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U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Amendment No. 3
(Amending Part I - Items 1 and 2, Part II - Items 7 and 8 and
Part IV - Item 14 and Financial Statements)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year ended: June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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, 1996, 13,180,918 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 $67,925,000.
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: Part III is incorporated by reference to
the Registrant's Proxy Statement relating to the Annual Meeting of Shareholders
to be held in December 1996.
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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 August 20, 1996, the
Company operated 69 facilities which it owned or leased, and managed an
additional 24 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. 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, Chris
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 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.
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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 canceled 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 in which 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 which is a subsidiary of Capitol Care. In this
transaction, the Company issued 92,610 shares of its Common Stock and shares of
preferred stock which were later converted into 115,763 shares of Common Stock
and $100,000 in cash in exchange for all of the outstanding stock of RMC. During
the period from January 1, 1993 to December 10, 1993, RMC had $668,861 in
revenue and net income of $85,511.
On September 30, 1994, the Company acquired approximately 63% of the
outstanding stock of Contour Medical, Inc., a publicly-held Nevada corporation
located in St. Petersburg, Florida, which manufactures a full line of orthopedic
care and rehabilitation products. The Company currently owns approximately 60%
of the outstanding 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.
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
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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 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-tem
care patients physical, speech, occupational and respiratory therapy, wound care
and other ancillary services. At June 30, 1996, all of the Company's long-term
care facilities were Medicare certified.
The following table sets forth the percentage of the Company's total
revenue attributable to each of Medicare, Medicaid and private payors during
each of the last three consecutive fiscal years.
<TABLE>
<CAPTION>
PAYOR Fiscal 1994 Fiscal 1995 Fiscal 1996
----- ----------- ----------- -----------
<S> <C> <C> <C>
Medicaid 65% 65% 55%
Medicare 8% 10% 10%
Private 27% 25% 35%
--- --- ---
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.
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GROWTH OF LONG-TERM CARE INSURANCE. Numerous insurance companies
currently offer long-term care insurance which provides the beneficiary coverage
for 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
additional long-term care and assisted/independent living facilities; (ii)
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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 August 31, 1996, the Company had
nine 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.
Although the Company believes it has generally been successful in
integrating and managing the operations of its acquired facilities, the Company
has experienced some difficulty in integrating the operations of certain of its
recently-acquired facilities. While the Company has been successful in
implementing its management information and control systems, administrative and
nursing staff and capital improvement plans and in obtaining Medicare
certification at all of its acquired facilities, the Company has experienced
significant turnover of key employees, a decline in occupancy rates and
Medicaid rates without corresponding reduction in operating costs, and certain
regulatory compliance problems at certain of its recently-acquired facilities.
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 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
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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 eight 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 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
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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 facility's
administrator 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.
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.
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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
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
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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 17 assisted/independent living centers and long-term
care facilities owned by its affiliates and 7 assisted/independent living
centers 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 $6,000 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. Most of the
revenue from management services is received pursuant to management agreements
with entities controlled by Messrs. Brogdon and Lane. These arrangements have
three to five year terms and are terminable upon sixty days prior written
notice by either party. The management services agreements expire on various
dates between 1999 and 2002.
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.
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
"--Governmental 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
-10-
<PAGE> 11
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 "-- Governmental
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.
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.
All 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
-11-
<PAGE> 12
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 St. Petersburg, Florida
which manufactures and sells a full line of orthopedic care and rehabilitation
products. These products range from braces designed for reconstructive
rehabilitation of patients after surgery to finger and leg spreaders, leg
positioning devices (designed to prevent muscle atrophy and speed recovery after
surgery) and a full line of proprietary orthopedic devices used in
rehabilitative therapy procedures. Some of these products are utilized for the
care of wheelchair or bed-bound patients in the hospital, long-term care
facility and the home. Contour also manufactures and sells 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 products, 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 the requirements of
infection control for medical, industrial and institutional applications. In
addition, Contour markets its REDINURSE 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 bear interest at 7% per annum and are due in full on January
10, 1997. In the event of a default in the payment of the promissory notes, they
are convertible into shares of common stock of the Company (Retirement Care
Associates, Inc.).
-12-
<PAGE> 13
Retirement Care holds approximately 27% of the outstanding capital
stock of Perennial Development Corporation, a publicly held company based in
Louisville, Kentucky, whose wholly owned subsidiary, In-House Rehab, Inc.,
provides rehabilitation services to approximately 26 of Retirement Care's
long-term care facilities.
COMPETITION
The senior residential care industry is highly competitive. The Company
competes with other providers of senior residential care 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 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 nonprofessional 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-
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<PAGE> 14
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 all 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.
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
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<PAGE> 15
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
venous states are considering imposing limitations on the amount of funding
available for various health care services. Among the proposals being considered
by the 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 assonance
prodded 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 August 31, 1996, the Company employed in the aggregate
approximately 6,900 employees, including 95 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
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<PAGE> 16
other facilities 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.
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 $25,304. The
Company believes that these facilities are suitable and adequate to meet its
present and anticipated needs.
The Company has entered into management services agreements with
facilities owned or controlled by affiliated entities that have three to five
year terms and are cancelable within sixty days written notice by either party.
The agreements provide for monthly fees ranging from $2,000 to $28,000 per
facility and expire at various times through 2002. These affiliated entities
are owned and controlled by Messrs. Brogdon and Lane.
The following table summarizes certain information regarding facilities
leased, owned and managed by the Company in Georgia, Florida, Tennessee,
Alabama, North Carolina, Virginia, Ohio and Arizona as of August 20, 1996. With
regard to facilities 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; and Chamber Health Care Society -
CHCS.
<TABLE>
<S> <C>
Long-term care facilities:
Owned 15
Leased 35
Managed 1
Managed for Affiliated Entities 8
Assisted living/independent living facilities:
Owned 16
Leased 6
Managed 6
Managed for Affiliated Entities 10
Total facilities 97*
</TABLE>
- ----------
* As of August 20, 1996, the Company had four facilities under
construction with estimated completion dates ranging from July 1997 to
April 1998.
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<PAGE> 17
<TABLE>
<CAPTION>
Leased/
Owned/ Occupancy
Number Managed As of
Type of of Beds (Name of August 20,
Name Location of Facility or Units Affiliate) 1996
- ------------------ ---------- ----------- -------- --------- ----------
<S> <C> <C> <C> <C> <C>
GEORGIA
Twin View Health Twin City Long-Term 110 Managed 98%
Care Center Care (GJ)
Griffin Health Griffin Long-Term 148 Owned 99%
Care Center Care
Midway Health Midway Long-Term 169 Managed 93%
Care Center Care (GJ)
Dearfield Nursing Columbus Long-Term 210 Owned 96%
Facility Care
Summer's Landing- Vidalia Assisted/ 24 Managed 100%
Vidalia Independent (SCI)
Living
Summer's Landing- Cordele Assisted/ 36 Owned 97%
Cordele Independent
Living
Summer's Landing- Douglas Assisted/ 58 Managed 97%
Douglas Independent (GJ)
Living
Summer's Landing- Dublin Assisted/ 56 Owned 86%
Dublin Independent
Living
Summer's Landing- Dahlonega Assisted/ 24 Leased 88%
Dahlonega Independent
Living
Summer's Landing- Griffin Assisted/ 30 Owned Under
Griffin Independent Con-
Living struc-
tion
Summer's Landing- Plains Assisted/ 40 Owned Under
Plains Independent Con-
Living struc-
tion
Twelve Oaks Health Riverdale Long-term 152 Leased 97%
Care Care
Cedartown Health Cedartown Long-term 116 Leased 98%
Care Center Care
Floyd Health Care Rome Long-term 100 Leased 97%
Center Care
</TABLE>
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<PAGE> 18
<TABLE>
<S> <C> <C> <C> <C> <C>
Friendship Health Cleveland Long-term 89 Leased 99%
Care Center Care
Gateway Health Cleveland Long-term 60 Leased 98%
Care Center Care
Gold City Health Dahlonega Long-term 102 Leased 100%
Care Center Care
Mountain View Clayton Long-term 117 Leased 97%
Health Care Center Care
Sandmont Health Trenton Long-term 71 Leased 97%
Care Center Care
Rome Health Care Rome Long-term 100 Leased 95%
Center Care
Sun Mountain Rome Long-term 100 Leased 99%
Health Care Center Care
Arrowhead Nursing Jonesboro Long-term 115 Owned 96%
Center Care
Roberta Nursing Roberta Long-term 100 Leased 96%
Home Care
West View Health Port Long-term 99 Leased 99%
Care Center Wentworth Care
Peachbelt Health Warner Long-term 106 Leased 96%
Care Center Robins Care
Dogwood Retirement Warner Assisted/ 18 Leased 79%
Village Robins Independent
Living
Riverside Health Covington Long-term 157 Managed 99%
Care Center Care (CHCS)
Springdale Conva- Atlanta Long-term 109 Owned 96%
lescent Center of Care
Atlanta
Springdale Conva- Carters- Long-term 118 Leased 98%
lescent Center ville Care
of Bartow County
Summer's Landing- Carters- Long-term 50 Owned 70%
Cartersville ville Care
Brunswick Nursing Brunswick Long-term 204 Leased 100%
Center Care
Tattnall Nurse Reidsville Long-term 92 Leased 87%
Care Center Care
Altamaha Conva- Jesup Long-term 62 Leased 95%
lescent Center Care
Summer's Landing- Rome Assisted/ 30 Owned 77%
Rome Independent
</TABLE>
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<PAGE> 19
<TABLE>
<S> <C> <C> <C> <C> <C>
Living
Manor on the Roswell Assisted/ 24 Managed 93%
Square Independent
Living
Riverview Nursing Rome Long-term 100 Owned 99%
Home Care
Summer's Landing- Rome Assisted/ 15 Owned 80%
Riverview Independent
Living
Marietta Health Marietta Long-term 119 Leased 98%
Care Care
Brown's Nursing Statesboro Long-term 63 Leased 100%
Home Care
Clinch Healthcare Homerville Long-term 92 Leased 92%
Center Care
Total for Georgia 3,585 (40 facilities)*
- ---------------
* Excludes facilities under construction.
FLORIDA
Renaissance of Sebring Assisted/ 170 Owned 79%
Sebring Independent
Living
The Garden at Green Cove Assisted/ 28 Managed 61%
Magnolia Manor Springs Independent (GJ)
Living
Magnolia Manor Green Cove Long-term 60 Managed 97%
Nursing Center Springs Care (GJ)
Lake Forrest Jackson- Long-term 60 Leased 95%
Health Care ville Care
Center
Summer's Landing- Lynn Haven Assisted/ 51 Managed 80%
Lynn Haven Independent (NAB)
Living
The Renaissance Titusville Assisted/ 93 Managed 89%
Independent (WHH)
Living
Renaissance of Sanford Assisted/ 94 Managed 94%
Sanford Independent (WHH)
Living
The Atrium Jackson- Assisted/ 178 Managed 95%
ville Independent and 75%
Care Owned
</TABLE>
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<PAGE> 20
<TABLE>
<S> <C> <C> <C> <C> <C>
The Atrium Jackson- Long-term 84 Managed Under
Nursing Home ville Care and 75% Con-
Owned struc-
tion
The Preserve Pompano Assisted/ 297 Managed 99%
Beach Independent
Living
The Renaissance Destin Assisted/ 116 Owned 82%
of Sandestin Independent
Living
The Edwinola Dade City Assisted/ 214 Owned 85%
Independent
Living
Oak Bluff Clearwater Assisted/ 251 Managed 80%
Independent
Living
Westwood Retire- Fort Walton Assisted/ 208 Owned 95%
ment Independent
Living
Southside Nursing Jackson- Long-term 116 Leased 60%
Center ville Care
The Renaissance Lakeland Assisted/ 104 Owned 56%
of Lakeland Independent
Living
The Renaissance Pensacola Assisted/ 106 Leased 50%
of Pensacola Independent
Living
Oak Bluff Clearwater Long-term 60 Managed 95%
Care
Westwood Nursing Fort Walton Long-term 60 Owned 95%
Center Care
Oak Cove Clearwater Long-term 56 Managed 95%
Care
Summer's Landing- Jackson- Assisted/ 39 Managed 97%
Atrium ville Independent and 75%
Living Owned
Summer's Landing- Titusville Assisted/ 28 Managed Under
of Titusville Independent (WHH) Con-
Living struc-
tion
Total for Florida 2,473 (22 facilities)*
- ---------------
*Excludes facilities under construction.
</TABLE>
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<PAGE> 21
<TABLE>
<S> <C> <C> <C> <C> <C>
TENNESSEE
Marshall C. Voss Harriman Long-term 139 Managed 99%
Health Care Care (NAB)
Trenton Health Trenton Long-term 58 Managed 98%
Care Center Care (GJ)
Summer's Landing- Trenton Assisted/ 22 Managed 100%
Trenton Independent (GJ)
Living
Jackson Oaks Jackson Assisted/ 178 Leased 97%
Retirement Independent
Living
Cumberland Green Henderson- Assisted/ 140 Managed 93%
Retirement ville Independent (WHH)
Living
Winchester Health Winchester Long-term 80 Leased 96%
Care Care
Health Care Ardmore Long-term 79 Leased 98%
Center of Care
Ardmore
Fayetteville Fayetteville Long-term 79 Leased 100%
Health Care Care
Center
River Park Health Nashville Long-term 78 Leased 88%
Care Center Care
Palmyra Inter- Palmyra Long-term 75 Leased 88%
mediate Care Care
Center
Milan Health Milan Long-term 66 Leased 96%
Care Center County Care
Pleasant View Bolivar Long-term 67 Leased 99%
Health Care Care
Center
Lauderdale Ripley Long-term 71 Owned 89%
Healthcare Care
Oak Manor Health McKenzie Long-term 66 Leased 99%
Care Center Care
Parkway Health Memphis Long-term 120 Managed 0%*
and Rehab Care (CHCS)
Hillview Nursing Dresden Long-term 70 Owned 96%
Home Care
Crestwood Nursing Manchester Long-term 59 Owned 93%
Home Care
Reelfoot Manor Tiptonville Long-term 120 Leased 85%
Care
</TABLE>
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<PAGE> 22
<TABLE>
<S> <C> <C> <C> <C> <C>
Woodbury Nursing Woodbury Long-term 101 Leased 100%
Home Care
Total for Tennessee 1,668 (19 facilities)
- ---------------
* This facility became licensed on August 12, 1996.
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 50%
Hanceville Independent
Living
Sea Breeze Mobile Long-term 120 Managed 96%
Health Care Care (WHH)
Center
Summer's Landing- Mobile Assisted/ 20 Managed 10%
Sea Breeze Independent (WHH)
Living
Total for Alabama 360 (5 facilities)
SOUTH CAROLINA
The Calhoun Anderson Assisted/ 90 Managed 64%
Independent
Living
Total for South 90 (1 facility)
Carolina
NORTH CAROLINA
Pine Manor Fayette- Long-term 100 Managed 65%
ville Care
Wilkinson Health Gastonia Long-term 50 Leased 98%
Care Center Care
Total for North 150 (2 facilities)
Carolina
VIRGINIA
Libbie Convales- Richmond Long-term 195 Owned 95%
cent Center Care
Highland Manor Dublin Long-term 132 Leased 92%
Nursing Center Care
Tappahannock Tappahannock Long-term 60 Owned 100%
</TABLE>
-22-
<PAGE> 23
<TABLE>
<S> <C> <C> <C> <C> <C>
Manor Care
Summer's Landing- Tappahannock Assisted/ 58 Owned 91%
Tappahannock Independent
Living
Brentlox Hall Chesapeake Long-term 120 Owned 98%
Care
Total for Virginia 565 (5 facilities)
OHIO
Hamlet Chagrin Assisted/ 222 Owned 90%
Retirement Falls Independent
Care
Hamlet Nursing Chagrin Long-term 88 Owned 81%
Manor Falls Care
Total for Ohio 310 (2 facilities)
ARIZONA
The Carillons Sun City Assisted/ 75 Owned 96%
Independent
Care
Total for Arizona 75 (1 facility)
</TABLE>
ITEM 3. LEGAL PROCEEDINGS.
The Company is a party to litigation arising in the ordinary course of
business. The Company and its subsidiaries are not currently parties to any
litigation that management believes would have a material adverse effect on the
financial condition or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
-23-
<PAGE> 24
PART II
AMENDMENT TO FORM 10-K
The accompanying financial statements of the Company for the twelve
months ended June 30, 1996 have been reaudited and restated. Items set
forth in this amended Form 10-K have been amended to reflect the effect of the
aforementioned restatement, but Items not set forth herein have not been
amended from the Company's previously issued Form 10-K for the fiscal year
ended June 30, 1996 filed by the Company with the Securities and Exchange
Commission (the "Original Form 10-K"). Further, this amended Form 10-K has not
been amended to reflect changes in market conditions, revisions to stated
estimates or events that have occurred since the filing of the Original Form
10-K in October 1996. Therefore, this amended Form 10-K/A should be read in
conjunction with the Original Form 10-K.
PART II
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial information for the fiscal year ended
June 30, 1996, 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. The selected
information for the fiscal year ended June 30, 1992, is derived from financial
statements of the Company audited by Laney, Boteler & Killinger, 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. reflects the financial
information of Capitol Care Management Company, Inc.
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
AT JUNE 30,
1996(1)(2) 1995(1)(2) 1994(1)(2) 1993(1)(2) 1992(1)
<S> <C> <C> <C> <C> <C>
Current Assets $ 29,478,560 $25,782,546 $12,449,522 $1,404,228 $240,088
Total Assets 177,492,287 80,257,546 31,230,025 2,453,241 359,397
Current Liabili-
ties 30,974,720 22,857,244 9,328,989 1,677,250 215,255
Working Capital
(Deficit) (1,496,160) 2,925,302 3,120,533 (273,022) 24,833
Long-Term Debt 108,481,040 32,426,023 8,199,915 -0- 11,164
Redeemable Pre-
ferred Stock 2,400,000 3,000,000 -0- -0- -0-
Shareholders'
Equity 30,886,118 19,733,254 13,399,751 775,991 132,978
</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.
(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
the eight 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, the eight
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 sixteen
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
-24-
<PAGE> 25
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.
STATEMENT OF INCOME DATA:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE 30,
1996 1995 1994 1993 1992
------------ ----------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C>
Revenues $134,011,369 $79,616,053 $37,971,052 $4,553,666 $610,981
Operating
Expenses 124,631,352 70,598,837 32,993,562 3,615,109 585,535
Net Income 1,746,808 5,058,503 2,917,642 573,557 18,951
Net Income (loss)
applicable to
common stock (519,969) 4,833,503 2,917,642 573,557 18,951
Net Income
(Loss) Per
Common and
Common Equi-
valent
Share(1) $ (.05) $ .38 $ .30 $ .11 $ .02
Weighted
Average
Shares(1) 11,324,755 12,616,835 9,839,993 5,010,354 964,688
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, 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 leased one
long-term care facility, purchased three long-term care facilities and purchased
two assisted living/independent living facilities during the fiscal year ended
June 30, 1996, each of which it managed during the fiscal year ended June 30,
1995. All of these facilities were owned and controlled by Messrs. Brogdon and
Lane. The Company purchased and leased these facilities to reduce the
affiliated receivable due the Company and to increase the number of facilities
owned or leased, rather than just managed, by the Company. 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.
25
<PAGE> 26
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.
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>
Long-term care 20 30 48
Assisted living/independent living 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,
26
<PAGE> 27
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.
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, represent 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
27
<PAGE> 28
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 three to 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.
YEAR ENDED JUNE 30, 1995 COMPARED TO YEAR ENDED JUNE 30, 1994
The Company's total revenues for the year ended June 30, 1995, were
$79,616,053 compared to $37,971,052 for the year ended June 30, 1994.
Management fees increased from $3,292,949 in the year ended June 30,
1994, to $4,169,694 in the year ended June 30, 1995, due to the increased
number of facilities which the Company manages as well as the renegotiation of
management agreements resulting in higher management fees. Included in the
Company's management fee revenue is $3,517,500 and $3,034,445 from affiliates
during the years ended June 30, 1995 and 1994, respectively.
Due to the increased number of facilities owned or leased by the
Company, patient service revenue increased from $34,340,394 for the year ended
June 30, 1994, to $69,949,822 for the year ended June 30, 1995. The cost of
patient services in the amount of $47,778,410 for the year ended June 30, 1995,
represented 68% of patient service revenue, as compared to $23,088,387, or 67%
of patient service revenue during the year ended June 30, 1994.
During the year ended June 30, 1995, the Company had revenue from
medical supply sales of $3,617,439. These sales reflect the operations of
Contour Medical, Inc., of which the Company acquired a 63% interest on
September 30, 1994. As a result, these sales only reflect nine months of
operations. The cost of goods sold for the year ended June 30, 1995, was
$3,153,430, or 87% of medical supply sales.
Lease expense increased from $3,714,105 in the year ended June 30,
1994, to $5,769,232 in the year ended June 30, 1995. This increase is
primarily attributed to the increased number of facilities leased during the
year, as well as the full year effect of leased facilities that started during
the year ended June 30, 1994. There were six new facilities leased during the
fiscal year ended June 30, 1995.
General and administrative expenses for the year ended June 30, 1995,
were $12,769,582 representing 16% of total revenues, as compared to $5,953,793
representing 16% of total revenues, for the year ended June 30, 1994.
During the year ended June 30, 1995, the Company had $658,215 in
interest income and financing fees. The Company had no similar revenue during
the year ended June 30, 1994.
28
<PAGE> 29
Interest expense increased from $232,365 in the year ended June 30,
1994, to $1,179,052 in the year ended June 30, 1995. This increase is
primarily attributed 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, 1994.
For the year ended June 30, 1995, the Company incurred expenses for
income taxes of $3,419,092 which represents an effective tax rate of 40% as
compared to expenses for income taxes of $1,827,483 which represents an
effective tax rate of 39% for the year ended June 30, 1994.
The net income of $5,058,503 for the year ended June 30, 1995, is
higher than the net income of $2,917,642 for the year ended June 30, 1994, due
to the increased number of facilities operated and managed during 1995.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1996, the Company had a deficit of $1,496,160 in working
capital compared to a surplus of $2,925,302 at June 30, 1995.
During the year ended June 30, 1996, cash provided by operating
activities was $5,549,626 as compared to $4,208,048 for the year ended June 30,
1995. The $1,341,578 increase was primarily due to net income of $1,746,808
for the year ended June 30, 1996, depreciation and amortization of $3,406,986
on the facilities, provisions for bad debts of $3,423,117 on accounts
receivable and increases in accounts payable and accrued expenses of $9,964,620
due to the addition of twenty eight facilities for the year ended June 30,
1996. Cash used in operating activities was primarily due to the increase in
accounts receivable of $10,672,485 due to the addition of twenty eight
facilities for the year ended June 30, 1996 and increases in inventories of
$2,245,194 on the nursing facilities and Contour.
Cash used in investing activities during the year ended June 30, 1996,
was $44,981,326. The expenditures primarily related to purchases of property
and equipment of $12,490,298 and acquisitions of facilities of $21,938,513. On
December 15, 1995, the Company obtained both a sole general and a limited
partnership interest, totaling 74.25% interest, in Encore Partners, L.P. in
exchange for a capital contribution to Encore of $3.5 million. Encore owns
three assisted living/independent living and two long-term care facilities.
The acquisition was accounted under the purchase method of accounting. 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. On February 27, 1996, the Company purchased a
thirty six unit assisted living/independent living facility from individuals
who are officers and directors of the Company. 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. The
Company issued notes receivable and advances of $8,935,677 to Gordon Jensen
Health Care Association, Inc., Winter Haven Homes, Inc., Southeastern Cottages,
Inc., National Assistance Bureau, Inc., Chamber Health Care Society, Inc., and
Senior Care, Inc. all owned or controlled by individuals who are officers and
directors of the Company The notes receivable bore interest at 12% and were
paid in full in 1997. The advances were due on demand and were paid in full in
1997. The Company funded an additional $4,720,047 in restricted bond funds
used for debt service reserve requirements, semi-annual principal and interest
payments and project funds for facilities under construction or renovation.
Cash provided by investment activities was primarily the repayment of a
$2,200,000 note receivable from an unrelated third-party.
Cash provided by financing activities during the year ended June 30,
1996, totaled $34,269,880. Sources of cash included proceeds of $9,300,000
from the issuance of 1,000,000 shares of $10.00 Series E Convertible Preferred
Stock which were sold in an offering to foreign investors in April, 1996.
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 multiplied by 8% annum from the date of
issuance divided by the applicable conversion price. Sources of cash also
included proceeds from stock options and warrants exercised of $559,593, and
proceeds from long-term debt and lines of credit of $35,329,244. The Company's
net borrowing from lines of credit was $3,556,535, with interest rates ranging
from prime plus .25% to prime plus 1.25%. Available borrowings at June 30, 1996
was $5,075,000. The Company incurred long-term debt of approximately $31
million, due through 2025, with interest rates ranging from 6.75% to 11.28%.
In connection with 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, 1996, the Company was in violation of
29
<PAGE> 30
several of these covenants creating a technical default on approximately $14
million of bond indentures. These violations included the failure to make
monthly payments to bond sinking funds for certain of these facilities and
inadequate debt service reserves for certain of these facilities. The Company
is also delinquent with regard to approximately $800,000 of property taxes at
several facilities. The trustees have not called the bonds in the past for
these violations and management does not forsee the bonds being called at this
time. All semi-annual interest and principal payments have been made in a
timely fashion. Cash used in financing activities primarily consisted of
$9,443,626 in payments of long-term debt, $600,000 in redemption of Series AA
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 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
30
<PAGE> 31
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, 1996, the
Company had approximately $1,500,000 in unused credit available under such
lines.
Subsequent to year end, the Company raised approximately $9,340,000
in net proceeds from the sale of the Series F convertible preferred stock
in a private offering to foreign investors. The proceeds of this offering are
being used for working capital purposes.
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
Series A redeemable convertible 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 assisted living/independent living and long-term care
facilities on terms which can be paid out of the cash flow generated by the
property.
The Company intends to continue to lease or purchase additional
assisted living/independent living and/or long-term care 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
31
<PAGE> 32
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-27 hereof.
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.
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.
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).
32
<PAGE> 33
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>
Independent Auditors' Report .................................. F-1
Report of Independent Certified Public Accountants ............ F-2
Consolidated Balance Sheets as of June 30, 1996 and 1995....... F-3 - F-4
Consolidated Statements of Income for the years ended
June 30, 1996, 1995 and 1994................................. F-5
Consolidated Statements of Shareholders' Equity for the
years ended June 30, 1996, 1995 and 1994..................... F-6 - F-7
Consolidated Statements of Cash Flows for the years ended
June 30, 1996, 1995 and 1994................................. F-8 - F-9
Notes to Financial Statements.................................. F-10 - F-27
</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:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION LOCATION
<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
</TABLE>
33
<PAGE> 34
<TABLE>
<CAPTION>
<S> <C> <C>
Incorporation (Series E
Convertible Preferred
Stock)
3.7* Articles of Amendment to
Articles of Incorporation
(Series F Convertible Pre-
ferred Stock) and Certif-
icate of Correction to
same
10.1* Employment Agreement
with Darrell C. Tucker
10.2* Management and Marketing
Agreement with Affiliates
10.3* Nursing Home Management
Agreements with Affiliates
10.4* Lease Agreements with
Affiliates
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
</TABLE>
34
<PAGE> 35
<TABLE>
<CAPTION>
<S> <C> <C>
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
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
</TABLE>
35
<PAGE> 36
<TABLE>
<CAPTION>
<S> <C> <C>
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
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 Purhase 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
</TABLE>
36
<PAGE> 37
<TABLE>
<CAPTION>
<S> <C> <C>
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
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
18* Letter re changes in
accounting principles
21* Subsidiaries of the
Registrant
23.1 Consent of Cherry, Bekaert Filed herewith electronically (see
& Holland, L.L.P. 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
</TABLE>
- ---------------
*Previously filed.
(b) No Reports on Form 8-K were filed during the last quarter of the
period covered by this Report.
37
<PAGE> 38
Independent Auditor's Report
Board of Directors and Shareholders of
Retirement Care Associates, Inc.
We have audited the accompanying consolidated balance sheet of Retirement Care
Associates, Inc. and subsidiaries as of June 30, 1996 and the related
consolidated statements of income, shareholders' equity and cash flows for the
year then ended. 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 financial position of Retirement Care
Associates, Inc. and subsidiaries as of June 30, 1996 and the results of their
operations and their cash flows for the year 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 7, 1997
F-1
<PAGE> 39
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> 40
Retirement Care Associates, Inc. & Subsidiaries
Consolidated Balance Sheets
June 30, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 45,365 $ 5,207,185
Accounts receivable, net 18,845,780 11,282,467
Notes and advances due from affiliates - 2,314,250
Inventories 3,998,991 1,364,569
Note and accrued interest receivable 613,750 2,396,667
Deferred tax asset 2,008,430 -
Restricted bond funds 2,342,565 719,175
Prepaid expenses and other assets 1,623,679 2,498,233
Total current assets 29,478,560 25,782,546
Property and equipment, net of
accumulated depreciation 111,420,486 37,233,506
Marketable equity securities 33,645 99,510
Investment in unconsolidated affiliates 496,800 4,431,235
Deferred loan and loan costs 7,665,891 3,732,197
Goodwill, net of accumulated amortization 6,636,675 1,798,881
Notes and advances due from non-affiliates 1,372,247 -
Notes and advances due from affiliates 14,316,661 5,013,972
Restricted bond funds 3,514,969 418,312
Other assets 2,556,353 1,747,387
Total assets $177,492,287 $80,257,546
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE> 41
Retirement Care Associates, Inc. & Subsidiaries
Consolidated Balance Sheets
June 30, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Lines of credit $3,556,535 $1,745,316
Current maturities of long-term debt 2,220,491 8,640,871
Accounts payable 10,115,347 7,699,640
Accrued expenses 11,316,030 3,184,233
Income taxes payable 3,726,317 3,158,000
Deferred income taxes - 134,500
Deferred gain 40,000 40,000
Total current liabilities 30,974,720 24,602,560
Deferred gain 371,370 261,370
Deferred income taxes 277,000 -
Long-term debt, less current 108,481,040 30,680,707
Minority interest 4,122,039 1,979,655
Commitments and contingencies
Redeemable convertible preferred stock 2,400,000 3,000,000
Shareholders' equity
Common stock, $.0001; 300,000,000 shares
authorized; 12,145,875 and 10,317,083
shares issued, respectively 1,214 1,031
Preferred stock 7,408,279 -
Additional paid-in capital 28,329,625 18,555,677
Retained earnings (deficit) (4,752,880) 1,176,546
Treasury stock, at cost (120,120) -
30,866,118 19,733,254
$177,492,287 $80,257,546
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE> 42
Retirement Care Associates, Inc. & Subsidiaries
Consolidated Statements of Income
For the Years Ended June 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Revenues:
Net patient service revenue $119,499,849 $ 69,949,822 $ 34,340,394
Medical supply revenue 9,825,252 3,617,439 -
Management fee revenue:
From affiliates 3,472,900 3,517,500 3,034,445
From others 308,533 652,194 258,504
Other revenue 904,835 1,879,098 337,709
Total revenues 134,011,369 79,616,053 37,971,052
Expenses:
Cost of patient services 80,815,511 47,778,410 23,088,387
Cost of medical supplies sold 5,350,817 3,153,430 -
Lease expense 8,442,671 5,769,232 3,714,105
General and administrative 23,192,250 12,769,582 5,953,793
Depreciation and amortization 3,406,986 1,128,183 237,277
Provision for bad debts 3,423,117 - -
Total expenses 124,631,352 70,598,837 32,993,562
Operating income 9,380,017 9,017,216 4,977,490
Other income (expense):
Interest income 1,847,868 658,215 -
Interest expense (7,948,091) (1,179,052) (232,365)
Income before minority interest,
income taxes and cumulative effect
of change in accounting principle 3,279,794 8,496,379 4,745,125
Minority interest (597,895) (18,784) -
Income before income taxes and cumulative
effect of change in accounting principle 2,681,899 8,477,595 4,745,125
Income taxes 1,307,091 3,419,092 1,827,483
Income before cumulative effect of
change in accounting principle 1,374,808 5,058,503 2,917,642
Cumulative effect of change in accounting
principle, net of income taxes of $228,000 372,000 - -
Net income $1,746,808 $5,058,503 $2,917,642
Preferred stock dividends 2,266,777 225,000 -
Net income (loss) applicable to common stock $(519,969) $4,833,503 $2,917,642
Income (loss) per common and common equivalent share:
Income (loss) before cumulative effect of
change in accounting principle $ (0.08) $ 0.38 $ .30
Cumulative effect of change in
accounting principle 0.03 - -
Net income (loss) (0.05) 0.38 .30
Weighted average shares outstanding
11,324,755 12,616,835 9,839,993
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE> 43
Retirement Care Associates, Inc. & Subsidiaries
Consolidated Statements of Shareholders' Equity
For the Years Ended June 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Preferred Stock
Common Stock
Series A Series C Series E Shares Amount
<S> <C> <C> <C> <C> <C>
Balance June 30, 1993 $ 670,642 $ 833,000 $ - 5,391,896 $ 539
Issuance of common stock upon conversion
of Series A preferred stock (670,563) - - 558,802 56
Issuance of common stock upon conversion
of Series C preferred stock - (833,000 ) - 833,333 83
Private placement Reg D - - - 1,494,165 149
Expenses on private placement Reg D - - - - -
Acquisition of Retirement Management
Corporation - - - 80,000 8
Stock dividend, 5% - - - 417,970 42
Private placement Reg S - - - 750,000 75
Expenses of private placement Reg S - - - - -
Recognition of convertibility of Series A
preferred stock 364,004 - - - -
Net Income - - - - -
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
Preferred stock, 10% dividend - - - - -
Stock dividend, 5% - - - 491,409 49
Net Income - - - - -
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
Unmamortized 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
Net Income - - - - -
Balance June 30, 1996 $ - $ - $ 7,408,279 12,145,875 $1,214
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE> 44
Retirement Care Associates, Inc. & Subsidiaries
Consolidated Statements of Shareholders' Equity
For the Years Ended June 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Retained
Paid-In Earnings Treasury
Capital (Deficit) Stock
<S> <C> <C> <C>
Balance June 30, 1993 $(1,433,725) $ 705,535 $ -
Issuance of common stock upon conversion
of Series A preferred stock 670,507 - -
Issuance of common stock upon conversion
of Series C preferred stock 832,917 - -
Private placement Reg D 5,047,349 - -
Expenses on private placement Reg D (520,580) - -
Acquisition of Retirement Management
Corporation 399,992 - -
Stock dividend, 5% 2,980,092 (2,980,134) -
Private placement Reg S 5,249,925 - -
Expenses on private placement Reg S (470,800) - -
Recognition of convertibility of Series A
preferred stock (364,004) - -
Net income - 2,917,642 -
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)
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
<PAGE> 45
Retirement Care Associates, Inc. & Subsidiaries
Consolidated Statements of Cash Flows
For the Years Ended June 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 1,746,808 $ 5,058,503 $ 2,917,642
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 3,406,986 1,128,183 237,277
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 3,423,117 - -
Equity in income from investees 146,800 - -
Minority interest 597,895 18,784 -
Deferred Income
(1,297,613) 261,092 (91,237)
Changes in assets and liabilities net of
effects of acquisitions
Accounts receivable (10,672,485) (6,012,900) (4,071,251)
Inventories (2,245,194) (996,139) -
Prepaid expenses and other assets 703,690 (642,013) (1,373,827)
Accrued interest receivable 157,917 (196,667) -
Accounts payable and accrued expenses 9,964,620 6,608,148 5,509,837
Deferred lease and loan costs - (978,943) (1,565,130)
Net cash provided by
operating activities 5,549,626 4,208,048 1,523,311
Cash flows from investing activities:
Purchases of property and equipment (12,490,298) (6,079,610) (5,093,344)
Proceeds from sale leaseback transaction - 4,500,000 -
Proceed from repayment of notes receivable 2,200,000 - -
Issuance of note receivable and advances
to affiliates and non-affiliates (8,935,677) (1,742,147) (5,142,182)
Purchase of bonds receivable - (4,487,936) -
Purchase of notes receivable - - (2,200,000)
Investments in unconsolidated affiliates 3,787,635 (3,335,833) (783,904)
Restricted bond funds
(4,720,047) (17,317) 913,857
Proceed from sale of fixed assets - - 2,481,370
Cash acquired in acquisition of Contour Medical, Inc. - 73,254 -
Decrease (increase) in marketable equity securities - 444,863 (544,373)
Proceed from sale of marketable equity securities 36,780 - -
Goodwill paid in acquisitions (2,327,736) - (93,422)
Acquisitions, net of cash required
(21,938,513) - -
Payment of deferred lease costs (593,470) - -
Net cash used in investing activities $(44,981,326) $(10,644,726) $(10,461,998)
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-8
<PAGE> 46
Retirement Care Associates, Inc. & Subsidiaries
Consolidated Statements of Cash Flows (continued)
For the Years Ended June 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
<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) - -
Purchase of treasury stock (274,040) - -
Dividends on preferred stock (270,000) (225,000) -
Proceeds from issuance of preferred stock 9,300,000 - 9,306,118
Proceeds from stock options and warrants exercised 559,593 - -
Proceeds from long-term debt and net borrowings
under line of credit 35,329,244 11,309,986 112,754
Payments on long-term debt (9,443,626) (2,130,654) -
Payments on deferred loan costs (2,419,783) - -
Net cash provided by financing
activities 34,269,880 10,683,801 9,418,872
Net increase (decrease) in cash and cash equivalents (5,161,820) 4,247,123 480,185
Cash and cash equivalents, beginning of year 5,207,185 960,062 479,877
Cash and cash equivalents, end of year $ 45,365 $ 5,207,185 $ 960,062
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-9
<PAGE> 47
RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996 and 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF BUSINESS AND BASIS OF PRESENTATION
Retirement Care Associates, Inc. ("RCA" or the "Company") operates 64 leased
and owned nursing and retirement facilities in the Southeast United States and
manages, for both related and unaffiliated third parties, an additional 28
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 maturity 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
F-10
<PAGE> 48
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
Company accounts for its investment in In-House on the equity method. The
Company's share of In-House's net income was $146,800 and $0 for the years
ended June 30, 1996 and 1995, respectively.
Investment in affiliates as of June 30, 1995 included the investment in
In-House and The Atrium of Jacksonville, Ltd. ("Atrium"). The accounts of
Atrium are consolidated with those of the Company as of June 30, 1996.
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 $233,000 and $111,000 as of June 30, 1996 and 1995,
respectively.
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 February 1994, January 1995 and April 1996, the Company declared 5%
stock dividends which were payable on March 1, 1994, February 15, 1995 and May
15, 1996, respectively, to shareholders of record on February 15, 1994 and 1995
and May 1, 1996, respectively. All common stock information presented has been
retroactively restated to reflect these stock 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.
F-11
<PAGE> 49
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 year ended June 30, 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 as described below. Shares used in the calculation
for the year ended June 30, 1994 consisted of the weighted average number of
shares actually outstanding (8,292,882) together with the weighted average
numbers outstanding of common shares expected to be issued upon the conversion
of all of the Series A convertible preferred stock (672,497 shares) issued in
the merger since the income levels required to permit conversion were currently
being attained. Shares used in the calculation also included the weighted
average number of common share equivalents (874,614) which include dilutive
stock options and warrants as described below.
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.
F-12
<PAGE> 50
NEW PRONOUNCEMENTS
The Financial Accounting Standards Board has released 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." SFAS No. 121
requires that long-lived assets and certain identifiable intangibles to be held
and used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. This standard would be effective for the company's fiscal year
ended June 30, 1997.
The Financial Accounting Standards Board also released SFAS No. 123,
"Accounting for 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.
This standard would be effective for the Company's fiscal year ending June 30,
1997.
RECLASSIFICATIONS
Certain 1995 and 1994 amounts have been reclassified to conform with the 1996
presentations.
2. BUSINESS ACQUISITIONS:
CONTOUR
On September 30, 1994, the Company acquired a 63% interest in Contour through
the acquisition of preferred and common stock from the existing shareholders.
Contour is a publicly held company based in St. Petersburg, Florida, which
manufactures a full line of orthopedic care and rehabilitation products. In
connection with the acquisition of the 63% interest in Contour, the Company
paid $4,000,000, consisting of 137,813 shares of its common stock and 300,000
shares of a new series of redeemable convertible preferred stock (see Note 9).
The acquisition of Contour was accounted for under the purchase method of
accounting. The excess of the purchase price over the fair value of
identifiable tangible and intangible assets of $899,792 was allocated to
goodwill and is being amortized over 15 years.
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.
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.
F-13
<PAGE> 51
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. 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.
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 cost of the facilities acquired during 1996 exceeded the fair value of net
assets acquired by approximately $2,660,000. The excess is being amortized over
a 20-year period.
During the year ended June 30, 1995, the Company purchased three nursing
facilities and two retirement facilities.
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, 1994.
<TABLE>
<CAPTION>
For the year ended June 30,
(Unaudited)
1996 1995
<S> <C> <C>
Revenue $148,466,000 $127,671,000
Net income (loss) (1,828,997) 5,568,000
Net income per share (.04) .42
</TABLE>
The pro forma information includes adjustments for interest expense that would
have been incurred to finance the acquisitions, additional depreciation based
on
F-14
<PAGE> 52
the fair market value of the facilities and other adjustments, together with
related income tax effects. The pro forma financial information is not
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 19 facilities
owned by affiliates and also leases one facility from an affiliate. The
affiliates are owned and controlled by two individuals who are officers and
directors of the Company. These services are provided pursuant to agreements
which have five-year terms and are cancelable with sixty days written notice by
either party. The agreements provide for monthly fees ranging from $6,000 to
$30,000 per facility and expire through 1999. Revenue from these management
services totaled $3,472,900, $3,517,500 and $3,034,445 for the years ended June
30, 1996, 1995 and 1994.
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 affiliates consist of advances to facilities, net of
advances from facilities, owned by the following affiliated entities:
<TABLE>
<CAPTION>
June 30,
1996 1995
<S> <C> <C>
Gordon Jensen Health Care Association, Inc. $2,982,975 $2,117,562
Winter Haven Homes, Inc. 8,887,833 4,966,589
Southeastern Cottages, Inc. 679,144 105,533
National Assistance Bureau, Inc. 1,326,391 748,801
Chamber Health Care Society, Inc. 336,857 (610,263)
Senior Care, Inc. 84,095 -
Other Affiliates 19,366 -
$14,316,661 $7,328,222
Less current portion - 2,314,250
$14,316,661 $5,013,972
</TABLE>
During 1995 and 1994, the Company received notes as consideration for advances
totaling $5,360,000. These notes require quarterly interest payments at 8% per
annum with all principal and accrued interest due on or before June 30, 1998.
The notes were collateralized by second mortgages on facilities owned by
affiliates and certain notes receivables are guaranteed by the principals of
Winter Haven, who are shareholders of the Company. All notes and advances due
from affiliates which existed at June 30, 1996, were liquidated subsequent to
year end.
FACILITY ACQUISITIONS AND LEASES
On April 28, 1995, the Company purchased a 210-unit nursing home of an
affiliate. The purchase price was $5,650,000 and was financed with $500,000
from the Company and a $5,150,000 mortgage loan from an unrelated third-party
real estate investment trust.
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-15
<PAGE> 53
The Company's exposure to credit loss in the event of nonperformance by its
related parties totaled $14,316,661 and $7,938,485 as of June 30, 1996 and
1995, respectively.
ADDITIONAL TRANSACTIONS
The Company paid amounts to affiliates for obtaining financing of $190,000 for
the year ended June 30, 1995. During 1994, the Company paid amounts to
affiliates for lease acquisition and buy out costs, financing fees and
financial advisory fees of $350,000, $300,000, and $70,000, respectively.
These amounts are deferred and included in deferred lease and loan costs in the
accompanying balance sheets.
The Company was paid fees of $150,000 and $400,000 by affiliates in connection
with locating financing for three facilities in 1996 and two facilities in
1995, respectively. These fees were included in interest income on the
accompanying statements of income.
The Company has service and consulting agreements whereby In-House provides
therapy and case management to facilities for a fixed monthly fee plus a charge
per treatment unit provided. For 1996 and 1995, substantially all of the sales
and accounts receivable of In-House were 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 68% and 72% of net patient service revenue during
1996 and 1995, 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,
1996 1995
<S> <C> <C>
Medicaid $10,644,368 $5,485,610
Medicare 4,304,368 4,327,868
Other third-party payors 1,598,816 697,402
Patients 3,113,145 10,884
Trade receivables 2,595,083 760,703
22,255,780 11,282,467
Allowance for doubtful accounts 3,410,000 -
$18,845,780 $11,282,467
</TABLE>
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,
1996 1995 1994
<S> <C> <C> <C>
Beginning of Period $ - - -
Provisions for Bad Debts 3,423,117 - -
Deductions (13,117) - -
End of Period 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, is due on February 7, 1997 and is
collateralized by a first lien on a 38-bed nursing home in Atlanta, Georgia
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
F-16
<PAGE> 54
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 1996 1995
<S> <C> <C> <C>
Land - $ 7,184,001 $ 2,237,133
Buildings 30 83,281,050 28,917,590
Equipment 5-10 12,179,912 5,702,897
Leasehold improvements 5-10 2,193,228 1,110,666
Buildings and equipment under
capital leases 5-30 8,111,801 -
112,949,992 37,968,286
Less accumulated depreciation 8,518,084 990,968
Construction in progress 104,431,908 36,977,318
Net property and equipment 6,988,578 256,188
$111,420,486 37,233,506
</TABLE>
Construction in progress, consisting of the development of four facilities,
includes approximately $605,000 and $4,600 of capitalized interest costs as of
June 30, 1996 and 1995, respectively. The total contract price of construction
in progress was approximately $8,500,000.
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
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,
1996 1995
<S> <C> <C>
Lease cost:
Affiliated $ 500,000 $ 500,000
Non-affiliated 1,801,619 1,283,149
Loan cost:
Affiliated 410,000 410,000
Non-affiliated 5,800,288 1,897,403
Less accumulated amortization 8,511,907 4,090,552
Net deferred lease and loan cost 846,016 358,355
$ 7,665,891 $3,732,197
</TABLE>
F-17
<PAGE> 55
9. SHAREHOLDERS' EQUITY:
STOCK PURCHASE WARRANTS
In prior years, the Company issued warrants to an investment banker and
consultants to purchase 1,126,500 shares of its common stock at prices ranging
from $1.632 to $6.875 per share. All exercise prices approximated the market
price at the date of grant. The warrants were exercisable at varying dates
through June 1998. During the year ended June 30, 1996, the Company issued
763,386 shares of its common stock in exchange for the cancellation of all of
these warrants.
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 warrants are exercisable at $.907
per warrent, Class B warrants are exercisable at $5.714 per and the Class C
warrants are exercisable at $2.721 per warrant. 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, 1996, Class A Warrants were exercised to purchase
approximately 156,783 shares of common stock, Class B Warrants were exercised to
purchase approximately 56,616 shares of common stock and Class C Warrants were
exercised to purchase approximately 222,109 shares of common stock. As of June
30, 1996, there were Class A warrants outstanding which entitles the holders to
purchase 136,212 shares of common stock, Class B warrants outstanding which
entitles the holders to purchase 302,312 shares of common stock and Class C
Warrants outstanding which entitles the holders to purchase 141,312 shares of
common stock.
STOCK OPTIONS
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 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.
Stock option transactions are summarized as follows:
<TABLE>
<CAPTION>
Exercise Price
Shares Per Share
<S> <C> <C>
Balance at June 30, 1993 -
Granted 882,110 $4.65 -$ 6.75
Balance at June 30. 1994 882,110 4.65 - 6.75
Granted 184,708 6.46 - 8.57
Balance at June 30, 1995 1,066,818 4.65 - 8.57
Granted 489,300 9.76 - 10.24
Exercised (22,076) 4.65 - 9.76
Canceled (35,674) 4.65 - 9.76
Balance at June 30, 1996 1,498,368 $4.65 -$10.24
</TABLE>
PREFERRED STOCK
F-18
<PAGE> 56
As of June 30, 1996, 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 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 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 $12.4025
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).
F-19
<PAGE> 57
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, 1996, 57,500 shares of Series E Convertible Preferred
Stock had been converted into 54,516 shares of common stock. The imputed
dividend on this preferred stock was $1,996,777 at June 30, 1996.
TREASURY STOCK
In November 1995, the Company purchased and retired 15,000 shares of its common
stock at an aggregate cost of $153,920. In December 1995, the Company
purchased 10,000 shares of its common stock at an aggregate cost of $120,120.
In March 1996, the Company purchased and retired 500 shares of its common stock
at an aggregate cost of $5,070.
10. LONG-TERM DEBT:
Long-term debt at June 30, 1996 and 1995 is summarized as follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Non-affiliates:
Notes payable to a real estate
investment trust ("REIT") $ 39,623,938 $12,930,347
Industrial development revenue bonds 20,060,000 9,345,000
Municipal revenue bonds 18,170,000 13,350,000
Housing development mortgage revenue bonds 21,750,000 1,660,000
Notes payable to banks (8.5% or prime plus
1% to 10% due through 2003) 3,049,012 1,220,749
Capitalized lease obligations 8,048,581 -
Affiliates:
Note payable to an affiliate (12%
due on July 31, 1996) - 1,000,000
Less discount on bonds payable - 184,518
110,701,531 39,321,578
Less current maturities 2,220,491 8,640,871
$108,481,040 $30,680,707
</TABLE>
Future maturities of debt and capital lease obligations are as follows:
<TABLE>
<CAPTION>
Capital
Year Lease Debt Total
<S> <C> <C> <C>
1997 $ 973,304 $ 2,161,380 $ 3,134,684
1998 980,120 2,368,392 3,348,512
1999 987,068 2,464,109 3,451,177
2000 994,202 2,948,158 3,942,360
2001 1,001,438 2,979,065 3,980,503
Thereafter 15,090,218 89,731,845 104,822,063
Total 20,026,350 102,652,949 122,679,299
Less amount representing imputed
interest at 11% to 12% 11,977,768 - 11,977,768
Total obligations $ 8,048,582 $102,652,949 $110,701,531
</TABLE>
The notes payable to the REIT consist of mortgage notes on eight facilities.
Principal amounts are amortized over a 25-year period with monthly installments
payable through 2008. Interest rates on these notes range from 9.75% to 11.18%
and increase annually at rates ranging from 0.1% to 0.25%. The notes are
collateralized by property and equipment of the eight facilities.
The industrial development revenue bonds consist of bonds on two facilities: a
retirement community located in San Destin, Florida and the Atrium, a nursing
and retirement community located in Jacksonville, Florida. The San Destin
facility serves as collateral for $9,225,000 of bonds payable to the Walton
County Industrial Development Authority. Principal payments range from
$135,000 to $1,000,000 annually through 2017 and interest accrues at 10.5%. The
Atrium
F-20
<PAGE> 58
facility serves as collateral for three City of Jacksonville Industrial
Development Revenue Refunding bonds totaling $10,835,000. Principal payments
range from $150,000 to $370,000 annually through 2024 and interest accrues at
rates ranging from 6.38% 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 four facilities, includes Okaloosa County, Florida Retirement
Rental Housing Revenue Series A bonds totaling $8,425,000 with semi-annual
interest payments at 10.75% due in 2003 and Ohio Rental Housing Revenue Series
A bonds totaling $10,100,000 with semi-annual interest at 10.38% due in 2009.
The remainder of the housing development mortgage revenue bonds consist of
bonds totaling $3,225,000 collateralized by two facilities with interest
ranging from 8% to 11.0%. The housing development mortgage revenue bonds
require annual principal payments ranging from $10,000 to $2,000,000.
The municipal revenue bonds, which are collateralized by property and equipment
of five facilities and require annual principal payments ranging from $15,000
to $540,000, consist of the following:
Dade City, Florida Series A and B bonds totaling $6,455,000, with principal
payments due through 2025 and interest ranging from 6.75% to 8%.
Highland County Series A and B bonds totaling $4,275,000, with principal
payments due through 2024 and interest ranging from 6.5% to 9.5%.
City of Dublin Series A and B bonds totaling $2,780,000, 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
$2,760,000, 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%.
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, 1996 and 1995, 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 $5,075,000 and $1,750,000 for the years ended June 30, 1996 and
1995, respectively. Total borrowings against the lines of credit were
$3,556,535 and $1,745,316 at June 30, 1996 and 1995, respectively.
12. COMMITMENTS AND CONTINGENCIES:
OPERATING LEASES
The Company leases nursing homes and retirement care facilities from
unaffiliated entities (in addition to leasing one nursing home from an
affiliated entity). 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 January 2006.
Included in the above agreements are three leases whereby a sale to the lessor
preceded the lease agreement ("sale/leaseback transaction"). The Company has
F-21
<PAGE> 59
accounted for two 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, 1996:
<TABLE>
<CAPTION>
Year Amount
<S> <C>
1997 $ 8,712,474
1998 9,101,249
1999 8,686,407
2000 8,357,981
2001 8,177,038
Future years 35,641,998
Total $78,677,147
</TABLE>
The Company's rental expense under operating leases for nursing homes and
retirement care facilities amounted to approximately $6,040,000, $5,750,000 and
$3,000,000 for the years ended June 30, 1996, 1995 and 1994, respectively.
The Company leases office space under a noncancelable operating lease which
expires in October 2000. At June 30, 1996, minimum future rental payments under
the noncancelable lease were as follows:
<TABLE>
<CAPTION>
Year Amount
<S> <C>
1997 $303,644
1998 325,455
1999 341,683
2000 358,673
2001 120,509
</TABLE>
Total amounts paid for rental of office facilities totaled approximately
$317,000, $60,000 and $35,000 for the years ended June 30, 1996, 1995 and 1994,
respectively.
OTHER
The Company has guaranteed the debt of three facilities owned by affiliates
totaling approximately $13,000,000. Additionally, the Company has guaranteed
20% to 25%, or approximately $1,900,000, of the debt on five 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 assessed taxes, penalties and interest in
connection with the alleged underpayment of approximately $1.2 million. The
Company contends that the IRS has misapplied payments between income and payroll
taxes and between the Company and its affiliates. On advise of counsel handling
the matter, the Company has estimated and accrued in the accompanying financial
statements $400,000 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.
13. INCOME TAXES:
The components of the provision for income taxes were as follows:
F-22
<PAGE> 60
<TABLE>
<CAPTION>
Year ended June 30,
1996 1995 1994
<S> <C> <C> <C>
Current:
Federal $2,671,891 $2,659,000 $1,630,900
State 501,600 499,000 287,820
3,173,491 3,158,000 1,918,720
Deferred (benefit):
Federal (1,571,500) 221,928 (77,600)
State (294,900) 39,164 (13,637)
261,092 (91,237) (1,866,400)
Total income tax provision $1,307,091 $3,419,092 $1,827,483
</TABLE>
The income tax provisions included in the consolidated statements of income are
as follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Income before cumulative
effect of change in
accounting principle $1,307,091 $3,419,092 $1,827,483
Cumulative effect of change
in accounting principle 228,000 - -
$1,535,091 $3,419,092 $1,827,483
</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,
1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Current deferred taxes:
Deferred tax assets:
Workers' compensation accrual $1,062,900 $ -
Provision for losses on accounts
receivable 811,300 -
Health insurance accrual 227,800 -
Net operating loss 355,100 -
Total 2,457,100 -
Less: Valuation allowance (355,100) -
Deferred tax liabilities
Net current deferred tax asset $2,008,430 $ -
Noncurrent deferred taxes:
Deferred tax asset - deferred gain $ 276,700 $120,590
Deferred tax liabilities:
Property and equipment 352,600 255,090
Deferred lease cost 201,100 -
553,700 255,090
Net noncurrent deferred tax
liability $ 277,000 $134,500
</TABLE>
The provision for income taxes for the year ended June 30, 1996 varies from the
amount determined by applying the Federal statutory rate to pretax income as a
result of the following:
<TABLE>
<S> <C>
Income tax expense at federal statutory rate $1,115,130
Nondeductible tax penalties 417,700
State income taxes, net of federal tax benefit 331,100
Other, net (556,839)
$1,307,091
</TABLE>
The primary difference between the actual income tax rate of approximately 40%
and 39% for the years ended June 30, 1995 and 1994, respectively, and the
Federal income tax rate of 34% is the amount paid for state income taxes.
14. FAIR VALUES OF FINANCIAL INSTRUMENTS AND INVESTMENTS
F-23
<PAGE> 61
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, 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 108,491,040 112,349,000
</TABLE>
As of June 30, 1995, the carrying amount of all financial instruments
approximated fair value.
15. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
In connection with the purchase of Contour in September 1994, the Company
issued $1,000,000 of common stock, and $3,000,000 of redeemable convertible
preferred stock. Total assets and liabilities acquired were $5,146,493 and
$1,146,493, respectively.
In June 1995, the Company acquired for $4,488,000 through foreclosure a
116-unit property which secured bonds that the Company held.
Total debt of $20,830,000 was incurred during the year ended June 30, 1995, to
purchase property and equipment totaling $17,825,642, pay loan costs of
$1,004,358, and pay off an existing note for $2,000,000.
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.
F-24
<PAGE> 62
Through the acquisition of a company in December 1993, the Company recorded
$500,000 as goodwill and additional paid-in capital in 1995 based on the fair
value of 105,000 shares of common stock issued in connection with the
conversion of Series D preferred stock.
Cash paid for interest during the years ended June 30, 1996, 1995 and 1994 was
$6,561,954, $1,172,883 and $11,172, respectively.
Cash paid for income taxes during the years ended June 30, 1996, 1995 and 1994
was $3,561,089, $829,292 and $1,360,720, respectively.
Cash dividends on preferred stock of $15,000 and imputed dividends of
$1,996,777 on Series E preferred stock were accrued but not paid at June 30,
1996.
During 1996, approximately $8,112,000 of lease assets and obligations were
capitalized.
16. ACCRUED EXPENSES:
Accrued expenses consisted of the following as of June 30:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Payroll and payroll taxes $ 3,587,217 $1,936,927
Interest 1,868,805 452,173
Workers Compensation 2,975,000 -
Other 2,885,008 795,133
Total $11,316,030 $3,184,233
</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
year ended June 30, 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, 1996, approximately 10,400 beds were
owned or operated by this entity.
The Contour entity manufacturers a full line of orthopedic care and
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, 1996 and
1995.
<TABLE>
<CAPTION>
1996
1995
<S> <C> <C>
Operating revenues:
Retirement Care Associates $124,951,954 $75,998,614
Contour Medical 9,059,415 3,617,439
$134,011,369 $79,616,053
Depreciation and amortization expense:
Retirement Care Associates $ 2,806,637 $ 1,051,842
Contour Medical 600,349 76,341
$ 3,406,986 $ 1,128,183
Identifiable assets:
</TABLE>
F-25
<PAGE> 63
<TABLE>
<S> <C> <C>
Retirement Care Associates $165,094,536 $72,644,179
Contour Medical 12,397,751 7,613,367
$177,492,287 $80,257,546
Capital expenditures:
Retirement Care Associates $ 11,741,135 $ 5,763,553
Contour Medical 749,163 316,057
$ 12,490,298 $ 6,079,610
Operating Income
Retirement Care Associates $ 8,540,815 $ 8,865,388
Contour Medical 839,202 151,828
$ 9,380,017 $ 9,017,216
</TABLE>
19. SUBSEQUENT EVENTS
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.
On September 27, 1996, Gordon Jensen Health Care Association, Inc. 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 shareholders' equity of the
Company by $3,000,000.
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 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 Atlantic Medical. The promissory
notes bear interred 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.
During the period from September 26 through October 2, 1996, the Company sold
1,000,000 shares of Series F Convertible Preferred Stock in an offering to
foreign investors 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 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 the lessor of (a) $9.6525 or 110% of the average
closing bid price for the twenty consecutive trading days commencing September
30, 1996,
F-26
<PAGE> 64
whichever is lower, or (b) 85% of the average closing bid price for the five
trading days prior to the date of conversion. The maximum number of shares of
common stock which can be issued upon conversion of the Series F Preferred
Stock is 2,588,000. 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.
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 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.
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 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:
<TABLE>
<S> <C>
Additional provisions or uncollectible account $ 1,705,000
Additional accrual for claims incurred, but not
reported for self-insured worker's
compensation and health care 3,400,000
Accrual for compensated absences 300,000
Adjustment of previously recorded inventory 809,219
Adjustment to lease expenses 530,000
-----------
Less: 6,744,219
Adjustment to income taxes (2,921,219)
Decrease in net income $ 3,832,000
Decrease in net income per share $ .34
</TABLE>
F-27
<PAGE> 65
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: March 11, 1998 By: /s/ Darrell C. Tucker
-------------------------------
Darrell C. Tucker, Treasurer
The accompanying notes are an integral part of the consolidated financial
statements.
