<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended September 30, 1998
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 Identification No.)
incorporation or organization)
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: $9,984,278
----------
The aggregate market value of voting stock held by non-affiliates of the
registrant as of September 30, 1998 was approximately: Not applicable.
Registrant's stock is not publicly traded.
As of September 30, 1998, there were 10,500 shares of Common Stock of the issuer
outstanding.
Documents Incorporated by Reference: None.
This Form 10KSB consists of pages 1 - 35
<PAGE> 2
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 had remained in Trustee Held Funds until
all certified draw requests were processed for construction costs, including
building construction, equipment installation, capitalized interest and other
Project costs. The entire amount in Trustee Held Funds had been expended at
September 30, 1998.
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 prohibited the licensure and certification
of skilled nursing beds in new, relocated or remodeled nursing facilities. The
Existing Facility and the Addition, which opened on December 6, 1995,
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.
1
<PAGE> 3
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 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 qualified
social workers. 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 Corporation believes that 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 licensure 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 are certified under the Medicare and Medicaid Programs described herein. The
Corporation ceased operations of the Cedar Pines Facility on December 5, 1995.
The Expanded Facility received a license and certification for 256 beds (an
increase of 56 beds) and opened on December 6, 1995. 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.
At September 30, 1998, the agency has temporarily ceased operations.
OPERATION OF THE EXPANDED FACILITY
The Corporation is benefiting 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.
2
<PAGE> 4
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 includes the development of specific Alzheimer training for
employees, specialized programming and minor, low-cost cosmetic changes to the
interior (such as textured wall covering and repainting in colors which have
been identified as moderating certain symptoms of Alzheimer's).
The Corporation also 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 provide therapy services.
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 Medicaid and Medicare programs. 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.
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.
3
<PAGE> 5
Dependence on Medicaid. Approximately 62% of the revenues of the
Expanded Facility for the year ended September 30, 1998 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 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.
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. Approximately 7% of the
revenues of the Expanded Facility for the year ended September 30, 1998 are
derived from payment rates established under the Medicare program.
4
<PAGE> 6
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 Corporation believes that 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 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 of up to five years, with each facility having
certain appeal rights. However, payments to the Existing Facility through June
30, 1996 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.
COMPETITION
The nursing care industry is highly competitive, particularly for
facilities located within the City of Minneapolis. 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.
5
<PAGE> 7
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,
management believes the physical condition and amenities at the Expanded
Facility are 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, 1998, the Corporation employed approximately 115
full-time employees and 79 part-time employees, with approximately 153 full-time
equivalent ("FTE") persons. A full-time equivalent represents one 2,080 hour
employee. On June 13, 1997, the non-professional employees (housekeepers,
laundry aides, custodians, health unit coordinators, nursing assistants and
licensed practical nurses) of Nile Health Care Center voted to have union
representation through the SEIU Local 113. A contract has been signed and
approved for the period July 1, 1998 through June 30, 1999.
SOURCES OF RESIDENTS
Between 70% and 80% 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.
LACK OF OUTSIDE DIRECTORS; CLOSELY-HELD CORPORATION
The Corporation is a closely-held corporation; all stock is owned by
Ms. Merle Nugent and her four adult children. Merle Nugent and her son, Jack E.
Nugent, are the directors 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.
6
<PAGE> 8
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.
During 1998, the Company entered into a definitive purchase agreement with
Shelter Care Foundation (Shelter) for the sale of the Company's 256-bed licensed
nursing facility, its home health agency, related parking and accessory
facilities. The agreement calls for Shelter to purchase all real and
personal property, all inventories and to assume all Company obligations for
vested employee vacation and personal leave time as of the date of closing.
The closing is contingent on the successful negotiation of a final definitive
purchase agreement, regulatory and other conditions.
Upon the contemplated closing, the Company plans to defease the outstanding
revenue bonds until the bonds are callable, at which point the revenue bonds
will be paid in full using sale proceeds that will be reserved for the bond
obligations.
Based on preliminary estimates, the pre-tax gain, net of the 2% prepayment
charge on the outstanding revenue bonds and write-off of finance costs, will
approximate $8.8 million.
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 of Minneapolis. 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 1984. 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. These offices have sufficient capacity, and
are currently 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 serve
both the Existing Facility and the Addition. The first floor contains a 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 into the keypad sensor before the elevator door will open onto the
second floor. This provides additional security for residents with Alzheimer's
disease.
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 has full sprinkler
systems as does the Existing Facility in accordance with existing fire codes. A
parking lot for the Expanded Facility was built on land acquired by the
Corporation across from the facility.
7
<PAGE> 9
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.
Average occupancy rates of the Facility have been as follows:
<TABLE>
<CAPTION>
Fiscal Year Occupancy Licensed Beds
----------- --------- --------------
<S> <C> <C>
1998 72.5% 256
1997 75.5% 256
</TABLE>
Home Health Services
Springs of Water Home Care, a home health agency, was a division of the
Corporation. It commenced operations in 1996 but temporarily ceased operations
in 1997, and provided home health services to elderly persons in the surrounding
community. The home health service is Medicare-certified and licensed by the
State of Minnesota.
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.
8
<PAGE> 10
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, 1997 and 1998:
<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 NA
Voting Rights Yes No No N/A
</TABLE>
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.
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, 1997 and 1998 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:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
-------------------------------
1997 1998
----------- -----------
<S> <C> <C>
Total Revenue $ 9,904,031 $ 9,984,278
Total Operating Expense 8,169,477 8,305,906
----------- -----------
Income Before Depreciation,
Amortization and Interest $ 1,734,554 $ 1,678,372
Depreciation and Amortization 480,585 497,893
Interest 1,352,086 1,347,831
Other Income (301,914) (357,626)
----------- -----------
Income from Operations
Before Taxes $ 203,797 $ 190,274
Provision for Income Tax 77,000 74,000
----------- -----------
Net Income $ 126,797 $ 116,274
=========== ===========
</TABLE>
9
<PAGE> 11
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------------
1997 1998
------------ ------------
<S> <C> <C>
Current Assets
Cash and Securities Available for Sale $ 1,360,571 $ 941,154
Accounts Receivable-Residents 800,577 1,287,425
Other 647,972 755,200
------------ ------------
Total Current Assets $ 2,809,120 $ 2,983,779
Assets Whose Use is Limited 1,013,672 1,000,059
Property and Equipment
(Net of Depreciation) 10,059,137 9,786,488
Intangible Assets, Net 957,247 850,998
Deferred Tax Asset 69,000 17,000
------------ ------------
Total Assets $ 14,908,176 $ 14,638,324
============ ============
Current Liabilities $ 2,030,162 $ 2,079,300
Long-Term Debt, Less
Current Maturities 12,778,904 12,483,562
Other Liabilities 234,586 94,664
Stockholders' (Deficit) (135,476) (19,202)
------------ ------------
Total Liabilities and Stock-
holders' (Deficit) $ 14,908,176 $ 14,638,324
============ ============
STATISTICAL INFORMATION:
Nile Health Care Center:
Percentage of Total Revenue:
Medicaid 66.4% 61.7%
Private Pay and Other 28.8 31.5
Medicare 4.8 6.8
------------ ------------
TOTAL 100.0% 100.0%
============ ============
</TABLE>
* Based upon 256 Beds
10
<PAGE> 12
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 was 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 approved 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, 1996 with an annual
inflationary adjustment of 2.82% for rates effective July 1, 1997, and an
additional annual inflationary adjustment of 2.12% for rates effective July 1,
1998.
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.
UNION CONTRACT
On June 13, 1997, the non-professional employees (housekeepers, laundry
aides, custodians, health unit coordinators, nursing assistants and licensed
practical nurses) of Nile Health Care Center voted to have union representation
through the SEIU Local 113. A signed contract has been approved and is effective
July 1, 1998 through June 30, 1999, and has minimal financial impact to the
Corporation.
COMPARISON OF 1998 WITH 1997
For the fiscal year ended September 30, 1998, the Corporation's net
income was $116,274 in comparison with $126,797 for the fiscal year ended
September 30, 1997 or a decrease of $10,523. Total occupancy was 72.5% in 1998
compared to 75.5% in 1997. Management believes the decrease in the occupancy
from 1997 to 1998 is partially attributable to the union contract negotiations
that took place from June 1997 to July 1998. Management is continually
developing more extensive marketing strategies in an effort to fill the beds in
the coming year.
11
<PAGE> 13
Revenue increased by $80,247, from $9,904,031 for the fiscal year ended
September 30, 1997 to $9,984,278 for the fiscal year ended September 30, 1998.
Resident services revenue decreased by $255,341 or 3.0%. The decrease is due to
the occupancy decrease by 3% in 1998. Ancillary revenue which includes therapy
services, specialty beds, prescription medications and nursing supplies
increased $510,121 or 41.4%.
Operating expenses, (excluding depreciation, amortization and interest
expense), which include salaries and benefits, supplies, utilities, food,
purchased services, and general and administrative expenses, increased $136,429
or 1.7% from primarily $8,169,477 for fiscal 1997 to $8,305,906 for fiscal 1998.
The increase is due to higher salaries in fiscal year 1998.
Depreciation, amortization and interest expense, increased $13,053 or
.7% from $1,832,671 for the fiscal year ended September 30, 1997 to $1,845,724
for fiscal year ended September 30, 1998. Depreciation expense increased in the
amount of $17,308 as a result of additional fixed assets purchased in fiscal
year ended September 30, 1998.
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. The Corporation's income taxes expense for the
fiscal years ended September 30, 1997 and 1998 were $77,000, based on pretax
income of $203,797, and $74,000 based on pretax income of $190,274 respectively.
At September 30, 1997 and 1998 there was a valuation allowance of $33,000 and
$0.
During 1996, the Corporation entered into a sale agreement in contemplation of
an exchange of its Cedar Pines Facility for land. Cash received in excess of the
basis of the facility and costs associated with the acquisition of the land were
deferred. During 1998, it was determined that an exchange would not be completed
and the deferred revenue was fully recognized.
LIQUIDITY AND CAPITAL RESOURCES
The Corporation does not maintain any line of credit or other external
sources of liquidity.
At September 30, 1998, the Corporation had $941,154 in cash and
securities available for sale, and working capital of $904,479 based upon
current assets of $2,983,779 and current liabilities of $2,079,300. Working
capital of $778,958 based on current assets of $2,809,120 and current
liabilities of $2,030,162 existed at September 30, 1997. During the fiscal year
ended September 30, 1998, the Corporation's cash and securities available for
sale decreased $419,417. Accounts receivable increased $486,848, net cash
provided by operating activities decreased $995,837, and Current Restricted
Trust Funds increased $103,105.
As of September 30, 1998, total outstanding long-term debt of the
Corporation <net of current maturity of long term debt> equaled $12,483,562
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, and also a
three-year capital lease of a copy machine.
As of September 30, 1998, Unamortized Financing Costs on the Series
1994 Bonds were $840,896. Total financing costs on the Series 1994 Bonds were
$1,224,528.
The Restricted Trust Funds decreased $13,613 from September 30, 1997 to
September 30, 1998 as a result of the project fund decrease through draws as the
Addition costs were paid.
The Corporation is not currently involved in any material agreements or
commitments with respect to acquisitions or development.
12
<PAGE> 14
The Corporation believes 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.
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.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain Statements in this Form 10-KSB constitute "Forward-Looking Statements"
within the meaning of the private securities litigation reform act of 1995
(the "Reform Act"). Such Forward-Looking statements involve known and unknown
risks, uncertainties, and other factors which may cause the actual results,
performance, or achievements of the Company to be materially different from any
future results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, the following:
changes in costs of labor, and employee benefits; changes in Government
Regulations; competition; and other factors referenced in this Form 10-KSB.
ITEM 7: FINANCIAL STATEMENTS
13
Included on pages F-Index to F-13
<PAGE> 15
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants F-1
Financial Statements:
Balance Sheets F-2
Statements of Operations F-3
Statements of Stockholders' Deficit F-4
Statements of Cash Flows F-5
Notes to Financial Statements F-6
</TABLE>
F-INDEX
<PAGE> 16
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
[LUND KOEHLER COX & ARKEMA, LLP LETTERHEAD]
To Care First, Inc.:
We have audited the accompanying balance sheets of Care First, Inc. (DBA: Nile
Health Care Center) as of September 30, 1998 and 1997, and the related
statements of operations, stockholders' deficit and cash flows for the years
then ended. These financial statements are the responsibility of the Company'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, 1998 and 1997, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
LUND KOEHLER COX & ARKEMA, LLP
Minneapolis, Minnesota
October 28, 1998
F-1
<PAGE> 17
CARE FIRST, INC.
BALANCE SHEETS
SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 265,652 $ 501,765
Available-for-sale securities 675,502 858,806
Accounts receivable, net 1,287,425 800,577
Restricted trust funds 718,668 615,563
Notes receivable - stockholders, net 25,015 0
Prepaid expenses 11,517 15,409
Deferred income taxes 0 17,000
------------ ------------
Total current assets 2,983,779 2,809,120
RESTRICTED TRUST FUNDS, NET OF CURRENT PORTION 1,000,059 1,013,672
PROPERTY AND EQUIPMENT, NET 9,786,488 10,059,137
INTANGIBLE ASSETS, NET 850,998 957,247
DEFERRED INCOME TAXES 17,000 69,000
------------ ------------
$ 14,638,324 $ 14,908,176
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Checks written in excess of cash in bank $ 132,396 $ 0
Current portion of long-term debt 295,340 150,340
Accounts payable 259,358 322,808
Accrued payroll, vacation and payroll taxes 421,678 388,845
Accrued interest 446,534 449,554
Accrued real estate taxes 454,616 659,040
Accrued expenses 21,511 12,272
Resident trust funds payable 47,867 47,303
------------ ------------
Total current liabilities 2,079,300 2,030,162
LONG-TERM DEBT, NET OF CURRENT PORTION 12,483,562 12,778,904
DEFERRED COMPENSATION 94,664 86,059
DEFERRED REVENUE 0 148,527
------------ ------------
Total liabilities 14,657,526 15,043,652
------------ ------------
STOCKHOLDERS' DEFICIT:
Class A voting common stock, $.01 par value, 500 shares authorized,
issued and outstanding 5 5
Class B non-voting common stock, $.01 par value, 10,000 shares
authorized, issued and outstanding 100 100
Additional paid-in capital 17,660 17,660
Accumulated deficit (36,967) (153,241)
------------ ------------
Total stockholders' deficit (19,202) (135,476)
------------ ------------
$ 14,638,324 $ 14,908,176
============ ============
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE> 18
CARE FIRST, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------------------- -----------------------
Percent Percent
------- -------
<S> <C> <C> <C> <C>
REVENUE:
Resident services $ 8,177,920 82.0 $ 8,433,261 85.2
Ancilliary services 1,741,940 17.4 1,231,819 12.4
Prior years' revenue adjustments 64,418 0.6 238,951 2.4
----------- ----- ----------- -----
Total revenue 9,984,278 100.0 9,904,031 100.0
----------- ----- ----------- -----
OPERATING EXPENSES:
Nursing 3,627,300 36.3 3,285,073 33.2
Activities and social service 258,558 2.6 338,501 3.4
Ancilliary 956,150 9.6 654,021 6.6
Dietary 866,203 8.7 871,800 8.8
Laundry 133,370 1.3 201,249 2.0
Housekeeping 289,902 2.9 284,998 2.9
Plant operations and maintenance 425,498 4.3 390,136 3.9
Property and related 399,267 4.0 688,993 7.0
Administrative and general 803,342 8.1 825,409 8.3
Payroll taxes and employee benefits 526,698 5.3 593,790 6.0
Depreciation and amortization 497,893 4.9 480,585 4.9
Home health 19,618 0.2 35,507 0.3
----------- ----- ----------- -----
Total operating expenses 8,803,799 88.2 8,650,062 87.3
----------- ----- ----------- -----
INCOME FROM OPERATIONS 1,180,479 11.8 1,253,969 12.7
----------- ----- ----------- -----
OTHER INCOME (EXPENSE):
Interest income 198,648 2.0 182,270 1.8
Interest expense (1,347,831) (13.5) (1,352,086) (13.6)
Other income 9,451 0.1 10,152 0.1
Gain on sale of assets 149,527 1.5 109,492 1.1
----------- ----- ----------- -----
Total other income (expense) (990,205) (9.9) (1,050,172) (10.6)
----------- ----- ----------- -----
INCOME BEFORE INCOME TAXES 190,274 1.9 203,797 2.1
PROVISION FOR INCOME TAXES 74,000 0.7 77,000 0.8
----------- ----- ----------- -----
NET INCOME $ 116,274 1.2 $ 126,797 1.3
=========== ===== =========== =====
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 19
CARE FIRST, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
Common Stock
---------------------------------------------------
Class A - voting Class B - non-voting
----------------------- ----------------------- Additional Accumulated
Shares Amount Shares Amount Paid-in Capital Deficit Total
--------- --------- --------- --------- --------------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE - SEPTEMBER 30, 1996 500 $ 5 10,000 $ 100 $ 17,660 $(280,038) $(262,273)
Net income -- -- -- -- -- 126,797 126,797
--------- --------- --------- --------- --------- --------- ---------
BALANCE - SEPTEMBER 30, 1997 500 5 10,000 100 17,660 (153,241) (135,476)
Net income -- -- -- -- -- 116,274 116,274
--------- --------- --------- --------- --------- --------- ---------
BALANCE - SEPTEMBER 30, 1998 500 $ 5 10,000 $ 100 $ 17,660 $ (36,967) $ (19,202)
========= ========= ========= ========= ========= ========= =========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 20
CARE FIRST, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 116,274 $ 126,797
Adjustments to reconcile net income to cash flows
from operating activities:
Depreciation and amortization 497,893 480,585
Gain on sale of assets (149,527) (109,492)
Deferred income taxes 69,000 72,000
Changes in operating assets and liabilities:
Accounts receivable, net (506,416) 515,873
Prepaid expenses 3,892 (25,270)
Checks written in excess of cash in bank 132,396 0
Accounts payable (63,450) (217,067)
Accrued payroll, vacation and payroll taxes 32,833 (52,987)
Accrued interest (3,020) (2,647)
Accrued real estate taxes (204,424) 162,525
Accrued expenses 9,239 5,559
Deferred compensation 8,605 7,824
Deferred revenue 0 (24,568)
----------- -----------
Cash flows from operating activities (56,705) 939,132
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (118,995) (185,749)
Payments on construction costs payable 0 (164,311)
Proceeds from sale of property and equipment 1,000 109,492
(Increase) decrease in investments 182,853 (592,716)
Advance on notes receivable - stockholders (25,015) 0
Payments received on notes receivable - stockholders 19,568 18,542
Deposits to restricted trust funds (1,670,874) (1,687,849)
Disbursements from restricted trust funds 1,581,946 1,974,914
(Increase) decrease in interest receivable on restricted trust funds 451 (11,948)
----------- -----------
Cash flows from investing activities (29,066) (539,625)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt (150,342) (136,780)
----------- -----------
Cash flows from financing activities (150,342) (136,780)
----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (236,113) 262,727
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 501,765 239,038
----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 265,652 $ 501,765
=========== ===========
SUPPLEMENTAL CASH FLOWS INFORMATION:
Cash paid for interest $ 1,350,851 $ 1,254,334
Cash paid for income taxes $ 5,000 $ 5,000
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 21
CARE FIRST, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1997
(1) NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS - Care First, Inc. (the Company) was incorporated in
Minnesota in 1964. The Company owns and operates a 256-bed licensed nursing
facility located in Minneapolis, Minnesota called Nile Health Care Center.
CASH AND CASH EQUIVALENTS - The Company includes as cash equivalents
certificates of deposit and all other investments with maturities of three
months or less when purchased which are readily convertible into known amounts
of cash.
AVAILABLE-FOR-SALE SECURITIES - Statement of Financial Accounting Standards No.
115 "Accounting for Certain Investments in Debt and Equity Securities" requires
certain securities to be recorded at fair value. Based on the short maturity of
investments held at September 30, 1998 and 1997, the carrying amount
approximates fair value. Therefore, there are no net unrealized gains or losses
on securities classified as available-for-sale.
ACCOUNTS RECEIVABLE - Accounts receivable have been reduced by an allowance for
uncollectible accounts of $80,000 and $70,000 at September 30, 1998 and 1997.
The Company believes all accounts receivable in excess of the allowance are
fully collectible. If accounts receivable in excess of the provided allowance
are determined uncollectible, they are charged to expense in the year that
determination is made.
RESTRICTED TRUST FUNDS - Restricted trust funds consist principally of
guaranteed investment contracts with an insurance company and bear interest at
approximately 7.5%. These investments are classified as held-to-maturity as the
Company has the intent and ability to hold these securities until maturity.
Held-to-maturity securities are carried at cost adjusted for amortization of
premiums and accretion of discounts (see Note 4).
DEPRECIATION - Property and equipment are recorded at cost. Depreciation is
provided for using the straight-line method over periods ranging from 5 to 35
years. Maintenance, repairs and minor renewals are expensed when incurred.
AMORTIZATION - Intangible assets consist of financing and start-up costs. The
financing costs associated with the issuance of revenue bonds are being
amortized over 10 and 19 years, the terms of the bonds, using the straight-line
method. The start-up costs associated with a building addition are being
amortized over five years using the straight-line method.
INCOME TAXES - The Company has adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes", under which deferred income
tax assets and liabilities are recognized for the differences between the
financial statement and income tax reporting basis of assets and liabilities
based on currently enacted rates and laws. The Company has incurred cumulative
net operating losses and has tax credit carryforwards for both financial
statement and income tax reporting purposes.
F-6
<PAGE> 22
CARE FIRST, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 1998 AND 1997
DEFERRED REVENUE - During 1996, the Company entered into a sale agreement in
contemplation of an exchange of its Cedar Pines facility for land. Cash received
in excess of the basis of the facility and costs associated with the acquisition
of the land were deferred. During 1998, it was determined that an exchange would
not be completed and the deferred revenue was fully recognized.
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.
STANDARD OF ACCOUNTING AND FINANCIAL REPORTING - The Company 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.
MANAGEMENT'S USE OF ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
FINANCIAL INSTRUMENTS - The carrying amounts for all financial instruments
approximates fair value. The carrying amounts for cash and cash equivalents,
accounts receivable, accounts payable and accrued liabilities approximates fair
value because of the short maturity of these instruments. The fair value of
long-term debt obligations approximates carrying value based on quoted market
prices.
(2) THIRD PARTY REIMBURSEMENT AGREEMENTS
MEDICAID - The Company participates in the medicaid program that 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-7
<PAGE> 23
CARE FIRST, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 1998 AND 1997
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 the prior July 1 are inflated. The rates effective July
1, 1997 and July 1, 1998 were inflated 2.82% and 2.12% from the previous July 1
rates.
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 that 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, 1998 and 1997, the occupancy percentages
and the percentages of residents covered under the medicaid and medicare
programs were as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Total occupancy 72.5% 75.5%
Medicaid 61.7% 66.4%
Medicare 6.8% 4.8%
</TABLE>
(3) NOTES RECEIVABLE - STOCKHOLDERS
The Company had unsecured notes receivable from its officers that bear interest
at 5.4% of $886,947 and $881,500 at September 30, 1998 and 1997. At September
30, 1998 and 1997 an allowance for uncollectible notes of $861,932 and $881,500
has been recorded against these notes.
Total interest income earned and collected on the notes receivable during the
years ended September 30, 1998 and 1997 was $47,121 and $48,148.
(4) RESTRICTED TRUST FUNDS
BOND FUND - All payments of principal and interest on the bonds are made from
funds transferred by the Company to this fund.
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.
F-8
<PAGE> 24
CARE FIRST, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 1998 AND 1997
PROJECT FUND - The proceeds from the issuance of the taxable bonds were on
deposit in this fund until certified draw requests are processed for
construction costs, including building construction, equipment installation,
capitalized interest and other project costs.
RESIDENT TRUST FUNDS - This fund consists of residents' cash held by the Company
on behalf of the residents. A corresponding liability has also been recorded.
Restricted trust funds consisted of the following at September 30:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Bond fund $ 643,626 $ 540,633
Debt service reserve fund 1,000,059 1,000,004
Project fund 0 13,669
Resident trust funds 47,867 47,303
Interest receivable 27,175 27,626
----------- -----------
Total restricted trust funds 1,718,727 1,629,235
Less: current portion (718,668) (615,563)
=========== ===========
Total restricted trust funds, net $ 1,000,059 $ 1,013,672
=========== ===========
</TABLE>
(5) PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at September 30:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Land $ 938,744 $ 938,744
Land improvements 123,633 123,633
Buildings and improvements 10,405,580 10,359,784
Equipment and furniture 1,301,087 1,227,888
------------ ------------
Total property and equipment 12,769,044 12,650,049
Less: accumulated depreciation (2,982,556) (2,590,912
============ ============
Property and equipment, net $ 9,786,488 $ 10,059,137
============ ============
</TABLE>
(6) LONG-TERM DEBT
Long-term debt consisted of the following at September 30:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
City of Minneapolis, Minnesota Health Care Facilities $4,270,000 $4,415,000
Refunding Revenue Bonds Series 1994, due in semi-annual principal installments
in accordance with the issuance statement, plus interest at rates ranging from
6.4% to 7.75%, secured by all property and accounts receivable, due June 2012
</TABLE>
F-9
<PAGE> 25
CARE FIRST, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 1998 AND 1997
<TABLE>
<S> <C> <C>
City of Minneapolis, Minnesota Taxable Health Care Facilities Revenue Bonds $ 8,500,000 $ 8,500,000
Series 1994, due in annual principal installments in accordance with the
issuance statement beginning fiscal 1999 and semi-annual interest installments
at 12%, secured by all property and accounts receivable, due December 2004
Capital lease obligation - Wagers Business System, monthly installments of $445 8,902 14,244
including interest at 10.50%, maturing May 2000, secured by copier
------------ ------------
Total long-term debt 12,778,902 12,929,244
Less: current portion (295,340) (150,340)
------------ ------------
Long-term debt, net $ 12,483,562 $ 12,778,904
============ ============
</TABLE>
Future maturities of long-term debt are as follows for the years ending
September 30:
<TABLE>
<S> <C>
1999 $ 295,340
2000 348,562
2001 375,000
2002 400,000
2003 440,000
Thereafter 10,920,000
-----------
Total $12,778,902
===========
</TABLE>
The above noted bonds are also secured equally and ratably on parity with each
issue. The bonds are subject to certain covenants that have been complied with
or waived through September 30, 1998. The covenants consist primarily of
reporting requirements, insurance coverage, meeting certain financial ratios and
other administrative requirements.
(7) INCOME TAXES
Certain items are recognized for tax reporting purposes in different periods
from those in which they are recognized for financial statement reporting
purposes. Deferred income taxes are provided for the tax effect of these
temporary differences.
F-10
<PAGE> 26
CARE FIRST, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 1998 AND 1997
The provision for income taxes consisted of the following for the years ended
September 30:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Current:
Federal $ 0 $ 0
State 5,000 5,000
Deferred 69,000 72,000
------- -------
$74,000 $77,000
======= =======
</TABLE>
The tax effects of temporary differences giving rise to the deferred items are
as follows for the years ended September 30:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Allowances for uncollectible notes and accounts receivable $ 377,000 $ 381,000
Operating loss and tax credit carryforwards 703,000 633,000
Other 106,000 172,000
Less: excess depreciation (1,169,000) (1,067,000)
----------- -----------
Subtotal 17,000 119,000
Less: valuation allowance 0 (33,000)
----------- -----------
Total $ 17,000 $ 86,000
=========== ===========
</TABLE>
Differences between the effective tax rates and the statutory U.S. federal
income tax rate are as follows at September 30:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Statutory U.S. federal income tax rate 34% 34%
State taxes, net of federal benefit 6% 6%
Graduated federal tax rates (4%) (3%)
Nondeductible expenses and other 3% 1%
---- ----
Total 39% 38%
==== ====
</TABLE>
As of September 30, 1998, the Company had federal and state net operating loss
carryforwards of approximately $1.5 million and $1.7 million, which, if not
used, will begin to expire in 2006. The Company also has federal tax credits of
approximately $102,000 available to offset future income taxes, which expire
through 2001.
(8) STOCK PURCHASE AGREEMENT
The Company has an agreement with its stockholders to purchase their stock in
the event of their death or retirement. The agreement provides that the Company
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-11
<PAGE> 27
CARE FIRST, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 1998 AND 1997
(9) RETIREMENT SAVINGS PLAN
The Company has established a qualified 401(k) profit sharing plan which allows
eligible employees to defer a portion of their salary. Profit sharing
contributions by the Company are completely discretionary. The Company made no
contributions to the plan for the years ended September 30, 1998 and 1997.
(10) COMMITMENTS AND CONTINGENCIES
CONCENTRATION OF CREDIT RISK - The Company maintains its cash balances with high
credit quality financial institutions. The balances, at times, may exceed
federally insured limits.
EMPLOYMENT AGREEMENTS - The Company has an employment agreement with one of its
stockholders effective through September 2004. The agreement provides
compensation only for services rendered. There are no severance provisions;
however, payments will be made in the case of disability.
DEFERRED COMPENSATION - The Company entered into a deferred compensation
agreement with a stockholder effective October 1, 1993. Under the terms of the
agreement, the Company 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 Company'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, 1998 and 1997 is $94,664 and $86,059, which has
been recorded as a long-term liability.
COLLECTIVE BARGAINING AGREEMENT - During fiscal 1997, the Company's employees
voted to be covered under a collective bargaining agreement. The contract, which
was signed in 1998 and is effective for the period July 1, 1998 to June 30,
1999, has not had a significant impact upon the Company. The contract is
automatically renewed each year unless either party gives written notice to
modify, amend or terminate the contract at least 90 days prior to June 30 of
each year.
GOVERNMENT REGULATIONS:
MEDICAID - The DHS reserves the right to perform field audit examinations of the
records of the Company. The reporting period from October 1, 1993 to September
30, 1998 remains open to examination. Any adjustments resulting from such an
examination could retroactively adjust medicaid revenue.
MEDICARE - The medicare intermediary has the authority to audit the Company's
records any time within a three year period after the date the Company receives
a final notice of program reimbursement for each cost reporting period. The
medicare cost reports for the years ended September 30, 1997 and 1998 have not
been audited by the medicare intermediary. Any adjustments resulting from the
audit process could retroactively adjust medicare revenue.
F-12
<PAGE> 28
CARE FIRST, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 1998 AND 1997
(11) SUPPLEMENTARY CASH FLOWS INFORMATION
During the year ended September 30, 1997, the Company purchased equipment under
a capital lease agreement for $16,024.
(12) PROPOSED FACILITY SALE
During 1998, the Company entered into a definitive purchase agreement with
Shelter Care Foundation (Shelter) for the sale of the Company's 256-bed licensed
nursing facility, its home health agency, related parking and accessory
facilities. The agreement calls for Shelter to purchase all real and personal
property, all inventories and to assume all Company obligations for vested
employee vacation and personal leave time as of the date of closing.
Upon closing, the Company plans to defease the outstanding revenue bonds until
the bonds are callable, at which point the revenue bonds will be paid in full
using sale proceeds that will be reserved for the bond obligations.
Based on preliminary estimates, the pre-tax gain, net of the 2% prepayment
charge on the outstanding revenue bonds and write-off of finance costs, will
approximate $8.8 million.
During 1998, the Board of Directors passed a resolution that forgives all
outstanding balances on the notes receivable stockholders (see Note 3) effective
on the date of closing.
The Company expects the transaction to close January 1999.
F-13
<PAGE> 29
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:
<TABLE>
<CAPTION>
Name Age Positions with Corporation
---- --- --------------------------
<S> <C> <C> <C>
Merle V. Nugent 79 Director, Vice President/Secretary
Jack E. Nugent 51 Director, President/Treasurer
</TABLE>
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.
Denise Bender-Lacy, age 44, is the Director of Nursing for the Expanded
Facility, and has held that position since June 1998. She has had numerous years
of previous experience in this capacity.
Tamara Austin, age 31, 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.
28
<PAGE> 30
ITEM 10. EXECUTIVE COMPENSATION
Summary of Compensation. Set forth in the following table is
information with respect to the compensation of the directors and the three
highest paid officers of the Corporation for the last three fiscal years of the
Corporation:
<TABLE>
<CAPTION>
Summary Compensation Table
--------------------------
Fiscal
Name and Principal Positions Year Annual Compensation
- ---------------------------- ------ -------------------
<S> <C> <C>
Jack E. Nugent-Director/President/Treasurer 1998 $189,981
1997 186,141
1996 199,952
Merle V. Nugent - Director/Vice President/ 1998 $ 75,880
Secretary 1997 75,880
1996 75,880
Nancy Nugent - Assistant Treasurer/Admission 1998 $ 41,570
Coordinator 1997 41,520
1996 41,600
</TABLE>
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 owed 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 owed 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, 1998 and 1997 is $94,664 and $86,059, 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. During 1998, the Board of Directors passed a resolution that will forgive
all outstanding balances on the loan agreements effective on the date of closing
in the proposed facility sale.
29
<PAGE> 31
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, 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 either was employed October 1, 1995 or subsequently has completed three
months of service (effective 10/01/97) with the Corporation, and has attained
age 21 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. Employees who have elected union representation are also eligible
to participate in this Corporate plan. 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 the Trustees of the Plan.
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.
<TABLE>
<CAPTION>
Number of Shares Percent of
Name Beneficially Owned Outstanding Shares
---- ------------------ ---------------------------
Class A Class B Class A Class B Total
------- ------- -------- -------- ------
<S> <C> <C> <C> <C> <C>
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%
</TABLE>
30
<PAGE> 32
- -----------
(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, it is 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 the Corporation and all
its stockholders, amended in 1994, (i) all outstanding shares become subject to
purchase options in favor of the 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) the 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 the Corporation. The Loan Agreement
prohibits the Corporation from redeeming its own shares except under certain
circumstances.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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, 1998, the outstanding balances on such loans equaled
$603,870, $212,442, and $70,635, 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 <See further
discussion under Item 10>. All but $25,015 (as of September 30, 1998) 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)
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)
31
<PAGE> 33
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)
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
32
<PAGE> 34
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 28, 1998 By 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.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
Jack E. Nugent President, Administrator and Director
- ---------------------------------- December 28, 1998
Jack E. Nugent
Merle V. Nugent Secretary and Director
- ---------------------------------- December 28, 1998
Merle V. Nugent
Tamara J. Austin Director of Finance
- ---------------------------------- December 28, 1998
Tamara J. Austin
</TABLE>
33
<PAGE> 35
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
3.1 Articles of Incorporation (1)
3.2 By-Laws (1)
10.1 Bond Purchase Agreement (2)
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)
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
</TABLE>
34
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<CASH> 265,652
<SECURITIES> 675,502
<RECEIVABLES> 1,367,425
<ALLOWANCES> 80,000
<INVENTORY> 0
<CURRENT-ASSETS> 2,983,779
<PP&E> 12,769,044
<DEPRECIATION> 2,982,556
<TOTAL-ASSETS> 14,638,324
<CURRENT-LIABILITIES> 2,079,300
<BONDS> 12,483,562
0
0
<COMMON> 105
<OTHER-SE> (19,307)
<TOTAL-LIABILITY-AND-EQUITY> 14,638,324
<SALES> 9,984,278
<TOTAL-REVENUES> 9,984,278
<CGS> 0
<TOTAL-COSTS> 8,305,906
<OTHER-EXPENSES> 497,893
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,347,831
<INCOME-PRETAX> 190,274
<INCOME-TAX> 74,000
<INCOME-CONTINUING> 116,274
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 116,274
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
