================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Year Ended December 31, 1999.
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Period from ___________ to ______________.
Commission File No. 0-19815
CAREMATRIX CORPORATION
(Exact name of registrant as specified in its charter)
--------------------------
Delaware 04-3069586
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
197 First Avenue, Needham, MA 02494
(address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (781) 433-1000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -------------------
Common Stock, Par Value $.05 Nasdaq
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
On April 7, 2000, the aggregate market value of the voting stock held by
non-affiliates of the registrant was $9,743,621. As of April 7, 2000, there were
outstanding 18,476,789 shares of registrant's Common Stock, $0.05 par value.
--------------------------------
================================================================================
<PAGE>
PART I
ITEM 1. BUSINESS
Overview
CareMatrix Corporation (the "Company") (formerly known as The Standish
Care Company, Inc.) is a provider of assisted living and other long-term care
services. At December 31, 1999, the Company operated 47 facilities in 14 states
with a capacity of 5,569 units. Of these facilities, 13 are owned, 20 are leased
or operated under long-term management agreements and 14 are managed. Currently,
the Company has four facilities under construction. The Company does not
currently plan to develop any additional facilities at this time other than
those in which it has a contractual obligation to do so. The Company's strategy
is to provide a full range of assisted living and other long-term care and
related services across a range of pricing options.
The Company was incorporated in Delaware in October 1989. On October 4,
1996, twelve wholly-owned subsidiaries of the Company were merged into twelve
corporations (the "CareMatrix Affiliates"), owned primarily by Abraham, Andrew
and Michael Gosman (the "Merger"). The stockholders of CareMatrix Affiliates
received approximately 92% of the outstanding shares of Common Stock of the
Company. The managements of the Company and the CareMatrix Affiliates determined
that a merger of their companies would result in a stronger enterprise with
greater potential for expansion. Furthermore, they believed that the Merger
would combine a strong base of existing facilities in attractive markets with a
large number of facilities under development or construction, strengthen the
senior management team and improve the Company's access to equity and debt
capital. On October 14, 1996, the Company changed its name to CareMatrix
Corporation. The Merger was accounted for as a reverse acquisition, whereby the
CareMatrix Affiliates were treated as the acquiror for accounting purposes.
The Company's principal place of business is 197 First Avenue, Needham,
Massachusetts 02494 and its telephone number at that address is (781) 433-1000.
Unless otherwise indicated herein or required by the context, references to the
"Company" include its subsidiaries.
Restatement of Historical Financial Statements
On June 19, 2000, the Company announced that after consultation with its
independent auditors it would restate its financial statements as of and for the
year ended December 31, 1998 and for the fiscal quarters beginning March 31,
1998, through September 30, 1999.
The restatement resulted primarily from a modification in the accounting
for certain development, management, and lease agreements with Chancellor Senior
Housing Group, Inc. and a third-party. This resulted in the Company reversing
certain development fees recorded in prior periods and recording deferred
revenue for the cash received from the respective development agreements,
recognizing the start-up losses and/or operating activities of the facilities
related to these agreements, capitalizing certain lease agreements, and
consolidating, for accounting purposes only, certain Chancellor Entities which
the Company is developing. The effect of these adjustments as of and for the
year ended December 31, 1998 is summarized in the chart below.
<TABLE>
<CAPTION>
Management/
Lease Cumulative
Historical Agreement(2) effect of Restated
December 31, accounting Capital accounting Income Tax December 31,
1998 EITF97-10(1) combination lease(2) change(1) effect 1998
------------ -------------- ------------- ----------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Current assets $101,940,220 ($5,757,673) ($3,555,657) $260,367 ($913,566) $2,081,370 $94,055,061
Long-term assets $247,706,227 $23,796,269 $17,110,080 $1,960,408 $290,572,984
Current liabilities $28,473,153 $1,782,741 ($374,562) ($3,127,050) $26,754,282
Long-term debt $186,753,053 $26,964,663 $20,638,587 ($19,540) $234,336,763
Shareholders' equity $134,420,241 ($8,926,067) ($3,555,657) ($5,050,881) ($539,004) $7,188,368 $123,537,000
Revenue $146,918,478 ($8,922,019) ($3,555,657) $1,520,539 $135,961,341
Operating expenses $116,211,810 $4,048 $5,429,347 $121,645,205
Other expoense, net $81,259 $1,142,073 $1,223,332
Earnings before tax and
cumulative effect of
accounting change $30,625,409 ($8,926,067) ($3,555,657) ($5,050,881) $13,092,804
Income taxes $12,556,418 ($7,188,368) $5,368,050
</TABLE>
(1) See Footnote 2 of Notes to Consolidated Financial Statements.
(2) See Footnote 7 of Notes to Consolidated Financial Statements.
The overall effect of the restatement on net earnings (loss) and net
earnings (loss) per share in each of the periods subject to the restatement is
as follows:
<TABLE>
<CAPTION>
As Previously Reported As Restated
Net earnings (loss) Net earnings (loss)
per share Net earnings per share
Net earnings (loss) Basic Diluted (loss) Basic Diluted
------------------- ------- ------- ------------ ------- -------
<S> <C> <C> <C> <C> <C> <C>
Quarter ended 3/31/98 $3,365,190 $0.19 $0.19 $1,115,096 $0.06 $0.06
Quarter ended 6/30/98 $4,150,535 $0.23 $0.23 $1,712,501 $0.10 $0.09
Quarter ended 9/30/98 $4,937,234 $0.28 $0.27 $2,082,896 $0.12 $0.12
Quarter ended 12/31/98 $5,605,982 $0.31 $0.30 $2,265,207 $0.13 $0.12
Year ended 12/31/98 $18,058,941 $1.02 $0.99 $7,175,700 $0.41 $0.40
Quarter ended 3/31/99 $5,895,841 $0.33 $0.32 $1,653,828 $0.09 $0.09
Quarter ended 6/30/99 $6,308,881 $0.35 $0.34 $ 979,821 $0.05 $0.05
Quarter ended 9/30/99 ($1,214,178) ($0.07) ($0.07) ($3,728,490) ($0.21) ($0.21)
</TABLE>
Assisted Living Industry
The Company believes that the assisted living industry is evolving as the
preferred alternative to meet the growing demands for a cost effective setting
for those seniors who cannot live independently due to physical or cognitive
frailties but who do not require the more intensive medical attention provided
by a skilled nursing facility. According to industry estimates, the assisted and
independent living industries generated approximately $12 billion to $15 billion
in revenues in 1996 and is expected to generate $25 billion in revenues in 2000.
Generally, assisted living represents a combination of housing and 24-hour
per day personal support services designed to assist seniors with the activities
of daily living ("ADLs"), which include bathing, eating, personal hygiene,
grooming, medication reminders, ambulating and dressing. Certain assisted living
facilities may offer higher levels of personal assistance for residents with
Alzheimer's disease or other forms of dementia.
Consumer Preference. The Company believes that assisted living is
increasingly becoming the setting preferred by prospective residents as well as
their families, who are often the decision makers for seniors. Assisted living
is a cost effective alternative to other types of care, offering seniors greater
independence and enabling them to age in place in a residential setting.
Cost Effectiveness. The average annual cost for a patient in a skilled
nursing home can exceed $40,000. The average cost for a private pay patient in a
skilled nursing home can exceed $75,000 per year in certain markets. In
contrast, assisted living services are provided at a cost which is generally 30%
to 50% lower than skilled nursing facilities located in the same region.
Additionally, the Company also believes that the cost of assisted living
services compares favorably with home health care, particularly when costs
associated with housing, meals and personal care assistance are taken into
account.
1
<PAGE>
Demographics and Changing Family Dynamics. The target market for the
Company's services are persons generally 75 years and older, one of the fastest
growing segments of the U.S. population.
According to the U.S. Census Bureau, the portion of the U.S. population
age 75 and older is expected to increase by 28.7%, from approximately 13.0
million in 1990 to approximately 16.8 million by the year 2000, and the number
of persons age 85 and older, as a segment of the U.S. population, is expected to
increase by 46%, from approximately 3.9 million in 1998 to over 5.7 million by
the year 2010. Furthermore, the number of persons afflicted with Alzheimer's
disease is also expected to grow in the coming years. According to data
published by the Alzheimer's Association, this group will grow from the current
4.4 million people to 10.0 million, or an increase of 127%, by the year 2010. As
Alzheimer's disease and other forms of dementia are more likely to occur as a
person ages, the increasing life expectancy of seniors is expected to result in
a greater number of persons afflicted with Alzheimer's disease and other forms
of dementia in future years absent breakthroughs in medical research.
According to the U.S. Census Bureau, the median income of the elderly
population has been increasing. Accordingly, the Company believes that the
number of seniors (and their families) who are able to afford high-quality
senior residential services, such as those offered by the Company, has also
increased.
In addition, the number of two-income households has increased over the
last decade and the geographical separation of senior family members from their
adult children has risen with the geographic mobility of the U.S. population. As
a result, many families that traditionally would have provided the type of care
and services offered by the Company to senior family members are in less of a
position to do so.
Supply/Demand Imbalance. Many factors had led to expansive development and
overbuilding in the assisted living industry over the last two years. The
Company's management feels that within the next two years, demand will catch up
with supply. Currently the Company's focus is on achieving stabilized occupancy
for all communities it owns, leases or manages.
Business Strategy
Provide a Full Range of Senior Residential Services. The Company expects
its existing and future assisted living facilities to serve as the foundation on
which it will provide a continuum of care for its seniors within targeted
cluster market regions. When such facilities are combined with supportive
independent living and skilled nursing/rehabilitation facilities and an
Alzheimer's care program, the Company's facilities will have the resources to
provide a less stressful transition for its residents who require a higher
degree of care to a more supportive environment suited to their evolving needs.
The Company believes that by combining different levels of care in a single
facility, on an integrated campus or in nearby facilities, it will gain an
advantage over those competitors that operate free-standing assisted living
facilities and do not have similar flexibility to allow their residents to age
in place.
Extend Average Length of Stay. Industry studies suggest that the length of
stay at assisted living facilities averages two to two and a half years. The
Company believes that extending the average stay can have a significant positive
impact on earnings. Decreasing turnover lowers marketing costs, apartment
renovation costs and results in higher occupancy. By combining a focus on
hospitality and health care with larger apartment sizes, we expect to attract
seniors earlier in the aging process. By building larger and more adaptable
facilities with different components, often within campus-style developments, we
strive to accommodate residents as they age in place leading to a longer length
of stay.
Provide Services Across a Range of Pricing Options. In addition to
providing a broad range of services, the Company believes it will eventually be
able to serve nearly all income segments of the senior population by providing
these services over a range of pricing options. The Company provides these
services to both the moderate and upper income markets.
2
<PAGE>
Offer Personalized, High Quality Care and Services. The Company's strategy
includes providing its residents with personalized, high quality care and
services. The Company, through its facility-based staff, develops an individual
care plan for each resident based on professional assessments and family
consultations. To keep in step with a resident's evolving needs, the care plan
is updated regularly by the facility's health care and social service staff in
conjunction with the resident, the resident's physician and family members. The
Company maintains a quality assurance program with the goal of meeting and
exceeding the expectations of its residents and their families. The Company pays
special attention to recruitment, screening and training of all personnel
assigned to serve its residents and surveys its own facilities to ensure that
its quality standards are being maintained.
Develop Regional Cluster Markets. The Company targets middle to upper
income metropolitan and suburban areas which have well-established populations
of persons 75 years or older. The Company currently has cluster markets in
Connecticut, Florida, Massachusetts, New Jersey, and New York.
Develop Hospital and Other Health Care Provider Relationships. The Company
continues to seek to develop relationships with regional hospital systems,
physician groups, managed care organizations and other care providers to offer a
full continuum of care in the areas of assisted living, supportive independent
living, Alzheimer's care and skilled nursing/rehabilitative care.
Service Models
While providing services ranging from independent and supportive
independent living to skilled nursing/rehabilitative care, the primary focus of
the Company's efforts centers on the various assisted living service models
developed by the Company.
Assisted Living. The Company offers a full range of assisted living
services based on individual resident needs. The Company has found that resident
needs generally fall in one or more of the following categories: (i) those
requiring socialization and interaction with others but needing assistance with
only the instrumental activities of daily living (IADLs), (ii) those requiring
physical support or assistance with ADLs, and (iii) those who require assistance
due to Alzheimer's disease or other cognitive impairments.
Based on these resident needs, the Company has developed three service
models that can be implemented either individually or in combination with one
another within the same facility or in a campus setting.
Health Care Services Model. This service model provides a lower cost
alternative for individuals needing lower acuity services than those
available in a skilled nursing facility. The Health Care Services Model is
designed to meet the needs of two different market segments. This model
will provide long-term care services to moderate and upper income seniors
who are generally 75 years of age or older and require assistance with at
least two ADLs. In addition, it serves as a step-down provider of
services, where it will emphasize short-term stays in a variety of
rehabilitative situations and also provide pre-operative and
post-operative care services. In both instances, the need for these
services is due primarily to physical limitations rather than cognitive
impairment. Personal care assistance with ADLs is provided on a 24-hour
basis and averages between one and two hours per day for each resident.
Alzheimer's Model. Alzheimer's care services are provided for
residents with early or intermediate stage Alzheimer's disease in
specially-designed freestanding facilities or as distinct components
contained within an assisted living facility. Residents with Alzheimer's
disease or other forms of dementia require high levels of care and
services as a result of the decline of their cognitive abilities. Staffing
is generally 15% to 20% higher in order to meet the needs of this
population group. The Company generally charges monthly rates which are
20% to 40% higher for the Alzheimer's Model than the rates for more
traditional assisted living services.
Social Model. Within this model, the Company provides three meals
daily, housekeeping, personal laundry services, transportation, 24-hour
security, regular health screening and assessment as well as personal care
services. Additionally, there is a greater focus on resident interaction
as well as social and recreational activities.
3
<PAGE>
Supportive Independent Living. Supportive independent living is provided
for seniors who do not yet need assistance with ADLs but who require a
residential environment that offers available health care services. The Company
provides this level of service in both moderate and upper income markets. The
Company believes that the availability of supportive independent living broadens
the market attractiveness of each facility or integrated campus by providing a
residential setting for those seniors who wish to maintain their independence
but desire a supportive environment. Services provided include daily meals,
transportation, social and recreational activities, linen, local transportation,
housekeeping and health care monitoring. Depending on government regulation,
personal care and medical services are available through either facility staff
or through home health care agencies. Residents generally pay a monthly rate to
cover all services, which is approximately 20% to 30% less than the rate for
more traditional assisted living services.
Skilled Nursing/Rehabilitation. In certain cluster market regions, the
Company provides skilled nursing/rehabilitative services within a skilled
nursing facility setting. These services include both short-term rehabilitation
and traditional long-term care and will be an important component of the
continuum of care provided by the Company within an integrated campus setting or
within cluster market regions. The short-term rehabilitation component addresses
the needs of patients requiring short-term rehabilitation or therapy services,
generally after a hospital stay.
Adaptability of Model
The Company has focused on developing models which are adaptable to
various locations, income levels and aging in place (increased resident acuity).
Location. One of the most significant barriers to entry is the ability to
obtain zoning and planning approval. For this reason the Company has developed
models which can be modified in size, unit count and exterior appearance to best
fit with local planning concerns and sensitivities. While these modifications
purposely change the external appearance and density to best conform to the
local market, the buildings are designed to preserve operating efficiencies and
program integrity.
Income Levels. The Company has developed models which can be adapted to
different income levels while again preserving operating efficiencies and
program integrity. Buildings in more affluent markets are enhanced by adding and
upgrading common space, enlarging unit sizes and using a higher level of finish
throughout the facility to maximize revenue. In more cost-sensitive markets, the
model is made more affordable through less elaborate common spaces, a higher
proportion of studio units and access to less expensive labor markets through
site location.
Aging in Place. The Company's new facilities are purposely built for
assisted living and senior housing. Each model, however, is designed so that
components or wings of the building can be converted over time to accommodate
higher acuity residents. Additionally, many individual units are designed in
such a way that smaller units can be combined to create larger apartments for
couples, individuals with caregivers or individuals with more income who desire
larger spaces. Likewise, many of the facility's two bedroom units are designed
so that they can be divided into two separate units to accommodate more
cost-sensitive residents.
Unit Mix and Size
The Company has conducted extensive consumer market research in most of
its markets. In response to that research, the Company designed most of its
buildings with a wider range of apartment styles than more traditional assisted
living providers. Many assisted living providers offer predominately one room
studio apartments. While the Company focuses on providing a high level of health
care related to supportive services, our research suggests that potential
residents are reluctant to sacrifice their privacy and sense of choice. For this
reason we have designed most of our buildings to offer a mix of studio, one
bedroom and two bedroom apartments. In addition, our studio apartments tend to
be larger than those of most traditional providers. We believe that this
approach will prove to be more effective in marketing, maximizing revenue and
enhancing resident satisfaction.
Company Operations
The Company centralizes many of its financial, administrative and
operational functions at its corporate headquarters. Such centralization allows
facility-based personnel to focus on resident care and ensures that
4
<PAGE>
Company-wide policies and procedures are maintained. Corporate personnel with
expertise in administration, nursing, marketing, food service, social services,
financial management and plant maintenance directly assist and supervise
personnel at the facility level. The Company believes that these corporate
resources enable each facility to provide services to its residents in a more
professional and cost effective manner. The Company is also developing regional
offices in certain cluster market regions to enhance its ability to manage its
development and operational activities.
Facility Staffing. Each of the Company's facilities has an Administrator
or Executive Director responsible for the day-to-day operations of the facility.
The Administrator is supported by the Director of Wellness, typically a licensed
nurse who oversees the nursing personnel and personal care assistants and who is
directly responsible for the day-to-day care of the residents. Other key
management personnel typically include a Social Services Director, a Marketing
Director, a Food Services Director, an Activities Director and a Director of
Environmental Services. Additionally, those facilities which offer additional
services, such as Alzheimer's care, also include a Director of Specialty
Services and additional management or medical staff as warranted.
The Company has attracted and continues to attract highly dedicated and
experienced personnel. The Company believes that education, training, staff
development and staff recognition enhance the effectiveness of its employees.
The Company provides training in all aspects of facility operations as well as
specialized training for programs offered. The Company also encourages
continuing education and provides a tuition reimbursement plan for its
employees. The Company believes it provides competitive wages and employee
benefits enabling it to attract and maintain qualified personnel. The Company
has developed employee recognition and incentive programs that increase employee
awareness of the importance of providing high quality care and services to
residents.
Financial Management. Corporate personnel oversee cash management, billing
and collection, accounts payable, payroll and all other financial and accounting
functions. The Company monitors and controls operating expenses for each of its
facilities through monthly budgeting, standardized management reporting and
centralized purchasing.
Quality Assurance. The Company's quality assurance program is intended to
achieve and maintain a high degree of resident and family satisfaction with the
care and services it provides. The Company coordinates the implementation of its
quality assurance program at each of its facilities through its corporate
personnel. The Company encourages resident and family participation and seeks
feedback from families and residents through surveys conducted on a regular
basis. In addition, facility inspections are conducted regularly by corporate
staff. These inspections review all aspects of operations, care and services
provided and the overall appearance and cleanliness of the facility.
Marketing. The Company's marketing efforts are implemented on a regional
and local level, all under the supervision of the corporate marketing staff.
This structure provides greater cost effectiveness through cost sharing and
ensures a consistency in the presentation of the Company to the various regional
market places. These efforts are intended to create awareness of the Company and
its services among prospective residents, their families, professional referral
sources and other key decision makers. The corporate marketing office develops
overall strategies to promote the Company and its service offerings throughout
the markets in which the Company is currently operating. The corporate marketing
staff conducts regional and local market surveys of age and income-qualified
seniors to help ensure that the Company is meeting the needs and demands of that
marketplace. To further both market awareness of the Company by prospective
residents and to more accurately assess the needs and demands of seniors, the
Company conducts regional focus groups. Corporate personnel develop the overall
marketing strategies for each facility, produce all marketing materials,
maintain marketing databases, oversee direct mailings, place all media
advertising and support facility personnel in the initial development and
continuing implementation of marketing plans and sales for each facility.
5
<PAGE>
Facilities
Three basic designs have been developed for the Company's facilities: (i)
the stand-alone assisted living facility; (ii) the combined assisted
living/supportive independent living facility, and/or with an attached
Alzheimer's wing; and (iii) the stand-alone Alzheimer's care facility. The unit
wings of the combined facilities are designed in a modular fashion which allows
for modification of the size of the facility in increments of 12 units. This
modular design allows for greater development flexibility and encourages social
interaction. The residential wings are accented by a large living room centrally
located and adjacent to elevators on each floor. The Alzheimer's care facility
design is generally smaller than the Company's other facility designs to
accommodate the cognitive limitation and needs of the residents and closer, more
supportive care programs.
The Company occupies executive offices located in Needham, Massachusetts
under a lease expiring in 2001.
Development and Acquisition
Development Activities. Although the Company is not currently pursuing
additional development projects, with respect to properties that it did develop,
the Company coordinated all aspects of each project, including obtaining the
final permits and approvals, design, construction and capital budgeting.
Generally, the Company entered into development agreements whereby
construction financing was obtained by the related or third parties. The Company
expects that risks related to construction and the initial operation of the
facilities will be borne primarily by related or third parties. The Company
enters into management agreements with these parties either at the time of
property acquisition or upon completion of the construction of such facilities
or upon acquisition of completed facilities. These management agreements
generally are for a 10 year period, with annual fees approximating 5% of net
revenues. The Company may also enter into fair market value leases (which will
be a negotiated percentage of total project costs) for a fifteen-year initial
term with two to four five-year fair market value renewal options. The Company
expects to enter into leases at such time as the facilities reach profitability.
The related party may sell some of the developed facilities. Any such sale would
be subject to any management, lease, or purchase terms already in place.
The Company expects to enter into long-term management agreements for most
developed facilities. These agreements will generally be for a 15 year period
with up to three five-year options. Such options normally may only be exercised
if the facility has achieved positive cash flow for the three fiscal years
immediately prior to the lease extension. The management fee will generally
equal the greater of $20,000 per month or 5% of net revenues plus incentive
management fees based on the net cash flow from the facilities. Under these
agreements, the manager is responsible for all expenses related to the
operations of the facility other than debt service and is reimbursed for such
costs.
The primary milestones in the development process are (i) site selection
and signing of a development contract, (ii) obtaining the permitting and
approvals necessary to commence construction and (iii) completion of
construction. Once a market has been identified, site selection and signing of a
development contract typically take approximately one to three months. Land
permitting generally takes five to 12 months, although it may take as long as
two years, and is typically the most difficult step in the development process
due to the Company's selection of sites in established communities which usually
require site rezoning. Facility construction normally takes 12 months. After a
facility receives a certificate of occupancy, residents usually begin to move in
immediately.
Acquisition Activities. In September 1998, the Company completed the
acquisition of six operating facilities and three development sites facilities
("SeniorCare") on Long Island, New York, from various affiliated individuals
(the "Sellers"). The acquisition of a tenth facility, located in New Jersey, was
completed in January 1999 upon receiving the necessary licenses. Including the
New Jersey facility, the acquisition price consisted of approximately $105.7
million in cash and $4.1 million in future payments, 400,000 stock options of
the Company, and the assumption of approximately $44.2 million in debt. In
addition, the Company entered into an arrangement whereby the Sellers have the
right to put to the Company and the Company has the right to buy from the
Sellers beginning September 2001 certain pharmacy and home health companies for
the greater of $8.0 million or eight times net earnings before income taxes for
a specified period prior to closing.
Competition
6
<PAGE>
Providers of assisted living services compete for residents primarily on
the basis of quality of care, reputation, physical appearance of the facilities,
price, services offered, family preferences, physician referrals and location.
Some of the Company's competitors operate on a not-for-profit basis or as
charitable organizations. Some of the Company's competitors are significantly
larger than the Company and have, or may obtain, greater resources than those of
the Company.
The long-term care industry generally is highly competitive, and the
Company expects that the assisted living business in particular will become more
competitive in the future. The Company will be competing with numerous other
companies providing similar long-term care alternatives such as home health
agencies, life care at home, community-based service programs, retirement
communities and convalescent centers. The Company expects that, as assisted
living receives greater attention, competition will grow from new market
entrants, including companies focused primarily on assisted living. Nursing
facilities that provide long-term care services are also a potential source of
competition for the Company.
The Company believes that there is moderate competition for less expensive
segments of the private market and for Medicaid-eligible residents in small
communities. Management's experience indicates that seniors who move into
assisted living facilities frequently choose facilities near their homes,
therefore, the Company's major competitors are other long-term care facilities
within the same geographic area as its facilities.
Government Funding
Assisted living residents or their families generally pay the cost of care
from their own financial resources. Depending on the nature of an individual's
health insurance program or long-term care insurance policy, the individual may
receive reimbursement for costs of care under an alternative care benefit.
Government funding for assisted living has been limited. Some state or local
governments offer housing subsidies for rent or housing-related services for low
income seniors. Others may provide subsidies in the form of additional payment
for those who receive Supplement Security Income (SSI). Medicaid provides
insurance for certain financially or medically needy persons, regardless of age,
and is funded jointly by federal, state and local governments. Medicaid
reimbursement varies from state to state.
In 1981, the federal government approved a Medicaid waiver program called
Home and Community-Based Care which was designed to permit states to develop
programs specific to the health care and housing needs of the low-income elderly
eligible for nursing home placement (a Medicaid Waiver Program). Under a
Medicaid Waiver Program, states apply to the Health Care Financing
Administration for a waiver to use Medicaid funds to support community-based
options for low-income elderly who need long-term care. These waivers permit
states to reallocate a portion of Medicaid funding for nursing facility care to
other forms of care such as assisted living. In 1994, the federal government
implemented new regulations which empowered states to further expand their
Medicaid Waiver Programs and eliminated restrictions on the amount of Medicaid
funding states could allocate to community-based care, such as assisted living.
A limited number of states currently have such programs operating that allow
them to pay for assisted living care. Without a Medicaid Waiver Program, states
can only use federal Medicaid funds for long-term care in nursing facilities.
The Company expects that state Medicaid and Medicare reimbursement
programs will constitute an additional source of future revenues at its skilled
nursing and rehabilitation centers. Medicaid programs typically provide for
fixed rate payment to health care providers. Providers must accept reimbursement
from Medicaid as payment in full for all covered services rendered to Medicaid
patients. Medicare is a federally-funded and administered health insurance
program that provides coverage for a wide range of health care services,
including intensive rehabilitation, skilled nursing and certain related medical
services. With respect to skilled nursing and rehabilitation, Medicare is
currently a prospective payment system in which each facility receives payment
during the year based upon standardized per diem rates. There can be no
assurance that either Medicaid or Medicare will pay rates that recognize all of
the Company's costs of providing services to residents covered by those
programs.
Government Regulation
The health care industry is subject to substantial federal, state and
local regulation. The various layers of governmental regulation affect the
Company's business by controlling its growth, requiring licensure or
certification of its facilities, regulating the use of its facilities and
controlling reimbursement to the Company for services provided. Licensing,
certification and other applicable governmental regulations vary from
jurisdiction to jurisdiction
7
<PAGE>
and are revised periodically. It is not possible to predict the content or
impact of future legislation and regulations affecting the health care industry.
Many of the states in which the Company operates have adopted Certificate
of Need statutes applicable to the assisted living and skilled nursing services
provided by the Company. Such statutes provide generally that, prior to the
addition of new services or the making of certain capital expenditures exceeding
defined levels, a state agency must determine that a need exists for such
proposed activities. Failure to obtain the necessary state approval can result
in the inability to provide the service, operate the facility or complete the
addition or other change, and also can result in the imposition of sanctions or
adverse action in respect of the facility's license and reimbursement. To date,
the Company has generally not experienced any difficulty in obtaining such state
approvals where required.
The ability of the Company to operate profitably will depend in part upon
the Company obtaining and maintaining all necessary licenses, certificates of
need and other approvals and operating in compliance with applicable health care
regulations.
Some residents may require ancillary health services from time to time,
such as skilled nursing, therapy, pharmacy or other health services. In some
states, these services must be provided by persons or entities that are
specifically licensed or certified, as applicable, to provide such health care
services. The Company may from time to time enter into agreements with other
entities to provide ancillary services where it is not itself licensed or
certified to provide them.
In certain states, the Company's assisted living facilities are subject to
certain state regulations and licensing requirements. In order to qualify as a
state licensed facility and therefore eligible to receive Medicaid funding, the
Company's facilities must comply with regulations which address, among other
things, staffing, physical design, required services and resident profile. The
Company expects that it will obtain licenses in states as required. The
Company's residences are also subject to various local building codes and other
ordinances, including fire safety codes. These requirements vary from state to
state and are monitored, to varying degrees, by state agencies.
The laws of many states prohibit physicians from splitting fees with
non-physicians and prohibit non-physician entities from practicing medicine.
These laws vary from state to state and are enforced by the courts and by
regulatory authorities with broad discretion. Although the Company believes its
operations are in compliance with such laws, the Company's business operations
have not been the subject of judicial or regulatory interpretation. There can be
no assurance that review of the Company's business by courts or regulatory
authorities will not result in determinations that could adversely affect the
operations of the Company or that the health care regulatory environment will
not change so as to restrict the Company's existing operations or their
expansion. In addition, the regulatory framework of certain jurisdictions may
limit the Company's expansion into such jurisdictions if the Company is unable
to modify its operational structure to conform with such regulatory framework.
Federal and state anti-remuneration laws, such as the Medicare/Medicaid
anti-kickback law, govern certain financial arrangements among health care
providers and others who may be in a position to refer or recommend patients to
such providers. These laws prohibit, among other things, certain direct and
indirect payments that are intended to induce the referral of patients to, the
arranging for services by, or the recommending of, a particular provider of
health care items or services. The Medicare/Medicaid anti-kickback law has been
broadly interpreted to apply to certain contractual relationships between health
care providers and sources of patient referral. Similar state laws vary from
state to state, are sometimes vague and seldom have been interpreted by courts
or regulatory agencies. Violation of these laws can result in loss of licensure,
civil and criminal penalties, and exclusion of health care providers or
suppliers from participation in (i.e., furnishing covered items or services to
beneficiaries of) the Medicare and Medicaid programs. Although the Company does
not receive all of its total revenues from certain Medicaid waiver programs and
is otherwise not a Medicare or Medicaid provider or supplier, it is subject to
these laws because (i) the state laws typically apply regardless of whether
Medicare or Medicaid payments are at issue and (ii) as required and under some
state licensure laws, and for the convenience of its residents, some of the
Company's assisted living facilities maintain contracts with certain health care
providers and practitioners, including pharmacies, visiting nurse organizations
and hospices, through which the health care providers made their health care
items or services (some of which may be covered by Medicare or Medicaid)
available to the Company's residents. There can be no assurance that such laws
will be interpreted in a manner consistent with the practices of the Company.
8
<PAGE>
In addition, the Company is subject to various federal, state and local
environmental laws and regulations. Such laws and regulations often impose
liability whether or not the owner or operator knew of, or was responsible for,
the presence of hazardous or toxic substances. The costs of any required
remediation or removal of these substances could be substantial and the
liability of an owner or operator as to any property is generally not limited
under such laws and regulations and could exceed the property's value and the
aggregate assets of the owner or operator. The presence of these substances or
failure to remediate such contamination properly may also adversely affect the
owner's ability to sell or rent the property, or to borrow using the property as
collateral. Under these laws and regulations, an owner, operator or an entity
that arranges for the disposal of hazardous or toxic substances, such as
asbestos-containing materials, at a disposal site may also be liable for the
costs of any required remediation or removal of the hazardous or toxic
substances at the disposal site. In connection with the ownership or operation
of its properties, the Company could be liable for these costs, as well as
certain other costs, including governmental fines and injuries to persons or
properties.
The Company believes that the structure and composition of government, and
specifically health care, regulations will continue to change and, as a result,
regularly monitors developments in the law. The Company expects to modify its
agreements and operations from time to time as the business and regulatory
environment changes. While the Company believes it will be able to structure all
its agreements and operations in accordance with applicable law, there can be no
assurance that its arrangements will not be successfully challenged.
Insurance
Health care companies are subject to medical malpractice, personal injury
and other liability claims, which are customary risks inherent in the operation
of health facilities and generally covered by insurance. The Company maintains
property, liability and professional malpractice insurance policies in amounts
and with such coverages and deductibles which are deemed appropriate by
management, based upon historical claims, industry standards, and the nature and
risks of its business. The Company currently maintains professional liability
insurance and general liability insurance. The general liability insurance is
limited to $1.0 million per occurrence and $3.0 million in the aggregate. The
Company also has an umbrella excess liability protection policy in the total
amount of $25.0 million. There can be no assurance that a future claim will not
exceed available insurance coverages or that such coverages will continue to be
available for the same scope at reasonable premium rates. Any substantial
increase in the cost of such insurance or the unavailability of any such
coverages could have an adverse effect on the Company's business.
Employees
As of December 31, 1999, the Company had approximately 2,400 full-time
employees. In addition, administrators of certain managed facilities, while not
employees of the Company, are under the supervision of the Company. None of the
Company's employees is represented by a union. The Company considers its
employee relations in general to be good. Although the Company believes it is
able to employ sufficiently skilled personnel to staff the facilities it
operates or manages, a shortage of skilled personnel in any of the geographic
areas in which it operates could adversely affect both the Company's ability to
recruit and retain qualified employees and its operating expenses.
9
<PAGE>
ITEM 2. PROPERTIES
The following table sets forth certain information regarding facilities
owned, leased or managed by the Company at December 31, 1999.
<TABLE>
<CAPTION>
Resident
Facility Location Care Level Capacity
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OWNED/LEASED
Arizona
Desert Amethyst (2) Peoria Assisted Living/
Independent Living 250
Inn at the Amethyst (2) Peoria Assisted Living/
Independent Living 81
Connecticut
Laurelwood Rehab and Skilled Nursing Center (2) Ridgefield Skilled Nursing 126
Westfield Court (2) Stamford Independent Living 167
Stony Brook Court (2) Darien Assisted Living/ 86
Independent Living
Florida
Bailey Village (3) Gainesville Assisted Living 72
Brazilian Court (4) Palm Beach Senior Residential Hotel 101
Forest Trace at Inverrary (2) (6) Lauderhill Assisted Living/ 386
Independent Living
Gardens Court (2) Palm Beach Skilled Nursing 120
Gardens
Chancellor Park at Jensen Beach (4) Stuart Assisted Living/ 148
Supportive Living
Chancellor Park at Deer Creek (4) Deerfield Assisted Living/ 128
Alzheimer's Care
Chancellor Park at Boynton Beach (4) Aberdeen Assisted Living/ 148
Independent Living/
Alzheimer's Care
Maryland
Forest Glen (2) Silver Spring Skilled Nursing 138
Massachusetts
Avery Crossing (2) Needham Assisted Living 60
Avery Manor (2) Needham Skilled Nursing/ 142
Alzheimer's Care
Endicott Manor (2) Dedham Skilled Nursing/
Alzheimer's Care 142
New Hampshire
Sara's Garden at Sunny Knoll (3) Franklin Alzheimer's Care 30
New Jersey
Forrestal Skilled Nursing and Rehab Center (2) Princeton Skilled Nursing 180
Chancellor Park at The Windrows (2) Princeton Assisted Living/ 83
Alzheimer's Care
The Fountains (3) Pennsauken Assisted Living 161
Park Ridge Rehab & Skilled Nursing Center (4) Park Ridge Skilled Nursing 210
Chancellor Park at Park Ridge (4) Park Ridge Assisted Living 100
New York
Westbury (3) Jericho Assisted Living 105
Island Manor (3) Bohemia Assisted Living 128
Islandia (3) Hauppage Assisted Living 104
Islandia East (3) Hauppage Assisted Living 80
Islandia West (3) Hauppage Alzheimer's Care 38
Senior Plaza (3) Hauppage Assisted Living 119
SeniorCare at Lynbrook (3) Lynbrook Assisted Living 124
Cambridge House on the Hudson (4) Ossining Assisted Living 112
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Resident
Facility Location Care Level Capacity
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Virginia
Dominion Village at Chesapeake (3) Chesapeake Assisted Living/ 57
Alzheimer's Care
Dominion Village at Poquoson (3) Poquoson Assisted Living 48
Dominion Village at Williamsburg (3) Williamsburg Assisted Living/ 54
Alzheimer's Care --------------
4,028
--------------
MANAGED (1)
California
Coventry Park San Francisco Assisted Living/ 169
Alzheimer's Care
Magnolia of Millbrae (5) Millbrae Assisted Living 158
Connecticut
Laurel Gardens of Avon (7) Avon Assisted Living 108
Laurel Gardens of Woodbridge (7) Woodbridge Assisted Living/ 90
Alzheimer's Care
Laurel Gardens of Milford (7) Milford Assisted Living 107
Laurel Gardens of Hamden (7) Hamden Assisted Living 100
Chancellor Gardens of Southington Southington Assisted Living/ 92
Alzheimer's Care
Chancellor Park at Laurelwood Ridgefield Assisted Living 123
Florida
Chancellor Park at Bonita Springs Bonita Springs Assisted Living/ 148
Supportive Living
Maine
Chancellor Gardens of Cape Elizabeth Cape Elizabeth Assisted Living 60
Chancellor Gardens of Saco Saco Assisted Living 42
Nevada
Chancellor Gardens of the Lakes Las Vegas Assisted Living/ 128
Alzheimer's Care
Pennsylvania
Chancellor Park of Philadelphia Philadelphia Assisted Living 135
Utah
Chancellor Gardens of Clearfield Clearfield Assisted Living 81
--------------
1,541
--------------
5,569
==============
</TABLE>
--------------------------------------------------------------------------------
(1) Management contracts typically have a term of between 5 and 15 years.
(2) Operating lease.
(3) 100% owned by the Company.
(4) Managed under agreements in which the manager is responsible for all
expenses related to the operations of the facility other than debt
service and is reimbursed for such costs.
(5) Management agreement was terminated in January 2000.
(6) The facility was sold to a third party in March 2000.
(7) For accounting purposes, the Company treats these facilities as if a
capital lease was in place.
In addition, the Company occupies executive offices located in Needham,
Massachusetts under a lease expiring in 2001.
ITEM 3. LEGAL PROCEEDINGS
CareMatrix Corporation and five of its officers and directors have been
named as defendants in fourteen class action lawsuits filed in the United States
District Court for the District of Massachusetts, one filed by Jonathan Polansky
on November 3, 1999, another filed by Howard Gunty Profit Sharing Plan on
November 5, 1999, another filed by Michael E. Glass on November 5, 1999, another
filed by John P. Delmonico on November 5, 1999, another filed by James Cosentino
on November 5, 1999, another filed by Miriam Nathan on November 5, 1999, another
filed by Patti Lisa on November 5, 1999, another filed by Leroy E. Schober on
November 12, 1999, another filed by
11
<PAGE>
Bradley Dunham on November 15, 1999, and another filed by Donald Camp, Marie
Camp and Arthur Boxer on December 23, 1999, another filed by Irving Ravens on
December 14, 1999, another filed by Gary A. Ryan and Michael B. London on
December 3, 1999, another filed by Brock Haynes on November 22, 1999, another
filed by Edward J. Oest on November 30, 1999. The complaints all make
substantially the same claims. Each complaint alleges that defendants violated
the federal securities laws by making material misstatements and omissions in
certain of CareMatrix's public filings and statements during 1998 and 1999.
Specifically, the complaints allege that such statements and omissions had the
effect of artificially inflating the market price for CareMatrix's common stock
until the disclosure by CareMatrix on October 7, 1999 of its expectation that
results for the third quarter and for the full year were not likely to meet
analysts' consensus anticipated levels. Damages are unspecified.
CareMatrix and each of its directors have been named as defendants in a
class action lawsuit filed in the Court of Chancery of the State of Delaware for
New Castle County. This class action was filed by the Howard Gunty Profit
Sharing Plan on August 18, 1999. The complaint alleges that the defendants are
engaged in a course of action that constitutes a breach of their fiduciary and
other common law duties to the public shareholders of CareMatrix. Specifically,
the complaint alleges that the defendants are preparing to execute a
management-led buy-out or other strategic alternatives that would be unfair to
the public shareholders of CareMatrix. Plaintiffs seek an injunction preventing
any such buy-out or, in the event that such a buy-out is consummated, an order
from the court setting it aside. Plaintiffs also seek damages and costs of an
unspecified amount.
A subsidiary of the Company (the "Subsidiary") has been named as a
defendant in a lawsuit filed in the Supreme Court of the State of New York,
County of Nassau. This lawsuit was filed on October 26, 1999 in the name of
Great Neck Holding, LLC and The Mayfair at Glen Cove, LLC, the Owners of two
senior housing facilities located in Long Island, New York. The amended
complaint alleges that the Subsidiary has breached its duties under certain
management agreements covering the two facilities. The plaintiffs seek an
accounting by the Subsidiary as to all funds received and expended by it with
respect to the facilities covered by the management agreements, as well as
damages of at least $1,000,000 and costs. In addition, the plaintiffs are
seeking injunctive relief, preventing the Subsidiary from entering the subject
properties or otherwise interfering with the plaintiffs' operation of the
subject properties. The Subsidiary has filed a lawsuit in the same court against
plaintiffs and another entity and two individuals who acted to allegedly
terminate the Subsidiary as Manager without notice or cause as required under
the management agreements. The complaint in the Subsidiary's action seeks to
enjoin those parties from taking any further action to terminate the management
agreements, as well as damages and costs. On March 30, 2000, the Subsidiary's
motion for preliminary injunctive relief was granted on the condition that the
Subsidiary post an undertaking in the amount of $1,000,000 and the Plaintiff's
motions for preliminary injunctive relief were denied.
The Subsidiary has also sued the company allegedly hired to replace the
Subsidiary as Manager of the two facilities, for tortiously interfering with the
Subsidiary's rights and performance of its obligations under the management
agreements. That action was filed in the United States District Court for the
Eastern District of New York. The complaint in this lawsuit seeks damages,
costs, and injunctive relief. The defendant has answered the complaint, denying
certain of the material allegations and asserting affirmative defenses. The
defendant filed motions seeking (i) a stay of the action against it pending the
outcome of the two state-court lawsuits between the Subsidiary and the Owners,
discussed above, and (ii) dismissal of one of the two claims for relief asserted
in the complaint. On May 5, 2000, the United States District Court granted the
Subsidiary permission to amend the complaint to address the alleged pleading
defect and otherwise denied the defendant's motion to dismiss that claim.
Accordingly, on May 8, 2000, the Subsidiary filed an amended complaint. On May
11, 2000, the District Court denied the defendant's motion for a stay of the
proceedings until the litigation with the Owners is resolved.
CareMatrix has been named as a nominal defendant and each of its directors
has been named as a defendant in two shareholder derivative class action
lawsuits filed in the Court of Chancery of the State of Delaware for New Castle
County. These class action lawsuits were filed by Patty Lisa and Magda Sejas on
December 13, 1999. The complaint alleges that the defendant directors have
breached their fiduciary duties to CareMatrix and damaged the goodwill and
reputation of CareMatrix. Specifically, the complaint alleges that the defendant
directors engaged in wrongful self-dealing transactions, encouraged and allowed
the improper self-dealing complained of, failed to take action to stop such
conduct resulting in, among other adverse consequences, federal securities
lawsuits against CareMatrix, exposed CareMatrix to losses and took no steps to
remove or institute legal action against those officers, directors and employees
responsible for permitting the alleged misconduct. The plaintiffs seek an
injunction requiring an accounting by the defendant directors to CareMatrix of
the damages suffered by CareMatrix and the establishment and maintenance of
effective compliance programs to ensure that CareMatrix's affiliates and
employees do not engage in wrongful and self-dealing practices. The plaintiffs
also seek the unspecified costs and disbursements in connection with the action.
CareMatrix has been named as a defendant in a civil suit filed by Mariner
Health Resources, Inc. and Prism Rehab Systems, Inc. in the Superior Court for
Suffolk County, Massachusetts. The suit arises from the termination
12
<PAGE>
in 1998 of various management, consulting and services agreements between
certain subsidiaries of CareMatrix and the plaintiffs in connection with certain
skilled nursing facilities in Maryland, Massachusetts, New Jersey and Florida.
The plaintiffs allege that CareMatrix failed to pay approximately $3.3 million
owed to the plaintiffs, plus interest and costs, under the terms of the
termination agreements between CareMatrix, certain of CareMatrix's subsidiaries
and the plaintiffs. CareMatrix and its subsidiaries have denied these
allegations and have counterclaimed against the plaintiffs and their corporate
parent, Mariner Post-Acute Network, Inc. ("MPAN"), seeking a declaration that no
monies are presently due under the termination agreements at issue. CareMatrix
and its subsidiaries also seek damages for certain misconduct by the plaintiffs
and MPAN relating to the management of the facilities, including, among other
items, the fraudulent misrepresentation of amounts due from Medicaid at the
Maryland skilled nursing facility. On January 12, 2000, plaintiffs and MPAN
filed voluntary petitions under Chapter 11 of the United States Bankruptcy Code,
staying the foregoing litigation.
CareMatrix Corporation and another entity have been named as defendants in
a class action lawsuit filed in the Supreme Court of the State of New York,
County of Nassau. The action was filed by Rosalind Romuno on June 15, 2000. The
Complaint alleges that the defendants breached their contractual obligations to
pay for certain medical services covered under the Company's health plan. The
plaintiff seeks injunctive relief requiring the defendants to pay for past,
present and future medical services covered under the Company's health plan, to
take all actions necessary to ensure that no entity will seek enforcement
against the plaintiff and other members of the class for medical services
covered under the Company's health plan, and to ensure that the credit rating of
the plaintiff and other members of the class is not affected by the defendant's
actions, and also seeks unspecified damages and costs.
The Company believes it has meritorious defenses to each of the actions
described above and intends to vigorously defend each such action. The Company
does not currently expect the outcome of any of the litigation, referenced
above, to have a material adverse impact on its financial position, results of
operations and cash flows.
The Company is also subject to litigation with various vendors as a result
of either contracts entered into or services provided related to facilities the
Company has developed and/or managed. The current aggregate amount of such
claims outstanding is approximately $3.9 million. Although the Company intends
to settle or otherwise resolve these claims, there can be no assurance any or
all such settlements or resolutions will be successful. Although an unfavorable
outcome of any individual claim would be unlikely to have a material adverse
impact on the Company, an unsuccessful resolution of a number of such claims
could, in the aggregate, have a material adverse impact on the Company's
financial position, results of operations, and cash flows. The Company has not
currently recorded a reserve to cover such potential claims as the range of
unsuccessful outcomes of such litigation cannot be reasonably estimated at this
time.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF THE SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SECURITY HOLDER
MATTERS
The Company's shares are traded on Nasdaq under the symbol CMDC. The
following table sets forth for the periods shown here the high and low sales
price for the shares.
1999 1998
---------------------------------- ----------------------------------
Quarter High Low Quarter High Low
------- ---- --- ------- ---- ---
First 30.750 15.000 First 35.000 23.125
Second 21.250 10.875 Second 31.000 22.250
Third 12.563 4.625 Third 28.375 13.000
Fourth 6.000 1.906 Fourth 31.000 18.625
As of March 10, 2000, there were outstanding 18,476,789 shares of common
stock held by 98 holders of record. Included in the number of shareholders of
record are shares held in "nominee" or "street" name.
Dividends
The Company has not declared or paid any cash dividends on its Common
Stock since its inception and does not currently plan to declare or pay any cash
dividends on its Common Stock in the foreseeable future. Dividends may be paid
only out of legally available funds as proscribed by statute, subject to the
discretion of the Company's Board of Directors. In addition, the Company's
ability to pay cash dividends is restricted by the provisions of its Restated
Certificate of Incorporation pertaining to the Series A Preferred Stock. In that
regard, no
13
<PAGE>
dividends may be paid on any shares of Common Stock unless all accumulated and
unpaid dividends on the Series A Preferred Stock have been declared and paid in
full.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
---------------------------------------------------------------------------------------------
(Restated)
<S> <C> <C> <C> <C> <C>
Operating revenue ................... $ 184,929,131 $ 135,961,341 $ 73,193,088 $ 12,907,445 $ 2,484,857
Net earnings (loss) ................. $ (65,187,553)(1) $ 7,175,700 $ 6,576,387 $ (6,645,614) $ (7,206,243)
Diluted earnings (loss) per common
share ............................. $ (3.63) $ 0.40 $ 0.38 $ (0.59) $ (0.72)
BALANCE SHEET DATA:
Total assets ........................ $ 439,621,237 $ 384,628,045 $ 232,048,480 $ 108,065,144 $ 2,409,844
Long-term obligations ............... $ 324,124,192(2) $ 234,336,763(3) $ 117,211,412(4) $ 10,109,037 $ 10,312,197
Preferred stock ..................... 71,000 $ 73,000 $ 233,000 $ 250,000 $ --
Total stockholders' equity
(deficit) ......................... $ 56,588,283(1) $ 123,537,000 $ 99,161,300 $ 88,035,557(5) $ (9,761,595)
Cash dividend declared per common
share ............................. $ -- $ -- $ -- $ -- $ --
</TABLE>
(1) In 1999, the Company recorded charges of $48.0 million to reflect the
write-down of certain assets to their estimated net realizable value.
(2) In 1999, the Company refinanced certain debt resulting in additional
indebtedness outstanding of approximately $26.4 million. The amount also
includes $40.7 million of capital lease obligations related to four
facilities, and $84.1 million related to construction financing for
certain Chancellor Entities which the Company consolidates for accounting
purposes only. The Company is not legally obligated to nor does it make
any payments on these obligations. Additionally, the balance outstanding
on the Company's revolving credit debt of $24.9 million was classified as
a current liability.
(3) Includes the assumption of approximately $44.2 million of long-term debt
from the acquisition of six operating facilities, $20.9 million of
revolving credit debt, $19.0 million of capital lease obligations related
to two facilities, and $27.0 related to construction financing for certain
Chancellor Entities which the Company consolidates for accounting
purposes. The Company is not legally obligated to nor does it make any
payments on these obligations.
(4) In 1997, the Company issued a total of $115,000,000 of 6.25% Convertible
Subordinated Notes.
(5) In 1996, the Company completed a public offering of its common stock. The
Company sold 6,250,000 shares of Common Stock at $15 per share, which
resulted in net proceeds to the Company of approximately $87,254,000.
Prior to the Merger (described below), the Company consisted of a
combination of business entities which were operated since their date of
inception (June 24, 1994) under common control by Abraham D. Gosman ("Mr.
Gosman"), who, together with his sons, Andrew D. Gosman and Michael M. Gosman,
owns approximately 40.8% of the Company, directly or through family limited
partnerships.
On October 4, 1996, twelve wholly-owned subsidiaries of The Standish Care
Company, Inc. ("Standish") were merged into the business entities controlled by
Mr. Gosman with the stockholders of such business entities receiving
approximately 92% (10,000,000 shares) of the then outstanding shares of Standish
common stock (the "Merger"). Following the Merger, Standish changed its name to
CareMatrix Corporation. The Merger was accounted for as a reverse acquisition,
whereby the Company was treated as the acquiror for accounting purposes.
Accordingly, the financial history presented is that of the Company prior to the
Merger. In conjunction with the Merger, the Company effected a one-for-five
reverse stock split of the Company's common stock. Accordingly, all common stock
data presented herein, including the retroactive restatement of the Company's
historical capitalization, has been adjusted to reflect this transaction and the
Merger.
THE SELECTED FINANCIAL DATA SHOULD BE READ IN CONJUNCTION WITH THE
CONSOLIDATED FINANCIAL STATEMENTS
14
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Restatement of Historical Financial Statements
On June 19, 2000, the Company announced that after consultation with its
independent auditors it would restate its financial statements as of and for the
year ended December 31, 1998 and for the fiscal quarters beginning March 31,
1998, through September 30, 1999.
The restatement resulted primarily from a modification in the accounting
for certain development, management, and lease agreements with Chancellor Senior
Housing Group, Inc. and a third-party. This resulted in the Company reversing
certain development fees recorded in prior periods and recording deferred
revenue for the cash received from the respective development agreements,
recognizing the start-up losses and/or operating activities of the facilities
related to these agreements, capitalizing certain lease agreements, and
consolidating, for accounting purposes only, certain Chancellor Entities which
the Company is developing. The effect of these adjustments as of and for the
year ended December 31, 1998 is summarized in the chart below.
<TABLE>
<CAPTION>
Management/
Lease Cumulative
Historical Agreement effect of Restated
December 31, accounting Capital accounting Income Tax December 31,
1998 EITF97-10(1) combination(2) lease(2) change(1) effect 1998
------------ -------------- -------------- ----------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Current assets $101,940,220 ($5,757,673) ($3,555,657) $260,367 ($913,566) $2,081,370 $94,055,061
Long-term assets $247,706,227 $23,796,269 $17,110,080 $1,960,408 $290,572,984
Current liabilities $28,473,153 $1,782,741 ($374,562) ($3,127,050) $26,754,282
Long-term debt $186,753,053 $26,964,663 $20,638,587 ($19,540) $234,336,763
Shareholders' equity $134,420,241 ($8,926,067) ($3,555,657) ($5,050,881) ($539,004) $7,188,368 $123,537,000
Revenue $146,918,478 ($8,922,019) ($3,555,657) $1,520,539 $135,961,341
Operating expenses $116,211,810 $4,048 $5,429,347 $121,645,205
Other expoense, net $81,259 $1,142,073 $1,223,332
Earnings before tax and
cumulative effect of
accounting change $30,625,409 ($8,926,067) ($3,555,657) ($5,050,881) $13,092,804
Income taxes $12,556,418 ($7,188,368) $5,368,050
</TABLE>
(1) See Footnote 2 of Notes to Consolidated Financial Statements.
(2) See Footnote 7 of Notes to Consolidated Financial Statements.
The overall effect of the restatement on net earnings (loss) and net
earnings (loss) per share in each of the periods subject to the restatement is
as follows:
<TABLE>
<CAPTION>
As Previously Reported As Restated
Net earnings (loss) Net earnings (loss)
per share Net earnings per share
Net earnings (loss) Basic Diluted (loss) Basic Diluted
------------------ ------- ------- ------------ ------- -------
<S> <C> <C> <C> <C> <C> <C>
Quarter ended 3/31/98 $3,365,190 $0.19 $0.19 $1,115,096 $0.06 $0.06
Quarter ended 6/30/98 $4,150,535 $0.23 $0.23 $1,712,501 $0.10 $0.09
Quarter ended 9/30/98 $4,937,234 $0.28 $0.27 $2,082,896 $0.12 $0.12
Quarter ended 12/31/98 $5,605,982 $0.31 $0.30 $2,265,207 $0.13 $0.12
Year ended 12/31/98 $18,058,941 $1.02 $0.99 $7,175,700 $0.41 $0.40
Quarter ended 3/31/99 $5,895,841 $0.33 $0.32 $1,653,828 $0.09 $0.09
Quarter ended 6/30/99 $6,308,881 $0.35 $0.34 $ 979,821 $0.05 $0.05
Quarter ended 9/30/99 ($1,214,178) ($0.07) ($0.07) ($3,728,490) ($0.21) ($0.21)
</TABLE>
Overview
The Company is a provider of assisted living services to the elderly. At
December 31, 1999, the Company operated 47 facilities in 14 states with a
capacity of approximately 5,569 units. Of the facilities, 13 are owned, 20 are
leased or operated under long-term management agreements, and 14 are managed.
The Company provides assistance with the activities of daily living and other
personalized support services in a residential setting for elderly residents who
cannot live independently but who do not need the level of medical care provided
in a skilled nursing facility. The Company also provides additional specialized
care and services to residents with certain low acuity medical needs and
residents with Alzheimer's disease or other forms of dementia. By offering this
full range of services, the Company is able to accommodate the changing needs of
residents as they age within a facility and develop further physical or
cognitive frailties.
The Company derives its revenues from three primary sources: (i) resident
fees for the delivery of independent and assisted living and other long-term
care services; (ii) management services income for management of and marketing
for facilities; and (iii) fee income from the development and construction of
facilities. Resident fees typically are paid monthly by residents, their
families or other responsible parties. Resident fees and management fees are
recognized as revenues when services are provided. Development fee revenue is
recognized on the percentage of completion basis using the achievement of
specific milestones in the development process.
The Company has made forward-looking statements in this Report (and in
documents that are incorporated by reference) that are subject to risks and
uncertainties. Forward-looking statements include information concerning
possible or future results of operations of the Company. Also, when the Company
uses words such as "believes," "expects," "anticipates" or similar expressions,
it is often, but not always, making forward-looking statements. Stockholders
should note that many factors could affect our future financial results and
could cause such results to differ materially from those expressed in our
forward-looking statements. Those factors include, but are not limited to, the
following:
o risks related to the Company's operating history and available
financing;
o risks related to the Company's anticipated growth and acquisition
strategy;
o risks inherent in the construction and development industry;
o uncertainty about the changing regulatory environment;
o risks related to the Year 2000 problem;
o risks related to competition;
o risks related to the Company's ability to attract and retain key
personnel; and
o risks related to the ability of the Chancellor Entities' (the
entities that own a majority of the facilities the Company develops
and operates) to obtain adequate financing to fund both the
facilities during start-up and any equity needed, including cash for
operating losses, to meet bank covenants, and to fund any amounts
owed to the Company. Any inability to do so, or any default by
Chancellor under its debt obligations, could have a material adverse
effect on the Company's financial position, results of operations,
and cash flows. As used herein "Chancellor" or "Chancellor Entities"
refer to Chancellor Senior Housing Group, Inc., Abraham D. Gosman
(Chief Executive Officer and Chairman of the Board of the Company)
or companies in which Mr. Gosman and certain current and former
members of the Company's senior management exercise significant
control.
All references to "Notes" contained herein refer to Notes to Consolidated
Financial Statements in this Form 10-K, unless otherwise specified.
15
<PAGE>
For the years ended December 31, 1999, 1998, and 1997, approximately 18%,
29%, and 25%, respectively, of the Company's operating revenue was derived
primarily from the participation of the Company's nursing homes in Medicare and
Medicaid programs (see Note 2). In addition to extensive existing governmental
health care regulation, there are numerous initiatives at the federal and state
levels for comprehensive reforms affecting the payment for and availability of
health care services. Legislative changes to federal or state reimbursement
systems could adversely and retroactively affect recorded revenues.
The Company classifies its operating expenses into the following
categories: (i) facility operating; (ii) facility lease; (iii) general and
administrative, which include headquarters and regional staff expenses and other
overhead costs; and (iv) depreciation and amortization.
The Year Ended December 31, 1999 Compared to the Year Ended December 31, 1998
Revenues. Resident operations revenue increased by $60.2 million for the
year ended December 31, 1999, compared to 1998. The increase is comprised
principally of $23.7 million from new facilities in 1999, $23.0 million from
seven facilities acquired in the purchase of SeniorCare Group, Ltd.
("SeniorCare") (see Note 3), $13.8 million from non-comparable facilities which
contributed a full year of revenue in 1999, and increases in fees related to
management contracts and other services as a result of the increase in the
average number of facilities under construction and in operation. Included in
resident operations revenue in 1999 is $9.7 million earned from marketing and
management services provided to facilities under construction per the terms of
existing development agreements compared to $12.6 million in 1998. During 1999,
the Company entered into long-term management agreements with seven facilities.
As described in Note 15, in 1999, the Company amended existing contracts
with certain Chancellor Entities to increase certain of its base management and
development fees. The impact of this change increased revenue during 1999 by
$3.5 million.
The Company's comparable nursing home revenue declined $5.0 million or
12.4% during 1999 primarily due to the impact of the implementation of
Medicare's prospective payment system ("PPS"). Under the terms of the Company's
existing leases, it has been indemnified by the various Chancellor Entity
lessors for this change in governmental regulations. Included in facility
operating expenses is a credit of $5.3 million, which represents an annual
adjustment of lost revenue due to PPS, to reflect the impact of these
indemnification agreements.
Development fee income was $3.8 million during 1999 compared to $15.1
million in 1998. The decrease in revenue is primarily due to the termination of
approximately 30 projects in the Company's development pipeline (see Note 17).
Facility Expenses. Facility operating expenses for 1999 increased by $50.9
million compared to 1998. The increase is primarily due to $15.3 million from
the SeniorCare facilities, $23.7 million from new facilities in 1999, and $12.1
million from non-comparable facilities which contributed a full year of expense
in 1999. Included in facility expenses in 1999 is a charge of $2.3 million to
write-down the value of certain skilled nursing facility trade receivables (see
Note 17) and $1.5 million in pre-opening and other start-up costs related to
seven facilities which the Company is developing but which are not yet open.
Facility lease expense was $20.7 million in 1999 compared to $17.0 million
in 1998. The increase of $3.7 million is primarily due to non-comparable
facilities which contributed a full year of expense in 1999.
General and Administrative. General and administrative expenses for 1999
increased to $24.6 million from $19.4 million in 1998. As a percentage of
operating revenue general and administrative expenses in 1999 declined to 13.3%
from 14.2% in 1998. The increase in expense is primarily due to increases in
legal, professional, and insurance costs incurred as a result of shareholder and
other litigation (see Note 13) and the evaluation of strategic alternatives (see
Note 17). Additionally, included in general and administrative expenses in 1999
is $1.4 million of compensation paid, via the issuance of common stock and cash,
to certain current and former officers of the Company under the terms of
retention agreements.
Asset impairment and other charges. Asset impairment and other charges
includes: $16.6 million from the write-down of various skilled nursing facility
and related assets primarily as a result of the continued deterioration in the
skilled nursing business in general, $12.9 million from the write-down of
related-party accounts receivable related to either projects in which the
Company elected to terminate its involvement so as to reduce its financial
exposure, the Company's future involvement in the projects is uncertain, or
projects which were terminated at the election of joint venture partners, $13.7
million from the write-down of other third-party advances and investments, $4.2
million from the write-down of assets related to projects that have either been
sold by Chancellor Entities or where the Company's management has determined,
based on existing litigation, that the asset has been impaired in accordance
with Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
("FAS 121"), and $0.6 million of severance and related benefits due to the
restructuring of corporate overhead (see Note 17).
16
<PAGE>
Depreciation and Amortization. Depreciation and amortization for 1999
increased $7.2 million compared to 1998. The increase is due primarily to an
incremental $2.8 million of depreciation from the SeniorCare facilities, an
incremental $1.8 million of amortization expense related to capital lease
assets, $0.7 million of depreciation from non-comparable facilities and other
assets and $1.7 million from the amortization of other intangible assets.
Interest and Other Income and Interest Expense. Interest and other income
for 1999 was $7.0 million compared to $8.5 million in 1998. The decrease in
interest income is due to lower average cash balances during 1999 compared to
1998. Included in other income during 1999 is a net gain of $2.1 million from
the sale of development rights related to the Company's interest in certain
phases of a campus community in New York. The gain is net of a $1.8 million
charge which represented the write-off of the unamortized purchase price of
these rights. Interest expense for 1999 increased to $18.8 million from $9.7
million in 1998. The increase is primarily due to incremental interest expense
of $4.3 million from SeniorCare debt assumed or refinanced, incremental interest
expense of $2.1 million related to capital lease obligations, $1.8 million from
borrowings under the line of credit, and $1.1 million from non-comparable
facilities.
Income Taxes. The Company's effective tax rate during 1999 was 2.4%
compared to 41.0% in 1998. The change in the effective tax rate is primarily due
to recording a valuation allowance of $21.4 million on the remaining balance of
the Company's available net operating loss carryforwards and other net deferred
tax assets offset by an 3.0% change in the net state benefit due to the
limitations on loss carrybacks at the state level (see Note 11).
The Year Ended December 31, 1998 Compared to the Year Ended December 31, 1997
Revenues. Net revenues for 1998 increased by $62.8 million compared to
1997. The increase is due to increases of $65.5 million in resident operations
revenue partially offset by a $2.7 million decline in development fee income.
Resident operations revenue increased primarily due to $29.5 million
earned from facilities leased or owned less than one year, including $8.1
million from six facilities acquired in the acquisition of SeniorCare Group Ltd.
(see Note 3), $26.3 million earned from four non-comparable facilities which
contributed a full year of revenue in 1998, and increases in management and
other fees due to the opening of new facilities and greater number of facilities
in development. Included in resident operations revenue in 1998 is $12.6 million
earned from marketing and management services provided to facilities under
construction per the terms of existing development agreements compared to $3.0
million in 1997. During 1998, the Company acquired or entered into leases for 13
facilities and disposed of four.
Development fee income was $15.1 million in 1998 compared to $17.6 million
in 1997. The decrease is primarily due to the accounting treatment accorded
approximately 19 projects in which the Company was required to defer the
development fees it received in accordance with EITF Statement 97-10, "The
Effect of Lessee Involvement in Asset Construction."
Facility Expenses. Facility operating expenses were $79.6 million in 1998
compared to $38.4 million in 1997, an increase of $41.2 million. The increase is
primarily due to $24.1 million of expenses from facilities leased or owned less
than one year, and $17.2 million from non-comparable facilities which
contributed a full year of expenses in 1998.
Facility lease expense was $17.0 million in 1998 compared to $8.5 million
in 1997, an increase of $8.5 million. The increase is primarily due to $2.4
million of expenses from facilities leased less than one year and $6.1 million
from non-comparable facilities which have a full year of lease expense in 1998.
Comparable facility lease expense decreased $0.2 million.
General and Administrative. General and administrative expenses in 1998
increased to $19.4 million from $15.0 million in 1997. As a percentage of
operating revenue, general and administrative expenses in 1998 declined to 14.2%
from 20.5% in 1997. The increase in expense is primarily due to an increase in
salary and related benefits of $3.0 million for the hiring of additional
corporate staff due to the Company's growth.
Depreciation and Amortization. Depreciation and amortization in 1998
increased by $3.4 million compared to 1997. The increase is primarily due to
$1.3 million of depreciation and amortization incurred from the acquisition of
SeniorCare, $0.9 million of amortization of capital lease assets related to two
facilities, and depreciation and amortization of other intangible assets,
primarily lease acquisition and deferred financing costs.
Interest and Other Income and Interest Expense. Interest and other income
increased by $3.1 million compared to 1997. The increase is due primarily to
income from the investment of the proceeds from the convertible notes issued in
August 1997 (see Note 9) and income from loans to various related and third
parties. Interest expense increased by $6.3 million compared to 1997. The
increase is primarily due to $4.5 million of
17
<PAGE>
incremental interest expense on the convertible notes, $1.0 million of interest
expense related to capital lease obligations for two facilities, and $1.0
million of interest related to debt assumed in the SeniorCare acquisition.
Income Taxes. The Company's effective tax rate was 41% in 1998 compared to
40.2% in 1997. The increase in the effective tax rate is due to the increase in
the amount of income subject to the federal tax rate of 35% for 1998, as
compared to 34% for 1997, and the utilization in 1997 of certain tax benefits
that had been fully reserved in 1996.
Cumulative Effect of Accounting Change. The cumulative effect of
accounting change of $0.9 million ($0.5 million after tax) relates to the
implementation of the Financial Accounting Standards Board Emerging Issues Task
Force Issue 97-10, "The Effect of Lessee Involvement in Asset Construction,"
(see Note 2).
Liquidity and Capital Resources
Cash and cash equivalents at December 31, 1999, were $4.3 million compared
to $28.3 million at December 31, 1998, a decrease of approximately $24.0
million.
Cash used by operations was $15.1 million in 1999 compared to a source of
$5.3 million in 1998. The use of cash is comprised of ($2.8) million of net loss
before depreciation and amortization and other noncash items and a $10.8 million
net increase in other working capital items, offset by an $18.3 million increase
in accounts receivable, primarily from new facilities in development and
operation, and a $4.8 million increase in refundable and deferred income tax and
other items.
Cash used in investing activities was $33.9 million in 1999 compared to
$160.5 million in 1998. The use of cash in 1999 was due to $5.8 million used to
complete the SeniorCare acquisition, $24.1 million used for prepaid rent, lease
commitment fees, and cash flow rights for 14 facilities (see Note 15), $2.9
million to purchase the rights to certain Chancellor Entities' interests in 11
development projects (see Note 15), $4.5 million in additions to property and
equipment, $2.0 million used to purchase the development and management rights
to a senior community (see Note 15), $6.0 million used for the purchase of or
investment in five parcels of land (see Note 15), $2.4 million of purchase
deposits for four facilities (see Note 7), $1.7 million for the rights to
receive future cash flow distributions related to development projects (see Note
15), and $5.6 million for amounts advanced under agreements to provide working
capital to two third party projects (see Notes 7 and 12). The Company received
$19.1 million from the return of cash held in a cash collateral account (see
Note 4).
Cash provided by financing activities was $25.1 million in 1999 compared
to $30.8 million in 1998. The net increase in cash is due primarily to $25.7
million of net proceeds from various mortgage refinancings (see Note 9), $0.8
million received from construction financing, and a $4.0 million increase in
borrowings under the line of credit, partially offset by $3.0 million used to
repurchase the Company's common shares on the open market (see Note 11) and $3.2
million of debt repayments, which includes $0.8 million related to assets held
for sale (see Note 5).
The Company has incurred significant operating losses, is in violation of
its bank financing covenants, and is dependent upon certain future transactions
to generate sufficient cash flow. These factors raise substantial doubt about
the Company's ability to continue as a going concern. The Company has planned
several initiatives to mitigate this doubt including the restructuring and
reduction of its corporate overhead, sales of certain assets, negotiation of a
settlement agreement with Chancellor to liquidate the remaining receivables,
and negotiating agreements with its lending institution to be fully paid after
the consummation of certain sale transactions. If these initiatives are
successful, the Company believes its remaining operations will allow it to
return to profitability.
The Company will require resources in the future to fund its working
capital requirements. The Company expects to fund these resource requirements
with its cash on hand, the sales of certain assets, the proceeds from its
expected tax refund of $17.2 million, and the proceeds from certain transactions
being contemplated between the Company and Chancellor. If certain of these
transactions are either not completed or not completed in a timely fashion or
modified in such a way as to significantly reduce the expected proceeds to the
Company, then the Company would expect to be unable to meet its then current
obligations. Additionally, on April 25, 2000, the Company was notified by Nasdaq
that its stock would begin trading under the symbol "CMDCe" due to the failure
of the Company to file its Annual Report on Form 10-K for the year ended
December 31, 1999. The Company was granted a hearing by Nasdaq on June 1, 2000,
to stay a determination by Nasdaq to delist the Company's common stock. As of
the date of this Report, the Company's common stock has not been delisted. If
the Company's common stock were delisted and was ineligible to be traded on
either a national exchange or automated trading market, such an event would
constitute a Repurchase Event, as defined under the Company's $115,000,000 6.25%
Convertible Notes (see Note 9). In a Repurchase Event, the holders of the Notes
could exercise a put option and require the Notes to be repaid. Such an event
would likely result in the Company filing for protection under Chapter 11 of the
United States Bankruptcy Code.
The Company's common stock could also be delisted from Nasdaq both as the
result of its price being below $1.00 per share for an extended period and if
its tangible net worth were to fall below $4 million. In the event the Company's
stock was delisted as a result of either of these two factors, the Company
believes that, if its filings with the Securities and Exchange Commission are
then current, its common stock will be able to be listed on either another
national or automated exchange, and that therefore any delisting by Nasdaq would
not cause a Repurchase Event.
In the event the Company is unable to continue as a going concern, assets
may not be recovered at their current carrying value and certain liabilities may
not be settled at their current carrying amount.
Due primarily to the decline in development fee income and the
consolidation of certain Chancellor Entities, the Company also expects to record
significant book operating losses during fiscal 2000 in excess of the operating
losses incurred in prior or comparable periods. A significant portion of the
losses to be recorded in fiscal 2000 are start-ups losses associated with
certain Chancellor Entities which are required to be consolidated for accounting
purposes (see Note 2). These losses are not funded by the Company.
Although Chancellor continues to seek additional sources of capital to
finance its working capital requirements, there can be no assurance that it will
be successful in doing so. If Chancellor cannot obtain adequate capital or
reduces the number and/or size of the projects in its development pipeline, then
the Company's development fee revenue will decline (see Note 17). Currently, the
Company expects that its development fee revenue will continue to decline in
fiscal 2000 and for the foreseeable future.
On April 12, 2000, the Company signed an amendment with the administrative
agent to modify certain terms of its Line. Among other requirements, the Company
must pay the lenders specified amounts from the proceeds of certain proposed
transactions; pay down principal on the Line in accordance with a specified
timetable; add additional collateral as security for the Line; convert all
borrowings to Prime based; and reduce the amount available under the Line to
$28.0 million with no further borrowing allowed. Although the financial
covenants were modified with the intention of allowing the Company to be in
compliance with all financial covenants at December 31, 1999, the amendment did
not contemplate the subsequent restatement of the 1998 financial statements. As
a result, the Company is technically in violation of certain covenants contained
in the modified agreement. As a result the Company has reclassified the
outstanding balance on the Line to current liabilities.
During 1999, as a result of negotiations during the Company's evaluation
of strategic alternatives and due to Chancellor's continued difficulty in
obtaining adequate financing, the Company recorded a charge of $13.0 million to
write-down certain Chancellor accounts receivable. Such charge is included in
Asset impairment and other charges in the Consolidated Statement of Operations.
Chancellor is in the process of attempting to sell a number of its properties
and has agreed to share a portion of those proceeds, if any, with the Company.
In evaluating the realizability of its receivable from Chancellor of $16.9
million, the Company has evaluated a number of factors including the potential
sale of specific properties by Chancellor. Recognizing that the proceeds could
be more or less than the amount currently being considered, the Company's
management believes the current receivable balance of $16.9 million to be
realizable.
In conjunction with the proposals being negotiated as part of the
Company's evaluation of strategic alternatives, during the year ended December
31, 1999, the Company recorded a charge of $16.1 million to write down to their
estimated net realizable value, in accordance with FAS 121, various Chancellor
related lease costs. Such charge is included in Asset Impairment and Other
Charges in the Consolidated Statement of Operations (see above). At December 31,
1999, the Company also has approximately $38.4 million of long-term assets,
including lease acquisition, lease deposits, and prepaid rent, which relate to
Chancellor facilities or properties which are
18
<PAGE>
encumbered by debt. If the related Chancellor entities were to default under the
terms of their debt agreements, all or part of these assets could be put at risk
depending upon the then existing facts and circumstances. The Company would
evaluate the recoverability of these assets as circumstances warrant.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data are included under Part
IV, Item 14 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
19
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Members of the Board of Directors serve as directors until their
respective successors are duly elected and qualified.
The current members of the Company's Board of Directors are as follows:
Abraham D Gosman, age 71, has served as Chairman of the Board of Directors
of the Company since October 1996 and as the Company's Chief Executive Officer
since April 15, 1999. In addition, he has served as the Chairman of the Board of
Directors and Chief Executive Officer of PhyMatrix Corp. ("PhyMatrix"), a
publicly-traded, physician-driven, integrated medical management company, from
1996 until 1999. He served as Chairman of the Board of Meditrust and its
successor Meditrust Corporation, a real estate investment trust, from its
inception in 1985 to August 1998 and was its Chief Executive Officer from 1985
to November 1997. Mr. Gosman also served as the Chairman, Chief Executive
Officer and Treasurer of Meditrust Operating Company from November 1997 until
August 1998. Mr. Gosman was the Chief Executive Officer and Chairman of the
Board of The Mediplex Group, Inc. ("Mediplex"), an operator and developer of
health care facilities, from August 1990 until June 1994.
Andrew D. Gosman, age 34, has served as a director of the Company since
October 1996 and as Vice Chairman of the Board of Directors, a post he
previously held from October 1996 to August 1997, since April 8, 1999. From
August 1997 until April 8, 1999, he served as President of the Company. He
served as Executive Vice President of the Company from October 1996 to August
1997. From January to October 1996, he served alternatively as President and
Executive Vice President of a group of privately-owned corporations (the
"CareMatrix Affiliates") which merged with and into the Company on October 4,
1996. Previously, he served as Executive Vice President of Development for
Continuum Care Corporation ("Continuum") from June 1994 to January 1996. He has
also served as a Vice President of AMA Funding Corporation and AMA Land
Ventures, Inc., two closely held investment and development concerns, since
March 1992.
Michael M. Gosman, age 37, has served as a director of the Company since
October 1996 and as its Vice Chairman from August 1997 until April 8, 1999. He
currently serves as a principal of K&G Associates, a firm which provides
consulting services to the Company. Mr. Gosman served as an Executive Vice
President - Acquisition and Development of the Company from October 1996 until
April 8, 1999. He was Executive Vice President - Assisted Living of the
CareMatrix Affiliates from January to October 1996. Previously, he served as the
Executive Vice President of Finance and Administration for Continuum from June
1994 to January 1996. From January 1990 to June 1993, he served as the Director
of Special Projects for Diamond Health Group, Inc.
20
<PAGE>
Robert Cataldo, age 75, has served as a director of the Company since June
1997 and has been President of Sheldon Corporation, a health care and real
estate consulting firm, since July 1983.
Thomas J. Magovern, age 57, has served as a director of the Company since
June 2000. He was a Director of Meditrust from 1985 to 1999 and a Director of
Meditrust Operating Company from 1997 to 1999. Mr. Magovern was a Regional Vice
President of Real Estate Asset Management of Summit Bank (successor to United
Jersey Bank), a New Jersey banking institution, from November 1995 to 1998. He
was a principal of Nationwide Financial Corp., a real estate consulting firm,
from September 1993 to October 1995. Mr. Magovern was Executive Vice President
of Northeast Savings, F.A. from January 1991 until February 1993. Prior to that
time he had been Senior Vice President of City Savings Bank, F.S.B. from April
1989 until January 1991 and a Vice President of that bank for more than five
years. He holds a New Jersey real estate license and is a member of the Planning
Board of Berkeley Heights, New Jersey.
Andrew D. Gosman and Michael M. Gosman are sons of Abraham D. Gosman. No
other family relationship exists among the Company's directors or executive
officers.
Executive Officers
Executive officers are appointed by and serve at the discretion of the
Board of Directors. The Company's executive officers as of the date of this
Report who do not serve as directors of the Company are as follows:
Michael J. Zaccaro, age 42, has served as President of the Company since
February 14, 2000, as the Chief Operating Officer of the Company since April 8,
1999, and as Executive Vice President of Operations of the Company from October
1996 until April 8, 1999. Previously, he served as Senior Vice President of the
CareMatrix Affiliates from December 1995 until October 1996. From 1990 to 1995,
Mr. Zaccaro served as Senior Vice President of Continuum and of GWZ Development
Corp. Prior to 1990, he was a founder of Athena Health Care Associates and
served as its President from 1983 to 1990. Mr. Zaccaro serves as a Vice
President and Director of the Connecticut Association of Health Care Facilities.
David B. Currie, age 36, has served as Senior Vice President, Secretary
and General Counsel of the Company since June 1999. He served as Vice President,
Assistant Secretary and Associate General Counsel of the Company from June 1998
to June 1999, and he served as Associate General Counsel of the Company from
March 1998 to June 1998. Prior to joining the Company, he was associated with
the law firm of Choate, Hall & Stewart from September 1993 to March 1998, the
law firm of Bacon & Wilson from December 1991 to September 1993, and the law
firm of Hale and Dorr from September 1988 to December 1991.
ITEM 11. EXECUTIVE COMPENSATION
The following summary compensation table shows compensation for the last
three completed fiscal years for the Company's former Chief Executive Officer
and the five other most highly compensated current and former executive officers
(collectively, the "Named Executive Officers"). Abraham D. Gosman, the Company's
current Chief Executive Officer, did not receive any compensation from the
Company during the last three fiscal years.
21
<PAGE>
<TABLE>
<CAPTION>
Long-term
Compensation
Annual Securities All Other
Compensation Underlying Compensation
Name Year Salary ($) Bonus ($) Options (1)
---- ---- ---------- --------- ------- ---
<S> <C> <C> <C> <C> <C>
Marc H. Benson (2) 1999 230,610 -- -- 40
Former President 1998 226,600 -- 30,000 8,535 (6)
1997 206,600 -- 70,000 102
Harold E. Nash, III (3) 1999 257,867 500,000 30,000 67
Former Executive Vice President 1998 257,800 -- 70,000 15
1997 232,800 -- 80,000 102
Michael J. Zaccaro 1999 224,986 450,000 (7) 30,000 39
President 1998 222,800 -- 50,000 9
1997 207,800 -- 60,000 66
Andrew D. Gosman 1999 240,648 -- -- 19
Vice Chairman and Former President 1998 268,037 -- -- 5
1997 157,800 -- -- 54
Michael M. Gosman (4) 1999 240,651 -- -- 23
Former Executive Vice President 1998 222,274 -- -- 6
1997 157,800 -- -- 66
Robert M. Kaufman (5) 1999 184,054 500,000 -- -- (8)
Former Chief Executive Officer 1998 255,400 50,000 120,000 50
1997 255,400 -- 100,000 174
</TABLE>
(1) Imputed income for Company-paid life insurance.
(2) Mr. Benson resigned from the Company effective February 2000.
(3) Mr. Nash resigned from the Company effective May 2000.
(4) Mr. Gosman resigned from the Company effective April 1999.
(5) Mr. Kaufman resigned from the Company effective May 1999.
(6) Includes a moving expense allowance of $8,526 and imputed income for
Company-paid life insurance of $9.
(7) An additional $800,000 of stock awards earned under retention agreement were
deferred.
(8) $6,522.05 was paid for legal expenses associated with his consulting
agreement.
Compensation of Directors.
Officers who are members of the Board of Directors do not receive
compensation for serving on the Board. Each other member of the Board receives
annual compensation of $15,000 for serving on the Board, plus a fee of $1,000
for each Board of Directors' meeting attended and $500 for telephonic meetings.
In addition, such directors receive an additional $500 for each committee
meeting attended, except that only one fee will be paid in the event that more
than one such meeting is held on a single day. All directors receive
reimbursement of reasonable expenses incurred in attending Board and committee
meetings and otherwise carrying out their duties.
Employment and Retention Agreements
The Company currently has a retention agreement with Michael J. Zaccaro,
its President. Under the terms of the agreement, Mr. Zaccaro is to receive the
following: (a) shares of the Company's Common Stock with a Fair Market Value, as
defined, on a certain date, but not later than April 20, 2000, equal to $500,000
(the "Bonus Shares"), (b) upon consummation of defined Transactions, a bonus of
$750,000 (the "Transaction Bonus"), (c) upon the execution of the retention
agreement, a payment of $450,000 in cash, and (d) on or before April 20, 2000,
shares
22
<PAGE>
of the Company's Common Stock with a Fair Market Value, as defined, of $300,000
(the "Signing Shares"). If Mr. Zaccaro is terminated without cause, he shall be
paid the Bonus and Signing Shares and, in certain circumstances, may be paid a
Transaction Bonus. Mr. Zaccaro has deferred his receipt of both the Bonus Shares
and the Signing Shares. Under certain circumstances upon termination of
employment, Mr. Zaccaro could be required to return or refund any Bonus or
Signing Shares and would not be paid the Transaction Bonus.
The Company amended its employment agreement with Harold E. Nash III, an
Executive Vice President. Under the terms of the agreement, Mr. Nash is to
receive the following: (a) shares of the Company's Common Stock with a Fair
Market Value, as defined, on a certain date, but not later than April 20, 2000,
equal to $500,000 (the "Bonus Shares"), and (b) upon consummation of defined
Transactions, a bonus of $750,000 (the "Transaction Bonus"). In certain
circumstances, Mr. Nash may be entitled to the Transaction Bonus.
On November 4, 1999, the Company entered into a Consulting Agreement with
Robert M. Kaufman, its former chief executive officer. The term ran through
January 15, 2000 with a consulting fee of $20,833 per month. In addition, Mr.
Kaufman was awarded bonus shares, the fair market value of which was $500,000,
under the Company's 1996 Equity Incentive Plan. Mr. Kaufman sold such shares in
November and December, 1999. Additionally, Mr. Kaufman received reimbursement of
$6,522.05 for his legal fees associated with his entering into the Consulting
Agreement. The Consulting Agreement subsumed a letter agreement between the
Company and Mr. Kaufman dated March 22, 1999, pursuant to which Mr. Kaufman
released all claims against the Company and under which he was retained by the
Company as a consultant in exchange for an annual fee of $250,000 and continued
option vesting and health coverage.
Stock Option Grants
The following is a summary of all stock options granted to the Named
Executive Officers during 1999. Where applicable, individual grants are listed
separately for each Named Executive Officer. None of Abraham, Michael or Andrew
Gosman have options to purchase common stock. Except as set forth below no other
Named Executive Officer was granted options to purchase common stock in 1999.
<TABLE>
<CAPTION>
No. of % of Total Potential Realizable
Shares Options Value at Assumed
Underlying Granted to Exercise Annual Rates of
Options Employees Price per Expiration Stock Appreciation
Granted in 1999 Share ($) Date 5% ($) 10% ($)
------- ------- --------- ---- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Harold E. Nash, III (2) 30,000 24.04% 15.875 2/16/2009 (1) 299,511 759,020
Michael J. Zaccaro 30,000 24.04% 15.875 2/16/2009 (1) 299,511 759,020
</TABLE>
(1) Vesting in one-quarter increments beginning February 16, 2000.
(2) Mr. Nash resigned from the Company effective March 2000.
Aggregated Stock Option Exercises and Stock Option Values
Certain of the Named Executive Officers exercised options during fiscal
1999 as set forth below. The following table indicates the aggregate value of
all exercised and unexercised options held by each Named Executive Officer as of
December 31, 1999. None of Abraham, Michael or Andrew Gosman have options to
purchase common stock.
23
<PAGE>
<TABLE>
<CAPTION>
As of December 31, 1999 Value of Unexercised
Shares Number of Shares of In-the-Money
Acquired Common Stock Options ($) (1)
on Value ----------------------------- --------------------------------
Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
============================================================= ================================
<S> <C> <C> <C> <C> <C> <C>
Marc H. Benson (2) -- -- 48,333 51,667 -- --
Harold E. Nash, III (3) 83,334 111,666 -- --
Michael J. Zaccaro -- -- 46,667 93,333 -- --
Robert M. Kaufman (4) 151,666 -- -- --
</TABLE>
(1) Value of unexercised, in-the-money options based upon the closing price of
the Company's Common Stock on the NASDAQ stock exchange on December 31,
1999, of $2.50.
(2) Mr. Benson resigned from the Company effective February 2000.
(3) Mr. Nash resigned from the Company effective March 2000.
(4) Mr. Kaufman resigned from the Company effective April 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of April 21, 2000 (except where
otherwise indicated), certain information regarding the beneficial ownership of
shares of Common Stock (i) by each person known by the Company to be the
beneficial owner of more than 5% of the outstanding Common Stock, (ii) by each
director and each director nominee, (iii) by each of the Named Executive
Officers of the Company, and (iv) by all current directors and executive
officers as a group. Except as indicated in the footnotes, all of such shares of
Common Stock set forth in the following table are owned directly, and the
indicated person has sole voting and investment power with respect to all Common
Stock shown as beneficially owned by such person:
Shares of Common Stock
Beneficially Owned (1)
-------------------------------
Name of Beneficial Owner Number Percentage (2)
------------------------ -------------- --------------
Abraham D Gosman (3) 7,544,313 40.8%
Andrew D. Gosman (4) (5) 1,528,309 8.3%
Michael M. Gosman (4) 1,527,309 8.3%
Michael J. Zaccaro (6) 208,476 1.1%
Harold E. Nash, III (7) 83,734 *
Robert M. Kaufman(12) 200,000 1.1%
Donald J. Amaral (8) 14,066 *
H. Loy Anderson, Jr. (8) (9) 15,076 *
Bedros Baharian (8) (10) 40,066 *
Robert Cataldo (8) 14,066 *
Stephen E. Ronai (8) (11) 15,066 *
All directors and executive officers as a
group (12 persons including certain of
the above-named individuals (13) 7,935,863 42.5%
----------
* Less than 1%
(1) Includes shares which may be acquired within 60 days of April 7, 2000,
pursuant to the exercise or conversion of outstanding options, warrants
and convertible securities of the Company.
24
<PAGE>
(2) Percentages shown are based on 18,476,789 shares of Common Stock
outstanding as of April 7, 2000, plus, as to each individual and group
listed, the number of shares of Common Stock deemed to be owned by such
holder pursuant to Rule 13d-3 under the Exchange Act, assuming exercise or
conversion of outstanding options, warrants and convertible securities of
the Company held by such holder which are exercisable or convertible
within 60 days from April 7, 2000, after anti-dilution adjustments in
respect of such holders.
(3) Consists of (i) 4,378,503 shares of Common Stock held of record by
Chancellor Partners Limited Partnership I ("CPLP I"), (ii) 3,069,250
shares of Common Stock held of record by Chancellor Partners Limited
Partnership II ("CPLP II"), (iii) 3,000 shares held directly by Mr.
Gosman, and (iv) a warrant to purchase 91,761 shares of Common Stock,
which is currently exercisable. Mr. Gosman is the sole shareholder of CLP,
Inc., which is the sole general partner of each of CPLP I and CPLP II. As
general partner of CPLP I, CLP, Inc. has sole voting and dispositive power
over the shares held by such partnership. As general partner of CPLP II,
CLP, Inc. has sole dispositive power over the shares held by such
partnership and sole voting power with respect to 14,632 shares held by
CPLP II. CPLP II's sole limited partner, Chancellor Partners Business
Trust (of which Andrew and Michael Gosman are trustees and shareholders)
has sole voting power over the remainder of such shares. Mr. Gosman's
business address is 197 First Avenue, Needham, MA 02494.
(4) CPLP II, the sole limited partner of which is Chancellor Partners business
Trust ("CPBT"), is the record owner of 3,069,250 shares of Common Stock.
Pursuant to the terms of the partnership agreement of CPLP II, CPBT has
sole voting power over all but 14,632 of such shares. Pursuant to the
terms of CPBT's declaration of trust, each of Andrew D. Gosman and Michael
M. Gosman, which are CPBT's sole trustees and shareholders, has voting
power with respect to one-half of the shares held by CPLP II (excluding
the aforementioned 14,632 shares), or 1,527,309 shares. Andrew D. Gosman's
and Michael M. Gosman's business address is 197 First Avenue, Needham, MA
02494.
(5) Also includes 1,000 shares of Common Stock held directly by Mr. Gosman.
(6) Includes 148,010 shares of Common Stock held directly by Mr. Zaccaro and
60,466 shares which Mr. Zaccaro has the right to acquire within 60 days
upon the exercise of stock options.
(7) Includes 400 shares of Common Stock held directly by Mr. Nash and 83,334
shares which Mr. Nash has the right to acquire within 60 days upon the
exercise of stock options. Mr. Nash resigned from the Company effective
March 2000.
(8) Includes 14,066 shares of Common Stock which each of Rev. Baharian and
Messrs. Amaral, Anderson, Cataldo and Ronai has the right to acquire
within 60 days upon the exercise of stock options.
(9) Also includes 110 shares of stock held directly by Mr. Anderson.
(10) Also includes 26,000 shares of Common Stock held directly by Rev.
Baharian.
(11) Also includes 1,000 shares of Common Stock held directly by Mr. Ronai.
(12) Mr. Kaufman resigned from the Company effective April 1999.
(13) Includes an aggregate of 214,130 shares of Common Stock that directors and
executive officers have the right to acquire within 60 days upon the
exercise of options or warrants.
25
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As used herein, "Chancellor" or a "Chancellor Entity" is Chancellor Senior
Housing Group, Inc. or a company in which Abraham D. Gosman has an ownership
interest in excess of 90%. The Company provides and will continue to provide
development, management, and other services in connection with the establishment
of assisted living facilities, skilled nursing facilities, and other health care
facilities to or for the benefits of Chancellor, which will be the owner of the
new facilities. In addition to Mr. Gosman, certain current and former members of
the Company's senior management also have an ownership interest in Chancellor.
During 1999, the Company recognized approximately $4.9 million in
development fee revenue and other income from development and consulting
agreements with various Chancellor Entities.
During 1999, the Company recognized approximately $15.7 million in
management fee revenue from management services performed for various Chancellor
Entities. During 1999, Chancellor sold its interests in nine facilities to
various third-parties. The Company had been managing these facilities and
terminated its management agreements in connection with the sales.
During 1999, the Company entered into six long-term management agreements
(three in Florida, two in New Jersey, and one in New York) with Chancellor
Entities. The management agreements have terms of 15 years. Under the terms of
these agreements, the Company is responsible for all facility expenses other
than debt service and is reimbursed for such expenses.
The Company leases various facilities from Chancellor Entities. Lease
terms are generally for periods of 15 years or less with at least three
five-year renewal options. Rent on the facilities is equal to either debt
service or, in the case of Chancellor Entities with third-party partners, debt
service plus a specified percentage of cash flow. Leases may contain fair market
value purchase options. At December 31, 1999, the Company leased from Chancellor
Entities facilities in Arizona, Connecticut, Florida, Massachusetts, and New
Jersey. In 1999, the Company recorded lease expense related to the various
Chancellor Entity lessors of approximately $19.0 million.
During 1999, Chancellor reimbursed the Company for services provided by
certain of the Company's executive officers and other employees in the amount of
approximately $2.8 million in connection with the development of projects by the
Company and Chancellor. The value of such services was determined based upon the
commitment of time by the applicable employee to the Chancellor projects
relative to such employee's annual base salary paid by the Company.
During the quarter ended December 31, 1999, the Company purchased the
rights to certain Chancellor Entities' interests in specified development
projects for $2.9 million. Such purchase price was based on the estimated net
fair market value of the projects, including the Company's accrued but unpaid
development fees.
During the quarter ended September 30, 1999, the Company purchased a
Chancellor Entity's rights to receive future cash flow distributions related to
development projects for $1.7 million. The purchase price was based on the
expected value of the future gross cash flows. The Company also purchased
options to purchase land related to two development projects in Connecticut from
certain Chancellor Entities for approximately $1.2 million. The purchase price
was based on the respective Chancellor Entities' investment in each project.
26
<PAGE>
During 1999, the Company paid a Chancellor Entity $4.2 million to
purchase, at estimated fair market value, an interest in a limited partnership.
The Chancellor Entity has guaranteed the value of the investment at $4.2
million. The Company received $3.3 million upon the liquidation of the
investment in the fourth quarter of 1999. The $0.9 million difference between
the purchase price and amount received has been reflected as a related party
receivable.
During 1999, the Company paid certain Chancellor Entities $4.0 million for
the right to receive each such Chancellor Entity's share of cash flow for two
facilities which are owned 50% by a Chancellor Entity and 50% by third parties.
The Company also purchased options to purchase two parcels of land from certain
Chancellor Entities for approximately $4.0 million. One parcel of land was
subsequently sold resulting in a gain of approximately $25,000.
In addition, during 1999 the Company paid various Chancellor Entities $5.8
million related to prepaid rent for three facilities which it is currently
leasing. The Company has also paid various Chancellor Entities $14.3 million
related to lease rights for nine facilities which the Company is currently
managing. The amount of the payment for the lease rights is based upon the
lesser of the one year's debt service or the Chancellor investment in the
related project.
During 1999, the Company paid a Chancellor Entity $2.0 million for
development and management rights related to a senior community in New Jersey,
the purchase price for which was based on expected earnings from the development
of the senior community.
During 1999, as part of its evaluation of strategic alternatives, the
Company terminated approximately 30 projects in its development pipeline as a
result of both Chancellor's inability to obtain adequate financing to continue
developing these projects and the Company's decision to discontinue projects in
markets where competitive factors have resulted in slower than expected facility
fill rates and overbuilding.
During 1999, the Company recorded interest income of $3.4 million from
various Chancellor Entities related primarily to amounts owed pursuant to
various development and management agreements and other advances. Such
outstanding amounts earned interest at the same rate as the Company pays under
its line of credit with an unrelated third-party bank.
During 1999, primarily as a result of negotiations during the Company's
evaluation of strategic alternatives, the continued deterioration in the skilled
nursing business, and the decisions of certain third-parties to terminate
development projects, the Company recorded charges totaling $30.4 million to
write-down to their estimated net realizable value certain Chancellor accounts
receivable and other long-term assets (see Notes 15 and 17).
27
<PAGE>
During 1999, to assist it in evaluating strategic alternatives, the
Company entered into a consulting contract with a company controlled by a member
of the Company's Board of Directors. The contract is renewable on a month to
month basis and may be terminated by either party upon 30 days notice. The
Company recognized expense of approximately $0.2 million in 1999 related to this
contract.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements and Applicable Schedules Thereto
Report of Independent Accountants F-1
Balance Sheets as of December 31, 1999 and 1998 F-2
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997 F-3
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997 F-4
Consolidated Statement of Changes in Stockholders' Equity
for the years ended December 31, 1999, 1998 and 1997 F-5
Notes to Consolidated Financial Statements F-6
Financial Statement Schedules F-23
All other schedules omitted are not required, inapplicable
or the information required is furnished in the financial
statements or notes therein.
(b) Reports on Form 8-K: None
(c) Exhibits: See Exhibit List immediately following the
signature pages hereto for a list of the exhibits filed
with this Annual Report on Form 10-K.
28
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
of CareMatrix Corporation:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a) present fairly, in all material respects, the
financial position of CareMatrix Corporation at December 31, 1999 and 1998, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States. In addition, in our opinion, the
financial statement schedule listed in the index under Item 14(a) presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States, which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
As more fully described in Notes 1, 2, and 7 to the Consolidated Financial
Statements, the consolidated financial statements as of and for the year ended
December 31, 1998, have been restated to reflect a modification in the
accounting for certain development, management, and lease agreements.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As described in Note 17 to the
consolidated financial statements, the Company has suffered significant losses
from operations, is in violation of its bank financing covenants, and is
dependent on certain future transactions to generate sufficient cash flow all of
which raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 17. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
July 3, 2000
F-1
<PAGE>
CAREMATRIX CORPORATION
CONSOLIDATED BALANCE SHEETS
as of December 31, 1999 and 1998
<TABLE>
<CAPTION>
ASSETS 1999 1998
------ ------------- --------------
(Restated)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,276,918 $ 28,258,098
Restricted cash 3,807,484 22,077,282
Receivables:
Accounts receivable, net of allowance for doubtful accounts of
$2,313,292 and $2,077,198 at December 31, 1999
and 1998, respectively 21,030,666 23,421,886
Accounts receivable -- related party, net of allowance for
doubtful accounts of $4,210,775 at December 31, 1999 16,949,886 13,302,747
Prepaid and refundable income taxes, net 17,206,913 --
Deferred income taxes -- 4,126,024
Prepaid expenses and other current assets 2,910,196 2,869,024
------------- -------------
Total current assets 66,182,063 94,055,061
Lease acquisition costs and prepaid rent, net 22,023,025 15,177,344
Property and equipment, net 276,586,515 188,745,951
Other long-term assets, net 39,438,712 44,152,996
Goodwill, net of accumulated amortization of $4,036,804 and $2,429,494 at
December 31, 1999 and 1998, respectively 35,390,922 42,496,693
------------- -------------
Total assets $ 439,621,237 $ 384,628,045
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of long-term debt $ 25,848,277 $ 848,600
Accounts payable 14,766,916 9,196,913
Accrued compensation and benefits 4,265,313 2,724,923
Accrued liabilities 11,898,170 12,728,839
Other current liabilities 2,130,086 1,255,007
------------- -------------
Total current liabilities 58,908,762 26,754,282
Borrowings under line of credit -- 20,863,687
Convertible subordinated notes 115,000,000 115,000,000
Long-term debt 76,527,746 43,029,548
Other long-term liabilities 132,596,446 55,443,528
Commitments and contingencies
Stockholders' equity:
Preferred stock, stated at liquidation value of $10.00 per share,
authorized 232,968 shares, 7,100 and 7,300 shares issued and
outstanding
at December 31, 1999 and 1998, respectively 71,000 73,000
Common stock, par value $.05, authorized 75,000,000 shares,
18,476,564 and 18,014,562 shares issued and outstanding
at December 31, 1999 and 1998, respectively 923,830 900,729
Additional paid-in capital 126,430,803 125,218,393
Treasury stock, at cost (191,400 shares at December 31, 1999) (2,994,675) --
Accumulated deficit (67,842,675) (2,655,122)
------------- -------------
Total stockholders' equity 56,588,283 123,537,000
------------- -------------
Total liabilities and stockholders' equity $ 439,621,237 $ 384,628,045
============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-2
<PAGE>
CAREMATRIX CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------
1999 1998 1997
------------- ------------- -------------
(Restated)
<S> <C> <C> <C>
Revenue:
Resident operations $ 165,368,769 $ 108,191,568 $ 50,784,960
Resident operations -- related party 15,732,693 12,688,650 4,771,799
Development fee income 1,036,619 2,122,297 5,790,795
Development fee income -- related party 2,791,050 12,958,826 11,845,534
------------- ------------- -------------
Total revenue 184,929,131 135,961,341 73,193,088
------------- ------------- -------------
Expenses:
Facility operating expenses 130,582,190 79,643,232 38,385,616
Facility lease expense 1,655,514 1,592,586 4,501,279
Facility lease expense -- related party 18,998,662 15,365,167 4,013,918
General and administrative 24,621,524 19,362,355 15,003,514
Asset impairment and other charges 48,028,047 -- --
Depreciation and amortization 12,856,878 5,681,865 2,315,189
------------- ------------- -------------
Total expenses 236,742,815 121,645,205 64,219,516
------------- ------------- -------------
Earnings (loss) from operations (51,813,684) 14,316,136 8,973,572
Other income (expense):
Interest and other income 1,674,390 6,353,923 5,421,078
Interest expense (18,779,001) (9,705,121) (3,357,716)
Interest and other income -- related party 5,290,196 2,127,866 --
------------- ------------- -------------
Total other income (expense) (11,814,415) (1,223,332) 2,063,362
------------- ------------- -------------
Earnings (loss) before income taxes,
cumulative effect of accounting
change, and preferred dividends (63,628,099) 13,092,804 11,036,934
Provision for income taxes 1,552,304 5,368,050 4,436,847
------------- ------------- -------------
Earnings (loss) before cumulative effect
of accounting change, and preferred
dividends (65,180,403) 7,724,754 6,600,087
Cumulative effect of accounting change, net
of taxes of $374,562 -- 539,004 --
Preferred dividends 7,150 10,050 23,700
------------- ------------- -------------
Net earnings (loss) $ (65,187,553) $ 7,175,700 $ 6,576,387
============= ============= =============
Basic shares outstanding 17,952,521 17,632,278 17,144,338
============= ============= =============
Basic earning (loss) per share
before cumulative effect
of accounting change $ (3.63) $ 0.44 $ 0.38
Loss per share of cumulative
effect of accounting
change -- (0.03) --
------------- ------------- -------------
Basic earnings (loss) per share $ (3.63) $ 0.41 $ 0.38
============= ============= =============
Diluted shares outstanding 17,952,521 18,136,382 17,536,173
============= ============= =============
Diluted earnings (loss) per share
before cumulative effect
of accounting change $ (3.63) $ 0.43 $ 0.38
Loss per share of cumulative
effect of accounting
change -- $ (0.03) $ --
------------- ------------- -------------
Diluted earnings (loss) per common share $ (3.63) $ 0.40 $ 0.38
============= ============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
CAREMATRIX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------
1999 1998 1997
------------- ------------- -------------
(Restated)
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ (65,187,553) $ 7,175,700 $ 6,576,387
Noncash items included in net earnings (loss):
Cumulative effect change in accounting -- 539,004 --
Asset impairment and other charges 48,028,047 -- --
Depreciation of fixed assets 7,992,534 2,913,750 644,237
Amortization of intangible assets 5,394,099 2,768,115 1,670,952
Other noncash items 1,000,000 -- 277,105
Increase in accounts receivable (18,289,873) (12,631,255) (16,514,572)
Decrease (increase) in current assets 1,398,349 (551,590) --
Increase in prepaid and refundable income taxes (17,206,913) -- --
Increase in current liabilities 9,334,928 5,122,104 4,714,040
Change in deferred taxes and other items 12,432,860 (28,743) 328,630
------------- ------------- -------------
Net cash provided by (used by) operating activities (15,103,522) 5,307,085 (2,303,221)
------------- ------------- -------------
Cash flows from investing activities:
Additions to property and equipment (4,527,373) (11,794,744) (1,948,169)
Sales of property and equipment -- 3,917,574 --
Purchase of SeniorCare Group, Ltd., net of
cash acquired (5,780,000) (100,727,631) --
Increase in assets held for sale -- -- (781,237)
Increase in other long-term assets (14,057,151) (21,224,799) (5,783,215)
Decrease (increase) in restricted cash 18,269,798 (18,974,814) (1,623,374)
Lease acquisition costs and prepaid rent, net (27,854,064) (11,701,003) (2,087,568)
------------- ------------- -------------
Net cash used by investing activities (33,948,790) (160,505,417) (12,223,563)
------------- ------------- -------------
Cash flows from financing activities:
Borrowings under the line of credit, net 4,000,000 20,863,687 --
Exercise of stock options and warrants 662,089 11,231,383 2,032,282
Repurchase of common shares (2,994,675) -- --
Repayments to stockholder -- -- (1,468,756)
Proceeds from issuance of convertible
subordinated notes, net -- -- 111,448,423
Net proceeds from mortgage refinancing 25,739,395 -- --
Net proceeds from construction financing 834,943 3,168,394 --
Payments on capital lease obligations -- (3,920,000) --
Repayment of debt and other long-term
liabilities, net (3,170,620) (598,444) (2,832,090)
Other -- 91,975 --
------------- ------------- -------------
Net cash provided by financing activities 25,071,132 30,836,995 109,179,859
------------- ------------- -------------
(Decrease) Increase in cash and cash equivalents (23,981,180) (124,361,337) 94,653,075
Cash and cash equivalents, beginning of period 28,258,098 152,619,435 57,966,360
------------- ------------- -------------
Cash and cash equivalents, end of period $ 4,276,918 $ 28,258,098 $ 152,619,435
============= ============= =============
Other noncash items:
Conversion of convertible debentures into equity $ -- $ 2,000,000 $ --
============= ============= =============
Issuance of stock options in connection with
the acquisition of SeniorCare Group, Ltd. $ -- $ 3,968,617 $ --
============= ============= =============
Exercise of compensatory stock options $ 1,000,000 $ -- $ --
============= ============= =============
Additions to property and equipment $ 54,809,982 $ 19,776,874 $ --
============= ============= =============
Additions to other long-term liabilities $ 56,308,661 $ 23,796,269 $ --
============= ============= =============
Additions to other long-term assets $ 726,912 $ 4,019,395 $ --
============= ============= =============
Additions to capital lease assets and liabiltites $ 23,561,780 $ 21,888,451 $ --
============= ============= =============
Change in capital lease obligations and
lease acquisition costs $ 5,280,000 $ -- $ --
============= ============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
CAREMATRIX CORPORATION
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
for the years ended December 31, 1999, 1998, and 1997
<TABLE>
<CAPTION>
Preferred Stock
---------------------------------
Common Stock Series A
--------------------------------- ---------------------------------
Shares Amount Shares Amount
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Balance - December 31, 1996 17,111,649 $ 855,582 25,000 $ 250,000
Conversion of preferred stock 1,489 74 (1,700) (17,000)
Exercise of stock options 149,569 7,478
Income tax effect of stock option exercises
Repurchase of shares (12,874) (644)
Exercise of warrants 12,060 605
Change in measurement date of employee stock options
Issuance of warrants
Net earnings -- -- -- --
------------- ------------- ------------- -------------
Balance - December 31, 1997 17,261,893 863,095 23,300 233,000
Conversion of preferred stock 14,121 706 (16,000) (160,000)
Exercise of stock options 456,163 22,808 -- --
Income tax effect of stock option exercises
Exercise of warrants 149,052 7,453
Issuance of options in connection with acquisition
Issuance of shares upon conversion of debt 133,333 6,667
Net earnings -- -- -- --
------------- ------------- ------------- -------------
Balance - December 31, 1998 (restated) 18,014,562 900,729 7,300 73,000
Conversion of preferred stock 176 9 (200) (2,000)
Exercise of stock options 17,734 887
Income tax effect of stock option exercises
Stock-based compensation 444,092 22,205
Purchase of treasury stock
Net loss
------------- ------------- ------------- -------------
Balance - December 31, 1999 18,476,564 $ 923,830 7,100 $ 71,000
============= ============= ============= =============
<CAPTION>
(Accumulated
Additional Deficit)
Paid-in Retained Treasury
Capital Earnings Stock Total
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Balance - December 31, 1996 $ 103,337,184 $ (16,407,209) $ -- $ 88,035,557
Conversion of preferred stock 16,926 --
Exercise of stock options 1,797,736 1,805,214
Income tax effect of stock option exercises 717,248 717,248
Repurchase of shares (644)
Exercise of warrants 227,111 227,716
Change in measurement date of employee stock options 1,154,750 1,154,750
Issuance of warrants 645,072 645,072
Net earnings 6,576,387 6,576,387
------------- ------------- ------------- -------------
Balance - December 31, 1997 107,896,027 (9,830,822) -- 99,161,300
Conversion of preferred stock 159,294 --
Exercise of stock options 6,421,232 6,444,040
Income tax effect of stock option exercises 1,990,000 1,990,000
Exercise of warrants 2,789,890 2,797,343
Issuance of options in connection with acquisition 3,968,617 3,968,617
Issuance of shares upon conversion of debt 1,993,333 2,000,000
Net earnings -- 7,175,700 7,175,700
------------- ------------- ------------- -------------
Balance - December 31, 1998 (Restated) 125,218,393 (2,655,122) 123,537,000
Conversion of preferred stock 1,991 --
Exercise of stock options 232,624 233,511
Stock-based compensation 977,795 1,000,000
Purchase of treasury stock (2,994,675) (2,994,675)
Net loss (65,187,553) (65,187,553)
------------- ------------- ------------- -------------
Balance - December 31, 1999 $ 126,430,803 $ (67,842,675) $ (2,994,675) $ 56,588,283
============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
CAREMATRIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS, ORGANIZATION AND PRESENTATION
CareMatrix Corporation ("CareMatrix" or the "Company") develops, manages
and operates assisted living and various other health care facilities.
Principles Of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany balances and transactions
have been eliminated. The financial statements also include the accounts of
certain special purpose entities that the Company is deemed to control although
it does not have an ownership interest in such entities. Certain balances in the
prior year financial statements have been reclassified to conform to the current
year's presentation.
Restatement of Historical Financial Statements
On June 19, 2000, the Company announced that after consultation with its
independent auditors it would restate its financial statements as of and for the
year ended December 31, 1998 and for the fiscal quarters beginning March 31,
1998, through September 30, 1999.
The overall effect of the restatement on net earnings (loss) and net
earnings (loss) per share in each of the periods subject to the restatement is
as follows:
<TABLE>
<CAPTION>
As Previously Reported As Restated
Net earnings (loss) Net earnings (loss)
per share Net earnings per share
Net earnings (loss) Basic Diluted (loss) Basic Diluted
------------------ ------- ------- ------------ ------- -------
<S> <C> <C> <C> <C> <C> <C>
Quarter ended 3/31/98 $3,365,190 $0.19 $0.19 $1,115,096 $0.06 $0.06
Quarter ended 6/30/98 $4,150,535 $0.23 $0.23 $1,712,501 $0.10 $0.09
Quarter ended 9/30/98 $4,937,234 $0.28 $0.27 $2,082,896 $0.12 $0.12
Quarter ended 12/31/98 $5,605,982 $0.31 $0.30 $2,265,207 $0.13 $0.12
Year ended 12/31/98 $18,058,941 $1.02 $0.99 $7,175,700 $0.41 $0.40
Quarter ended 3/31/99 $5,895,841 $0.33 $0.32 $1,653,828 $0.09 $0.09
Quarter ended 6/30/99 $6,308,881 $0.35 $0.34 $ 979,821 $0.05 $0.05
Quarter ended 9/30/99 ($1,214,178) ($0.07) ($0.07) ($3,728,490) ($0.21) ($0.21)
</TABLE>
The restatement resulted primarily from a modification in the accounting
for certain development, management, and lease agreements with Chancellor Senior
Housing Group, Inc. and a third-party (see Note 2). This resulted in the Company
reversing certain development fees recorded in prior periods and recording
deferred revenue for the cash received from the respective development
agreements, recognizing the start-up losses and/or operating activities of the
facilities related to these agreements, capitalizing certain lease agreements,
and consolidating, for accounting purposes only, certain Chancellor Entities
which the Company is developing. The effect of these adjustments for and as of
the year ended December 31, 1998 is summarized in the chart below.
<TABLE>
<CAPTION>
Management/
Lease Cumulative
Historical Agreement effect of Restated
December 31, accounting Capital accounting Income Tax December 31,
1998 EITF97-10(1) combination(2) lease(2) change(1) effect 1998
------------ -------------- -------------- ----------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Current assets $101,940,220 ($5,757,673) ($3,555,657) $260,367 ($913,566) $2,081,370 $94,055,061
Long-term assets $247,706,227 $23,796,269 $17,110,080 $1,960,408 $290,572,984
Current liabilities $28,473,153 $1,782,741 ($374,562) ($3,127,050) $26,754,282
Long-term debt $186,753,053 $26,964,663 $20,638,587 ($19,540) $234,336,763
Shareholders' equity $134,420,241 ($8,926,067) ($3,555,657) ($5,050,881) ($539,004) ($7,188,368) $123,537,000
Revenue $146,918,478 ($8,922,019) ($3,555,657) $1,520,539 $135,961,341
Operating expenses $116,211,810 $4,048 $5,429,347 $121,645,205
Other expoense, net $81,259 $1,142,073 $1,223,332
Earnings before tax and
cumulative effect of
accounting change $30,625,409 ($8,926,067) ($3,555,657) ($5,050,881) $13,092,804
Income taxes $12,556,418 ($7,188,368) $5,368,050
</TABLE>
(1) See Note 2.
(2) See Note 7.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Estimates Used in Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Estimates
are used when accounting for the collectibility of receivables and third party
settlements, depreciation and amortization, recognition of revenue on
development contracts, and contingencies.
Cash and Cash Equivalents
Cash and cash equivalents consist of highly liquid instruments with
maturities at the time of purchase of three months or less and whose cost
approximates market value because of the short maturity of these instruments.
Restricted Cash
Restricted cash is comprised of amounts held as cash collateral (see Note
4) and security deposits received from residents at the independent and assisted
living facilities.
Revenue
Revenue from resident operations consists primarily of resident,
management, and marketing fees from the assisted living and other health care
facilities. Resident fees are paid by residents for housing, health care and
related services and are recognized in the period in which the Company provides
the services. Revenue under certain third-party payor agreements is subject to
audit and retroactive adjustments. Provisions for estimated third-party payor
settlements and adjustments are estimated in the period the related services are
rendered and adjusted in future periods as final settlements are determined.
Management and marketing fee revenues are included in resident operations
and are recognized in the period in which the Company provides services. The
Company normally receives fees based on either a percentage of net revenues of
the facilities managed (generally approximating 5%) or fixed fees over certain
terms. On eight related-party management agreements, the Company is
contractually responsible for all operating expenses, excluding debt service,
and therefore includes these amounts in its results.
Development fee revenues are recognized on a percentage of completion
basis using the achievement of specific milestones in the development process.
The Company enters into development agreements with both related and unrelated
parties and the time required for fulfillment of obligations under these
agreements normally exceeds one year.
Bad debt expense was $16,746,380 ($12,999,511 included in Asset Impairment
and other charges and $4,446,869 included in general and administrative
expense), $971,766, and $317,588 for the years ended December 31, 1999, 1998,
and 1997, respectively.
F-6
<PAGE>
CAREMATRIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Third-Party Reimbursement
For the years ended December 31, 1999, 1998, and 1997, approximately 19%,
29%, and 25%, respectively, of the Company's operating revenue was derived
primarily from the participation of the Company's nursing homes in Medicare and
Medicaid programs. During the periods included in these financial statements,
Medicare compensated the Company both on a "cost reimbursement" and on a
"prospective payment system" basis. Medicaid compensates the Company for nursing
services, patient care and administrative and routine services based on interim
payments and re-indexed rate payments (final settlements) subject to ceilings.
In addition to extensive existing governmental health care regulation, there are
numerous initiatives at the federal and state levels for comprehensive reforms
affecting the payment for and availability of health care services. Legislative
changes to federal or state reimbursement systems could adversely and
retroactively affect recorded revenues.
Property and Equipment
Additions are recorded at cost and depreciation is recorded by use of the
straight-line method for buildings, improvements and equipment over their useful
lives or, in the case of leasehold improvements, over the life of the lease, if
shorter. Maintenance and repairs are charged to expense as incurred. Major
renewals or improvements are capitalized.
Goodwill and Other Intangible Assets
Goodwill represents the excess of the acquisition cost over the fair
market value of net assets acquired in purchase transactions and is being
amortized over lives ranging from 25 to 30 years from the date of acquisition.
Lease acquisition costs are amortized over the term of the related lease.
Goodwill is assessed for impairment when there are indicators of potential
impairment. Whenever the undiscounted future cash flows are less than the
carrying value of the goodwill an impairment has been triggered and an
impairment charge is recorded for the difference between the carrying amount and
the discounted cash flows.
Long-Lived Assets
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of" ("FAS 121"), the Company periodically assesses the
recoverability of long-lived assets, including property and equipment and
intangibles, when there are indications of potential impairment, based on
estimates of undiscounted future cash flows. The amount of impairment is
calculated by comparing anticipated discounted future cash flows with the
carrying value of the related assets. In performing this analysis, management
considers such factors as current results, trends, future prospects, and other
economic factors.
Earnings (Loss) Per Common Share
Basic earnings (loss) per common share is calculated based on net earnings
(loss) divided by the weighted average number of common shares outstanding
during the year. Diluted earnings (loss) per common share is computed assuming
the issuance or conversion of all potentially dilutive securities.
F-7
<PAGE>
CAREMATRIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Segment Reporting
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 establishes standards for
the way public business enterprises report information about operating segments
in annual financial statements and requires those enterprises to report selected
information about operating segments in interim financial statements. It also
requires disclosures about products and services, geographic areas and major
customers.
The Company is in the business of providing a continuum of assisted living
and other services to seniors, including development, management, leasing and
ownership of senior care facilities. The Company's executive management and
Board of Directors evaluates the activities and financial information associated
with providing these services as a single operating segment. Because the Company
is operated as a single operating segment, the adoption of SFAS 131 did not
affect the results of operations, financial position, or require the disclosure
of segment information.
Accounting Changes
Effective the beginning of 1998, the Company's financial statements
reflect the implementation of the Financial Accounting Standards Board Emerging
Issues Task Force Issue 97-10, "The Effect of Lessee Involvement in Asset
Construction," ("EITF 97-10"). EITF 97-10 concerns, among other items, the
accounting treatment for development fees received by a lessee in build-to-suit
leases. Under certain conditions, the Company may also be considered, in
substance, the owner of a real estate development project. If the Company is
deemed the owner of the real estate development project during the development
stage, the Company would be required to consolidate the real estate project and
defer the development fees it earns under its development agreements. Such fees
would be amortized over the future lease term. The cumulative effect of the
implementation of EITF-97-10, which relates to fees earned prior to January 1,
1998, reduced net earnings for the year ended December 31, 1998, by $0.5 million
(net of $0.4 million in income taxes). See Note 1 for the impact on fiscal years
1998 and 1999.
3. MERGERS, ACQUISITIONS AND DISPOSITIONS
In September 1998, the Company completed the acquisition of six operating
facilities and three development sites ("SeniorCare") on Long Island, New York,
from various affiliated individuals (the "Sellers"). The acquisition of a tenth
facility, located in New Jersey, was completed in January 1999 upon receiving
the necessary licenses.
Including the New Jersey facility, the acquisition price consisted of
approximately $105.7 million in cash and $4.1 million of future payments,
400,000 stock options of the Company, and the assumption of approximately $44.2
million in debt. The acquisition was accounted for as a purchase and
accordingly, the results of operations of SeniorCare are included in the
Company's results beginning September 1, 1998. The Company recorded
approximately $22.3 million of goodwill related to the purchase, which is being
amortized over 30 years. The remainder of the purchase price was allocated
primarily to the acquired land and buildings.
The Company also entered into an arrangement whereby the Sellers have the
right to put to the Company and the Company has the right to buy from the
Sellers, beginning September 2001, certain pharmacy and home health companies
for the greater of $8.0 million or eight times net earnings before income taxes
for a specified period prior to closing.
The following represents the unaudited pro forma combined results of
operations of the Company as if SeniorCare was acquired on January 1, 1997.
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997
--------------- ---------------
<S> <C> <C>
Revenue $ 153,970,243 $ 94,913,386
Net earnings $ 6,578,922 $ 3,659,347
Basic earnings per share $ 0.37 $ 0.21
Diluted earnings per share $ 0.36 $ 0.20
</TABLE>
The pro forma information given above is prior to the cumulative effect of
a change in accounting principle for the year ended December 31, 1998.
The pro forma information given above does not purport to be indicative of
the results that actually would have been attained if the acquisition of
SeniorCare had occurred on the date noted, and is not intended to be a
projection of future results or trends.
During the quarter ended September 30, 1998, the Company purchased six
facilities which it had previously been leasing under the terms of various
operating leases. The total purchase price was approximately $8.4 million.
Subsequently, three of these facilities representing 164 units were sold.
F-8
<PAGE>
CAREMATRIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. RESTRICTED CASH
Cash Collateral
Under the terms of an agreement to fix interest rates on future leases
with Chancellor Senior Housing Group, Inc. and certain affiliated companies, the
Company was required to maintain specified levels of cash collateral with a
financial institution. Interest on the funds held accrued to the benefit of the
Company. As of December 31, 1999, the Company had terminated this agreement. At
December 31, 1998, the amount held as collateral was approximately $19.1
million.
5. ASSETS HELD FOR SALE
In 1996, the Company initiated a plan to dispose of certain acquired
facilities, of which one facility containing 72 beds remains to be sold at
December 31, 1999. The Company expects to dispose of this facility during 2000.
Included in general and administrative expenses in 1999 and 1998 are losses of
$147,878 and $35,054, respectively, from this facility. During the year ended
December 31, 1997, the facilities generated operating losses of $303,501 which
were excluded from the Company's consolidated statement of operations and
accounted for as an adjustment to the carrying amount of the related assets.
6. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31,
Estimated Useful -------------------------------
Life Years 1999 1998
---------- ------------- -------------
(restated)
<S> <C> <C> <C>
Land $ 37,488,665 $ 33,738,439
Buildings and improvements 30 - 35 115,730,226 105,737,248
Furniture, fixtures and equipment 3 - 8 13,162,814 9,719,042
Leasehold improvements 4 - 15 518,611 1,169,448
Capital lease assets 17 45,450,231 21,888,451
Construction in progress 75,195,488 20,140,309
------------- -------------
287,546,035 192,392,937
Accumulated depreciation and
amortization (10,959,520) (3,646,986)
------------- -------------
Property and equipment, net $ 276,586,515 $ 188,745,951
============= =============
</TABLE>
Included in construction in progress are assets of $74.7 million in 1999
and $19.8 million in 1998 related to facilities in construction in which the
Company does not have legal title to the related assets but which are requred to
be consolidated under EITF 97-10 as the Company is deemed the owner of the
related project (see Note 2).
7. OTHER LONG-TERM ASSETS
Other long-term assets consist of the following at December 31, 1999 and
1998:
December 31,
----------------------------
1999 1998
----------- -----------
Notes receivable, net $ 3,038,016 $ 9,273,807
Deferred financing costs, net 8,748,211 7,489,779
Deferred tax assets -- 4,597,470
Lease and purchase deposits, net 14,153,629 17,205,646
Investments 851,898 3,463,139
Other, net 12,646,958 2,123,155
----------- -----------
$39,438,712 $44,152,996
=========== ===========
In 1998, the Company entered into various agreements with SeniorCare
Development, LLC., to develop, manage, and operate up to seven assisted living
facilities in Connecticut at mutually agreed upon locations. As of December 31,
1999, the Company had entered into definitive agreements regarding five
facilities with two sites yet
F-9
<PAGE>
CAREMATRIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
to be identified. The Company has entered into a management agreement to manage
the properties upon obtaining a certificate of occupancy and is required to
lease each facility no later than two years from the date the certificate of
occupancy was issued. In addition the Company is required to fund certain
operating losses during the two year management period. At December 31, 1999,
four of the facilities were in operation. Because the Company is required to
lease these facilities, the Company treats the development, management and lease
agreements as a single agreement. In addition, the Company's financial
statements reflect the start-up losses of the facilities funded by the lessor
after the lease commitments were signed as a lease inducement (See Note 1 for
restatement impact.) Accordingly, the Company's financial statements reflect the
results of operations for each of these facilities as of January 1998.
Additionally, although no lease agreement is legally in effect, the financial
statements reflect each of these facilities as a capital lease asset and
liability as of the date each facility opened.
Under the terms of these agreements, the Company was required to make the
following payments: (i) loans to the facilities totaling $5.1 million at
December 31, 1999 and 1998. The loans bear interest at a rate of LIBOR plus 2.4%
which is lowered to LIBOR plus 2.0% upon commencement of the leases. The
outstanding loan balance plus accrued but unpaid interest are due and payable at
varying dates beginning May 31, 2001, and ending December 2002; (ii) the Company
is obligated to fund start-up losses, as defined, in excess of $0.9 million per
facility; (iii) payments of lease deposits totaling $9.0 million. The lease
deposits are repaid via a rent credit upon the Company electing to extend its
lease under the terms of the then existing lease agreements. If the Company
elects not to extend the lease, then the lease deposit is forfeited; and (iv)
lease commitment fees totaling $2.8 million. The lease deposits and commitment
fees are accounted for as capital lease assets with the payment of such amounts
reducing the respective capital lease obligations.
In 1998, the Company entered into an affiliation agreement with National
Assisted Living Limited Partnership. Under the terms of the agreement, the
parties have a put and call related to the purchase/sale of up to 600 units in
nine facilities once they achieve stabilized occupancy. The Company is required
to make a purchase deposit of $0.6 million within five days after the
certificate of occupancy is obtained for a facility. The purchase price is based
on a multiple of eight and a half times cash flow, as defined. In connection
with entering into the agreement, the Company made an initial deposit of $1.0
million and, at December 31, 1999 and 1998, had made deposits on six and two
properties, respectively.
During 1998, the Company made lease deposits on two facilities which are
owned 50% by a third party and 50% by a related party (see Note 15).
8. ACCRUED LIABILITIES
Accrued liabilities consist of the following at December 31, 1999 and
1998:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Accrued merger related costs $ 550,210 $ 5,937,768
Accrued interest 3,169,236 2,793,104
Other 8,178,724 3,997,967
----------- -----------
Total accrued liabilities $11,898,170 $12,728,839
=========== ===========
</TABLE>
During 1999, approximately $4.0 million of merger related costs
established in the allocation of the purchase price of SeniorCare were reversed
after management determined they were no longer required. The adjustment is
reflected as a reduction of goodwill in the Consolidated Balance Sheet.
F-10
<PAGE>
CAREMATRIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. DEBT
Long-term debt consists of the following at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
a) Convertible subordinated notes, 6.25% interest, due in August
2004, convertible to common stock at $28.875 per share $115,000,000 $115,000,000
b) Facility mortgages payable with varying interest rates due
between January 2002 and June 2009, collateralized by real
estate 77,444,958 43,724,996
c) Borrowings under line of credit 24,863,687 20,863,687
Other notes payable at varying interest rates 67,378 153,152
------------ ------------
Subtotal 217,376,023 179,741,835
Less current maturities 25,848,277 848,600
------------ ------------
Long-term debt $191,527,746 $178,893,235
============ ============
</TABLE>
a) In 1997, the Company completed a private offering of $115 million 6.25%
Convertible Subordinated Notes (the "Notes") due August 15, 2004. Interest
is payable semi-annually in February and August. The Notes are convertible
into common stock of the Company at any time through the close of business
on the final maturity date of the Notes, unless previously redeemed or
repurchased, at a conversion price of $28.875 per share, subject to
adjustment under certain conditions. Prior to August 18, 2000, the Notes
are not redeemable at the option of the Company. Thereafter, the Notes are
redeemable at the option of the Company, in whole or in part, at declining
redemption prices. The Notes are unsecured obligations of the Company and
are subordinated to all existing and future Senior Indebtedness, as
defined, and all liabilities of the Company and its subsidiaries. The
holders of the Notes may put the Notes to the Company if the Company's
common stock is not traded on either a national or an automated trading
exchange. The fair value of the Notes at December 31, 1999, and 1998, was
estimated at $41.4 million and $134.5 million, respectively, based on the
quoted market prices of the Notes at those dates.
b) The facility mortgages were originally assumed as part of the purchase of
SeniorCare. During the quarter ended June 30, 1999, the Company refinanced
certain of these mortgages. The new loans have an aggregate principal
amount of $38.0 million and bear interest at 7.53%. The loans mature June
2009 and payments of principal and interest began July 1999. The proceeds
from the loan were used primarily for working capital. In connection with
the refinancing, the Company reduced goodwill by approximately $1.5
million, which represented the net excess of the carrying value of the
debt over the amount required to be repaid.
During the quarter ended March 31, 1999, the Company also refinanced
mortgage debt assumed in the acquisition. The new mortgage has a principal
amount of $16.7 million, bears interest at 30 day LIBOR plus 3% and
matures January 31, 2002. Interest payments are due monthly and began in
March 1999. The proceeds from the loan were used primarily to complete the
acquisition of SeniorCare.
The fair value of these mortgages is the same as the book value based on
interest rates offered to the Company for similar borrowings.
c) In 1998 the Company entered into an agreement with several banks for a
$35.0 million line of credit (the "Line"). The Line bears interest at a
spread over either LIBOR or Prime Rate as selected by the Company. The
interest rate on the outstanding balance at December 31, 1999, was 9.5%.
The agreement requires the Company to pay a commitment fee of between
0.250% and 0.625% on the
F-11
<PAGE>
CAREMATRIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
unused portion of the Line. The Line matures in January 2001 and is
collateralized, in part, by certain of the Company's accounts receivable.
The agreement contains, among other restrictions, provisions limiting the
issuance of additional debt, the amount and type of investments, the
payment of dividends, and the maintenance of specified financial ratios.
Although at December 31, 1999, the Company was in violation of certain of
these covenants, an Event of Default, as defined, was not declared. As a
result of the Company being in violation of these covenants, the Company
has classified the balance of the Line as a current liability (see Note
19).
At December 31, 1999, the principal payments due on the debt noted above
over the next five fiscal years are as follows:
Year Ended December 31,
-----------------------
2000 $ 25,848,277
2001 1,073,477
2002 31,957,986
2003 886,568
2004 123,125,950
Thereafter 34,483,765
-------------
$217,376,023
=============
Interest paid in the years ended December 31, 1999 and 1998, was $14.2
million and $8.7 million, respectively.
10. OTHER LONG-TERM LIABILITIES
Other long-term liabilities consist of the following at December 31, 1999
and 1998.
1999 1998
------------ -----------
Construction financing $ 84,108,267 $26,964,663
Deferred service costs 3,973,717 5,338,976
Deferred income taxes -- 2,096,938
Capital lease obligations 40,724,690 19,041,772
Deferred income 3,457,261 1,596,815
Other 332,511 404,364
------------ -----------
$132,596,446 $55,443,528
============ ===========
Construction financing relates to projects in development that the Company
is required to consolidate for accounting purposes. The Company is not legally
obligated to nor does it make payments on such obligations.
The capital lease obligations relate to four facilities in 1999 and two in
1998. The obligations have imputed interest rates ranging between 8.65% and
9.59%. The lease terms extend through dates ranging between April 2015 and
January 2016. Cash payments are not required under the terms of these leases for
up to two years from the date the lease is entered into.
At December 31, 1999, payments due on the capital lease obligations over
the next five fiscal years are as follows:
Year ended December 31,
-----------------------
2000 $ 4,062,965
2001 4,738,889
2002 4,757,295
2003 4,943,149
2004 5,313,429
Thereafter 59,981,233
------------
83,796,960
Less amounts representing interest 43,072,270
------------
$ 40,724,690
============
11. INCOME TAXES
Deferred income taxes reflect the net effect of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. A valuation allowance is
recognized if it is more likely than not that some portion of the deferred tax
assets will not be realized.
The Company's deferred tax assets and liabilities, included in prepaid
expenses and other current and long-term assets and other long-term liabilities
on the balance sheet, are comprised of the following at December 31, 1999 and
1998:
<TABLE>
<CAPTION>
1999 1998
------------ -----------
<S> <C> <C>
Deferred tax assets
Accrued merger costs $ 914,087 $ 986,918
Accrued consulting 62,840 67,990
Bad debt reserve 9,871,576 706,803
Accrued expenses 4,385,556 2,081,368
Accrued vacation 217,477 200,595
Net operating loss carryforwards 5,206,745 2,637,062
Deferred revenue 3,070,235 1,960,408
Insurance reserves 562,831 82,350
------------ -----------
Deferred tax assets 24,291,347 8,723,494
------------ -----------
Deferred tax liabilities
Fixed assets (2,459,405) (2,034,595)
Intangible assets (466,043) (62,343)
------------ -----------
Deferred tax liabilities (2,925,448) (2,096,938)
------------ -----------
Valuation allowance on
net deferred taxes (21,365,899) --
------------ -----------
$ -- $ 6,626,556
============ ===========
</TABLE>
F-12
<PAGE>
CAREMATRIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
Rate reconciliation 1999 1998 1997
----------- ----------- ------------
<S> <C> <C> <C>
Federal tax at statutory rate (35.0)% 35.0% 34.0%
State tax, net of federal benefit 3.4 6.4 5.7
Goodwill amortization 0.5 2.7 3.3
Utilization of net operating loss carryforwards -- -- (1.6)
Other (1.6) (3.1) 0.7
Change in valuation allowance 35.1 -- (1.9)
----------- ----------- ------------
Net effective rate 2.4% 41.0% 40.2%
=========== =========== ============
</TABLE>
1999 1998 1997
------------ ------------ -----------
Tax provision/(benefit)
Current:
Federal $ (6,815,224) $ 6,699,996 $ 2,504,505
State 1,740,972 2,169,818 836,494
------------ ------------ -----------
(5,074,252) 8,869,814 3,340,999
------------ ------------ -----------
Deferred:
Federal 5,706,090 (2,623,863) 877,769
State 920,466 (877,901) 218,079
------------ ------------ -----------
6,626,556 (3,501,764) 1,095,848
------------ ------------ -----------
Total $ 1,552,304 $ 5,368,050 $ 4,436,847
============ ============ ===========
During 1997, both the valuation allowance and goodwill were reduced by
$5.1 million to reflect the utilization of deferred tax assets which were
recorded as part of the Company's merger with The Standish Care Company, Inc. In
1997, the Company also recognized a tax benefit of $0.5 million to reflect the
utilization of deferred tax assets existing at December 31, 1996 which related
to post-Merger activity. As a result of the acquisition of SeniorCare, the
Company recorded additional deferred tax liabilities of $1.5 million.
Additionally, the Company recorded tax benefits of $0.4 million in 1998, $2.0
million in 1998, and $0.7 million in 1997 related to the exercise of employee
stock options which was recognized as an addition to additional paid-in capital.
The Company has net operating loss carryforwards ("NOL") of $14.7 million
which will expire from 2004 to 2011. Additionally, $7.6 million of such NOL are
subject to Internal Revenue Code Section 382 which limits the annual amount of
the loss carryforward which may be deducted annually. During 1999, the Company
established a valuation allowance of $21.4 million against these NOLs and its
other remaining net deferred tax assets since their utilization in future
periods is uncertain at this time.
The Company has paid federal income taxes of $7.4 million in 1999 and $7.1
million in 1998 and state income taxes of $1.4 million in 1999 and $3.6 million
in 1998.
12. EQUITY
Stock Options
The Company has adopted a stock option plan for officers and employees.
The number of shares available under this plan was increased from 1,600,000 in
1997 to 2,600,000 in 1998 and 2,900,000 in 1999. The Company also maintains a
stock option plan for non-employee members of the Board of Directors to purchase
up to 36,000 shares of its Common Stock. Options granted under these plans
generally vest over three and four year periods and expire ten years after the
date of the grant. The total shares available under these plans and the
Company's Amended and Restated 1991 Combination Stock Option Plan are 3,336,000.
F-13
<PAGE>
CAREMATRIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Shares Price
--------- ---------
<S> <C> <C>
Outstanding at December 31, 1996 729,140 $ 12.62
Granted 944,200 23.79
Exercised (149,569) 12.07
Canceled (62,286) 17.81
--------- ---------
Outstanding at December 31, 1997 1,461,485 19.66
Granted 1,381,850 18.69
Exercised (456,163) 14.12
Canceled (164,384) 20.64
--------- ---------
Outstanding at December 31, 1998 2,222,788 20.11
Granted 569,092 3.66
Exercised (461,826) 0.51
Canceled (409,387) 21.04
--------- ---------
Outstanding at December 31, 1999 1,920,667 $ 19.76
========= =========
</TABLE>
The number of shares available for the granting of options at December 31,
1999, was 349,775.
During 1999, a total of 444,092 common shares were granted at no cost to
certain current and former executive officers of the Company under the terms of
retention agreements. The Company recognized compensation expense of $1.0
million from the grant of these shares. Such expense has been included in
general and administrative expenses in the Consolidated Statement of Operations.
<TABLE>
<CAPTION>
Options outstanding Options exercisable
----------------------------------- ----------------------------
------------------------------- Weighted
Range of Shares average Remaining contractual Weighted average ---------
exercise prices outstanding exercise price life in months exercise price Number
--------------- ----------- -------------- -------------- -------------- ---------
<S> <C> <C> <C> <C> <C>
$10.00 - $15.00 169,177 $12.04 84 $11.87 155,845
$15.01 - $22.50 1,287,841 $17.79 96 $17.66 712,249
$22.51 - $31.63 463,649 $28.08 88 $28.08 309,549
----------- -------------- -------------- -------------- ---------
1,920,667 $19.76 93 $19.63 1,177,643
=========== =========
</TABLE>
The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for its options. Accordingly, no compensation expense has been
recognized for its stock-based compensation plan. Had compensation cost for the
Company's stock options been determined based upon the fair value at the grant
date consistent with the methodology prescribed under Statement of Financial
Accounting Standards No. 123 "Accounting for Stock-Based Compensation," the
Company's net loss in 1999 would have been increased by $2.2 million, or $0.12
per share on a diluted basis. In 1998, the Company's net earnings would have
been reduced by $2.4 million, or $0.13 per share on a diluted basis and by $1.8
million, or $0.10 per share on a diluted basis in 1997.
The fair value of the options granted during the previous three years and
the valuation assumptions used are as follows:
Year ended Fair value of Weighted average
December 31, options granted Volatility Interest rate expected life
------------ --------------- ---------- ------------- -------------
1999 $1,300,000 80% 4.8% 4.5
1998 $8,100,000 48% 5.0% 4.0
1997 $8,600,000 38% 6.3% 4.0
F-14
<PAGE>
CAREMATRIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In February 1999, the Company announced that its Board of Directors
authorized a share repurchase program of up to one million shares of its
outstanding common stock from time to time in open market transactions. As of
December 31, 1999, the Company had repurchased 191,400 shares at an average
price of $15.59. Pending resolution of the Company's review of strategic
alternatives (see Note 17), the Company has suspended purchases under the
program.
In April 1999, the Company was approved to be listed on the Nasdaq Stock
Market. The Company's common stock began trading under the symbol "CMDC" on
April 23, 1999.
Warrants
During 1997, 14,808 warrants were issued at $16.55 per share and 50,000
warrants were issued at $13.125 per share. At December 31, 1999, there were
176,497 warrants to purchase shares of the Company's common stock outstanding
with exercise prices ranging from $13.125 to $35.45. At December 31, 1999, all
warrants were exercisable.
Series A Preferred Stock
The conversion price of the Convertible Preferred Stock at December 31,
1999 and 1998, was $11.33. The Convertible Preferred Stock is redeemable by the
Company at $10.00 per share, plus accrued but unpaid dividends, under certain
circumstances.
Earnings (Loss) Per Share
For the year ended December 31, 1999, basic loss per share was the same as
diluted loss per share as the impact of the assumed exercise or conversion of
options, warrants, preferred stock, and 6.25% Convertible notes would be
antidilutive.
<TABLE>
<CAPTION>
Year ended December 31, 1998
Earnings Shares Per Share
----------- ---------- ---------
<S> <C> <C> <C>
Basic earnings per share
Earnings available to common stockholders $ 7,175,700 17,632,278 $ 0.41
Effect of dilutive securities:
Stock options -- 427,185 --
Warrants -- 76,919 --
----------- ---------- ---------
Diluted earnings per share $ 7,175,700 18,136,382 $ 0.40
=========== =========== =========
<CAPTION>
Year ended December 31, 1997
Earnings Shares Per Share
----------- ---------- ---------
<S> <C> <C> <C>
Basic earnings per share
Earnings available to common stockholders $ 6,576,387 17,144,338 $ 0.38
Effect of dilutive securities:
Stock options -- 331,424 --
Warrants -- 60,411 --
----------- ---------- ---------
Diluted earnings per share $ 6,576,387 17,536,173 $ 0.38
=========== =========== =========
</TABLE>
Securities issued and outstanding but not included in the calculation of
earnings per share as their assumed exercise would be antidilutive are as
follows:
F-15
<PAGE>
CAREMATRIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
Year ended December 31,
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Stock options 1,920,667 527,250 439,500
Warrants 176,497 4,800 4,800
6.25% Convertible notes 3,982,684 3,982,684 3,982,684
Preferred stock 7,100 -- 23,300
----------- ----------- -----------
6,086,948 4,514,734 4,450,284
=========== =========== ===========
</TABLE>
13. COMMITMENTS AND CONTINGENCIES
Commitments
The Company leases various office space and certain equipment pursuant to
operating lease agreements. The Company also leases certain of its health care
facilities. These leases are generally for periods between five and fifteen
years plus renewal options at the option of the Company. Future minimum lease
payments under the terms of non-cancelable lease agreements at December 31, 1999
are as follows:
<TABLE>
<S> <C>
2000 $ 17,363,001
2001 15,810,076
2002 15,882,129
2003 15,983,281
2004 16,070,358
Thereafter 65,184,299
------------
$146,293,144
============
</TABLE>
The Company has provided letters or lines of credit totaling $7.6 million
at December 31, 1999 and 1998, related to management/ownership agreements for
three of its facilities. Amounts advanced under the terms of the related
agreements totaled $5.6 million at December 31, 1999. The Company has also
signed lease guarantees with a third-party for two additional facilities.
Contingencies
The Company is subject to complaints, claims and litigation which have
risen in the normal course of business (see Note 14 for a description of other
litigation). The Company does not believe that any such litigation will have a
material adverse effect on its business, financial position or results of
operations.
14. LITIGATION
CareMatrix Corporation and five of its officers and directors have been
named as defendants in fourteen class action lawsuits filed in the United States
District Court for the District of Massachusetts, one filed by Jonathan Polansky
on November 3, 1999, another filed by Howard Gunty Profit Sharing Plan on
November 5, 1999, another filed by Michael E. Glass on November 5, 1999, another
filed by John P. Delmonico on November 5, 1999, another filed by James Cosentino
on November 5, 1999, another filed by Miriam Nathan on November 5, 1999, another
filed by Patti Lisa on November 5, 1999, another filed by Leroy E. Schober on
November 12, 1999, another filed by Bradley Dunham on November 15, 1999, and
another filed by Donald Camp, Marie Camp and Arthur Boxer on December 23, 1999,
another filed by Irving Ravens on December 14, 1999, another filed by Gary A.
Ryan and Michael B. London on December 3, 1999, another filed by Brock Haynes on
November 22, 1999, another filed by Edward J. Oest on November 30, 1999. The
complaints all make substantially the same claims. Each complaint alleges that
defendants violated the federal securities laws by making material misstatements
and omissions in certain of CareMatrix's public filings and statements during
1998 and 1999. Specifically, the complaints allege that such statements and
omissions had the effect of artificially inflating the market price for
CareMatrix's common stock until the disclosure by CareMatrix on October 7, 1999
of its expectation that results
F-16
<PAGE>
CAREMATRIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
for the third quarter and for the full year were not likely to meet analysts'
consensus anticipated levels. Damages are unspecified.
CareMatrix and each of its directors have been named as defendants in a
class action lawsuit filed in the Court of Chancery of the State of Delaware for
New Castle County. This class action was filed by the Howard Gunty Profit
Sharing Plan on August 18, 1999. The complaint alleges that the defendants are
engaged in a course of action that constitutes a breach of their fiduciary and
other common law duties to the public shareholders of CareMatrix. Specifically,
the complaint alleges that the defendants are preparing to execute a
management-led buy-out or other strategic alternatives that would be unfair to
the public shareholders of CareMatrix. Plaintiffs seek an injunction preventing
any such buy-out or, in the event that such a buy-out is consummated, an order
from the court setting it aside. Plaintiffs also seek damages and costs of an
unspecified amount.
A subsidiary of the Company (the "Subsidiary") has been named as a
defendant in a lawsuit filed in the Supreme Court of the State of New York,
County of Nassau. This lawsuit was filed on October 26, 1999 in the name of
Great Neck Holding, LLC and The Mayfair at Glen Cove, LLC, the Owners of two
senior housing facilities located in Long Island, New York. The amended
complaint alleges that the Subsidiary has breached its duties under certain
management agreements covering the two facilities. The plaintiffs seek an
accounting by the Subsidiary as to all funds received and expended by it with
respect to the facilities covered by the management agreements, as well as
damages of at least $1,000,000 and costs. In addition, the plaintiffs are
seeking injunctive relief, preventing the Subsidiary from entering the subject
properties or otherwise interfering with the plaintiffs' operation of the
subject properties. The Subsidiary has filed a lawsuit in the same court against
plaintiffs and another entity and two individuals who acted to allegedly
terminate the Subsidiary as Manager without notice or cause as required under
the management agreements. The complaint in the Subsidiary's action seeks to
enjoin those parties from taking any further action to terminate the management
agreements, as well as damages and costs. On March 30, 2000, the Subsidiary's
motion for preliminary injunctive relief was granted on the condition that the
Subsidiary post an undertaking in the amount of $1,000,000 and the Plaintiff's
motions for preliminary injunctive relief were denied.
The Subsidiary has also sued the company allegedly hired to replace the
Subsidiary as Manager of the two facilities, for tortiously interfering with the
Subsidiary's rights and performance of its obligations under the management
agreements. That action was filed in the United States District Court for the
Eastern District of New York. The complaint in this lawsuit seeks damages,
costs, and injunctive relief. The defendant has answered the complaint, denying
certain of the material allegations and asserting affirmative defenses. The
defendant filed motions seeking (i) a stay of the action against it pending the
outcome of the two state-court lawsuits between the Subsidiary and the Owners,
discussed above, and (ii) dismissal of one of the two claims for relief asserted
in the complaint. On May 5, 2000, the United States District Court granted the
Subsidiary permission to amend the complaint to address the alleged pleading
defect and otherwise denied the defendant's motion to dismiss that claim.
Accordingly, on May 8, 2000, the Subsidiary filed an amended complaint. On May
11, 2000, the District Court denied the defendant's motion for a stay of the
proceedings until the litigation with the Owners is resolved.
CareMatrix has been named as a nominal defendant and each of its directors
has been named as a defendant in two shareholder derivative class action
lawsuits filed in the Court of Chancery of the State of Delaware for New Castle
County. These class action lawsuits were filed by Patty Lisa and Magda Sejas on
December 13, 1999. The complaint alleges that the defendant directors have
breached their fiduciary duties to CareMatrix and damaged the goodwill and
reputation of CareMatrix. Specifically, the complaint alleges that the defendant
directors engaged in wrongful self-dealing transactions, encouraged and allowed
the improper self-dealing complained of, failed to take action to stop such
conduct resulting in, among other adverse consequences, federal securities
lawsuits against CareMatrix, exposed CareMatrix to losses and took no steps to
remove or institute legal action against those officers, directors and employees
responsible for permitting the alleged misconduct. The plaintiffs seek an
injunction requiring an accounting by the defendant directors to CareMatrix of
the damages suffered by CareMatrix and the establishment and maintenance of
effective compliance programs to ensure that CareMatrix's affiliates and
employees do not engage in wrongful and self-dealing practices. The plaintiffs
also seek the unspecified costs and disbursements in connection with the action.
CareMatrix has been named as a defendant in a civil suit filed by Mariner
Health Resources, Inc. and Prism Rehab Systems, Inc. in the Superior Court for
Suffolk County, Massachusetts. The suit arises from the termination in 1998 of
various management, consulting and services agreements between certain
subsidiaries of CareMatrix and the plaintiffs in connection with certain skilled
nursing facilities in Maryland, Massachusetts, New
F-17
<PAGE>
CAREMATRIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Jersey and Florida. The plaintiffs allege that CareMatrix failed to pay
approximately $3.3 million owed to the plaintiffs, plus interest and costs,
under the terms of the termination agreements between CareMatrix, certain of
CareMatrix's subsidiaries and the plaintiffs. CareMatrix and its subsidiaries
have denied these allegations and have counterclaimed against the plaintiffs and
their corporate parent, Mariner Post-Acute Network, Inc. ("MPAN"), seeking a
declaration that no monies are presently due under the termination agreements at
issue. CareMatrix and its subsidiaries also seek damages for certain misconduct
by the plaintiffs and MPAN relating to the management of the facilities,
including, among other items, the fraudulent misrepresentation of amounts due
from Medicaid at the Maryland skilled nursing facility. On January 12, 2000,
plaintiffs and MPAN filed voluntary petitions under Chapter 11 of the United
States Bankruptcy Code, staying the foregoing litigation.
CareMatrix Corporation and another entity have been named as defendants in
a class action lawsuit filed in the Supreme Court of the State of New York,
County of Nassau. The action was filed by Rosalind Romuno on June 15, 2000. The
Complaint alleges that the defendants breached their contractual obligations to
pay for certain medical services covered under the Company's health plan. The
plaintiff seeks injunctive relief requiring the defendants to pay for past,
present and future medical services covered under the Company's health plan, to
take all actions necessary to ensure that no entity will seek enforcement
against the plaintiff and other members of the class for medical services
covered under the Company's health plan, and to ensure that the credit rating of
the plaintiff and other members of the class is not affected by the defendant's
actions, and also seeks unspecified damages and costs.
The Company believes it has meritorious defenses to each of the actions
described above and intends to vigorously defend each such action. The Company
does not currently expect the outcome of any of the litigation, referenced
above, to have a material adverse impact on its financial position, results of
operations and cash flows.
The Company is also subject to litigation with various vendors as a result
of either contracts entered into or services provided related to facilities the
Company has developed and/or managed. The current aggregate amount of such
claims outstanding is approximately $3.9 million. Although the Company intends
to settle or otherwise resolve these claims, there can be no assurance any or
all such settlements or resolutions will be successful. Although an unfavorable
outcome of any individual claim would be unlikely to have a material adverse
impact on the Company, an unsuccessful resolution of a number of such claims
could, in the aggregate, have a material adverse impact on the Company's
financial position, results of operations, and cash flows. The Company has not
currently recorded a reserve to cover such potential claims as the range of
unsuccessful outcomes of such litigation cannot be reasonably estimated at this
time.
15. RELATED PARTY TRANSACTIONS
As used herein, "Chancellor" or "Chancellor Entity" refers to Chancellor
Senior Housing Group, Inc., Abraham D. Gosman (Chief Executive Officer and
Chairman of the Board of the Company) or companies in which Mr. Gosman and
certain current and former members of the Company's senior management exercise
significant control.
During 1999, the Company has entered into management and marketing
agreements with Chancellor Entities which provide for fees to be earned by the
Company during the fill-up and upon the initial move-in of residents into new
facilities up to the maximum occupancy of a facility and for fees based upon the
revenues of a facility. For the year ended December 31, 1999, the Company
recognized revenue of $15.7 million for marketing and management services
provided to various Chancellor Entities under the terms of these agreements
compared to revenue of $12.7 million for the year ended December 31, 1998, and
$4.8 million for the year ended December 31, 1997.
During the quarter ended December 31, 1999, the Company purchased the
rights to certain Chancellor Entities' interests in specified development
projects for $2.9 million. The Company expects to sell its interests in such
projects during fiscal 2000 and 2001.
During 1999, Chancellor sold its interests in nine facilities to various
third-parties. The Company had been managing these facilities and terminated its
management agreements in connection with the sales.
During the quarter ended September 30, 1999, the Company purchased a
Chancellor Entity's rights to receive future cash flow distributions related to
development projects for $1.7 million. The Company also purchased options to
purchase land related to two development projects in Connecticut from certain
Chancellor Entities for approximately $1.2 million.
During the quarter ended June 30, 1999, the Company paid a Chancellor
Entity $4.2 million to purchase, at estimated fair market value, an interest in
a limited partnership. The investment was being accounted for under
F-18
<PAGE>
CAREMATRIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
the equity method, accordingly, the Company recorded its share of the income or
expense from the investment in other income and expense. The Chancellor Entity
has guaranteed the value of the investment at $4.2 million. The Company received
$3.3 million upon the liquidation of the investment in the fourth quarter of
1999. The $0.9 million difference between the purchase price and amount received
has been reflected as a related party receivable.
During the quarter ended June 30, 1999, the Company paid certain
Chancellor Entities $4.0 million for the right to receive each such Chancellor
Entity's share of cash flow for two facilities which are owned 50% by a
Chancellor Entity and 50% by third parties. The rights are being amortized over
15 years. The Company also purchased options to purchase two parcels of land
from certain Chancellor Entities for approximately $4.0 million. One parcel of
land was subsequently sold resulting in a gain of approximately $25,000.
In addition, during 1999 the Company paid various Chancellor Entities $5.8
million related to prepaid rent for three facilities which it is currently
leasing. The rent is being amortized over 15 years. The Company has also paid
various Chancellor Entities $14.3 million related to lease rights for nine
facilities which the Company is currently managing. These amounts will be
amortized over the terms of the related lease agreements.
During the quarter ended March 31, 1999, the Company paid a Chancellor
Entity $2.0 million for development and management rights related to a senior
community in New Jersey. The development rights are being amortized as the
related fees are earned.
During the quarter ended March 31, 1999, the Company paid certain
Chancellor Entities $2.1 million to purchase, at cost, certain fixed assets.
These assets were leased back to the respective Chancellor Entities under
various operating leases.
In 1998, the Company purchased, for $0.8 million, a management agreement
for a skilled nursing facility located in Florida from PhyMatrix Corp., a
publicly-owned physician practice management company of which Mr. Gosman was the
Chairman of the Board and Chief Executive Officer and of which he, together with
his two sons, beneficially owned approximately 24.6%. The Company began leasing
this facility in the second quarter of 1998.
In 1998, the Company paid various Chancellor Entities a total of $6.9
million for lease rights to three facilities. The Company also exercised its
option to lease, from certain Chancellor Entities, four facilities which it had
been managing. The Company paid a total of $4.0 million in lease deposits
related to two of these facilities which are owned 50% by certain Chancellor
entities and 50% by an unrelated third party.
During 1998, the Company also paid a Chancellor Entity $2.0 million for
development rights related to a senior living community in New York and $1.0
million to another Chancellor Entity to purchase, at original cost, its interest
in a limited partnership. Such interest was liquidated in 1999.
In 1997, the Company purchased from a related party, for $2.1 million, a
subordinated loan related to a facility that it managed for a Chancellor Entity.
The loan has a face value of $2.4 million, bears interest at 8.5% and matures
November 2024. Payment of accrued interest on the note is subordinated to the
facility achieving certain financial performance measures. During 1998, $0.4
million of this note was repaid.
In 1997, the Company entered into a management/lease contract with a
Chancellor Entity for a senior living facility in Florida. Under the terms of
the agreement, the Company is not required to make a lease payment until the
facility achieves certain financial performance measures. No lease payments were
made in either 1999, 1998, or 1997.
During 1997, the Company entered into four leases with Chancellor
Entities. The lease terms are generally for 15 year periods plus renewal
options. The Company had been managing three of these facilities. In connection
with one of these leases, the Company paid $1.8 million to a Chancellor Entity
for the lease rights and paid $4.8 million to another Chancellor Entity as a
lease deposit.
As of December 31, 1999, the net receivable due from Chancellor Entities
was $16.9 million (see Note 17).
F-19
<PAGE>
CAREMATRIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
At December 31, 1999, the Company also has approximately $38.4 million of
long-term assets, including lease acquisition, lease deposits, and prepaid rent,
which relate to Chancellor facilities or properties which are encumbered by
debt. If the related Chancellor entities were to default under the terms of
their debt agreements, all or part of these assets could be put at risk
depending upon the then existing facts and circumstances. The Company would
evaluate the recoverability of these assets as circumstances warrant.
Additionally, the Company is contemplating the sale of certain of these assets
in conjunction with its evaluation of strategic alternatives (see Note 17).
16. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Securities and Exchange Commission Staff Accounting Bulletin No. 101 ("SAB
101") was released on December 3, 1999 and provides the staff's views in
applying generally accepted accounting principles to selected revenue
recognition issues. The Company's implementation date for SAB 101 is the fourth
quarter of 2000. The Company is currently in the process of assessing the effect
of the implementation on its results of operations, financial position and cash
flows.
The FASB has also issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Investments and Hedging Activities," ("FAS
133"). FAS 133 is effective for fiscal quarters beginning after June 15, 2000.
FAS 133 requires that all derivatives are required to be recognized on the
balance sheet as either assets or liabilities and measured at fair value. FAS
133 is not expected to have an impact on the Company's statement of financial
position or results of operations.
17. STRATEGIC ALTERNATIVES
The Company has incurred significant operating losses, is in violation of
its bank financing covenants, and is dependent upon certain future transactions
to generate sufficient cash flow. These factors raise substantial doubt about
the Company's ability to continue as a going concern. The Company has planned
several initiatives to mitigate this doubt including the restructuring and
reduction of its corporate overhead, sales of certain assets, negotiation of a
settlement agreement with Chancellor to liquidate the remaining receivables,
and negotiating agreements with its lending institution to be fully paid after
the consummation of certain sale transactions. If these initiatives are
successful, the Company believes its remaining operations will allow it to
return to profitability.
The Company will require resources in the future to fund its working
capital requirements. The Company expects to fund these resource requirements
with its cash on hand, the sales of certain assets, the proceeds from its
expected tax refund of $17.2 million, and the proceeds from certain transactions
being contemplated between the Company and Chancellor. If certain of these
transactions are either not completed or not completed in a timely fashion or
modified in such a way as to significantly reduce the expected proceeds to the
Company, then the Company would expect to be unable to meet its then current
obligations. Additionally, on April 25, 2000, the Company was notified by Nasdaq
that its stock would begin trading under the symbol "CMDCe" due to the failure
of the Company to file its Annual Report on Form 10-K for the year ended
December 31, 1999. The Company was granted a hearing by Nasdaq on June 1, 2000,
to stay a determination by Nasdaq to delist the Company's common stock. As of
the date of this Report, the Company's common stock has not been delisted. If
the Company's common stock were delisted and was ineligible to be traded on
either a national exchange or automated trading market, such an event would
constitute a Repurchase Event, as defined under the Company's $115,000,000 6.25%
Convertible Notes (see Note 9). In a Repurchase Event, the holders of the Notes
could exercise a put option and require the Notes to be repaid. Such an event
would likely result in the Company filing for protection under Chapter 11 of the
United States Bankruptcy Code.
The Company's common stock could also be delisted from Nasdaq both as the
result of its price being below $1.00 per share for an extended period and if
its tangible net worth were to fall below $4 million. In the event the Company's
stock was delisted as a result of either of these two factors, the Company
believes that, if its filings with the Securities and Exchange Commission are
then current, its common stock will be able to be listed on either another
national or automated exchange, and that therefore any delisting by Nasdaq would
not cause a Repurchase Event.
In the event the Company is unable to continue as a going concern, assets
may not be recovered at their current carrying value and certain liabilities may
not be settled at their current carrying amount.
On July 22, 1999, the Company announced that the Board of Directors had
instructed management to explore various strategic alternatives to maximize
shareholder value. A member of the Company's Board of Directors has been engaged
by the Company as a consultant to help identify strategic alternatives.
On August 10, 1999, the Company's Board of Directors authorized the
retention of certain investment banking firms to assist in further identifying
strategic alternatives. The agreements with these firms expired in December
1999. Also, a special committee of the Board of Directors has been formed with
the authority to engage financial advisors to assist it in considering for the
benefit of the Company and its shareholders any proposal which may arise and in
connection therewith retained the investment banking firm of PaineWebber
Incorporated.
During the quarter ended September 30, 1999, as part of its evaluation of
strategic alternatives, the Company terminated approximately 30 projects in its
development pipeline as a result of both Chancellor's inability to obtain
adequate financing to continue developing these projects and the Company's
decision to discontinue projects in markets where competitive factors have
resulted in slower than expected facility fill rates and overbuilding. The
Company expects that Chancellor's inability to obtain financing to sustain its
development pipeline and the competitive factors noted above will continue to
adversely impact the Company's financial position, results of operations, and
cash flows for the foreseeable future.
In accordance with FAS 121, the Company also assessed the recoverability
of its long-lived assets by comparing anticipated discounted future cash flows
with the carrying value of the related assets. As a result of this assessment,
during 1999 the Company recorded a charge of $11.5 million to write down the
value of various skilled nursing facility lease costs and fixed assets to their
expected net realizable value. This amount has been reflected in Asset
Impairment and Other Charges in the Consolidated Statement of Operations.
As a result of the reduction in the Company's development pipeline, the
Company also restructured its corporate overhead by eliminating development
positions in markets where the Company will no longer be developing projects.
The Company initiated a program to reduce overall corporate overhead due to the
reduced growth plans. The costs associated with these reductions in personnel,
including severance and related benefits, approximated $0.6 million and have
been included in Asset Impairment and Other Charges on the Consolidated
F-20
<PAGE>
CAREMATRIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Statement of Operations. There can be no assurance that the savings produced by
the reduction in overhead will completely offset the revenue lost due to the
reduction in the development pipeline.
During the fourth quarter of 1999 the Company also recorded a charge of
$3.4 million to write down the value of third-party trade accounts receivable
related to the operation of the Company's skilled nursing facilities. This
amount has also been reflected in Asset Impairment and Other Charges in the
Consolidated Statement of Operations.
During 1999, as a result of negotiations during the Company's evaluation
of strategic alternatives and due to Chancellor's continued difficulty in
obtaining adequate financing, the Company recorded a charge of $13.0 million to
write-down certain Chancellor accounts receivable. Such charge is included in
Asset impairment and other charges in the Consolidated Statement of Operations.
Chancellor is in the process of attempting to sell a number of its properties
and has agreed to share a portion of those proceeds, if any, with the Company.
In evaluating the realizability of its receivable from Chancellor of $16.9
million, the Company has evaluated a number of factors including the potential
sale of specific properties by Chancellor. Recognizing that the proceeds could
be more or less than the amount currently being considered, the Company's
management believes the current receivable balance of $16.9 million to be
realizable.
During the fourth quarter of 1999 the Company recorded a charge of $5.9
million which consists of both assets related to projects which were sold by
Chancellor Entities and certain Chancellor related assets which the Company's
management has determined, based on existing litigation, have been impaired in
accordance with FAS 121.
During the fourth quarter of 1999, the Company recorded charges of $13.6
million to reflect the write-down to the estimated net realizable value of
certain assets to be disposed of, notes, investments, and advances. Such amounts
are included in Asset Impairment and Other Charges in the Consolidated
Statements of Operations.
18. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
First Second Third Fourth Full
Quarter Quarter Quarter Quarter Year
------------- ------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
FISCAL 1999
Total revenue $ 46,243,662 $ 49,137,289 $ 44,744,836 $ 44,803,344 $ 184,929,131
============= ============= ============= ============== =============
Total operating expenses $ 40,515,413 $ 44,907,950 $ 48,808,216 $ 102,511,236 $ 236,742,815
============= ============= ============= ============== =============
Net earnings (loss) $ 1,653,828 $ 979,821 $ (3,728,490) $ (64,092,712) $ (65,187,553)
============= ============= ============= ============== =============
Diluted earnings per share $ 0.09 $ 0.05 $ (0.21) $ (3.56) $ (3.63)
============= ============= ============= ============== =============
<CAPTION>
First Second Third Fourth Full
Quarter Quarter Quarter Quarter Year
------------- ------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
FISCAL 1998
Total revenue $ 26,771,455 $ 30,905,890 $ 36,464,474 $ 41,819,522 $ 135,961,341
============= ============= ============= ============= =============
Total operating expenses $ 24,366,371 $ 28,061,327 $ 32,321,167 $ 36,896,340 $ 121,645,205
============= ============= ============= ============= =============
Net earnings $ 1,115,096 $ 1,712,501 $ 2,082,896 $ 2,265,207 $ 7,175,700
============= ============= ============= ============= =============
Diluted earnings per share $ 0.06 $ 0.09 $ 0.12 $ 0.12 $ 0.40
============= ============= ============= ============= =============
</TABLE>
The majority of the asset impairment and other charges of $48.0 million
was recorded in the fourth quarter of 1999.
19. SUBSEQUENT EVENTS
In January 2000, in order to retain those employees the Company considers
critical to its future, the Company implemented an employee retention program
for substantially all remaining corporate employees except for certain of the
Company's executive officers. Under the terms of the program, amounts to be paid
vest over fixed time periods and are payable only upon each employee's continued
employment with the Company at the time of the
F-21
<PAGE>
CAREMATRIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
final vesting date in May 2000. Employees terminated without cause, as defined,
prior to the final vesting date are to be paid their vested portion of the
retention amount. The maximum total liability under the program is approximately
$3.2 million.
In February 2000, the Company announced the appointment of Michael J.
Zaccaro, formerly the Company's Chief Operating Officer, to the office of
Company President.
On February 15, 2000, the Company announced that it had elected to utilize
the 30 day grace period for the $3.6 million semi-annual interest payment due on
the Notes. On March 14, 2000, the Company made the interest payment.
On April 12, 2000, the Company signed an amendment with the administrative
agent to modify certain terms of its Line. Among other requirements, the Company
must pay the lenders specified amounts from the proceeds of certain proposed
transactions; pay down principal on the Line in accordance with a specified
timetable; add additional collateral as security for the Line; convert all
borrowings to Prime based; and reduce the amount available under the Line to
$28.0 million with no further borrowing allowed. Although the financial
covenants were modified with the intention of allowing the Company to be in
compliance with all financial covenants at December 31, 1999, the amendment did
not contemplate the subsequent restatement of the 1998 financial statements. As
a result, the Company is technically in violation of certain covenants contained
in the modified agreement. As a result the Company has reclassified the
outstanding balance on the Line to current liabilities.
F-22
<PAGE>
CAREMATRIX CORPORATION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at Charged to Charged Balance at
beginning costs and to other end of
Description of period expenses accounts Deductions period
----------- ---------- ---------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance at 12/31/97 $1,067,092 $ 317,588 $ -- $ 279,248 $ 1,105,432
Allowance for doubtful accounts 1,105,432 971,766 -- -- 2,077,198
---------- ---------- -------- ---------- -----------
Balance at 12/31/98 1,105,432 971,766 -- -- 2,077,198
Allowance for doubtful accounts 2,077,198 4,446,869 -- -- 6,524,067
---------- ---------- -------- ---------- -----------
Balance at 12/31/99 $2,077,198 $4,446,869 $ -- $ -- $ 6,524,067
========== ========== ======== ========== ===========
</TABLE>
F-23
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or Section 15(d) of the
Securities Exchange Act of 1934, as amended, the Registrant has duly caused this
Report to be signed on its behalf by the undersigned, thereunto duly authorized.
CAREMATRIX CORPORATION
By:
-----------------------------------------
Michael J. Zaccaro
President
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this Report has been signed by the following persons in the capacities and on
the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Michael J. Zaccaro
----------------------------------------- President
Michael J. Zaccaro (Principal Accounting Officer) July 5, 2000
/s/ Abraham D. Gosman
-----------------------------------------
Abraham D. Gosman Chairman of the Board July 5, 2000
/s/ Andrew D. Gosman
-----------------------------------------
Andrew D. Gosman Vice Chairman of the Board July 5, 2000
/s/ Michael M. Gosman
-----------------------------------------
Michael M. Gosman Director July 5, 2000
/s/ Robert Cataldo
-----------------------------------------
Robert Cataldo Director July 5, 2000
/s/ Thomas J. Magovern
-----------------------------------------
Thomas J. Magovern Director July 5, 2000
</TABLE>
<PAGE>
Exhibits. The following is a list of exhibits as required by Item 601 of
Regulation S-K under the Act.
Exhibit Description
------- -----------
2.01 Agreement and Plan of Merger dated as of July 3, 1996, by and among
the Company, 12 subsidiaries thereof and the CareMatrix Affiliates
(with certain exhibits and schedules attached thereto) (8)
3.01 Corrected Third Restated Certificate of Incorporation of the Company
(*)
3.02 By-laws of the Company, as amended through December 9, 1996 (12)
4.01 Indenture, dated as of August 15, 1997, between the Company and
State Street Bank and Trust Company, providing for the terms and
conditions of up to $115,000,000 of the Notes (10)
10.01 Warrants dated November 9, 1993, January 13, 1994, February 4, 1994,
March 1, 1994, May 25, 1995, and June 28, 1995, to purchase an
aggregate of 35,833 shares of the Company's Common Stock issued to
Health Care REIT, Inc. (7)
10.02 Adams Square Limited Partnership First Amended and Restated Limited
Partnership Agreement dated as of January 31, 1994 (with certain
exhibits attached) (7)
10.03 Amended and Restated 1991 Combination Stock Option Plan, as amended
through June 19, 1997 (13)
10.04 1995 Non-Qualified Stock Option Plan for Non-Employee Directors
("1995 Non-Employee Directors' Plan") (7)
10.05 1996 Equity Incentive Plan, as amended through June 19, 1997 (13)
10.06 Warrants dated May 26, 1993, to purchase an aggregate of 15,000
shares of the Company's Common Stock granted to Robert W. DeVore at
a price of $4.50 per share (7)
10.07 Form of Indemnification Agreement for officers and directors (2)
10.08 Warrants dated July 30, 1996, to purchase an aggregate of 80,000
shares of the Company's Common Stock issued to Abraham D. Gosman (8)
10.09 First Amendment to Warrant dated as of July 30, 1996 (9)
10.10 Registration Rights Agreement dated as of July 30, 1996,between the
Company and Abraham D. Gosman (8)
10.11 Employment Agreement dated July 29, 1996, by and between CareMatrix
of Massachusetts, Inc. and Marc H. Benson (9)
10.12 Lease Agreement concerning 197 First Avenue office space (9)
10.13 Assignment Agreement dated July 3, 1996, by and between CareMatrix
of Massachusetts, Inc. ("CMM") and Chancellor of Massachusetts, Inc.
(Tampa, Florida) (9)
10.14 Assignment Agreement dated July 3, 1996, by and between CMM and
Chancellor of Massachusetts, Inc. (Atlanta, Georgia) (9)
10.15 Assignment Agreement dated July 3, 1996, by and between CMM and
Chancellor of Massachusetts, Inc. (Boynton Beach, Florida) (9)
10.16 Management Agreement dated as of June 30, 1996, between CMM and
Continuum Care of Dedham, Inc. (Dedham, Massachusetts) (9)
10.17 Management Agreement dated as of July 1996, between CMM and
Continuum Care of Needham, Inc. (Needham, Massachusetts) (9)
10.18 Assignment Agreement dated as of June 6, 1996, between CMM and
Continuum Care of West Bridgewater, Inc. (West Bridgewater,
Massachusetts) (9)
10.19 Assignment Agreement dated as of June 6, 1996, between CMM and
Continuum Care of Massachusetts, Inc. (Auburn, Massachusetts) (9)
10.20 Assignment Agreement dated as of June 6, 1996, between CMM and
Continuum Care of Massachusetts, Inc. (Plymouth, Massachusetts) (9)
10.21 Assignment Agreement dated June 6, 1996, between CMM and Continuum
Care of Massachusetts, Inc. (Raynham, Massachusetts) (9)
10.22 Development Agreement dated September 1, 1996, between CareMatrix of
Cypress Station, Inc. and Chancellor of Houston, Inc. (Houston,
Texas) (9)
<PAGE>
10.23 Assignment Agreement dated July 3, 1996, by and among AMA Funding
Corporation, CMM, and Chancellor of Massachusetts, Inc. (Peoria,
Arizona) (9)
10.24 Turnkey Construction Agreement dated August 14, 1996, by and among
CMM, Atlantic on the Hudson, L.L.C. and Cambridge House Associates
General Partnership (Ossining, New York) (9)
10.25 Management Agreement dated October 3, 1996, among CMM and The
Mayfair at Glen Cove, L.L.C. and Hassett-Belfer Senior Housing,
L.L.C. (Glen Cove, New York) (9)
10.26 Development Agreement dated March 8, 1996, between CareMatrix of
Emerald Springs Inc./Netwest of Yuma, Inc. and Emerald Springs
Associates General Partnership (Yuma, Arizona) (9)
10.27 Development Agreement dated August 18, 1996, between CareMatrix of
Amethyst Arbor, Inc./Netwest Development Corporation and Amethyst
Arbor Associates General Partnership (Peoria, Arizona) (9)
10.28 Assignment Agreement dated as of June 6, 1996, between CCC of
Connecticut, Inc. and CMM (Westfield Court, Connecticut) (9)
10.29 Assignment Agreement dated July 3, 1996, by and between Chancellor
of Houston, Inc. and CMM (Houston, Texas) (9)
10.30 Assignment Agreement dated July 3, 1996, by and between Continuum
Care of Massachusetts, Inc. and Chancellor of Massachusetts, Inc.
(Ridgefield, Connecticut) (9)
10.31 Assignment Agreement dated June 6, 1996, by and between CCC of
Florida, Inc. and CMM (Millbury, Massachusetts) (9)
10.32 Assignment Agreement dated July 3, 1996, by and among AMA Funding
Corporation, CMM and Chancellor of Massachusetts, Inc. (Tucson,
Arizona) (9)
10.33 Management Agreement dated August 14, 1996, by and among CMM and
Cambridge House Associates General Partnership (Ossining, New York)
(9)
10.34 Assignment Agreement dated July 3, 1996, by and between CarePlex of
Southington, Inc., and Chancellor of Massachusetts, Inc.
(Southington, Connecticut) (9)
10.35 Assignment Agreement dated July 3, 1996, by and among The CarePlex
Group, Inc., CMM and Chancellor of Massachusetts, Inc. (Deerfield
Beach, Florida) (9)
10.36 Development Agreement dated April 18, 1996, by and between Cheshire
Care, L.L.C. and CMM Cheshire, Connecticut) (9)
10.37 Assignment Agreement dated July 3, 1996, by and between CMM and
Chancellor of Massachusetts, Inc. (Atlanta, Georgia) (9)
10.38 Purchase and Sale Agreement dated May 1996, between CMM (f/k/a
CareMatrix Corporation) and Ensign-Bickford Realty Corporation
(Avon, Connecticut) (9)
10.39 Assignment Agreement dated July 3, 1996, by and between CMM and
Chancellor of Massachusetts, Inc. (Macon, Georgia) (9)
10.40 Assignment Agreement dated July 3, 1996, by and between CMM and
Chancellor of Massachusetts, Inc. (Durham, North Carolina) (9)
10.41 Assignment Agreement dated July 3, 1996, by and between CMM and
Chancellor of Massachusetts, Inc. (Livingston, New Jersey) (9)
10.42 Assignment and Assumption of Management Agreement dated July 3,
1996, by and between CCC of New Jersey, Inc. and CMM (Park Ridge,
New Jersey) (9)
10.43 Agreement dated July 3, 1996, by and between CCC of New Jersey, Inc.
and CareMatrix of Massachusetts (9)
10.44 Development Agreement dated April 18, 1996, by and between
Woodbridge Care, L.L.C. and CareMatrix Corporation (9)
10.45 Assignment Agreement dated July 3, 1996, by and between CareMatrix
of Massachusetts, Inc., and Chancellor of Massachusetts, Inc. (Glen
Cove, NY; Roslyn, NY; Great Neck, NY; Wallingford, CT) (9)
10.46 Assignment Agreement dated July 3, 1996, by and between CMM and
Chancellor of Massachusetts, Inc. (Bonita Springs, Florida) (9)
10.47 Assignment Agreement dated July 3, 1996, by and between CMM and
Chancellor of Massachusetts, Inc. (Jensen Beach, Florida) (9)
<PAGE>
10.48 Assignment Agreement dated July 3, 1996, by and between CareMatrix
of Stony Brook, Inc. and CMM (Darien, Connecticut) (9)
10.49 Agreement of Sale dated September 6, 1996, by and between Reston
Land Corporation and CMM (Reston, Virginia) (9)
10.50 Deposit Receipt and Sale Agreement dated September 5, 1996, between
Bonita Bay Properties, Inc. and CMM (Bonita Bay, Florida) (9)
10.51 Global Services Agreement dated September 1, 1996, between
Chancellor Senior Housing Group, Inc. and CMM (9)
10.52 Master Agreement dated effective December 31, 1996, between Company
and North Shore Health System (excluding exhibits) (12)
10.53 Management Agreement dated as of December 20, 1996, between CMM and
Brazilian Court, Inc. (12)
10.54 Facility Lease dated as of December 16, 1996, between The
Annapolitan Care Center, Inc. and CareMatrix of Annapolis, Inc. (12)
10.55 First Amendment to Facility Lease dated as of December 15, 1996,
between The Annapolitan Care Center, Inc. and CareMatrix of
Annapolis, Inc. (12)
10.56 Office Lease dated as of December 31, 1996, between Continuum Care
of Dedham, Inc. and Company (12)
10.57 Guaranty Agreement dated November 25, 1996, between Company and
Sylvan Manor Health Care Center Limited Partnership (12)
10.58 Purchase Agreement dated August 12, 1997, by and among the Company
and certain initial purchasers of the Company's 6 1/4% Convertible
Subordinated Notes (10)
10.59 Registration Rights Agreement dated as of August 15, 1997, by and
among the Company and the Initial Purchasers (10)
10.60 Registration Agreement dated as of October 23, 199,7 by and between
the Company and BancAmerica Robertson Stephens ("BARS") (11)
10.61 Resignation Agreement by and between CareMatrix Corporation and
Michael J. Doyle, dated as of July 30, 1997 (15)
10.62 Resignation Agreement by and between CareMatrix Corporation and
Kenneth M. Miles, dated as of April 10, 1997 (15)
10.63 Warrant dated August 22, 199,7 to purchase an aggregate of 11,131
shares of the Company's Common Stock issued to Health Care REIT,
Inc. (15)
10.64 Warrant dated September 18, 1997, to purchase an aggregate of 3,677
shares of the Company's Common Stock issued to Health Care REIT,
Inc. (15)
10.65 Management Agreement dated August 14, 1996, by and among CMM and
Cambridge House Associates General Partnership (12)
10.66 Management Agreement dated October 3, 1996, by and among CMM and The
Mayfair at Glen Cove, LLC and Hassett-Belfer Senior Housing, LLC
(12)
10.67 Management Agreement dated April 15, 199,7 by and among CMM and CCC
of New Jersey, Inc. (15)
10.68 Assignment Agreement dated January 1, 1997, by and between CMM and
CCC of Massachusetts, Inc. (15)
10.69 Lease dated August 20, 1997, between CareMatrix of Dedham, Inc. and
Continuum Care of Dedham, Inc. (15)
10.70 Lease dated June 2, 1997, between CareMatrix of Needham, Inc. and
Continuum Care of Needham, Inc. (15)
10.71 Sublease dated July 1, 1997, between CareMatrix of Lauderhill I,
Inc. and Chancellor of Lauderhill I, Inc. (15)
10.72 Development Agreement between CareMatrix of Massachusetts, Inc. and
Chancellor of Aberdeen, Inc. dated April 11, 1997 (15)
10.73 Development Agreement between CMM and Chancellor Senior Housing
Group, Inc. dated September 26, 1997 (Bayport, New York) (15)
10.74 Development Agreement between CMM and Chancellor of Clearwater, Inc.
dated December 4, 1997 (15)
<PAGE>
10.75 Development Agreement between CMM and Chancellor of Dix Hills, Inc.
dated December 30, 1997 (15)
10.76 Development Agreement between CMM and Chancellor of East Longmeadow,
Inc. dated December 4, 1997 (15)
10.77 Development Agreement between CMM and Chancellor of Easton, Inc.
dated December 4, 1997 (15)
10.78 Development Agreement between CMM and Chancellor of Greenbelt, Inc.
dated December 4, 1997 (15)
10.79 Development Agreement between CMM and Chancellor of Islandia, Inc.
dated December 4, 1997 (15)
10.80 Development Agreement between CMM and Chancellor of Livingston, Inc.
dated December 4, 1997 (15)
10.81 Development Agreement between CMM and Chancellor of Middletown, Inc.
dated September 26, 1997 (15)
10.82 Development Agreement between CMM and Chancellor of Senior Housing
Group, Inc. dated September 26, 1997 (Naples, Florida) (15)
10.83 Development Agreement between CMM and Chancellor of Watchung, Inc.
dated December 4, 1997 (15)
10.84 Development Agreement between CMM and Chancellor of Westport, Inc.
dated December 30, 1997(15)
10.85 Turnkey Construction Contract between CarePlex of Cragganmore, Inc.
and The Cragganmore Associates Limited Partnership dated October 3,
1996 (15)
10.86 Development Agreement between CMM and Chancellor Senior Housing
Group, Inc. dated April 11, 1997 (Atlanta, Georgia) (15)
10.87 Development Agreement between CMM and Chancellor Senior Housing
Group, Inc. dated July 25, 1997 (Cape Elizabeth, Maine) (15)
10.88 Development Agreement between CMM and Chancellor Senior Housing
Group, Inc. dated April 11, 1997 (Durham, North Carolina) (15)
10.89 Development Agreement between CMM and Chancellor Senior Housing
Group, Inc. dated April 11, 1997 (Ellicott City, MD) (15)
10.90 Development Agreement between CareMatrix of Massachusetts, Inc. and
Chancellor Senior Housing Group, Inc. dated March 31, 1996 (Houston,
Texas) (15)
10.91 Assignment Agreement between CarePlex of Newton, Inc. and CMM dated
July 3, 1996 (Newton, Massachusetts; Lasell Village) (15)
10.92 Development Agreement between CMM and Chancellor Senior Housing
Group, Inc. September 26, 1997 (Merrillville, Indiana) (15)
10.93 Development Agreement between CMM and CCC of New Jersey, Inc. dated
July 15, 1996 (Park Ridge, New Jersey) (15)
10.94 Development Agreement between CMM and Chancellor Senior Housing
Group, Inc. dated September 26, 1997 (Pennington, New Jersey) (15)
10.95 Development Agreement between CMM and Chancellor Senior Housing
Group, Inc. dated July 25, 1997 (Pineville, North Carolina) (15)
10.96 Development Agreement between CMM and Chancellor Senior Housing
Group, Inc. dated September 26, 1997 (Reston, Virginia) (15)
10.97 Development Agreement between CMM and Chancellor Senior Housing
Group, Inc. dated September 26, 1997 (Tamarac, Florida) (15)
10.98 Development Agreement between CMM and Chancellor Senior Housing
Group, Inc. dated September 26, 1997 (Upper Nyack, New York) (15)
10.99 Development Agreement between CMM and Chancellor of Deerfield Beach,
Inc. dated March 19, 1997 (15)
10.100 Development Agreement between CMM and Chancellor Stuart, Inc. dated
January 10, 1997 (15)
10.101 Development Agreement between CMM and Chancellor Senior Housing
Group, Inc. dated April 11, 1997 (Jensen Beach (Villas), Florida)
(15)
<PAGE>
10.102 Development Agreement between CMM and Chancellor of Logan Square,
Inc. dated April 11, 1997 (15)
10.103 Development Agreement between CMM and Chancellor Senior Housing
Group, Inc. dated April 11, 1997 (Ridgefield, Connecticut) (15)
10.104 Development Agreement between CMM and Chancellor Senior Housing
Group, Inc. dated April 11, 1997 (Roswell, Georgia) (15)
10.105 Development Agreement between CMM and Chancellor Senior Housing
Group, Inc. dated April 11, 1997 (Saco, Maine) (15)
10.106 Development Agreement between CMM and Chancellor Senior Housing
Group, Inc. dated July 25, 1997 (Upper Providence, Pennsylvania)
(15)
10.107 Development Services Agreement between CMM, The Mayfair at Great
Neck, LLC, and Hassett-Belfer Senior Housing & Services, LLC dated
December 5, 1997 (15)
10.108 Development Agreement between CareMatrix of Amber Lights, Inc.,
Netwest Development Corporation and Amber Lights Associates General
Partnership dated December 10, 1996 (15)
10.109 Development Agreement between CareMatrix of Amethyst Arbor, Inc.,
Netwest Development Corporation and Amethyst Arbor Associates
General Partnership dated August 28, 1996 (15)
10.110 Development Agreement between CMM and Chancellor of the Armory, Inc.
dated September 1, 1998 (16)
10.111 Management Agreement between CMM and Chancellor of Aberdeen, Inc.
dated April 11, 1997 (16)
10.112 Consulting Agreement between CMM and Chancellor of Aberdeen, Inc.
dated July 1, 1998 (16)
10.113 First Amendment to Management Agreement between CMM and Chancellor
of Aberdeen, Inc. dated April 15, 1998 (16)
10.114 Development Agreement between CMM and Chancellor Senior Housing
Group, Inc. dated September 30, 1998 (Bradenton, Florida) (16)
10.115 Development Agreement between CMM and Chancellor Senior Housing
Group, Inc. dated July 10, 1998 (Brooklyn, Ohio) (16)
10.116 Development Agreement between CMM and Chancellor Senior Housing
Group, Inc. dated November 19, 1998 (Burr Ridge, Illinois) (16)
10.117 Development Agreement between CMM and Chancellor Senior Housing
Group, Inc. dated September 30, 1998 (Chestnut, Pennsylvania) (16)
10.118 Management Agreement between CMM and Chancellor of Deerfield Beach,
Inc. dated March 19, 1997 (16)
10.119 Consulting Agreement between CMM and Chancellor of Deerfield Beach,
Inc. dated July 1, 1998 (16)
10.120 First Amendment to Management Agreement between CMM and Chancellor
of Deerfield Beach, Inc. dated April 15, 1998 (16)
10.121 Development Agreement between CMM and Chancellor Senior Housing
Group, Inc. dated March 3, 1998 (Garden City, New York) (16)
10.122 Management Agreement between CMM and Chancellor Senior Housing
Group, Inc. dated September 26, 1997 (Merrillville, Indiana) (16)
10.123 Assignment Agreement between Chancellor Senior Housing Group, Inc.
and Chancellor of Merrillville, Inc. dated November 19, 1997 (16)
10.124 First Amendment to Management Agreement between CMM and Chancellor
of Merrillville, inc. dated April 15, 1998 (16)
10.125 Development Agreement between CMM and Chancellor Senior Housing
Group, Inc. dated September 1, 1998 (Old Saybrook, Connecticut) (16)
10.126 Consulting Agreement between CMM and CCC of New Jersey, Inc. dated
December 31, 1997 (Park Ridge, New Jersey) (16)
10.127 Consulting Agreement between CMM and CCC of New Jersey, Inc. dated
July 1, 1998 (Park Ridge/Princeton, New Jersey) (16)
<PAGE>
10.128 Development Agreement between CMM and Chancellor Senior Housing
Group, Inc. dated July 1, 1998 (Southbury, Connecticut) (16)
10.129 Management Agreement between CMM and Cragganmore Associates Limited
Partnership dated August 1, 1998 (16)
10.130 Development Agreement between CMM and Chancellor Senior Housing
Group, Inc. dated December 22, 1997 (Chicago, Illinois) (16)
10.131 Development Agreement between CMM and Chancellor Senior Housing
Group, Inc. dated December 24, 1998 (Venice, Florida) (16)
10.132 Development Agreement between CMM and Chancellor Senior Housing
Group, Inc. dated March 31, 1998 (Vernon Hills, Illinois) (16)
10.133 Development Agreement between CMM and Chancellor of Abington, Inc.
dated August 31, 1998 (Abington, Pennsylvania) (16)
10.134 Development Agreement between CMM and Chancellor of Cordova, Inc.
dated January 20, 1998 (Cordova, Tennessee) (16)
10.135 Development Agreement between CMM and Chancellor of Easton, Inc.
dated December 4, 1997 (Easton, Connecticut) (16)
10.136 Development Agreement between CMM and Chancellor of Flossmoor, Inc.
dated March 31, 1998 (Flossmoor, Illinois) (16)
10.137 Development Agreement between CMM and Chancellor of Ft. Myers, Inc.
dated March 6, 1998 (Ft. Myers, Florida) (16)
10.138 Development Agreement between CMM and Chancellor of Haverford, Inc.
dated March 12, 1998 (Haverford, Pennsylvania) (16)
10.139 Development Agreement between CMM and Chancellor of Mt. Prospect,
Inc. dated May 6, 1998 (Mt. Prospect, Illinois) (16)
10.140 Development Agreement between CMM and Cambridge House Associates
General Partnership dated September 1, 1998 (Ossining, New York)
(16)
10.141 Development Agreement between CMM and Chancellor of Pennington, Inc.
dated September 26, 1997 (Pennington, New Jersey) (16)
10.142 Development Agreement between CMM and Chancellor of Stoneham, Inc.
dated December 12, 1997 (Stoneham, Massachusetts) (16)
10.143 Development Agreement between CMM and Chancellor Senior Housing
Group, Inc. dated April 1, 1998 (Wellington, Florida) (16)
10.144 Development Agreement between CMM and Chancellor of Westlake, Inc.
dated June 26, 1998 (Westlake, Ohio) (16)
10.145 Facility Lease Agreement between CCC of New Jersey, Inc. and
CareMatrix of Princeton (ALF), Inc. dated October 30, 1998 (16)
10.146 Facility Lease Agreement between Stony Brook Court, LLC and
CareMatrix of Darien, Inc. dated September 30, 1998 (16)
10.147 Purchase agreement between CMM and various affiliated individuals
dated July 13, 1998. (14)
10.148 First Amendment between CMM and various affiliated individuals dated
August 31, 1998 (14)
10.149 Development Agreement between CMM, The Benenson Capital Company,
Spectrum Bellefair Corporation and Bellefair Holding Company
(Ryebrook) dated January 1, 1998(16)
10.150 Development Agreement between CMM, The Benenson Capital Company,
Spectrum Bellefair Corporation and The Bellefair Home & Land Company
(Ryebrook) dated January 1, 1998(16)
10.151 Consulting Agreement effective as of October 1, 1998, between
Chancellor of ARI, Inc. and CMM (*)
10.152 Assignment Agreement dated August 20, 1999, by and between CMM and
Chancellor Senior Housing Group, Inc. (North Haven, CT) (*)
10.153 Consulting Agreement effective as of October 1, 1998, between
Chancellor of Bonita Springs, Inc. and CMM (*)
<PAGE>
10.154 Consulting Agreement between Chancellor of Aberdeen, Inc. and CMM
effective as of October 1, 1998 (*)
10.155 Consulting Agreement between Cambridge House Associates, G.P. and
CMM effective as of October 1, 1998 (*)
10.156 Consulting Agreement between Chancellor of Cape Elizabeth, Inc. and
CMM effective as of October 1, 1998 (*)
10.157 Consulting Agreement between Sheldon Corp. and CareMatrix
Corporation dated August 9, 1999 (*)
10.158 Consulting Agreement between Chancellor of Clearfield, Inc. and CMM
effective as of October 1, 1998 (*)
10.159 Consulting Agreement between The Cragganmore Associates Limited
Partnership and CMM effective as of October 1, 1998 (*)
10.160 Consulting Agreement between Chancellor of Deerfield Beach, Inc. and
CMM effective as of October 1, 1998 (*)
10.161 Consulting Agreement effective as of October 1, 1998, between
Chancellor of Durham, Inc. and CMM (*)
10.162 Consulting Agreement effective as of October 1, 1998, between
Chancellor of Ellicott City, Inc. and CMM (*)
10.163 Agreement dated March 30, 1999, by and between CMM and various
Chancellor Entities (*)
10.164 Consulting Agreement effective as of October 1, 1998, between
CareMatrix of Houston, Inc. and CMM (*)
10.165 Consulting Agreement between Chancellor of the Lakes, Inc. and CMM
effective as of October 1, 1998 (*)
10.166 Consulting Agreement between Chancellor of Laurelwood, Inc. and CMM
effective as of October 1, 1998 (*)
10.167 Consulting Agreement effective as of October 1, 1998, between
Chancellor at Logan Square, Inc. and CMM (*)
10.168 Agreement dated September 30, 1999, by and between CMM and
Chancellor of Deerfield Beach, Inc. (*)
10.169 Agreement dated August 10, 1999, by and between CMM and Chancellor
of Aberdeen, Inc. (*)
10.170 Agreement dated August 10, 1999, by and between CMM and Chancellor
of Cape Elizabeth, Inc. (*)
10.171 Agreement dated September 30, 1999, by and between CMM and
Chancellor of Clearfield, Inc. (*)
10.172 Agreement dated August 10, 1999, by and between CMM and Chancellor
of Merrillville, Inc. (*)
10.173 Agreement dated June 30, 1999, by and between CMM and Cambridge
House Associates General Partnership (*)
10.174 Agreement dated March 31, 1999, by and between CMM and CCC of New
Jersey, Inc. (*)
10.175 Agreement dated August 10, 1999, by and between CMM and Chancellor
of Saco, Inc. (*)
10.176 Consulting Agreement effective as of October 1, 1998, between
Chancellor of Merrillville, Inc. and CMM (*)
10.177 Consulting Agreement effective as of October 1, 1998, between
Chancellor of Naples, Inc. and CMM (*)
10.178 Consulting Agreement effective as of October 1, 1998, between CCC of
New Jersey, Inc. and CMM (*)
10.179 Option Agreement dated June 30, 1999, by and between AMA of South
Florida, Inc. and CMX Leasing Co. (*)
10.180 Consulting Agreement between Chancellor of Pineville, Inc. and CMM
effective as of October 1, 1998 (*)
<PAGE>
10.181 Consulting Agreement made effective as of July 1, 1999, between The
Windrows at Princeton Corporation and CMM (*)
10.182 Letter dated March 30, 1999, by and between Continuum Care of
Dedham, Inc. and CareMatrix of Dedham, Inc. (*)
10.183 Letter dated March 30, 1999, by and between PBG Medical Mall SNF,
Ltd. and CareMatrix of Palm Beach Gardens (SNF), Inc. (*)
10.184 Consulting Agreement effective as of October 1, 1998, between
Chancellor of Roswell, Inc. and CMM (*)
10.185 Consulting Agreement between Chancellor of Saco, Inc. and CMM
effective as of October 1, 1998 (*)
10.186 Consulting Agreement between Chancellor of Stuart, Inc. and CMM
effective as of October 1, 1998 (*)
10.187 Letter dated March 30, 1999, by and between CCC of New Jersey, Inc.
and CareMatrix of Princeton (SNF), Inc. (*)
10.188 Assignment Agreement dated March 30, 1999, by and between CMM and
Chancellor of Glen Cove, Inc. (*)
10.189 Assignment Agreement dated September 8, 1999, by and between CMM and
Abraham D. Gosman (*)
10.190 Assignment Agreement dated November 4, 1999, by and between CMM,
Chancellor of Abington, Inc., and Chancellor Senior Housing Group,
Inc. (*)
10.191 Option Agreement dated August 13, 1999, by and between CMX Leasing
Co. and Chancellor of Cheshire, Inc. (*)
10.192 Option Agreement dated March 31, 1999, by and between CareMatrix of
Houston, Inc. and CMM (*)
10.193 Consulting Agreement effective as of May 1, 1999, between
Chancellor Senior Housing Group, Inc. and CMM (Brooklyn, OH) (*)
10.195 Consulting Agreement effective as of September 1, 1998, between
Chancellor of Clearwater, Inc. and CMM (*)
10.199 Consulting Agreement effective as of October 1, 1998, between
Chancellor of Green Valley I, Inc. and CMM (*)
10.200 Consulting Agreement effective as of September 1, 1998, between
Chancellor of Greenbelt, Inc. and CMM (*)
10.201 Consulting Agreement effective as of January 1, 1998, between
CareMatrix of Houston, Inc. and CMM (*)
10.204 Consulting Agreement effective as of February 1, 1998, between
Chancellor at Logan Square, Inc. and CMM (*)
10.206 Consulting Agreement effective as of May 1, 1999, between
Chancellor of Middletown, Inc. and CMM (*)
10.207 Consulting Agreement effective as of February 1, 1999, between
Chancellor of Mount Prospect, Inc. and CMM (*)
<PAGE>
10.208 Consulting Agreement effective as of January 1, 1998, between
Chancellor of Naples, Inc. and CMM (*)
10.210 Consulting Agreement effective as of October 1, 1998, between
Chancellor of Pennington, Inc. and CMM (*)
10.211 Consulting Agreement effective as of July 1, 1998, between
Chancellor of Peoria, Inc. and CMM (*)
10.212 Consulting Agreement effective as of January 1, 1998, between
Chancellor of Roswell, Inc. and CMM (*)
10.213 Agreement between CareMatrix Corporation and The Windrows at
Princeton Corporation dated July 1, 1998 (*)
10.215 Consulting Agreement effective as of July 1, 1998, between
Chancellor of Tucson, Inc. and CMM (*)
10.216 Consulting Agreement effective as of July 1, 1998, between
Chancellor of Upper Providence, Inc. and CMM (*)
10.217 Consulting Agreement effective as of July 1, 1998, between
Chancellor of Watchung, Inc. and CMM (*)
10.218 Termination Agreement by and between CareMatrix of Houston, Inc. and
CMM dated September 30, 1999 (*)
10.219 Consulting Agreement effective as of January 1, 1998, between
Chancellor of the Armory, Inc. and CMM(*)
10.220 Consulting Agreement effective as of May 1, 1999, between Chancellor
of Bayport, Inc. and CMM (*)
10.221 Consulting Agreement effective as of January 1, 1998, between
Chancellor of Bonita Springs, Inc. and CMM (*)
10.222 Consulting Agreement effective as of January 1, 1998, between
Chancellor of Aberdeen, Inc. and CMM (*)
10.223 Consulting Agreement effective as of March 1, 1998, between
Chancellor of Cape Elizabeth, Inc. and CMM (*)
10.224 Consulting Agreement effective as of January 1, 1998, between
Chancellor of Deerfield Beach, Inc. and CMM (*)
10.225 Consulting Agreement effective as of January 1, 1998, between
Chancellor of Durham, Inc. and CMM (*)
10.226 Consulting Agreement effective as of September 1, 1998, between
Chancellor of East Longmeadow, Inc. and CMM (*)
10.227 Consulting Agreement effective as of January 1, 1998, between
Chancellor of Ellicott City, Inc. and CMM (*)
10.228 Consulting Agreement effective as of January 1, 1998, between
Chancellor of Merrillville, Inc. and CMM (*)
10.229 Consulting Agreement effective as of September 1, 1998, between
Chancellor of Altamonte Springs, Inc. and CMM (*)
10.230 Consulting Agreement effective as of January 1, 1998, between CCC of
New Jersey, Inc. and CMM (*)
10.231 Consulting Agreement effective as of January 1, 1998, between
Chancellor of Pineville, Inc. and CMM (*)
10.232 Consulting Agreement effective as of January 1, 1998, between
Chancellor of Ridgefield, Inc. and CMM (*)
10.233 Consulting Agreement effective as of January 1, 1998, between
Chancellor of Stuart, Inc. and CMM (*)
21.00 Subsidiaries of the Company (*)
23.00 Consent of PricewaterhouseCoopers LLP (*)
27.00 Financial Data Schedule for fiscal year-end 1999 (*)
_____________________
* Filed herewith
(1) Filed as an Exhibit to the Company's Registration Statement on Form S-1
(No. 33-64720)
(2) Filed as an Exhibit to the Company's Registration Statement on Form S-18
(No. 33-44966-B)
(3) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1992
(4) Filed as an Exhibit to the Company's Report on Form 10-K dated for the
fiscal year ended December 31, 1993
(5) Filed as an Exhibit to the Company's Report on Form 10-K for the fiscal
year ended December 31, 1994
(6) Filed as an Exhibit to the Company's Report on Form 8-K dated July 20, 1992
(7) Filed as an Exhibit to the Company's Report on Form 10-K for the fiscal
year ended December 31, 1995
(8) Filed as an Exhibit to the Company's Registration Statement on Form S-4
(No. 333-5364)
(9) Filed as an Exhibit to the Company's Registration Statement on Form S-1
(No. 333-11455)
(10) Filed as an Exhibit to the Company's Registration Statement on Form S-3
filed by the Company on October 17, 1997 (No. 333-38113)
(11) Filed as an Exhibit to the Company's Registration Statement on Form S-3
filed by the Company on November 12, 1997 (No. 333-40015)
(12) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996
(13) Filed as an Exhibit to the Company's Proxy Statement dated May 2, 1997
(14) Filed as an Exhibit to the Company's Report on Form 8-K dated as of
September 1, 1998
(15) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997
(16) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1998.
