and financing fees as compared to $658,215 in interest income
and financing fees for the year ended June 30, 1995. Financing fees, which
totaled $150,000 for the year ended June 30, 1996, represents fees received by
the Company for assisting other companies to obtain financing for nursing homes
and retirement facilities. The increase in interest income is a result of the
increased amount of advances to related parties during the current year.
Interest expense increased from $1,179,052 in the year ended June 30,
1995, to $7,948,091 in the year ended June 30, 1996. This increase is
primarily attributable to the increased numbers of facilities acquired by the
Company during the year, as well as the full year effect of facilities that
were acquired by the Company during the year ended June 30, 1995.
For the year ended June 30, 1996, the Company incurred expenses for
income taxes of $1,307,091, which represents an effective tax rate of 48%, as
compared to expenses for income taxes of $3,419,092, which represents an
effective tax rate of 40%, for the year ended June 30, 1995. The increase in
the effective tax rate is mainly the result of a non-deductible tax penalty of
approximately $400,000 which was assessed during the year ended June 30, 1996.
The net income of $1,746,808 for the year ended June 30, 1996, is less
than the net income of $5,058,503 for the year ended June 30, 1995, due to the
provision of an additional allowance for bad debts and increased interest
expense because of the larger number of facilities acquired during the most
recent fiscal year.
Most of the revenue from the management services division of the
Company's business is received pursuant to management agreements with entities
controlled by Messrs. Brogdon and Lane, two of the Company's officers and
directors. These management agreements have five year terms; however, they are
all subject to termination on 60 days notice, with or without cause, by either
the Company or the owners. Therefore, Messrs. Brogdon and Lane have full
control over whether or not these management agreements, and thus the
management services revenue, continue in the future. These fees represent
2.82% and 5.24% of total revenues of the Company for the years ended June 30,
1996 and 1995, respectively.
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<PAGE> 35
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1997, the Company had a deficit of $10,489,285 in working
capital compared to a $1,280,270 deficit at June 30, 1996.
During the year ended June 30, 1997, cash provided by or used in
operating activities was ($3,532,919) as compared to $5,279,626 for the year
ended June 30, 1996. The $8,812,545 decrease was primarily due to the
increases in deferred income taxes of $11,111,558, and increases in accounts
receivable of $20,200,604. Cash provided by operating activities was primarily
attributed to an increase in accounts payable and accrued expenses of
$29,187,587.
Cash used in investing activities during the year ended June 30, 1997,
was $23,886,904. The expenditures primarily related to acquisitions to
purchases of property and equipment of $12,734,389, and acquisitions of
facilities of $19,113,658.
Cash provided by financing activities during the year ended June 30,
1997, totaled $31,012,336. Sources of cash included proceeds from the
issuance of preferred stock of $9,340,000, proceeds from stock options and
warrants exercised of $1,900,306, and proceeds from long-term debt and lines of
credit of $33,919,190. Cash used in financing activities primarily consisted
of $13,329,520 in payments of long-term debt, $600,000 in redemption of
preferred stock, $841,318 in purchases of treasury stock, and $240,000 for
dividends on preferred stock.
At June 30, 1996, the Company had $(1,496,160) in working capital
compared to $2,925,302 at June 30, 1995.
During the year ended June 30, 1996, cash provided by operating
activities was $5,279,626 as compared to $4,208,048 for the year ended June 30,
1995. The $1,071,578 increase was primarily due to the increased accounts
payable associated with acquiring facilities in the year ended June 30, 1996
and an increase in depreciation and amortization from 1,128,183 for the year
ended June 30, 1995 to $3,406,986 for the year ended June 30, 1996.
Cash used in investing activities during the year ended June 30, 1996,
was $44,711,326. The expenditures primarily related to acquisitions to
purchases of property and equipment of $12,490,298, and advances to affiliates
and non-affiliates of $8,935,686 due to capital expenditures and working
capital deficits of the affiliates.
At June 30, 1996, advances to affiliates had increased to $14,316,661
from $7,328,222 at June 30, 1995, due to additional capital expenditures and
working capital deficits of the affiliates. These advances were repaid
subsequent to year end. The repayment transactions included the transfer of
two facilities to the Company at fair market value, as established by an
independent appraisal. The proceeds of this transfer reduced the balance to
approximately $2.8 million. The balance was eliminated by the contribution of
shares of the Company's common stock by affiliated shareholders. The stock
will be retired.
Cash provided by financing activities during the year ended June 30,
1996, totaled $34,769,880. Sources of cash included capital investment by
minority shareholders of a subsidiary of $2,088,492, proceeds from issuance of
preferred stock of $9,300,000, proceeds from stock options and warrants
exercised of $559,595, and proceeds from long-term debt and lines of credit of
$35,329,244. Cash used in financing activities primarily consisted of
$9,443,626 in payments of long-term debt, $2,419,783 in payments of debt
issuance costs, and $600,000 in redemption of preferred stock, $274,040 in
purchases of treasury stock, and $270,000 for dividends on preferred stock.
During the year ended June 30, 1995, cash provided by operating activities
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<PAGE> 36
was $4,208,048 as compared to $1,523,311 for the year ended June 30, 1994.
The $2,684,737 increase was primarily due to the increased net income for the
year ended June 30, 1995.
Cash used in investing activities during the year ended June 30, 1995,
was $(10,644,726). The expenditures primarily related to purchases of
property and equipment of $6,079,610, purchases of bonds receivable of
$4,487,936, increases in investments and advances to The Atrium Ltd. of
$2,985,833 and advances to affiliates of $1,742,147 due to capital expenditures
and working capital deficits of the affiliates. These were partially offset by
the proceeds from a sale-leaseback transaction of $4,500,000.
At June 30, 1995, advances to affiliates had increased to $7,328,222
from $5,605,250 at June 30, 1994, due to additional capital expenditures and
working capital deficits of the affiliates.
Cash provided by financing activities during the year ended June 30,
1995, totalled $10,683,801. Sources of cash included capital investment by
minority shareholders of a subsidiary of $1,729,469, net borrowings under lines
of credit of $1,745,316 and proceeds from long-term debt of $9,564,670. Cash
used in financing activities primarily consisted of $2,130,654 in payments of
long-term debt and $225,000 for dividends on preferred stock.
Management's objective is to acquire only those facilities it believes
will be able to generate sufficient revenue to pay all operating costs,
management fees, lease payments or debt service, and still return a 3% to 4%
cash flow. Management believes that the Company's cash flow from operations,
together with lines of credit and the sale of securities described below, will
be sufficient to meet the Company's liquidity needs for the current year.
The Company maintains various lines of credit with interest rates
ranging from prime plus .25% to prime plus 1.25%. At June 30, 1997, the
Company had approximately $4,115,000 in unused credit available under such
lines.
On September 30, 1994, the Company purchased a majority of the stock
of Contour Medical, Inc. in exchange for shares of the Company's common stock
and preferred stock. The Company is obligated to redeem the preferred stock
issued in the transaction over the five years for $3,000,000 in cash. $600,000
was paid on September 30, 1996 pursuant to this obligation. Management intends
to fund these redemptions from cash flow generated from operations.
The Company believes that its long-term liquidity needs will generally
be met by income from operations. If necessary, the Company believes that it
can obtain an extension of its current line of credit and/or other lines of
credit from commercial sources. Except as described above, the Company is not
aware of any trends, demands, commitments or understandings that would impact
its liquidity.
The Company intends to use long-term debt financing in connection with
the purchase of additional retirement care facilities and nursing homes on
terms which can be paid out of the cash flow generated by the property.
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<PAGE> 37
The Company intends to continue to lease or purchase additional
retirement care and/or nursing home facilities in the future.
IMPACT OF INFLATION AND PENDING FEDERAL HEALTH CARE LEGISLATION
Management does not expect inflation to have a material impact on the
Company's revenues or income in the foreseeable future so long as inflation
remains below the 9% level. The Company's business is labor intensive and
wages and other labor costs are sensitive to inflation. Management believes
that any increases in labor costs in its management services segment can be
offset over the long term by increasing the management fees. With respect to
the operations segment, approximately 52% of the Company's net patient service
revenue is received from state Medicaid programs. The two states which make
Medicaid payments to the Company have inflation factors built into the rates
which they will pay. Georgia's inflation factor is nine percent and
Tennessee's inflation is eleven percent. Therefore, increases in operating
costs due to inflation should be covered by increased Medicaid reimbursements.
Management is uncertain what the final impact will be of pending
federal health care reform packages since the legislation has not been
finalized. However, based on information which has been released to the public
thus far, Management doesn't believe that there will be cuts in reimbursements
paid to nursing homes.
Legislative and regulatory action, at the state and federal level, has
resulted in continuing changes in the Medicare and Medicaid reimbursement
programs. The changes have limited payment increases under these programs.
Also, the timing of payments made under the Medicare and Medicaid programs are
subject to regulatory action and governmental budgetary constraints. Within
the statutory framework of the Medicare and Medicaid programs, there are
substantial areas subject to administrative rulings and interpretations which
may further affect payments made under these programs. Further, the federal
and state governments may reduce the funds available under those programs in
the future or require more stringent utilization and quality review of health
care facilities.
ACCOUNTING PRONOUNCEMENT
The Financial Accounting Standard Board has adopted Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" (SFAS No. 115). The Company has adopted this
standard in fiscal 1995. In management's opinion, adopting SFAS No. 115 did
not materially affect the Company's financial statements for the year ended
June 30, 1995.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Independent Auditors' Reports appear at pages F-1 and F-2, and the
Financial Statements and Notes to Financial Statements appear at pages F-3
through F-28 hereof.
Effective July 1, 1996, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and SFAS No. 123
"Accounting for Stock Based Compensation." These pronouncements had no effect
on the Company's financial position or operations for the year ended June 30,
1997.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
In August 1997, the accounting firm of Coopers & Lybrand, L.L.P.
resigned as the Company's independent accountants and notified the Company that
its report on its audit of the Company's financial statements for the fiscal
year ended June 30, 1996 should no longer be relied upon.
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<PAGE> 38
The Company engaged the accounting firm of Cherry, Bekaert & Holland,
L.L.P. to reaudit the Company's financial statements for the fiscal year ended
June 30, 1996 and audit the Company's financial statements for the fiscal year
ended June 30, 1997.
These changes in the Company's independent accountants were previously
reported in the Company's Current Report on Form 8-K dated August 14, 1997 (as
amended by an amendment to such Current Report on Form 8-K/A filed with the
Commission on September 9, 1997).
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<PAGE> 39
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT.
The Directors and Executive Officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION AND OFFICES HELD
- ----------------- --- -------------------------------------------
<S> <C> <C>
Chris Brogdon 48 President and a Director since October 1991
Edward E. Lane 61 Secretary and a Director since October 1991
Darrell C. Tucker 39 Treasurer since November 1993, and a
Director since November 1991
Julian S. Daley 70 Director since November 1993
Harlan Mathews 70 Director since July 1996
</TABLE>
There is no family relationship between any Director or Executive
Officer of the Company.
The Company has no Nominating Committee, but does have a Compensation
Committee and an Audit Committee.
The Compensation Committee consists of Edward E. Lane, Julian S. Daley
and Harlan Mathews. The Compensation Committee reviews the compensation
arrangements for each of the Company's Executive Officers and makes
recommendations to the Board of Directors.
The Audit Committee consists of Julian S. Daley and Harlan Mathews.
The Audit Committee reviews audit plans, reports on material changes in
accounting principles and audit reports.
Set forth below are the names of all Directors and Executive Officers
of the Company, all positions and offices with the Company held by each such
person, the period during which he has served as such, and the principal
occupations and employment of such persons during at least the last five years:
CHRIS BROGDON - PRESIDENT AND A DIRECTOR. Mr. Brogdon has served as
President and a Director of the Company since October 1991. He also served as
Treasurer of the Company from October 1991, to November 1993. He served as
Secretary of Capitol Care from October 1990, until it was merged into the
Company in November 1992, and now serves in these same capacities with Capitol
Care. Mr. Brogdon has been involved in financing and operating nursing homes
and retirement communities since 1982. From 1969 until 1982, Mr. Brogdon was
employed in the securities business as a retail salesman. Mr. Brogdon
attended Georgia State University in Atlanta, Georgia. Since March 1987, Mr.
Brogdon has been Secretary/Treasurer of Winter Haven Homes, Inc. ("WHH") and
since August 1990, he has been Secretary/Treasurer of National Assistance
Bureau, Inc. ("NAB"). Both WHH and NAB are engaged in the business of owning and
operating nursing homes and retirement communities. These two companies either
own or operate pursuant to long-term leases with options to purchase, or are the
sole or managing general partner of limited partnerships that own or lease, a
total of five properties. Mr. Brogdon also serves as a Director and Chairman of
the Board of Contour Medical, Inc., a publicly-held company, of which the
Company is a majority shareholder. He is also a Director of In-House Rehab
Corporation, a publicly-held company of which the Company is a minority
shareholder which
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<PAGE> 40
provides physical, speech and occupational therapy services to nursing home and
other long-term care providers. Mr. Brogdon is also a Director and Chairman of
the Board of NewCare Health Corporation, a publicly-held company which provides
senior residential care services, primarily as an operator of long-term care
facilities.
EDWARD E. LANE - SECRETARY AND A DIRECTOR. Mr. Lane has served as
Secretary and a Director of the Company since October 1991. Mr. Lane attended
the University of Iowa from 1954 to 1958. From 1961 until 1968, he was self-
employed as Gene Lane & Associates where he was engaged in industrial financing
with municipal tax exempt bonds. From 1968 until 1971, he was employed by the
investment banking firm of Johnson, Lane, Space, Smith & Co. in Atlanta,
Georgia. From 1972 until 1984, he was self-employed as Gene Lane & Associates
where he was involved with private investment banking principally in the areas
of municipal and industrial finance. In 1984, he was involved in the creation of
the full service investment banking firm of Lane, McNally & Jackson where he was
a principal until the firm was sold and merged into Bay City Securities, Inc. in
1987. In 1988, Mr. Lane co-founded Winter Haven Homes, Inc. to acquire defaulted
retirement centers and nursing homes. Mr. Lane also serves as President and a
Director of Gordon Jensen Health Care Association, Inc., a nonprofit corporation
that owns eight nursing homes and personal care facilities and National
Assistance Bureau, Inc., a nonprofit corporation that owns two health care
facilities. Mr. Lane is also a Director of Contour Medical, Inc., a
publicly-held company, of which the Company is a majority shareholder.
DARRELL C. TUCKER - TREASURER AND A DIRECTOR. Mr. Tucker has been a
Director of the Company since November 1991, and Treasurer since November 1993.
Mr. Tucker has also served as President of the Company's Capitol Care subsidiary
since November 1992. He also served as President of Capitol Care from October
1990, until it was merged into the Company in November 1992. From July 1990 to
October 1990, he was a consultant to Winter Haven Homes, Inc., an affiliate of
the Company. From September 1988, to July 1990, he was a risk manager for Pruitt
Corporation where he was involved in insurance management for 30 long-term
health care facilities. From April 1987 to August 1988, he was Chief Financial
Officer for Allgood Health Care, Inc. which managed 12 nursing home facilities.
Mr. Tucker received a Bachelors Degree in Accounting from the University of
Georgia in 1980. Mr. Tucker is also a Director of Contour Medical, Inc., a
publicly-held company, of which the Company is a majority shareholder.
JULIAN S. DALEY - DIRECTOR. Mr. Daley has been a Director of the
Company since November 1993. Since 1975, he has been a real estate broker and
developer in Atlanta, Georgia. From 1969 to 1975, he was engaged in financial
analysis of companies in the Southeastern United States for Reynolds Securities,
Inc. (1969 to 1974) and Fundamental Service Corporation (1974 to 1975). From
1950 to 1969, he was a senior financial analyst with Courts & Co. in Atlanta,
Georgia. Mr. Daley received a B.B.A. Degree from the University of Georgia in
1950.
HARLAN MATHEWS - DIRECTOR. Mr. Mathews has been a Director of the
Company since July 1996. Since 1994 he has been a partner in the law firm of
Farris, Mathews, Gilman, Branan & Hellen, P.L.C., in Nashville, Tennessee.
From 1993 to 1994, he served as a United States Senator from the State of
Tennessee. From 1987 to 1993, he was Deputy to the Governor of Tennessee and
Cabinet Secretary. From 1974 to 1987, Mr. Mathews was Treasurer of the State
of Tennessee. He received a Bachelor's Degree in Business from Jacksonville
State University in Alabama in 1949 and a Master's Degree in Public
Administration from Vanderbilt University in 1950. Mr. Mathews received a law
degree from the Nashville School of Law in 1962. Mr. Mathews currently serves
as a Director of Murray Guard, Inc., and NewCare Health Corporation, which are
publicly-held companies.
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<PAGE> 41
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based solely on a review of Forms 3 and 4 and amendments thereto
furnished to the Company during its most recent fiscal year, and Forms 5 and
amendments thereto furnished to the Company with respect to its most recent
fiscal year and certain written representations, the following persons who were
either a director, officer or beneficial owner of more than 10% of the Company's
Common Stock, failed to file on a timely basis reports required by Section 16(a)
of the Exchange Act during the most recent fiscal year: Chris Brogdon, Connie
Brogdon and Edward E. Lane each filed two Form 4 filings one day late which
reported a total of three transactions late each. Darrell C. Tucker filed one
Form 4 two weeks late reporting one transaction.
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth information regarding the executive
compensation for the Company's President and each other executive officer who
received compensation in excess of $100,000 for the fiscal year ended June 30,
1997, 1996 and 1995:
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION
ANNUAL COMPENSATION AWARDS PAYOUTS
SECURITIES
OTHER UNDERLYING
ANNUAL RESTRICTED OPTIONS/ ALL
NAME AND PRINCIPAL COMPEN- STOCK SARs LTIP OTHER
POSITION YEAR SALARY BONUS SATION AWARD(S) (NUMBER) PAYOUTS COMPENSATION
- ------------------ ---- -------- ----- ------ -------- -------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Chris Brogdon, 1997 $240,000 -0- -0- -0- -0- -0- -0-
President 1996 $171,000 -0- -0- -0- 105,000 -0- -0-
1995 $ 90,000 -0- -0- -0- -0- -0- -0-
Darrell C. Tucker, 1997 $245,000 $30,000 $14,400(1) -0- 100,000 -0- $ 765(2)
Treasurer
1996 $234,103 -0- $14,400(1) -0- 52,500 -0- $2,000(2)
1995 $160,000 -0- $ 6,000(1) -0- -0- -0- $ 665(2)
Edward E. Lane, 1997 $240,000 -0- -0- -0- -0- -0- -0-
Secretary 1996 $180,000 -0- -0- -0- 105,000 -0- -0-
</TABLE>
- ---------------------
(1) Represents an automobile allowance paid to Mr. Tucker.
(2) Represents amounts paid for a term life insurance policy for Mr.
Tucker.
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<PAGE> 42
2
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information concerning
individual grants of stock options made to each of the Executive Officers named
above during the fiscal year ended June 30, 1997:
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES
OF STOCK PRICE
APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM(1)
---------------------------------------------- ---------------------
NUMBER OF
SECURITIES % OF TOTAL
UNDERLYING OPTIONS/SARs
OPTIONS/ GRANTED TO EXERCISE EXPIR-
SARs EMPLOYEES IN OR BASE ATION
NAME GRANTED(#) FISCAL YEAR PRICE($/SH) DATE 5%($) 10%($)
---- ---------- ------------ ----------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Chris Brogdon -0- 0.0% -- -- -- --
Darrell C. Tucker 100,000 29.2% $8.50 7/16/01 $234,800 $394,500
Edward E. Lane -0- 0.0% -- -- -- --
</TABLE>
- --------------
(1) Gains are reported net of the option exercise price, but before taxes
associated with exercise. These amounts represent assumed rates of
appreciation only. Actual gains, if any, on stock option exercise are
dependent on the future performance of the Company's Common Stock as
well as the option holder's continued employment. The amounts reflected
in this table may not necessarily be achieved.
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<PAGE> 43
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
The following table sets forth information as to the value of stock
options held by the Executive Officers named above as of June 30, 1997. None of
these Executive Officers exercised any options during the year ended June 30,
1997.
<TABLE>
<CAPTION>
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS OPTIONS/SARs
SARs AT FY-END AT FY-END
EXERCISABLE/ EXERCISABLE/
NAME UNEXERCISABLE UNEXERCISABLE
----------------- -------------- -------------
<S> <C> <C>
Chris Brogdon 394,406/0 $2,510,894/0
Darrell C. Tucker 268,264/0 $1,419,307/0
Edward E. Lane 394,406/0 $2,510,894/0
</TABLE>
Effective July 1, 1995, Mr. Tucker entered into a two year employment
agreement which will continue on a year-to-year basis thereafter unless either
party decides to terminate prior to an annual renewal. Pursuant to the agreement
he will receive an annual salary of $220,000 during the first year, $245,000
during the second year, and his salary will increase by 10% per year thereafter.
Effective July 1, 1997, Mr. Tucker receives an annual salary of $269,500. He
also receives a $1,200 per month automobile allowance, a $1,000,000 term life
insurance policy paid for by the Company, and full family health insurance paid
for by the Company. He is also entitled to receive options to purchase 50,000
shares of common stock under the Company's stock option plan each year. However,
such options will only be granted in years in which the Company increases its
profits over the previous year's profit. Mr. Tucker has agreed that during the
term of his employment, and for a period of two years thereafter he will not
engage in the business of, or be employed by a business entity engaged in, the
management of health care facilities in the areas in which the Company does
business. Mr. Tucker has also agreed not to disclose any confidential
information or trade secrets of the Company which he may acquire during the
course of his employment.
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<PAGE> 44
Until January 1, 1994, Edward E. Lane and Chris Brogdon received no
salaries for their services as Officers of the Company and they received no
other compensation, directly or indirectly, from the Company. Messrs. Lane and
Brogdon have received compensation from Winter Haven Homes, Inc., which owns or
controls three of the facilities which are currently managed by the Company.
Some of this compensation is in the form of financial advisory fees which are
earned by Messrs. Lane and Brogdon in connection with the financing related to
the ownership of these facilities and the rest of the compensation is related to
the fees derived by Winter Haven from its ownership and operation of the
facilities.
Effective January 1, 1994, Edward E. Lane and Chris Brogdon each
received a salary of $60,000 per year for their services as Officers of the
Corporation. Effective January 1, 1995, their salaries were each increased to
$120,000 per year. Effective January 1, 1996, their salaries were each increased
to $240,000 per year.
COMPENSATION OF DIRECTORS
Commencing in the year ended June 30, 1994, outside Directors of the
Company received $1,000 for each Board meeting attended. Effective July 1, 1996,
outside Directors receive $500 per month. In addition, Directors are entitled to
receive reimbursement for reasonable out-of-pocket expenses incurred by them in
attending meetings of the Board of Directors.
STOCK OPTION PLAN
In December, 1993, the Company's Board of Directors adopted the
Company's 1993 Stock Option Plan (the "1993 Plan"). The 1993 Plan allows the
Board to grant stock options from time to time to employees, officers and
directors of the Company and consultants to the Company. The Board has the power
to determine at the time the option is granted whether the option will be an
Incentive Stock Option (an option which qualifies under Section 422 of the
Internal Revenue Code of 1986) or an option which is not an Incentive Stock
Option. However, Incentive Stock Options will only be granted to persons who are
key employees of the Company. Vesting provisions are determined by the Board at
the time options are granted. The option price must be satisfied by the payment
of cash. The total number of shares of Common Stock subject to options under the
1993 Plan currently may not exceed 2,182,625, subject to adjustment in the event
of certain recapitalizations, reorganizations and similar transactions.
The Board of Directors may amend the 1993 Plan at any time, provided
that the Board may not amend the 1993 Plan to materially increase the number of
shares available under the 1993 Plan, materially increase the benefits accruing
to Participants under the 1993 Plan, or materially change the eligible class of
employees without shareholder approval.
As of June 30, 1997, options to purchase 1,584,610 shares of Common
Stock were outstanding under the 1993 Plan exercisable at prices ranging from
$4.647 to $15.95 per share. The exercise prices of all of the options granted
under the 1993 Plan are at least equal to the market value of the Company's
Common Stock on the date of grant.
Included in options granted on December 14, 1993, are non-qualified
stock options granted to Chris Brogdon and Edward E. Lane, Officers and
Directors of the Company, to purchase 289,406 shares each; an incentive stock
option granted to Darrell C. Tucker, an Officer and Director of the Company, to
purchase 115,764 shares; and non-qualified stock options granted to Michael P.
Traba, a former Director, and Julian S. Daley, a Director of the Company, to
purchase 11,576
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<PAGE> 45
shares each. These options are exercisable at $4.647 per share. Included in
options granted on November 3, 1995, are non-qualified stock options granted to
Chris Brogdon and Edward E. Lane to purchase 105,000 shares each; to Darrell C.
Tucker to purchase 52,500 shares; and to Michael P. Traba and Julian S. Daley to
purchase 10,500 shares each. These options are exercisable at $9.762 per share.
In July 1996, the Company granted non-qualified stock options to Julian
S. Daley and Harlan Mathews each to purchase 10,000 shares of common stock at
$8.875 per share. In addition, the Company granted non-qualified stock options
to Darrell C. Tucker to purchase 100,000 shares, and to two employees to
purchase an aggregate of 125,000 shares, at an exercise price of $8.50 per
share.
EMPLOYEE RETIREMENT PLAN
During the year ended June 30, 1996, the Company established a defined
contribution retirement plan. Employees qualify for the plan upon the completion
of three months of service with the Company and reaching the age of twenty-one.
Company contributions to the plan represent a matching percentage of certain
employee contributions. The matching percentage is subject to management's
discretion based upon consolidated financial performance. For the year ended
June 30, 1997, the Company did not make any contributions to the plan.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth as of September 18, 1997, as to the
shares of the Common Stock beneficially owned by each person who is the
beneficial owner of more than five percent (5%) of the Company's shares, each of
the Company's Directors and by all of the Company's Directors and Executive
Officers as a group. Each person has sole voting and investment power with
respect to the shares shown, except as noted.
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT OF BENEFICIAL PERCENTAGE
OF BENEFICIAL OWNER OWNERSHIP OF CLASS
- ------------------------ -------------------- ----------
<S> <C> <C>
Chris Brogdon 2,733,404 (1) 18.0%
Suite 200
6000 Lake Forrest Drive
Atlanta, GA 30328
Edward E. Lane 2,673,941 (2) 17.7%
Suite 200
6000 Lake Forrest Drive
Atlanta, GA 30328
Darrell C. Tucker 655,664 (3) 4.4%
Suite 200
6000 Lake Forrest Drive
Atlanta, GA 30328
Julian S. Daley 46,243 (4) 0.3%
805 Edgewater Trail
Atlanta, GA 30328
</TABLE>
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<PAGE> 46
<TABLE>
<S> <C> <C>
Harlan Mathews 10,000 (5) 0.1%
420 Hunt Club Road
Nashville, TN 37221
Connie Brogdon 2,733,404 (6) 18.0%
Suite 200
6000 Lake Forrest Drive
Atlanta, GA 30328
All Officers and Directors 6,119,252 38.6%
as a Group (5 Persons)
</TABLE>
- -------------------------
(1) Includes 927,948 shares of Common Stock owned by Mr. Brogdon; 1,164,160
shares of Common Stock owned by Mr. Brogdon's wife, Connie Brogdon;
1,159 shares of Common Stock held by Mr. Brogdon's daughter; 245,731
shares of Common Stock which represents 50% of the shares held by
Winter Haven Homes, Inc. of which Mr. Brogdon's wife, Connie Brogdon,
is a 50% owner; and 394,406 shares underlying stock options held by Mr.
Brogdon.
(2) Includes 2,033,804 shares of Common Stock owned by Mr. Lane; 245,731
shares of Common Stock which represents 50% of the shares held by
Winter Haven Homes, Inc. of which Mr. Lane is a 50% owner; and 394,406
shares underlying stock options held by Mr. Lane.
(3) Includes 370,128 shares of Common Stock owned by Mr. Tucker, 12,268
shares held by Mr. Tucker's wife, and 268,268 shares underlying stock
options held by Mr. Tucker.
(4) Includes 1,603 shares held directly by Mr. Daley, 12,497 shares held by
Mr. Daley's wife, 67 shares held by a partnership, and 32,076 shares
underlying stock options held by Mr. Daley.
(5) Represents 10,000 shares underlying stock options held by Mr. Mathews.
(6) Includes 1,164,160 shares of Common Stock owned by Connie Brogdon;
927,948 shares of Common Stock owned by Mrs. Brogdon's husband, Chris
Brogdon; 1,159 shares of Common Stock held by Mrs. Brogdon's daughter;
245,731 shares of Common Stock which represents 50% of the shares held
by Winter Haven Homes, Inc., of which Connie Brogdon is a 50% owner;
and 394,406 shares underlying stock options held by her husband.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Company has agreements to provide management and accounting
services for nursing homes and personal care facilities which are owned or
controlled by entities which are owned or controlled by Officers, Directors and
principal shareholders of the Company. As of October 1, 1997, the Company had
agreements to manage two facilities owned or controlled by Winter Haven Homes,
Inc. ("Winter Haven"); one facility owned or controlled by Gordon Jensen Health
Care Associates, Inc. ("Gordon Jensen"); two facilities owned or controlled by
National Assistance Bureau, Inc. ("NAB"); one facility owned by Southeastern
Cottages, Inc. ("SCI"); and two facilities owned by Chamber Health Care
Society, Inc. ("Chamber"). The Company previously managed a facility owned by
Senior Care, Inc. ("Senior Care"). Winter Haven is owned by a corporation
which is owned 50% by Edward E. Lane, an Officer and Director of the Company,
and 50% by
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<PAGE> 47
Connie Brogdon, the wife of an Officer and Director of the Company. Gordon
Jensen is a non-profit corporation of which Edward E. Lane is President. NAB is
also a non-profit corporation of which Edward E. Lane is President and Chris
Brogdon is Secretary/Treasurer. Chamber and Senior Care are non-profit
corporations. Edward E. Lane is President and a director of Chamber. SCI is a
corporation owned 50% by Chris Brogdon and 50% by Edward E. Lane.
The agreements to provide management and accounting services to the
affiliated entities are for periods of five years but are cancelable upon 60
days' notice by either party. The agreements provide for monthly fees ranging
from $1,000 to $24,000 per facility and expire in 1998. During the fiscal year
ended June 30, 1997, these agreements resulted in revenue to the Company of
$2,212,500.
The Company currently manages eight facilities owned or controlled by
affiliates of the Company, and as part of its duties, the Company also manages
the cash and pays the bills for the facilities. In doing so, the Company
maintains a cash management system where the deposits of all properties are
swept into an investment account daily. The Company also advances working
capital to these properties when needed. At June 30, 1996, aggregate amounts
were due from the following entities: Winter Haven - $8,887,833; Gordon Jensen -
$2,982,975; SCI - $679,144; NAB - $1,326,391; Chamber - $336,857; Senior Care -
$84,095; and other affiliates - $19,366. Subsequent to June 30, 1996, entities
controlled by Winter Haven assumed the liabilities of NAB, SCI, Chamber and
Senior Care.
On October 14, 1996, Winter Haven sold two retirement facilities to the
Company for their fair value, based on an independent appraisal, for a total
purchase price of $19,200,000. These include the Jackson Oaks retirement
facility in Jackson, Tennessee, which the Company previously leased, and the
Cumberland Green retirement facility which the Company previously managed. The
purchase prices for these facilities were $12,400,000 and $6,800,000,
respectively. These facilities were acquired subject to total bond debt of
$7,670,000, resulting in $11,530,000 due to Winter Haven, which was applied to
eliminate the $11,214,320 owed to the Company by Winter Haven.
On September 27, 1996, Gordon Jensen transferred 399,426 shares of the
Company's Common Stock to the Company with a fair market value of $3,000,000 in
exchange for the cancellation of its debt totaling $2,982,000. These shares were
loaned to Gordon Jensen by Edward E. Lane, Chris Brogdon and Connie Brogdon.
In February 1996, the Company purchased a 36-unit retirement facility
known as Summers Landing-Cordele, from Gordon Jensen for $2,000,000.
In May 1996, the Company leased the 60-bed Lake Forest Health Care
Center from a partnership controlled by Winter Haven. The lease is for a period
of 10 years at $25,000 per month.
On June 30, 1996, the Company leased the 158-unit Jackson Oaks
retirement facility from Winter Haven for a period of 15 years. The Company paid
Winter Haven $50,000 per month under this lease. As noted above, Winter Haven
subsequently sold this facility to the Company in October 1996 to retire a
portion of its debt to the Company.
On September 1, 1996, the Company leased the 58-unit Summer's Landing-
Douglas facility from Gordon Jensen. The Company paid $300,000 to Gordon Jensen
on execution of the lease and is paying the debt service on an existing mortgage
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<PAGE> 48
each month during the first year. During year two, there will be an additional
payment of $500 per month; in year three - $750 per month; in year four - $1,000
per month; and in year five (and any extension of the lease) - $1,250 per month.
The lease is for an initial term of five years, but the Company may extend the
lease for additional terms of five years each.
The Company has guaranteed the debts of two facilities owned by Winter
Haven totaling approximately $6,000,000.
On September 30, 1996, the Company leased the 101-unit (with 28
additional units under construction) retirement facility known as The
Renaissance - Titusville in Titusville, Florida from a partnership controlled by
Winter Haven for a period of 10 years. The Company has the right to extend the
lease for an additional five year term. The Company paid Winter Haven $1,500,000
on execution of the lease, and will pay monthly rent equal to 1.1 times the debt
service requirements on the facility. For the purposes of this calculation, the
principal debt will not exceed $6,000,000.
During the year ended June 30, 1997, the Company entered into leases on
eight facilities with Retirement Group, L.L.C., the owner of these facilities.
Retirement Group, L.L.C. is owned 41.1% by an entity controlled by Edward E.
Lane; 41.8% by Chris Brogdon and his wife, Connie Brogdon; 10.0% by Winter Haven
Homes; 3.5% by Darrell C. Tucker; and 3.6% by James J. Andrews, an officer of a
subsidiary of the Company. Each of these leases are for an initial term of ten
(10) years, with the Company having the right to extend each lease for an
initial five (5) year term. The amount of the rent payment under each lease is
equal to 110% of the principal and interest that Retirement Group, L.L.C. is
required to pay to the lenders of the respective properties. During the fiscal
year ended June 30, 1997, $1,355,217 was paid to Retirement Group, L.L.C. under
these leases.
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<PAGE> 49
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. FINANCIAL STATEMENTS. The following financial statements are
filed as part of this report:
<TABLE>
<CAPTION>
Page(s)
<S> <C> <C>
Independent Auditors' Report................................... F-1
Report of Independent Certified Public Accountants............. F-2
Consolidated Balance Sheets as of June 30, 1997 and 1996....... F-3 - F-4
Consolidated Statements of Income for the years ended
June 30, 1997, 1996 and 1995................................. F-5
Consolidated Statements of Shareholders' Equity for the
years ended June 30, 1997, 1996 and 1995..................... F-6 - F-7
Consolidated Statements of Cash Flows for the years ended
June 30, 1997, 1996 and 1995................................. F-8 - F-9
Notes to Financial Statements.................................. F-10 - F-28
</TABLE>
(a) 2. FINANCIAL STATEMENT SCHEDULES. All schedules have been omitted,
as the required information is inapplicable or the information is presented in
the financial statements or the notes thereto.
(a) 3. Exhibits:
[TO BE UPDATED]
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION LOCATION
<S> <C> <C>
2.1 Agreement and Plan of Incorporated by reference
Merger and Reorganization to Exhibit 2.1 to the Company's
dated February 17, 1997, Current Repot on Form 8-K
among Sun Healthcare Group, dated February 17, 1997
Peach Acquisition Corporation
2.2 Amendment No. 1 to the Agree- Incorporated by reference
ment and Plan of Merger and to Exhibit 2.1 to the Company's
Reorganization dated as of Current Report on Form 8-K
February 17, 1997, among Sun dated May 23, 1997
Healthcare Group, Inc.,
Peach Acquisition Corporation
and Retirement Care Associates,
Inc.
2.3 Amendment No. 2 to the Agree- Incorporated by reference
ment and Plan of Merger and to Exhibit 2.1 to the Company's
Reorganization dated as of Current Report on Form 8-K
February 17, 1997, among Sun dated August 21, 1997
Healthcare Group, Inc., Peach
Acquisition Corporation
and Retirement Care Associates,
Inc.
</TABLE>
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<PAGE> 50
<TABLE>
<S> <C> <C>
3.1 Articles of Incor- Incorporated by reference
poration, as amended to Exhibit No. 3.1 to the
Company's Form S-18 Regis-
tration Statement No. 33-7666-D
3.2 Bylaws, as amended Incorporation by reference
to Exhibit No. 3.2 to the
Company's Form S-18 Regis-
tration Statement No. 33-7666-D
3.3 Articles of Amendment Incorporated by reference
to Articles of Incor- to Exhibit 3.3 to the
poration Company's Annual Report on
Form 10-K for the fiscal year
ended June 30, 1993
3.4 Statements Establish- Incorporated by reference
ing Series A and Series to Exhibit 3.4 to the
D Convertible Preferred Company's Annual Report on
Stock Form 10-K for the fiscal year
ended June 30, 1994
3.5 Articles of Amendment to Incorporated by reference
Articles of Incorporation to Exhibit 3.5 to the
(Series AA Convertible Company's Annual Report on
Preferred Stock) Form 10-K for the fiscal year
ended June 30, 1994
3.6 Articles of Amendment to Incorporated by reference
Incorporation (Series E to Exhibit 3.6 to the
Convertible Preferred Company's Annual Report on
Stock) Form 10-K for the fiscal
year ended June 30, 1996
3.7 Articles of Amendment to Incorporated by reference
Articles of Incorporation to Exhibit 3.7 to the
(Series F Convertible Pre- Company's Annual Report on
ferred Stock) and Certif- Form 10-K for the fiscal
icate of Correction to year ended June 30, 1996
same
10.1 Employment Agreement Incorporated by reference
with Darrell C. Tucker to Exhibit 10.1 to the
Company's Annual Report on
Form 10-K for the fiscal
year ended June 30, 1996
10.2 Management and Marketing Filed herewith electronically
Agreement with Affiliates
10.3 Nursing Home Management Filed herewith electronically
Agreements with Affiliates
10.4 Lease Agreements with Filed herewith electronically
Affiliates
</TABLE>
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<PAGE> 51
<TABLE>
<S> <C> <C>
10.5 Loan Agreement between Incorporated by reference
Residential Care Facilities to Exhibit 10.1 to the
for the Elderly Authority of Company's Current Report
the City of Dublin and the on Form 8-K dated February 3,
Company 1994
10.6 Deed to Secured Debt and Incorporated by reference
Security between Residen- to Exhibit 10.2 to the
tial Care Facilities for Company's Current Report
the Elderly Authority of on Form 8-K dated February 3,
the City of Dublin and 1994
the Company
10.7 Trust Indenture between Incorporated by reference
Residential Care Facili- to Exhibit 10.3 to the
ties for the Elderly Company's Current Report
Authority of the City of on Form 8-K dated February 3,
Dublin and the Sentinel 1994
Trust Company
10.8 Loan Agreement between Incorporated by reference
Highlands County (Florida) to Exhibit 10.2 to the
Industrial Development Company's Current Report
Authority and the Company on Form 8-K dated March 3,
1994
10.9 Trust Indenture between Incorporated by reference
Highlands County (Florida) to Exhibit 10.3 to the
Industrial Development Company's Current Report
Authority and the Company on Form 8-K dated March 3,
1994
10.10 Asset Purchase Agreement Incorporated by reference
between the Company and to Exhibit 10.1 to the
Springdale Convalescent Company's Current Report
Center of Atlanta, Ltd., et on Form 8-K dated April 29,
al., and Springdale Conva- 1994
lescent Center Purchase
Agreement between the
Company and Bartow
River L.L.C.
10.11 Promissory Note from the Incorporated by reference
Company to Winter Haven to Exhibit 10.46 to the
Homes Company's Annual Report
on Form 10-K for the fiscal
year ended June 30, 1994
10.12 Promissory Note from the Incorporated by reference
Company to Tiffany Indus- to Exhibit 10.3 to the
tries, Inc. Company's Current Report
on Form 8-K dated April 29,
1994
</TABLE>
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<PAGE> 52
<TABLE>
<S> <C> <C>
10.13 Loan Agreement with Cave Incorporated by reference
Spring Housing Develop- to Exhibit 10.57 to the
ment Corporation Company's Annual Report
on Form 10-K for the fiscal
year ended June 30, 1994
10.14 Trust Indenture between Incorporated by reference
Cave Spring Housing to Exhibit 10.58 to the
Development Corporation Company's Annual Report
and Sentinel Trust Company on Form 10-K for the fiscal
year ended June 30, 1994
10.15 Transfer and Assignment of Incorporated by reference to
Loan Asset and Forbearance to Exhibit 10.67 to the
Agreement with R. Wayne Company's Annual Report
Lowe, et al. on Form 10-K for the fiscal
year ended June 30, 1994
10.16 Promissory Note from South- Incorporated by reference
eastern Cottages, Inc. and to Exhibit 10.67 to the
related Mortgage and Company's Registration
Security Agreement Statement on Form S-1
File No. 33-85886
10.17 Promissory Note from Gordon Incorporated by reference
Jensen Health Care, Inc. to Exhibit 10.68 to the
and related Deed to Secure Company's Registration
Debt Statement on Form S-1
File No. 33-85886
10.18 Promissory Note from Incorporated by reference
Renaissance Retirement, to Exhibit 10.69 to the
Ltd. and related Mortgage Company's Registration
and Security Agreement Statement on Form S-1
File No. 33-85886
10.19 Promissory Note from Incorporated by reference
Retirement Village of to Exhibit 10.70 to the
Jackson, Ltd. and related Company's Registration
Deed of Trust Statement on Form S-1
File No. 33-85886
10.20 Promissory Note from Incorporated by reference
Hendersonville Retirement to Exhibit 10.71 to the
Village, Ltd. and related Company's Registration
Deed of Trust Statement on Form S-1
File No. 33-85886
10.21 Agreement and Amendment Incorporated by reference
to Agreement with The to Exhibit 10.77 to the
Atrium of Jacksonville, Company's Annual Report
Ltd. and Assignment to on Form 10-K for the fiscal
the Company year ended June 30, 1994
10.22 Guaranties and Stock Pledge Incorporated by reference
and Maintenance Agreements to Exhibit 10.80 to the
with Edward E. Lane and Company's Registration
Connie B. Brogdon Statement on Form S-1
File No. 33-85886
</TABLE>
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<PAGE> 53
<TABLE>
<S> <C> <C>
10.23 Dearfield Nursing Home Incorporated by reference
Purchase Agreement to Exhibit 10.1 to the Com-
pany's Report on Form 8-K
dated April 28, 1995
10.24 Loan Agreement Incorporated by reference
to Exhibit 10.2 to the Com-
pany's Report on Form 8-K
dated April 28, 1995
10.25 Promissory Note Secured by Incorporated by reference
Security Deed to Exhibit 10.3 to the Com-
pany's Report on Form 8-K
dated April 28, 1995
10.26 Security Agreement Incorporated by reference
to Exhibit 10.4 to the Com-
pany's Report on Form 8-K
dated April 28, 1995
10.27 Deed to Secure Debt, Incorporated by reference
Security Agreement, to Exhibit 10.5 to the Com-
Assignment of Rents and pany's Report on Form 8-K
Filing for Dearfield dated April 28, 1995
Nursing Home
10.28 Edwinola Retirement Incorporated by reference
Community Purchase Agree- to Exhibit 10.93 to the
ment Company's Annual Report on
Form 10-K for the fiscal
year ended June 30, 1995
10.29 Loan Agreement between Incorporated by reference
Dade City, Florida and to Exhibit 10.94 to the
the Company Company's Annual Report on
Form 10-K for the fiscal
year ended June 30, 1995
10.30 Promissory Note from The Incorporated by reference
Atrium Nursing Home, Inc. to Exhibit 10.95 to the
Company's Annual Report on
Form 10-K for the fiscal
year ended June 30, 1995
10.31 Promissory Note from Incorporated by reference
Hendersonville Retirement to Exhibit 10.96 to the
Village, Ltd. Company's Annual Report on
Form 10-K for the fiscal
year ended June 30, 1995
10.32 Second Amendment to Incorporated by reference
Agreement with The Atrium to Exhibit 10.97 to the
of Jacksonville, Ltd. Company's Annual Report on
Form 10-K for the fiscal
year ended June 30, 1995
</TABLE>
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<PAGE> 54
<TABLE>
<S> <C> <C>
10.33 Promissory Note from Incorporated by reference
National Assistance to Exhibit 10.98 to the
Bureau Company's Annual Report on
Form 10-K for the fiscal
year ended June 30, 1995
10.34 Letter Agreement with Incorporated by reference
R. Wayne Lowe, et al., to Exhibit 10.99 to the
Amending Forebearance Company's Annual Report on
Agreement Form 10-K for the fiscal
year ended June 30, 1995
10.35 Hillview Nursing Home Incorporated by reference
Purchase Agreement to Exhibit 10.100 to the
Company's Annual Report on
Form 10-K for the fiscal
year ended June 30, 1995
10.36 Crestwood Nursing Home Incorporated by reference
Purchase Agreement and to Exhibit 10.101 to the
Lease Assignment Agree- Company's Annual Report on
ment Form 10-K for the fiscal
year ended June 30, 1995
10.37 Florida Retirement Villa Incorporated by reference
Purchase Agreement to Exhibit 10.102 to the
Company's Annual Report on
Form 10-K for the fiscal
year ended June 30, 1995
10.38 Loan Agreement dated Incorporated by reference
September 29, 1995, with to Exhibit 10.103 to the
LTC Properties, Inc. Company's Annual Report on
Form 10-K for the fiscal
year ended June 30, 1995
16 Letter re Change in Incorporated by reference
Certifying Accountant to Exhibit 16.1 to the
Company's Current Report on
Form 8-K/A dated as of
August 14, 1997
21 Subsidiaries of the Filed herewith electronically
Registrant
23.1 Consent of Cherry, Bekaert & Filed herewith electronically
Holland, L.L.P. (See Item 14(a)1. hereof)
23.2 Consent of BDO Seidman, LLP Filed herewith electronically
(See Item 14(a)1. hereof)
27 Financial Data Schedule Filed herewith electronically
</TABLE>
(b) REPORTS ON FORM 8-K. The Company filed one Report on Form 8-K
during the last quarter of the period covered by this Report as follows: The
Company filed a Report on Form 8-K dated May 27, 1997, reporting information
under Item 5 - Other Events and Item 7 - Financial Statements, Pro Forma
Financial Information and Exhibits, reporting an amendment to the Company's
Agreement and Plan of Merger with Sun Healthcare Group, Inc.
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<PAGE> 55
REPORT OF CHERRY, BEKEART & HOLLAND
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders of
Retirement Care Associates, Inc.
We have audited the accompanying consolidated balance sheets of Retirement Care
Associates, Inc. and subsidiaries as of June 30, 1997 and 1996 and the related
consolidated statements of income, shareholders' equity and cash flows for the
years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsiblity is to express an
opinion on these financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Retirement Care
Associates, Inc. and subsidiaries as of June 30, 1997 and 1996 and the results
of their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
As described in Note 6 to the consolidated financial statements, the Company
changed its method of accounting for certain costs in inventory.
/s/ Cherry, Bekaert & Holland, L.L.P.
CHERRY, BEKAERT & HOLLAND, L.L.P.
Greensboro, North Carolina
October 10, 1997
F-1
<PAGE> 56
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders of
Retirement Care Associates, Inc.
We have audited the accompanying consolidated statements of income,
shareholders' equity and cash flows of Retirement Care Associates, Inc. and
Subsidiaries for the year ended June 30, 1995. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Retirement Care Associates, Inc. and Subsidiaries for the year ended June 30,
1995, in conformity with generally accepted accounting principles.
/s/ BDO Seidman, LLP
BDO SEIDMAN, LLP
Atlanta, Georgia
October 9, 1995,
except for Note 1
which is as of May 1, 1996
F-2
<PAGE> 57
FINANCIAL STATEMENTS
Retirement Care Associates, Inc. & Subsidiaries
Consolidated Balance Sheets
June 30, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Assets:
Current Assets
Cash and cash equivalents $ 3,637,878 $ 45,365
Accounts receivable, net 40,391,377 18,845,780
Inventories 7,255,289 3,998,991
Note and accrued interest receivable 75,000 613,750
Deferred tax asset 4,408,733 2,008,430
Income tax receivable 4,065,431 --
Restricted bond funds 3,068,276 2,342,565
Prepaid expenses and other assets 2,009,467 1,623,679
Total current assets 64,911,451 29,478,560
Property and equipment, net of
accumulated depreciation 150,492,221 111,420,486
Marketable equity securities -- 33,645
Investment in unconsolidated affiliates 734,514 496,800
Deferred lease and loan costs 13,065,759 7,665,891
Goodwill, net of accumulated amortization 16,357,532 6,636,675
Notes and advances due from non-affiliates 1,421,405 1,372,247
Notes and advances due from affiliates 1,411,379 14,316,661
Restricted bond funds 3,689,969 3,514,969
Other assets 3,286,736 2,556,353
Total assets $255,370,966 $177,492,287
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
F-3
<PAGE> 58
Retirement Care Associates, Inc. & Subsidiaries
Consolidated Balance Sheets
June 30, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Liabilities and Shareholders' Equity
Current liabilities:
Lines of credit $ 9,935,036 $ 3,556,535
Current maturities of long-term debt 11,454,059 2,220,491
Loans Payable to Affiliates 1,478,368 --
Accounts payable 34,076,015 10,115,347
Accrued expenses 18,417,258 11,316,030
Income taxes payable -- 3,726,317
Deferred gain 40,000 40,000
Total current liabilities 75,400,736 30,974,720
Deferred gain 181,370 371,370
Deferred income taxes 1,098,929 277,000
Long-term debt, less current 141,674,131 108,481,040
Minority interest 4,520,953 4,122,039
Commitments and contingencies
Redeemable convertible preferred stock 1,800,000 2,400,000
Shareholders' equity
Common stock, $.0001; 300,000,000 shares
authorized; 14,489,888 and 12,145,875
shares issued, respectively 1,450 1,214
Preferred stock 3,250,000 7,408,279
Additional paid-in capital 43,799,617 28,329,625
Retained earnings (deficit) (16,356,220) (4,752,880)
Treasury stock, at cost -- (120,120)
30,694,847 30,866,118
$ 255,370,966 $ 177,492,287
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE> 59
Retirement Care Associates, Inc. & Subsidiaries
Consolidated Statements of Income
For the years ended June 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Revenues:
Net patient service revenue 202,603,841 $ 119,499,849 $ 69,949,822
Medical supply revenue 45,500,712 9,825,252 3,617,439
Management fee revenue:
From affiliates 2,212,500 3,472,900 3,517,500
From others 446,829 308,533 652,194
Other revenue 2,463,979 904,835 1,879,098
Total revenues 253,227,861 134,011,369 79,616,053
Expenses:
Cost of patient services 148,520,849 80,815,511 47,778,410
Cost of medical supplies sold 31,045,671 5,350,817 3,153,430
Lease expense 14,117,392 8,442,671 5,769,232
General and administrative 46,346,051 23,192,250 12,769,582
Depreciation and amortization 6,514,713 3,406,986 1,128,183
Provision for bad debts 2,982,063 3,423,117 --
Total expenses 249,526,739 124,631,352 70,598,837
Operating income 3,701,122 9,380,017 9,017,216
Other income (expense):
Interest income 673,655 1,847,868 658,215
Interest expense (14,111,843) (7,948,091) (1)179,052
Income before minority interest, income taxes,
extraordinary item and cumulative effect of
change in accounting principle (9,737,066) 3,279,794 8,496,379
Minority interest 348,000 (597,895) (18,784)
Income before income taxes, extraordinary item
item and cumulative effect of change in
accounting principle (9,389,066) 2,681,899 8,477,595
Income taxes (2,343,256) 1,307,091 3,419,092
Income before extraordinary item and cumulative
effect of change in accounting principle (7,045,810) 1,374,808 5,058,503
Extraordinary Charge - loss on extinguishment
of debt, net of tax benefit of $300,000 490,000 -- --
Cumulative effect of change in accounting
principle, net of income taxes of $228,000 -- 372,000 --
Net income (loss) (7,535,810) $ 1,746,808 $ 5,058,503
Preferred stock dividends 2,236,777 2,266,777 225,000
Income (loss) applicable to common stock $ (9,772,587) $ (519,969) $ 4,833,503
Income (loss) per common and common equivalent share:
Income (loss) before extraordinary item
and cumulative effect of change in
accounting principle $ (0.68) $ (.08) $ 0.38
Extraordinary Charge-loss on
extinguishment of debt (.03) -- --
Cumulative effect of change in
accounting principle -- 0.03 --
Net income (loss) (.71) (.05) 0.38
Weighted average shares outstanding 13,709,590 11,324,755 12,616,835
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE> 60
Retirement Care Associates, Inc. & Subsidiaries
Consolidated Statements of Shareholders' Equity
For the Years Ended June 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Preferred Stock Common Stock
Series A Series E Series F Shares Amount
<S> <C> <C> <C> <C> <C>
Balance June 30, 1994 $ 364,083 $ -- $ -- 9,526,166 $ 952
Issuance of common stock upon
conversion of
Series A preferred stock (364,083) -- -- 69,508 7
Issuance of common stock upon
conversion of
Series D preferred stock -- -- -- 125,000 12
Issuance of common stock upon
Contour Medical, Inc. acquisition -- -- -- 105,000 11
Stock dividend, 5% -- -- -- 491,409 49
Balance June 30, 1995 $ -- $ -- $ -- 10,317,083 $ 1,031
Issuance of Series E preferred stock -- 9,300,000 -- -- --
Issuance of common stock upon
conversion of
Series E preferred stock -- (534,750) -- 54,516 5
Unamortized balance on imputed
Series E Preferred stock dividend -- (1,356,971) -- -- --
Treasury stock purchased -- -- -- -- --
Retirement of treasury stock -- -- -- (15,500) (2)
Stock issued in exchange for
cancellation of warrants and
stock warrants exercised -- -- -- 1,198,894 120
Stock options exercised -- -- -- 22,076 2
Preferred stock, 10% dividend -- -- -- -- --
Stock dividend, 5% -- -- -- 568,806 58
Balance June 30, 1996 $ -- $ 7,408,279 $ -- 12,145,875 $ 1,214
Issuance of Series F preferred stock -- -- 9,340,000 -- --
Amortization of imputed Series E
preferred stock dividend -- 1,356,971 -- -- --
Issuance of common stock upon
conversion of
Series E preferred stock -- (8,765,250) -- 1,318,533 132
Issuance of common stock upon
conversion of
Series F preferred stock -- -- (6,090,000) 1,148,698 115
Treasury stock purchased
Retirement of treasury stock -- -- -- (520,272) (52)
Stock issued in exchange for
Cancellation of warrants and
new stock warrants exercised -- -- -- 144,872 15
Stock options exercised -- -- -- 252,182 26
Preferred stock, 10% dividend -- -- -- -- --
Balance June 30, 1997 $ -- $ -- $ 3,250,000 14,489,888 $ 1,450
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE> 61
Retirement Care Associates, Inc. & Subsidiaries
Consolidated Statements of Shareholders' Equity
For the Years Ended June 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Retained
Paid-In Earnings Treasury
Capital (Deficit) Stock
<S> <C> <C> <C>
Balance June 30, 1994 $ 12,391,673 $ 643,043 $ --
Issuance of common stock upon conversion
of Series A preferred stock 364,076 -- --
Issuance of common stock upon conversion
of Series D preferred stock 499,989 -- --
Issuance of common stock upon
Contour Medical, Inc. acquisition 999,988 -- --
Preferred stock, 10% dividend -- (225,000) --
Stock dividend, 5% 4,299,951 (4,300,000) --
Net income -- 5,058,503 --
Balance June 30, 1995 $ 18,555,677 $ 1,176,546 $ --
Issuance of Series E preferred stock -- -- --
Issuance of common stock upon conversion
of Series E preferred stock 534,743 -- --
Unamortized balance on imputed Series E
preferred stock dividend 1,356,971 -- --
Treasury stock purchased -- -- (274,040)
Retirement of treasury stock -- (153,918) 153,920
Stock issued in exchange for cancellation
of warrants and stock warrants exercised 473,673 -- --
Stock options exercised 156,303 -- --
Preferred stock, 10% dividend -- (270,000) --
Stock dividend, 5% 7,252,258 (7,252,316) --
Net income -- 1,746,808 --
Balance June 30, 1996 $ 28,329,625 $ (4,752,880) $ (120,120)
Issuance of Series F preferred stock -- -- --
Amortization of imputed Series E
Preferred stock dividend (1,356,971) -- --
Issuance of common stock upon conversion
of Series E preferred stock 8,768,297 -- --
Issuance of common stock upon conversion
of Series F preferred stock 6,086,446 --
Treasury stock purchased -- -- (3,707,410)
Retirement of treasury stock -- (3,827,530) 3,827,530
Stock issued in exchange for
Cancellation of warrants and
new stock warrants exercised 70,966 -- --
Stock options exercised 1,901,254 -- --
Preferred stock, 10% dividend -- (240,000) --
Net income -- (7,535,810) --
Balance June 30, 1997 $ 43,799,617 $(16,356,220) $ --
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE> 62
Retirement Care Associates, Inc. & Subsidiaries
Consolidated Statements of Cash Flows
For the Years Ended June 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Cash flows from operating activities
Net income (loss) $ (7,535,810) $ 1,746,808 $ 5,058,503
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Gain on sale of assets (608,423) -- --
Depreciation and amortization 6,514,713 3,406,986 1,128,183
Loss on sale of marketable securities -- 29,085 --
Cumulative effect of change in accounting
principles -- (372,000) --
Amortization of deferred gain (40,000) (40,000) (40,000)
Provision for bad debt 2,982,063 3,423,117 --
Equity in income from investees -- 146,800 --
Minority interest (348,000) 597,895 18,784
Deferred income taxes (11,111,558) (1,297,613) 261,092
Changes in assets and liabilities net of
effects of acquisitions
Accounts receivable (20,987,667) (10,672,485) (6,012,900)
Inventories (960,447) (2,245,194) (996,139)
Prepaid expenses and other assets (970,008) 703,690 (642,013)
Accrued interest receivable 38,750 157,917 (196,667)
Accounts payable and accrued expenses 29,187,587 9,964,620 6,608,148
Deferred lease and loan costs -- -- (978,943)
Net cash provided by (used in)
operating activities (3,838,800) 5,549,626 4,208,048
Cash flows from investing activities:
Purchases of property and equipment (12,734,389) (12,490,298) (6,079,610)
Proceeds from sale leaseback transaction -- -- 4,500,000
Proceed from repayment of notes receivable 13,500,000 2,200,000 --
Issuance of notes receivable and advances
to affiliates and non-affiliates (143,876) (8,935,677) (1,742,147)
Purchase of bonds receivable -- -- (4,487,936)
Investments in unconsolidated affiliates (237,714) 3,787,635 (3,335,833)
Restricted bond funds (900,711) (4,720,047) (17,317)
Proceed from sale of fixed assets 3,350,000 -- --
Cash acquired in acquisition of Contour Medical, Inc. -- -- 73,254
Decrease in marketable equity securities -- -- 444,863
Proceed from sale of marketable equity securities 33,645 36,780 --
Goodwill paid in acquisitions (2,109,852) (2,327,736) --
Acquisitions, net of cash required (18,807,777) (21,938,513) --
Payment of deferred lease costs (5,530,349) (593,470) --
Net cash used in investing activities $(23,581,023) $(44,981,326) $(10,644,726)
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
<PAGE> 63
Retirement Care Associates, Inc. & Subsidiaries
Consolidated Statements of Cash Flows (continued)
For the Years Ended June 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Cash flows from financing activities
Capital investment by minority shareholders
of subsidiary $ -- $ 2,088,492 $ 1,729,469
Redemption of preferred stock (600,000) (600,000) --
Purchase of treasury stock (841,318) (274,040) --
Dividends on preferred stock (240,000) (270,000) (225,000)
Proceeds from issuance of preferred stock 9,340,000 9,300,000 --
Proceeds from stock options and warrants exercised 1,900,306 559,593 --
Proceeds from long-term debt and net borrowings
under line of credit 33,919,190 35,329,244 11,309,986
Payments on long-term debt (13,329,520) (9,443,626) (2,130,654)
Payments on deferred loan costs (614,690) (2,419,783) --
Proceeds from L/P to affiliates 1,478,368 -- --
Net cash provided by financing
activities 31,012,336 34,269,880 10,683,801
Net increase (decrease) in cash and cash equivalents 3,592,513 (5,161,820) 4,247,123
Cash and cash equivalents, beginning of year 45,365 5,207,185 960,062
Cash and cash equivalents, end of year $ 3,637,878 $ 45,365 $ 5,207,185
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-8
<PAGE> 64
RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 and 1996
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF BUSINESS AND BASIS OF PRESENTATION
Retirement Care Associates, Inc. ("RCA" or the "Company") operates 101 leased
and owned nursing and retirement facilities in the Southeast United States and
manages, for both related and unaffiliated third parties, an additional 9
nursing and retirement facilities. The Company also owns a majority interest in
Contour Medical, Inc. ("Contour") whose principal operations consist of
distributing medical supplies to healthcare facilities.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, as well as its majority-owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation.
CASH AND CASH EQUIVALENTS
For purposes of financial statement presentation, the Company considers all
highly liquid investments with maturities of three months or less at issuance
to be cash equivalents.
INVENTORIES
Inventories, consisting mainly of medical supplies, are valued at the lower of
cost (first-in, first-out) or market.
ALLOWANCE FOR POSSIBLE LOAN LOSSES
The Company periodically reviews the adequacy of the allowance for possible
loan losses on affiliate notes receivable by considering various factors, among
others, such as the fair value of the underlying facility collateral in excess
of prior and senior liens, the periodic results of operations of the underlying
collateral, the fair value of other collateral or guarantees pledged as
security for the notes receivable, and the Company's ability to foreclose, if
necessary, against prior and senior liens to protect the collateral value.
During 1996, the Company adopted Statement of Financial Accounting Standards
No. 114, "Accounting by Creditors for Impairment of a Loan" (SFAS No. 114).
All affiliated notes receivable were liquidated subsequent to June 30, 1996
(see Note 19).
PROPERTY, EQUIPMENT AND DEPRECIATION
Property and equipment are recorded at cost less accumulated depreciation.
Depreciation, which includes amortization of assets under capital leases, is
computed using the straight-line method over the estimated useful lives of the
related assets (five to thirty years). Maintenance and repairs are charged to
expense as incurred. Upon sale, retirement or other disposition of these assets
the cost and the related accumulated depreciation are removed from the
respective accounts and any gain or loss on the disposition is included in
income.
INVESTMENT IN UNCONSOLIDATED AFFILIATES
During the year ended June 30, 1995, the Company acquired a 35% interest in
In-House Rehab, Inc. ("In-House"), a therapy service company, for $350,000. The
F-9
<PAGE> 65
Company accounts for its investment in In-House on the equity method. The
Company's share of In-House's net income was $327,714 and $146,800 for the
years ended June 30, 1997 and 1996, respectively.
DEFERRED LEASE AND LOAN COSTS
Deferred lease and loan costs, consisting of lease acquisition fees paid to
lessors and loan commitment fees and related expenditures, are amortized over
the respective terms of the lease or loan using the interest method. The
related amortization of the lease and loan cost is recorded as lease and
interest expense, respectively.
RESTRICTED BOND FUNDS
Restricted bond funds relate to the debt service requirements of RCA's
outstanding bond obligations. RCA has several industrial revenue bonds, housing
development mortgage revenue bonds and municipal revenue bonds, which relate to
the restricted bond funds. Current restricted bond funds include principal and
interest funds which are used for payment of principal and interest on or
before the dates required by the trust indenture. Non-current restricted bond
funds include debt service reserve funds (used for payment of principal and
interest when principal and interest funds are insufficient) and project funds
(used for payment of construction, improvement and equipment costs at
facilities under construction).
GOODWILL
Goodwill arises in connection with business combinations accounted for as
purchases where the purchase price exceeds the fair value of the net assets of
the acquired businesses. Goodwill is amortized on a straight-line basis over 15
years. The carrying value of goodwill is reviewed if the facts and
circumstances suggest that it may be impaired. Any permanent impairment would
be recognized by a charge against earnings. Accumulated amortization of
goodwill approximated $719,000 and $233,000 as of June 30, 1997 and 1996,
respectively.
ASSESSMENT OF LONG-LIVED ASSETS
Effective July 1, 1996, the Company adopted FAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of.
The Company periodically reviews the carrying values of its long-lived assets
(primarily property and equipment and intangible assets) whenever events or
circumstances provide evidence that suggests that the carrying amount of
long-lived assets may not be recovered. If this review indicates that the
long-lived assets may not be recoverable, the Company reviews the expected
undiscounted future net operating cash flows from its facilities, as well as
valuations obtained in connection with various refinancings. Any permanent
impairment of value is recognized as a charge against earnings in the statement
of income. As of June 30, 1997, the Company does not believe there is any
indication that the amortization period of its long-lived assets needs to be
adjusted.
DEFERRED GAIN
Deferred gain on a sale-leaseback transaction is recorded at cost and is
amortized into income on a straight-line basis over 10 years, the life of the
lease. The related amortization is recorded as a reduction of lease expense.
STOCK DIVIDENDS
During January 1995 and April 1996, the Company declared 5% stock dividends
which were payable on February 15, 1995 and May 15, 1996, respectively, to
shareholders of record on February 15, 1995 and May 1, 1996, respectively. All
common stock information presented has been retroactively restated to reflect
these stock
F-10
<PAGE> 66
dividends.
NET PATIENT SERVICE REVENUE
Net patient service revenue is derived primarily from services to retirement
center residents and nursing home patients. Retirement center residents
typically pay rent in advance of the month for which it is due. Nursing home
patients are predominately beneficiaries of the Medicare and Medicaid programs.
The Medicare program reimburses nursing homes on the basis of allowable costs,
subject to certain limits. Payments are received throughout the year at amounts
estimated to approximate costs. Following year end, cost reports are filed with
the Medicare program and final settlements are made. Provisions for Medicare
settlements are provided in the financial statements in the period the related
services are rendered. Differences between amounts accrued and final
settlements are reported in the year of settlement.
State Medicaid programs pay nursing homes primarily on a per diem basis with no
retroactive settlement. Revenues from services to Medicaid patients are
recorded at payment rates established by the various state programs in the
period services are rendered.
There has been, and the Company expects that there will continue to be, a
number of proposals to limit Medicare and Medicaid payments for long-term and
rehabilitative services. The Company cannot predict at this time whether any of
these proposals will be accepted or, if adopted and implemented, what effect
such proposals would have on the Company.
TAXES ON INCOME
Deferred income taxes are recognized for the tax consequences of temporary
differences between the financial reporting bases and the tax bases of the
Company's assets and liabilities. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized.
Income tax expense is the tax payable for the period and the change during the
period in deferred tax assets and liabilities.
NET INCOME PER SHARE
Net income per share is computed on the basis of net income applicable to
common stock and the weighted average number of common and common equivalent
shares outstanding during each year, retroactively adjusted to give effect to
the stock dividends. Shares used in the calculation consist of the weighted
average number of shares actually outstanding as well as the weighted average
number of common share equivalents which include dilutive convertible preferred
stock, stock options and warrants.
Common stock equivalents for the years ended June 30, 1997 and 1996 have not
been included since the effect would be antidilutive. Shares used in the
calculation for the year ended June 30, 1995 consisted of the weighted average
number of shares actually outstanding (10,798,292), as well as, the weighted
average number of common share equivalents (1,818,543) which include dilutive
stock options and warrants.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
The Financial Accounting Standards Board released SFAS No. 123, "Accounting for
F-11
<PAGE> 67
Stock Based Compensation." SFAS No. 123 encourages, but does not require,
companies to recognize compensation expense based on the fair value of grants
of stock, stock options, and other equity investments to employees. Although
expense recognition for employee stock-based compensation is not mandatory,
SFAS No. 123 requires that companies not adopting must disclose pro forma net
income and earnings per share. The Company will continue to apply the prior
accounting rules and make pro forma disclosures.
RECLASSIFICATIONS
Certain 1995 amounts have been reclassified to conform with the 1997 and 1996
presentations.
2. BUSINESS ACQUISITIONS:
ENCORE
On December 15, 1995, the Company obtained both a sole general and a limited
partnership interest, totaling a 74.25% interest, in Encore Partners, L.P.
("Encore") in exchange for a capital contribution to Encore of $3.5 million.
Encore owns three retirement facilities, totaling 527 beds, and two nursing
homes, totaling 157 beds. The acquisition was accounted under the purchase
method of accounting. The consolidated financial statements include the results
of operations since the date of acquisition.
Profits and losses of Encore are allocated 74.25% to the Company and 25.75% to
other partners. Available cash, if any, is distributed 74.25% to the Company
and 25.75% to the other partners.
ATRIUM
During the year ended June 30, 1995, Winter Haven Homes, Inc. ("Winter
Haven"),an affiliated entity, assigned to the Company its rights under an
agreement between Atrium and Winter Haven. The agreement granted Winter Haven
the right to acquire up to a 75% ownership interest in Atrium in exchange for
and upon meeting certain performance requirements.
In addition to the assignment, Winter Haven and the Company entered into a
separate Compensation Agreement requiring the Company to pay Winter Haven an
amount equal to 25% of the appraised values of Atrium upon each transfer of a
25% interest in Atrium to the Company. Through June 30, 1996, the payment of
each 25% interest in Atrium was reflected as an increase in Investment in
Unconsolidated Affiliates and a decrease in Notes and Advances Due From
Affiliates in the accompanying financial statements.
At June 30, 1995, a 50% interest in Atrium had been transferred to the Company
at a carrying value of $1,913,000 plus advances made by the Company to Atrium
of $2,149,060. This investment was accounted for under the equity method. In
May 1996, the Company obtained an additional 25% interest for $1,230,000,
bringing the total investment to $3,143,000 plus advances made by the Company
to Atrium of $2,602,942, and the total ownership interest to 75%. Effective May
1996, the accounts of Atrium have been consolidated with those of the Company.
The minority partners of Atrium are allocated 25% of the profits and losses and
25% of available cash flow, if any, is distributed to the minority partners.
ATLANTIC MEDICAL
On August 6, 1996, Contour acquired all of the outstanding stock of Atlantic
Medical Supply Company, Inc. ("Atlantic Medical"), a distributor of disposable
medical supplies and a provider of third-party billing services to the nursing
home and home health care markets. The acquisition was accounted for as a
purchase and made retroactively to July 1, 1996. Contour paid $1.4 million in
cash and $10.5 million in promissory notes for all of the outstanding stock of
F-12
<PAGE> 68
Atlantic Medical. The purchase price exceeded fair value of the net assets
acquired by approximately $1.3 million. The resulting goodwill is being
amortized on the straight-line method over forty years. The consolidated
financial statements include the results of operation of Atlantic Medical
subsequent to June 30, 1996.
The promissory notes bore interest at 7% per annum and were due in full on
January 10, 1997. In the event of a default in the payment of the promissory
notes, they were convertible into shares of common stock of RCA. On January 10,
1997, Contour retired all outstanding notes due to sellers of Atlantic Medical
in the aggregate principal amount of $10,850,000, along with accrued interest.
The retirement of these notes was funded by a loan of $9,750,000 from the
Company, with the balance funded from Contour's existing line of credit with
Barnett Bank. The loan from the Company was evidenced by a convertible
promissory note bearing interest at 9% per annum and payable upon demand. This
note was convertible into 1,950,000 shares of Contour's Common Stock, and on
January 10, 1997, the Company exercised this conversion right.
OTHER
During the year ended June 30, 1996, the Company purchased a number of other
facilities. Such purchases included both nursing and retirement facilities.
The data related to these purchases is as follows:
<TABLE>
<CAPTION>
1996
<S> <C>
Number of Facilities Purchased:
Nursing 7
Retirement 3
Total 10
Cost of acquired facilities:
Cash paid $ 223,000
Debt incurred 19,811,000
Total $20,034,000
</TABLE>
The Company typically obtains financing in excess of the purchase price paid
for acquired facilities. The excess funds are used to cover certain closing
costs associated with the transactions with any residual amounts retained by
the Company.
The acquisitions referred to above have been accounted for using the purchase
method of accounting. The operating results of those acquired facilities have
been included in the consolidated statement of operations from the date of
acquisition.
The following table presents unaudited pro forma results of operations data as
if the acquisitions described above had occurred on July 1, 1995. The pro forma
amounts are provided for information purposes only. It is based on historic
information and does not necessarily reflect the actual results that would have
occurred, nor is it necessarily indicative of future results of operations of
the combined enterprise.
<TABLE>
<CAPTION>
For the year ended June 30,
(Unaudited)
1997 1996
<S> <C> <C>
Revenues $254,410,713 $158,534,082
Net income (7,537,686) 1,798,053
Net income (loss) per share (.71) (.04)
</TABLE>
The pro forma information includes adjustments for interest expense that would
have been incurred to finance the acquisitions, additional depreciation based
on the fair market value of the facilities and other adjustments, together with
related income tax effects. The pro forma financial information is not
F-13
<PAGE> 69
necessarily indicative of the results of operations as they would have been had
the transactions been effected on the assumed dates.
3. RELATED PARTY TRANSACTIONS:
The Company provides management and administrative services for eight
facilities in addition to leasing eleven facilities, all owned by affiliates.
These affiliates are owned and controlled by two individuals who are officers
and directors of the Company.
The management and administrative services to affiliate facilities are provided
pursuant to agreements which have five- to ten-year terms and are cancelable
with sixty days written notice by either party. The agreements provided for
monthly fees ranging from $4,000 to $28,000 per facility and expire through
2007. Revenue from these management services totaled $1,993,000, $3,472,900 and
$3,517,500 for the years ended June 30, 1997, 1996 and 1995, respectively.
CCMC maintains a cash management account where all operating cash funds of the
managed facilities are pooled into one bank account and invested daily. Notes
and advances due from (to) affiliates consist of advances to facilities, net of
advances from facilities, owned by the following affiliated entities:
<TABLE>
<CAPTION>
June 30,
1997 1996
<S> <C> <C>
Gordon Jensen Health Care Association, Inc. $(1,019,474) $2,982,975
Winter Haven Homes, Inc. (458,894) 8,887,833
Southeastern Cottages, Inc. 295,642 679,144
National Assistance Bureau, Inc. 149,815 1,326,391
Chamber Health Care Society, Inc. 964,240 336,857
Senior Care, Inc. 1,682 84,095
Other Affiliates - 19,366
(66,989) $14,316,661
Less current portion (payable) (1,478,368) -
Noncurrent receivable $ 1,411,379 $14,316,661
</TABLE>
The above amounts receivable from affiliates as of June 10, 1996 were satisfied
during the acquisition by the Company of two facilities from related parties
and the return of approximately 400,000 shares of Company stock held by Gordon
Jensen to the Company treasury, discussed in following paragraphs. These notes
required quarterly interest payments at 8% per annum. The notes were
collateralized by second mortgages on facilities owned by affiliates, and
certain notes were guaranteed by the principals of Winter Haven, who are
shareholders of the Company.
The amounts receivable from and payable to affiliates as of June 30, 1997 were
unsecured. The amounts receivable of $1,411,379 are noncurrent. The amounts
payable of $1,478,368 are current and payable upon demand.
The Company's exposure to credit loss in the event of nonperformance by its
related parties totaled $1,411,379 and $14,316,661 as of June 30, 1997 and
1996, respectively.
FACILITY ACQUISITIONS FROM AFFILIATES
On February 27, 1996, the Company purchased a 36-unit retirement facility from
an affiliate. The purchase price was $2,000,000 and was financed with $400,000
from the Company and a $1,600,000 mortgage loan from an unrelated third-party
real estate investment trust.
On May 5, 1996, the Company entered into a lease agreement with an affiliate to
rent a 60-unit nursing home. Terms of the agreement are ten years at $300,000
per year beginning on June 1, 1996. The total lease payments in 1996 were
$25,000.
F-14
<PAGE> 70
On October 14, 1996, the Company acquired two retirement facilities from
related parties, individuals who control the Company and its affiliates, for
their fair value, based on independent appraisals, totaling $19,200,000. The
facilities were subject to bond debt of $7,670,000. The remaining balance due
from the Company was $11,530,000. For the purpose of this transaction, Winter
Haven had assumed the amounts due to the Company in the amount of $2,426,487,
from Southeastern Cottages, Inc., National Assistance Bureau, Inc., Chamber
Health Care Society, Inc. and Senior Care, Inc. which, in combination with the
amount of $8,887,833 previously due from Winter Haven to the Company, totaled
$11,314,320. As part of the exchange agreement, the Company and Winter Haven
agreed to offset the Company's debt incurred of $11,530,000 with the Company's
receivable of $11,314,320.
FACILITIES LEASED FROM AFFILIATES
During the years ended June 30, 1997 and 1996, the Company leased nursing
homes and retirement homes from affiliates. In 1996, one facility was leased
with an annual rental of $300,000, expiring in 2006 with one ten-year renewal.
In 1997, a total of eleven facilities were leased with annual rentals ranging
from approximately $290,000 to $850,000, expiration dates through 2007, and
renewal periods of five to ten years. The annual rentals of the ten leases
acquired in 1997 are based upon 110% of the outstanding debt balance, so the
future annual rentals are expected to decline during the lease terms.
ADDITIONAL TRANSACTIONS
On September 27, 1996, Gordon Jensen Health Care Association, Inc. (Gordon
Jensen) returned approximately 400,000 shares of stock in the Company which had
a fair market value of $3,000,000 in payment of Gordon Jensen's debt of
$2,982,000 due to the Company. The retirement of these shares reduced
stockholders' equity of the Company by $3,000,000.
In 1997, the Company received a guarantee fee of $500,000 for guarantee of
Contour's $10,500,000 note payable which arose in connection with its
acquisition of Atlantic Medical. As payment, the Company received 100,000
shares of Contour common stock. Contour's note payable was paid off in January,
1997 and the guarantee was released.
As of June 30, 1997 the Company had guaranteed debt in the amount of
approximately $30,000,000 related to eight facilities of affiliates which the
Company leases or manages. The debt is collateralized by the facilities, bears
interest ranging from approximately 10% to 11.5% with due dates through 2007.
The Company was paid fees of $150,000 by affiliates in connection with
locating financing for three facilities in 1996. These fees were included in
interest income on the accompanying statements of income.
The Company has service and consulting agreements whereby In-House provides to
facilities therapy and case management for a fixed monthly fee plus a charge
per treatment unit provided. In 1997, the Company purchased approximately
$5,129,000 or 77% of the total sales of In-House, and the Company's account
payable to In-House of $1,528,000 was 49% of the total accounts receivable of
In-House. For 1996, total sales and accounts receivable of In-House related to
the Company.
4. ACCOUNTS RECEIVABLE:
Patient accounts receivable and net patient service revenue include amounts
estimated by management to be payable by Medicaid and Medicare under the
provisions of payment formulas in effect. Medicaid and Medicare programs
accounted for approximately 72% and 68% of net patient service revenue during
1997 and 1996, respectively.
The Company grants credit without collateral to its patients most of whom are
local residents of the respective nursing home and retirement facilities and
are insured under third-party payor agreements. The mix of receivables from
patients and third party payors is as follows:
<TABLE>
<CAPTION>
June 30,
1997 1996
<S> <C> <C>
Medicaid $17,452,025 $10,644,368
Medicare 9,728,258 4,304,368
Other third-party payors 1,084,008 1,598,816
Patients 12,315,451 3,113,145
Trade receivables - Contour 7,811,635 2,595,083
48,391,377 22,255,780
Allowance for doubtful accounts 8,000,000 3,410,000
$40,391,377 $18,845,780
</TABLE>
F-15
<PAGE> 71
In the opinion of management, any differences between the net revenue recorded
and final determination will not materially affect the consolidated financial
statements.
The activity in the allowance for doubtful accounts is as follows:
<TABLE>
<CAPTION>
June 30,
1997 1996 1995
<S> <C> <C> <C>
Beginning of Period $3,410,000 $ -- $ --
Provision 2,982,063 3,423,117 --
Other Additions-Contour 1,995,386 -- --
Write Offs (387,449) (13,117) --
End of Period $8,000,000 $3,410,000 --
</TABLE>
5. NOTE RECEIVABLE:
On February 7, 1996, the Company loaned $500,000 to an unaffiliated company.
The note, plus interest at 9% per annum, was due on February 7, 1997 and was
collateralized by a first lien on a 38-bed nursing home in Atlanta, Georgia.
This note was paid in full with interest on May 15, 1997.
6. CHANGE IN ACCOUNTING FOR SUPPLIES INVENTORY:
During the year ended June 30, 1996, the Company changed its method of
accounting for facility supplies inventory from expensing when purchased to
capitalizing and expensing as used. The Company believes that this change is
preferable in the circumstances because it more closely matches inventory costs
with net patient service revenue. In connection with the capitalization
of facility supplies inventory at June 30, 1996, the Company recorded
additional inventory and reduced supplies expense by approximately $1.0
million, of which approximately $600,000 related to inventory on hand as of
June 30, 1995. Accordingly, the cumulative effect of this change in accounting
principle on beginning retained earnings has been shown, net of tax, as a
separate component of the statement of operations for the year ended June 30,
1996. Although the cumulative effect on retained earnings at June 30, 1995
resulting from the change can be determined, the pro forma effects of
retroactive application cannot be computed for individual prior periods.
Accordingly, net income and income per common share computed on a pro forma
basis have not been presented for the years ended June 30, 1995 and 1994.
7. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
Estimated
Useful
Lives 1997 1996
<S> <C> <C> <C>
Land - $ 8,330,565 $ 7,184,001
Buildings 30 107,901,652 83,281,050
Equipment 5-10 16,115,893 12,179,912
Leasehold improvements 5-10 3,373,755 2,193,228
Buildings and equipment under
capital leases 5-30 18,642,560 8,111,801
154,364,425 112,949,992
Less accumulated depreciation 13,897,697 8,518,084
140,466,728 104,431,908
Construction in progress 10,025,493 6,988,578
Net property and equipment $150,492,221 111,420,486
</TABLE>
Construction in progress, consisting of the development of four facilities,
includes approximately $607,000 and $605,000 of capitalized interest costs as
of June 30, 1997 and 1996, respectively. The total contract price of
construction in progress was approximately $13,500,000 for the year ended June
30, 1997.
Substantially all property and equipment is pledged as collateral for long-term
debt.
8. DEFERRED LEASE AND LOAN COST:
In connection with the execution of certain lease transactions and financing of
F-16
<PAGE> 72
acquisitions, the Company incurred lease and loan commitment fees, which are
included in deferred lease and loan costs in the accompanying balance sheets,
as follows:
<TABLE>
<CAPTION>
June 30,
1997 1996
<S> <C> <C>
Lease cost:
Affiliated $ 2,000,000 $ 500,000
Non-affiliated 5,831,968 1,801,619
Loan cost:
Affiliated 410,000 410,000
Non-affiliated 6,414,978 5,800,288
14,656,946 8,511,907
Less accumulated amortization 1,591,187 846,016
Net deferred lease and loan cost 13,065,759 $7,665,891
</TABLE>
9. SHAREHOLDERS' EQUITY:
STOCK PURCHASE WARRANTS
During the year ended June 30, 1997, the Company issued warrants to an
investment banker and consultants to purchase 250,000 shares of its common
stock at prices ranging from $6.96875 to $9.25 per share. The warrants were
exercisable at varying dates through June 1999. None of the warrants were
exercised during the year ended June 30, 1997.
The Company has issued Class A warrants in connection with a private offering
and Class B and Class C warrants in connection with an offer to Class A warrant
holders to convert their warrants. The Class A and Class C warrants are
exercisable at $1.00 per share of common stock, the Class B warrants are
exercisable at $6.00 per share of common stock. At any time during the period
the warrants are exercisable, the Company may redeem the warrants at $.05 per
warrant upon 45 days written notice in the event certain listing and
registration requirements are achieved, and the closing bid price of the common
stock exceeds $7.00 per share for the Class A and Class C Warrants, and $10.00
per share for the Class B Warrants, for 20 of 30 consecutive trading days.
During the year ended June 30, 1997, Class A Warrants were exercised to
purchase approximately 136,180 shares of common stock and Class C Warrants were
exercised to purchase approximately 8,692 shares of common stock. As of June
30, 1997, there were Class A warrants outstanding which entitle the holders to
purchase 101,581 shares of common stock, Class B warrants outstanding which
entitle the holders to purchase 426,432 shares of common stock and Class C
Warrants outstanding which entitle the holders to purchase 186,956 shares of
common stock.
STOCK OPTIONS
Stock option plans
In October 1995 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation." This new standard defines a fair value based method of
accounting for an employee stock option or similar equity instrument. This
statement gives entities a choice of recognizing related compensation expense
by adopting the new fair value method or to continue to measure compensation
using the intrinsic value approach under Accounting Principals Board (APB)
Opinion No. 25, the former standard. If the former standard for measurement is
elected SFAS No. 123 requires supplemental disclosure to show the effects of
using the new measurement criteria. This statement is effective for the
Company's 1997 fiscal year. The Company intends to continue using the
measurement practices prescribed by APB Opinion No. 25, and accordingly, this
pronouncement will not affect the Company's financial position or results
of operations.
In December 1993, the Company adopted the 1993 Stock Option Plan (the "Plan").
A total of 1,682,625 shares of the Company's common stock have been reserved
for
F-17
<PAGE> 73
issuance under the Plan. Under the Plan, options are granted at an exercise
price of not less than 100% of the fair market value of the shares on the date
of grant. Certain options are exercisable immediately, while others are subject
to vesting provisions as specified by the Board of Directors on the date of
grant. Each option grant under the Plan automatically expires ten years after
the date of grant or at such earlier time as may be determined by the Board of
Directors.
The following is a summary of stock option activity and related information for
the years ended June 30:
<TABLE>
<CAPTION>
1997 1996 1995
Weighted Avg. Weighted Avg. Weighted Avg.
Options Exercise Price Options Exercise Price Options Exercise Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding:
Beginning 1,498,368 $6.77 1,066,818 $5.24 882,110 $4.74
Granted 364,025 $7.44 489,300 $9.90 239,138 $7.42
Exercised (246,973) $4.59 (22,076) $4.65 - -
Canceled (30,810) $4.65 (35,674) $5.36 (54,430) $6.67
End of year 1,584,610 $5.40 1,498,368 $6.77 1,066,818 $5.24
Exercisable:
End of year 1,584,610 $5.40 1,498,368 $6.77 1,066,818 $5.24
Weighted average fair
value of options
granted during the
year: $6.72 $7.56 $5.82
</TABLE>
Exercise prices for options outstanding as of June 30, 1997 ranged from $4.65
to $10.24. The weighted average remaining contractual life of those options is
7.35 years.
Because the Company has adopted the disclosure-only provisions of SFAS No. 123,
no compensation cost has been recognized for the stock option plans. Had
compensation cost for the Company's stock option plan been determined based on
the fair value at the grant date of the awards consistent with the provisions
of SFAS No. 123, the Company's net earnings and earnings per share would have
been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Net income (loss) as reported $(7,535,810) 1,746,808
Net loss - pro forma net (8,908,810) (513,192)
Loss per share - as reported (.71) (.05)
Loss per share - pro forma (.81) (.25)
</TABLE>
The fair value of each option grant is estimated on the date of grant using
Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1996 and 1995; dividend yield of 0%, expected
volatility of 66%, risk-free interest rates of 6.0% for 1997 and 5.4% for 1996
and expected lives of four years for 1996 options and five years for 1995
options.
PREFERRED STOCK
As of June 30, 1997, the Company has authorized 40,000,000 shares of preferred
stock and has designated the following series of preferred stock:
- - SERIES AA REDEEMABLE CONVERTIBLE PREFERRED STOCK
300,000 shares of Series AA Redeemable Convertible Preferred Stock are
authorized. These shares were issued in connection with the acquisition of a
majority interest in Contour. Holders of the Series AA Redeemable Convertible
Preferred Stock are entitled to receive cumulative dividends of $1.00 per share
(10%) annually, and are convertible into common stock at any time at the rate of
F-18
<PAGE> 74
5.5125 shares of common stock for each six shares of Series AA Redeemable
Convertible Preferred Stock. Each share is entitled to one vote and has a
preferred rate of $10.00 per share upon voluntary or involuntary liquidation,
dissolution, or winding up of affairs of the Company.
The Company may redeem shares of Series AA Redeemable Convertible Preferred
Stock, in whole or in part, at any time at its option at a price of $10.00 per
share plus any unpaid dividends (the "Redemption Price"). In addition, to the
extent that such funds are legally available, the Company is required to
redeem, at the Redemption Price, at least 20% of each holder's initial number
of shares of Series AA Redeemable Convertible Preferred Stock by September 30,
1995; 40% by September 30, 1996; 60% by September 30, 1997; 80% by September
30, 1998; and 100% by September 30, 1999. In the event that a holder of Series
AA Redeemable Convertible Preferred Stock shall have converted a portion of his
shares into common stock, such converted shares shall be counted toward the
redemption requirement and shall be deemed redeemed for the purposes of the
mandatory redemption requirement. In addition, in the event that the Company
fails to pay any dividend on the Series AA Redeemable Convertible Preferred
Stock within 30 days of the due date, the Company is required to redeem all of
the outstanding Series AA Redeemable Convertible Preferred Stock. During the
year ended June 30, 1996, the Company redeemed 60,000 shares of Series A
Redeemable Preferred Stock.
- - SERIES A CONVERTIBLE PREFERRED STOCK
2,000,000 shares of Series A Convertible Preferred Stock, par value $.10 per
share, are authorized. Each share is entitled to 10 votes and has a preference
rate of $.01 per share with no dividend rights. 750,000 shares of Series A
Preferred Stock were issued in connection with a 1992 acquisition transaction
between the Company and Capitol Care Management Company, Inc. The preferred
shares were converted into common stock in 1994 and 1995.
- - SERIES C CONVERTIBLE PREFERRED STOCK
1,000,000 shares of Series C Convertible Preferred Stock are authorized. Each
share is entitled to one vote per share and had a preference rate of $1.00 per
share with no dividend rights.
The shares of Series C Convertible Preferred Stock were converted in 1994 into
common stock.
- - SERIES E CONVERTIBLE PREFERRED STOCK
1,000,000 shares of Series E Convertible Preferred Stock are authorized. These
shares were sold in an offering to foreign investors in April 1996 at $10.00
per share. Holders of the Series E Preferred Stock have no voting rights except
as required by law, and have a liquidation preference of $10.00 per share plus
4% per annum from the date of issuance. The shares of Series E Preferred Stock
are convertible into shares of common stock at a conversion price of $11.55 or
85% of the average closing bid price for the five trading days prior to the
date of conversion, whichever is lower (but no lower than $5.00).
At the time of conversion, the holder is also entitled to additional shares
equal to $10.00 per share of Series E Preferred Stock converted multiplied by
8% per annum from the date of issuance divided by the applicable conversion
price. As of June 30, 1997, the remaining 942,500 shares of Series E
Convertible Preferred Stock were converted into 1,318,533 shares of common
stock.
- - SERIES F CONVERTIBLE PREFERRED STOCK
1,000,000 SHARES of Series F Convertible Preferred Stock are authorized. These
shares were sold in an offering to foreign investors in September, 1996 at
$10.00 per share. Holders of the Series F Preferred Stock have no voting rights
except as required by law, and have a liquidation preference of $10.00 per
share plus
F-19
<PAGE> 75
4% per annum from the date of issuance. The shares of Series F Preferred Stock
are convertible into shares of common stock at a conversion price of $7.425 or
85% of the average closing bid price for the five trading days prior to the
date of conversion, whichever is lower.
At the time of conversion, the holder is also entitled to additional shares
equal to $10.00 per share of Series F Preferred Stock converted multiplied by
8% per annum from the date of issuance divided by the applicable conversion
price. During the year ended June 30, 1997, the 651,666 shares of Series F
Convertible Preferred Stock were converted into 1,148,698 shares of common
stock.
TREASURY STOCK
During the year ended June 30, 1997, the Company purchased and retired 520,326
shares of its common stock at an aggregate cost of $3,923,222.
10. LONG-TERM DEBT:
Long-term debt at June 30, 1997 and 1996 is summarized as follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Non-affiliates:
Notes payable to a real estate
investment trust ("REIT") $ 40,700,380 $ 39,623,938
Industrial development revenue bonds 22,615,000 20,060,000
Municipal revenue bonds 26,265,000 18,170,000
Housing development mortgage revenue bonds 25,795,000 21,750,000
Notes payable to banks (8.5% or prime plus
1% to 10% due through 2003) 15,780,008 3,049,012
Capitalized lease obligations 21,972,802 8,048,581
153,128,190 110,701,531
Less current maturities 11,454,059 2,220,491
$141,674,131 $108,481,040
</TABLE>
Future maturities of debt and capital lease obligations are as follows:
<TABLE>
<CAPTION>
Capital
Year Lease Debt Total
<S> <C> <C> <C>
1998 $ 2,408,701 $ 11,980,406 $ 14,389,107
1999 2,416,138 2,538,317 4,954,455
2000 2,423,272 2,963,682 5,386,954
2001 2,430,508 3,455,739 5,886,247
2002 2,437,846 3,552,304 5,990,150
Thereafter 36,798,942 106,664,940 143,463,882
Total 48,915,407 131,155,388 180,070,795
Less amount representing imputed
interest at 11% to 12% 26,942,605 - 26,942,605
Total obligations $ 21,972,802 $131,155,388 $153,128,190
</TABLE>
The notes payable to the REIT consist of mortgage notes on sixteen facilities.
Principal amounts are amortized over a 25-year period with monthly installments
payable through 2006. Interest ranges on these notes from 9.75% to 11.28% and
increases annually at rates ranging from 0.1% to 0.25%. The notes are
collateralized by property and equipment of the sixteen facilities.
The industrial development revenue bonds consist of bonds on two facilities: a
retirement community located in San Destin, Florida and Atrium, a nursing and
retirement community located in Jacksonville, Florida. The San Destin facility
serves as collateral for $11,925,000 of bonds payable to the Walton County
Industrial Development Authority. Principal payments range from $150,000 to
$1,300,000 annually through 2019 and interest accrues at 10.5%. The Atrium
facility serves as collateral for three City of Jacksonville Industrial
Development Revenue Refunding bonds totaling $10,690,000. Principal payments
F-20
<PAGE> 76
range from $65,000 to $375,000 annually through 2024, $6,060,000 due in 2011,
and interest accrues at rates ranging from 6.5% to 11.5%.
The housing development mortgage revenue bonds include approximately
$18,525,000 of bond debt assumed by the Company in connection with the
acquisition of Encore. The bond debt, which is collateralized by property and
equipment of five facilities, includes Okaloosa County, Florida Retirement
Rental Housing Revenue Series A bonds totaling $7,925,000 with semi-annual
interest payments at 10.75% due in 2003 and Ohio Rental Housing Revenue Series
A bonds totaling $9,800,000 with semi-annual interest at 10.38% due in 2009.
The remainder of the housing development mortgage revenue bonds consist of
bonds totaling $8,070,000 collateralized by three facilities with interest
ranging from 7% to 11.0% with maturities through 2026. The housing development
mortgage revenue bonds require annual principal payments ranging from $150,000
to $2,000,000.
The municipal revenue bonds, which are collateralized by property and equipment
of seven facilities and require annual principal payments ranging from $370,000
to $1,635,000, consist of the following:
Dade City, Florida Series A and B bonds totaling $6,395,000, with principal
payments due through 2025 and interest ranging from 6.75% to 8%.
Highland County Series A and B bonds totaling $4,230,000, with principal
payments due through 2024 and interest ranging from 6.5% to 8.5%.
City of Dublin Series A and B bonds totaling $2,740,000, with principal
payments due through 2024 and interest ranging from 8.5% to 10.5%
Rome-Floyd County Development Authority Revenue Series A and B bonds totaling
$2,655,000, with principal payments due through 2011 and interest rates ranging
from 7.5% to 10%.
Americus-Sumter Series A and B bonds totaling $1,900,000, with principal
payments due through 2026 and interest rates ranging from 8.0% to 10.25%.
Houston County Series A and B bonds totaling $5,650,000 with principal payments
due through 2026 and interest rates ranging from 7% to 8.4%.
Sumner, TN Series A and B bonds totaling $2,695,000 with principal payments due
through 2010 and interest rates ranging from 10.5% to 12.5%.
The Company recorded an extraordinary charge of $490,000, net of income tax
benefit of $300,000, associated with the early extinguishment of approximately
$9.2 million of long-term debt on the Company's retirement facility located in
Destin, Florida.
In connection with the bond indentures, the Company is required to meet certain
covenants, including monthly sinking fund deposits, adequate balances in debt
service reserve funds, timely payment of tax obligations and adequate insurance
coverage. At June 30, 1997 and 1996, the Company was in violation of several of
these covenants including the failure to make monthly payments to the bond
sinking funds for certain of these facilities and inadequate debt service
reserves for certain of the facilities. The Company is also delinquent with
regard to the payment of property taxes at several facilities. The trustees
have not called the bonds in the past for these violations and management does
not foresee the bonds being called at this time. All semi-annual interest and
principal payments have been made in a timely fashion.
11. LINES OF CREDIT:
The Company maintains various lines of credit with interest rates ranging from
prime plus .25% to prime plus 1.25%. Available borrowings under the lines of
credit totaled $14,050,000 and $5,075,000 for the years ended June 30, 1997 and
1996, respectively. Total borrowings against the lines of credit were
$9,935,036 and $3,556,535 at June 30, 1997 and 1996, respectively.
12. COMMITMENTS AND CONTINGENCIES:
OPERATING LEASES
The Company leases nursing homes and retirement care facilities from
unaffiliated entities (in addition to leasing eleven nursing and retirement
facilities from affiliated entities. (see Note 3). The lease agreements
commenced on various dates with terms extending through February 2016. The
Company has options to extend most of the leases for an additional five to ten
years. The Company also leases certain facilities under agreements classified
as capital leases. These agreements include purchase options exercisable at
the Company's discretion during, or at the end of, each of the lease terms. The
capital lease agreements commenced on various dates with terms extending
through October 2008.
Included in the above agreements are seven leases whereby a sale to the lessor
F-21
<PAGE> 77
preceded the lease agreement ("sale/leaseback transaction"). The Company has
accounted for six of these sale/leaseback transactions as sales with no gains
or losses recognized on the transactions. The remaining sale/leaseback
transaction was capitalized and included a deferred gain of $381,370 to be
amortized over the term of the lease. Future minimum payments, by year and in
the aggregate, under noncancelable operating leases with initial or remaining
terms of one year or more consist of the following at June 30, 1997:
<TABLE>
<CAPTION>
Year Amount
<S> <C>
1998 $ 19,484,267
1999 19,264,153
2000 19,243,829
2001 19,159,033
2002 18,710,901
Future years 119,850,928
Total $215,713,111
</TABLE>
The Company's rental expense under operating leases for nursing homes and
retirement care facilities amounted to approximately $13,200,000, $6,040,000
and $5,750,000 for the years ended June 30, 1997, 1996 and 1995, respectively.
The Company leases office space under a noncancelable operating lease which
expires in October 2000. At June 30, 1997, minimum future rental payments under
the noncancelable lease were as follows:
<TABLE>
<CAPTION>
Year Amount
<S> <C>
1998 $325,455
1999 341,683
2000 358,673
2001 120,509
</TABLE>
Total amounts paid for rental of office facilities totaled approximately
$306,000, $317,000, and $60,000 for the years ended June 30, 1997, 1996 and
1995, respectively.
OTHER
The Company has guaranteed 20% to 100%, or approximately $9,000,000, of debt on
six facilities owned by unaffiliated entities that are currently operated by
the Company under operating leases.
The Company is involved in legal proceedings arising in the ordinary course of
business. In addition, the Company is in dispute with the Internal Revenue
Service ("IRS") concerning the application of certain income and payroll tax
liabilities and payments. The IRS contends that the Company is delinquent in
the payment of certain taxes and has charged penalties and interest in
connection with the alleged underpayment. The Company contends that the IRS has
misapplied payments between income and payroll taxes and between the Company
and its affiliates. The Company has estimated in the accompanying financial
statements amounts for ultimate settlement of this dispute. The Company has
filed lawsuits against the IRS related to this matter. In the opinion of
management, the ultimate resolution of pending legal proceedings and the IRS
dispute will not have a material effect on the Company's financial positions or
results of operations.
F-22
<PAGE> 78
13. INCOME TAXES:
The components of the provision for income taxes were as follows:
<TABLE>
<CAPTION>
Year ended June 30,
1997 1996 1995
<S> <C> <C> <C>
Current:
Federal $(1,097,110) $2,671,891 $2,659,000
State (240,648) 501,600 499,000
(1,337,758) 3,173,491 3,158,000
Deferred (benefit):
Federal (846,568) (1,571,500) 221,928
State (158,930) (294,900) 39,164
$(1,005,498) (1,866,400) 261,092
Total income tax provision $(2,343,256) $1,307,091 $3,419,092
</TABLE>
The income tax provisions (benefit) included in the consolidated statements of
income are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Income before extraordinary item and
cumulative effect of change in
accounting principle $(2,343,256) $1,307,091 $3,419,092
Cumulative effect of change
in accounting principle - 228,000 -
Extraordinary Item (300,000) - -
(2,643,256) $1,535,091 $3,419,092
</TABLE>
Deferred income taxes are provided to reflect temporary differences between
financial and income tax bases of assets and liabilities. The sources of the
temporary differences and their effect on the net deferred taxes at June 30,
1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Current deferred taxes:
Deferred tax assets:
Workers' compensation accrual $1,936,000 $1,062,900
Provision for losses on accounts
receivable 2,039,200 811,300
Health insurance accrual 227,800 227,800
Net operating loss 444,500 355,100
Total current deferred tax asset 4,647,500 2,457,100
Less valuation allowance (444,500) (355,100)
4,203,000 2,102,000
Deferred tax liability - other (137,569) (93,570)
Net current deferred tax asset 4,065,431 $2,008,430
Noncurrent deferred taxes:
Deferred tax asset - deferred gain 276,700 $ 276,700
Deferred tax liabilities:
Property and equipment 673,900 352,600
Deferred lease cost 568,200 201,100
Other 133,529 -
Net noncurrent deferred tax
liability $1,098,929 $ 277,000
</TABLE>
The provision for income taxes for the year ended June 30, 1996 and 1995 varies
from the amount determined by applying the Federal statutory rate to pretax
income as a result of the following:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Income tax expense (benefit)
at federal statutory rate (3,310,600) $1,115,130
Nondeductible tax penalties 305,800 417,700
State income taxes, net of
federal tax benefit (192,000) 331,100
Other, net 668,801 (556,839)
$(2,527,999) $1,307,091
</TABLE>
The primary difference between the actual income tax rate of approximately 40%
for the year ended June 30, 1995 and the Federal income tax rate of 34% is the
F-23
<PAGE> 79
amount paid for state income taxes.
14. FAIR VALUES OF FINANCIAL INSTRUMENTS AND INVESTMENTS:
The following methods and assumptions were used by the Company in estimating
the fair value of its financial instruments.
CASH AND CASH EQUIVALENTS
The carrying amount reported in the balance sheet for cash and cash equivalents
approximates fair value because of the short maturity of these instruments.
MARKETABLE EQUITY SECURITIES
The carrying amount reported in the balance sheet for marketable equity
securities approximates fair value. All marketable equity securities are
classified as "available for sale" for accounting purposes and, therefore, are
carried at fair value with unrealized gains and losses recorded directly in
equity. There were no significant unrealized gains or losses at June 30, 1996.
NOTES RECEIVABLE
The carrying amount approximates fair value for the notes receivable based on
the fair value being estimated as the net present value of cash flows that
would be received on the notes over the remaining notes' terms using the
current market interest rates rather than stated interest rates.
SHORT- AND LONG-TERM DEBT
The fair value of all debt has been estimated based on the present value of
expected cash flows related to existing borrowings discounted at rates
currently available to the Company for debt with similar terms and remaining
maturities.
The cost basis and estimated fair values of the Company's financial instruments
at June 30 are as follows:
<TABLE>
<CAPTION>
June 30, 1997
Carrying Fair
Amount Value
<S> <C> <C>
Financial assets:
Cash and cash equivalents $ 3,637,878 $ 3,637,878
Financial liabilities:
Short-term debt 21,389,095 21,389,095
Long-term debt 141,674,131 128,718,000
</TABLE>
<TABLE>
<CAPTION>
June 30, 1996
Carrying Fair
Amount Value
<S> <C> <C>
Financial assets:
Cash and cash equivalents $ 45,365 $ 45,365
Marketable equity securities 33,645 33,645
Financial liabilities:
Short-term debt 5,777,026 5,777,026
Long-term debt 108,481,040 112,338,000
</TABLE>
As of June 30, 1995, the carrying amount of all financial instruments
approximated fair value.
F-24
<PAGE> 80
15. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
As described in Note 2, the Company acquired certain businesses during 1997.
The fair value of the assets acquired was $30,411,391 and the fair value of the
liabilities assumed was $11,603,614, which resulted in net cash payments of
$18,807,777.
As described in Note 2, the Company acquired certain businesses during 1996.
The fair value of assets acquired was $69,826,951 and the fair value of
liabilities assumed was $47,888,438, which resulted in net cash payments of
$21,938,513.
During 1997, the Company entered into approximately $14,000,000 of capital
lease agreements.
Contour acquired Atlantic Medical Supply Company, Inc. and sold CFI with
noncash transactions of $16,073,970 and $624,252, respectively.
Cash paid for interest during the years ended June 30, 1997, 1996 and 1995 was
$13,851,484, $6,561,954, and $1,172,883, respectively.
Cash paid for income taxes during the years ended June 30, 1997, 1996 and 1995
was $3,265,632, $3,561,089, and $829,292, respectively.
Dividends on preferred stock of $15,000 and $1,996,777 were accrued but not
paid at June 30, 1996.
Dividends on preferred stock of $1,966,777 were accrued but not paid at June
30, 1997.
During 1997 and 1996, approximately $13,730,000 and $8,112,000, respectively,
of lease assets and obligations were capitalized.
16. ACCRUED EXPENSES:
Accrued expenses consisted of the following as of June 30:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Payroll and payroll taxes $ 5,808,124 $ 3,587,217
Interest 2,129,164 1,868,805
Workers Compensation 5,275,000 2,975,000
Other 5,204,970 2,885,008
Total $18,417,258 $11,316,030
</TABLE>
17. EMPLOYEE RETIREMENT PLAN:
During the year ended June 30, 1996, the company established a defined
contribution retirement plan. Employees qualify for the plan upon the
completion of three months of service with the Company and reaching the age of
twenty-one. Company contributions to the plan represent a matching percentage
of certain employee contributions. The matching percentage is subject to
management's discretion based upon consolidated financial performance. For the
years ended June 30, 1997 and 1996, the Company has not made any contributions
to the plan.
18. BUSINESS SEGMENT INFORMATION:
Retirement Care Associates; Inc. and Subsidiaries is a long-term health care
provider which engages in two distinct business segments. The Retirement Care
Associates entity operates and manages nursing homes and retirement facilities
throughout the Southeast. As of June 30, 1997, approximately 11,100 beds were
owned or operated by this entity.
The Contour entity manufacturers a full line of orthopedic care and
F-25
<PAGE> 81
rehabilitation products and distributes them to nursing facilities throughout
the Southeast. The Contour entity was acquired in 1995. The following
represents business segment information for the years ended June 30, 1997,
1996 and 1995.
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Operating revenues:
Retirement Care Associates $204,612,388 $124,951,954 $76,656,829
Contour Medical 48,615,473 9,059,415 2,959,224
253,227,861 $134,011,369 $79,616,053
Depreciation and amortization
expense:
Retirement Care Associates $ 5,653,472 $ 2,806,637 $ 1,051,842
Contour Medical 861,241 600,349 76,341
$ 6,514,713 $ 3,406,986 $ 1,128,183
Identifiable assets:
Retirement Care Associates $227,984,979 $165,094,536 $72,644,179
Contour Medical 27,385,987 12,397,751 7,613,367
$255,370,966 $177,492,287 $80,257,546
Capital expenditures:
Retirement Care Associates $ 11,764,903 $ 11,741,135 $ 5,763,553
Contour Medical 969,486 749,163 316,057
$ 12,734,389 $ 12,490,298 $ 6,079,610
Operating Income
Retirement Care Associates $ 3,006,819 $ 8,540,815 $ 8,865,388
Contour Medical 694,303 839,202 151,820
$ 3,701,122 $ 9,380,017 $ 9,017,208
</TABLE>
19. SUBSEQUENT EVENTS
The board of directors of RCA has unanimously approved and adopted the
Agreement and Plan of Merger and reorganization, dated as of February 17, 1997,
as amended by Amendment No. 1 thereto dated as of May 27, 1997, and also
amended by Amendment No. 2 thereto dated as of August 21, 1997, with Sun
Healthcare Group, Inc. ("Sun"). The proposed RCA merger is contingent upon,
among other things, the approval of the holders of the requisite number of
shares of Sun Common Stock and RCA Capital Stock, which is described in a Joint
Proxy Statement/Prospectus/Information Statement. The proposed RCA Merger will
be consummated as soon as practicable after such approvals are obtained and the
other conditions to the RCA Merger are satisfied or waived.
The Company renewed debt of $9,750,000 and obtained $5,000,000 of additional
debt with Sun Healthcare Group, Inc. on July 10, 1997. Interest accrues at
rates ranging from 11% to 12% and would increase from 15% to 16% during any
period of default. Principal is due 120 days following the termination of the
agreement or merger with Sun.
Subsequent to June 30, 1997, the Company became obligated on approximately
$2,500,000 bonds to construct a twenty-five unit addition to its Jackson,
Tennessee facility.
20. ADJUSTMENTS TO 1996 FINANCIAL STATEMENTS
As discussed in Note 19, on February 17, 1997, following a series of meetings
and negotiations, the company agreed to be acquired by Sun Healthcare Group,
Inc. (Sun) through an exchange of shares of Sun for shares of the Company.
During due diligence procedures associated with the transaction, certain
adjustments to previously issued financial statements were discovered to be
required. Those adjustments, together with additional amounts, have been
applied to the financial statements for the year ended June 30, 1996 as
restatements and corrections as follows:
F-26
<PAGE> 82
<TABLE>
<CAPTION>
<S> <C>
Additional provision for uncollectible accounts $1,705,000
Additional accrual for claims incurred, but not
reported for self-insured worker's compen-
sation and health care 3,400,000
Accrual for compensated absences 300,000
Adjustment of previously recorded inventory 809,219
Adjustment to lease expense 530,000
6,744,219
Less:
Adjustment to income taxes (2,921,219)
Decrease in net income before extraordinary
item $3,823,000
Decrease in net income per share $ .34
</TABLE>
21. LIQUIDITY
During the period ending June 30, 1997, the Company experienced a significant
net operating loss and at the same time a decline in liquidity, resulting from
the operating loss and a heightened level of investment in new facilities.
Management believes that the operating loss is the result of a decline in the
overall census of residents and patients in the Company's facilities, together
with losses at Contour Medical, Inc. resulting from costs of consolidation of
subsidiaries acquired during the period. Closing of the merger of the Company
with Sun as discussed in Note 19 will provide access to additional sources of
liquidity as the Company's facility proceed through a combination of new
admissions to nursing facilities and set-up of retirement facilities. In the
event the merger does not take place, management's plans include a complete
reorganization of operations of the nursing home segment, assisted living
segment and Contour Medical, Inc. This reorganization plan would include new
personnel to implement increased census, develop and implement ancillary
business (i.e., pharmacy, therapy, etc.) which would be beneficial from an
operations point of view as well as increase profits for the Company. A
comprehensive plan is being developed to implement these changes if necessary.
The personnel for this plan have been identified and could be brought on board
quickly. The funds to implement this plan would be provided from a new line of
credit, sale and lease-back transactions for certain identified properties of
the Company as well as refinancing of other Company targeted facilities.
F-27
<PAGE> 83
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned thereunto duly authorized.
RETIREMENT CARE ASSOCIATES, INC.
Dated: October 14, 1997 By: /s/ Christopher F. Brogdon
---------------------------------
Chris Brogdon, President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
Signature Title Date
/s/ Christopher F. Brogdon President and Director October 14, 1997
- --------------------------
Chris Brogdon
/s/ Edward E. Lane Secretary and Director October 14, 1997
- --------------------------
Edward E. Lane
/s/ Darrell C. Tucker Treasurer (Chief Financial October 14, 1997
- -------------------------- Officer and Principal
Darrell C. Tucker Accounting Officer) Director
/s/ Julian S. Daley Director October 14, 1997
- --------------------------
Julian S. Daley
Director
- --------------------------
Harlan Mathews
<PAGE> 1
EX-10.2
MANAGEMENT AND MARKETING AGREEMENT
This agreement (the "Agreement") is made and entered into as of the 1st
day of January 1996, by and between Winter Haven Homes, Inc. ("Owner"), which
owns a retirement community known as Renaissance of Sanford, located at 300 West
Airport Road, Sanford, Florida (the "Facility"), and Capitol Care Management
Company, Inc., a Georgia corporation ("CCMC"). This Agreement shall take effect
on January 1, 1996, or on such other date as the parties agree in writing (the
"Effective Date@).
In consideration of the mutual covenants, promises and conditions
contained herein, the parties hereby agree as follows:
I. APPOINTMENT
Owner hereby appoints CCMC as its exclusive agent and manager for the
marketing and management of the Facility during the term of this Agreement and
any extensions or renewals thereof.
II. TERM; TERMINATION
1. The term of this Agreement shall commence as of the Effective
Date and shall continue for a period of five (5) years. In addition, the Owner
shall have the option to renew this Agreement for additional terms of One (1)
year each. Such renewals shall be automatic unless Owner gives Manager written
notice of cancellation at least sixty (60) days prior to the expiration of the
then current contract term.
2. Owner may terminate this Agreement upon giving CCMC sixty (60)
days written notice after the end of the third year of this Agreement. CCMC may
terminate this Agreement at any time by giving the Owner, sixty (60) days
written notice.
III. COMPENSATION
1. As compensation for the services to be performed by CCMC under
this Agreement CCMC shall receive a monthly marketing fee (the AMarketing Fee@)
of: $.00 and receive a monthly management fee (the "Management Fee") of:
$14,000.00, and receive a monthly accounting fee (the "Accounting Fee") of:
$1,000.00.
2. In addition to the Marketing and Management Fee, the Manager
shall be entitled to reimbursement of all reasonable out-of-pocket expenses
incurred in connection with management of the Facility and documented in a
reasonable manner; provided, however, that any such expenses in excess of $250
shall require the Owner's prior approval. Expense reimbursements shall be due
and payable within 30 days of Management's submission of an invoice therefore.
3. If any time during the term of this agreement Owner terminates as
Owner of facility this agreement shall terminate upon receipt of notice of
Owner's termination.
<PAGE> 2
IV. RESPONSIBILITIES OF CCMC
As Exclusive Agent and Manager of the Facility, CCMC shall have the
authority to and shall operate, market and manage the Facility on behalf of and
as agent for the Owner, including, but not limited to the following:
1. General Authority and Policies
a. Subject to Owner's prior approval, CCMC shall have the
authority to establish and change all resident rents, fees and other charges
with respect to the Facility.
b. CCMC is authorized to and shall establish and enforce
operating policies and procedures for the Facility with a view of promoting a
safe and comfortable residential environment consistent with maximizing the net
cash flow to Owner from the Facility. Such policies shall cover all aspects of
management including leasing, tenant relations, food service, public relations,
advertising, maintenance, social activities, accounting and regulatory
compliance.
c. CCMC is authorized to and shall, on the Owner's behalf,
take all action necessary in order to assure that such policies and procedures
are correctly followed.
d. CCMC is hereby granted exclusive authority by Owner to
advertise the availability of units in the Facility or any room, space, or
apartment thereon for rental and to display same; to execute, renew, mollify
and/or cancel leases for the Owner for any part of the Facility on such terms
and conditions as CCMC reasonably deems best and to collect on Owner's behalf,
rents and other income clue or to become due and given written acknowledgment of
payment. Subject to prior written approval of Owner, given at the direction of
the Owner, the Manager shall have the authority to terminate tenancies as
Owner's agent and to sign and serve in the name of Owner such direction and
shall have authority to institute and prosecute legal actions, evict tenants,
and settle, compromise and release such actions or suits or reinstate such
tenancies.
e. CCMC shall establish procedures for collection of rentals
and other income from the Facility and shall deposit all such amounts in the
operating account maintained by Manager for the benefit of Owner.
2. Marketing
Manager's marketing responsibilities shall include:
identifying target markets; developing appropriate marketing strategies and
procedures; hiring, training and supervising qualified leasing counselors as
employees of Owner, and budgeting and cost control Subject to Owner's prior
approval, Manager shall have the authority as agent for Owner to retain the
services of marketing professionals to assist in the marketing of the
2
<PAGE> 3
Facility. The costs incurred in retaining such professionals shall be included
in the proposed operational budget to be approved by Owner.
3. Accounting
CCMC, on the effective date of this Agreement, shall have
implemented a system of accounting controls and procedures for timely monthly
reporting of all accounts, including an analysis versus budget. CCMC shall make
its accounting system available for review by Trustee. All costs associated with
the accounting for the Facility shall be at Owner's sole cost and expense.
Manager shall make all accounting records available to Owner's auditors upon
reasonable notice.
4. Standard of Care
In performing its obligations under this Agreement, CCMC shall
act in good faith and with the prudence and care required of health
professionals situated in similar circumstances in this industry.
Notwithstanding any other provision contained herein, whether express or
implied, neither the Owner nor the Bondholders shall be responsible for any
claims, liabilities, or expenses arising from CCMC's negligence or willful
misconduct.
5. Employees
Manager shall hire as employees of Owner and discharge,
maintain and supervise, to the extent the same are available in the community,
an adequate staff of employees at competitive wage and salary rates for the
various job classifications approved from time to time by Owner. Release of
employees shall be at the discretion of Manager. Manager shall recommend and
institute, subject to approval of Owner, appropriate employee benefits. Employee
benefits may include pension plans (where applicable), insurance benefits,
incentive plans for key employees and vacation policies.
V. RESPONSIBILITIES OF OWNER
Owner shall make itself or its designated representative available
to meet with Manager on a monthly basis to review the progress of the Facility
and approve or otherwise direct Manager's plans and strategies. Owner agrees
that it will review and evaluate all proposals within a reasonable time to
assure the uninterrupted operation of the property. Owner also agrees as
follows:
1. Employment
Owner agrees and acknowledges that all Facility employees
shall be employees of Owner. Owner accepts hill responsibility for all costs and
expenses associated with employment of such employees. Owner agrees to pay, and
to indemnity and hold Manager harmless with respect to, all salary, benefits,
taxes and regulatory costs with respect to such employees, including, but not
limited to, payroll taxes, wages, worker's compensation
3
<PAGE> 4
insurance, unemployment insurance, health and benefit plan costs, salaries, any
extended benefits, and other charges or insurance provided to such employees or
levied or required by federal, state or local statutes related to the employment
of the Facility's employees.
2. Indemnification
Owner agrees to indemnify and hold Manager harmless from and
against any and all liabilities, claims, laws, damages or actions arising out of
or relating to the Facility or the operation thereof, including without
limitation any liabilities arising out of violations of any antipollution or
environmental protection or remediation laws, the Occupational Safety and Health
Act of 1970, the Fair Labor Standards Act, as amended, Title VI of the Civil
Rights Act of 1964, as amended, the Age Discrimination in Employment Act of
1967, as amended, and any rules and regulations thereunder, except for any
liabilities, claims, laws, damages or actions arising directly out of (a) any
actions taken by Manager contrary to the express written instructions or
specific written policy of Owner relating to the operation of the Facility, or
3. Designated Representatives of Owner
The name of the officer, agent or employee of Owner designated
by the Owner as Owner's representative for purposes of this Agreement are as
follows:
Christopher F. Brogdon, President
Retirement Care Associates, Inc.
6000 Lake Forrest Drive, Suite 200
Atlanta, Georgia 30328
(404) 255-7500 fax (404) 843-9677
Owner may change its designated representative(s) from time to
time by giving written notice to Manager. In any situation in which Owner is
required or permitted under the terms of this Agreement to take any action,
or to give any consent or approval, Manager shall be entitled to rely
conclusively upon the statement of any of such designated representative(s). In
the event Owner, through its designated representative(s) does not respond to a
request by Manager for approval or consent under this Agreement within 15
business days after receipt of such request, the request shall be deemed
approved. If any action is required in a shorter period of time in order to
comply with legal requirements or other emergency circumstances, Owner shall be
so notified and shall be required to respond within such shorter period of time.
Owner agrees that it will not unreasonably withhold or delay any approvals or
consents requested by Manager hereunder.
VI. PROPRIETARY MATERIALS
The Owner acknowledges that in managing the Facility under this
Agreement, the Manager will use certain proprietary materials which are the
exclusive property of the Manager, including computer software used for
accounting, marketing and food service functions, as well as marketing,
4
<PAGE> 5
accounting and food services operations manuals. The Owner understands that
these materials will remain the sole and exclusive property of the Manager and
that the Owner will not acquire any rights or license in such materials. Upon
expiration or termination of this Agreement for any reason, all such materials
in tangible form, including all copies, shall be returned to Manager, and all
such materials or copies stored by electronic means shall be purged or erased.
VII. MISCELLANEOUS PROVISIONS
The following provisions are an integral part of this Agreement.
1. The Agreement shall be binding upon and shall inure to the
benefit of the successors and assigns of the respective parties hereto. Either
party may assign this contract after obtaining the prior written consent of the
other party, which consent shall not be unreasonably withheld or delayed.
2. The headings used in the Agreement are inserted for reference
purposes only and shall not be deemed to limit or affect the meaning or
interpretation of any of the terms or provisions of this Agreement.
3. This Agreement constitutes the entire understanding and agreement
between the patties with respect to the subject matter hereof and supersedes all
prior agreements, representations or understandings between the parties relating
to such subject matter.
4. The provisions of this Agreement are severable and should any
provision hereof be void, unenforceable, or invalid, such void, unenforceable or
invalid provision shall not affect any other portion or provision of this
Agreement.
5. Any waiver by either party hereto or any breach of this Agreement
of any kind or character whatsoever by the other party, whether such waiver be
direct or implied, shall not be construed as a continuing waiver or as a consent
to any subsequent breach or waiver of this Agreement on the part of the other
party. 6. The several tights and remedies herein expressly reserved to each of
the parties shall be construed as cumulative; none of them shall be exclusive or
in lieu or Dictation of any other right, remedy, or priority allowed by law.
7. This Agreement shall be interpreted, construed and enforced
according to the laws of the State of Georgia.
8. This Agreement may not be modified except by an instrument in
writing signed by the party against whom enforcement is sought.
9. In the event arty action or proceeding is brought by either party
against the other under this Agreement, the prevailing party shall be entitled
to recover reasonable attorney's fees such amounts as the courts may deem just.
5
<PAGE> 6
10. Unless otherwise specified, all notices, demands and requests
required or permitted to be given hereunder shall be deemed duly given at the
time of delivery if delivered in person on the date of delivery if sent and
receipted for by Federal Express or other nationally recognized overnight
service, or three (3) business day=s following mailing if mailed by registered
or certified mail, return receipt requested, addressed to the following:
If to Owner, to:
Christopher F. Brogdon, President
Retirement Care Associates, Inc.
6000 Lake Forrest Drive, Suite 200
Atlanta, Georgia 30328
If to Manager, to:
Jeff Andrews, President
Retirement Management Company, Inc.
6000 Lake Forrest Drive, Suite 525
Atlanta, Georgia 30328
Either party shall have the right to specify in writing, in
the manner above provided other address to which subsequent notices to such
parties be given. Any notice given hereunder shall be deemed to have been given
as of the date delivered or mailed
11. Nothing contained in this Agreement shall constitute or be
construed to be or to create a joint venture, partnership or lease between Owner
and Manager with respect to the Facility or any equity interest in the Facility
on the part of Manager. The relationship of Manager to Owner under this
Agreement is that of an independent contractor.
12. Manager shall not, by entering into and performing this
Agreement or by managing the Facility, assume or become liable for any of the
existing or future obligations, liabilities or debts of the Facility or Owner.
Manager's sole liability to Owner hereunder will be for actual damages incurred
by Owner due to Manager's breach of the standard of care described in paragraph
V.9. Under no circumstances shall Manager be liable for any incidental,
consequential or special damages suffered by Owner for any reason whatsoever,
whether arising out of breach of contract, negligence, tort or otherwise.
13. Neither party shall be deemed to be in violation of this
Agreement if it is prevented from performing any of its obligations hereunder
for any reason beyond its reasonable control, including without limitation, acts
of God or of the public enemy, flood or stone, fire or explosion, labor trouble
or statutes, regulations or rules of any federal, state or local government, or
any agency thereof.
6
<PAGE> 7
IN WITNESS WHEREOF, the parties hereto have signed this agreement as of
the date first stated above.
CAPITOL CARE MANAGEMENT WINTER HAVEN HOMES, INC.
COMPANY, INC.
By: /s/ Darrell Tucker By: /s/ Edward E. Lane
Its: President Its: President
7
<PAGE> 8
ADDITIONAL MANAGEMENT & MARKETING AGREEMENTS OMITTED
The Registrant has additional Management and Marketing Agreements with
affiliates substantially identical to the foregoing. The material details of
such agreements which differ are as follows:
<TABLE>
<CAPTION>
Monthly Fees
----------------------------
Name of Date of Manage-
Facility Location Owner* Agreement ment Marketing Accounting
- --------------- ----------- ------ --------- ------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Summer=s Landing Lynn Haven, NAB 12/10/96 $ 1,000 -0- $1,000
- - Lynn Haven FL
Summer=s Landing Vidalia, GA SCI 12/10/93 $ 1,000 -0- $1,000
- - Vidalia
- ---------------
</TABLE>
* The names of the owners are abbreviated as follows: National Assistance
Bureau, Inc. - NAB; Southeastern Collages, Inc. - SCI
8
<PAGE> 1
EX-10.3
NURSING HOME
MANAGEMENT AGREEMENT
THIS MANAGEMENT AGREEMENT (the "Agreement") is made and entered into this
1st day of January 1995, by and between National Assistance Bureau, Inc.,
(hereinafter called "Owner"), and Capitol Care Management Company, Inc.
(hereinafter called "CCMC").
Owner and CCMC agree that CCMC shall manage Marshall C. Voss Care Center,
HIarriman, Tennessee (the "Facility"), owned by Owner, containing 138 licensed
nursing home beds, on the following tens and conditions:
SECTION ONE: MANAGEMENT DUTIES AND OBLIGATIONS
1.01 Management of Facility. During the term of this Agreement, CCMC shall
supervise the management of the Facility including but not limited to staffing,
accounting, billing, collections, setting of rates and charges and general
administration. In connection therewith CCMC (either directly or through
supervision of employees of the Facility) shall:
(a) Hire on behalf of Owner and maintain (to the extent such
personnel are reasonably available in the community in which the Facility is
located) an adequate staff of nurses, technicians, office and other employees,
including an administrator, at wage and salary rates for various job
classifications approved Dom time to time by Owner; and release employees at
CCMC's discretion.
(b) Recommend and institute, subject to approval of Owner,
appropriate employee benefits. Employee benefits may include pension and
profit-sharing plans, insurance benefits, incentive plans for key employees and
vacation policies.
(c) Design and maintain accounting, billing, patient and collection
records; prepare and file insurance, Medicaid and any and all other necessary or
desirable reports and claims related to revenue production.
(d) Order, supervise and conduct a program of regular maintenance
and repair of the Facility except that physical improvements costing more than
$500.00 shall be subject to prior approval of Owner which shall not be
unreasonably withheld.
(e) Purchase supplies, drugs, solutions, equipment, Furniture and
furnishings on behalf of Owner' except that purchases of items of equipment
which cost more than $500.00 shall be subject to prior approval of Owner which
shall not be unreasonably withheld.
(f) Administer and schedule all services of the Facility.
(g) Supervise and provide the operation of food service facilities.
<PAGE> 2
(h) Provide for the orderly payment (to the extent funds of Owner
are available therefore) of accounts payable, employee payroll, taxes and
insurance premiums.
(i) Institute standards and procedures for admitting patients, for
charging patients for services, and for collecting the charges from the patients
or third parties.
2
<PAGE> 3
(j) Advise and assist Owner in obtaining and maintaining adequate
insurance coverage with Owner, Manager and such other persons as requested by
Owner named as insured for the Facility. CCMC shall advise Owner with regard to
the availability, nature and desirable policy limits of insurance coverage for
the Facility, and shall request and receive bids for such coverage.
(k) Negotiate on behalf of Owner (and in conjunction with Owner's
counsel) with any labor union lawfully entitled to represent employees of the
Owner who work at the Facility, but any collective bargaining agreement of labor
contact must be submitted to Owner for approval and execution.
(1) Make periodic evaluation of the performance of all departments
of the facility paying particular attention to those departments where there is
an inconsistency between expenditures and budget.
(m) Establish and maintain books of account using accounts and
classifications consistent with those used by CCMC at other facilities owned or
leased by it or its affiliates.
(n) Advise and assist Owner in designing an adequate and appropriate
public and personnel relations program.
1.02 Reports to Owner. CCMC shall prepare and deliver to Owner monthly
financial statements (unaudited) containing a balance sheet and statement of
income in reasonable detail, and such monthly financial statements will be
delivered to Owner within 30 days after the close of each calendar month. CCMC
shall submit to Owner each 12 months a proposed budget for the operation of the
Facility during the succeeding 12-month period, and shall use its best efforts
to operate the Facility in accordance with the provisions of the budget
submitted to and approved by Owner. CCMC shall submit to Owner each week a
vacancy report for the Facility.
1.03 Bank Accounts and Working Capital. CCMC shall deposit all funds
received from the operation of the Facility in an Operating Account in a bank or
banks presently being used by the Facility or such other banks as are designated
from time to time by CCMC. Owner shall provide sufficient working capital for
the operation of the Facility and shall make deposits in the Operating Accounts
of such working capital from time to time upon the request of CCMC. All costs
and expenses incurred in the operation of the Facility shall be paid out of the
Operating Accounts. All checks or other documents withdrawal must be signed by
the Comptroller of CCMC or his designate. Deposits may be made by the
Comptroller of CCMC or his designate.
1.04 Access to Records and Facility. The books and records kept by CCMC
for the Facility shall be maintained at the Facility, although CCMC shall have
the right to maintain copies of such records at its home office for the purpose
of providing services under this Agreement. CCMC shall make available to Owner,
its agents, accountants and attorneys, during normal business hours, all books
and records pertaining to the Facility and CCMC shall promptly respond to any
questions of Owner with respect to such books and records and
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<PAGE> 4
shall confer with Owner at all reasonable times, upon request, concerning
operation of the Facility. In addition, Owner shall have access to the Facility
at all reasonable hours for the purpose of examining or inspecting the Facility.
1.05 Licenses.
(a) CCMC shall use its best efforts to manage the Facility in a
manner necessary to maintain all necessary licenses, permits, consents, and
approvals from all governmental agencies which have jurisdiction over the
operation of the Facility. CCMC shall not assume the liability for any
employee action, failure to act or negligence prohibiting the intent of this
provision to be met.
(b) Neither Owner nor CCMC shall knowingly take any action which may
(1) cause any governmental authority having jurisdiction over the operation of
the Facility to institute any proceeding for the rescission or revocation of any
necessary license, permit, consent or approval, or (2) adversely affect Owner's
right to accept and obtain payments under Medicare, Medicaid, or any other
public or private medical payment program; however, this Agreement in no way
guarantees or warrants that any or all of the above will not or could not occur.
(c) CCMC shall, with the written approval of Owner, have the right
to contest by appropriate legal proceedings, diligently conducted in good faith,
in the name of the Owner, the validity or application of any law, ordinance,
rule, ruling, regulation, order or requirement of any governmental agency having
jurisdiction over the operation of similar facilities. Owner, after having given
its written approval, shall cooperate with CCMC with regard to the contest, and
Owner shall pay the reasonable attorney's fees incurred win regard to the
contest. Counsel for any such contest shall be mutually selected by CCMC and
Owner. CCMC shall have the right, without the written consent of the Owner, to
process all third-party payment claims for the services of the Facility,
including the full right to contest adjustments and denials by governmental
agencies (or their fiscal intermediaries) as third-party payer.
1.06 Taxes. Any taxes or other governmental obligations properly imposed
on the Facility are the obligations of the Owner, not of CCMC, and shall be paid
out of the operating Accounts of the Facility. With the Owner's written consent,
CCMC may contest the validity or amount of any such tax or imposition on the
Facility in the same manner as described in Section 1.05(c).
1.07 Use of CCMC's Personnel. CCMC shall actively utilize CCMC staff
specialists in such areas as accounting, auditing, budgeting, computer services,
dietary services, housekeeping, industrial engineering, interior design, legal,
nursing, personnel, pharmaceutical, purchasing, systems and procedures, and
third-party payments for services of facilities in the management of the
Facility when considered desirable by CCMC or upon the reasonable request of
Owner.
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<PAGE> 5
SECTION TWO: TERM AND TERMINATION
2.01 Term. The term of this Agreement shall commence on July 1, 1995 and
shall terminate at Midnight on June 30, 2001, unless an earlier date is mutually
agreed upon during the provision of section 2.02.
This Agreement shall automatically renew for an additional three year term
unless either party shall terminate this Agreement in accordance with Section
2.02.
2.02 Termination. Owner may terminate this Agreement upon giving CCMC
sixty (60) days written notice after the end of the third year of this
Agreement. CCMC may terminate this Agreement at any time by giving the Owner
sixty (60) days written notice.
SECTION THREE: MANAGEMENT FEE
3.01 Fee to CCMC. During each term of this Agreement the Facility shall
pay CCMC a fee equal to Fourteen Thousand dollars ($14,000.00) per month for the
term of this Agreement. During the term of this Agreement, the management fee
shall comply with Revenue Procedure 93-19.
3.02 Timing of Payments to CCMC. Within twenty (20) days after the end of
each month of the term, CCMC shall be paid the fee computed in accordance with
the provisions of Section 3.01. The amount of such fee shall be calculated on
the basis of monthly financial statements regularly prepared by CCMC in
accordance with Section 1.02 hereof.
SECTION FOUR: COVENANTS OF OWNER
4.1 Insurance. Owner shall provide and maintain throughout the Term, the
following insurance with responsible companies naming Owner and CCMC (as its
interest may appear) as insured thereunder in amounts approved by CCMC and
Owner.
(a) public liability insurance and insurance against theft of or
damage to patient's property in the Facility or its Premises;
(d) workman's compensation, employers' liability or similar
insurance as may be required by law;
(c) insurance against loss or damage to the Facility Down fire and
such other risks and casualties now or hereafter embraced by "Extended
Coverage," as well as such other risks and casualties with respect to which
insurance is customarily carried for similar facilities;
(d) business interruption insurance against loss of income due to
the risks insured against under this Section 4.01;
(e) personal injury liability insurance against claims of bodily
injury or death or otherwise arising out of the operations of the Facility
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<PAGE> 6
such insurance to afford minimum protection of not less than $1,000,000 in
respect to bodily injury or death to any one person;
(f) such other insurance or additional insurance as CCMC and Owner
together shall reasonably deem necessary for protection against claims,
liabilities and losses arising from the operation or ownership of the Facility.
If Owner fails to effect or maintain any such insurance, Owner will
indemnify CCMC against damage, loss or liability resulting from all risks for
which such insurance should have been maintained, and CCMC may, but shall not be
liable for its failure so to do, effect the same as the agent of Owner by taking
our policies in such insurance companies as may be selected by CCMC, running for
a period not to exceed one year.
4.02 Convalescent Services. Owner covenants and agrees that Facility is
and will continue to be a fully licensed nursing home containing the number of
licensed beds set forth on the first page of this Agreement. CCMC and Owner
agree that the services rendered by the Facility will not, during the term
thereof, be changed in any material respect, unless there shall first have been
mutual agreement between CCMC and Owner to such change.
SECTION FIVE: MISCELLANEOUS
5.01 Assignment by CCMC. CCMC shall not assign its rights or obligations
under this Agreement without the consent of Owner.
5.02 Assignment by Owner. Owner shall not assign its rights or obligations
under this Agreement without the notice to CCMC. 5.03 Binding on Successors and
Assigns. The terms, covenants, conditions, provisions and agreements herein
contained shall be binding upon and inure to the benefit of the parties hereto,
their heirs, administrators, executors, successors and assigns, subject to
provisions of Section 5.01 and 5.02 above.
5.04 Negation of Partnership. Joint Venture and Agency. Nothing in this
Agreement contained shall constitute or be construed to be or to create a
partnership, joint venture or lease between Owner and CCMC with respect to the
Facility. The parties intent for the relationship of CCMC to Owner under this
Agreement to be that of an independent contractor, nor that of an agent. Owner
shall not have the power to control the time method or manner of CCMC's
performance hereunder, Owner shall look solely to the results to be achieved by
CCMC, and nothing contained herein shall be construed to create a relationship
of agency between CCMC and Owner.
5.05 Notices. All notices hereunder by either party to the other shall be
in writing. All notices, demands and request shall be deemed given when mailed,
postage prepaid, registered, or certified mail, return receipt requested,
(a) to Owner: Edward E. Lane
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<PAGE> 7
National Assistance Bureau, Inc.
6000 Lake Forrest Drive, Suite 200
Atlanta, GA 30328
(b) to CCMC: Capitol Care Management Company, Inc.
6000 Lake Forrest Drive, Suite 225
Atlanta, GA 30398
or to such other address or to such other person as may be designated by notice
given from time to time during the term by one party to the other.
5.06 Entire Agreement. This Agreement contains the entire agreement
between the parties hereto, and no representations or agreements, oral or
otherwise, between the parties not embodied herein or attached hereto shall be
of any force and effect. Any additions or amendments to this Agreement
subsequent hereto shall be of no force and effect unless in writing and signed
by the party to be bound.
5.07 Governing Law. This Agreement has been executed and delivered in the
State of Georgia, all the teas and provisions hereof and the rights and
obligations of the parties hereto shall be construed and enforced in accordance
with the laws hereof.
5.08 Captions and Headings. The captions and headings throughout this
Agreement are for convenience and reference only, and the words contained
therein shall in no way be held or deemed to define, limit, describe, explain,
modify, amplify or add to the interpretation, construction or meaning of any
provision of or the scope or intent of this Agreement nor in any way affect this
Agreement.
5.09 Disclaimer of Employment of Facility Employees. No person employed by
Owner in operation of the Facility will be an employee of CCMC, and CCMC will
have no liability for payment of wages, payroll taxes and other expenses of
employment, except that CCMC shall have the obligation to exercise reasonable
care in its management of the Facility to properly apply available Facility
funds to the payment of such wages and payroll taxes.
5.10 Impossibility of Performance. Neither party to this Agreement shall
be deemed to be in violation of this Agreement if it is prevented from
performing any of its obligations hereunder for any reason beyond its control,
including without limitation, acts of God or of the public enemy, flood or
storm, strikes or statutory regulation or rule of any federal, state, or local
government, or any agency thereof.
5.11 Non-assumption of Liabilities. CCMC shall not, by entering into and
performing this Agreement, become liable for any of the existing or future
obligations, liabilities or debts of Owner, and CCMC shall not be managing the
Facility assume or become liable for any of the obligations, debts and
liabilities of Owner, and CCMC will in its role as manager of the Facility have
only the obligation to exercise reasonable care in its management and handling
of the funds generated from the operation of the Facility.
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<PAGE> 8
5.12 Responsibility for Misconduct of Employees and Other Personnel. CCMC
will have no liability whatever for damages suffered on account of the
dishonesty, willful misconduct or negligence of any employee of the Owner
regarding the Facility in connection with damage or loss directly sustained by
it by reason of the dishonesty, willful misconduct and gross negligence of CCMC
employees in the operation of the Facility during the teen of this Agreement.
5.13 Rights Cumulative, No Waiver. No right or remedy herein conferred
upon or reserved to either of the parties hereto is intended to be exclusive of
any other right or remedy, and each and every right and remedy shall be
cumulative and in addition to any other right or remedy given hereunder, or now
or hereafter legally existing upon the occurrence of any event of default
hereunder. The failure of either party hereto to insist at any time upon the
strict observance or performance of any of the provisions of this Agreement or
to exercise any right or remedy as provided in this Agreement shall not impair
any such right or remedy to be construed as a waiver or relinquishment thereof.
Every right and remedy given by this Agreement to the parties hereto may be
exercised from time to time and as often as may be deemed expedient by the
parties hereto, as the case may be.
5.14 Time of Essence. Time is of the essence of this Agreement.
5.15 Invalid or Unenforceable Provisions. If any terms, covenants or
conditions of this Agreement or the application thereIof to any person or
circumstances other than those to which it is held invalid or unenforceable,
shall not be affected thereby and each term, covenant or condition of this
Agreement shall be valid and shall be enforced to the fullest extent permitted
by law.
5.16 Counterparts. This Agreement may be executed in several counterparts,
each of which shall be deemed an original and all such counterparts together
shall constitute one and the same instrument.
5.17 Authorization of Agreement. CCMC and Owner represent and warrant,
each to the other, thIat this Agreement has been duly authorized by its
respective Board of Directors and, if required by law, shareholders; and that
this Agreement consulates a valid and enforceable obligation of CCMC and Owner
in accordance with its terms.
5.18 Designation. Owner agrees that, during the term of this Agreement,
CCMC shall have the right to designate and make public reference to the Facility
as a Capitol Care ManaIgement Company, Inc., managed facility.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement, the
day and year first above written.
CAPITOL CARE MANAGEMENT COMPANY, INC.
By:/s/ Darrell C. Tucker
NATIONAL ASSISTANCE BUREAU, INC.
By: /s/ Edward E. Lane
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<PAGE> 9
ADDITIONAL NURSING HOME MANAGEMENT AGREEMENTS
The Registrant has additional Nursing Home Management Agreements with
affiliates substantially identical to the foregoing. The material details of
such agreements which differ are as follows:
<TABLE>
<CAPTION>
Owner Date of Termination Monthly
Name of Facility Location (1) Agreement Date Fee
- ---------------- ------------- ----- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Midway H.C.C. Midway, GA GJ(1) 7/1/95 12/31/00 $24,000
New Beginnings Covington, GA CHCS(1) 7/1/95 12/31/00 $28,000
Health & Rehab
Sea Breeze H.C.C. Mobile, AL WHH(1)(2) 7/1/94 7/31/00 $12,000
Parkway H.C.C. Memphis, TN CHCS(1) 4/1/95 3/31/00 3% of Gross
Revenues(3)
- -------------
</TABLE>
(1) The names of the owners are abbreviated a follows: Gordon Jensen Health Care
Associates, Inc. - GJ; Chamber Health care Society, Inc. - CHCS; Winter Haven
Homes, Inc. - WHH.
(2) Owned by Sea Breeze Health Care Center, Inc., a subsidiary of Winter Haven
Homes, Inc.
(3) In addition, the owner paid an initial fee of $100,000.
9
<PAGE> 1
EX-10.4
LEASE AGREEMENT
This lease agreement made and entered into this 5 day of May, 1996, by and
between PHEO MED LIMITED PARTNERSHIP a partnership organized under the laws of
the State of Georgia, hereinafter referred to as LESSOR and LAKE FOREST HEALTH
CARE CENTER, INC., a corporation organized under the laws of the State of
Georgia, hereinafter referred to as LESSEE;
WITNESSETH
That for and in consideration of the mutual promises and benefits hereinafter
stipulated and agreed to, the parties mutually agree and bind themselves as
follows:
SECTION 1. Lease of Property. The Lessor hereby leases unto the Lessee and the
Lessee hereby leases from the Lessor the premises described as follows:
that 60-bed licensed nursing home facility, located in Jacksonville, Florida
commonly known as "Lake Forest Health Care Center" located at 1771 Edgewood
Avenue, Jacksonville, Florida 32208, including all furnishings, equipment and
attachments thereto. It is understood that the leased premises include such
inventories, supplies and other items as are incident to the operation of the
facility in accordance with the requirements of the Department of Human
Resources, and that comparable inventories, supplies and other items will be
returned to the Lessor upon the expiration of this lease.
SECTION 2. Term of Lease. The term of this lease shall commence on June 1, 1996,
and the same shall continue for a period of ten(10) years thereafter,
terminating at midnight on May 31, 2006,or until the same is sooner terminated
according to the provisions hereinafter contained. At the expiration of the
original term of this lease, Lessee shall have the option to renew upon a thirty
(30) day written notice to Lessor prior to the expiration of the original term
of this lease for an additional ten year period through May 31, 2012 at a rate
to be mutually agreeable.
SECTION 3. Lease Payments. The Lessee shall pay to the Lessor as rental the sum
of $25,000.00 on June 1, 1996 and at the 1st of every month thereafter up to and
including May 1, 2006. The monthly Lease payments are due on the first day of
each month beginning June 1, 1996, with the last payment due on May 1, 2006, or
2016, as the case may be.
SECTION 4. Supplies and Inventory. Lessee shall be permitted to utilize the
inventory of consumable items located on the Property at the commencement of the
term, including but not limited to food, beverages, medicines, drugs, linens and
cleaning supplies and other items incident to the operation of the nursing home
(collectively the "Supplies and Inventory") and Lessee shall replenish the
Supplies and Inventory as they are consumed, and a comparable inventory of
supplies shall be returned to the Lessor upon the expiration of this Lease.
<PAGE> 2
SECTION 5. Payables and Receivables. (a) All accounts payables chargeable to the
nursing home prior to the month of June, 1996 shall remain the liability of
Lessor. Lessee shall accumulate such payables as received and forward to Lessor
for payment within 10 days of receipt of same.
(b) Uncollected receivables prior to the month of June, 1996 will be received by
Lessee and immediately forwarded to Lessor.
SECTION 6. Use and Operation. (a) The Lessee agrees to use and operate said
property during the entire term of this lease as a nursing home and shall
operate the same in a business like and professional manner as is generally
acceptable and normal in the operation of a nursing home for the elderly. The
same shall be open for business and in operation continuously each and every day
for the entire term hereof unless otherwise mutually agreed upon in writing by
the parties hereto. Provided, however, that the business office may be closed on
Saturday and Sunday of each week, but such closure shall not prevent admission
or dismissal of residents.
(b) The Lessee agrees that said premises shall at all times be kept and used in
accordance with laws of the State of Florida, and the rules and regulations of
the Florida Agency for Health Care Administration or any successor agency and in
accordance with the ordinances, resolutions, rules, and regulations of all
local, state, and federal governments. The Lessee will permit no waste, damage
or injuries to the premises and at Lessee's own cost and expense will keep all
drainage pipes free and open.
(c) The Lessee shall not make any alterations, additions, or improvements in and
to the leased premises, including the improvements placed thereon by the Lessor,
without the consent of the Lessor in writing first being had and obtained. The
Lessor shall not withhold approval of any alterations, additions, or
improvements required by the Florida Agency for Health Care Administration or
any successor agency thereof for the continued use of the premises as a nursing
home. Lessee will make appropriate alterations, additions, or improvements as
may be required by the Florida Agency for Health Care Administration or any
successor agency. All alterations, additions, or improvements made to the
nursing home, and/or grounds, shall become a part of the leased premises and
shall be and remain the sole property of the Lessor, subject to the terms of
this lease.
(d) All personal property brought upon the leased premises during the term of
this lease shall be at the risk of the Lessee. The Lessor shall not be liable
for any damage, either to persons or to property, sustained by Lessee or others,
caused by any defect in the leased premises or the sidewalks adjoining the same,
now existing or hereafter arising therein, including any improvements placed
thereon by Lessor or any part or appurtenance thereof, nor by reason of the same
becoming out of repair, nor by reason of any bursting or leaking water, gas,
steam or other pipes or from any act of neglect of employees, co-tenants or
other occupants of said building or buildings, if any, or any other persons
whomsoever, in and upon or about the leased premises or sidewalks adjoining the
same, or the occurrence of any accident or event from whatever cause in and
about the leased premises and the improvements
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<PAGE> 3
thereon and sidewalks or areas adjoining the same. The Lessee agrees to defend
and hold Lessor harmless from any and all lawful claims, demands, liabilities,
or judgements for damages suffered or alleged to be suffered in or about the
leased premises by any person, firm, or corporation, including reasonable costs
incurred by Lessor in investigating and/or defending against the same in the
event the Lessee does not do so.
(e) The Lessee shall keep the leased premises including all improvements therein
free from any liens arising out of any work performed, material furnished or
obligations incurred by Lessee. In the event Lessee becomes insolvent,
voluntarily or involuntarily bankrupt, or if a receiver, assignee, or other
liquidating officer is appointed for the business of Lessee, then Lessor may
cancel this lease at Lessor's option.
(f) All signs or symbols placed in the windows or doors of the premises or upon
any exterior part of the buildings on the leased premises by Lessee, shall be
subject to the approval of Lessor. In the event Lessee shall place signs or
symbols on the exterior of said building or in the windows or doors where they
are visible from the street that are not satisfactory to the Lessor, the Lessor
may immediately demand removal of said signs or symbols, and refusal of Lessee
to comply with such demand within a period of ten (10) days shall constitute a
breach of this lease and entitle Lessor to immediately recover possession of
said premises in the manner provided by law.
(g) The Lessee agrees to immediately forward a copy of all licensure surveys,
cost reports, any disciplinary action, fines or penalties, or default of any bed
tax, or tax or licensed assessed by any government agency. In absence of a
timely agreement with that agency, this shall constitute a default of lease
agreement and Lessor shall have the right to immediately and without further
demand or legal process retake the leased property.
SECTION 7. Insurance Requirements (a) The Lessee agrees to and shall carry
liability insurance including malpractice insurance with limits and liability of
at least one million dollars ($1,000,000) for property damages and personal
injury limits of at least one million ($1,000,000) dollars, and Lessor may
require of the Lessee that said limits be adjusted upward in such amounts as may
be required by law, ordinance, state or federal rules and regulations. In the
event the Lessee fails to obtain the insurance hereinabove mentioned, then, the
Lessor may obtain the same at the expense of and to the charge of the Lessee or
the Lessor may at its option treat such failure as a breach of this lease and
terminate the same and take possession of the premises and fixtures and hold the
Lessee liable for such damages as the Lessor may show itself entitled to as a
result of such breach. The Lessee agrees to and shall hold the Lessor harmless
on account of any or all liability which may result as a result of the use,
occupancy, and operation of the nursing home on the premises. The Lessee agrees
to carry workers compensation insurance on all employees of the Facility.
(b) The Lessee shall furnish and carry at its expense, fire and extended
coverage insurance with Lessor as named insured in the amount of $1,950,000 on
the building, equipment and furnishings in an amount sufficient to replace the
3
<PAGE> 4
entire building, equipment and furnishings in the same condition as before they
were destroyed or damaged with not more than Five Thousand ($5,000) Dollars
deductible and shall insure the Lessor's interest therein and furnish a copy of
the policy to the Lessor. The Lessee shall be liable to the Lessor for any
losses occasioned by the Lessor resulting from the Lessee's failure to provide
and maintain such insurance. Upon the failure of the Lessee to provide such
insurance, the Lessor may at its option terminate the original lease and the
lease as herein amended or may purchase such insurance at the charge and expense
of the Lessee.
(c) Lessee shall furnish, at its expense, use and occupancy insurance in an
amount sufficient to pay Lessor its monthly rental fee for up to not less than
twelve months should Lessee experience the loss of use of any part or all of the
facility caused by the perils covered by fire and extended coverage insurance. A
copy of said policy shall be furnished to Lessor.
SECTION 8. Maintenance. The Lessee assumes responsibility to maintain and repair
the building, including the roof and outside structure, equipment, fixtures and
furnishings in a good state of repair during the entire period of this lease and
shall bear the expense of all the same except those expenses that may be
compensated for by insurance carried by either party hereto. At the expiration
or termination of this lease, the Lessee will return the premises to the Lessor
in as good a condition as that which existed at the commencement of this lease,
except for ordinary and usual wear and tear.
SECTION 9. Property Taxes. The Lessee shall be responsible for any real estate,
personal property, or intangible taxes during the term of this lease. Taxes for
the year 1993 shall be prorated between Lessor and Lessee with each paying for
their respective share.
SECTION 10. Fees and Charges. All fees and charges due and owing to any agency,
firm, city, county, state, or federal government on account of any required
inspection made of the facility or the leased premises by any officer or
employee of such inspection shall be paid by the Lessee.
SECTION 11. Utilities. The Lessee hereby covenants and agrees to pay all charges
for heat, lights, water, telephone and all other utilities which shall be used
in or charged against the leased premises during the entire term of this lease.
SECTION 12. Access to Property. Lessee will allow Lessor or Lessor's agent free
access at all reasonable times to said premises for the purpose of inspecting
the buildings and premises or any allegations made by a governing agency. This
right shall not be construed as an agreement on the part of the Lessor to make
any repairs, all of such repairs to be made by Lessee as aforesaid.
SECTION 13. Damage by Casualty. In the event the nursing home is damaged by
fire, windstorm, or other casualty to the extent of not more than fifty (50%)
percent of the value of the facility, the Lessee shall rebuild, remodel, repair,
and restore said facilities to the condition existing immediately preceding said
fire or casualty within a reasonable time. In the event the
4
<PAGE> 5
premises are destroyed by fire, windstorm, or other casualty in excess of fifty
(50) percent of its value, it shall be optional with the Lessor as to whether it
rebuilds, repairs, or restores the facilities. If the facility is so repaired,
rebuilt, or repaired, then it is agreed that during any period of time within
which the premises may be untenable and after such restoration the term of this
lease herein provided for shall be extended over and above the original term or
any extension thereof by the amount of time necessary to restore the premises.
If the Lessor does not elect to rebuild, repair, or restore the same, then, in
such event this lease shall terminate and be of no force and effect except for
the rights and obligations which shall have accrued prior to the date of such
termination.
SECTION 14. Assignment and Subletting. Lessee shall not let, sublease, or sublet
the whole leased premises, or any part thereof, or assign this lease without the
written consent of Lessor which shall not be unreasonably withheld.
SECTION 15. Waivers. (a) Failure of Lessor to insist upon strict performance of
any of the covenants and agreements of this lease, or to exercise any option
herein conferred in any one or more instances, shall not be construed to be a
waiver or relinquishment of any such or any other covenants or agreements, but
the same shall be and remain in full force and effect.
(b) In the event of any suit or action instituted on account of any default or
to enforce any provisions of this agreement, both Lessor and Lessee agree that
the court may award to the prevailing party such amount as the court may
consider necessary and reasonable as the attorney fees, together with court
costs, and this provision shall also apply in connection with any appeal
thereof.
SECTION 16. Defaults. If the Lessee shall default in payment of any rent,
additional rent, or other sum required by this lease, and Lessee fails to cure
such default for a period of ten (10) days after receipt by Lessee of written
demand by Lessor for payment, Lessee shall immediately return the leased
property back to Lessor. In the event Lessee defaults in the performance of any
other provision of this lease, for a period of thirty (30) days after Lessee's
receipt of written demand by Lessor for performance of such other provision of
this lease (provided, however, that if such non-monetary default may not be
reasonable cured within thirty (30) days after Lessee receives Lessors written
demand therefor, Lessee shall immediately cure said default with due diligence,
unless by mutual written agreement said time is extended), Lessor may cancel
this lease by giving a fifteen (15) day written notice to Lessee, whereupon the
expiration of the said fifteen (15) day notice period, Lessee shall return the
leased property to Lessor. Lessor may immediately reenter property at the end of
fifteen (15) day period without legal process if Lessor has not remitted proper
payment. No further notice to Lessee shall be necessary before reentry by Lessor
or commencement of legal actions.
SECTION 17. Binding Effect. Subject to the provisions hereof pertaining to
assignment and subletting, the covenants and agreements of this lease shall be
5
<PAGE> 6
binding upon the heirs, legal representatives, successors, and assigns of any or
all of the parties hereto.
SECTION 18. Notices. Any notice required to be served in accordance with the
terms of this lease shall be sent by registered mail, to the last known address
of either the Lessor or the Lessee, or their agents or representatives, and such
notice shall be deemed and treated as notice to all of them, their heirs, legal
representatives or assigns. Lessee will forward within fifteen (15) days of
receipt of any State Licensure Inspection a copy of such Licensure inspection as
well as plans of corrections to Lessor.
SECTION 19. Regulatory Approval. This lease is subject to approval and
continued approval of all applicable state and federal regulatory agencies.
SECTION 20. Right of First Refusal to Purchase. Lessee has the first right of
refusal to purchase this facility from Lessor at any time during the period of
this lease provided Lessor receives a bona fide offer for the Facility. Lessee
has thirty days to respond in writing to Lessor of its intentions of exercising
its Right of Refusal to purchase the Facility. In any event if Lessor chooses to
sell this Facility the new purchaser is bound by this Lease.
SECTION 21. Acceptance of the Premises. Lessee has inspected the facility and
the operations thereof, and herewith agree to accept the facility in its current
condition, as is, and subject only to the terms of this Lease Agreement. Lessee
agrees to hold Lessor, its Agents, Officers, and Directors harmless for any acts
or omissions of actions arising out of or in connection with this Lease
Agreement so long as it shall remain in full force and effect.
IN TESTIMONY WHEREOF, the parties hereunto have executed this contract
in duplicate originals as of the day and date first above mentioned.
PHEO MED LIMITED PARTNERSHIP
By: Winter Haven Homes, Inc.
Its General Partner
By: /s/ Edward E. Lane
Its President (Lessor)
[Corporate Seal]
LAKE FOREST HEALTH CARE CENTER, INC.
By: /s/ Chris Brogdon
Its President (Lessee)
[Corporate Seal]
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<PAGE> 7
ADDITIONAL LEASE AGREEMENTS WITH AFFILIATES
The Registrant has additional Lease Agreements with affiliates
substantially identical to the foregoing. The material details of such
agreements which differ are as follows:
<TABLE>
<CAPTION>
Owner Date of
Name of Facility Location (1) Agreement Lease Lease Payment
- ---------------- ---------- ----- --------- ------- ------------------------
<S> <C> <C> <C> <C> <C>
Summer=s Landing Douglas, GJ 9/1/96 5 years $300,000 on execution of
- - Douglas GA (2) the lease plus debt pay-
ment on existing mort-
gage each month (3)
Magnolia Manor Green Cove RG 2/28/97 10 years 1.1 times payment of
Springs, FL (4) principal and interest
on debt, debt not to ex-
ceed $3,200,000 (initial
monthly payment -
$34,144.30)
Macon Health Macon, GA RG 2/28/97 10 years 1.1 times payment of
Care Center (4) principal and interest
(Hartley Woods on debt, debt not to ex-
H.& R.C.) ceed $2,700,000 (initial
monthly payment -
$30,026.66)
Trenton Health Trenton, RG 1/8/97 10 years 1.1 times payment of
Care Center TN (4) principal and interest
on debt, debt not to ex-
ceed $3,500,000
Twin View Twin City, RG 2/28/97 10 years 1.1 times payment of
Health Care GA (4) principal and interest
Center on debt, debt not to ex-
ceed $2,750,000 (initial
monthly payment -
$29,342.75)
Laurelwood Jackson, RG 4/8/97 10 years 1.1 times payment of
Health Care TN (4) principal and interest
Center on debt, debt not to ex-
ceed $2,300,000
Maplewood Jackson, RG 4/8/97 10 years 1.1 times payment of
Health Care TN (4) principal and interest
Center on debt, debt not to ex-
ceed $6,375,000
Renaissance - Titusville, WHH 9/30/96 10 years $1,500,000 upon execu-
Titusville FL (4) tion of the lease plus
1.1 times payment of
principal and interest
on debt not to exceed
$6,000,000
- --------------
</TABLE>
(1) The names of the owners are abbreviated as follows: Gordon Jensen Health
Care associates, Inc. - GJ, Winter Haven Homes, Inc. - WHH, and Retirement
Group, L.L.C. - RG.
(2) The Registrant may extend up to two additional terms of five years each.
(3) Beginning in year two there will be an additional payment of $500 per month;
in year three $750 per month; in year four $1,000 per month and in year five
$1,250 per month. During any extensions the additional amount will be
$1,250 per month.
(4) The Registrant may extend for one additional term of five years.
7
<PAGE> 1
EX-21
SUBSIDIARIES OF THE REGISTRANT
Atrium Nursing Home, Inc. Florida
Bibb Health & Rehabilitation, Inc. Georgia
Brent-Lox Hall Nursing Home, Inc. Virginia
Capitol Care Management Company, Inc. Georgia
Charlton Healthcare, Inc. Georgia
Crescent Medical Services, Inc. Georgia
Duval Healthcare Center, Inc. Georgia
Encore Retirement Partners, Ltd. New York
F & L Associates, Inc. Virginia
Gainesville Healthcare Center, Inc. Georgia
Gardendale Health Care Center, Inc. Georgia
Jeff Davis Healthcare, Inc. Georgia
Lake Forest Healthcare Center, Inc. Georgia
Lake Health Care Center, Inc. Georgia
Libbie Rehabilitation Center, Inc. Virginia
Maplewood Health Care Center of
Jackson, Tennessee, Inc. Tennessee
Mid-Florida, Inc. Georgia
Phoenix Associates, Inc. Virginia
Pine Manor Rest Home, Inc. North Carolina
Pro-Scription, Inc. Georgia
Quality N.H.F. Leasing, Inc. Georgia
Retirecare, Inc. Colorado
Retirement Management Corp. Georgia
Riviera Retirement, Inc. Georgia
Roberta Health Care Center, Inc. Georgia
Sea Side Retirement, Inc. Georgia
Southside Health Care Center, Inc. Georgia
Statesboro Health Care Center, Inc. Georgia
Summers Landing, Inc. Georgia
Sun Coast Retirement, Inc. Georgia
The Atrium of Jacksonville, Ltd. Florida
W.R. Partners (Warner Robins) L.P. Georgia
West Tennessee, Inc. Georgia
Willow Way, Inc. Georgia
Woodbury Health Care Center, Inc. Georgia
Contour Medical, Inc. Nevada
Contour Medical - Michigan Michigan
Contour Medical of Central Florida, Inc. Florida
AmeriDyne Corporation Tennessee
Atlantic Medical Supply Company, Inc. Georgia
Americare Health Services Corp. Delaware
Facility Supply, Inc. Florida
Gerimed, Inc. Florida
Florida ACLF, Inc. Florida
Quest Medical Supply, Inc. Georgia
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF INCOME FOUND ON
PAGES F-3 THROUGH F-5 OF THE COMPANY'S FORM 10-K FOR THE FISCAL YEAR ENDED JUNE
30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 3,637,878
<SECURITIES> 0
<RECEIVABLES> 40,391,377
<ALLOWANCES> 0
<INVENTORY> 7,255,289
<CURRENT-ASSETS> 64,911,451
<PP&E> 150,492,221
<DEPRECIATION> 0
<TOTAL-ASSETS> 255,370,966
<CURRENT-LIABILITIES> 75,400,736
<BONDS> 141,674,131
1,800,000
3,250,000
<COMMON> 1,450
<OTHER-SE> 27,443,397
<TOTAL-LIABILITY-AND-EQUITY> 255,370,966
<SALES> 45,500,712
<TOTAL-REVENUES> 253,227,861
<CGS> 31,832,734
<TOTAL-COSTS> 217,694,005
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (14,111,843)
<INCOME-PRETAX> (9,389,066)
<INCOME-TAX> (2,343,256)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 490,000
<CHANGES> 0
<NET-INCOME> (7,535,810)
<EPS-PRIMARY> (.71)
<EPS-DILUTED> 0
</TABLE>
