<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-10968
LIVING CENTERS OF AMERICA, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 74-2012902
(State or other jurisdiction of incorporation (I.R.S. Employer
organization) Identification No.)
15415 KATY FREEWAY
SUITE 800
HOUSTON, TEXAS
77094
(Address of principal executive offices)
(Zip Code)
(713) 578-4700
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
There were 20,259,597 shares outstanding of the issuer's only class of
common stock as of July 25, 1996.
The Exhibit Index is located on page 16.
THERE ARE 17 PAGES TO THIS REPORT.
<PAGE> 2
LIVING CENTERS OF AMERICA, INC.
AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
JUNE 30, 1996
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements and Notes 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
PART II - OTHER INFORMATION
Item 1. Not applicable
Item 2. Not applicable
Item 3. Not applicable
Item 4. Not applicable
Item 5. Not applicable
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURE PAGE 17
</TABLE>
<PAGE> 3
PART 1 FINANCIAL INFORMATION
Item 1. CONSOLIDATED FINANCIAL STATEMENTS
LIVING CENTERS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended June 30, Ended June 30,
---------------------------------- ---------------------------------
1996 1995 1996 1995
<S> <C> <C> <C> <C>
NET REVENUES
Nursing home revenue:
Net patient services $193,795 $184,373 $576,127 $539,999
Other 2,155 4,215 6,904 9,966
Non-nursing home revenue:
Pharmacy services 33,141 23,863 87,333 65,977
Therapy services 50,816 2,697 155,931 7,972
Medical supplies and other 1,310 703 3,358 2,162
-------------- --------------- -------------- --------------
281,217 215,851 829,653 626,076
COSTS AND EXPENSES:
Salaries and wages 113,839 84,308 342,333 247,615
Employee benefits 26,016 19,230 76,672 59,200
Nursing, dietary and other supplies 14,917 13,963 45,243 41,265
Ancillary services 49,888 38,678 136,502 107,039
General and administrative 41,423 32,747 122,373 94,948
Depreciation and amortization 9,818 7,132 28,784 21,677
Provision for bad debts 4,380 2,208 11,377 7,112
Life insurance proceeds (2,015) - (2,015) -
Merger and acquistion costs - 4,745 - 5,295
-------------- --------------- -------------- --------------
258,266 203,011 761,269 584,151
-------------- --------------- -------------- --------------
INCOME FROM OPERATIONS 22,951 12,840 68,384 41,925
INTEREST EXPENSE, NET:
Interest expense 4,877 3,323 14,812 12,816
Interest income (1,964) (1,598) (5,823) (5,361)
-------------- --------------- -------------- --------------
2,913 1,725 8,989 7,455
-------------- --------------- -------------- --------------
INCOME BEFORE INCOME TAXES
AND EQUITY EARNINGS/MINORITY
INTEREST 20,038 11,115 59,395 34,470
PROVISION FOR INCOME TAXES 7,344 5,859 23,199 14,528
-------------- --------------- -------------- --------------
INCOME BEFORE EQUITY EARNINGS/
MINORITY INTEREST 12,694 5,256 36,196 19,942
EQUITY EARNINGS/MINORITY INTEREST 122 (48) (69) (182)
-------------- --------------- -------------- --------------
NET INCOME $12,816 $5,208 $36,127 $19,760
============== =============== ============== ==============
PRO FORMA DATA (UNAUDITED):
INCOME BEFORE PRO FORMA TAXES $5,208 $19,760
PRO FORMA TAXES 166 549
--------------- --------------
PRO FORMA NET INCOME $5,042 $19,211
=============== ==============
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES
OUTSTANDING 20,501 20,089 20,434 18,608
============== =============== ============== ==============
EARNINGS PER SHARE $0.63 $0.26 $1.77 $1.06
============== =============== ============== ==============
PRO FORMA EARNINGS PER SHARE $0.25 $1.03
=============== ==============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
3
<PAGE> 4
LIVING CENTERS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share amounts)
(unaudited)
<TABLE>
<CAPTION>
June 30, September 30,
ASSETS 1996 1995
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $15,168 $17,886
Receivables (less allowances of $19,369 and $16,500) 190,253 151,969
Notes receivable, net 3,437 3,403
Receivable from affiliates - 2,698
Supplies 13,500 13,264
Prepaid expenses 10 10,503
Deferred income taxes 18,375 17,264
Other (including patient trust funds of $4,532 and $4,506) 11,230 9,865
----------------- ------------------
TOTAL CURRENT ASSETS 251,973 226,852
PROPERTY AND EQUIPMENT:
Land, buildings and improvements 368,390 356,725
Furniture, fixtures and equipment 106,519 92,996
Leased property under capital leases 12,550 13,465
----------------- ------------------
487,459 463,186
Less accumulated depreciation 190,144 169,815
----------------- ------------------
297,315 293,371
GOODWILL, NET 174,264 145,402
RESTRICTED INVESTMENTS 35,666 36,622
INVESTMENT IN UNCONSOLIDATED AFFILIATE 2,925 205
NOTES RECEIVABLE, NET 10,987 10,781
OTHER ASSETS 19,992 17,475
----------------- ------------------
$793,122 $730,708
================= ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $31,289 $34,981
Accounts payable 64,364 73,076
Accrued payroll and related expenses 62,850 55,957
Accrued property taxes 4,044 5,131
Patient trust funds 4,532 4,506
Accrued income taxes payable 10,296 4,534
Other accrued expenses 18,962 14,036
----------------- ------------------
TOTAL CURRENT LIABILITIES 196,337 192,221
LONG-TERM DEBT, NET OF CURRENT MATURITIES 195,930 181,929
LONG-TERM INSURANCE RESERVES 32,276 22,986
MINORITY INTERESTS 104 604
DEFERRED INCOME TAXES AND OTHER NONCURRENT LIABILITIES 26,739 29,372
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.01; 4,650,000 shares authorized;
none issued - -
Series A - Junior participating preferred stock, par
value $.01; 350,000 authorized and
reserved; none issued - -
Common stock, par value $.01; 75,000,000 and 35,000,000
shares authorized; 20,267,920 shares issued 203 203
Capital surplus 228,065 227,099
Retained earnings 113,680 77,553
Unrealized loss on securities available-for-sale (29) -
Treasury stock at cost - 8,323 and 77,109 shares (183) (1,259)
----------------- ------------------
TOTAL STOCKHOLDERS' EQUITY 341,736 303,596
----------------- ------------------
$793,122 $730,708
================= ==================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
4
<PAGE> 5
LIVING CENTERS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(dollars and shares in thousands)
(unaudited)
<TABLE>
<CAPTION>
Common Stock Unrealized Treasury Stock
-------------------- Capital Retained Loss on ------------------------
Shares Amount Surplus Earnings Securities Shares Amount Total
---------- -------- ------------ ------------- ----------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, SEPTEMBER 30, 1995 20,267 $203 $227,099 $77,553 - 77 ($1,259) $303,596
Net income 36,127 36,127
Funding of employee benefit
plans 632 (35) 539 1,171
Funding of options exercised
under 1992 Employee Stock
Option Plan, net of tax 334 (34) 537 871
Unrealized loss on securities
available-for-sale (29) (29)
---------- -------- ------------ ------------- ----------- ---------- ------------ ------------
BALANCE, JUNE 30, 1996 20,267 $203 $228,065 $113,680 ($29) 8 ($183) $341,736
========== ======== ============ ============= =========== ========== ============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
5
<PAGE> 6
LIVING CENTERS OF AMERICA, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months
Ended June 30,
-------------------------------
1996 1995
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $36,127 $19,761
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 28,784 21,678
Income taxes deferred (4,007) (4,652)
Equity earnings/minority interest 69 182
Provision for bad debts 11,377 7,112
Changes in noncash working capital:
Receivables (46,522) (37,150)
Supplies 1,294 1,559
Receivable from affilates 2,698 (574)
Prepayments, including insurance 10,493 (2,661)
Other current assets (1,365) (1,477)
Accounts payable (9,272) 323
Accrued expenses and other current liabilities 10,685 17,441
Changes in long-term insurance reserves 9,290 11,461
Changes in other noncurrent liabilities (385) 237
Restricted investments 927 (10,759)
Other (38) 648
-------------- --------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 50,155 23,129
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchases of property and equipment (66,183) (117,470)
Disposals of property, equipment and
other assets 2,653 6,900
Additions to notes receivable (1,135) 0
Collections on notes receivable 703 (2,553)
Other 317 315
-------------- --------------
NET CASH USED IN INVESTING ACTIVITIES (63,645) (112,808)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 236 192,200
Net draws under credit line 37,300 13,607
Repayment of long-term debt (27,635) (208,565)
Funding of options under 1992 employee stock
purchase plan and employee benefit plans 871 608
Issuance of Common Stock - 99,061
Other - (3,144)
-------------- --------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 10,772 93,767
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,718) 4,088
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 17,886 17,563
-------------- --------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $15,168 $21,651
============== ==============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
6
<PAGE> 7
LIVING CENTERS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION
Living Centers of America, Inc. ("Living Centers" or the "Company")
provides a full range of services to the long-term care industry. As of
February 1992, the Company commenced an initial public offering ("IPO") in
which 7,776,000 shares of stock were sold for the benefit of the Company's
parent (The ARA Group, Inc.). On March 17, 1992, an additional 822,180 shares
of stock were sold as an over-allotment for the benefit of the Company. In
October 1993, the Company issued an additional 1,193,193 shares of common stock
in connection with its acquisition of Vari-Care, Inc. ("Vari-Care"). In
September 1994, the Company acquired the remaining 51% of the outstanding
Common Stock of American Pharmaceutical Services, Inc. ("APS"), previously
Abbey Pharmaceutical Services, Inc. In February 1995, the Company issued an
additional 2,875,000 shares of common stock in an additional public offering.
The net proceeds of the transaction, approximately $99.1 million, were used to
retire existing debt and for working capital and general corporate purposes.
Effective July 31, 1995, the Company issued 6,479,482 additional shares of its
common stock in a merger transaction with The Brian Center Corporation and 16
related S corporations (collectively the "BCC Entities"). The merger was
accounted for using the pooling of interests methodology and the accompanying
financial statements have been restated to include the accounts of the BCC
Entities as though the transaction occurred on September 30, 1994.
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of the Company
have been prepared in accordance with generally accepted accounting principles
for interim financial information and pursuant to the rules and regulations of
the Securities and Exchange Commission. Accordingly, they do not include all
of the information and notes required by generally accepted accounting
principles for annual financial statements. In the opinion of management, all
adjustments (which include only normal recurring adjustments) considered
necessary for a fair presentation have been included. These financial
statements should be read in conjunction with the audited consolidated
financial statements and notes thereto for the year ended September 30, 1995
filed with the Securities and Exchange Commission on Form 10-K, Annual Report,
file No. 33-44726.
CASH MANAGEMENT
The Company maintains a centralized cash management system in which cash
receipts are transferred daily from center and ancillary company depository
accounts to a cash concentration account. Cash is then used to provide for
normal working capital requirements, including reduction of the outstanding
credit lines or placement of excess funds in commercial grade investments. To
the extent that cash transferred from the center and ancillary company
depository accounts is not sufficient to provide for cash disbursement
requirements, a cash advance is obtained from the Bank Credit Facility. See
Note 2. Cash equivalents consist of temporary investments with original
maturities of three months or less.
RESTRICTED INVESTMENTS
Restricted investments represent restricted funds that have been designated
to pay insurance claims of the Company's wholly-owned insurance subsidiary.
The invested funds restricted to pay insurance claims have been classified as
available-for-sale securities.
NOTE 2. LONG-TERM DEBT
As part of the IPO, the Company entered into an unsecured agreement (the
"Bank Credit Facility") with several banks in which the banks agreed to provide
both long-term and short-term financing for the Company. The Bank Credit
Facility (which has been amended and restated on several occasions to
accommodate various purchase transactions) was most recently amended on June
29, 1995 and currently provides for a revolving credit agreement (the
"Revolver") in the amount of $130.0 million and a fully amortizing five-year
term loan (the "Term Loan") of $135.0 million. The Bank Credit Facility
provides for the issuance of letters of credit in aggregate amounts up to $35.0
million. In the event of issuance of letters of credit by the Company, the
availability under the Revolver is decreased by a corresponding amount. The
balance of the Revolver at June 30, 1996 was $78.0 million and the Company had
additional credit availability under the Revolver of $47.3 million. The Term
Loan is repayable in 20 equal quarterly installments of $6,750,000 each
beginning September 30, 1995
7
<PAGE> 8
LIVING CENTERS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
and continuing through June 30, 2000. The balance of the Term Loan at June 30,
1996 was $108.0 million. The interest rate on the Bank Credit Facility is, at
the Company's option, NationsBank's Adjusted Base Rate or the reserve-adjusted
Eurodollars Rate for periods of one, three or six months plus .875%. Interest
rates are increased under both options if certain financial ratios are not
achieved. As of June 30, 1996, NationsBank announced Adjusted Base Rate was
8.25% per annum.
In October 1993, the Company borrowed $20.0 million from SouthTrust Bank of
Alabama, N.A. that was used to retire debt that was assumed in the Vari-Care
merger transaction. The note is unsecured and bears interest at the rate of
6.95%, payable semiannually. The principal is repayable in five annual
payments of $4 million beginning October 1, 1998.
In January 1994, the Company issued, in a private placement, a $10.0
million note to a wholly owned subsidiary of American General Insurance Company
at a fixed rate of interest of 7.79%. The note was subsequently acquired by
the Variable Annuity Life Insurance Company ("Variable Annuity Life"). The
note is unsecured and will mature in a single payment due in ten years. The
note agreement contains restrictions similar to other unsecured debt of the
Company. The proceeds of the Variable Annuity Life note were used in April
1994 to retire Term Notes under the Bank Credit Facility.
In May 1994, the Company executed a promissory note which was extended in
June 1996 (payable on demand or by June 29, 1997 unless extended at the option
of the Bank) with NationsBank of Texas, N.A. in the principal amount of $10.0
million. Subject to the Bank's prior approval of any request for an advance,
the Company may borrow, repay and reborrow principal amounts in increments such
that the unpaid principal balance at anytime will not exceed $10.0 million.
The interest rate on each advance is quoted separately based on market
conditions that exist at that time. At June 30, 1996, the balance on the note
was zero.
The covenants governing the Bank Credit Facility and the notes with
SouthTrust Bank and Variable Annuity Life provide for the maintenance of
various financial ratios. The Company is in compliance with the terms of all
such covenants. These covenants also limit the Company's ability to pay cash
dividends. At June 30, 1996, these restrictions effectively limited dividend
payments to no more than $3.2 million. Even though the covenants of the Bank
Credit Facility permit the payment of dividends as described above, the Company
does not presently intend to pay any such dividends.
A summary of total debt as of June 30, 1996 is as follows (in thousands):
<TABLE>
<S> <C>
Bank Credit Facility . . . . . . . . . . . . . . $186,000
SouthTrust Bank of Alabama, N.A. . . . . . . . . 20,000
Variable Annuity Life Insurance Company . . . . 10,000
Mortgage notes . . . . . . . . . . . . . . . . . 1,523
Other notes payable . . . . . . . . . . . . . . 6,325
Obligations under capital leases . . . . . . . . 3,371
--------
227,219
Less current portion . . . . . . . . . . . . . . 31,289
--------
Debt classified as long-term . . . . . . . . . . $195,930
========
</TABLE>
8
<PAGE> 9
LIVING CENTERS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3. EARNINGS PER COMMON SHARE
The following table presents a reconciliation of the number of weighted
average common shares used in computing primary earnings per share (in
thousands):
<TABLE>
<CAPTION>
Three Months Nine Months
Ended June 30, Ended June 30,
---------------------- -----------------------
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Common shares outstanding, end of
period . . . . . . . . . . . . . . . 20,260 13,437 20,260 13,437
Issuance of shares in connection with
the BCC Entities merger . . . . . . -- 6,479 - 6,479
Effect of using weighted average
shares outstanding . . . . . . . . . (10) (2) (29) (1,504)
Effect of using treasury stock method
on stock options and warrants . . . 251 175 203 196
------ ------ ------ ------
Shares used in computing earning per
share . . . . . . . . . . . . . . . 20,501 20,089 20,434 18,608
====== ====== ====== ======
</TABLE>
NOTE 4. LIFE INSURANCE PROCEEDS
The Company recorded non-taxable life insurance proceeds of $2.0 million in
the third quarter on Don Wortley, former president of ARS, who passed away
earlier in the year.
NOTE 5. CASH INTEREST AND TAXES
Total cash interest paid during the nine months ended June 30, 1996 and
1995 was $14.1 million and $13.0 million, respectively. Cash taxes paid during
the nine months ended June 30, 1996 and 1995 were $27.8 million and $11.7
million, respectively.
NOTE 6. RESTRUCTURING PLAN
During the third quarter the Company finalized a plan originating in June,
1995 to restructure the operations and exit certain activities of ARS. This
plan includes centralization of billing and collection, closing or downsizing
unprofitable clinics and offsite contracts, and staff reductions in both
corporate overhead and field management. This plan resulted in an increase to
the original purchase price of the acquisition by $10.1 million which included
an accrual for estimated exit costs of $8.6 million. The increase in purchase
price includes the following ($000 omitted):
<TABLE>
<S> <C>
Termination/severance for displaced employees $ 4,394
Future lease costs for abandoned real property 4,176
Write off of abandoned tangible and intangible
assets at closed locations 1,532
-------
Total $10,102
=======
</TABLE>
The restructuring is expected to be completed during the second quarter of
fiscal 1997.
9
<PAGE> 10
LIVING CENTERS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 7. TREASURY STOCK
During the nine months ended June 30, 1996, the Company used approximately
35,000 shares of its treasury stock to fund the employers' contributions to the
Company sponsored 401(k) Plan and Deferred Retirement Income Plan. The excess
of the market value of the shares at September 30, 1995 over the actual cost
was added to capital surplus (approximately $632,000).
NOTE 8. CONTINGENCIES
The Company is a party to various legal proceedings. The Company believes
that there are no material pending legal proceedings which are not adequately
covered by insurance or related reserves.
Effective December 31, 1995 the Company was removed as guarantor on certain
debts of affiliated companies which totaled $500,000.
NOTE 9. SUBSEQUENT EVENTS
On July 25, 1996 the Company announced that it had signed a letter of
intent to sell its Living Centers-DevCon (DevCon) subsidiary to American
Habilitation Services, Inc. for $47.5 million in cash. In addition, the
Company announced plans to expand APS by reaching an agreement to acquire
Allied Pharmacy Management, Inc. (Allied), which operates five institutional
pharmacies and a home health business in Florida, and that it recently
completed the acquisition of Lahr Pharmacies, Inc. in Arizona. Net proceeds of
the DevCon sale will be utilized for the Allied acquisition and to reduce
outstanding debt under the Company's bank credit facility.
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company provides a full range of long-term care services, specialty
nursing services such as Alzheimer's care, and ancillary services such as
comprehensive subacute nursing care, rehabilitation therapy, infusion therapy
and pharmaceutical services. In addition, the Company provides client-centered
services to people with mental retardation and developmental disabilities (see
Note 9). The Company derives its net revenues from Medicaid, Medicare and
private pay payors. Payments made under the Medicaid and Medicare programs are
subject to regulatory action and governmental budgetary constraints.
As noted below, the Company made several acquisitions during the 1995
fiscal year which are expected to result in a significant revenue increase
during the fiscal year 1996. Unless the Company continues to acquire
additional companies in the 1996 fiscal year, the large percentage increase in
revenues expected in the 1996 fiscal year will likely not be repeated in
subsequent years.
EFFECTS OF SIGNIFICANT FISCAL 1995 ACQUISITIONS
On June 30, 1995, the Company completed its acquisition of Rehability,
which is one of the largest providers of rehabilitation services in the United
States. As the significant component of ARS, the Company's rehabilitation
services group, Rehability operates 160 outpatient rehabilitation centers in 21
states and provides contract rehabilitation therapy services to approximately
600 skilled nursing centers (approximately 500 of which are unaffiliated with
the Company) and approximately 50 acute care hospitals. ARS services include
physical and occupational therapies, speech language pathology and audiology
and respiratory therapy programs through third-party contracts. Since the
acquisition, the Company has made significant changes in Rehability's
operations, including replacing several senior management personnel,
implementing various overhead reductions, refinancing existing debt, and
implementing a restructuring plan to close 30 clinic locations that were
operating unprofitably. As a result of the Company's acquisition of TMI
effective August 1, 1995, ARS also provides rehabilitation consulting services,
rehabilitation therapy program enhancement services and management of
rehabilitation therapy programs. TMI's services include clinical,
documentation and billing protocols, as well as monitoring of patient outcomes.
Prior to the TMI acquisition, TMI managed substantially all of the Company's
rehabilitation therapy programs in its long-term care services group. The
Company expects to further integrate the activities of Rehability and TMI in
its continuing efforts to improve the operations of ARS (see Note 6). The
acquisitions of Rehability and TMI were accounted for using the purchase method
of accounting.
On July 31, 1995, the Company completed its acquisition of BCC, adding 47
skilled nursing centers with 5,790 beds in Florida, Georgia, North Carolina,
South Carolina and Virginia, with two retirement centers with 192 beds, two
apartment complexes with 87 units, and institutional pharmacy business, a
rehabilitation therapy company and a medical supply company. The BCC
acquisition was accounted for using the pooling of interests method of
accounting. Consequently, the accounts of BCC have been incorporated into the
Company's consolidated financial statements as though the transaction was
completed on September 30, 1994. In order to better integrate and consolidate
the operation of the privately held BCC into Living Centers, the Company
relocated its Montgomery, Alabama office to Hickory, North Carolina (the prior
corporate office of BCC), moved the primary accounting and MIS functions of BCC
to the Company's corporate office in Houston, implemented significant overhead
reductions and refinanced existing BCC debt in order to take advantage of lower
interest rates available to the Company. The Company also is integrating the
pharmacy and therapy operations of BCC into the Company's APS and ARS
operations. Management expects future improvements in the overall operations
of the Company as the Rehability and BCC acquisitions are integrated further.
Presentation of the combined operation of BCC and the Company for fiscal
year 1995 results in an unusually low effective tax rate since the tax expense
of certain BCC entities, which were S corporations, were paid at the
shareholder level rather than at the corporate level. Consequently, net income
has been adjusted on a pro forma basis to reflect the estimated tax provision
that would have been provided had the S corporations in the BCC group been
treated as C corporations.
11
<PAGE> 12
RESULTS OF OPERATIONS
The following table sets forth certain data from the statement of income
expressed as a percentage of net revenues:
<TABLE>
<CAPTION>
Nine Months
Ended June 30,
----------------
1996 1995
<S> <C> <C>
Net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100% 100%
Costs and expenses:
Payroll and payroll related expenses . . . . . . . . . . . . . . . . 50.5 50.5
Operating and administrative . . . . . . . . . . . . . . . . . . . . 37.8 39.3
Depreciation and amortization . . . . . . . . . . . . . . . . . . . 3.5 3.5
----- -----
91.8 93.3
----- -----
Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . 8.2 6.7
Interest expense, net . . . . . . . . . . . . . . . . . . . . . . . . . 1.1 1.2
----- -----
Income before income taxes and equity earnings/
minority interests . . . . . . . . . . . . . . . . . . . . . . . . . 7.1 5.5
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . 2.8 2.3
----- -----
Income before equity earnings/minority interests . . . . . . . . . . . . 4.3 3.2
Equity earnings/minority interests . . . . . . . . . . . . . . . . . . . -- --
----- -----
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3 3.2
Pro forma taxes (unaudited) . . . . . . . . . . . . . . . . . . . . . . -- .1
----- -----
Pro forma net income (unaudited) . . . . . . . . . . . . . . . . . . . . 4.3% 3.1%
===== =====
</TABLE>
THIRD QUARTER OF FISCAL 1996 COMPARED TO THIRD QUARTER OF FISCAL 1995.
Net revenues for three months ended June 30, 1996 increased $65.3 million, or
30%, to $281.2 million compared to the same period for fiscal 1995. Of the
$65.3 million increase in net revenues, $7.4 million was from nursing home
operations, including approximately $8.1 million from rate increases
(primarily in the area of Medicaid and Medicare services) and changes in
patient mix over the prior period. Ancillary revenues in the nursing home
operations increased approximately $4.5 million due to higher acuity levels and
increases in Medicare patients. In addition, there were net revenue decreases
in the nursing home operations of approximately $4.5 million due to
divestitures. Of the $65.3 million increase in net revenues, $57.1 million was
from non-nursing home operations comprising pharmacy and therapy services
acquisitions (primarily Rehability, TMI, and various pharmacies).
Costs and expenses for the three months ended June 30, 1996 increased $55.3
million, or 27%, to $258.3 million compared to the same period for fiscal 1995.
Of the $55.3 million increase in costs and expenses, $54.7 million was due to
acquisitions, primarily Rehability, TMI, and various pharmacies. Ancillary
services expense increased $7.5 million and payroll related expense increased
$4.2 million both primarily from the higher resident acuity level and the
increase in the number of Medicare residents in the Company's nursing home
operations. General and administrative expenses increased by $1.5 million
which primarily reflects increases in the nursing home insurance program.
Total expenses decreased by $6.3 million as a result of divestitures, $2.0
million of life insurance proceeds, and $4.7 million in merger and acquisition
expense relating to the BCC merger.
Net interest expense increased by $1.2 million or 69%, to $2.9 million,
reflecting the increase in interest cost associated with the additional debt
incurred to acquire Rehability, which was partially offset by an increase in
interest income from the Company's insurance subsidiary.
Net income increased $7.6 million, or 146%, to $12.8 million, reflecting
primarily the impact of the improvements in operations noted above and a
reduced effective tax rate. The reduction in effective tax rate is due to the
life insurance proceeds received in the current quarter which are non-taxable
and the merger and acquisition costs from the prior year quarter which are
primarily not deductible.
The elimination of proforma tax expense is a result of the conversion of
the BCC S corporations to a C corporation status.
12
<PAGE> 13
FISCAL 1996 YEAR TO DATE COMPARED TO FISCAL 1995 YEAR TO DATE. Net
revenues for nine months ended June 30, 1996 increased $203.6 million, or 33%,
to $829.7 million compared to the same period for fiscal 1995. Of the $203.6
million increase in net revenues, $33.1 million was from nursing home
operations, including approximately $5.4 million from acquisitions and
approximately $25.0 million from rate increases (primarily in the area of
Medicaid and Medicare services) and changes in patient mix over the prior
period. Ancillary revenues in the nursing home operations increased
approximately $17.5 million due to higher acuity levels and increases in
Medicare patients. In addition, there were net revenue decreases in the
nursing home operations of approximately $13.4 million due to divestitures. Of
the $203.6 million increase in net revenues, $169.1 million was from
non-nursing home operations comprising $167.4 million in pharmacy and therapy
services acquisitions (primarily Rehability and TMI) and an increase of
approximately $3.1 million in revenues from base pharmacy operations, medical
supplies and other services which related primarily to the BCC operations.
Costs and expenses for the nine months ended June 30, 1996 increased $177.1
million, or 30%, to $761.3 million compared to the same period for fiscal 1995.
Of the $177.1 million increase in costs and expenses, $162.6 million was due to
acquisitions, primarily Rehability, TMI, and various pharmacies. Other major
expense increases included $12.0 million in payroll related expenses, $21.3
million in ancillary services (primarily from the higher resident acuity level
and the increase in the number of Medicare residents in the Company's nursing
home operations) and $5.7 million in general and administrative expenses. The
increase in general and administrative expenses primarily reflects increases in
the nursing home insurance program. Total expenses decreased by $17.1 million
as a result of divestitures; there were also reductions in bad debt expense of
$2.5 million (primarily due to a non-recurring $.7 million adjustment for BCC
in 1995 fiscal year coupled with increased collection efforts), $2.0 million of
life insurance proceeds, and $5.3 million in merger and acquisition expense
relating to the BCC merger.
Net interest expense increased by $1.5 million or 21%, to $9.0 million,
reflecting the increase in interest cost associated with the additional debt
incurred to acquire Rehability, which was partially offset by an increase in
interest income from the Company's insurance subsidiary.
Net income increased $16.4 million, or 83%, to $36.1 million, primarily
reflecting the impact of the improvements in operations noted above and a
reduced effective tax rate. The reduction in effective tax rate is due to the
life insurance proceeds received in the current year which are non-taxable and
the merger and acquisition costs from the prior year which are primarily not
deductible.
The elimination of proforma tax expense is a result of the conversion of
the BCC S corporations to a C corporation status.
CHANGES IN OCCUPANCY LEVELS AND PAYOR MIX. The following table sets forth
the average occupancy levels (based on licensed beds) for the Company's owned
and leased centers for the periods indicated:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended June 30, Ended June 30,
-------------- --------------
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Weighted Licensed bed count . . . . . 25,772 26,658 25,757 26,568
Total average residents . . . . . . . 21,521 22,661 21,626 22,577
Average occupancy . . . . . . . . . . 83.5% 85.0% 84.0% 85.0%
</TABLE>
The average occupancy rate declined slightly in the third quarter
partially due to an increase in hospital-operated skilled nursing units in key
markets. The Company has implemented an aggressive marketing program to
increase census and improve quality mix.
13
<PAGE> 14
The following table sets forth the approximate percentage of the Company's
net patient revenues derived from the various sources of payment for the
periods indicated:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended June 30, Ended June 30,
-------------- --------------
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Medicaid . . . . . . . . . . . . . 42.5% 52.6% 42.9% 53.8%
Private . . . . . . . . . . . . . . 31.8 22.6 31.9 22.9
Medicare . . . . . . . . . . . . . 25.7 24.8 25.2 23.3
</TABLE>
The declining trend in the percentage of revenues derived from Medicaid
sources is attributable primarily to the increases in the number of Medicare
residents and corresponding increases in ancillary services due to higher
acuity levels of this class of residents. The average reimbursement rates for
Medicare patients have increased more rapidly than for Medicaid residents due
primarily to the higher reimbursement rates associated with the increase in
acuity levels. In addition, the impact of recording ARS revenues in fiscal
1996 results in a shift of Medicaid utilization to the private and Medicare
categories.
Consistent with the long-term care industry in general, changes in the mix
of the Company's resident population among the Medicaid, private pay and
Medicare categories can affect the profitability of the Company's operations.
Although the level of cost reimbursement for Medicare residents generates the
most revenue per resident day, profitability is not proportionally increased
due to the additional costs associated with the required higher level of care
and other services for such residents. Private pay residents generally
constitute the most profitable resident category.
SEASONALITY
The Company's revenues and operating income generally fluctuate from
quarter to quarter and tend to be higher in the second, third and fourth fiscal
quarters. This seasonality is related to a combination of factors which
include the timing of Medicaid rate increases and seasonal census cycles.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL. During the first nine months of fiscal 1996, cash from
operations was $50.2 million compared to $23.1 million for the nine months
ending June 30, 1995. In addition to higher net income and non-cash charges,
this increase was attributable to a reduction in prepayments related to the
timing on funding insurance programs ($10.5 million); an increase in long-term
insurance reserves ($9.3 million) as a result of the seasonal increase in the
accrual for expected unfunded losses under a Texas employee benefit program and
an increase in reserves at the Company's wholly-owned insurance company; and an
increase in accrued expenses related to the ARS restructuring plan (see Note
6). These increases were partially offset by an increase in receivables of
$46.5 million which was attributable to acquisitions ($7.8 million), seasonal
increase due to the timing of interim Medicare settlements and other rate
adjustments ($21.0 million), and an increase in average days outstanding, net
of allowance, ($9.4 million).
During fiscal 1996, the Company utilized cash generated from operations and
net draws on its line of credit to fund capital expenditures and repayment of
long-term debt. When available, excess cash was invested in commercial paper
in accordance with provisions of the Company's Bank Credit Facility. During
1995 fiscal year, the Company restructured and increased its available credit
under its bank credit facility to provide additional working capital
flexibility. See "--Bank Credit Facility."
The Company's Board of Directors has authorized a share repurchase program
for up to $20.0 million of its common stock at prevailing market prices. The
shares repurchased pursuant to this program are primarily intended to be
utilized over the next several years to fulfill the Company's obligations under
its various employee benefit programs. The Company expects to finance the cost
of these shares from internally generated funds, through borrowings from banks
or others.
ACQUISITIONS AND DEVELOPMENT. The Company has in place a bank credit
facility (the "Bank Credit Facility") with several banks which provides a total
of $265.0 million in term debt and revolving credit loans. A complete
description of the Bank Credit Facility is included in Note 2 to the
Consolidated Financial Statements.
As part of its growth strategy, the Company regularly reviews possible
acquisitions within the health care continuum and arrangements or
understandings currently exist regarding potential material acquisitions (see
Note 9). Year to date the
14
<PAGE> 15
Company acquired four institutional pharmacies totaling $24.2 million in cash
consideration as follows: December, 1995 in New York State; January, 1996 in
Illinois, March, 1996 in New Jersey; and June, 1996 in Arizona. The Company
also converted a leased long-term care center to an ownership position in
January, 1996 and in May, 1996 purchased a 50% ownership interest in a hospice
located in Kansas. The Company expects to finance the cost of acquisitions from
internally generated funds, through borrowings from banks or others.
In addition to its acquisitions, the Company is in the process of
developing and constructing several new centers and has increased the capacity
of certain existing centers. Construction projects currently under development
are summarized as follows (in thousands):
<TABLE>
<CAPTION>
Cash
Expended
as of Additional
June 30, Cash
1996 Committed
---- ---------
<S> <C> <C>
Construction of 45-bed assisted living center adjacent to a
center in Durango, Colorado . . . . . . . . . . . . . . . . . . . $ 36 $ 2,154
Construction of 52-bed assisted living center in Greeley,
Colorado . . . . . . . . . . . . . . . . . . . . . . . . . . . . 241 2,164
Construction of 52-bed assisted living center
adjacent to a center in Casper, Wyoming . . . . . . . . . . . . . 416 2,006
Construction of 36-bed assisted living center near Atlanta,
Georgia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,051 1,579
Construction of 38-bed assisted living center adjacent to a
center in Crete, Nebraska . . . . . . . . . . . . . . . . . . . 1,503 384
Physical therapy additions in Texas . . . . . . . . . . . . . . . 631 49
Bed expansion projects in Alabama (83), Colorado (24) and Texas
(30) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,394 3,593
Conversion of four previously leased facilities in Texas to an
ownership position. . . . . . . . . . . . . . . . . . . . . . . . - 11,407
------ -------
$6,272 $23,336
====== =======
</TABLE>
Sources for cash to be committed subsequent to June 30, 1996 ($23.3
million) will include existing cash reserves, cash generated from operations
and the line of credit available under the Bank Credit Facility.
BANK CREDIT FACILITY. The covenants governing the Bank Credit Facility and
various other note agreements limit the Company's ability to pay dividends. At
June 30, 1996, these restrictions effectively limited cash dividend payments to
no more than $3.2 million. Even though the covenants of the Bank Credit
Facility and the other note agreements permit the payment of dividends as
described above, the Company does not presently intend to pay such dividends.
As of July 19, 1996, an aggregate of $196.1 million in borrowings were
outstanding under the Bank Credit Facility ($88.2 million in revolving credit
loans and $108.0 million term loans); an additional $37.2 million in revolving
credit borrowings were available under the revolving credit portion of the Bank
Credit Facility. The weighted average interest rate for outstanding borrowings
as of July, 1996 was 7.0%.
The Company's long-term strategy in managing working capital is to maintain
substantial available commitments under bank credit agreements or other
financial agreements to finance short-term capital requirements in excess of
internally generated cash.
IMPACT OF INFLATION
The health care industry is labor intensive. Wages and other labor-related
costs are especially sensitive to inflation. Increase in wages and other
labor-related costs as a result of inflation without a corresponding increase
in Medicaid and Medicare reimbursement rates would adversely impact the
Company.
To the extent that unfavorable changes in economic conditions impact
payments under governmental or third-party payor programs, the Company would be
adversely affected.
15
<PAGE> 16
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit Index
<TABLE>
<CAPTION>
Exhibit Page
Number Number
------ ------
<S> <C> <C>
10.1 Employment Agreement between Living Centers of America, Inc.
and James L. Martin, Jr. 18
11 Statement re: Computation of Per Share Earnings 30
</TABLE>
(b) Reports on Form 8-K
There were no reports filed on Form 8-K during the quarter ended
June 30, 1996.
16
<PAGE> 17
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this amendment to be
signed on its behalf by the undersigned, thereunto duly authorized.
LIVING CENTERS OF AMERICA, INC.
(Registrant)
August 12, 1996 By: /s/ L. D. WILLIAMS
-----------------------------------
L. D. Williams
President and
Chief Operating Officer
By: /s/ RONALD W. FLEMING
-----------------------------------
Ronald W. Fleming
Controller and
Chief Accounting Officer
17
<PAGE> 18
INDEX TO EXHIBITS
10.1 Employment Agreement between Living Centers of America, Inc.
and James L. Martin, Jr.
11 Statement re: Computation of Per Share Earnings
27 Financial Data Schedule
<PAGE> 1
EXHIBIT 10.1
EMPLOYMENT AGREEMENT
THIS AGREEMENT is between the undersigned individual ("Employee") and LC
MANAGEMENT COMPANY ("LC Management"), a wholly owned subsidiary of Living
Centers of America, Inc. ("LCA").
R E C I T A L S:
A. LCA, through its operating subsidiaries, is an operator of long-term
health care centers, Progressive Care Centers providing subacute care,
Alzheimer's care centers, assisted living centers, retirement apartments,
centers and programs for people with mental retardation and developmental
disabilities, and a company providing pharmaceutical services and supplies.
B. LCA and LC Management have a proprietary interest in its business methods,
opportunities, operations and systems which include, but are not limited to,
internal financial and operating reports and data, strategic plans, business
acquisition and development opportunities, policy and procedure manuals,
management information programs and systems, financial forms and information,
supplier and vendor information, accounting forms and procedures, personnel
policies and information on the needs of residents, clients and patients and
their families, and the financial condition of LCA all of which information
("Corporation Information") not publicly disclosed is considered by LCA and LC
Management and recognized by Employee to be confidential.
C. LC Management intends to employ or continue to employ Employee in a
position where Employee will have access to this Corporate Information, and
therefore, LCA will be vulnerable to unfair post-employment competition by
Employee.
<PAGE> 2
D. In consideration of the severance and other employment benefits provided
for herein, Employee is willing to enter into this Agreement with LC Management
as a condition of employment.
NOW, THEREFORE, intending to be legally bound, the parties agree as follows
effective the day and date set opposite their signatures below:
ARTICLE 1.
Term of Employment
Employee acknowledges that LC Management has the right to terminate
Employee's employment at any time for any reason whatsoever; provided, however,
that any termination by LC Management for reasons other than "good and
sufficient cause," as defined in Article 2., Paragraph E below, shall result in
the severance benefits described in Article 2 below, to become due in
accordance with the terms of this Agreement. Employee further acknowledges
that the severance payments made and other benefits provided by LC Management
are in full satisfaction of any claims that Employee may have against LC
Management resulting from LC Management's exercise of its right to terminate
Employee's employment, except for those fringe benefits which are intended to
survive termination such as the rights to receive payments pursuant to
retirement plans and similar rights.
ARTICLE 2.
Severance Benefits
If Employee's employment with LC Management is terminated by LC Management
for any reason other than "good and sufficient cause," Employee shall be
entitled to the following severance benefits:
-2-
<PAGE> 3
A. Severance Pay: Employee shall receive severance payments equivalent to
Employee's base salary in effect at the time of termination for the number of
months set forth below:
================================================================================
Years of Living Centers Continuous Service
Completed from Last Hire Date
- - --------------------------------------------------------------------------------
1 2 3 4 5 6 7 8 9 10 or more
- - --------------------------------------------------------------------------------
Months of Severance Pay
- - --------------------------------------------------------------------------------
6 8 10 12 14 16 18 20 22 24
================================================================================
B. Other Severance Benefits:
(1) Group medical and life insurance coverages shall continue under then
prevailing terms as long as severance payments are being made to Employee.
Deductions for Employee's share of the premiums will be made from Employee's
severance payments. Group medical coverage provided during such period shall
be applied against LC Management's obligation to continue group medical
coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985
("COBRA"). Upon termination of group medical and life insurance coverage,
Employee may convert, at his cost, to individual policies.
(2) Employee shall receive payment at the Employee's then prevailing rate,
for Employee's earned, but unused, and accrued vacation days through the date
of termination.
(3) Employee's eligibility to receive or participate in all other benefit
and compensation plans, including, but not limited to Management Incentive
Bonus, Long Term Disability, Retirement Savings, and Stock Option Plans, shall
terminate as of the effective
-3-
<PAGE> 4
date of Employee's termination except as provided otherwise hereunder or under
the terms of a particular benefit or compensation plan.
C. Change of Control of the Employer. In addition to the Severance Pay and
Other Severance Benefits provided for in Paragraphs A and B, immediately above,
in the event of a "change of control" of LCA and either the Employee's (a)
involuntary termination or (b) "voluntary termination for good cause in
anticipation of, during or after a change of control";
(1) The Employee shall be entitled to receive a lump sum payment from LC
Management of an amount equal to twelve (12) month's salary, which shall be the
Employee's base salary in effect at the date of termination plus Employee's
base bonus for Employee's grade as of the date of termination as set forth in
LCA's policy statement on the Management Incentive Bonus Program; and
(2) All stock options granted to Employee under the Living Centers of
America, Inc. 1992 Stock Option Plan, as amended (the "Option Plan"), as of the
date of termination shall "vest" and become exercisable, as that term is
defined in the Option Plan, as of the termination date, and Employee shall
thereupon have all rights applicable thereto as set forth in the Option Plan
pertaining to Employee's Stock Options.
For purposes of this Agreement, "voluntary termination for good cause in
anticipation of, during or after a change of control" shall mean Employee's
electing to terminate his employment with LC Management as a result of an
adverse change in title or working responsibilities of the Employee within the
six (6) month time period before and the twelve (12) month time period after a
"change of control." For purposes of this Paragraph C,
-4-
<PAGE> 5
"change of control" is the occurrence of one or more of the following events:
(i) any person or entity, together with all associates of such person or
entity, becomes the owner, beneficial or otherwise, of 30% or more of the then
outstanding common stock of LCA, or (ii) during any two (2) year period,
directors of LCA serving at the beginning of such period cease for any reason
to constitute a majority of the directors serving, unless the election of at
least 75% of the new directors was approved by at least 75% of the directors in
office immediately prior to the election.
D. Right to Terminate Severance Pay and Benefits. If Employee is terminated
by LC Management for reasons other than "good and sufficient cause," as that
term is defined in Section E of this Article 2, Employee will receive the
severance payments and benefits described in Paragraphs A, B and C of this
Article 2. Notwithstanding the foregoing, if Employee commences other
employment while receiving such severance payments and benefits said severance
payments and benefits shall cease as of the date Employee commences such other
employment, but in no event shall the severance payments and benefits provided
in Paragraphs A and B of this Article 2 be terminated prior to Employee's
receiving severance payments and benefits for a two (2) month period. However,
if Employee commences other employment and the base salary Employee is paid in
the course of the other employment is less than the base salary Employee
received from LC Management at Employee's termination, LC Management shall pay
to Employee the difference in said base salaries each month for the remaining
number of months Employee would otherwise be entitled to severance pay as
provided in Section A of this Article 2 at the commencement of said other
employment, starting with the first full month after Employee commences said
-5-
<PAGE> 6
other employment. LC Management reserves the right to terminate all continuing
severance payments and benefits described in Paragraphs A and B of this Article
2 if Employee violates any of the non-disclosure covenants set forth in Article
3 or any of the non-competition covenants set forth in Article 4 below.
E. "Good and Sufficient Cause" Defined. Termination for "good and sufficient
cause" shall include termination for such things as fraud or dishonesty,
willful failure to perform assigned duties, willful violation of LCA's Business
Conduct Policy, or intentionally working against the best interests of LCA.
F. Termination for Good and Sufficient Cause. If Employee's employment with
LC Management is terminated by LC Management for "good and sufficient cause" as
that term is defined in Section E of this Article 2, Employee will not receive
the severance payments and benefits described in Paragraphs A, B, C, and D of
this Article 2.
G. Voluntary Termination by Employee. If Employee voluntary terminates
his/her employment with LC Management Company, (and said termination is other
than "voluntary termination for good cause in anticipation of, during or after
a change of control" as defined in this agreement), Employee will not receive
the severance payments and benefits described in Paragraphs A, B, C, and D of
this Article 2.
H. Parachute Payment. If the Employee is liable for the payment of any
excise tax (the "Basic Excise Tax") because of Section 4999 of the Internal
Revenue Code of 1986, as amended (the "Code"), or any successor or similar
provision, with respect to any payments or benefits received or to be received
from LC Management or any successor to LC Management, whether provided under
this Agreement or otherwise, LC Management shall
-6-
<PAGE> 7
pay the Employee an amount (the "Special Reimbursement") which, after payment
by the Employee (or on the Employee's behalf) of any federal, state and local
taxes applicable thereto, including, without limitation, any further excise tax
under such Section 4999 of the Code, on, with respect to or resulting from the
Special Reimbursement, equals the net amounts of the Basic Execise Tax.
I. Survival. The provisions of this Article 2 shall survive the termination
of Employee's employment with LC Management.
ARTICLE 3
Non-Disclosure Agreement
Employee acknowledges and recognizes that in the course of Employee's
employment, Employee has had and will continue to have or will have access to
Corporate Information; and that LC Management may provide and confide to
Employee Corporation Information, techniques and methods of operation developed
at great expense by LCA, all of which Employee recognizes to be unique assets
of LCA. Employee agrees that Employee shall not, during or after the term of
employment, directly or indirectly, in any manner utilize, appropriate,
disclose, communicate, divulge, copy or relate to any person, firm,
corporation, association or other entity, except where required by law, or use
or make use of any such Corporate Information, any such techniques or methods
of operation; data of any kind; or any information relating to strategic plans,
revenues, costs, profits or the financial condition of LCA, which is not
generally known to the public or recognized as standard practice in the
industry in which LCA is or shall be engaged. The provisions of this Article 3
shall survive the termination of Employee's employment with LC Management.
-7-
<PAGE> 8
ARTICLE 4
Non-Competition Agreement
A. Duration; Applicability. Subject to the provisions of Paragraphs B and E
below, Employee agrees that for a period of two (2) years following Employee's
voluntary termination of Employee's employment with LC Management (other than
"voluntary termination for good cause in anticipation of, during or after a
change of control" as defined in this Agreement), or Employee's termination by
LC Management for "good and sufficient cause" as that term is defined in
Section E of Article 2 of this Agreement, employee shall not, without LC
Management's prior written permission, which may be withheld by LC Management
in its sole discretion, (I) directly or indirectly, on Employee's behalf or on
behalf of any other person, firm, corporation, association or other entity,
engage in, or in any way be employed by, connected with, concerned with,
involved with, consult for or negotiate for, or acquire or maintain any
ownership interest in any business or activity which is the same, similar to or
competitive with that conducted by, engaged in or developed for later
implementation by LCA at any time during the term of Employee's employment. If
Employee's employment with LC Management is terminated by LC Management for any
reason other than "good and sufficient cause" as that term is defined in Section
E of Article 2 of this Agreement, the provisions of this Article 4 shall not
apply to Employee and shall not be enforced as against Employee.
B. Area. The provisions set forth in Paragraph A. above shall apply to any
area within a 25 miles radius of any center or facility operated by the
operating subsidiary of
-8-
<PAGE> 9
LCA or which any such operating subsidiary may be engaged in business at the
termination of Employee's employment or at any time within twelve (12) months
prior thereto.
C. Non-Piracy. Employee further agrees that Employee shall not for a period
of two (2) years following the termination of Employee's employment for any
reason, directly or indirectly, or through third parties, for himself or for
others, at any time in any manner, induce or attempt to influence any employees
of any subsidiary of LCA to terminate their employment with such subsidiary,
nor shall Employee have an interest in, directly or indirectly, any entity
which shall, with Employee's direct or indirect participation, induce or
attempt to influence any employee of any subsidiary of LCA to terminate their
employment with such subsidiary.
D. Remedies. Employee acknowledges that in the event of any violation or
threatened violation by Employee of the provisions set forth in Article 3 or
this Article 4, LCA will sustain serious, irreparable, continuing and
substantial harm and damage to its business, the extent of which will be
difficult to determine and impossible to remedy by an action at law for money
damages. Accordingly, Employee agrees that, in the event of such violation or
threatened violation by Employee, LCA shall be entitled to an injunction
preventing such violation or threatened violation before trial from any court
of competent jurisdiction as a matter of course in addition to and not in lieu
of any and all such other legal and equitable remedies as may be available to
LCA. Should any court of competent jurisdiction determine, consistent with the
established precedent of the forum jurisdiction, that the public policy of such
jurisdiction requires a more limited restriction in geographic area, duration,
nature of restricted activities, or any combination thereof, it would be in
-9-
<PAGE> 10
furtherance of the intentions of the parties hereto for the court to so
interpret and construe the terms of this Article 4 to apply only to the extent
of such more limited restrictions.
E. Shorter Duration. Notwithstanding anything to the contrary in this
Agreement, if LC Management elects to terminate Employee's employment for any
reason other than good and sufficient cause (or in the event of Employee's
"voluntary termination for good cause in anticipation of, during or after a
change of control"), then, in such event the term of the non-competition
provision set forth in Paragraph A above shall be reduced to the number of
months that Employee is entitled to severance pursuant to Article 2A. above, but
not to exceed twelve (12) months.
F. Survival. The provisions of this Article 4 shall survive the termination
of Employee's employment with LC Management.
ARTICLE 5
Miscellaneous
A. Definition. As used throughout this Agreement, "LC Management" shall
include all subsidiaries of LCA, affiliates, and any corporation, joint
venture, or other entity in which LCA or its subsidiaries or affiliates has an
equity interest in excess of ten percent (10%).
B. Gender. Reference to the masculine gender shall include the feminine
gender.
C. Supersede. This Agreement shall supersede and substitute for any previous
employment or severance agreement between Employee and LCA or LC Management,
and is entered into in consideration of the mutual undertakings of the parties,
the cancellation of all previous agreements, and the release of the parties of
their respective rights and
-10-
<PAGE> 11
obligations under any previous employment or severance agreement, excepting
only such rights and obligations which by their nature are intended to survive
termination or cancellation of such employment agreement.
D. Hire Date. Employee and LC Management acknowledge that for purpose of
Article 2, Employee's last hire date with LC Management is that date provided
in Schedule B hereof, which is attached hereto and incorporated by reference
herein as if reproduced verbatim.
E. Binding Effect. The respective rights and obligations of LC Management
and the Employee under this Employment Agreement shall inure to the benefit of
and shall be binding upon LCA, LC Management and the Employee and the
respective successors and assigns of LCA and LC Management. This Employment
Agreement shall not be assignable by the Employee, but shall inure to the
benefit of Employee's heirs, legal and personal representatives. As used
herein, the term "successors and assigns" shall include any corporation or
corporations which acquire all or substantially all of the assets and
businesses of LCA whether by purchase, merger, consolidation or otherwise,
including without limitation a surviving corporation upon a "change in control"
as defined herein.
F. Arbitration. Any dispute under this Employment Agreement, except for
those arising under Articles 3 and 4 hereof, shall be resolved by arbitration.
The arbitration shall be conducted in Houston, Texas, under the auspices of the
American Arbitration Association and under its rules for commercial
arbitrations generally. The prevailing party in such proceedings shall be
entitled to its costs and attorneys' fees.
-11-
<PAGE> 12
It is understood and agreed that LCA will benefit from the covenants and
agreements of Employee hereunder, and, therefore by its execution hereof,
guarantees the performance by LC Management of its obligations and agreements
hereunder.
IN WITNESS WHEREOF, LC Management, LCA and the Employee have executed this
Employment Agreement in duplicate originals as of the date first above written.
Date: April 24th, 1996 JAMES L. MARTIN, JR.
----------------------------- -------------------------------------
"EMPLOYEE"
LC MANAGEMENT COMPANY
Date: By:
----------------------------- ------------------------------------
"LC MANAGEMENT"
LIVING CENTERS OF AMERICA, INC.
Date: By:
----------------------------- ------------------------------------
"LCA"
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<PAGE> 1
EXHIBIT 11
LIVING CENTERS OF AMERICA, INC. AND SUBSIDIARIES
COMPUTATION OF PER SHARE EARNINGS
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended June 30, Ended June 30,
----------------------- ------------------------
1996 1995 1996 1995
<S> <C> <C> <C> <C>
ASSUMING FULL DILUTION (a)
Net Income $12,816 $5,208 $36,127 $19,760
========== ========== ========== ==========
Applicable Common Shares:
- - -------------------------
Weighted average shares outstanding
during the period 20,250 19,914 20,230 18,412
Weighted average shares issuable
upon exercise of common stock
options using the treasury stock
method 241 350 205 350
Weighted average shares issuable
upon exercise of warrants using
the treasury stock method 10 -- -- --
---------- ---------- ---------- ----------
Total shares 20,501 20,264 20,435 18,762
========== ========== ========== ==========
Earnings per share (fully diluted) $0.63 $0.26 $1.77 $1.05
========== ========== ========== ==========
</TABLE>
(a) This calculation is submitted in accordance with Regulation S-K, item 601
(b) (11) although not required by footnote 2 to paragraph 14 of APB
Opinion No. 15 because it results in less than 3% dilution.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> JUN-30-1996
<CASH> 15,168
<SECURITIES> 0
<RECEIVABLES> 190,253
<ALLOWANCES> 19,369
<INVENTORY> 13,500
<CURRENT-ASSETS> 251,973
<PP&E> 487,459
<DEPRECIATION> 190,144
<TOTAL-ASSETS> 793,122
<CURRENT-LIABILITIES> 196,337
<BONDS> 195,930
<COMMON> 203
0
0
<OTHER-SE> 341,533
<TOTAL-LIABILITY-AND-EQUITY> 793,122
<SALES> 829,653
<TOTAL-REVENUES> 829,653
<CGS> 0
<TOTAL-COSTS> 761,269
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,989
<INCOME-PRETAX> 59,395
<INCOME-TAX> 23,199
<INCOME-CONTINUING> 36,127
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 36,127
<EPS-PRIMARY> 1.77
<EPS-DILUTED> 1.77
</TABLE>
