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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
(Mark One)
X ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 (FEE REQUIRED)
For the fiscal year ended September 30 1996
OR
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
Securities Act File No. 33-84692C
CARE FIRST INC.
(Name of small business issuer as specified in its charter)
Minnesota 41-0877001
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3720 23rd Avenue South
Minneapolis MN 55407
(Address of principal executive offices)(Zip Code)
Issuer's telephone number, including area code: (612) 724-5495
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 ____
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB: Not applicable.
State issuer's revenues for its most recent fiscal year: $9,579,485
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The aggregate market value of voting stock held by nonaffiliates of the
registrant as of September 30, 1996 was approximately: Not applicable.
Registrant's stock is not publicly traded.
As of September 30, 1996, there were 10,500 shares of Common Stock of the
issuer outstanding.
Documents Incorporated by Reference: None.
This Form 10KSB consists of pages 1 - 43
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PART I
ITEM 1: DESCRIPTION OF BUSINESS
OVERVIEW
On December 27, 1994 the City of Minneapolis issued $4,725,000 of Health
Care Facilities Refunding Revenue Bonds (Care First Inc. Project) and $8,500,000
of Taxable Health Care Facilities Revenue Bonds (Care First Inc. Project) to
refund the Series 1983 Tax Exempt Bonds and to finance construction and
equipping of a 131-bed Addition to the Corporation's 125-bed Existing Facility.
The Series 1983 Tax Exempt Bonds were refunded January 11, 1995. The proceeds
from the Series 1994 Tax Exempt Bonds were deposited with the trustee in the
Bond Fund until the refunding occurred. The proceeds from the Taxable Health
Care Facilities Revenue Bonds remain in Trustee Held Funds until all certified
draw requests are processed for construction costs, including building
construction, equipment installation, capitalized interest and other Project
costs.
FINANCING PLAN
Proceeds of the Bonds were loaned by the City to the Corporation to finance
construction and equipping of a new 131-licensed bed addition (the "Addition" to
an existing skilled nursing facility which had 125 licensed beds located in the
City and known as the Nile Health Care Center (the "Existing Facility"). The
Addition was constructed pursuant to an exemption from the general moratorium in
Minnesota that prohibits the licensure and certification of skilled nursing beds
in new, relocated or remodeled nursing facilities. The Existing Facility and
the Addition (collectively, the "Expanded Facility") is owned and operated by
the Corporation.
As a condition to the issuance of the Bonds, pursuant to a separate Trust
Indenture between the City and the Trustee, the City concurrently issued its
Health care Facilities Revenue Refunding Bonds (Care First Inc. Project), Series
1994 (the "Tax Exempt Bonds") in the aggregate principal amount of $4,725,000.
Pursuant to a separate loan agreement (the "Tax Exempt Loan Agreement") the
City loaned to the Corporation (the "Tax Exempt Loan") proceeds from the sale
of the Tax Exempt Bonds to refund $4,725,000 aggregate principal amount of the
City's outstanding Health Care Facility Revenue Bonds (Nile Nursing Home
Project) Series 1983 (the "Refunded Bonds"). On the date of issuance of the
Bonds and Tax Exempt Bonds, proceeds of the Tax Exempt Bonds, together with a
portion of the proceeds of the Bonds, were deposited with the Trustee in an
amount sufficient, with other funds on deposit with the Trustee therefor, to pay
within 30 days thereafter all principal of and interest on the Refunded Bonds,
plus a redemption premium equal to 1% of the principal amount of the Refunded
Bonds. Such deposit on the date of issuance was used to defease the Refunded
Bonds, satisfying the Corporation's obligation to repay the City's loan of
Refunded Bond proceeds and permit the release of certain loan covenants and the
mortgage lien on the Existing Facility which secured the Refunded Bonds.
Proceeds of the Refunded Bonds were previously loaned to the Corporation to
finance the acquisition, construction and equipping of the Existing Facility.
The Refunded Bonds had a final maturity of March 1, 2013 and bore annual
interest rates ranging from 10.25% to 11.75%.
Under the Tax Exempt Loan Agreement, the Corporation is obligated to pay
all amounts due on the Tax Exempt Bonds. Pursuant to an Intercreditor and
Parity Agreement between the City and the Trustee (the "Parity Agreement"), the
Tax Exempt Bonds are secured equally and ratably on parity with the Bonds by a
mortgage lien on and security interest in the land, buildings and certain
personal property of the Expanded Facility (the "Project Facilities"). The
Taxable Bonds are not secured by any amounts held by the Trustee under the Tax
Exempt Indenture (including Corporation repayments of the Tax Exempt Loan or a
reserve fund for the Tax Exempt Bonds), and likewise the Tax Exempt Bonds are
not secured by amounts held under the Indenture for the Taxable Bonds. An
"Event of Default" with respect to the Tax Exempt Bonds will cause an Event of
Default with respect to the Taxable Bonds, and vice versa.
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INDUSTRY BACKGROUND
The Expanded Facility provides skilled nursing care and convalescent
facilities for in-patient elderly and disabled persons, including those admitted
as an interim step after hospitalization and before returning to their homes, as
well as those admitted for long-term residency. The residents of the Expanded
Facility receive room and board, 24-hour professional nursing care, special
diets as required, and such drugs and therapy as may be prescribed by the
resident's physician. Three balanced meals are provided to each resident daily,
either in his or her room or at a central dining location. Light snacks are
provided during the day and at bedtime. The Expanded Facility is managed by a
full-time administrator, an assistant administrator, a finance director, and a
director of nursing who is a registered nurse responsible for supervising the
licensed nurses and nurses' aides working at the facilities. Social service
programs at the facility are provided by a qualified social worker. The
facility has a licensed physician on call available to the residents. In
addition, the facility has an arrangement with the hospital of the resident's
choice for the transfer of the resident and his or her medical records between
the facility and such hospital when necessary. The Corporation contracts with
Novacare-Northside Therapy Services, Inc., for on-site provision of physical,
occupational and speech therapy.
The beds at the Expanded Facility are licensed by the Department of Health
of the State of Minnesota and certified under federal regulations as a nursing
facility. The facility is currently in compliance with all physical
requirements, safety standards and operating procedures necessary for
eligibility in the Medicaid program and are certified for Medicare
reimbursement. Federal certification requires, among other things, that the
Corporation provide a high level of care, with continuous licensed nursing
supervision. State licenser and certification requires, among other things,
prescribed ratios of skilled personnel to residents.
THE CORPORATION AND ITS FACILITY
The Corporation was incorporated under the laws of Minnesota in 1964. All
stock of the Corporation is owned by Merle V. Nugent and her four adult
children. Merle V. Nugent and her son Jack E. Nugent (the "Controlling
Shareholders") are the Corporation's sole directors and principal officers. The
Corporation's principal office is located at 3720 23rd Avenue South,
Minneapolis, Minnesota 55407; its telephone number is (612)724-5495. The
Corporation presently owns and operates the Expanded Facility with 256 beds.
All such beds in this facility are licensed by the Minnesota Department of
Health and certified under the Medicare and Medicaid Programs described herein.
The Corporation ceased operations of the Cedar Pines Facility on December 5,
1996, and the Expanded Facility received a license and certification for 256
beds (an increase of 56 beds). The Corporation later sold the Cedar Pines
Facility on September 16, 1996.
In 1993, the Corporation established a home health care agency to provide
licensed health care services in clients' homes or at other facilities. The
Corporation suspended its operations July 1995 until it is determined that it
will be profitable.
EXISTING LONG-TERM DEBT
In December of 1978, the Corporation redeemed 500 shares of common
stock owned by Fred E. Nugent, former husband of Merle Nugent, pursuant to an
agreement of the Corporation (the "Redemption Agreement"). To finance its
obligation to pay the purchase price of the stock, the Corporation issued a
promissory note to Fred E. Nugent in the amount of $636,414 (the "Nugent
Note"). During 1983, the Nugent Note was renegotiated, at which time the
balance of the Note was $483,810. As of September 16, 1996, the outstanding
balance of the Nugent Note was paid in full upon the sale of the facility.
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OPERATION OF THE EXPANDED FACILITY
The Corporation is benefitting financially from operating efficiencies
attributable to increased utilization of capacities of the Expanded Facility,
including centralization of services and personnel, increased coordination of
staffing, and purchasing activities.
With respect to the property cost component of the Rate-setting System, the
Corporation has historically received inadequate reimbursement for actual costs
at the Existing Facility. Such deficiency has been due primarily to a change in
the Rate-setting System during construction of the Expanded Facility and
because, in anticipation of future expansion, costs were incurred in the
construction to provide servicing capacity exceeding that required for a 125-bed
nursing facility. As a result of the Addition, the facility has seen an
increase in Medicaid daily rates, in part, because of an upward adjustment in
existing limitations applicable to property-related costs for the Expanded
Facility.
SPECIALIZED PROGRAMS
During 1995, the Corporation implemented the Alzheimer's program on the
second floor of the Existing Facility, which is fondly named the "Arbor". The
Arbor programming included the development of specific Alzheimer training for
employees, specialized programming and minor, low-cost cosmetic changes to the
interior (such as textured wall covering, repainting in colors which have been
identified as moderating certain symptoms of Alzheimers).
The Corporation also has developed a short-term rehabilitation program.
This program is located on the first floor of the Existing Building and
primarily serves residents with short stays (30-60 days) with a more intensive
therapy and rehabilitation program. Short-term rehabilitation provides
additional revenues, but also modestly increases resident turnover. The short-
term rehabilitation program utilizes the staff and services of a third party who
provides therapy services and directly or indirectly bills residents without
cost to the Corporation.
GOVERNMENT REGULATION; REIMBURSEMENT
GENERAL. Nursing facilities are subject to extensive governmental
regulation through state licensing requirements and, in the case of nursing
facilities such as those of the Corporation, complex laws and regulations
imposed at the federal and state level for facilities to remain certified to
receive payments under the so-called Medicaid and Medicare program. Nursing
facilities are subject to periodic inspection by governmental authorities to
determine compliance with licensure and certification requirements. Continuing
licensure to provide nursing care is essential to the operation of the Expanded
Facility. Further, revenues of the Corporation are significantly dependent on
payments under the Medicaid program such that a loss of certification for
participation in the Medicaid program or an elimination of or a material
reduction in the availability of Medicaid payments would materially adversely
affect the operations and financial condition of the Corporation.
CHANGES IN LAW. Licensing and certification requirements are subject to
change, and there can be no assurance that the Corporation will be able to
maintain all necessary licenses or certification or that it will not incur
substantial costs in doing so. Both federal and state regulation relating to
health care and the payment thereof have been subject to change in the past, and
future change can be expected, the effect of which may materially adversely
affect the operations and financial condition of the Corporation. In attempts
to limit federal and state expenditures, there have been, and the Corporation
expects that there will continue to be, a number of proposals to limit Medicare
and Medicaid payments, including those for care provided by nursing facilities.
Previous federal changes include limitations on payments to nursing facilities
under the Medicare and Medicaid programs and an increased emphasis on cost
control. Further, various health care reform proposals have been made recently
which may result in changes in general health care funding in the near future.
It is presently unclear which, if any, of such proposals might be actually
enacted in to law or their effect on the Corporation.
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The methods of determining the amount and availability of payments under
the Medicaid Program in Minnesota have been subject to a variety of significant
changes in the past and future changes can be expected to occur. For example,
in 1985 certain changes in Minnesota law revised the method of paying property-
related costs, with a phase-in application over time. However, because of
perceived adverse effects of full implementation on nursing facilities, full
implementation of this concept was later suspended. As another example, after
intense negotiations between legislators and representatives of the long-term
care industry, the Minnesota legislature adopted a compromise proposal designed
to reduce the rate of increase of the state's Medicaid payments to nursing
facilities. Further, various studies and proposals for changes in Minnesota
reflect a general emphasis on directing residents requiring lower levels of care
to non-licensed facilities and otherwise encouraging non-institutional care for
the aged to save Medicaid costs.
DEPENDENCE ON MEDICAID. Approximately than 85% of the revenues of the
Expanded Facility are derived from payment rates established under the Minnesota
Medicaid Program. States currently fund a substantial portion of Medicaid
payments and exercise considerable discretion in determining payments allowed to
care providers. Regulations promulgated by the federal Health Care Financing
Administration provide that states are not required to pay for long-term care
services on a cost-related basis, but may do so according to rates that are
adequate to meet costs incurred by efficiently and economically operated
facilities. As a result, the reimbursement payments allowed by states are based
less on the actual costs of the nursing services and more on formula rates which
the governmental agencies deem reasonable, creating a more competitive
environment for nursing facilities.
In Minnesota, the amount which will be paid (reimbursed) by the Medicaid
program for services provided to a Medicaid-eligible resident in a multiple bed
room is based on a daily rate established for such facility and for the
patient's level of required care, both of which are periodically adjusted.
Further, Minnesota generally requires a facility with Medicaid residents to
charge other residents the same rates paid under the Medicaid program. There
can be no assurance that such rates in the future will be sufficient for timely
payment in full of all debt service and for the proper operation of the Expanded
Facility. Under current Minnesota laws and regulations, daily Medicaid rates
for a facility vary among eleven "case-mix" levels of care provided to
residents. Daily rates are based on those costs of the facility during the
prior reporting year which were allowed for rate-setting purposes and the actual
occupancy and level of care provided during such year. For a variety of
reasons, it is typical that not all actual costs are allowed for rate-setting
purposes as described below. Although rates are presently determined by applying
a factor to reflect inflation since the last cost reporting period, the rates so
determined may not be adequate, either on an interim basis until a following
rate year or otherwise, to cover the costs of the facility. Rates might be
inadequate for a number of reasons, including, but not limited to (i) an
increase in operating costs in excess of historic costs, even after an
adjustment by the inflation factor, (ii) a decline in occupancy or increase in
the average level of care provided in the facility such that the per resident
rate derived from prior occupancy or care levels is not adequate, and (iii) a
disallowance in the rate-setting formula of prior costs because such costs
exceed a certain percentage of costs for other because administrative costs
exceed certain levels, or for numerous other reasons. As a result of
limitations on the recognition of costs in the rate-setting , incentives exist
to avoid or defer costs, which may result in deferring costs for maintenance and
repair to the long term detriment of the physical condition of the facility.
Subject to certain appeal rights of health care providers, the Minnesota
Department of Human Services ("DHS") has broad discretion in determining the
allowed historic costs and other factors establishing a facility's daily rates.
Furthermore, due to the complexity and detailed record-keeping required by
Minnesota law, errors in or disagreements with DHS related to reporting costs
and resident care classifications may arise with the result that a facility (I)
received less reimbursement than might be otherwise available or (ii) is
required retroactively to make repayments to the state for prior overpayments.
From time to time, Medicaid reimbursements paid to the Corporation may be
subject to DHS field audit that may result in retroactive adjustment of the
Corporation's daily rates to create liabilities which could adversely affect the
Corporation's cash flow and, in the extreme, the ability of the Corporation to
make timely payments in respect of the Bonds.
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In 1995, the State of Minnesota, by statute, also authorized the DHS to
establish a contractual alternative payment system, called the "Nursing Home
Contract Project". The purpose of the Project is to explore a contract-based
reimbursement system as an alternative to the current cost-based system for
reimbursement. On December 15, 1995, the facility was approved to participate
in this project in which medicaid and private pay reimbursement rates from July
1, 1995 were inflated 2.98% for rates effective July 1, 1996.
MEDICARE REIMBURSEMENT
Under Minnesota law, facilities receiving Medicaid payments must also be
certified for the Medicare program (Title XVIII of the federal Social Security
Act). Medicare is funded directly by the federal government and is administered
by the Health Care Financing Administration through fiscal intermediaries.
Medicare coverage provides for nursing home care for up to 100 days following
the discharge of a patient after a qualifying hospital stay. The facility is
then permitted to charge interim rates.
OTHER REGULATORY MATTERS
Various health and safety regulations and statutes apply to the Expanded
Facility and are administered and enforced by various state agencies.
Violations of certain health and safety standards could result in closure of all
or a portion of the Expanded Facility or imposition of intermediate sanctions.
The Expanded Facility is currently in compliance with all existing material
regulations and standards. Such standards are, however, subject to change and
there can be no guarantee that in the future the facility will meet these
changed standards or that the Corporation will not be required to expend
significant sums in order to comply with such changed standards.
FUTURE DEMAND
The State of Minnesota is among those states having the highest proportion
of nursing facility residents and Medicaid nursing home beds per population, and
in the recent past, various proposals and studies have been directed to
controlling future increases in or reducing existing levels of state funding for
the Medicaid program, including an emphasis on encouraging care to be provided
outside of nursing homes, especially for the lower case-mix levels (i.e. those
needing the least amount of care). The Corporation believes it has a smaller
percentage of lower-care residents than most of the nursing facilities in its
market area.
The State of Minnesota is expected to pay monthly payments for Medicaid
patients upon billing from each facility, but from time to time payments have
been known to be delayed or reduced for various reasons. Annually, a "desk
audit" is performed by DHS on submitted cost reports. Furthermore, upon a
"field audit" payments in any rate year are subject to retroactive adjustment
(thereby potentially resulting in a facility's repayment to the State of
Minnesota for prior payments) for a period up to five years, with each facility
having certain appeal rights. However, payments to the Existing Facility and
the Cedar Pines Facility through June 30, 1994 have been subjected to a field
audit and are therefore not subject to any further retroactive adjustments under
ordinary circumstances.
CHANGES IN HEALTH CARE INDUSTRY
The health care industry in general is experiencing a trend toward
consolidation or integration of services among providers. Although long term
care services such as those primarily provided by the Corporation have not as
yet been subject to such trend as significantly as acute health care services,
no assurance can be made that future consolidation, integration or other changes
in the long term care industry may not adversely affect resident referrals to
the Expanded Facility or the ability of the Corporation to otherwise maintain
occupancy, charge sufficient rates or maintain competitive operating costs.
Subject to the terms and restrictions in the Loan Agreement, the Corporation in
the future may or may not participate in any such consolidation or integration
trend (the Corporation has no current plans to do so).
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COMPETITION
The nursing care industry is highly competitive, particularly for
facilities located within the City. The success of the Expanded Facility will
depend on its ability to compete with other nursing facilities, assisted living
facilities, as well as home health care or other service providers, at least
some of which are likely to have greater financial resources than the
Corporation. In the State of Minnesota a general moratorium exists on the
addition of new licensed or certified nursing beds from which restriction the
Corporation received an exemption to construct the Addition. However, there can
be no assurance that the State of Minnesota will continue to restrict the
addition of new nursing beds. Furthermore, with a federal and state focus on
cost cutting and cost containment, resulting in an emphasis of shifting care for
the elderly away from licensed nursing facilities, competition is likely to
increase.
The Corporation considers the southern central part of Minneapolis,
Minnesota as its primary service area for the Expanded Facility. Based on an
independent market study prepared for the Corporation in 1994, there are a total
of approximately 1,737 skilled nursing home beds and 412 board and care beds
within the Corporations primary service area. The Corporation's daily resident
rates are generally higher than those charged by other licensed nursing
facilities in its statutorily-prescribed region. The Corporation presently does
not compete to any material degree on the basis of its prices (daily rates)
since rates for Medicaid residents are established under the Rate-setting System
and paid by the Medicaid program. Although residents not receiving Medicaid or
Medicare assistance generally must pay the daily rates from their own resources,
the physical condition and amenities at the Expanded Facility are believed to be
generally more attractive than those of many nursing facilities in the Expanded
Facility's market area.
NURSING PERSONNEL
In recent years, the nursing home industry has suffered from a scarcity of
skilled nursing personnel and aides to staff its facilities. A scarcity of
qualified personnel could eventually force the Corporation to pay increased
salaries to such personnel as competition for such employees intensifies, and,
in an extreme situation, could lead to difficulty in keeping the Expanded
Facility licensed. To date, the Corporation has not experienced any significant
difficulty in obtaining qualified personnel at the facility through either
hiring employees or use of specialized temporary employment agencies commonly
referred to as "nursing pools". Use of nursing pools is an accepted practice in
the industry to address unexpected increases in staffing requirements.
PERSONNEL AND STAFFING
As of September 30, 1996, the Corporation employed approximately 168 full-
time employees and 75 part-time employees, with approximately 183 full-time
equivalent ("FTE") persons. A full-time equivalent represents one 2,080 hour
employee.
SOURCES OF RESIDENTS
Between 65% and 75% of the residents at the Expanded Facility are admitted
from or referred by hospitals or other acute care health facilities, with
Hennepin County Medical Center, Riverside Medical Center and Abbott-Northwestern
Hospital providing more than one-half of such referrals or admissions.
MALPRACTICE INSURANCE
In recent years, the number of malpractice lawsuits and patient recoveries
against providers of health care services have increased, resulting in increases
in insurance premiums. Changes in the availability and cost of malpractice
insurance could adversely influence the revenues of the Corporation. The
Corporation to date has experienced no claims or actions for malpractice.
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LACK OF OUTSIDE DIRECTORS; CLOSELY-HELD CORPORATION
The Corporation is a closely-held corporation, all stock of which is owned
by Ms. Merle Nugent and her four adult children. Merle Nugent and one of her
sons, Jack E. Nugent, are the sole directors of the Corporation. There is no
present expectation that a person who is not a shareholder will be elected or
appointed as a director of the Corporation. The Corporation's directors control
the operation of the Corporation and holders of the Bonds have no voting rights
or control with respect to the Corporation's operations.
SALE OF EXPANDED FACILITY
Under the Loan Agreement the Corporation is permitted to sell the Expanded
Facility to any purchaser that assumes the Corporation's obligations in respect
of the Bonds and Tax Exempt Bonds if, among other conditions, the purchaser has
a Tangible Net Worth equal to the Tangible Net Worth of the Corporation (but not
less than $1.00) and a certain 125% historic or forecasted debt service coverage
test is met. If a purchaser is an Accredited Institution, or if there is
deposited with the Trustee the sum of $500,000 as a Supplemental Reserve, the
Corporation will be released from any further liability for the payment of the
Bonds. Furthermore, upon any sale of the Expanded Facility, the purchaser will
not be subject to certain restrictions, imposed on the Corporation set forth in
the Loan Agreement. The Corporation to date has no plans to sell the facility.
ITEM 2: DESCRIPTION OF PROPERTIES
The Corporation currently operates the Expanded Facility, a nursing care
facility located at 3720 23rd Avenue South in the City. The Existing Facility
was completed in 1984, one year after the imposition of the Minnesota moratorium
on licensing and certification of new, remodeled or relocated beds. Therefore,
it is one of the most modern licensed nursing facilities in the state. The
Expanded Facility is located in a residential neighborhood with a small
commercial area. The residences are primarily single family, middle to lower-
middle income residences, built between 1930 and 1950. The residences generally
appear to be in fair to good condition.
EXISTING FACILITY
The Existing Facility consists of three floors and a lower level and is
constructed of masonry, concrete and structural steel. Construction of the
original structure was completed in 1983. The structure is maintained in
accordance with licensing requirements. A registered underground fuel storage
tank is located on the site of the Existing Facility.
The lower level of the Existing Facility contains a kitchen, laundry
department, maintenance office, employee locker area, staff development area,
staff dining area, and storage area. The kitchen, laundry and maintenance
office have sufficient capacity, and will be used, to provide services to the
Addition.
The first floor of the Existing Facility contains 25 beds in 13 resident
rooms, one of which is a private room. The first floor also contains the
rehabilitation areas which also serves the Addition. The first floor contains
dining area, administrative offices and a meeting room.
The second and third floors of the Existing Facility each contain 50 beds
in 26 resident rooms, 2 of which are private on each floor. The exits on these
two floors contain electronic locks on the doors that require residents to press
a button and wait a moment prior to exiting. Such locks provide a secure
environment for residents with severe Alzheimer's disease. In addition, the
second floor elevator requires a code to be keyed in to the keypad censor before
the elevator door will open onto the second floor to provide additional security
for residents with Alzheimer's disease.
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THE ADDITION
The total above grade gross area of the Existing Facility was 56,922 square
feet. The Addition added approximately 55,221 square feet, with a resulting
total for the Expanded Facility of 112,143 square feet above grade. The
Addition consists of three floors and a lower level, attached as an extension to
the Existing Facility. It is constructed of masonry, concrete and structural
steel. The lower level of the Addition contains a day storage area for the
dietary department, a mechanical room (heating, water heaters, electrical,
emergency generator and a fuel tank), and a storage room. The upper three
floors of the Addition contain 131 beds in 60 double occupancy rooms and 11
single resident rooms. The first floor also contains a dining room, day room,
office area, resident and family counseling areas, and a nurses' station, in
addition to rooms for other various functions. The Addition is fully
sprinklered as is the Existing Facility in accordance with existing fire codes.
A parking lot for the Expanded Facility was built on land acquired by the
Corporation accross from the facility.
The Addition contains rooms designed to improve the quality of life of its
residents. The room design for double occupancy rooms in the Addition utilizes
a fixed or moveable wall which completely separates the living areas of the two
residents. Each resident's living area within such rooms has its own bed,
window, storage, and entrance. The individual entrances lead out into the main
entrance to the room and to the handicapped accessible restroom shared by the
two residents. Residents in the double occupancy rooms also share a small
sitting area adjacent to, but recessed from, the hallway. This design provides
a privacy and autonomy for each resident, while not requiring the space or cost
of a traditional private room with its own restroom.
Equipment purchased with the Bonds included appropriate furnishings for
each resident room to supplement the existing beds and other appropriate
furnishings which was transferred from the Cedar Pines Facility, as well as
furnishings for meeting areas, dining area equipment, and appropriate support
equipment for the nursing stations and administrative office.
In addition to constructing and equipping the addition, Bonds proceeds were
used for minor renovation and remodeling of areas in the Existing Facility which
will be adjacent to the Addition. Bond proceeds remaining as of September 30,
1996, will be used for final equipment expenditures and completion of the
parking lot.
Average occupancy rates of the Facility have been as follows:
Fiscal Year Occupancy Licensed Beds
----------- --------- --------------
1996 76.3% (125)10/1/95-12/5/96;(256)12/5/96-9/30/96
1995 97.8% 125
CEDAR PINES FACILITY
The Bonds were issued to finance construction of the Addition, which
replaced the Cedar Pines Facility. Fred and Merle Nugent began operating Cedar
Pines Facility in 1955 with 27 beds and expanded it to 44 beds in 1958, to 67
beds in 1963 and to 131 beds in 1966. Between 1989 and 1993, the Corporation
delicensed and decertified 37 nursing facility beds and in 1995 delicensed an
additional 15 nursing facility beds at Cedar Pines Facility. Forty-nine nursing
beds were delicensed and decertified because of unattractive location,
inadequate physical configuration and outdated facilities, and inadequate
demand, and the other three beds because of a change in law prohibiting the
licensing and certification of nursing facility beds in rooms with five or more
beds. Therefore, until operations ceased on December 5, 1995, the Cedar Pines
Facility operated 75 licensed and certified beds.
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Because of the condition of the Cedar Pines Facility, the State of
Minnesota granted for the Addition an exemption from the general moratorium that
prohibits the licensure and certification of skilled nursing beds in new,
relocated or remodeled facilities. All conditions relating to the grant of the
moratorium exception were met and the Minnesota Department of Health approved
the plans and specifications for the Addition. Upon completion of the Addition
and the licensing and certification of the 256 beds at the Expanded Facility on
December 5, 1995, the licensing and certification of beds in the Cedar Pines
Facility terminated and the Cedar Pines Facility was no longer permitted to
operate as a licensed health care facility. The Corporation sold the building
and land comprising the Cedar Pines Facility on September 16, 1996, and used the
proceeds of the sale, together with other required funds, to prepay the Nugent
note.
HOME HEALTH SERVICES
Care First Home Health Services, a home health agency ("Home Health
Services"), is a division of the Corporation which commenced operations in
1993 to provide home health services to elderly persons in the surrounding
community. Home Health Services is Medicare-certified and licensed by the
State of Minnesota. As of July, 1995, the Corporation suspended the
operations of the Home Health Services until it is determined that Home
Health Services will be profitable.
ITEM 3: LEGAL PROCEEDINGS
The Corporation is not currently a party to any material pending legal
proceedings. From time to time the Corporation may become involved in routine
litigation incidental to its business.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable. The holders of the bonds have no voting rights.
PART II
ITEM 5: MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Corporation's common stock is not publicly traded.
Authorized and outstanding common stock shares are as follows at
September 30, 1994 and 1995:
Class A Class B Unclassified Total
------- -------- ------------ ------
Shares of Stock Authorized 500 10,000 4,500 15,000
Shares of Stock Outstanding 500 10,000 0 10,500
Par Value per Share $0.01 $0.01 $0.01 NA
Voting Rights Yes No No N/A
The Corporation has never declared a dividend. The Corporation currently
intends to retain any earnings for use in its operations and does not anticipate
paying a cash dividend in the foreseeable future. Future dividend policy will
be determined by the Corporation's board of directors based upon the
Corporation's earnings, if any, its capital needs and other relevant factors
including bonds covenant restrictions.
10
<PAGE>
ITEM 6: MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The following table sets forth selected financial data and statistics of the
Corporation as of September 30, 1995 and 1996 and for each of the fiscal years
then ended. This data should be read in conjunction with the Corporation's
financial statements and notes thereto included elsewhere in this filing, and
with "Management's Discussion and Analysis of Results of Operations and
Financial Condition."
OPERATING DATA:
FISCAL YEAR ENDED SEPTEMBER 30,
-------------------------------
1995 1996
---- ----
Total Revenue $8,892,378 $9,579,485
Total Operating Expense 7,831,369 8,058,813
---------- ---------
Income Before Depreciation,
Amortization and Interest $1,061,009 $1,520,672
Depreciation and Amortization 276,505 457,832
Interest 428,645 1,215,524
---------- ---------
Income (Loss) from Operations
Before Taxes and
Extraordinary Item $ 355,859 $ (152,684)
Provision for (Benefit Of)
Income Tax 121,392 (65,000)
Extraordinary Item: Loss on
Refinancing, Net of Tax 172,925 -
---------- ----------
Net Income $ 61,542 $ (87,684)
---------- ----------
---------- ----------
BALANCE SHEET DATA:
SEPTEMBER 30,
---------------------------
1995 1996
---- ----
Current Assets
Cash $ 704,833 $ 505,128
Accounts Receivable-Residents 715,559 1,233,141
Other 1,181,058 777,751
----------- ------------
Total Current Assets $ 2,601,450 $ 2,516,020
Assets Whose Use is Limited 3,035,043 1,304,230
Property and Equipment
(Net of Depreciation) 4,000,308 10,231,700
Unamortized Financing Costs 1,146,176 1,044,416
Construction in Progress 4,830,493 -
Other Assets 14,932 89,080
----------- -----------
Total Assets $15,628,402 $ 15,185,446
----------- -----------
----------- -----------
Current Liabilities $ 2,080,306 $ 2,117,078
Long-Term Debt, Less
Current Maturities 13,367,185 12 ,915,000
Other Liabilities 355,500 415,641
Stockholders (Deficit) (174,589) (262,273)
----------- -----------
Total Liabilities and Stock-
holders' (Deficit) $15,628,402 $ 15,185,446
----------- -----------
----------- -----------
11
<PAGE>
STATISTICAL INFORMATION:
Nile Health Care Center: Existing Facility: Expanded Facility:
Occupancy Percentage 97.8% 76.3%
------ ------
Percentage of Total Revenue:
Medicaid 65.5% 66.4%
Private Pay and Other 26.0 27.3
Medicare 8.5 6.3
------ ------
TOTAL 100.0% 100.0%
------ ------
------ ------
* Based upon 125 Beds from October 1, 1994 - December 4, 1995 and 256 Beds from
December 5, 1995 - September 30, 1996.
Cedar Pines Facility:
Occupancy Percentage 77.9%* 67.2%
------ ------
Percentage of Total Revenue:
Medicaid 86.5% 88.5%
Private Pay and Other 8.4 8.9
Medicare 5.1 2.6
------ ------
TOTAL 100.0% 100.0%
------ ------
------ ------
* Based upon 94 Beds from October 1, 1994 - February 14, 1995 and 75 Beds from
February 15, 1995 - December 31, 1995.
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following analysis of the results of operations and financial condition
of the Corporation should be read in conjunction with the Corporation's
Financial Statements included herewith.
DEPENDENCE ON MINNESOTA MEDICAID PROGRAM
Substantially all revenues of the Corporation are derived from daily
resident rates established by the Department of Human Services (DHS) for the
Corporation's nursing facility pursuant to the Rate-setting System. The
requirements of the Rate-setting System significantly affect the Corporation's
decisions as to staffing, services, expenditures and other operating matters.
Changes in the Rate-setting System may be anticipated and the effects of such
changes on the Corporation cannot be predicted. A change occurred in 1995 when
the State of Minnesota, by statute, authorized the DHS to establish a
contractual alternative payment system, called the "Nursing Home Contract
Project". The purpose of the Project is to explore a contract-based
reimbursement system as an alternative to the current cost-based system for
reimbursement. The DHS completed its review of the applications in December
1995, from which 39 facilities were selected to be reimbursed under this new
system. The Corporation submitted an application to be reimbursed under the new
system and was selected as one of the 39 to participate with the DHS in the
"Nursing Home Contract Project" on December 15, 1995. Under the new system, the
Corporation was paid its reimbursement rates in effect July 1, 1995 with an
annual inflationary adjustment of 2.98% for rates effective July 1,1996.
12
<PAGE>
RELOCATION TO EXPANDED FACILITY OF CEDAR PINES FACILITY BEDS
Because the Cedar Pines Facility became costly to operate and from
diminishing attractiveness to new residents because of location, obsolescence
and building design limitations, the Corporation terminated operations at the
Cedar Pines Facility and relocated its beds to the new addition attached to the
Nile Health Care Center (The Addition).
These preparations were costly. They included an application, granted in
1989, for an exception to the moratorium which prohibits licensing and
certification of beds in new, relocated or remodeled facilities; subsequent
lobbying activities to obtain extensions of the exception; the acquisition of
land at the location of the Nile Health Care Center for parking purposes;
certain site preparation work (which also included the demolition of vacant
businesses on nearby properties owned by the Corporation to reduce insurance and
property tax expenses), and certain survey, construction planning and
architectural planning work. In December 1994, the general contractor began
constructing the new addition and obtained substantial completion in December
1995.
COMPARISON OF 1996 WITH 1995
For the fiscal year ended September 30, 1996, the Corporation's net income
(loss) before extraordinary loss on refunding of debt was $(87,684) in
comparison with $234,467 for the fiscal year ended September 30, 1995 or a
decrease of $322,151. The 1996 net income was negatively affected by the
increased number of beds in the Expanded Facility which were not filled. Total
occupancy was 76.3% in 1996 compared to 97.8% in 1995. Management has developed
a marketing strategy which is more extensive than what has been done in the past
in an effort to fill the beds in the coming year. In addition, it has not been
unusual for senior residential or care facilities to experience delayed or
reduced fill up following completion.
Revenue increased by $687,107, from $8,892,378 for the fiscal year ended
September 30, 1995 to $9,579,485 for the fiscal year ended September 30, 1996.
Resident services revenue increased by $581,242 or 7.7%. The Corporation
received rate increases each July 1 approximating 3-5%. At the Existing
Facility, resident days increased from fiscal year 1995 to fiscal 1996 by 20,750
days or 47% as a result of the 56 additional beds from the completion of the
Addition. Ancillary revenue which includes therapy services, specialty beds,
prescription medications and nursing supplies increased $206,390 or 20%. The
increase is mainly attributable to the increase in Medicare utilization at the
Expanded Facility. Part of the increase may also be attributed to the increase
of acuity of residents.
Operating expenses, which include salaries and benefits, supplies,
utilities, food, purchased services, and general and administrative expenses,
increased $227,444 or 3% from $7,831,369 for fiscal 1995 to $8,058,813 for
fiscal 1996. The increase is a result of the increase in resident days as well
as the increase of the Addition to the Expanded Facility.
Depreciation, amortization and interest expense, increased $968,206 or 137%
from $705,150 for the fiscal year ended September 30, 1995 to $1,673,356 for
fiscal year ended September 30, 1995. The increase is a result of the refunding
of the Tax Exempt Series 1994 bonds which bear interest from 5.0 to 7.75%
interest was being capitalized as part of the project costs until project
completion in December, 1995, when interest was expensed. Depreciation expense
also increased as a result of the additional fixed assets from the Addition.
The extraordinary loss on refunding of the Series 1983 Bonds is the sum of
the unamortized financing costs on the Series 1983 Bonds of $240,958 and the
prepayment penalty of $47,250, net of an effective income tax rate of 40% in
fiscal year September 30, 1995.
Effective October 1, 1993, the Corporation adopted the provisions of FASB
Statement No. 109, ACCOUNTING FOR INCOME TAXES, which requires the asset and
liability method of accounting for income taxes rather than the deferred method
previously used. The impact of this accounting change was not material to the
financial statements as the result of establishing a valuation allowance equal
to the net deferred tax asset that would have been recorded at October 1, 1993
under the new method. The Corporation's income taxes
13
<PAGE>
expense for the fiscal years ended September 30, 1995 and 1996 were $121,392,
based on pretax income of $355,859, and $(65,000) based on pretax loss of
$152,684) respectively. At September 30, 1995 and 1996 there is no valuation
allowance.
During 1996, the Corporation entered into a sales agreement in contemplation of
an exchange of its Cedar Pines Facility for land. Cash received in excess of
the basis of the facility has been deferred until the exchange transaction has
been consummated.
LIQUIDITY AND CAPITAL RESOURCES
The Corporation does not maintain any line of credit or other external
sources of liquidity.
At September 30, 1996, the Corporation had $505,128 in cash, and working
capital of $398,942 based upon current assets of $2,516,020 and current
liabilities of $2,117,078. Working capital of $521,144 based on current assets
of $2,601,450 and current liabilities of $2,080,306 existed at September 30,
1995. During the fiscal year ended September 30, 1996, the Corporation's cash
decreased $199,705. Accounts receivable increased $517,582 net cash provided by
operating activities decreased $535,483 and Current Assets Whose Use is Limited
decreased $388,048.
The note payable from Cedar Pines was paid off in September 1996 upon the
sale of the facility. In addition, with the decreased cash flow and increased
bills from a larger facility, the Corporation has accrued a higher volume of
payables at year end.
As of September 30, 1996, total outstanding long-term debt of the
Corporation equaled $12,915,000 consisting of the Series 1994 Taxable Health
Care Facilities Revenue Bonds and the Series 1994 Health Care Facilities
Refunding Revenue Bonds, both of which are secured equally and ratably on parity
by a mortgage lien on, security interest in and an assignment of leases and
rents of the Addition.
As of September 30, 1996, Unamortized Financing Costs on the Series 1994
Bonds were $1,044,416. Total financing costs on the Series 1994 Bonds were
$1,224,528.
The Assets Whose Use is Limited decreased $2,118,861 from September 30,
1995 to September 30, 1996 as a result of the project fund decrease through
draws as Addition costs were paid. The Bond fund also decreased as principal
payrments were paid out during 1996. The net proceeds of the 1994 Taxable
Health Care Facilities Bonds are being held by the trustee in accounts whose use
is limited until they are expended for their designated purposes.
The Corporation has not entered into any material agreements or commitments
with respect to acquisitions or development except the construction and
architect contracts. Purchase orders for equipment financed with proceeds of
the Bonds were entered in to near the completion of the Addition. The
Department of Health, the City of Minneapolis and the Fire Marshall approved the
Addition for occupancy November 30, 1995.
The Corporation believes the proceeds from the offering of the Bonds,
together with existing capital resources and cash flow from its existing
operations, will be sufficient to continue to make the indebtedness repayments,
capital additions and improvements, and to meet other working capital needs for
the next twelve months.
14
<PAGE>
IMPACT OF INFLATION
The health care industry is labor intensive. Wage and other expenses
increase more rapidly during periods of inflation and when shortages in the
labor market occur. In addition, suppliers pass along rising costs in the form
of higher prices. Increase in daily rates under the Rate-setting System
generally lag behind actual cost increases, so the Corporation may have
difficulty covering them in a timely fashion, despite an inflation factor in the
rate-setting process. This is due to the lag between "reporting" period (when
costs are incurred) and the rate year when their costs are actually reflected in
daily rates paid to the Corporation for services provided.
RECENTLY ISSUED ACCOUNTING STANDARDS
FASB issued Statement No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT
AND EQUITY SECURITIES amends ARB No. 43, supersedes SFAS No. 12, and establishes
accounting standards for both marketable equity and debt securities. SFAS No.
115 which became effective in 1995 did not have a material effect on the
Corporation.
In March 1995, the FASB issued Statement No. 121, ACCOUNTING FOR IMPAIRMENT
OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF. SFAS No 121
will be effective for the Corporation with the fiscal year beginning October 1,
1996. The effects of the SFAS No. 121 on this Corporation have not yet been
determined, but are expected to be insignificant.
ITEM 7: FINANCIAL STATEMENTS
INCLUDED ON PAGES F-1 - F-17.
15
<PAGE>
This page intentionally left blank.
16
<PAGE>
CARE FIRST INC.
FINANCIAL STATEMENTS AND
INDEPENDENT AUDITOR'S REPORT
SEPTEMBER 30, 1996 AND 1995
<PAGE>
TABLE OF CONTENTS
PAGE
Independent Auditor's Report F-1
Balance Sheets
September 30, 1996 and 1995 F-2
Statements of Operations and Retained Deficit
For the Years Ended September 30, 1996 and 1995 F-3
Statements of Cash Flows
For the Years Ended September 30, 1996 and 1995 F-4 - F-5
Notes to Financial Statements F-6 - F-17
F-INDEX
<PAGE>
[LOGO]
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Stockholders
Care First Inc.
Minneapolis, Minnesota
We have audited the accompanying balance sheets of CARE FIRST INC. as of
September 30, 1996 and 1995, and the related statements of operations and
retained deficit, and cash flows for the years then ended. These financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of CARE FIRST INC. as of
September 30, 1996 and 1995, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
LARSON, ALLEN, WEISHAIR & CO., LLP
Minneapolis, Minnesota
November 6, 1996
F-1
<PAGE>
CARE FIRST INC.
BALANCE SHEETS
SEPTEMBER 30, 1996 AND 1995
1996 1995
------------ ------------
ASSETS
CURRENT ASSETS
Cash $ 239,038 $ 704,833
Investments 266,090 --
Accounts Receivable - Residents 1,233,141 715,559
Accounts Receivable - Other 60,962 1,334
Current Assets Whose Use is Limited 609,868 997,916
Notes Receivable - Stockholders 7,833 25,402
Prepaid Expenses 11,088 46,406
Deferred Tax Asset 88,000 110,000
------------ ------------
Total Current Assets $ 2,516,020 $ 2,601,450
------------ ------------
ASSETS WHOSE USE IS LIMITED
Bond Fund $ 537,141 $ 906,929
Debt Service Reserve Fund 1,012,591 1,050,364
Project Fund 291,639 1,984,679
Interest Receivable 15,678 23,786
Resident Trust Funds 57,049 67,201
------------ ------------
Total Assets Whose Use is Limited $ 1,914,098 $ 4,032,959
Less: Assets Whose Use is Limited
Which are Current Assets 609,868 997,916
------------ ------------
Non-current Assets Whose Use is Limited $ 1,304,230 $ 3,035,043
------------ ------------
PROPERTY AND EQUIPMENT (at Cost)
Land $ 938,744 $ 1,026,755
Land Improvements 36,064 123,166
Buildings and Improvements 10,312,074 4,710,610
Equipment and Furnishings 1,164,075 1,297,291
------------ ------------
Total $ 12,450,957 $ 7,157,822
Less: Accumulated Depreciation 2,219,257 3,157,514
------------ ------------
Total Property and Equipment
(at Depreciated Cost) $ 10,231,700 $ 4,000,308
------------ ------------
OTHER ASSETS
Unamortized Financing Costs $ 1,044,416 $ 1,146,176
Deferred Tax Asset 70,000 --
Construction in Progress -- 4,830,493
Unamortized Start-up Costs 19,080 14,932
------------ ------------
Total Other Assets $ 1,133,496 $ 5,991,601
------------ ------------
Total Assets $ 15,185,446 $ 15,628,402
------------ ------------
------------ ------------
1996 1995
------------ ------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Current Maturities of Long-Term Debt $ 135,000 $ 146,120
Accounts Payable - Trade 395,472 294,099
Accounts Payable - Other 100,908 121,735
Accrued Salaries and Payroll Taxes 223,770 224,370
Accrued Vacation and Personal Leave 239,211 288,353
Accrued Real Estate Taxes 496,515 415,386
Resident Trust Funds Payable 57,049 67,201
Accrued Interest Payable 451,978 458,463
Accrued Expenses 17,175 64,579
------------ ------------
Total Current Liabilities $ 2,117,078 $ 2,080,306
------------ ------------
LONG-TERM DEBT (Net of Current
Maturities Shown Above)
Bonds Payable $ 12,915,000 $ 13,050,000
Mortgage and Note Payable -- 317,185
------------ ------------
Total Long-Term Debt $ 12,915,000 $ 13,367,185
------------ ------------
OTHER LIABILITIES
Deferred Compensation Payable $ 78,235 $ 71,500
Construction Costs Payable 164,311 262,000
Deferred Revenue 173,095 --
Deferred Tax Liability -- 22,000
------------ ------------
Total Other Liabilities $ 415,641 $ 355,500
------------ ------------
Total Liabilities $ 15,447,719 $ 15,802,991
------------ ------------
STOCKHOLDERS' DEFICIT
Common Stock $ 105 $ 105
Paid-In Capital 17,660 17,660
Retained Deficit (Page 3) (280,038) (192,354)
------------ ------------
Total Stockholders' Deficit $ (262,273) $ (174,589)
------------ ------------
Total Liabilities and
Stockholders' Deficit $ 15,185,446 $ 15,628,402
------------ ------------
------------ ------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-2
<PAGE>
CARE FIRST INC.
STATEMENTS OF OPERATIONS AND RETAINED DEFICIT
FOR THE YEARS ENDED SEPTEMBER 30, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------------------- ------------------------
PERCENT PERCENT
OF OF
AMOUNT REVENUE AMOUNT REVENUE
------------- --------- ------------ ---------
<S> <C> <C> <C> <C>
REVENUE
Resident Services $ 8,047,296 84.0 % $ 7,466,054 84.0 %
Ancillary Services 1,240,107 12.9 1,033,717 11.6
Home Health Services -- -- 224,067 2.5
Prior Years' Revenue Adjustments 86,061 0.9 87,724 1.0
Other Income 206,021 2.2 80,816 0.9
------------- --------- ------------ ---------
Total Revenue $ 9,579,485 100.0 % $ 8,892,378 100.0 %
------------- --------- ------------ ---------
OPERATING EXPENSE
Nursing $ 3,314,818 34.6 % $ 3,201,064 36.0 %
Activities and Social Service 352,154 3.7 354,707 4.0
Ancillary 675,239 7.0 543,837 6.1
Dietary 791,094 8.3 708,340 8.0
Laundry 181,776 1.9 147,599 1.7
Housekeeping 271,417 2.8 203,840 2.3
Plant Operations and Maintenance 446,732 4.7 364,863 4.1
Property and Related 461,594 4.8 470,126 5.3
Administrative and General 756,820 7.9 739,768 8.3
Payroll Taxes and Employee Benefits 805,749 8.4 886,349 10.0
Depreciation and Amortization 457,832 4.8 276,505 3.1
Interest 1,215,524 12.7 428,645 4.8
Home Health 1,420 -- 210,876 2.4
------------- --------- ------------ ---------
Total Operating Expense $ 9,732,169 101.6 % $ 8,536,519 96.1 %
------------- --------- ------------ ---------
INCOME (LOSS) FROM OPERATIONS BEFORE
INCOME TAXES AND EXTRAORDINARY ITEM $ (152,684) (1.6)% $ 355,859 3.9 %
PROVISION FOR (REFUND OF) INCOME TAXES (65,000) (0.7) 121,392 1.4
------------- --------- ------------ ---------
NET INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM $ (87,684) (0.9)% $ 234,467 2.5 %
EXTRAORDINARY ITEM - LOSS ON
REFINANCING, NET OF TAX -- -- (172,925) (1.9)
------------- --------- ------------ ---------
NET INCOME (LOSS) $ (87,684) (0.9)% $ 61,542 0.6 %
--------- ---------
--------- ---------
Retained Deficit - Beginning (192,354) (253,896)
------------- ------------
RETAINED DEFICIT - ENDING
(to Page 2) $ (280,038) $ (192,354)
------------- ------------
------------- ------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-3
<PAGE>
CARE FIRST INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
-------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Cash Received from Resident Services $ 8,863,940 $ 8,640,824
Cash Paid to Suppliers and Employees (8,008,878) (7,847,497)
Interest Paid (1,222,009) (310,182)
Interest Received 198,090 62,684
Miscellaneous Cash Received 173,095 --
Income Tax Refunds Received -- (6,108)
-------------- -------------
Net Cash Provided by Operating Activities $ 4,238 $ 539,721
-------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of Property and Equipment $ (316,434) $ (42,074)
Acquisition of Start-up Costs (22,448) --
Acquisition of Investments (266,090) --
Disposal of Property and Equipment - Net of Accumulated Depreciation 230,394 --
Decrease in Notes Receivable - Stockholders 17,569 8,335
(Increase) Decrease in Construction in Progress (1,652,631) 53,314
Deposits to Debt Service Reserve Fund (68,791) (24,486)
Disbursements from Debt Service Reserve Fund 106,564 --
Deposits to Bond Fund (993,733) (437,487)
Decrease in Project Fund 1,595,351 --
Disbursements from Bond Fund 1,363,521 349,862
-------------- -------------
Net Cash Used by Investing Activities $ (6,728) $ (92,536)
-------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal Payments on Long-Term Debt $ (463,305) $ (175,154)
-------------- -------------
NET INCREASE (DECREASE) IN CASH $ (465,795) $ 272,031
Cash - Beginning 704,833 432,802
-------------- -------------
CASH - ENDING $ 239,038 $ 704,833
-------------- -------------
-------------- -------------
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
Net Income (Loss) (Page 3) $ (87,684) $ 61,542
Depreciation and Amortization 457,832 276,505
Extraordinary Loss on Refunding -- 288,208
(Increase) Decrease in Current Assets:
Accounts Receivable - Residents (517,582) 17,057
Other Current Assets (16,202) (4,477)
Decrease in Current Liabilities:
Accounts Payable 101,373 (89,663)
Other Current Liabilities (43,329) (13,451)
Increase in Deferred Compensation Payable 6,735 4,000
Increase in Deferred Revenue 173,095 --
Increase in Deferred Tax Asset (70,000) --
-------------- -------------
Net Cash Provided by Operating Activities $ 4,238 $ 539,721
-------------- -------------
-------------- -------------
</TABLE>
F-4
<PAGE>
CARE FIRST INC.
STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
-------------- -------------
<S> <C> <C>
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES
Proceeds from Bonds Payable $ -- $ 13,225,000
-------------- -------------
-------------- -------------
Refunding of Bonds Payable $ -- $ (4,725,000)
Increase in Financing Costs -- (566,750)
Deposits to Trustee/Held Funds -- (7,933,250)
-------------- -------------
Total $ -- $(13,225,000)
Transfers from Project Fund for
Property and Equipment Acquisition $ 1,595,351 $ 5,031,713
Payment for Construction in Progress $ (1,497,286) $ (4,393,546)
Payment for Financing Costs (376) (521,459)
Decrease in Construction Costs Payable (97,689) (116,708)
-------------- -------------
Total $ (1,595,351) $ (5,031,713)
-------------- -------------
-------------- -------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
</TABLE>
F-5
<PAGE>
CARE FIRST INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996 AND 1995
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OPERATIONS
Care First, Inc. owns and operates a 256-bed licensed nursing facility
located in Minneapolis, Minnesota called Nile Health Care Center. On
December 5, 1995, the Corporation moved beds from Cedar Pines Health Care
facility to occupy a significant building addition to Nile Health Care Center.
The property and plant associated with Cedar Pines Health Care facility was
sold to a third party; the equipment was transferred to the new facility. The
Corporation also owned a home health agency which previously served the
surrounding area. Operations from this division ceased in July of 1995.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements. Estimates also affect the reported amounts of revenue and expense
during the reporting period. Actual results could differ from those estimates.
STANDARDS OF ACCOUNTING AND FINANCIAL REPORTING
The Corporation follows the accounting guidance in the audit and
accounting guide, AUDITS OF PROVIDERS OF HEALTH CARE SERVICES, which is in
conformity with the recommendation of the American Institute of Certified
Public Accountants.
RESIDENT SERVICES REVENUE
Resident services revenue includes room charges and ancillary services to
residents and is recorded at established billing rates net of contractual
adjustments resulting from agreements with third-party payors.
Provisions for estimated third-party payor settlements are provided in the
period the related services are rendered. Differences between the amounts
accrued and subsequent settlements are recorded in revenue in the year of
settlement.
THIRD PARTY REIMBURSEMENT AGREEMENTS
MEDICAID
Nile Health Care Center participates in the medicaid program which is
administered by the Minnesota Department of Human Services (DHS). Per
diem rates for residents are determined on a cost-related basis subject
to certain limitations as prescribed by Rule 50. The facility must
submit a cost report for each reporting year ending September 30, from
which its per diem rates effective the following July 1 are determined.
These rates are subject to retroactive adjustment by field audit.
Minnesota statutes passed in 1995 imposed additional operating cost
limitations by controlling the maximum operating cost per diem increase
a facility may receive for rate setting. In addition, if a facility is
determined to be high cost as defined in Minnesota statutes, the
operating cost per diem for rate setting will be reduced.
F-6
<PAGE>
CARE FIRST INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996 AND 1995
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OPERATIONS
(CONTINUED)
THIRD PARTY REIMBURSEMENT AGREEMENTS (CONTINUED)
MEDICAID (CONTINUED)
In 1995, the State of Minnesota, by statute, also authorized the DHS to
establish a contractual alternative payment system, called the "Nursing
Home Contract Project". The purpose of the Project is to explore a
contract-based reimbursement system as an alternative to the current
cost-based system for reimbursement. On December 15, 1995, the facility
was approved to participate in the "Nursing Home Contract Project" in
which medicaid and private pay reimbursement rates from July 1, 1995
were inflated 2.98% for rates effective July 1, 1996.
By Minnesota statute, nursing facilities may not charge private paying
residents in multiple occupancy rooms per diem rates in excess of the
approved medicaid rates for similar services.
MEDICARE
By Minnesota statute, nursing facilities which participate in the medicaid
program must also participate in the medicare program. This program is
administered by the United States Department of Health and Human Services.
Annual cost reports must be submitted to the designated intermediary for
cost settlement. These reports are subject to retroactive adjustment by
audit.
During the years ended September 30, 1996 and 1995, the occupancy
percentages and the percentages of residents covered under the medicaid and
medicare programs were as follows:
1996 1995
------ -----
CEDAR PINES HEALTH CARE FACILITY (Based on 94
Beds from October 1, 1994 - February 14,
1995 and 75 Beds from February 15, 1995 -
December 5, 1995)
Total Occupancy 67.2 % 77.9 %
Medicaid 88.5 % 86.5 %
Medicare 2.6 % 5.1 %
NILE HEALTH CARE CENTER (Based on 125
Licensed Beds from October 1, 1994 -
December 5, 1995 and 256 Beds from
December 6, 1995 to September 30, 1996)
Total Occupancy 76.3 % 97.8 %
Medicaid 66.4 % 65.5 %
Medicare 6.3 % 8.5 %
F-7
<PAGE>
CARE FIRST INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996 AND 1995
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OPERATIONS
(CONTINUED)
CONCENTRATION OF CREDIT RISK
The Corporation places its cash deposits with high credit quality
financial institutions. At times such deposits may be in excess of the FDIC
insurance limit.
INVESTMENTS
Investments consist of a government obligation mutual fund of $266,090 and
$-0- at September 30, 1996 and 1995, respectively.
ACCOUNTS RECEIVABLE
The Corporation accounts for uncollectible accounts by the reserve method.
At September 30, 1996 and 1995, the allowances for uncollectible accounts were
$138,300 and $99,500, respectively.
DEPRECIATION
Property and equipment are depreciated over their estimated useful lives
by the straight-line method of depreciation. The Corporation uses the
following lives for depreciating its property and equipment:
Estimated
Useful Life
-------------
Land Improvements 15-20 Years
Buildings and Improvements 10-35 Years
Equipment and Furnishings 5-15 Years
UNAMORTIZED FINANCING COSTS
Financing costs associated with the issuance of the City of Minneapolis,
Minnesota Taxable Health Care Facilities Revenue Bonds and City of Minneapolis,
Minnesota Healthcare Facilities Refunding Revenue Bonds are being amortized
over 10 and 19 years, respectively, the terms of the bonds.
UNAMORTIZED START-UP COSTS
Start-up costs associated with opening of the building addition are being
amortized over five years.
CONSTRUCTION IN PROGRESS
Construction in progress represents the cumulative costs incurred with
respect to the construction and equipping of a 131-bed replacement of Cedar
Pines by adding on to the existing 125-bed Nile Health Care Center. These
costs were capitalized and are being depreciated over the life of the capital
project beginning in the year ended September 30, 1996.
At September 30, 1996 and 1995, construction costs payable were classified
as noncurrent since they are to be paid from bond proceeds.
F-8
<PAGE>
CARE FIRST INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996 AND 1995
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OPERATIONS
(CONTINUED)
DEBT TRUST FUNDS
Debt trust fund investments consist principally of guaranteed investment
contracts with an insurance company and bear interest of approximately 7.5%.
These investments are classified as held-to-maturity as the Corporation has the
positive intent and ability to hold this securities until maturity. Held-to-
maturity securities are carried at cost adjusted for amortization of premiums
and accretion of discounts.
INCOME TAXES
The Corporation follows the provisions of FASB Statement No. 109,
ACCOUNTING FOR INCOME TAXES, which requires the asset and liability method of
accounting for income taxes. A deferred tax asset or liability is recognized
for the estimated future tax effects attributable to temporary differences and
operating loss and tax credit carryforwards. Temporary differences are
differences between the tax bases of assets and liabilities and their reported
amounts in the financial statements. A valuation allowance is provided to the
extent it is more likely than not that a deferred tax asset will not be
realized. Tax credits are accounted for by using the "flow-through" method
whereby the benefit is reflected as a reduction of income taxes in the year
utilized.
DEFERRED REVENUE
During 1996, the Corporation entered into a sale agreement in
contemplation of an exchange of it Cedar Pines facility for land. Cash
received in excess of the basis of the facility has been deferred until the
exchange transaction has been executed.
RECENTLY ISSUED ACCOUNTING STANDARDS
FASB issued Statement No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT
AND EQUITY SECURITIES amends ARB No. 43, supersedes Statement of Financial
Accounting Standards (SFAS) No. 12, and establishes accounting standards for
both marketable equity and debt securities. SFAS No. 115 which became
effective in 1995 did not have a material effect on the Corporation.
In March 1995, the FASB issued Statement No. 121, ACCOUNTING FOR
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF.
SFAS No. 121 is effective for the years beginning after December 31, 1995. The
SFAS No. 121 will be effective for the Corporation with the fiscal year
beginning October 1, 1996. The effects of the SFAS No. 121 on the Corporation
have not yet been determined, but are expected to be insignificant.
F-9
<PAGE>
CARE FIRST INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996 AND 1995
NOTE 2 INCOME TAXES
The provision for (benefit of) income taxes for the years ended
September 30, 1996 and 1995 consists of the following:
1996 1995
---------- ----------
Current:
Federal $ 0 $ 0
State 5,000 6,108
Deferred (70,000) 115,284
--------- ---------
Total $ (65,000) $ 121,392
--------- ---------
--------- ---------
Significant components of the Corporation's deferred tax assets and
liabilities at September 30, 1996 are as follows:
Deferred Tax Assets:
Allowance for Uncollectible Notes Receivable -
Stockholders $ 357,000
Operating Loss Carryforwards 386,000
Tax Credit Carryforwards 109,000
Accrued Vacation and Personal Leave 83,000
Allowance for Uncollectible Accounts
Receivable - Residents 55,000
Deferred Revenue 70,000
Deferred Compensation 31,000
------------
Total Deferred Tax Assets $ 1,091,000
Deferred Tax Liabilities:
Depreciation 899,000
------------
Net Deferred Tax Asset $ 192,000
Less: Valuation Allowance 34,000
------------
Total $ 158,000
------------
------------
Differences between the effective tax rates and the statutory U.S. federal
income tax rate are explained as follows:
1996 1995
---------- ----------
Statutory U.S. Federal Income Tax Rate (34) % 34 %
State Taxes Net of Federal Benefit (6) 6
Graduated Federal Tax Rates 0 (6)
Nondeductible Expenses and Other (3) 0
---------- ----------
Effective Tax Rates (43) % 34 %
---------- ----------
---------- ----------
F-10
<PAGE>
CARE FIRST INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996 AND 1995
NOTE 2 INCOME TAXES (CONTINUED)
Operating loss and tax credit carryovers available to reduce future income
taxes at September 30, 1996 are as follows:
Net Operating Losses
-------------------------- Federal
Expiration Date Federal State Tax Credits
--------------- ------- ----- -----------
1997 $ 0 $ 0 $ 2,000
1998 0 0 5,000
1999 0 0 85,000
2000 0 0 15,000
2001 0 0 2,000
2006 597,000 708,000 0
2008 91,000 83,000 0
2009 175,000 173,000 0
Later Years 88,000 83,000 0
---------- ------------ ----------
Total $ 951,000 $ 1,047,000 $ 109,000
---------- ------------ ----------
---------- ------------ ----------
NOTE 3 DEBT TRUST FUNDS
BOND FUND
All payments of principal and interest on the bonds are made from funds
transferred by the Corporation to these funds. At September 30, 1996 and
1995, the Bond Fund balances were $537,141 and $906,929, respectively.
DEBT SERVICE RESERVE FUND
The primary purpose of this fund is to provide a reserve for payment of
principal and interest on the bonds in the event the Bond Fund is
insufficient to meet debt service requirements. At September 30, 1996
and 1995, the balances of the Debt Service Reserve Fund were $1,012,591
and $1,050,364, respectively.
PROJECT FUND
The proceeds from the issuance of the taxable bonds are on deposit in the
Project Fund until certified draw requests are processed for construction
costs, including building construction, equipment installation,
capitalized interest and other project costs. The balances of the
Project Fund at September 30, 1996 and 1995 were $291,639 and $1,984,679,
respectively.
F-11
<PAGE>
CARE FIRST INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996 AND 1995
NOTE 4 NOTES RECEIVABLE - STOCKHOLDERS
At September 30, 1996 and 1995, the Corporation had unsecured notes
receivable from its officers bearing interest at 5.4% as follows:
1996 1995
---------- ----------
Notes Receivable $ 900,042 $ 917,611
Less: Allowance for Uncollectible Accounts (892,209) (892,209)
---------- ----------
Net $ 7,833 $ 25,402
---------- ----------
---------- ----------
Total interest income earned on the notes receivable during the years
ended September 30, 1996 and 1995 was $49,120 and $49,790, respectively.
NOTE 5 CONSTRUCTION IN PROGRESS
During 1989, the Corporation submitted an application and received
approval from the State of Minnesota to transfer the beds at Cedar Pines
Health Care Facility to a new addition to Nile Health Care Center. The
131-bed addition was completed December 5, 1995 and financed by revenue
bonds (see Note 6). At September 30, 1996, costs have been capitalized
as building and equipment.
NOTE 6 LONG-TERM DEBT
<TABLE>
<CAPTION>
Description Security 1996 1995
----------- -------- ------------ ------------
<S> <C> <C> <C>
NILE HEALTH CARE CENTER
5.00% - 7.75% City of
Minneapolis, Minnesota Real and Personal
Health Care Facilities Property of Existing
Refunding Revenue Bonds Facility and the
(Care First Inc. Project) Additions and
Series 1994, Due June 2012 Accounts Receivable $ 4,550,000 $ 4,675,000
12.00% City of
Minneapolis, Minnesota
Taxable Health Care
Facilities Revenue Bonds Real and Personal
(Care First Inc. Project) Property of the
Series 1994, Due December Addition and
2004 Accounts Receivable 8,500,000 8,500,000
</TABLE>
F-12
<PAGE>
CARE FIRST INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996 AND 1995
NOTE 6 LONG-TERM DEBT (CONTINUED)
<TABLE>
<CAPTION>
Description Security 1996 1995
----------- -------- ------------ ------------
<S> <C> <C> <C>
CEDAR PINES HEALTH CARE FACILITY
10% Note Payable -
Janice Nugent (A Related Real Property
Party), Due September 2005 (Cedar Pines) 0 338,305
------------ ------------
Totals $ 13,050,000 $ 13,513,305
Current Maturities (135,000) (146,120)
------------ ------------
Long-Term Debt $ 12,915,000 $ 13,367,185
------------ ------------
------------ ------------
</TABLE>
In December 1994, the City of Minneapolis, Minnesota issued $4,725,000 of
Health Care Facilities Refunding Revenue Bonds to finance the refunding of
prior bonds that were issued to construct the existing 125-bed Nile Health
Care Center. Interest rates on the bonds range from 5.00% to 7.75%
depending on the term. The bonds are secured, equally and ratably on
parity with $8,500,000 principal amount of the taxable bonds, by a
mortgage lien on and a security interest in the land, buildings and
certain personal property of the existing facility and the addition and
accounts receivable.
In December 1994, the City of Minneapolis, Minnesota issued $8,500,000 of
Taxable Health Care Facilities Revenue Bonds to finance construction and
equipping of a 131-bed addition to the existing 125-bed facility. The
interest rate on the bonds is 12.00%. The bonds are secured, equally and
ratably on parity with $4,725,000 principal amount of the tax exempt
bonds, by a mortgage lien on and a security interest in the land, buildings
and certain personal property of the addition and accounts receivable.
Interest expense incurred on the debt and interest earnings on the debt-
related trust funds were as follows:
<TABLE>
<CAPTION>
1996
--------------------------------------------
Cedar Pines Nile Total
----------- ----------- -----------
<S> <C> <C> <C>
Interest Capitalized $ 0 $ 170,000 $ 170,000
Capitalized Interest Income 0 (16,356) (16,356)
-------- ----------- -----------
Net Capitalized Interest $ 0 $ 153,644 $ 153,644
-------- ----------- -----------
-------- ----------- -----------
Interest on Long-Term Debt $ 31,443 $ 1,326,414 $ 1,357,857
Interest on Working Capital Loans
and Finance Charges 0 (1,380) (1,380)
Less: Interest Earned on Trust Funds 0 (140,953) (140,953)
-------- ----------- -----------
Net Interest Expense $ 31,443 $ 1,184,081 $ 1,215,524
-------- ----------- -----------
-------- ----------- -----------
</TABLE>
F-13
<PAGE>
CARE FIRST INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996 AND 1995
NOTE 6 LONG-TERM DEBT (CONTINUED)
<TABLE>
<CAPTION>
1995
------------------------------------------------
Cedar Pines Nile Total
-------------- ----------------- ------------
<S> <C> <C> <C>
Interest Capitalized $ 0 $ 776,333 $ 776,333
Capitalized Interest Income 0 (317,980) (317,980)
-------------- ----------------- ------------
Net Capitalized Interest $ 0 $ 458,353 $ 458,353
-------------- ----------------- ------------
-------------- ----------------- ------------
Interest on Long-Term Debt $ 34,165 $ 421,900 $ 456,065
Interest on Working Capital Loans
and Finance Charges 0 8,405 8,405
Less: Interest Earned on Trust Funds 0 (35,825) (35,825)
Net Interest Expense $ 34,165 $ 394,480 $ 428,645
-------------- ----------------- ------------
-------------- ----------------- ------------
</TABLE>
Maturity requirements on long-term debt are as follows:
Year Ending September 30, Amount
------------------------- --------------
1997 $ 135,000
1998 280,000
1999 300,000
2000 360,000
2001 390,000
Later Years 11,585,000
--------------
Total $ 13,050,000
--------------
--------------
As part of the bond agreements, the Corporation has agreed to comply
with certain covenants. These consist primarily of reporting
requirements, insurance coverage, meeting certain financial ratios and
other administrative requirements.
F-14
<PAGE>
CARE FIRST INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996 AND 1995
NOTE 7 OTHER INCOME
Other income includes the following items:
<TABLE>
<CAPTION>
1996
--------------------------------------------------------------
Cedar Pines Nile Home Health Total
--------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Interest Income $ 53,424 $ 136,558 $ 0 $ 189,982
Rental Income 3,239 0 0 3,239
Meal Income 75 6,648 0 6,723
Miscellaneous Income 5,866 211 0 6,077
--------------- ------------- -------------- --------------
Total Other Income $ 62,604 $ 143,417 $ 0 $ 206,021
--------------- ------------- -------------- --------------
--------------- ------------- -------------- --------------
1995
--------------------------------------------------------------
Cedar Pines Nile Home Health Total
--------------- ------------- -------------- --------------
Interest Income $ 55,496 $ 7,749 $ 0 $ 63,245
Rental Income 1,017 0 0 1,017
Meal Income 405 6,235 0 6,640
Miscellaneous Income 882 6,552 2,480 9,914
--------------- ------------- -------------- --------------
Total Other Income $ 57,800 $ 20,536 $ 2,480 $ 80,816
--------------- ------------- -------------- --------------
--------------- ------------- -------------- --------------
</TABLE>
NOTE 8 COMMON STOCK
Authorized and outstanding common stock shares are as follows at
September 30, 1996 and 1995:
<TABLE>
<CAPTION>
Class A Class B Unclassified Total
------- ------- ------------ -------
<S> <C> <C> <C> <C>
Shares of Stock Authorized 500 10,000 4,500 15,000
Shares of Stock Outstanding 500 10,000 0 10,500
Par Value per Share $ 0.01 $ 0.01 $ 0.01 N/A
Voting Rights Yes No No N/A
</TABLE>
NOTE 9 STOCK PURCHASE AGREEMENT
The Corporation has an agreement with its stockholders to purchase
their stock in the event of their death or retirement. The agreement
provides that the Corporation has the right of first refusal to redeem
such stockholders' shares at a purchase price based on the fair market
value as determined by an appraisal.
F-15
<PAGE>
CARE FIRST INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996 AND 1995
NOTE 10 COMMITMENTS - EMPLOYMENT AGREEMENT AND DEFERRED COMPENSATION
AGREEMENT
The Corporation has an employment agreement with one of the
stockholders effective through September 20, 2004. The terms of the
agreement provide compensation only for services rendered. There are
no severance provisions; however, payments will be made in the case of
disability.
In addition, the Corporation entered into a deferred compensation
agreement with the stockholder effective October 1, 1993. Under the
terms of this agreement, the Corporation has an unfunded obligation to
pay an annual life annuity of $67,500 beginning October 2004. The
annual annuity will be reduced to $30,000 when the Corporation's note
receivable from this stockholder has been collected in full. The
present value of the anticipated payments will be expensed over the
expected service life of the stockholder. The estimated present value
of the future payments at September 30, 1996 and 1995 is $78,235 and
$71,500, respectively, which is recorded as a liability.
NOTE 11 CONTINGENT LIABILITIES
GOVERNMENT REGULATIONS - MEDICAID
The DHS reserves the right to perform field audit examinations of the
records of the Corporation. The reporting period from October 1, 1992
to September 30, 1996 remains open to examination. Any adjustments
resulting from such an examination could retroactively adjust medicaid
revenue.
GOVERNMENT REGULATIONS - MEDICARE
The medicare intermediary has the authority to audit the Corporation's
records any time within a three-year period after the date the
Corporation receives a final notice of program reimbursement for each
cost reporting period. The medicare cost reports for the years ended
September 30, 1996 and 1995 have not been audited by the medicare
intermediary. Any adjustments resulting from the audit process could
retroactively adjust medicare revenue.
During 1996, the medicare intermediary conducted an audit and proposed
therapy adjustments to the medicare cost report filed for the year
ended September 30, 1994. The Corporation has taken exception with
the proposed adjustments relating to contracted therapy services. The
ultimate resolution of the proposed adjustments is uncertain. The
amount the Corporation has paid to the medicare program as a result
of these adjustments is $100,028. The therapist has agreed to
indemnify the Corporation for the medicare disallowances. Therefore,
the Corporation expects full recovery from the therapist and a
receivable for the amount of the disallowance has been recorded on
these financial statements.
F-16
<PAGE>
CARE FIRST INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996 AND 1995
NOTE 12 EXTRAORDINARY ITEMS
During the year ended September 30, 1995, Nile Health Care Center
refunded its City of Minneapolis, Minnesota Commercial Development
Revenue Bonds, Series 1983. The Corporation realized an extraordinary
loss on the refunding as follows:
Prepayment Penalty $ 47,250
Write-Off of Unamortized Financing Costs
on Refinanced Debt 240,959
-------------
Subtotal $ 288,209
Less: Income Tax Benefit 115,284
-------------
Total (Net of Tax) $ 172,925
-------------
-------------
F-17
<PAGE>
ITEM 8: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9: DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The present executive officers and directors, their ages and their
positions with the Corporation are as follows:
Name Age Positions with Corporation
---- --- --------------------------
Merle V. Nugent 77 Director, Vice President/Secretary
Jack E. Nugent 49 Director, President/Treasurer
Merle V. Nugent and Jack E. Nugent have served as directors of the Corporation
since 1964 and 1978, respectively, and will continue to serve until their
resignation or until further action by the shareholders. Merle V. Nugent is the
mother of Jack E. Nugent. In addition to the executive officers described in
the table above, Fred E. Nugent, II is the Assistant Vice President, Patricia
Wolff is the Assistant Secretary and Nancy Nugent is the Assistant Treasurer,
however, such officers do not participate in the management of the Corporation.
All officers of the Corporation serve in such capacity until their resignation
or until further action by the directors.
JACK E. NUGENT is the Administrator for the Expanded Facility and the
President and Treasurer of the Corporation. He has served as an Administrator
or Controller/Business Officer Manager of either the Cedar Pines Facility or the
Existing Facility since 1973. He presently has total responsibility for the
operation of the Expanded Facility and participates actively in long range
decision making.
MERLE V. NUGENT is the Secretary for the Corporation. Prior to August 1994
she was President of the Corporation. She has served in the capacity of Co-
Administrator of the Cedar Pines Facility from 1955 to 1983. Since that time
she has served in various capacities in the Expanded Facility, including work in
the following areas: administration, social services, activities, and resident
services.
JILL KIESER, age 34, is the Director of Nursing for the Expanded
Facility,and has held that position since May 1996. Previously, she has been
employed by the Corporation as an audit consultant on RAI and worked full-time
as a clinical coordinator since January 1996. Ms. Kieser has been a registered
nurse for nearly twelve years.
MARGARET ARNE, age 42, is the Resident Services Director for the
Expanded Facility, and has held that position since December 1995. From
June 1995 to December 1995 she was the Administrator of the Cedar Pines
facility. From 1982 to June 1995, she served in various administrative
capacities with the Corporation including quality assurance coordinator,
resident services director, assistant administrator and administrator of
Home Health Services. Ms. Arne has been employed with the Corporation since
1974.
DEBORAH ROSE, age 37, is the Assistant Administrator of the Expanded
Facility and has held that position since December 1995. From March 1992 to
December 1995, she was the Director of Resident Services of the Existing
Facitlity. She began working for the Corporation in 1984. From December 1988
to March 1992 she held the position of the Administrator of the Existing
Facility and from June 1987 to December 1988 she was the administrator of the
Cedar Pines Facility. Ms. Rose holds a Nursing Home Administrator's License
from the Minnesota Department of Health and a degree in social work.
36
<PAGE>
TAMARA AUSTIN, age 29, has been Finance Director of the Corporation since
May 1996. As Finance Director, she develops and supervises the financial
reporting and annual budgeting process of the Corporation. Prior to employment
with the Corporation, Ms. Austin was employed as a certified public accountant
at the accounting firm of Larson, Allen, Weishair & Co., in its long term health
care department.
ITEM 10. EXECUTIVE COMPENSATION
SUMMARY OF COMPENSATION. Set forth in the following table is information
with respect to the compensation of the directors and three highest paid
officers of the Corporation for the last three fiscal years of the Corporation:
Summary Compensation Table
--------------------------
Fiscal
Name and Principal Positions Year Annual Compensation
- ---------------------------- ------ -------------------
Jack E. Nugent-Director/President/Treasurer 1995 $204,518
1996 199,952
Merle V. Nugent - Director/Vice President/ 1995 $ 76,052
Secretary 1996 75,880
Nancy Nugent - Assistant Treasurer/Admission 1995 $ 41,696
Coordinator 1996 41,600
Pursuant to an Employment Agreement dated as of September 1, 1994, the
Corporation has agreed to pay Merle V. Nugent $75,000 per year until September
30, 2004. Such amount shall be adjusted each year in relation to the Consumer
Price Index and will be reduced by $30,000 per year upon retirement of Ms.
Nugent's outstanding debt owing to the Corporation. The Corporation may
terminate such Agreement if Ms. Nugent becomes disabled or is convicted of a
gross misdemeanor or felony or commits fraud or dishonesty in connection with
her employment. Pursuant to an Agreement for Deferred Compensation (a non-
funded, non-qualified retirement plan for Merle Nugent), as amended and restated
as of September 1, 1994, upon termination of her employment (unless for cause),
the Corporation has agreed to pay after November 1, 2004 (or earlier if Ms.
Nugent becomes disabled), Merle V. Nugent deferred compensation of $67,500 per
year for the remainder of her life. Such amount will be reduced by $30,000 per
year upon retirement of Ms. Nugent's outstanding debt owing to the Corporation.
The present value of the anticipated payments will be expensed over the
expected service life of Ms. Nugent. The estimated present value of the future
payments at September 30, 1996 and 1995 is $78,235 and $71,500, which has been
incurred and expensed by the Corporation and is recorded as a liability.
The Loan Agreement provides that, except for increases based on the
consumer price index, neither Merle V. Nugent nor Jack E. Nugent shall receive
any increases in compensation (including salary, bonuses, consulting fees,
director's fees, etc.) from the Corporation beyond the level of such
compensation currently in effect for such individual, unless, based on the
Corporation's audited financial statements for its most recently ended fiscal
year: (i) the Corporation has Current Assets in an amount at least equal to
125% of Current Liabilities; (ii) the Corporation's Income Available for Debt
Service is at least equal to 125% of its Total Principal and Interest
Requirements; (iii) the Corporation has a Tangible Net Worth at least equal to
$1,000,000; and (iv) in any fiscal year, the aggregate amount of such increased
compensation or payments shall not exceed an amount equal to 25% of the
remainder of (A) the Corporation's Income Available for Debt Service, less (B)
the Corporation's Total Principal and Interest Requirements, in each case for
the prior fiscal year.
INDEMNIFICATION. The Corporation's Bylaws provide that the Corporation
must indemnify its officers and directors, and may indemnify its employees and
other agents, to the fullest extent permitted by Minnesota Law. At present,
there is no pending litigation or proceeding involving any director, officer,
37
<PAGE>
employee, or agent of the Corporation where indemnification will be required or
permitted. Insofar as indemnification of liabilities arising under the
Securities Act of 1933 may be permitted to officers, directors or persons
controlling the Corporation pursuant to the foregoing provisions, the
Corporation has been informed that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is therefore unenforceable.
401(k) PLAN. Effective October 1, 1995, under the Care First Inc. Employee
401(k) Plan and Profit Sharing Plan, each employee of Care First Inc. who was
employed October 1, 1995 or has attained age 21 and has completed one year of
service with the Corporation, may become a participant in the 401(k) Plan on the
January 1, April 1, July 1 or October 1 next occurring after employee has met
the requirements for participation. Participants may elect to contribute a
portion of their compensation to the 401(k) plan on a pre-tax basis. Care First
Inc. may match participants' contributions to the Plan. Care First Inc.
currently does not match contributions to the Plan. The Corporation reconsiders
the amount of its matching contribution each year. Neither the employee's or
Care First Inc.'s matching contribution is subject to federal income tax in the
year contributed. An employee's contributions are fully vested when made.
Matching contributions vest at the rate of 20% for each year of service by the
employee. Participants direct the investment of contributions allocated to
their Plan accounts in funds selected by Care First Inc.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Corporation has an authorized capitalization of 15,000 shares of stock,
with each share having a par value of $.01. Five hundred of such authorized
shares are outstanding Class A voting common shares and 10,000 of such shares
are outstanding Class B non-voting common shares. None of the remaining shares
are classified or outstanding. All outstanding Class A and Class B shares are
identical except that, to the extent permitted by law, all voting power is
vested in the Class A shares. Each share of Class A stock entitles the holder
thereof to one vote for such share. Shareholders have no rights of cumulative
voting and are not entitled as a matter of right, preemptive or otherwise, to
subscribe or apply for the purchase or receive any part of the unissued stock or
other securities of the Corporation.
The following table sets forth certain information regarding the beneficial
ownership of all outstanding shares of common stock of the Corporation as of the
date of this Report. Each of the following persons has sole voting power with
respect to the shares of Class A common stock and sole investment power with
respect to all shares of common stock set forth opposite his or her respective
name. Merle V. Nugent is the mother of all other shareholders.
Number of Shares Percent of
Name (1,2) Beneficially Owned Outstanding Shares
--------- ------------------ ----------------------------
Class A Class B Class A Class B Total
------- ------- ------- ------- -----
Merle V. Nugent 260 1,158 52.0% 11.6% 13.5%
Patricia Wolff 61 1,220 12.2% 12.2% 12.2%
Jack E. Nugent 61 4,794 12.2% 47.9% 46.2%
Nancy Nugent 57 1,608 11.4% 16.1% 15.9%
Fred E. Nugent, II 61 1,220 12.2% 12.2% 12.2%
--- ------ ----- ----- -----
TOTAL 500 10,000 100% 100% 100%
All Officers and Directors
As a Group 321 5,952 64.2% 59.5% 59.7%
38
<PAGE>
___________
1 Merle V. Nugent and Jack E. Nugent are the sole directors and principal
officers of the Corporations. Merle V. Nugent, Jack E. Nugent and Nancy Nugent
are employees of the Corporation. For a further description of the positions
with the Corporation held by the above-named individuals see Item 9.
2 The address of each stockholder is: c/o Care First Inc., 3720 23rd Avenue
South, Minneapolis, Minnesota 55407, other than Patricia Wolff and Fred E.
Nugent, II, whose addresses are, respectively, 410 E. 9th Street, #1, New York,
New York, 10009 and 4912 Amalfi Way, Oxnard, California 93035.
By virtue of her Class A stock ownership, Merle V. Nugent controls the
composition of the Corporation's Board of Directors and the election of its
officers. Prior to or upon the death of Merle V. Nugent, its expected that Jack
E. Nugent will become the owner of a controlling voting interest in the
Corporation. For a discussion of the governance and management of the
Corporation, see Item 9.
Under a 1983 Stock Purchase Agreement between Corporation and all its
stockholders, amended in 1994, (i) all outstanding shares become subject to
purchase options in favor of Corporation for thirty days, when offered for sale,
and for ten days thereafter in favor of all other shareholders, exercisable at
the lower of the price offered by a non-shareholder or appraised fair market
value, and (ii) Corporation must redeem all shares of a deceased shareholder at
appraised fair market value unless such redemption is prohibited by law or by
any agreement binding on Corporation. The Loan Agreement prohibits Corporation
from redeeming its own shares except under certain circumstances.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On August 24, 1994, the Corporation obtained a loan of $100,000 from First
Bank National Association, St. Paul, Minnesota. The loan is secured by all
inventory, equipment, rights of payment, and general intangibles of the
Corporation and evidenced by a note (the "First Bank Note") due January 5, 1995
that bears interest at a variable rate equal to First Bank National
Association's reference rate plus 2% (initially set at 9.75%). The proceeds of
the First Bank Note were used by the Corporation to pay costs associated with
the constructing and equipping of the Addition. The Corporation repaid the
entire principal amount of the First Bank Note, plus interest, from proceeds of
the Bonds. Jack E. Nugent and Merle V. Nugent, the sole directors of the
Corporations, had guaranteed payment of the First Bank Note. The First Bank
Note was further secured by all inventory, equipment, accounts receivable and
all general intangibles of the Corporation.
Over a period of years through 1991, the Corporation made significant loans
to Jack E. Nugent, Merle V. Nugent and Nancy Nugent for various personal uses.
As of September 30, 1996, the outstanding balances on such loans equaled
$595,318.79, $228,686.86, and $76,036.34, respectively. Repayment of such
balances is being made pursuant to separate promissory notes from the above
individuals (each a "Shareholder Note"). Each Shareholder Note bears interest
at the annual rate of 5.4%. The Shareholder Notes from Jack Nugent, Merle
Nugent and Nancy Nugent require monthly payments of principal and interest equal
to $3,330.12, $1,671.57 and $555.78, respectively, until March 15, 2001, at
which time the entire balances thereon will be due, unless the Notes are
renewed. All but $7,833 (as of September 30, 1996) of the outstanding balances
on such Notes have been reserved against on the financial statements of the
Corporation. The Loan Agreement restricts the ability of the Corporation to
make further loans to the shareholders.
ITEM 13: EXHIBITS AND REPORTS ON FORM 8K
(a). Exhibits
3.1 Articles of Incorporation(1)
3.2 By-Laws (1)
10.1 Bond Purchase Agreement (2)
39
<PAGE>
10.2 Agreement Between Underwriters (2)
10.3 Guaranty Agreement (2)
10.4 Assignment of Combination Mortgage, Security Agreement
and Fixture Financing Statement and Assignment of
Leases and Rents $8,500,000 City of Minneapolis,
Minnesota Bonds (2)
10.5 Intercreditor and Parity Agreement (2)
10.6 $8,500,000 City of Minneapolis, Minnesota Taxable
Health Care Facilities Revenue Bonds (Care First Inc.
Project Series 1994 Trust Indenture) (2)
10.7 Remarketing Agreement (2)
10.8 Assignment and Agreement Regarding Construction and
Architect's Contract (2)
10.9 Disbursing Agreement (2)
10.10 $4,725,000 City of Minneapolis, Minnesota Health Care
Facilities Refunding Revenue Bonds (Care First Inc.
Project) Series 1994 Loan Agreement (2)
10.11 $4,725,000 City of Minneapolis, Minnesota Health Care
Facilities Refunding Revenue Bonds (Care First Inc.
Project) Series 1994 Trust Indenture (2)
10.12 $8,500,000 City of Minneapolis, Minnesota Taxable
Health Care Facilities Revenue Bonds (Care First Inc.
Project) Series 1994 Loan Agreement (2)
10.13 Combination Mortgage, Security Agreement and Fixture
Financing Statement $4,725,000 City of Minneapolis,
Minnesota . . . Bonds (2)
10.14 Assignment of Leases and Rents $4,725,000 City of
Minneapolis, Minnesota . . . Bonds (2)
10.15 Combination Mortgage, Security Agreement and Fixture
Financing Statement $8,500,000 City of Minneapolis,
Minnesota . . . Bonds (2)
10.16 Assignment of Leases and Rents $8,500,000 City of
Minneapolis, Minnesota . . . Bonds (2)
10.17 Controlling Shareholder Agreement (2)
10.18 Assignment of Combination Mortgage, Security Agreement
and Fixture Financing Statement and Assignment of
Leases and Rents $4,725,000 City of Minneapolis,
Minnesota . . . Bonds (2)
10.19 Amended and Restate Agreement for Deferred Compensation
as of September 1, 1994, between the Corporation and
Merle V. Nugent (1)
40
<PAGE>
10.20 Employment Agreement dated September 1, 1994, between
the Corporation and Merle V. Nugent (1)
(1) Incorporated by reference to the Corporation's Registration Statement on
Form SB-1, Registration No 33-84692C
(2) Incorporated by reference to the Corporation's Quarterly Statements on Form
10QSB, for the period ended March 31, 1995
41
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Care First Inc.
Dated: December 26, 1996 By /s/ Jack E. Nugent
-----------------------------------
Jack E. Nugent,
President and Administrator
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the date indicated.
Signature Title
--------- -----
/s/ Jack E. Nugent President, Administrator and Director
- --------------------------------------- December 26, 1996
Jack E. Nugent
/s/ Merle V. Nugent Secretary and Director
- --------------------------------------- December 26, 1996
Merle V. Nugent
/s/ Tamara J. Austin Director of Finance
- --------------------------------------- December 26, 1996
Tamara J. Austin
42
<PAGE>
EXHIBIT INDEX
None.
43
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