<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 MARCH 31, 1997
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)
(281) 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 19,547,616 shares outstanding of the issuer's only class of
common stock as of May 2, 1997.
The Exhibit Index is located on page 14.
<PAGE> 2
LIVING CENTERS OF AMERICA, INC.
AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
MARCH 31, 1997
PAGE
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 10
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Not applicable
Item 3. Not applicable
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Not applicable
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURE PAGE 15
<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 Six Months
Ended March 31, Ended March 31,
------------------------ ------------------------
1997 1996 1997 1996
<S> <C> <C> <C> <C>
NET REVENUES
Nursing home revenue:
Net patient services $ 185,323 $ 193,962 $ 368,007 $ 382,332
Other 1,363 2,203 2,700 4,749
Non-nursing home revenue:
Pharmacy services 48,656 28,719 95,259 54,192
Therapy services 45,899 52,127 93,569 105,115
Home health, hospice, and other 4,077 1,045 5,985 2,048
--------- --------- --------- ---------
285,318 278,056 565,520 548,436
COSTS AND EXPENSES:
Salaries and wages 108,962 114,340 220,397 228,494
Employee benefits 25,974 25,724 50,250 50,656
Nursing, dietary and other supplies 13,314 14,783 26,793 30,326
Ancillary services 56,715 45,666 110,930 86,614
General and administrative 39,880 40,642 79,583 80,950
Depreciation and amortization 10,163 9,587 20,066 18,966
Provision for bad debts 4,466 3,204 9,975 6,997
--------- --------- --------- ---------
259,474 253,946 517,994 503,003
--------- --------- --------- ---------
INCOME FROM OPERATIONS 25,844 24,110 47,526 45,433
INTEREST EXPENSE, NET:
Interest expense 5,501 4,108 10,625 8,237
Interest income (1,119) (1,152) (2,189) (2,161)
--------- --------- --------- ---------
4,382 2,956 8,436 6,076
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES
AND EQUITY EARNINGS/MINORITY
INTEREST 21,462 21,154 39,090 39,357
PROVISION FOR INCOME TAXES 9,129 8,553 16,369 15,855
--------- --------- --------- ---------
INCOME BEFORE EQUITY EARNINGS/
MINORITY INTEREST 12,333 12,601 22,721 23,502
EQUITY EARNINGS/MINORITY INTEREST (119) (189) (182) (191)
--------- --------- --------- ---------
NET INCOME $ 12,214 $ 12,412 $ 22,539 $ 23,311
========= ========= ========= =========
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES
OUTSTANDING 19,747 20,503 19,672 20,414
========= ========= ========= =========
EARNINGS PER SHARE $ 0.62 $ 0.61 $ 1.15 $ 1.14
========= ========= ========= =========
</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>
March 31, September 30,
ASSETS 1997 1996
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 10,351 $ 21,394
Receivables (less allowances of $33,894 and $22,783) 227,567 192,340
Notes receivable, net 4,201 3,756
Supplies 16,743 16,582
Prepaid expenses 2,740 6,450
Deferred income taxes 19,644 19,644
Other (including patient trust funds of $3,672 and $3,768) 8,329 9,273
--------- ---------
TOTAL CURRENT ASSETS 289,575 269,439
PROPERTY AND EQUIPMENT:
Land, buildings and improvements 370,879 359,137
Furniture, fixtures and equipment 112,387 104,363
Leased property under capital leases 12,551 12,551
--------- ---------
495,817 476,051
Less accumulated depreciation 198,804 186,333
--------- ---------
297,013 289,718
GOODWILL, NET 194,174 188,508
RESTRICTED INVESTMENTS 50,107 31,040
INVESTMENT IN UNCONSOLIDATED AFFILIATE 43 3,016
NOTES RECEIVABLE, NET 11,729 10,780
OTHER ASSETS 23,619 17,111
--------- ---------
$ 866,260 $ 809,612
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable and current maturities of long-term debt $ 15,995 $ 13,746
Accounts payable 38,777 48,088
Accrued payroll and related expenses 57,533 60,089
Accrued property taxes 3,136 4,995
Patient trust funds 3,672 3,768
Accrued income taxes payable 5,384 16,921
Other accrued expenses 17,972 20,741
--------- ---------
TOTAL CURRENT LIABILITIES 142,469 168,348
LONG-TERM DEBT, NET OF CURRENT MATURITIES 311,233 262,702
LONG-TERM INSURANCE RESERVES 33,453 26,093
MINORITY INTERESTS 218 289
DEFERRED INCOME TAXES AND OTHER NONCURRENT LIABILITIES 26,078 22,865
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 shares
authorized; 20,267,920 shares issued 203 203
Capital surplus 228,091 228,171
Retained earnings 143,272 120,733
Unrealized loss on securities available-for-sale (202) (18)
Treasury stock at cost - 720,304 and 767,053 shares (18,555) (19,774)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 352,809 329,315
--------- ---------
$ 866,260 $ 809,612
========= =========
</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, 1996 20,267 $203 $ 228,171 $120,733 $ (18) 767 $(19,774) $ 329,315
Net income 22,539 22,539
Funding of employee benefit
plans (44) (42) 1,101 1,057
Funding of options exercised
under 1992 Employee Stock
Option Plan, net of tax (36) (5) 118 82
Unrealized loss on
securities available-for-sale (184) (184)
------ ---- --------- -------- ----- ---- -------- ---------
BALANCE, MARCH 31, 1997 20,267 $203 $ 228,091 $143,272 $(202) 720 $(18,555) $ 352,809
====== ==== ========= ======== ===== ==== ======== =========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
5
<PAGE> 6
LIVING CENTERS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Months
Ended March 31,
----------------------
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 22,539 $ 23,311
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 20,066 18,966
Income taxes deferred (603) (3,705)
Equity earnings/minority interest 182 191
Provision for bad debts 9,975 6,997
Changes in noncash working capital:
Receivables (43,826) (39,159)
Supplies 122 (518)
Receivable from affiliates -- 2,698
Prepayments, including insurance 3,763 6,513
Other current assets (1,756) (1,082)
Accounts payable (9,799) (10,469)
Accrued expenses and other current liabilities (12,497) 9,532
Changes in long-term insurance reserves 7,360 6,845
Other (334) (523)
-------- --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (4,808) 19,597
CASH FLOWS USED IN INVESTING ACTIVITIES:
Acquisitions and investments (15,536) (15,996)
Purchases of property and equipment (21,181) (14,322)
Disposals of property, equipment and
other assets 4,928 574
Restricted investments (19,251) (1,850)
Additions to notes receivable (868) (595)
Collections on notes receivable 964 433
Other (1,433) 279
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (52,377) (31,477)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 806 232
Net draws under credit line 48,814 29,625
Repayment of long-term debt (3,560) (18,566)
Funding of options under 1992 employee stock
option plan 82 465
Other -- (41)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 46,142 11,715
DECREASE IN CASH AND CASH EQUIVALENTS (11,043) (165)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 21,394 17,886
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 10,351 $ 17,721
======== ========
</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. (the "Company" or "Living Centers"),
engages in the operation of long-term care facilities, specialty health care
services, pharmacy and rehabilitation services through its operating
subsidiaries. The Company's operations are geographically concentrated and
specifically focused in key markets, including Texas, North Carolina, and
Colorado. The accompanying consolidated financial statements include the
accounts of the Company and its subsidiaries and exclude all significant
intercompany transactions.
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, 1996 filed with the Securities and Exchange Commission on Form
10-K, Annual Report, file No. 33-44726.
NOTE 2. LONG-TERM DEBT
The covenants governing the 1996 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
dividends. At March 31, 1997 these restrictions effectively limited dividend
payments to no more than $10.8 million. Even though the covenants of the 1996
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 March 31, 1997 is as follows (in thousands):
<TABLE>
<S> <C>
Bank Credit Facility ..................................................... $ 275,450
SouthTrust Bank of Alabama, NA ........................................... 20,000
Variable Annuity Life Insurance Company .................................. 10,000
NationsBank of Texas, NA ................................................. 10,000
Mortgage notes ........................................................... 700
Other notes payable ...................................................... 7,589
Obligations under capital leases ......................................... 3,489
---------
327,228
Less short-term notes payable and current portion ........................ (15,995)
---------
Total long-term debt ..................................................... $ 311,233
=========
</TABLE>
7
<PAGE> 8
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 Six Months
Ended March 31, Ended March 31,
-------------------- --------------------
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Common shares outstanding, end of
period ................................. 19,548 20,244 19,548 20,244
Effect of using weighted average shares
outstanding ............................ (9) (9) (27) (23)
Effect of using treasury stock method on
stock options and warrants ............. 208 268 151 193
------ ------ ------ ------
Shares used in computing earning per
share .................................. 19,747 20,503 19,672 20,414
====== ====== ====== ======
</TABLE>
NOTE 4. CASH INTEREST AND TAXES
Total cash interest paid during the six months ended March 31, 1997 and
1996 was $10.1 million and $8.8 million, respectively. Cash taxes paid during
the six months ended March 31, 1997 and 1996 were $23.5 million and $16.1
million, respectively.
NOTE 5. RESTRUCTURING PLAN
During fiscal year 1996, the Company finalized a plan originating in June
1995 to restructure the operations and exit certain activities of American
Rehabilitation Services, Inc. ("ARS"), its rehabilitation subsidiary. This plan
includes centralization of billing and collection, closing or downsizing
unprofitable clinics and offsite contracts, and staff reductions of
approximately 300 employees 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 and included an accrual for estimated exit costs
of $4.4 million related to termination/severance for displaced employees and
$4.2 million related to future lease costs for abandoned real property. Through
March 31, 1997 ARS has charged $3.0 million against the accrual for
termination/severance for over 300 displaced employees and $1.2 million against
the accrual for future lease costs. The restructuring was substantially
completed at March 31, 1997.
NOTE 6. RECLASSIFICATIONS
During the March 1997 quarter, information became available to summarize
trade receivables and payables due between the Company's operating subsidiaries
and exclude these intercompany balances from the Consolidated Financial
Statements. As a result, the September 1996 Receivables and Accounts payable
balances have both been reduced by $12.1 million to reflect this new
information.
Certain other prior year amounts have also been reclassified to conform
with the 1997 presentation.
NOTE 7. CONTINGENCIES
The Company has been served with a petition seeking $5.0 million in
damages in connection with a home health agency management agreement entered
into by a subsidiary of Rehability Health Services, Inc., the predecessor of
ARS. The former manager alleges that the Company breached the management
agreement by terminating its services. The Company is vigorously defending this
allegation and has filed a lawsuit against the former manager for breach of the
agreement. The Company is unable to measure the outcome of these proceedings or
the effect on its financial position, if any, at this time.
8
<PAGE> 9
The Company is a party to various other legal proceedings in the normal
course of business. The Company takes every legal claim seriously and
investigates and, where appropriate, defends such allegations vigorously. Such
claims are generally covered by insurance, or the Company has provided reserves
which it believes are adequate for any potential losses which may result from
such claims. The Company believes that the results of any such proceedings, if
determined unfavorably to the Company, will not have a material adverse effect
on its consolidated financial position or its results of operations.
In October 1996 the Company entered into a master lease arrangement
providing for the acquisition, development, and construction of skilled nursing
and assisted living facilities for a total amount not to exceed $100.0 million.
The lease is an unconditional "triple net" lease for all facilities covered for
a period of seven years. The Company guarantees a substantial portion of the
residual value of the facilities covered and has an option to purchase the
facilities at any time prior to the maturity date. At March 31, 1997
approximately $22.8 million of this arrangement was utilized.
NOTE 8. SUBSEQUENT EVENTS
On May 8, 1997 the Company announced execution of agreements for a
leveraged recapitalization of the Company to be followed immediately by a
business combination with GranCare, Inc. See Management's Discussion and
Analysis of Financial Condition and Results of Operations for a more complete
description of these transactions.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company provides a diverse range of services in the health care
continuum including long-term health care, rehabilitation therapy, and
pharmaceutical services. Services provided at the Company's long-term care
facilities, which comprise approximately 66% of the Company's total revenue,
include long-term nursing services and specialty care services including
assisted living services, subacute care, and care for individuals with
Alzheimer's disease. The Company is currently expanding or developing
additional specialty care services such as hospice care, geriatric physician
practice management services, and home health care.
RESULTS OF OPERATIONS
The following table sets forth certain data from the statement of income
expressed as a percentage of net revenues:
<TABLE>
<CAPTION>
Three Months Six Months
Ended March 31, Ended March 31,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Net Revenues:
Nursing home 65.4% 70.6% 65.6% 70.5%
Non-nursing home:
Pharmacy 17.1 10.3 16.8 9.9
Therapy 16.1 18.7 16.5 19.2
Home health, hospice, and other 1.4 0.4 1.1 0.4
------ ------ ------ ------
100.0 100.0 100.0 100.0
Costs and Expenses:
Salaries and wages 38.0 41.1 39.0 41.6
Employee benefits 9.1 9.3 8.9 9.2
Nursing, dietary, and other supplies 4.7 5.3 4.7 5.5
Ancillary services 19.9 16.4 19.6 15.8
General and administrative 14.0 14.6 14.1 14.8
Depreciation and amortization 3.6 3.4 3.5 3.5
Provision for bad debts 1.6 1.2 1.8 1.3
------ ------ ------ ------
Income from operations 9.1 8.7 8.4 8.3
Interest expense, net 1.5 1.1 1.5 1.1
------ ------ ------ ------
Income before income taxes and equity earnings/
minority interest 7.6 7.6 6.9 7.2
Provision for income taxes 3.2 3.1 2.9 2.9
------ ------ ------ ------
Income before equity earnings/minority interest 4.4 4.5 4.0 4.3
Equity earnings/minority interest -- (0.1) -- --
------ ------ ------ ------
Net income 4.4% 4.4% 4.0% 4.3%
====== ====== ====== ======
</TABLE>
10
<PAGE> 11
Nursing home revenues are derived from two basic sources: routine services
($147.3 million or 78.9% in the second quarter of fiscal 1997 and $294.6
million or 79.5% year-to-date fiscal 1997) and ancillary services ($39.4
million or 21.1% in the second quarter of fiscal 1997 and $76.1 million or
20.5% year-to-date fiscal 1997) and are a function of occupancy rates in the
long-term care facilities and the payor mix. Occupancy rates, as identified in
the following table, decreased in the second quarter of fiscal 1997 primarily
due to the divestiture of DevCon in the fourth quarter of fiscal 1996. The
DevCon divestiture reduced weighted average licensed bed count by 1,747 and
total average residents by 1,549 and 1,555 for the three months and six months
ended March 31, 1997, respectively. Also, an increase in hospital-operated
skilled units, assisted living facilities, and other alternative care providers
in key markets contributed to a decrease in occupancy rates. The Company has
invested in the marketing and managed care areas and has implemented an
aggressive marketing program to increase census and improve quality mix.
<TABLE>
<CAPTION>
Three Months Six Months
Ended March 31, Ended March 31,
----------------- -----------------
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Weighted average licensed bed count 23,098 25,824 23,211 25,750
Total average residents 19,093 21,607 19,270 21,678
Average occupancy 82.7% 83.7% 83.0% 84.2%
</TABLE>
Payor mix is the source of payment for the services provided and consists
of private pay, Medicare and Medicaid. Private pay includes revenue from
individuals who pay directly for services without government assistance,
managed care companies, commercial insurers, health maintenance organizations,
and Veteran's administration contractual payments.
Reimbursement rates from government sponsored programs, such as Medicare
and Medicaid, are strictly regulated and subject to funding appropriations from
federal and state governments. To the extent unfavorable changes in economic
conditions impact payments under governmental or third-party payor programs,
the Company would be adversely affected. Revenues derived from the Company's
pharmacy and therapy groups are also influenced by payor mix. The table below
presents 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 Six Months
Ended March 31, Ended March 31,
--------------- ---------------
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Private 33.4% 31.3% 33.7% 31.9%
Medicare 26.2 25.7 25.3 24.9
Medicaid 40.4 43.0 41.0 43.2
</TABLE>
The higher percentage of revenues derived from private pay sources is
primarily attributable to the growth in the Company's pharmacy operations. The
revenue from the pharmacy operations, which is primarily generated from private
pay sources, along with the divestiture of DevCon in the fourth quarter of
fiscal 1996, result in a reduction of the percentage of net revenue derived
from the Medicaid program. In addition, average reimbursement rates for
Medicare patients have increased more rapidly than for Medicaid residents
primarily due to the higher reimbursement rates associated with the increase in
acuity levels. Although cost reimbursement for Medicare residents generates a
higher level of revenue per patient 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.
SECOND QUARTER OF FISCAL 1997 COMPARED TO SECOND QUARTER OF FISCAL 1996.
Net revenues comprising nursing home and non-nursing home operations totaled
$285.3 million for the quarter ended March 31, 1997, an increase of $7.3
million or 2.6 %, as compared to the same period for fiscal 1996. Nursing home
operations contributed $7.8 million of the increase, which included rate
increases of $8.4 million, higher ancillary service billings resulting from the
improvement in mix, primarily Medicare, of $3.1 million, a $1.7 million
reduction due to fewer days in the period, a $1.1 million reduction due to an
increase in Medicare reserves, and a $2.1 million reduction due to lower
average occupancy. Divestitures, primarily the disposition of the DevCon
operations in the fourth quarter of fiscal 1996, lowered nursing home revenue
by $17.3 million. Non-nursing home operations contributed $16.7 million of the
increase, consisting of an increase of $19.9 million for pharmacy services, a
decrease of $6.2 million for therapy services, and an increase of $3.0 million
from home health, hospice and other services. The acquisition of pharmacies
subsequent to the second quarter of fiscal 1996 primarily caused the increase
in pharmacy services and the closure of approximately 30 clinics during fiscal
1996 that no longer met
11
<PAGE> 12
the Company's financial or operating objectives resulted in a decrease in
therapy services. The increase in home health, hospice and other services is
primarily due to the purchase of Colorado Home Care in January 1997 and the
purchase of the remaining 50% interest in Heart of America Hospice during
fiscal year 1997.
Costs and expenses totaled $259.5 million for the quarter ended March 31,
1997, an increase of $5.5 million or 2.2%, as compared to the same period for
fiscal 1996. Payroll and employee benefits, ancillary, and general and
administrative costs increased $4.3, $11.7, and $2.5 million, respectively,
excluding divested operations. The increase in ancillary services was primarily
the result of higher pharmaceutical costs related to the increase in pharmacy
services revenue. Bad debt expense increased $1.2 million, which included a
reduction of $1.1 million due to collection of a note receivable that was
substantially reserved. The remaining increase of $2.3 million was due to focus
Medicare billing reviews in several states for therapy services and the
increase in pharmacy revenues which have a higher provision for bad debts.
Divestitures, primarily DevCon, reduced total expenses by $15.4 million.
Net interest expense totaled $4.4 million for the quarter ended March 31,
1997, an increase of $1.4 million as compared to the same period for fiscal
1996. The increase reflected interest expense to finance the increase in
working capital, additional debt incurred to purchase $20.0 million of the
Company's common stock late in fiscal 1996, and acquisitions, investments, and
other capital expenditures during the quarter.
The provision for income taxes totaled $9.1 million for the quarter ended
March 31, 1997 or 42.6% of income before income taxes and equity
earnings/minority interest, an increase of $0.6 million or 2.2 percentage
points. The effective rate increase was the result of higher state income tax
rates and an increase in non-deductible goodwill.
FISCAL 1997 YEAR TO DATE COMPARED TO FISCAL 1996 YEAR TO DATE. Net
revenues comprising nursing home and non-nursing home operations totaled $565.5
million for the six months ended March 31, 1997, an increase of $17.1 million
or 3.1%, as compared to the same period for fiscal 1996. Nursing home
operations contributed $16.1 million of the increase, which included rate
increases of $15.5 million, higher ancillary service billings resulting from
the improvement in mix, primarily Medicare, of $6.3 million, a $1.7 million
reduction due to fewer days in the period, a $1.1 million reduction due to an
increase in Medicare reserves, and a $4.2 million reduction due to lower
average occupancy. Divestitures, primarily the disposition of the DevCon
operations in the fourth quarter of fiscal 1996, lowered nursing home revenue
by $32.5 million. Non-nursing home operations contributed $33.5 million of the
increase, consisting of an increase of $41.1 million for pharmacy services, a
decrease of $11.5 million for therapy services, and an increase of $3.9 million
from home health, hospice and other services. The acquisition of pharmacies
subsequent to the second quarter of fiscal 1996 primarily caused the increase
in pharmacy services and the closure of approximately 30 clinics during fiscal
1996 that no longer met the Company's financial or operating objectives
resulted in a decrease in therapy services. The increase in home health,
hospice and other services was primarily due to the purchase of Colorado Home
Care in January 1997 and the purchase of the remaining 50% interest in Heart of
America Hospice during fiscal year 1997.
Costs and expenses totaled $518.0 million for the six months ended March
31, 1997, an increase of $15.0 million or 3.0%, as compared to the same period
for fiscal 1996. Payroll and employee benefits, ancillary, and general and
administrative costs increased $9.3, $25.3, and $5.0 million, respectively,
excluding divested operations. The increase in ancillary services was primarily
the result of higher pharmaceutical costs related to the increase in pharmacy
services revenue. Bad debt expense increased $3.1 million, which included a
reduction of $1.1 million due to collection of a note receivable that was
substantially reserved. The remaining increase of $4.2 million was due to focus
Medicare billing reviews in several states for therapy services and the
increase in pharmacy revenues which have a higher provision for bad debts.
Divestitures, primarily DevCon, reduced total expenses by $29.7 million.
Net interest expense totaled $8.4 million for the six months ended March
31, 1997, an increase of $2.4 million as compared to the same period for fiscal
1996. The increase reflected interest expense to finance the increase in
working capital, additional debt incurred to purchase $20.0 million of the
Company's common stock late in fiscal 1996, and acquisitions, investments, and
other capital expenditures during the six months ended March 31, 1997.
The provision for income taxes totaled $16.4 million for the six months
ended March 31, 1997 or 41.9% of income before income taxes and equity
earnings/minority interest, an increase of $0.5 million or 1.6 percentage
points. The effective rate increase was the result of higher state income tax
rates and an increase in non-deductible goodwill.
12
<PAGE> 13
CAPITAL RESOURCES AND LIQUIDITY
Cash and cash equivalents were $10.4 million at March 31, 1997 and working
capital was $147.1 million, an increase of $46.0 million during the first six
months of fiscal 1997. Receivables increased by $43.8 million primarily
attributable to acquisitions ($1.3 million), timing of collections of Medicare
cost reports and rate adjustments ($2.9 million), an increase in average days
outstanding, net of allowance, ($9.1 million), and revenue increases ($19.5
million). Accounts payable decreased $9.8 million due to the timing of
payments. Accrued expenses and other current liabilities decreased by $12.5
million primarily due to federal income taxes on the divestiture of DevCon
($7.0 million) and cash payments related to the ARS restructuring ($2.9
million).
Cash used in investing activities was $52.4 million during the first six
months of fiscal 1997 compared to $31.5 million for the same period in fiscal
1996. Investing activities in fiscal 1997 included the purchase of the
remaining 50% interest in Heart of America Hospice ($3.3 million), three
pharmacy related acquisitions ($5.0 million), construction of four assisted
living facilities and the expansion of existing facilities ($5.5 million), and
routine capital expenditures. Capital commitments on the four assisted living
facilities remaining under construction and expansion of existing long-term
care facilities totaled $3.5 million at March 31, 1997. These commitments are
expected to be funded by cash from operations or the Bank Credit Facility. Cash
flow from the disposition of assets was primarily related to the divestiture of
two long-term care facilities in Texas. Restricted investments increased $19.2
million due to the collection of outstanding receivables from the third-party
insurance carrier.
Financing activities provided $46.1 million during the first six months of
fiscal 1997 and were primarily used to fund working capital, acquisitions,
investments and other capital expenditures. In addition to the Bank Credit
Facility, the Company has a lease arrangement providing for up to $100.0
million to be used as a funding mechanism for future skilled nursing and
assisted living facility acquisitions, development, and construction. At March
31, 1997, $22.8 million of this arrangement was utilized or committed.
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.
RECAPITALIZATION AND MERGER
As previously reported, the Company entered into two merger agreements on
May 7, 1997, one with an affiliate of Apollo Management, L.P. ("Apollo") and
the other with GranCare, Inc. ("GranCare").
Under the terms of these agreements, Apollo will invest $200.0 million in
a recapitalization transaction to purchase approximately 4.94 million shares of
newly-issued common stock of the Company at $40.50 per share. In connection
with the recapitalization, existing shareholders of the Company will receive
$40.50 per share in cash for 93% of the outstanding shares of the Company and
will retain 7% of such stock after the recapitalization. Specifically, unless
some of the Company's shareholders elect to retain a larger percentage of their
shares, each share will be converted into approximately $37.67 in cash plus
0.07 shares.
Upon completion of the recapitalization, GranCare will merge with a
subsidiary of the Company. In the merger, each outstanding share of GranCare
common stock will be exchanged for 0.2469 shares of common stock of the
Company, as recapitalized. Immediately after the recapitalization and merger
transactions, GranCare shareholders will hold approximately 49.5% of the then
outstanding shares of the Company, Apollo will hold approximately 39.3% and the
Company's current shareholders will own the remaining 11.2%.
The recapitalization and merger are each subject to the consummation of
the other, the availability of necessary financing, stockholder approvals by
the shareholders of the Company and GranCare, receipt of required regulatory
approvals, and other customary conditions.
13
<PAGE> 14
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company has been served with a Petition, Cause No.
97-1500-G, Community Healthcare Services of America, Inc. v.
Rehability Health Services, Inc. and Living Centers of America,
Inc., in the 319th Judicial District Court of Nueces County, Texas,
seeking $5.0 million in damages, filed by Community Health Services,
Inc. ("Community"), in connection with a home health agency
management agreement entered into between Community and a subsidiary
of Rehability, the predecessor of the Company's rehabilitation
subsidiary company, American Rehability Services, Inc. The
Rehability subsidiary operated a Texas home health agency which
Community managed. The Company is vigorously defending the
allegations of Community that the Company breached the agreement by
terminating Community's management services and has filed a lawsuit
against Community for breach of the agreement, Cause No. 97-03569;
Rehability Health Services, Inc. v. Community Healthcare Services,
Inc., in the 353rd Judicial District Court of Travis County, Texas.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of stockholders of the Company was held on
February 6, 1997 in Houston, Texas. At that time the following
directors were elected (the votes cast for and withheld for each
director are summarized below):
<TABLE>
<CAPTION>
Votes Votes
For Withheld
---------- --------
<S> <C> <C>
Anthony M. Frank (Class II) 12,907,523 137,321
Leroy D. Williams (Class II) 12,373,571 671,273
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit Index
<TABLE>
<CAPTION>
Exhibit Page
Number Number
------ ------
<S> <C> <C>
2.1 Agreement and Plan of Merger among Apollo Management, L.P.,
Apollo LCA Acquisition Corporation and Living Centers of
America, Inc. (filed as Exhibit 99.1 to the Registrant's Form
8-K dated May 8, 1997 and incorporated herein by reference).
2.2 Agreement and Plan of Merger among Living Centers of America,
Inc., GranCare, Inc. and Apollo Management, L.P. (filed as
Exhibit 99.2 to the Registrant's Form 8-K dated May 8, 1997 and
incorporated herein by reference).
10.1 Employment Agreement between Living Centers of America, Inc. 16
and Charles B. Carden
10.2 Employment Agreement between Living Centers of America, Inc. 28
and David L. Ward
11 Statement re: Computation of Per Share Earnings 46
27 Financial Data Schedule 48
99.1 Joint Press Release issued by Living Centers of America, Inc.
and GranCare, Inc. on May 8, 1997 (filed as Exhibit 99.3 to the
Registrant's Form 8-K dated May 8, 1997 and incorporated herein
by reference).
</TABLE>
(b) Reports on Form 8-K
On May 8, 1997 the Company filed Form 8-K regarding the announced
execution of agreements for a leveraged recapitalization of the
Company to be followed immediately by a business combination with
GranCare, Inc.
14
<PAGE> 15
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.
May 8, 1997
LIVING CENTERS OF AMERICA, INC.
(Registrant)
By: /s/ Charles B. Carden
--------------------------------
Charles B. Carden
Executive Vice President and
Chief Financial Officer
By: /s/ Ronald W. Fleming
--------------------------------
Ronald W. Fleming
Vice President and Controller
(Principal Accounting Officer)
15
<PAGE> 16
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------ -----------
2.1 Agreement and Plan of Merger among Apollo Management, L.P.,
Apollo LCA Acquisition Corporation and Living Centers of
America, Inc. (filed as Exhibit 99.1 to the Registrant's Form
8-K dated May 8, 1997 and incorporated herein by reference).
2.2 Agreement and Plan of Merger among Living Centers of America,
Inc., GranCare, Inc. and Apollo Management, L.P. (filed as
Exhibit 99.2 to the Registrant's Form 8-K dated May 8, 1997 and
incorporated herein by reference).
10.1 Employment Agreement between Living Centers of America, Inc.
and Charles B. Carden
10.2 Employment Agreement between Living Centers of America, Inc.
and David L. Ward
11 Statement re: Computation of Per Share Earnings
27 Financial Data Schedule
99.1 Joint Press Release issued by Living Centers of America, Inc.
and GranCare, Inc. on May 8, 1997 (filed as Exhibit 99.3 to the
Registrant's Form 8-K dated May 8, 1997 and incorporated herein
by reference).
<PAGE> 1
EXHIBIT 10.1
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT, dated May 7, 1997, by and between LC
MANAGEMENT COMPANY ("LC Management"), a wholly- owned Subsidiary of LIVING
CENTERS OF AMERICA, INC., a Delaware corporation (the "LCA"), and Charles B.
Carden (the "Employee");
RECITALS:
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,
a company providing rehabilitation services and other services, and a company
providing pharmaceutical services and supplies.
B. LC Management (sometimes "Employer") intends to employ or
continue to employ Employee in a position where Employee will have access to
Confidential Information (defined below), and therefore, Employer will be
vulnerable to unfair post-employment competition by Employee.
C. In consideration of the benefits provided for herein, Employee
is willing to enter into this Agreement with LC Management as a condition for
employment.
NOW, THEREFORE, intending to be legally bound, the parties agree as
follows effective the date and date set opposite their signatures below:
1. EMPLOYMENT. Employer hereby employs the Employee, and the
Employee hereby accepts employment upon the terms and conditions set forth in
this Employment agreement effective as of October 1, 1996.
<PAGE> 2
2. DUTIES. The Employer agrees to employ the Employee and the
Employee agrees to accept employment by the Employer and to serve the employer
in such capacities and with such powers and duties as from time to time may be
assigned to him by Employer on a basis involving the employee's full working
time. Such duties will be performed in Houston, Texas and at such other places
as Employer may reasonably require without necessitating any change in the
employee's place of residence.
3. ANNUAL COMPENSATION. As his compensation for services to the
Employer under this employment Agreement, the Employer shall pay to the
Employee during the term of this Employment Agreement a salary, in the
aggregate of two hundred forty thousand ($240,000.00) per year, plus such
increases as may be granted ("Annual Compensation"), payable in equal
semi-monthly installments, subject only to such payroll and withholding
deductions as may be required by law or elected by the Employee. The Employee
shall be reimbursed for all reasonable costs and expenses incurred by him in
the performance of his services and duties hereunder, including travel and
entertainment expenses.
4. BONUSES, STOCK OPTIONS AND OTHER BENEFITS. The Employee shall
participate in the Employer's Management Incentive Bonus Plan ("MIB Plan"),
Stock Option Plan, Executive Benefits Plan, Employee Stock Purchase Plan and
other present or future benefits provided for other executives of the Employer.
The Annual Compensation to be paid to the Employee shall not operate as a
limitation upon or as a direction against the exercise by the Employer of its
power and discretion to grant bonuses, options, awards or other additional
direct or indirect benefits to or on behalf of the Employee if, in the judgment
of employer, such action is in the best interest of the Employer.
2
<PAGE> 3
5. TERM AND TERMINATION.
5.1 This Employment Agreement shall be for a term of two
(2) years, commencing on the effective date hereof. The term shall be extended
for additional one (1) year periods on the anniversary date of each one year
period of the term with the Employee's consent and the approval of the Board of
Directors, and all other provisions hereof shall apply during such extended
term. This Employment Agreement may be terminated at will, with or without
"good cause" (as defined below), by the Employer prior to the expiration of
such term upon thirty (30) days written notice of election so to terminate (or
pay in lieu of such notice); provided, however, that if this Employment
agreement is terminated by the Employer without good cause prior to the
expiration of the two year term, as Severance Payments hereunder, the
employee's Annual Compensation hereunder shall continue for the remainder of
the two (2) year term and the Employee shall be paid his bonus pursuant to the
MIB Plan for the fiscal year in which this employment Agreement is terminated.
However, notwithstanding the provision for Severance Payments in this Section
5.1 hereof, in the event of Employee's termination pursuant to a change of
control of LCA as provided in Section 9 hereof, Employee shall not receive
Severance Payments as provided herein, and will receive only that lump sum
payment provided in Section 9 hereof.
In addition, in the event of such a termination without good
cause, Employee shall be entitled to the following severance benefits:
(1) Group medical and life insurance coverages shall
continue under then-prevailing terms for the
remainder of the then current term of this Employment
Agreement, provided that Employee continues to
contribute his share of the premiums for such
coverages. Group medical coverage provided
3
<PAGE> 4
during such period shall be applied against
Employer's obligation to continue group medical
coverage under the Consolidated Omnibus Budget
Reconciliation Act of 1985, as amended ("COBRA").
Upon termination of group medical and life insurance
coverages, Employee may convert, at his cost, to
individual policies.
(2) Employee's eligibility to receive benefits under 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 date of Employee's termination except
as provided otherwise hereunder of under the terms of
any particular benefit or compensation plan.
(3) 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.
5.2 Parachute Payment: If the Employee is liable
for the payment of any excise tax (the "Basis Excise Tax") because of Section
4999 of the Internal Revenue Code of 1986, as amended (the "Code"), or any
successor or similar provisions, 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 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
4
<PAGE> 5
Special Reimbursement, equals the net amount of the Basic Excise Tax.
5.3 Termination for "good cause" shall include
only (a) fraud or dishonesty, (b) willful failure to perform assigned duties,
(c) willful violation of the Employer's Business Conduct Policy, or (d)
intentionally working against the best interests of the Employer; provided,
however, that in the case of actions described in Sections 5.2(b), (c) or (d),
such alleged activity by the Employee must have continued unabated for a period
in excess of five (5) days following receipt by the Employee of written notice
from the Employer.
5.4 Survival The provisions of this Section 5
shall survive the termination of Employee's employment with LC Management.
6. Extent of Services. Consistent with the obligations
hereunder, the Employee shall regulate his own hours of employment, performing
the duties assigned to him from time to time by the Board of directors of the
employer in accordance with the terms of this Agreement to the best of his
ability and with reasonable care and diligence.
7. OBLIGATIONS SURVIVING EMPLOYMENT.
7.1. LCA, through its Subsidiaries operates
long-term health care centers and companies which provide pharmaceutical
supplies and services, and rehabilitation services. It has a valuable, special,
unique and proprietary interest in its various business methods and systems,
which include, but are not limited to, strategic operating plans and budgets,
policy and procedure manuals, computer programs, financial forms and
information, supplier information, accounting forms and procedures, personnel
policies, information on the needs of residents, techniques and methods of
operation, prospects, research and data developed by or for the benefit of LCA
and the Employer, and information relating to strategic plans, revenues, costs,
profits and the financial condition of LCA
5
<PAGE> 6
and the Employer, and all other information developed by or for the benefit of
LCA and the employer, all of which information is considered by the LCA and the
Employer to be confidential trade secrets ("Confidential Information"), to the
extent such information is not publicly disclosed or generally known in the
industry.
7.2 The Employer may, pursuant to Employee's
employment hereunder, provide and confide to Employee, and Employee will have
access to the Confidential Information, which was developed at great expense by
or on behalf of LCA and the employer, all of which Employee recognizes and
acknowledges to be unique, valuable and confidential assets of LCA and the
Employer. Further, as an adjunct of Employee performing his duties hereunder,
Employee may develop additional information, techniques and programs for the
LCA and the Employer which Employee agrees shall be the sole and exclusive
property of LCA and the Employer. Employee agrees that he shall not during or
after the term of employment hereunder, directly or indirectly, in any manner,
utilize, disclose or otherwise divulge to any person, firm, corporation,
association or other entity, for any reason whatsoever, any such Confidential
Information or other such information, techniques, methods of operations, or
programs, whether developed by him on behalf of LCA or the Employer, or by LCA
or the Employer independent of Employee, which is not generally known to the
public or recognized as standard practice in the industry in which LCA, the
Employer or LCA's operating Subsidiaries shall be engaged.
7.3 Employee agrees that he, during the term
hereof and for a period of two (2) years following the expiration of the term
hereof or the earlier termination of his employment pursuant hereto, shall not,
without the employer's prior written permission, (i) directly or indirectly, on
Employee's behalf or on behalf of any other person, firm, corporation,
association or other entity,
6
<PAGE> 7
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 in competition with
(i.e., within a 25 mile radius of a center or facility operated by the
Employer) that conducted by the Employer; or (ii) or indirectly, at any time in
any manner, inducer or attempt to influence any employee of the Employer to
terminate his employment with the Employer. Notwithstanding anything in this
Employment Agreement to the contrary, the foregoing noncompetition restriction
shall not apply to the Employee when the term of this Employment Agreement
expires as a result of the Board of directors having elected to not extend the
term of this employment Agreement.
7.4 This Employment Agreement by Employee shall
cover and be enforceable by LCA and the Employer in all states in which LCA,
its operating subsidiaries and the Employer are engaged in business at the
termination of Employee's employment of have been so engaged at any time during
the term hereof. For purposes of this Article 7, the term "Employer" shall
include the Employer as herein defined and any direct or indirect subsidiary or
affiliate.
8. REMEDIES:
8.1 Employee acknowledges that in the event of
any violation by Employee of the provisions set forth in Article 7 hereof LCA
and the Employer will sustain serious, irreparable and substantial harm to its
business, the extent of which will be difficult to determine and impossible to
remedy solely by an action at law for money damages. Accordingly, Employee
agrees that, in the event of such violation or threatened violation by
Employee, LCA and the Employer shall be entitled to, in addition to all such
other legal and equitable remedies as may be available to LCA and the Employer,
an injunction before trial from any court of competent jurisdiction as a matter
of course
7
<PAGE> 8
upon the posting of not more than a nominal bond, restraining Employee from such
violation or threatened violation. Nothing herein contained shall be construed
as limiting or prohibiting LCA and the Employer from pursuing other remedies
available to LCA and the Employer therefor, including recovery of money damages
through an action at law against Employee. Employee further agrees that, in the
event any of the provisions of this Agreement are determined by a court of
competent jurisdiction to be contrary to any applicable statute, law or rule,
or for any reason unenforceable as written, such court may modify any of such
provisions so as to permit enforcement thereof as thus modified.
8.2 In the event a legal action is filed by
either party to enforce its rights under this Employment Agreement, the
prevailing party shall be reimbursed by the other party for the prevailing
party's reasonable enforcement costs, including without limitation, attorneys'
fees and costs of investigation and court. For purposes of the foregoing, the
parties agree that the judge or other trier of law assigned to the action shall
determine which party is the "prevailing party" in such action, and that there
shall be only one "prevailing party" in any action.
9. CHANGE OF CONTROL OF LCA. In the event of a change of
control of LCA and either the Employee's (a) involuntary termination by the
Employer or (b) voluntary termination for good cause after a change of control,
then in lieu of Severance Payments as described in Section 5.1 hereof, (i)
employee shall be entitled to receive a lump-sum payment from the Employer of
an amount equal to two times (1) his Annual Compensation and (2) his average
annual bonus calculated over the last two years or $192,000.00 whichever amount
is greater; and (ii) 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
8
<PAGE> 9
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 Option. For purposes of this Article 9
"voluntary termination for good cause after a change of control" shall occur
when, within the six-month time period after a change of control, the Employer
effects a substantial change in the employee's authority or working
responsibilities and the Employee voluntarily terminates his employment. For
purposes of this Article 9, "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 beneficial owner of 15% or
more of LCA's outstanding common stock, except when such person or entity is
bound by the terms of a standstill agreement under which the parties cannot
acquire more than 15% of the outstanding common stock or (ii) during any
two-year period, directors of LCA serving at the beginning of such period cease
for any reason to constitute a majority of the directors of LCA serving, unless
the election of at least 75% of the new directors of LCA was approved by at
least 75% of the directors in office at the time of election. The provisions of
this Section 9. shall service the termination of Employee's Employment with LC
Management.
10. MISCELLANEOUS.
10.1 Definition. As used throughout this
Agreement, "LCA" shall include LCA, 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%).
10.2 Binding Effect. The respective rights and
obligations of LCA and the Employer and the Employee under this Employment
Agreement shall inure to the benefit of and shall be binding upon LCA and the
employer and the Employee and the respective successors and assigns
9
<PAGE> 10
of LCA and the employer and Employee. This Employment Agreement shall not be
assignable by the Employee. 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 the employer whether by
purchase, merger, consolidation or otherwise and which, in the case of a
purchase, assumes the employer's obligations hereunder.
10.3 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 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.
10.4. Arbitration. Any dispute under this
Employment Agreement, except for those arising under paragraphs 7 and 8 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. For
purposes of the foregoing, the parties agree that the judge or other trier of
law assigned to the action shall determine which party is the "prevailing
party" in such action and that there shall be only one "prevailing party" in
any action.
10.5 Applicable Law. This Employment agreement
shall be interpreted and construed in accordance with the laws of the State of
Texas. The parties agree to venue and personal jurisdiction in the state or
federal courts of Harris County, Texas.
10
<PAGE> 11
10.6. LCA Guaranty. 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. Further, LCA agrees
that Employee shall initially hold the offices of Executive Vice President and
Chief Financial Officer of LCA, at the continued discretion of LCA's Board of
Directors, but such title or office shall in no way diminish or inhibit the
authority of the Board of Directors of the Employer to reasonable enlarge or
restrict the duties and functions of the Employee.
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: May 7, 1997 /s/ Charles B. Carden
--------------------- --------------------------------
"EMPLOYEE"
LC MANAGEMENT COMPANY
Date: May 7, 1997 By: /s/ Sydney K. Boone
--------------------- --------------------------------
"LC MANAGEMENT"
LIVING CENTERS OF AMERICA, INC.
Date: May 7, 1997 By: /s/ Leroy D. Williams
--------------------- --------------------------------
11
<PAGE> 1
EXHIBIT 10.2
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").
RECITALS:
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.
1
<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, upon the terms expressed herein and
the initial provisions described in the attached letter dated April 9, 1996 and
its attachments, affixed hereto as Addendum A.
NOW, THEREFORE, intending to be legally bound, the parties agree as
follows effective the day and date set opposite their signatures below:
ARTICLE 1
TERMS 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
should he accept the severance payments made and other benefits provided by LC
Management, such 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.
2
<PAGE> 3
ARTICLE 2.
SEVERANCE BENEFITS
If Employee's employment with LC Management is terminate by LC
Management for any reason other than "good and sufficient cause," Employee
shall be entitled to the following severance benefits:
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
- ----------------------------------------------
0-2 3 4 5+
- ----------------------------------------------
Months of Severance Pay
- ----------------------------------------------
6 8 10 12
- ----------------------------------------------
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, under COBRA,
Employee may convert, at his cost, to individual policies.
3
<PAGE> 4
(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 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 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 an additional 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.
4
<PAGE> 5
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, "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
5
<PAGE> 6
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 other employment. Notwithstanding the foregoing, 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" and if Employee commences other employment while receiving
severance payments and benefits described in Paragraphs A, B, and C of this
Article 2, said severance payments and benefits shall not cease as of the date
Employee commences such other employment, and shall continue pursuant to
paragraph A of this Article 2. 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 the non-piracy 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 intentional 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.
6
<PAGE> 7
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 successor to LC Management, whether provided
under this Agreement or otherwise, LC Management shall 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 Excise Tax.
I. Survival. The provision of this Article 2 shall survive the
termination of Employee's employment with LC Management.
ARTICLE 3
NON-DISCLOSURE AGREEMENT
7
<PAGE> 8
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.
ARTICLE 4
NON-PIRACY AGREEMENT
A. 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
8
<PAGE> 9
participation, induce or attempt to influence any employee of any subsidiary of
LCA to terminate their employment with such subsidiary.
B. Remedies. Employees acknowledges that in the event of any
violation or threatened violation by Employee of the provisions set forth in
Article 3 of 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 any 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 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
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.
C. Survival. The provisions of this Article 4 shall survive the
termination of Employee's employment with LC Management.
ARTICLE 5
MISCELLANEOUS
9
<PAGE> 10
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
an 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 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 Addendum 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 Employees' heirs, legal and personal representatives. As used
herein, the term "successors and assigns"
10
<PAGE> 11
shall include any corporation or corporations which acquire a controlling
interest in or a majority 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.
G. Applicable Law. This Employment Agreement shall be interpreted
and construed in accordance with the laws of the State of Texas.
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.
11
<PAGE> 12
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: 4/11/96 By: /s/ DAVID L. WARD
----------------------- -------------------------------
"EMPLOYEE"
LC MANAGEMENT COMPANY
Date: 4/9/96 By: /s/ FRED GREEN
----------------------- -------------------------------
"LC MANAGEMENT"
LIVING CENTERS OF AMERICA, INC.
Date:
----------------------- --------------------------------
"LCA"
12
<PAGE> 13
ADDENDUM A
April 9, 1996 letter
13
<PAGE> 14
ADDENDUM B
Employee's last hire date: ________________________
14
<PAGE> 15
[AMERICAN REHABILITATION MANAGEMENT LETTERHEAD]
April 9, 1996
David L. Ward
803 Ridgedale Court
Southlake, Texas 76092
Dear David:
I am pleased to offer you the position of Senior Vice President of American
Rehabilitation Services, Inc., and Senior Vice President of American Therapy
Services Group. In this position you will report directly to me, and your
office will be based in Brentwood, Tennessee.
I would like for you to begin employment no later than June 1, 1996, at a base
monthly salary of $14,166.66, which on an annualized basis is $170,000, with
provisions for an annual performance review beginning with your first
anniversary date.
In addition to your base compensation, you will be eligible to participate in
the Management Incentive Bonus Plan. You may earn up to 35% of the midpoint of
your salary grade E-18. Based on a salary range midpoint of $145,700, your
bonus target would be $50,995. The exact amount of your bonus will be based
upon the number of months you are eligible to participate, as well as the
Company's performance and your achievement of specific goals.
A Company leased automobile will be provided for business as well as personal
use. The Company will provide maintenance, insurance and gasoline credit cards.
You will be provided with an approved list of automobiles from which to make
your choice. Some of your choices may include Chevrolet Suburban, Buick Park
Avenue Ultra, Ford Explorer Limited, Chevy Tahoe 4 Dr., Jeep Grand Cherokee
Limited, Chrysler LHS and Oldsmobile Aurora.
You will become eligible for consideration to participate in Living Centers of
America's Stock Option Plan. You will be eligible for 15,000 shares, which vest
over a five year period at 20% per year. Grants are subject to approval by the
Company's Board of Directors.
15
<PAGE> 16
Page 2
You will be eligible to participate in a Retirement Plan (401K) after 6 months
of service. The Company will pay the full cost for $200,000 of group term life
insurance and will also provide long-term disability insurance. You and your
dependents will be eligible to purchase group medical and dental coverage
according to company policy. In addition, you will be covered under our
Executive Benefits Program consisting of survivor benefits, long-term
disability benefits and an annual physical.
The Company will pay for reasonable expenses incurred in the movement of your
household goods from Southlake, Texas to Brentwood, Tennessee, including
packing, shipping, delivery and insurance against loss or damage. Finally, the
Company will assist you by paying reasonable and customary closing costs
associated with the sale of your current residence and the purchase of a new
residence, within your first year of employment. Qualified relocation expenses
incurred during the move that may be covered include:
o Home finding trips o Temporary living
o Return trips home o Home sale closing fees
o Transportation of household o Home purchase closing fees
goods
o Storage of household goods as
needed
It may be necessary for temporary living arrangements to be made until you are
able to locate a home in the Brentwood area; therefore, we will arrange for up
to three months of temporary housing. Specific guidelines will be provided at a
later time. Please contact Pam Merickle at 1-800-753-8087, Ext 192 for
assistance in beginning your relocation process.
The cost of this move is offered to you as a two year forgivable loan. It will
be forgiven by American Rehabilitation Services in equal installments over a
24 month period, beginning on the first of the month following the date of
employment. If you voluntarily sever your employment with American
Rehabilitation Services prior to completing two years of employment, that
portion of the loan remaining unforgiven becomes immediately due and payable.
Your signature on a return copy of this letter will verify your acceptance of
our offer. A self-addressed, postage paid envelope is included for your
convenience.
David, we look forward to your becoming a part of the management team at
American Rehabilitation Services.
Sincerely,
/s/ KELLY GILL
- ------------------------
Kelly Gill
President
American Rehabilitation Services
16
<PAGE> 17
Page 3
I acknowledge and accept these terms of employment with the understanding that
the offer and acceptance is not an employment contract, express or implied,
between the company and myself for any specific period of employment, nor for
continuing or long-term employment. The company and I each have the right to
terminate employment, with or without cause.
DAVID L. WARD 4/11/96
- ---------------------------- -------------------
Signature Date
17
<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 Six Months
Ended March 31, Ended March 31,
------------------- -------------------
1997 1996 1997 1996
ASSUMING FULL DILUTION (a)
<S> <C> <C> <C> <C>
Net Income $12,214 $12,412 $22,539 $23,311
======= ======= ======= =======
Applicable Common Shares:
Weighted average shares outstanding
during the period 19,539 20,235 19,521 20,221
Weighted average shares issuable upon
exercise of common stock options
using the treasury stock method 287 271 287 271
Weighted average shares issuable
upon exercise of warrants using
the treasury stock method -- 15 -- 15
------- ------- ------- -------
Total shares 19,826 20,521 19,808 20,507
======= ======= ======= =======
Earnings per share (fully diluted) $ 0.62 $ 0.60 $ 1.14 $ 1.14
======= ======= ======= =======
</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> 6-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> MAR-31-1997
<CASH> 10,351
<SECURITIES> 0
<RECEIVABLES> 261,461
<ALLOWANCES> 33,894
<INVENTORY> 16,743
<CURRENT-ASSETS> 289,575
<PP&E> 495,817
<DEPRECIATION> 198,804
<TOTAL-ASSETS> 866,260
<CURRENT-LIABILITIES> 142,469
<BONDS> 311,233
0
0
<COMMON> 203
<OTHER-SE> 352,606
<TOTAL-LIABILITY-AND-EQUITY> 866,260
<SALES> 565,520
<TOTAL-REVENUES> 565,520
<CGS> 0
<TOTAL-COSTS> 517,994
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,436
<INCOME-PRETAX> 39,090
<INCOME-TAX> 16,369
<INCOME-CONTINUING> 22,539
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> 1.15
<EPS-DILUTED> 1.14
</TABLE>
