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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
(Mark One)
X ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended September 30, 1997
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: $ 9,904,031
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The aggregate market value of voting stock held by non-affiliates of the
registrant as of September 30, 1997 was approximately: Not applicable.
Registrant's stock is not publicly traded.
As of September 30, 1997, 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
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PART I
ITEM 1: DESCRIPTION OF BUSINESS
OVERVIEW
On December 27, 1994 the City of Minneapolis issued $4,725,000 of
Health Care Facilities Refunding Revenue Bonds (Care First Inc. Project) and
$8,500,000 of Taxable Health Care Facilities Revenue Bonds (Care First Inc.
Project) to refund the Series 1983 Tax Exempt Bonds and to finance construction
and equipping of a 131-bed Addition to the Corporation's 125-bed Existing
Facility. The Series 1983 Tax Exempt Bonds were refunded January 11, 1995.
The proceeds from the Series 1994 Tax Exempt Bonds were deposited with the
trustee in the Bond Fund until the refunding occurred. The proceeds from the
Taxable Health Care Facilities Revenue Bonds remain in Trustee Held Funds until
all certified draw requests are processed for construction costs, including
building construction, equipment installation, capitalized interest and other
Project costs. The amount in Trustee Held Funds at September 30, 1997 is
$13,669.
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.
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INDUSTRY BACKGROUND
The Expanded Facility provides skilled nursing care and convalescent
facilities for in-patient elderly and disabled persons, including those
admitted as an interim step after hospitalization and before returning to their
homes, as well as those admitted for long-term residency. The residents of the
Expanded Facility receive room and board, 24-hour professional nursing care,
special diets as required, and such drugs and therapy as may be prescribed by
the resident's physician. Three balanced meals are provided to each resident
daily, either in his or her room or at a central dining location. Light snacks
are provided during the day and at bedtime. The Expanded Facility is managed
by a full-time administrator, a finance director, and a director of nursing who
is a registered nurse responsible for supervising the licensed nurses and
nurses' aides working at the facilities. Social service programs at the
facility are provided by 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 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.
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.
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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.
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Dependence on Medicaid. Approximately 66% of the revenues of the
Expanded Facility are derived from payment rates established under the
Minnesota Medicaid Program. States currently fund a substantial portion of
Medicaid payments and exercise considerable discretion in determining payments
allowed to care providers. Regulations promulgated by the federal Health Care
Financing Administration provide that states are not required to pay for
long-term care services on a cost-related basis, but may do so according to
rates that are adequate to meet costs incurred by efficiently and economically
operated facilities. As a result, the reimbursement payments allowed by states
are based less on the actual costs of the nursing services and more on formula
rates which the governmental agencies deem reasonable, creating a more
competitive environment for nursing facilities.
In Minnesota, the amount which will be paid (reimbursed) by the
Medicaid program for services provided to a Medicaid-eligible resident in a
multiple bed room is based on a daily rate established for such facility and
for the patient's level of required care, both of which are periodically
adjusted. Further, Minnesota 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 5% of
the revenues of the Expanded Facility are derived from payment rates
established under the Medicare program.
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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 up to five years,
with each facility having certain appeal rights. However, payments to the
Existing Facility and the Cedar Pines Facility through June 30, 1995 have been
subjected to a field audit and are therefore not subject to any further
retroactive adjustments under ordinary circumstances.
CHANGES IN HEALTH CARE INDUSTRY
The health care industry in general is experiencing a trend toward
consolidation or integration of services among providers. Although long term
care services such as those primarily provided by the Corporation have not as
yet been subject to such trend as significantly as acute health care services,
no assurance can be made that future consolidation, integration or other
changes in the long term care industry may not adversely affect resident
referrals to the Expanded Facility or the ability of the Corporation to
otherwise maintain occupancy, charge sufficient rates or maintain competitive
operating costs. Subject to the terms and restrictions in the Loan Agreement,
the Corporation in the future may or may not participate in any such
consolidation or integration trend (the Corporation has no current plans to do
so).
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.
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The Corporation considers the southern central part of Minneapolis,
Minnesota as its primary service area for the Expanded Facility. Based on an
independent market study prepared for the Corporation in 1994, there are a
total of approximately 1,737 skilled nursing home beds and 412 board and care
beds within the Corporations primary service area. The Corporation's daily
resident rates are generally higher than those charged by other licensed
nursing facilities in its statutorily-prescribed region. The Corporation
presently does not compete to any material degree on the basis of its prices
(daily rates) since rates for Medicaid residents are established under the
Rate-setting System and paid by the Medicaid program. Although residents not
receiving Medicaid or Medicare assistance generally must pay the daily rates
from their own resources, the physical condition and amenities at the Expanded
Facility are believed to be generally more attractive than those of many
nursing facilities in the Expanded Facility's market area.
NURSING PERSONNEL
In recent years, the nursing home industry has suffered from a
scarcity of skilled nursing personnel and aides to staff its facilities. A
scarcity of qualified personnel could eventually force the Corporation to pay
increased salaries to such personnel as competition for such employees
intensifies, and, in an extreme situation, could lead to difficulty in keeping
the Expanded Facility licensed. To date, the Corporation has not experienced
any significant difficulty in obtaining qualified personnel at the facility
through either hiring employees or use of specialized temporary employment
agencies commonly referred to as "nursing pools". Use of nursing pools is an
accepted practice in the industry to address unexpected increases in staffing
requirements.
PERSONNEL AND STAFFING
As of September 30, 1997, the Corporation employed approximately 139
full-time employees and 55 part-time employees, with approximately 163
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. As of September 30,
1997, and December 1997, no contract has been approved and the effect on the
Corporation is not known.
SOURCES OF RESIDENTS
Between 65% and 75% of the residents at the Expanded Facility are
admitted from or referred by hospitals or other acute care health facilities,
with Hennepin County Medical Center, Riverside Medical Center and
Abbott-Northwestern Hospital providing more than one-half of such referrals or
admissions.
MALPRACTICE INSURANCE
In recent years, the number of malpractice lawsuits and patient
recoveries against providers of health care services have increased, resulting
in increases in insurance premiums. Changes in the availability and cost of
malpractice insurance could adversely influence the revenues of the
Corporation. The Corporation to date has experienced no claims or actions for
malpractice.
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. There is no present
expectation that a person who is not a shareholder will be elected or appointed
as a director of the Corporation. The Corporation's directors control the
operation of the Corporation and holders of the Bonds have no voting rights or
control with respect to the Corporation's operations.
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SALE OF EXPANDED FACILITY
Under the Loan Agreement the Corporation is permitted to sell the
Expanded Facility to any purchaser that assumes the Corporation's obligations
in respect of the Bonds and Tax Exempt Bonds if, among other conditions, the
purchaser has a Tangible Net Worth equal to the Tangible Net Worth of the
Corporation (but not less than $1.00) and a certain 125% historic or forecasted
debt service coverage test is met. If a purchaser is an Accredited
Institution, or if there is deposited with the Trustee the sum of $500,000 as a
Supplemental Reserve, the Corporation will be released from any further
liability for the payment of the Bonds. Furthermore, upon any sale of the
Expanded Facility, the purchaser will not be subject to certain restrictions
imposed on the Corporation set forth in the Loan Agreement. The Corporation to
date has no plans to sell the facility.
ITEM 2: DESCRIPTION OF PROPERTIES
The Corporation currently operates the Expanded Facility, a nursing
care facility located at 3720 23rd Avenue South in the City. The Existing
Facility was completed in 1984, one year after the imposition of the Minnesota
moratorium on licensing and certification of new, remodeled or relocated beds.
Therefore, it is one of the most modern licensed nursing facilities in the
state. The Expanded Facility is located in a residential neighborhood with a
small commercial area. The residences are primarily single family, middle to
lower-middle income residences, built between 1930 and 1950. The residences
generally appear to be in fair to good condition.
Existing Facility
The Existing Facility consists of three floors and a lower level and
is constructed of masonry, concrete and structural steel. Construction of the
original structure was completed in 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.
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The Addition contains rooms designed to improve the quality of life of
its residents. The room design for double occupancy rooms in the Addition
utilizes a fixed or moveable wall which completely separates the living areas
of the two residents. Each resident's living area within such rooms has its
own bed, window, storage, and entrance. The individual entrances lead out into
the main entrance to the room and to the handicapped accessible restroom shared
by the two residents. Residents in the double occupancy rooms also share a
small sitting area adjacent to, but recessed from, the hallway. This design
provides a privacy and autonomy for each resident, while not requiring the
space or cost of a traditional private room with its own restroom.
Equipment purchased with the Bonds included appropriate furnishings
for each resident room to supplement the existing beds and other appropriate
furnishings which was transferred from the Cedar Pines Facility, as well as
furnishings for meeting areas, dining area equipment, and appropriate support
equipment for the nursing stations and administrative office.
In addition to constructing and equipping the addition, Bonds proceeds
were used for minor renovation and remodeling of areas in the Existing Facility
which will be adjacent to the Addition. Bond proceeds remaining as of
September 30, 1997, in the amount of $13,669 will be used for final equipment
expenditures.
Average occupancy rates of the Facility have been as follows:
Fiscal Year Occupancy Licensed Beds
----------- --------- --------------
1997 75.5% 256
1996 76.3% (125)10/1/95-12/5/95;(256)12/6/95-9/30/96
Home Health Services
Springs of Water Home Care, a home health agency ("Home Health
Services"), is a division of the Corporation which commenced operations in 1996
to provide home health services to elderly persons in the surrounding
community. Home Health Services is Medicare-certified and licensed by the
State of Minnesota.
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.
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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, 1996 and 1997:
<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, 1996 and 1997 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,
-------------------------------
1996 1997
---- ----
<S> <C> <C>
Total Revenue $9,373,464 $9,904,031
Total Operating Expense 8,058,813 8,169,477
----------- -----------
Income Before Depreciation,
Amortization and Interest $1,314,651 $1,734,554
Depreciation and Amortization 457,832 480,585
Interest 1,215,524 1,352,086
Other Income 206,021 301,914
----------- -----------
Income (Loss) from Operations
Before Taxes $ (152,684) $ 203,797
Provision for (Benefit Of)
Income Tax (65,000) 77,000
----------- -----------
Net Income (Loss) $ (87,684) $ 126,797
=========== ===========
</TABLE>
9
<PAGE> 11
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------
1996 1997
---- ----
<S> <C> <C>
Current Assets
Cash and Securities Available for Sale $ 505,128 $ 1,360,571
Accounts Receivable-Residents 1,316,450 800,577
Other 706,549 647,972
------------- -------------
Total Current Assets $ 2,528,127 $ 2,809,120
Assets Whose Use is Limited 1,304,230 1,013,672
Property and Equipment
(Net of Depreciation) 10,231,700 10,059,137
Intangible Assets, Net 1,063,496 957,247
Deferred Tax Asset 70,000 69,000
------------- -------------
Total Assets $ 15,197,553 $14,908,176
============= =============
Current Liabilities $ 2,129,185 $ 2,030,162
Long-Term Debt, Less
Current Maturities 12,915,000 12,778,904
Other Liabilities 415,641 234,586
Stockholders (Deficit) (262,273) (135,476)
------------- -------------
Total Liabilities and Stock-
holders' (Deficit) $ 15,197,553 $14,908,176
============= =============
STATISTICAL INFORMATION:
Nile Health Care Center:
Percentage of Total Revenue:
Medicaid 66.4% 66.4%
Private Pay and Other 27.3 28.8
Medicare 6.3 4.8
----- -----
TOTAL 100.0% 100.0%
===== =====
</TABLE>
* Based upon 125 Beds from October 1, 1995 - December 5, 1995 and 256 Beds from
December 6, 1995 - September 30, 1997.
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.
10
<PAGE> 12
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, 1995 with an annual
inflationary adjustment of 2.98% for rates effective July 1,1996 and an
additional annual inflationary adjustment of 2.82% for rates effective July 1,
1997.
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. As of September 30, 1997 and
December 1997, no contract has been approved and the financial effect to the
Corporation is not known.
COMPARISON OF 1997 WITH 1996
For the fiscal year ended September 30, 1997, the Corporation's net
income (loss) was $126,797 in comparison with $(87,684) for the fiscal year
ended September 30, 1996 or an increase of $214,481. Total occupancy was 75.5%
in 1997 compared to 76.3% in 1996. Management is continually developing more
extensive marketing strategies in an effort to fill the beds in the coming
year. In addition, it has not been unusual for senior residential or care
facilities to experience delayed or reduced fill up following completion.
Revenue increased by $530,567, from $9,373,464 for the fiscal year
ended September 30, 1996 to $9,904,031 for the fiscal year ended September 30,
1997. Resident services revenue increased by $385,965 or 4.8%. Even though
occupancy decreased slightly in 1997, the Corporation received rate increases
each July 1 approximating 3-5%, which accounts for the increase in revenue.
Ancillary revenue which includes therapy services, specialty beds, prescription
medications and nursing supplies decreased $8,288 or .7%.
11
<PAGE> 13
Operating expenses, (excluding depreciation and amortization), which
include salaries and benefits, supplies, utilities, food, purchased services,
and general and administrative expenses, increased $110,664 or 1.4% from
$8,058,813 for fiscal 1996 to $8,169,477 for fiscal 1997. The increase is due
to higher dietary costs from the nutritional services contract entered into in
August 1996, and increased salaries in fiscal year 1997.
Depreciation, amortization and interest expense, increased $159,315 or
9.5% from $1,673,356 for the fiscal year ended September 30, 1996 to $1,832,671
for fiscal year ended September 30, 1997. The increase is a result of the
refunding of the Tax Exempt Series 1994 bonds which bear interest from 5.0 to
7.75% interest was being capitalized as part of the project costs until project
completion in December, 1995, when interest was expensed. Depreciation expense
also increased in the amount of $22,753 as a result of additional fixed assets
purchased in fiscal year ended September 30, 1997.
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, 1996 and 1997 were $(65,000), based on pretax
loss of $(152,684), and $77,000 based on pretax income of $203,797
respectively. At September 30, 1996 and 1997 there is no valuation allowance.
During 1996, the Corporation entered into a sales agreement in contemplation of
an exchange of its Cedar Pines Facility for land. Cash received in excess of
the basis of the facility in the amount of $148,527 at September 30, 1997, has
been deferred until the exchange transaction has been consummated.
LIQUIDITY AND CAPITAL RESOURCES
The Corporation does not maintain any line of credit or other
external sources of liquidity.
At September 30, 1997, the Corporation had $1,360,571 in cash and
securities available for sale, and working capital of $778,958 based upon
current assets of $2,809,120 and current liabilities of $2,030,162. Working
capital of $398,942 based on current assets of $2,528,127 and current
liabilities of $2,129,185 existed at September 30, 1996. During the fiscal
year ended September 30, 1997, the Corporation's cash and securities available
for sale increased $855,443. Accounts receivable decreased $515,873, net cash
provided by operating activities increased $934,894 and Current Restricted
Trust Funds increased $5,695.
As of September 30, 1997, total outstanding long-term debt of the
Corporation equaled $12,778,904 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, 1997, Unamortized Financing Costs on the Series
1994 Bonds were $942,656. Total financing costs on the Series 1994 Bonds were
$1,224,528.
The Restricted Trust Funds decreased $290,558 from September 30, 1996
to September 30, 1997 as a result of the project fund decrease through draws as
the Addition costs were paid. The Bond fund also decreased as principal
payments were paid out during 1997. The net proceeds of the 1994 Taxable
Health Care Facilities Bonds are being held by the trustee in accounts whose
use is limited until they are expended for their designated purposes.
The Corporation 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.
RECENTLY ISSUED ACCOUNTING STANDARDS
FASB issued Statement No. 121, Accounting for Impairment of Long-lived
Assets and For Long-lived Assets to be Disposed of. Statement No. 121 became
effective during the fiscal year ended September 30, 1997, and did not have an
impact on the Company's financial position or results of operations.
ITEM 7: FINANCIAL STATEMENTS
Included on pages F-Index to F-14.
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 to F-14
</TABLE>
F-Index
<PAGE> 16
[LUND KOEHLER COX & COMPANY, PLLP LETTERHEAD]
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Care First, Inc.:
We have audited the accompanying balance sheet of Care First, Inc. as of
September 30, 1997 and the related statements of operations, stockholders'
deficit and cash flows for the year 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 audit. The
financial statements of Care First, Inc. as of September 30, 1996, were audited
by other auditors whose report dated November 6, 1996, expressed an unqualified
opinion on those statements.
We conducted our audit 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 audit provides 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, 1997 and the results of its operations and its cash flows
for the year ended in conformity with generally accepted accounting principles.
Minneapolis, Minnesota
November 14, 1997
F-1
<PAGE> 17
CARE FIRST, INC.
BALANCE SHEETS
SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------ -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 501,765 $ 239,038
Securities available-for-sale 858,806 266,090
Accounts receivable, net 800,577 1,316,450
Restricted trust funds 615,563 609,868
Notes receivable - stockholders, net 0 7,833
Prepaid expenses 15,409 848
Deferred tax asset 17,000 88,000
------------ -------------
Total current assets 2,809,120 2,528,127
RESTRICTED TRUST FUNDS, NET OF CURRENT PORTION 1,013,672 1,304,230
PROPERTY AND EQUIPMENT, NET 10,059,137 10,231,700
INTANGIBLE ASSETS, NET 957,247 1,063,496
DEFERRED TAX ASSET 69,000 70,000
------------ -------------
$ 14,908,176 $ 15,197,553
============ =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current portion of long-term debt $ 150,340 $ 135,000
Accounts payable 322,808 539,875
Accrued payroll, vacation and payroll taxes 388,845 441,832
Accrued interest 449,554 452,201
Accrued real estate taxes 659,040 496,515
Accrued expenses 12,272 6,713
Resident trust funds payable 47,303 57,049
------------ -------------
Total current liabilities 2,030,162 2,129,185
LONG-TERM DEBT, NET OF CURRENT PORTION 12,778,904 12,915,000
CONSTRUCTION COSTS PAYABLE 0 164,311
DEFERRED COMPENSATION 86,059 78,235
DEFERRED REVENUE 148,527 173,095
------------ -------------
Total liabilities 15,043,652 15,459,826
------------ -------------
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 (153,241) (280,038)
------------ -------------
Total stockholders' deficit (135,476) (262,273)
------------ -------------
$ 14,908,176 $ 15,197,553
============ =============
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE> 18
CARE FIRST, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
--------------------- ---------------------
Percent Percent
------- -------
<S> <C> <C> <C> <C>
REVENUE:
Resident services $ 8,433,261 85.2 $ 8,047,296 85.9
Ancilliary services 1,231,819 12.4 1,240,107 13.2
Prior years' revenue adjustments 238,951 2.4 86,061 0.9
------------ ------- ------------ -------
Total revenue 9,904,031 100.0 9,373,464 100.0
------------ ------- ------------ -------
OPERATING EXPENSES:
Nursing 3,285,073 33.2 3,314,818 35.4
Activities and social service 338,501 3.4 352,154 3.8
Ancilliary 654,021 6.6 675,239 7.2
Dietary 871,800 8.8 791,094 8.4
Laundry 201,249 2.0 181,776 1.9
Housekeeping 284,998 2.9 271,417 2.9
Plant operations and maintenance 390,136 3.9 446,732 4.8
Property and related 688,993 7.0 461,594 4.9
Administrative and general 825,409 8.3 756,820 8.1
Payroll taxes and employee benefits 593,790 6.0 805,749 8.6
Depreciation and amortization 480,585 4.8 457,832 4.9
Home health 35,507 0.4 1,420 0.0
------------ ------- ------------ -------
Total operating expenses 8,650,062 87.2 8,516,645 90.9
------------ ------- ------------ -------
INCOME FROM OPERATIONS 1,253,969 12.7 856,819 9.1
------------ ------- ------------ -------
OTHER INCOME (EXPENSE):
Interest income 182,270 1.8 189,982 2.0
Interest expense (1,352,086) (13.6) (1,215,524) (12.9)
Other income 10,152 0.1 16,039 0.2
Gain on sale of assets 109,492 1.1 0 0.0
------------ ------- ------------ -------
Total other income (expense) (1,050,172) (10.6) (1,009,503) (10.7)
------------ ------- ------------ -------
INCOME (LOSS) BEFORE INCOME TAXES 203,797 2.1 (152,684) (1.6)
Provision for income taxes (benefit) 77,000 0.8 (65,000) (0.7)
------------ ------- ------------ -------
NET INCOME (LOSS) $ 126,797 1.3 $ (87,684) (0.9)
============ ======= ============ =======
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 19
CARE FIRST, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND 1996
<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, 1995 500 $ 5 10,000 $ 100 $ 17,660 $ (192,354) $ (174,589)
Net loss -- -- -- -- -- (87,684) (87,684)
---- ------ ------ ------ -------- ---------- ----------
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)
==== ====== ====== ====== ======== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 20
CARE FIRST, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from resident services $ 10,488,204 $ 8,863,940
Cash paid to suppliers and employees (8,491,253) (8,008,878)
Interest paid (1,254,334) (1,222,009)
Interest received 81,871 198,090
Miscellaneous cash received 119,644 173,095
Income taxes paid (5,000) 0
------------ ------------
Cash flows from operating activities 939,132 4,238
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (185,749) (1,969,065)
Payments on construction costs payable (164,311) 0
Disposal of property and equipment, net of accumulated depreciation 0 230,394
Cash received from sale of assets 109,492 0
Payment of start-up costs 0 (22,448)
Purchases of investments (592,716) (266,090)
Principal payments received on notes receivable - stockholders 18,542 17,569
Deposits to restricted debt trust funds (1,687,849) (1,062,524)
Disbursements from resticted debt trust funds 1,974,914 3,065,436
Increase in accrued interest receivable (11,948) 0
------------ ------------
Cash flows from investing activities (539,625) (6,728)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt (136,780) (463,305)
------------ ------------
Cash flows from financing activities (136,780) (463,305)
------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 262,727 (465,795)
CASH AND CASH EQUIVALENTS, BEGINNING 239,038 704,833
------------ ------------
CASH AND CASH EQUIVALENTS, ENDING $ 501,765 $ 239,038
============ ============
RECONCILIATION OF NET INCOME (LOSS) TO CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income (loss) $ 126,797 $ (87,684)
Depreciation and amortization 480,585 457,832
Gain on sale of assets (109,492) 0
Deferred tax asset 72,000 (70,000)
Changes in operating assets and liabilities -
Accounts receivable, net 515,873 (517,582)
Other current assets (25,270) (16,202)
Accounts payable (217,067) 101,373
Accrued expenses 112,450 (43,329)
Deferred compensation 7,824 6,735
Deferred revenue (24,568) 173,095
------------ ------------
Cash flows from operating activities $ 939,132 $ 4,238
============ ============
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 21
CARE FIRST, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 AND 1996
(1) NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS - Care First, Inc. was incorporated in the state of
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.
SECURITIES AVAILABLE-FOR-SALE - 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, 1997 and 1996, 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 $70,000 and $138,300 at September 30, 1997 and 1996.
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 of
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 financial
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 reporting and income
tax purposes.
F-6
<PAGE> 22
CARE FIRST, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 1997 AND 1996
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 have been deferred until the exchange transaction has
been executed.
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.
RECENTLY ISSUED ACCOUNTING STANDARD - During fiscal 1997, the Company adopted
Statement of Financial Accounting Standards No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
(Statement 121). Statement 121 establishes accounting standards for the
recognition and measurement of impairment of long-lived assets, certain
identifiable intangibles, and goodwill either to be held or disposed of. The
adoption of Statement 121 did not have an impact on the Company's financial
position or results of operations.
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.
RECLASSIFICATIONS - Certain accounts in the prior year financial statements
have been reclassified for comparative purposes to conform with the
presentation in the current year financial statements. These reclassifications
had no effect on net income or stockholders' deficit.
F-7
<PAGE> 23
CARE FIRST, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 1997 AND 1996
(2) THIRD PARTY REIMBURSEMENT AGREEMENTS
MEDICAID - Nile Health Care Center 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.
In 1995, the State of Minnesota, by statute, also authorized the DHS to
establish a contractual alternative payment system, called the "Nursing Home
Contract Project". The purpose of the Project is to explore a contract-based
reimbursement system as an alternative to the current cost-based system for
reimbursement. On December 15, 1995 the facility was approved to participate
in the "Nursing Home Contract Project" in which medicaid and private pay
reimbursement rates from July 1, 1995 were inflated 2.98% for rates effective
July 1, 1996 and 2.82% for rates effective July 1, 1997.
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, 1997 and 1996, the occupancy percentages
and the percentages of residents covered under the medicaid and medicare
programs were as follows:
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Cedar Pines Health Care Facility (based on 75 beds from
February 15, 1995 to December 5, 1995)
Total occupancy 0% 67.2%
Medicaid 0% 88.5%
Medicare 0% 2.6%
Nile Health Care Center (based on 256 beds from
December 6, 1995 to September 30, 1997
Total occupancy 75.5% 76.3%
Medicaid 66.4% 66.4%
Medicare 4.8% 6.3%
</TABLE>
F-8
<PAGE> 24
CARE FIRST, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 1997 AND 1996
(3) NOTES RECEIVABLE - STOCKHOLDERS
The Company had unsecured notes receivable from its officers that bear interest
at 5.4% of $881,500 and $900,042 at September 30, 1997 and 1996. At September
30, 1997 and 1996 an allowance for uncollectible accounts of $881,500 and
$892,209 has been recorded against these notes.
Total interest income earned on the notes receivable during the years ended
September 30, 1997 and 1996 was $48,148 and $49,120.
(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.
PROJECT FUND - The proceeds from the issuance of the taxable bonds are 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>
1997 1996
------------ ------------
<S> <C> <C>
Bond fund $ 540,633 $ 537,141
Debt service reserve fund 1,000,004 1,012,591
Project fund 13,669 291,639
Resident trust funds 47,303 57,049
Interest receivable 27,626 15,678
------------ ------------
Total restricted trust funds 1,629,235 1,914,098
Less: current portion 615,563 609,868
------------ ------------
Total restricted trust funds, net $ 1,013,672 $ 1,304,230
============ ============
</TABLE>
F-9
<PAGE> 25
CARE FIRST, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 1997 AND 1996
(5) PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at September 30:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Land $ 938,744 $ 938,744
Land improvements 123,633 36,064
Buildings and improvements 10,359,784 10,312,074
Equipment and furniture 1,227,888 1,164,075
------------- -------------
Total property and equipment 12,650,049 12,450,957
Less: accumulated depreciation 2,590,912 2,219,257
------------- -------------
Total property and equipment, net $ 10,059,137 $ 10,231,700
============= =============
</TABLE>
The Company's policy is to capitalize interest incurred on debt during the
course of the qualifying construction project. As noted in note 2, the Nile
Health Care Center was completed in December 1995. Therefore, the amount of
capitalized interest during the year ended September 30, 1996 was $153,644 (net
of interest income earned on proceeds from tax-exempt bonds in the amount of
$16,356).
(6) LONG-TERM DEBT
Long-term debt consisted of the following at September 30:
<TABLE>
1997 1996
------------- -------------
<S> <C> <C>
City of Minneapolis, Minnesota Health Care Facilities
Refunding Revenue Bonds Series 1994, due in semi-annual
principal installments in accordance with the issuance
statement, plus interest at rates ranging from 5.0% to
7.75%, secured by all property and accounts receivable,
due June 2012. $ 4,415,000 $ 4,550,000
City of Minneapolis, Minnesota Taxable Health Care
Facilities Revenue Bonds Series 1994, due in
semi-annual interest only payments of 12% for fiscal
1998 and annual principal and
interest installments in accordance with the issuance
statement beginning fiscal 1999, secured by all property
and accounts receivable, due December 2004. 8,500,000 8,500,000
Capital lease obligation - Wagers Business System,
monthly installments of $445 including interest at
10.50%, maturing May 2000, secured by copier. 14,244 0
------------- -------------
Total long-term debt 12,929,244 13,050,000
Less: current portion 150,340 135,000
------------- -------------
Long-term debt, net $ 12,778,904 $ 12,915,000
============= =============
</TABLE>
F-10
<PAGE> 26
CARE FIRST, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 1997 AND 1996
Future maturities of long-term debt are as follows for the years ending
September 30:
<TABLE>
<S> <C>
1998 $ 150,340
1999 295,340
2000 348,564
2001 375,000
2002 400,000
Thereafter 11,360,000
-------------
Total $ 12,929,244
=============
</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
through September 30, 1997. The covenants consist primarily of reporting
requirements, insurance coverage, meeting certain financial ratios and other
administrative requirements.
The fair value of the Company's long-term debt is estimated based on quoted
market rates and approximates the carrying value. The fair value of the
capital lease obligation approximates the carrying amount based on the maturity
and security of the related obligation.
(7) INCOME TAXES
Certain items are recognized for tax reporting purposes in different
periods from those in which they are recognized for financial reporting
purposes. Deferred income taxes are provided for the tax effect of these
temporary differences.
The provision for income taxes consists of the following for the years ended
September 30:
<TABLE>
<CAPTION>
1997 1996
--------- -----------
<S> <C> <C>
Current:
Federal $ 0 $ 0
State 5,000 5,000
Deferred 72,000 (70,000)
--------- ------------
$ 77,000 $ (65,000)
========= ============
</TABLE>
F-11
<PAGE> 27
CARE FIRST, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 1997 AND 1996
The tax effects of temporary differences giving rise to the deferred items are
as follows for the years ended September 30:
<TABLE>
<CAPTION>
1997 1996
------------ ----------
<S> <C> <C>
Allowances for uncollectible notes and
accounts receivable $ 381,000 $ 412,000
Operating loss and tax credit carryforwards 633,000 495,000
Other 172,000 184,000
Less: excess depreciation 1,067,000 899,000
------------ ----------
Subtotal 119,000 192,000
Less: valuation allowance 33,000 34,000
------------ ----------
Total $ 86,000 $ 158,000
============ ==========
</TABLE>
Differences between the effective tax rates and the statutory U.S. federal
income tax rate are as follows at September 30:
<TABLE>
<CAPTION>
1997 1996
------------ ----------
<S> <C> <C>
Statutory U.S. federal income tax rate 34 % (34)%
State taxes net of federal benefit 6 % (6)%
Graduated federal tax rates (3)% (0)%
Nondeductible expenses and other 1 % (3)%
------------ ----------
Total 38 % (43)%
============ ==========
</TABLE>
As of September 30, 1997, the Company had federal and state net operating loss
carryforwards of approximately $1.3 million and $1.4 million, which, if not
used, will begin to expire in 2006. The Company also has federal tax credits
of approximately $107,000 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.
(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, 1997 and 1996.
(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.
F-12
<PAGE> 28
CARE FIRST, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 1997 AND 1996
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 reduce 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, 1997 and 1996 is $86,059
and $78,235, which has been recorded as a liability.
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, 1992 to
September 30, 1997 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, 1995, 1996 and 1997
have not been audited by the medicare intermediary. Any adjustments resulting
from the audit process could retroactively adjust medicare revenue.
During 1996, the medicare intermediary conducted an audit and proposed therapy
adjustments to the medicare cost report filed for the year ended September 30,
1994. The Company has taken exception with the proposed adjustments relating
to contracted therapy services. The ultimate resolution of the proposed
adjustments is uncertain. The amount the Company has paid to the medicare
program as a result of these adjustments is $100,028. The therapist has agreed
to indemnify the Company for the medicare disallowances. Therefore, the
Company expects full recovery from the therapist and a receivable for the
amount of the disallowance has been recorded.
COLLECTIVE BARGAINING AGREEMENT - During fiscal 1997, the Company's employees
voted to be covered under a collective bargaining agreement. Negotiations are
still continuing between the Company and the employees. A contract has not
been approved and the effect on the Company is not known.
F-13
<PAGE> 29
CARE FIRST, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 1997 AND 1996
(11) SUPPLEMENTARY CASH FLOWS INFORMATION
During the year ended September 30, 1997, the Company purchased equipment under
a capital lease agreement for $16,024. In addition, during the year ended
September 30, 1996, there were transfers from the project fund for property and
equipment acquisitions. The transfers were in the form of payments for
construction in progress of $1,497,286, financing costs of $376 and a decrease
in construction costs payable of $97,689.
F-14
<PAGE> 30
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>
Merle V. Nugent 78 Director, Vice President/Secretary
Jack E. Nugent 50 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.
Jill Kieser, age 35, is the Director of Nursing for the Expanded
Facility,and has held that position since May 1996. Previously, she hasv been
employed by the Corporation as an audit consultant on RAI and worked full-time
as a clinical coordinator since January 1996. Ms. Kieser has been a
registered nurse for nearly twelve years.
Tamara Austin, age 30, 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.
29
<PAGE> 31
ITEM 10. EXECUTIVE COMPENSATION
Summary of Compensation. Set forth in the following table is
information with respect to the compensation of the directors and three highest
paid officers of the Corporation for the last three fiscal years of the
Corporation:
<TABLE>
<CAPTION>
Summary Compensation Table
--------------------------
Fiscal
Name and Principal Positions Year Annual Compensation
- ---------------------------- ---- -------------------
<S> <C> <C>
Jack E. Nugent-Director/President/Treasurer 1997 $186,141
1996 199,952
1995 204,518
Merle V. Nugent - Director/Vice President/ 1997 $ 75,880
Secretary 1996 75,880
1995 76,052
Nancy Nugent - Assistant Treasurer/Admission 1997 $ 41,520
Coordinator 1996 41,600
1995 41,696
</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 owing to the Corporation. The Corporation may
terminate such Agreement if Ms. Nugent becomes disabled or is convicted of a
gross misdemeanor or felony or commits fraud or dishonesty in connection with
her employment. Pursuant to an Agreement for Deferred Compensation (a
non-funded, non-qualified retirement plan for Merle Nugent), as amended and
restated as of September 1, 1994, upon termination of her employment (unless
for cause), the Corporation has agreed to pay after November 1, 2004 (or
earlier if Ms. Nugent becomes disabled), Merle V. Nugent deferred compensation
of $67,500 per year for the remainder of her life. Such amount will be reduced
by $30,000 per year upon retirement of Ms. Nugent's outstanding debt owing to
the Corporation. The present value of the anticipated payments will be
expensed over the expected service life of Ms. Nugent. The estimated present
value of the future payments at September 30, 1997 and 1996 is $86,059 and
$78,235, which has been incurred and expensed by the Corporation and is
recorded as a liability.
The Loan Agreement provides that, except for increases based on the
consumer price index, neither Merle V. Nugent nor Jack E. Nugent shall receive
any increases in compensation (including salary, bonuses, consulting fees,
director's fees, etc.) from the Corporation beyond the level of such
compensation currently in effect for such individual, unless, based on the
Corporation's audited financial statements for its most recently ended fiscal
year: (i) the Corporation has Current Assets in an amount at least equal to
125% of Current Liabilities; (ii) the Corporation's Income Available for Debt
Service is at least equal to 125% of its Total Principal and Interest
Requirements; (iii) the Corporation has a Tangible Net Worth at least equal to
$1,000,000; and (iv) in any fiscal year, the aggregate amount of such increased
compensation or payments shall not exceed an amount equal to 25% of the
remainder of (A) the Corporation's Income Available for Debt Service, less (B)
the Corporation's Total Principal and Interest Requirements, in each case for
the prior fiscal year.
Indemnification. The Corporation's Bylaws provide that the Corporation must
indemnify its officers and directors, and may indemnify its employees and other
agents, to the fullest extent permitted by Minnesota
30
<PAGE> 32
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 one year
of service 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>
- -----------
(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.
31
<PAGE> 33
(2) The address of each stockholder is: c/o Care First Inc. , 3720 23rd Avenue
South, Minneapolis, Minnesota 55407, other than Patricia Wolff and Fred E.
Nugent, II, whose addresses are, respectively, 410 E. 9th Street, #1, New York,
New York, 10009 and 4912 Amalfi Way, Oxnard, California 93035.
By virtue of her Class A stock ownership, Merle V. Nugent controls the
composition of the Corporation's Board of Directors and the election of its
officers. Prior to or upon the death of Merle V. Nugent, its expected that
Jack E. Nugent will become the owner of a controlling voting interest in the
Corporation. For a discussion of the governance and management of the
Corporation, see Item 9.
Under a 1983 Stock Purchase Agreement between 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, 1997, the outstanding balances on such loans
equaled $587,308, $220,783, and $73,409, respectively. Repayment of such
balances is being made pursuant to separate promissory notes from the above
individuals (each a "Shareholder Note"). Each Shareholder Note bears interest
at the annual rate of 5.4%. The Shareholder Notes from Jack Nugent, Merle
Nugent and Nancy Nugent require monthly payments of principal and interest
equal to $3,330.12, $1,671.57 and $555.78, respectively, until March 15, 2001,
at which time the entire balances thereon will be due, unless the Notes are
renewed. All (as of September 30, 1997) 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
<TABLE>
<CAPTION>
(a). Exhibits
<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)
</TABLE>
32
<PAGE> 34
<TABLE>
<S> <C>
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)
</TABLE>
(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
33
<PAGE> 35
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: January 8, 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.
Signature Title
--------- -----
Jack E. Nugent President, Administrator and Director
------------------------------------ January 8, 1998
Jack E. Nugent
Merle V. Nugent Secretary and Director
------------------------------------ January 8, 1998
Merle V. Nugent
Tamara J. Austin Director of Finance
------------------------------------ January 8, 1998
Tamara J. Austin
34
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<CASH> 501,765
<SECURITIES> 858,806
<RECEIVABLES> 870,577
<ALLOWANCES> 70,000
<INVENTORY> 0
<CURRENT-ASSETS> 2,809,120
<PP&E> 12,650,049
<DEPRECIATION> 2,509,912
<TOTAL-ASSETS> 14,908,176
<CURRENT-LIABILITIES> 2,030,162
<BONDS> 12,778,904
0
0
<COMMON> 105
<OTHER-SE> (135,581)
<TOTAL-LIABILITY-AND-EQUITY> 14,908,176
<SALES> 9,904,031
<TOTAL-REVENUES> 9,904,031
<CGS> 0
<TOTAL-COSTS> 8,169,477
<OTHER-EXPENSES> 480,585
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,352,086
<INCOME-PRETAX> 203,797
<INCOME-TAX> 77,000
<INCOME-CONTINUING> 126,797
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 126,797
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
