SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996. OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
AND EXCHANGE ACT OF 1934.
COMMISSION FILE NUMBER: 0-26502
COMMUNITY CARE OF AMERICA, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 52-1823411
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
3050 NORTH HORSESHOE DRIVE, SUITE 260,
NAPLES, FLORIDA 34104
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (941) 435-0085
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK,
$.0025 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of Common Stock held by non-affiliates of the
registrant as of March 31, 1997, was approximately $19,161,858. Solely for
purposes of this computation, the registrant's directors and executive officers
have been deemed to be affiliates. Such treatment is not intended to be, and
should not be construed to be, an admission by the registrant or such directors
and officers that any of such persons are "affiliates," as that term is defined
under the Securities Act of 1933.
The number of shares of common stock outstanding as of March 31, 1997, was
7,597,801.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
------
<S> <C> <C>
PART I
Item 1. Business
General 1
Acquisition History 2
Business Strategy 3
Services 4
Revenue Sources and Reimbursement 6
Government Regulation 8
Competition 10
Employees 11
Insurance 11
Item 2. Properties 11
Item 3. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Executive Officers of the Company 14
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters 15
Item 6. Selected Financial Data 15
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 17
Item 8. Financial Statements and Supplementary Data 24
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 24
</TABLE>
PART III
The information called for by Part III (Items 10, 11, 12 and 13) of Form 10-K
(except information as to the Company's executive officers, which information
follows Item 4 in this Report) is incorporated herein by reference to such
information which will be contained in the Company's definitive Proxy Statement
to be used in connection with the Company's 1997 Annual Meeting, which Proxy
Statement will be filed pursuant to Regulation 14A under the Securities Exchange
Act of 1934 or in an amendment to this Report, which Proxy Statement or
amendment will be filed within 120 days following the end of the year covered by
this Report.
<TABLE>
<CAPTION>
<S> <C> <C>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 26
Signatures 32
</TABLE>
<PAGE>
FORWARD LOOKING STATEMENTS
When used in this Report, the words "anticipates", "believes", "expects",
"intends", "may", "plans", "seeks to" and "strategy is to" and variations of
such words and similar expressions are intended to identify forward-looking
statements that involve risks and uncertainties.
In order to keep its stockholders and the investment community informed of
the Company's future plans, the Company and certain officers, directors or
employees of the Company, acting on behalf of the Company, may make
forward-looking statements concerning, among other things, the Company's
revenues, earnings, capital expenditures, capital structure and other financial
items, plans and objectives and economic performance. Forward-looking statements
may be made in writing or orally. The Company's ability to do this has been
fostered by the Private Securities Litigation Reform Act of 1995 which provides
a "safe harbor" for forward-looking statements to encourage companies to provide
prospective information so long as those statements are accompanied by
meaningful cautionary statements identifying important factors that could cause
actual results to differ materially from those discussed in the statement. The
Company believes it is in the best interest of the Company and its stockholders
to take advantage of the "safe harbor" provisions of that Act. Among the factors
that could cause the Company's future actual results, performance or achievement
to differ materially from those described or implied in forward-looking
statements (including any that may be contained in this Report) are: (a) the
Company's ability to obtain, on a timely and economically feasible basis, the
financing required to (i) meet its various obligations (including those
discussed in Notes 6 and 13 of the Notes to the Company's Consolidated Financial
Statements), (ii) increase its working capital and tangible net worth in order
to meet the working capital maintenance covenants and tangible net worth
covenant contained in the Company's master leases with Health and Retirement
Properties Trust (as discussed in Note 7 of the Notes to the Company's
Consolidated Financial Statements), and (iii) finance any future acquisitions or
other transactions that the Company may consider to implement its growth
strategy (see "Business-Acquisition History", "Business-Business Strategy," and
"Business-Services" and Note 13 of the Notes to the Company's Consolidated
Financial Statements); (b) the Company's ability to successfully integrate
acquisitions and effectuate economies of scale and otherwise implement its
growth strategy (see "Business-Business Strategy"); (c) the government climate
towards healthcare (see "Business-Revenue Sources and Reimbursement" and
"Business-Government Regulation"); (d) the continuation of third-party payor
programs, including Medicare and Medicaid, at current benefit levels and
reimbursement rates (see "Business-Revenue Sources and Reimbursement"); (e) the
Company's ability to remain in compliance with the requirements for
participation in such programs, as well as remain in compliance with the other
government regulations to which it is subject (see "Business-Government
Regulation"); (f) the level of, and the Company's ability to meet, competition
(see "Business-Competition"); (g) the Company's ability to avoid significant
claims and defense costs, and maintain adequate insurance to cover any material
claims and costs it may incur, which may arise out of malpractice and other
claims (see "Business-Insurance"); (h) the Company's ability to retain qualified
personnel (see "Business-Employees"); and (i) general economic conditions.
PART I
ITEM 1: BUSINESS
GENERAL
Community Care of America, Inc. (unless the context indicates otherwise,
together with its subsidiaries, "CCA" or the "Company") develops and operates
skilled nursing facilities in medically underserved rural communities. CCA's
strategy is to enter rural areas through the acquisition of long-term care
facilities which serve as platforms from which to develop networks that provide
an array of healthcare and related services. The Company believes that long-term
care facilities in rural communities generally represent underutilized assets to
which other services can be added to extend high quality, cost-effective
solutions to address unmet basic healthcare needs for those who live in rural
locations. The Company's strategy is designed to coordinate flexible,
community-based healthcare services, includ-
<PAGE>
ing long-term care, rehabilitation, adult day care, home healthcare, assisted
living and transportation services. The Company also affiliates with other
healthcare providers whose patients can benefit from utilizing the Company's
other services. During 1996, the Company achieved a growth of 37.4% in revenues
(before a $1.9 million revenue adjustment in 1996) above 1995 levels which was
largely attributable to the acquisition or management of eight facilities in the
Southeast.
As of March 31, 1997, the Company operated 54 licensed long-term care
facilities with 4,450 licensed beds, one 22-bed rural hospital, two physician
practices, two primary care clinics, one rural healthcare clinic, one
outpatient rehabilitation center, one child day care center, a home healthcare
agency and 115 assisted living units within six of the communities which the
Company serves. The Company currently operates in Alabama, Colorado, Florida,
Georgia, Iowa, Kansas, Louisiana, Maine, Missouri, Nebraska, Texas and Wyoming.
The Company was incorporated on December 28, 1992 as a Delaware corporation
under the name ElderCare of America, Inc. and changed its name to Community Care
of America, Inc. on October 13, 1993. The Company's principal executive offices
are located at 3050 North Horseshoe Drive, Suite 260, Naples, Florida 34104, and
its telephone number is (941) 435-0085.
ACQUISITION HISTORY
The Company began operations in December 1993 with its acquisition of all of
the capital stock of MeritWest and the refinancing of the acquired facilities
through mortgage and lease arrangements (the "MeritWest Transaction"). As a
result, the Company began operations with 28 long-term care facilities, of which
14 were owned, 13 were leased and one was managed, in six states. In May 1995,
the management agreement with respect to the managed facility was terminated and
in January 1996, the Company closed one of the acquired facilities. On November
1, 1994, the Company entered into long-term leases for, and assumed the
operation of, two additional long-term care facilities in two states. Effective
February 1, 1995, the Company acquired a 22-bed rural hospital, a physician
practice and two associated primary care clinics and a home healthcare agency in
Alabama (the "Georgiana Transaction"). The Company is presently engaged in
negotiations to sell these operations (together with another physician practice
and associated primary care clinic in the same geographic area, which the
Company acquired in August 1995). On April 1, 1995, the Company leased 11 and
purchased three additional long-term care facilities in four of the states in
which the Company already had a presence. Effective July 1, 1995, the Company
leased three additional long-term care facilities in Alabama. On August 15,
1995, the Company assumed the management of nine long-term care facilities in
Maine pursuant to a series of management agreements (which also contemplated the
Company managing one additional facility upon completion of construction and the
achievement of certain occupancy levels). As part of the arrangement, the
Company also obtained an option to acquire these ten facilities pursuant to
which the Company made a $5.0 million non-refundable deposit. On August 15,
1996, the Company terminated these arrangements as they were not generating
sufficient cash flows to pay their management fees to the Company. This resulted
in charges to earnings of $9.9 million. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and Notes 12 and 16
of the Notes to the Company's Consolidated Financial Statements contained
elsewhere in this Report. Effective October 1, 1995, the Company acquired a
long-term care facility in Nebraska and, on November 1, 1995, acquired an
outpatient head trauma therapy center in Maine. Effective January 1, 1996, the
Company acquired a certified rural healthcare clinic in Florida. As a result of
a series of transactions, on May 16, 1996, the Company began leasing five
long-term care facilities in Georgia and one long-term care facility in
Louisiana and entered into an agreement to manage an additional facility in
Texas. During the second quarter of 1996, as a result of their unfavorable
performance, the Company determined to close four primary care clinics, four
adult day care centers and one physician practice. This resulted in
non-recurring charges to earnings of $4.5 million. See "Management's Discussion
and Analysis" and Note 12 of the Notes to the Company's Consolidated Financial
Statements. The terms and certain effects of each of the foregoing transactions
are described in greater detail in Note 2 of the Notes to the Company's
Consolidated Financial Statements contained elsewhere in this Report. See also
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
2
<PAGE>
The continuation of the Company's strategy of entering rural markets by
acquiring a long-term care facility and improving and expanding the services
offered by the facility will require substantial capital investment for the
acquisition and integration of the facilities, improvements to acquired
facilities and working capital to expand the Company's operations generally.
There can be no assurance that additional borrowings or other sources of capital
will be available to the Company or, if available, as to the terms on which they
may be obtained. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
The Company has engaged the investment banking firm of Smith Barney, Inc. as
the Company's financial advisor to assist the Company in evaluating strategic
alternatives for enhancing shareholder value, including the possible sale of the
Company.
BUSINESS STRATEGY
The Company's business strategy is to improve and expand the services offered
in rural skilled nursing facilities to provide cost-effective services to people
who live in medically underserved rural areas throughout the United States. CCA
has historically entered these markets by acquiring existing long-term care
facilities or, in one case, a small rural hospital. CCA works with existing
local practitioners and other providers in these communities to create an
integrated delivery network that allows access to quality healthcare services.
The Company believes that long-term care facilities in rural communities
generally represent underutilized assets to which other services can be added to
extend high quality, cost-effective solutions to address unmet basic healthcare
needs for rural Americans. By providing professional management, introducing
management information systems and making capital improvements, the Company
seeks to improve the quality and availability of local healthcare services
within targeted rural communities.
The Company's target market is rural communities with populations under
50,000 that the Company believes are medically underserved. However, the Company
has acquired and may in the future acquire facilities located in larger
communities if the facility is included in a group of facilities which the
Company desires to acquire. In determining which markets to enter, the Company
assesses the needs and available healthcare resources in areas meeting its
population and demographic profile to determine if the Company's strategy can be
profitably implemented.
The Company's strategy involves a two-phased plan. The first phase involves
conforming acquired facilities to the Company's basic operating standards and
procedures. The Company also undertakes a community-wide survey and performs
local market research, including consultation with community leaders and
healthcare and social service providers, to analyze the healthcare needs and
available resources in the community. Based on this analysis, the Company
proceeds, where appropriate, to implement the second strategic phase within the
community. This phase involves the development of an expanded delivery network
designed to provide a broad array of healthcare and healthcare related services.
Operational Improvement
Acquired facilities generally have a basic infrastructure largely in place,
including a skilled nursing staff, clinical aides, qualified local
practitioners, a support staff, administrators and a medical director. In the
first phase of the Company's strategy, the Company improves an acquired facility
by providing professional management, introducing management information systems
and making capital improvements necessary to attain the Company's standards for
quality of care and operating efficiency and, where such certification does not
exist at the time of acquisition, meet the standards for Medicare certification.
The Company has substantially completed this process at most of the 54 currently
owned, leased or managed long-term care facilities. The Company believes that
enhanced long-term care facilities provide a base for delivering a broad array
of healthcare and healthcare related services. This process involves four
strategic investments:
o Capital Improvements. The Company makes repairs and improvements to the
physical plant, builds or expands areas for therapy services and upgrades
equipment. These enhancements to the facility are designed to achieve
compliance with all pertinent regulatory standards and improve its image
and reputation in the local community.
3
<PAGE>
o Training. The Company invests in recruiting and training its employees to
upgrade clinical and management skills and enhance the quality of patient
care. The Company believes that these programs for employees give it a
competitive advantage in attracting qualified applicants and result in
reduced turnover and higher productivity.
o Medicare Certification. The Company generally seeks to obtain Medicare
certification for those acquired long-term care facilities that are
eligible to participate in the Medicare program but were not previously
certified. Obtaining Medicare certification enables the Company to increase
its access to higher acuity patients and thereby realize higher
reimbursement levels.
o Information Systems. The Company automates medical records, patient care
plans, financial reporting and reimbursement. The Company has engaged
Integrated Health Services, Inc. ("IHS") under a management agreement to
assist the Company in providing these services, as well as to provide
certain financial, accounting, MIS, reimbursement and ancillary services
directly to the Company for a term of five years commencing January 1,
1997. See Note 14 of the Notes to the Consolidated Financial Statements.
DEVELOPMENT OF THE INTEGRATED HEALTHCARE DELIVERY NETWORK
The second phase of the Company's strategy involves the development in
targeted rural communities of expanded healthcare services designed to provide
an array of healthcare services. The Company's strategy is to identify the
specific needs of each community by conducting local market research and
tailoring the array of services to meet those needs. The core services which may
be be offered by the Company include:
o Long-Term Care o Assisted Living
o Rehabilitation o Transportation
o Home Healthcare
The Company's strategy is designed to expand and coordinate the delivery of
basic healthcare services in underserved rural markets and to maximize profits,
while enhancing quality. The Company intends to tailor the range of services it
provides in each network based upon consultations with local leaders and
healthcare and social service providers, as well as local market research, that
enables it to assess community-specific needs. Based on this analysis, the
Company intends to develop and operate, alone or in alliance with other
providers, a broad array of healthcare and healthcare related services tailored
to the community's unmet healthcare needs. This strategy is designed to enable
patients to avoid the necessity for travel to distant locations to obtain
services not available in their local communities. The Company's objective is to
utilize its rural healthcare facilities to provide accessible, cost-effective
healthcare and become the provider preferred by patients as well as payors,
physicians and other referral sources.
The degree to which the Company will be able to expand the services which it
may offer will depend upon its ability to obtain additional financing. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources," and Note 13 of the Notes to the
Consolidated Financial Statements.
SERVICES
The Company intends to include at its facilities those core services needed
by the particular communities the Company serves. The Company believes that, by
linking and integrating the healthcare service components of its facilities, it
will be well positioned to contract with managed care organizations in rural
markets. The core services of the Company's strategy are:
Long-Term Care. CCA provides nursing, rehabilitation, custodial services and
other long-term care to patients resident at its 54 long-term care facilities.
In addition to nursing care, which is provided on a 24-hour basis by licensed
practical nurses and certified nursing aides, the Company also provides a broad
range of support services, including speech, physical and occupational
rehabilitation therapy, recreational activities, social services, dietary,
housekeeping and laundry services and furnishes pharmaceuti-
4
<PAGE>
cal, nutritional and medical supplies. Each long-term care facility is
supervised by a licensed healthcare administrator and employs a medical director
to supervise the delivery of healthcare services to residents and a director of
nursing to supervise the nursing staff. The Company maintains a corporate
quality assurance program designed to ensure regulatory compliance and to
enhance the standard of care provided in each facility.
Rural Hospital. The Company operates the Georgiana Doctors Hospital, a 22-bed
acute care hospital in Georgiana, Alabama, in conjunction with two physician
practices, and a home healthcare agency. This rural delivery network serves a
county of approximately 22,000 residents. The Company is presently engaged in
negotiations to sell Georgiana Doctors Hospital (together with its two related
primary care clinics and home healthcare agency and two physician practices in
Alabama). In addition on May 1, 1996, the Company acquired one hospital and
obtained an option to acquire three additional hospitals, a long-term care
facility and a home care agency, as well as to manage one additional hospital,
all in Georgia. Largely as a result of an inability to obtain financing to
consummate the transaction, on December 31, 1996, the Company sold the acquired
hospital back to the former owners and terminated the agreement pursuant to
which it was to acquire the remaining facilities. This resulted in non-recurring
charges to earnings of approximately $4.4 million in the fourth quarter of 1996.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 12 to the Notes to Consolidated Financial Statements
elsewhere in this Report.
Out-Patient Rehabilitation. The Company currently provides out-patient
rehabilitation services at its Ashland, Nebraska and Saratoga, Wyoming long term
care facilities. The Company intends to expand this core service at other
facilities. Outpatient rehabilitation services include physical therapy,
occupational therapy and speech therapy, and the Company intends to expand these
services to cover respiratory therapy. The rehabilitation services, provided by
the Company's employees or independent contractors, would typically be provided
at locations within the Company's facility for in-patients, as well as to others
in the surrounding community who are not residents of the facility. If
rehabilitation services are provided at its long-term care facilities on an
outpatient basis, the Company intends to provide separate access to its
facilities for such patients. At some locations, the Company intends to make
available rehabilitation services in facilities adjacent to or near the
Company's long-term care facility. In November 1995, the Company acquired a
freestanding outpatient head trauma center in Maine and, in April 1996, the
Company established another head trauma location in Lewiston, Maine.
Home Healthcare. The Company intends to provide a broad range of healthcare
services to individuals in their homes, affording these individuals an
alternative to institutional care. The Company expects that these services will
be rendered by licensed and registered nurses, therapists and medical social
workers, who would provide services such as intravenous therapy, pain
management, ventilator care, dressing changes, injections, administration of
medication and other nursing procedures. In addition, the Company expects that
personal care services will be provided by home health aides who will assist
patients with their activities of daily living. At present, home healthcare
services are offered as part of the Company's operations in Georgiana, Alabama
and, through a joint venture, at the Company's long-term care facilities in
Nebraska.
Assisted Living. The Company presently has 115 assisted living units in six
of the communities it serves, and intends to construct additional separate
residences adjacent to or in the vicinity of its long-term care facilities, in
order to provide living units for adults who require some assistance with their
daily living activities. Such services would be provided to individuals who do
not require the 24-hour nursing care provided in the Company's long-term care
facilities, but who may not be able to live without some form of assistance.
Support services may include meals, laundry, housekeeping, maintenance,
transportation and social and recreational activities. In addition, personal
care services, including bathing, dressing and grooming, as well as ambulatory
assistance, will be provided.
Transportation Services. The Company operates vans, primarily with wheel
chair lifts, and other vehicles to transport patients to and from service
providers within its networks. The Company views this service as an important
and integral component of its marketing program as a means of alleviating a
major burden on the patient's family and facilitate patient utilization of each
service the Company offers.
5
<PAGE>
Other. In addition to its two physician practices in Alabama discussed above,
the Company operates a certified rural healthcare clinic in Arcadia, Florida.
REVENUE SOURCES AND REIMBURSEMENT
General. The following table sets forth the sources of net patient service
revenues by payor type for the periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Private pay and
other................ 36.3% 31.3% 30.1%
Medicare............. 15.8 17.1 20.3%
Medicaid............. 47.9 51.6 49.6%
-------- -------- --------
Total................ 100.0% 100.0% 100.0%
======== ======== ========
</TABLE>
The Company believes that the foregoing percentages are not necessarily
indicative of the relative percentage of revenues to be derived from such
sources in the future.
The Company's revenues from long-term care services are determined by a
number of factors, including: (i) the licensed bed capacity of its facilities,
(ii) the occupancy rates of its facilities, (iii) the mix of patients and the
rates of reimbursement among payor categories (private pay, Medicaid and
Medicare) and (iv) the extent to which certain ancillary services available in
the Company's facilities are utilized by patients and paid for by the respective
payor sources. The Company monitors both Medicaid and Medicare regulatory
developments and seeks to comply with all reporting requirements with a view to
increasing reimbursement payments.
Private Pay. Private pay revenues include payments from individuals who pay
directly for services without governmental assistance, commercial insurers, Blue
Cross organizations, HMOs, preferred provider organizations, workers'
compensation programs and other similar payment sources. Payments from these
private pay sources may be charge-based, cost-based or based on contracts
negotiated with these payors. Many conditions treated by rehabilitation services
are covered by liability insurance, rather than health benefits policies. In
such cases, reimbursement rates are established on a case-by-case basis.
Although the level of charges by the Company to private patients in its
facilities is not subject to the same regulatory control as with Medicaid or
Medicare, its charges are still generally limited to customary and reasonable
charges for such healthcare services. In addition, many HMOs and other private
payors are under pressure to contain or reduce costs through increasing case
management review of services, lowering reimbursement rates and negotiating
reduced contract pricing.
Medicaid. The Medicaid program refers to various state administered
reimbursement programs created by Federal law to provide a joint Federal-state
medical insurance assistance program for individuals who fit within defined
resource and income standards. Skilled nursing facilities, such as the Company's
long-term care facilities, are required to meet state licensing requirements and
Federal Omnibus Budget Reconciliation Act of 1987 ("OBRA-87") requirements to be
certified to receive reimbursement under applicable Federal and state Medicaid
guidelines. Similarly, hospitals are subject to regulation, and must meet
certain standards for Medicaid certification, under both Federal law and state
health codes, which vary from state to state. Medicaid reimbursement is
available for qualified individuals in most state programs for long-term care,
primary care, out-patient rehabilitation programs, assisted living and adult day
care programs. States have a wide degree of flexibility in the establishment of
Medicaid reimbursement systems, and Federal waivers permitting experimentation
in the methodology of delivery of care to Medicaid patients have been granted
with increasing frequency. These waiver programs have increased substantially
the number of Medicaid patients receiving services through managed care
intermediaries, which can affect, positively or negatively, the amount of the
reimbursement entitlement for rural hospitals and primary care provided in an
outpatient setting. Most states operate on the basis of a cost-based
reimbursement system under which the reimbursement rate for an individual
healthcare facility is determined by cost reports filed on an annual basis.
Most of the Company's long-term care facilities participate in the Medicaid
program. The Medicaid cost-based reimbursement system is a prospective rate
system, subject to retroactive adjustment. Under
6
<PAGE>
a prospective system, per diem rates are established (generally on an annual
basis) based upon certain historical costs of providing services during the
prior year, adjusted to reflect factors such as inflation and any additional
services required to be performed. Retroactive adjustments, if any, are based on
a recomputation of the applicable reimbursement rate following an audit of cost
reports. To date, adjustments from Medicaid audits have not had a material
adverse effect on the Company. The Company believes that it has properly applied
the various payment formulas and that any future adjustments will not be
material, although there can be no assurance to that effect.
Providers must accept reimbursement from Medicaid as payment in full for the
services rendered. The provider may not bill the patient for services covered by
the Medicaid program but may bill the patient for noncovered services. There can
be no assurance that Medicaid reimbursement will be sufficient to cover actual
costs incurred by the Company with respect to Medicaid services rendered. State
Medicaid plans also require that providers must be subject to governmental audit
to ensure the propriety of costs incurred, which are used as the basis for
payments.
Certain states are studying methods for reducing expenses under their
Medicaid programs, which initiatives could have an adverse effect on applicable
Medicaid rates. If enacted, current Federal initiatives, including a change in
the methods for paying the Federal share of Medicaid costs, may cause a
reduction in the availability of Federal Medicaid funds in future years. The
Company cannot currently determine the potential effect of any such changes.
The Company currently operates long-term care facilities in Alabama,
Colorado, Georgia, Iowa, Kansas, Louisiana, Missouri, Nebraska, Texas and
Wyoming, a rural hospital and three primary care clinics in Alabama and a
certified rural healthcare clinic in Florida. Kansas uses a prospective payment
facility specific Medicaid reimbursement system and establishes a new rate plan
each year. Wyoming has a similar program and recently increased the inflation
index in its Medicaid reimbursement formula.
Medicare. Medicare is a Federally funded and administered health insurance
program that provides coverage for beneficiaries who require in-patient acute
care and certain intensive rehabilitation therapy services or skilled nursing
and certain related medical services, such as physical, occupational and speech
therapy, pharmaceuticals, medical supplies and ancillary, diagnostic and other
necessary services of the type provided by skilled nursing facilities. Medicare
benefits generally cover only a short portion of a patient's stay in a long-term
care facility. Medicare benefits are not available for patients requiring
intermediate and custodial levels of care. In general, Medicare payments for
skilled nursing services and rehabilitative care are based on allowable costs.
With certain exceptions, Medicare is a retrospective payment system in which
each facility receives an interim payment during the year, which is later
adjusted upward or downward to reflect actual allowable direct and indirect
costs of services based on the submission of a cost report at the end of each
year. Of the Company's 54 long-term care facilities (including managed
facilities), 48 are currently certified to receive benefits provided under
Medicare. In addition, the Company's rural hospital is also certified to
participate in the Medicare program.
Medicare reimbursement for services provided in skilled nursing facilities is
based upon the lesser of (i) actual allowable routine, ancillary and capital
costs or (ii) charges. Facilities that have been in operation longer than three
full cost reporting periods are subject to limits on their actual routine per
diem costs. The routine service cost limits, which are regionally adjusted for
labor costs, are updated annually by the Healthcare Financing Administration of
the United States Department of Health and Human Resources ("HCFA"). Most of the
Company's facilities are subject to these limits. Medicare also provides
reimbursement for in-patient care at hospitals and skilled nursing facilities,
and hospice and home health agency care. Reimbursement for hospitalization costs
is determined on a national weighted cost basis, known as Diagnostic Related
Groups, related to the type of illness being treated, rather than the duration
of the patient's hospitalization.
Healthcare Reform; Governmental Budgetary Constraints; Proposed Budgetary
Legislation. Numerous Federal and state governmental and private sector
proposals have been advanced to address the nationwide concerns on the
availability and affordability of quality healthcare. As a result of these and
other proposals, the healthcare industry is subject to considerable and rapid
change. In addition, the significant impact of market forces, including the
formation of provider networks and the grouping of
7
<PAGE>
consumers into large managed care organizations sponsored by insurance companies
and other entities, has caused market-induced healthcare reform to become a
significant factor in restructuring the delivery system. Although the failure of
passage of the Health Security Act may have deterred comprehensive healthcare
reform at the Federal level, the potential for healthcare reform at the Federal
level cannot be disregarded nor can any such reform be predicted as to content
or timing with any degree of certainty. The enactment of Federal and state
reform proposals which might cause a reduction of revenue in certain states in
which the Company operates remains a continuing possibility which cannot be
predicted. Further, no assurance can be given that any such reform will not have
a material adverse impact on the Company.
Both the Federal government and various states are considering imposing
limitations on the amount of funding available for various healthcare services.
A Presidential task force has reported that the Medicare "trust fund" is likely
to become insolvent by the year 2002 if the current growth rate of approximately
10% per annum continues. The U.S. Congress passed a fiscal year 1996 budget
reconciliation bill with an objective of balancing the Federal budget by the
year 2002, which was vetoed by the President. The U.S. Congress and the
Executive Branch of government are presently working toward developing a 1998
federal budget. Certain provisions of the proposed 1996 budget were, and
provisions of 1998 budget are expected to be, designed to reduce the rate of
increase in Medicare expenditures through cost savings and other measures, the
magnitude of which is the subject of debate between the Executive and
Legislative Branches of the Federal government. The effect of any legislation
upon the Company's operations cannot be predicted at this time. In addition,
various states are themselves considering reduced levels of spending in various
areas which also could affect the amount of available Medicaid funding.
Accordingly, Medicare and Medicaid reimbursements may not continue at the
current levels or rates of increase.
GOVERNMENT REGULATION
The healthcare industry is subject to substantial Federal, state and local
regulation. The various layers of governmental regulation affect the Company's
business by requiring licensure or certification of its facilities, regulating
the use of its properties, controlling reimbursement to the Company for services
provided and controlling growth. See "-- Revenue Sources and Reimbursement."
Licensing, certification and other applicable governmental regulations vary from
jurisdiction to jurisdiction and are revised periodically, and vary among the
long-term care, rehabilitation therapy and other operations. It is not possible
to predict the content or impact of future legislation and regulations affecting
the healthcare industry.
Of the twelve states in which the Company operates, Alabama, Florida,
Georgia, Iowa, Louisiana, Maine, Missouri, Nebraska, Texas and Wyoming have
adopted certificate of need ("CON") statutes applicable to the services
presently provided by the Company in such states. CON statutes provide generally
that, prior to the construction of new beds, the addition of new services or the
making of certain capital expenditures exceeding defined levels, a state agency
must determine that a need exists for such proposed activities. The Company has
generally been able to obtain requisite CONs without material delay.
Medicare certification is a critical factor contributing to the revenues and
profitability of a long-term care facility and, accordingly, is a key objective
of the Company's facility enhancement program. Such certification depends on a
favorable review of the Company's facilities by HCFA. Any suspension or delay in
the administration of the survey and certification program of HCFA (as had been
proposed on an industry-wide basis by HCFA early in 1995) could delay Medicare
certification of the Company's facilities and adversely effect implementation of
the Company's facility enhancement program.
Both initial and continuing qualification of a long-term care facility to
participate in the Medicaid or Medicare programs depends upon many factors,
including accommodations, equipment, services, patient care, safety, personnel,
physical environment and adequate policies, procedures and controls. Licensing,
certification and other applicable standards vary from jurisdiction to
jurisdiction and are revised periodically. State agencies survey all long-term
care facilities on a regular basis to determine whether such facilities are in
compliance with the requirements for participation in government sponsored
third-party payor programs.
8
<PAGE>
Similarly, a hospital must meet certain standards and observe certain
operating procedures to be eligible for Medicare certification. These standards
include maintaining adequate records, adoption of and compliance with
appropriate patient treatment plans and self-review procedures, and providing
24-hour care rendered or supervised by a registered professional nurse. Waivers
of certain Medicare requirements, such as nurse staffing, are available upon
application, to rural hospitals with fewer than 50 beds. Hospitals are subject
to periodic review and may be disqualified from participation in the Medicare
program if they fail to satisfy the applicable conditions without obtaining a
waiver.
The Company believes that all of its facilities are in substantial compliance
with the various Medicare and Medicaid requirements and all are in substantial
compliance with other regulatory requirements applicable to them. However, in
the ordinary course of its business, the Company receives notices of
deficiencies for failures to comply with various regulatory requirements. The
Company reviews such notices and seeks to take appropriate corrective action. In
most cases, the Company and the reviewing agency have agreed upon the measures
to be taken to bring the facility into compliance. In some cases or upon
repeated violations, the reviewing agency has the authority to impose fines,
temporarily suspend admission of new patients to the facility, suspend or
decertify from participation in the Medicare or Medicaid programs and, in
extreme circumstances, revoke a facility's license. These actions could
adversely affect a facility's ability to continue to operate, the ability of the
Company to provide certain services and the facility's eligibility to
participate in the Medicare or Medicaid programs. Additionally, a finding of
abusive or fraudulent behavior with respect to one facility could subject other
facilities under common control or ownership to disqualification from
participation in the Medicare and Medicaid programs.
In March 1996, the Company's Toledo, Iowa long-term care facility voluntarily
withdrew from participating in the Medicare and Medicaid programs rather than
risk being decertified from participating in those programs. In September 1996,
this facility was recertified by the state for only nine beds until further
notice. Subject to obtaining financing, the Company intends to convert this
facility into a multi-use facility which would include a skilled nursing
facility operating on a private pay basis, assisted living to add to its
existing assisted living operations in the community, a home healthcare agency,
outpatient rehabilitation and a primary care clinic. Also, in March 1996 the
Company's Council Bluffs North facility was terminated from participation in the
Medicare and Medicaid programs. The facility has been resurveyed and found to be
deficiency free and, accordingly, the facility was recertified in April 1996.
Effective October 1, 1990, OBRA-87 eliminated the different certification
standards for "skilled" and "intermediate care" nursing facilities under the
Medicaid program in favor of a single "nursing facility" standard. This standard
requires, among other things, that the Company have at least one registered
nurse on each day shift and one licensed nurse on each other shift. Final
regulations of HCFA implementing the nursing home reform requirements in OBRA-87
took effect on September 30, 1995, although to date only the most serious
violations are being immediately enforced. The final regulations create a
variety of remedies that both Federal and state governments may utilize to bring
nursing homes into compliance with Federal guidelines, including the imposition
of fines up to $10,000 per day. The rules define conduct which constitutes abuse
and neglect of a nursing home patient, and changes have been made in the
qualification requirements for managers and surveyors of nursing homes. The
standards additionally require increased nursing staffing to ensure compliance
with quality care initiatives; increased training of nursing assistants; uniform
approaches to resident assessment and preparation of patient care plans; and
implementation of specific procedures when there is reason to believe that an
identifiable individual was responsible for an act of patient abuse and neglect.
The Company's rural long-term care strategy entails the risk of violating
Federal antitrust laws. The healthcare industry has recently been an active area
of antitrust enforcement action by the Federal Trade Commission (the "FTC"). The
principally rural primary care and skilled nursing facility structure of the
Company's operation sites has been developed to comply with existing Department
of Justice and FTC guidelines, including jointly issued antitrust guidelines
that were promulgated in September 1994. Although the Company's acquisitions and
existing delivery structure arrangements have not been the subject of Department
of Justice or FTC enforcement action, there can be no assurance that an
enforcement action will not be brought in the future.
9
<PAGE>
Various federal and state laws regulate relationships among providers of
healthcare services, including employment or service contracts and investment
relationships. These laws include the fraud and abuse provisions of the Social
Security Act that are applicable to the Medicare and Medicaid programs, which
prohibit various transactions involving Medicare or Medicaid covered patients or
services. These laws also include anti-kickback provisions which prohibit the
payment or receipt of any remuneration by anyone in return for, or to induce,
the referral of patients for items or services that are paid for, in whole or in
part, by Medicare or Medicaid. A violation of these provisions may result in
civil or criminal penalties for individuals or entities and/or exclusion from
participation in the Medicare and Medicaid programs. Among such laws is the
so-called "Stark" amendments of the Social Security Act provide, with certain
exceptions, that if a physician or member of the physician's immediate family
has a "financial interest" in an entity (which may consist of either an
ownership interest or a compensation arrangement), the physician is prohibited
from making a referral to the entity for the provision of certain "designated
health services" for which payment may be made by Medicare or Medicaid. Also,
the entity is prohibited from billing the Medicare or Medicaid programs for
designated health services rendered pursuant to a prohibited referral.
Submission of a claim that a provider knows or should know is for services for
which payment is prohibited under the Stark law could result in refunds of any
amounts billed, civil money penalties of not more than $15,000 for each such
service billed, and possible exclusion from the Medicare and Medicaid programs.
The Company's healthcare operations, including its acquisitions of physician
practices and relationships with physicians, potentially subject it to the Stark
law (as well as to certain state anti-referral statutes, which may vary from the
Stark law) and the Medicare and Medicaid anti-kickback provisions of the Social
Security Act. These provisions are broadly worded and often vague, and the
future interpretation of these provisions and their applicability to the
Company's operations cannot be fully predicted with certainty. There can be no
assurance that the Company will be able to arrange its acquisitions or business
relationships so as to comply with these laws or that the Company's present or
future operations will not be accused of violating, or be determined to have
violated, such provisions. Any such result could have a material adverse effect
on the Company.
Additionally, business corporations such as the Company are generally not
permitted under state law to practice medicine, exercise control over the
medical judgments or decisions of physicians or engage in certain practices,
such as fee splitting, with physicians. While the Company intends to structure
its relationships with physicians to comply with these laws, there can be no
assurance that regulatory authorities or other parties will not assert that the
Company's relationship with physicians violates these laws.
In addition, the Company, as an operator of healthcare facilities, is subject
to various Federal, state and local environmental laws (including, among other
laws, those regarding the disposal of medical wastes).
COMPETITION
The healthcare industry is highly competitive. The Company expects that it
will face increasing levels of competition with respect to its operations and
the healthcare services it expects to provide. The Company will be competing
with others who provide similar healthcare services, such as other long-term
care facilities, regional hospitals, physician practice groups, home healthcare
agencies, community-based service programs, retirement communities and
convalescent centers. The Company also expects that it will have competition
from new entrants in the rural healthcare services market. Moreover, in the
10
<PAGE>
implementation of the Company's growth strategy, the Company expects to face
competition for acquisition opportunities. Some of the Company's present and
potential competitors are significantly larger and have, or may have access to,
greater financial and other resources than those of the Company.
The Company competes with other facilities based on key competitive factors
such as reputation for the quality and comprehensiveness of care provided; the
commitment and expertise of staff; local physician and hospital support;
marketing programs; charges for services; and the physical appearance, location
and condition of facilities. The range of specialized services, together with
the price charged for services, are also competitive factors in attracting
patients from large referral sources. Conversely, because of the limits on rates
charged for services performed and uniform cost reimbursement principles there
is minimal price competition for Medicaid and Medicare patients. See "-- Revenue
Sources and Reimbursement."
The Company may also face opposition from other facilities, hospitals or
healthcare companies when it initiates a CON project or seeks to acquire a CON
or a facility covered by an existing CON. CON programs affect the opportunity to
develop or acquire new facilities by creating a regulatory system that can be
used by competitors to delay the implementation of growth strategies. CON laws,
applicable in most of the states in which the Company's facilities are located,
also currently restrict the number of facilities that can compete with the
Company in such states.
EMPLOYEES
As of December 31, 1996, the Company had 4,169 full-time and regular
part-time employees, of which there were approximately 4,010 employees at the
Company's owned, leased and managed long-term care facilities, including 944
nurses (421 of which are registered nurses). Three of the Company's facilities,
encompassing approximately 233 employees, are covered by a collective bargaining
agreement. The Company believes its relationship with its employees is generally
satisfactory.
Although the Company believes it is able to employ sufficient nurses and
therapists to provide its services, a shortage of healthcare professional
personnel in any of the geographic areas in which it operates could affect the
Company's ability to recruit and retain qualified employees and could increase
its operating costs. The Company competes with other healthcare providers for
both professional and non-professional employees and with non-healthcare
providers for non-professional employees.
INSURANCE
Healthcare companies are subject to medical professional liability, personal
injury and other liability claims that are customary risks inherent in the
operation of healthcare facilities. The Company maintains property, liability
and professional liability insurance policies in amounts and with such coverages
and deductibles that are deemed appropriate by management, based upon historical
claims, industry standards and the nature and risks of its business. The Company
also requires that physicians practicing at its facilities carry medical
professional liability insurance to cover their respective individual
professional liabilities.
ITEM 2: PROPERTIES
The executive offices of the Company occupy approximately 9,375 square feet
in a modern office building in Naples, Florida under a lease expiring in August
1998. The Company believes that this office space is adequate for its present
needs and is attempting to sublease part of the space which, in light of its
management agreement with IHS, it no longer requires.
11
<PAGE>
The following table sets forth certain information with respect to the
Company's current long-term care facilities;
<TABLE>
<CAPTION>
1990 CENSUS
OWNED/ OCCUPANCY POPULATION
LEASED/ NUMBER RATE AT ------------------------
MARKET SERVED MANAGED OF BEDS MARCH 31, 1997 TOWN COUNTY
- - ------------------------------------------------------------------- ---------
<S> <C> <C> <C> <C> <C>
Alabama
Bessemer....... Leased 81 94.1% 33,400 651,500
Bessemer....... Leased 69 94.3% 33,400 651,500
Greensboro..... Leased 102 92.8% 3,200 23,100
Colorado
Canon City..... Owned 157 83.1% 12,700 32,300
Colorado
Springs....... Owned 132 75.9% 281,100 397,000
Colorado
Springs....... Leased 49 76.1% 281,100 397,000
Delta.......... Owned 100 77.3% 3,800 21,000
Grand Junction. Leased 116 83.5% 29,000 93,100
Grand Junction. Leased 82 91.1% 29,000 93,100
Paonia......... Leased 60 65.2% 1,400 21,000
Georgia
College Park... Leased 100 99.1% 20,000 118,000
Dublin......... Leased 130 98.7% 16,000 40,000
Glenwood....... Leased 62 90.1% 1,000 4,900
Harbor City.... Managed 62 93.3% 3,000 42,000
Macon.......... Leased 130 88.5% 107,000 150,000
Marietta....... Leased 109 93.9% 46,000 476,000
Iowa
Clarinda....... Leased 117 79.5% 5,100 16,900
Council Bluffs. Leased 110 72.0% 54,300 82,600
Council Bluffs. Leased 62 94.0% 54,300 82,600
Glenwood....... Leased 128 100.0% 500 13,200
Glenwood....... Leased 12 100.0% 500 13,200
Mediapolis..... Leased 66 97.2% 1,600 42,600
Muscatine...... Leased 148 80.2% 22,900 39,900
Toledo......... Leased 117 57.4% 2,400 17,400
Winterset...... Leased 118 88.6% 4,200 12,500
Kansas
Arma........... Leased 92 69.7% 1,600 35,600
Ellinwood...... Leased 59 96.1% 2,400 29,400
Smith Center... Leased 75 85.1% 2,000 5,100
Topeka......... Leased 46 -0- 119,900 161,000
Topeka......... Leased 50 98.2% 119,900 161,000
Topeka......... Leased 79 80.4% 119,900 161,000
Louisiana
Luling......... Leased 117 82.7% 3,000 42,400
Missouri
Oak Grove...... Leased 90 97.2% 4,600 633,200
Tarkio......... Leased 95 78.1% 2,200 7,500
Nebraska
Ainsworth...... Owned 50 98.6% 1,900 3,700
Ashland........ Owned 101 87.2% 2,100 18,300
Blue Hill...... Owned 68 66.9% 800 4,300
12
<PAGE>
1990 CENSUS
OWNED/ OCCUPANCY POPULATION
LEASED/ NUMBER RATE AT -------------------------
MARKET SERVED MANAGED OF BEDS MARCH 31, 1997 TOWN COUNTY
- - -------------------------------------------------------------------- ---------
Campbell....... Leased 49 88.8% 400 4,000
Central City... Owned 70 76.0% 2,900 8,000
Columbus....... Owned 48 99.1% 19,500 55,500
Edgar.......... Owned 54 97.1% 600 7,000
Exeter......... Owned 59 64.6% 700 7,100
Grand Island... Leased 81 76.6% 39,400 48,900
Gretna......... Owned 63 97.8% 2,200 102,600
Lyons.......... Owned 84 81.9% 1,100 7,900
Milford........ Owned 66 78.2% 1,900 15,400
Palmer......... Owned 39 85.1% 400 8,000
Sutherland..... Owned 61 95.6% 1,000 32,500
Utica.......... Owned 41 76.5% 700 15,400
Waverly........ Owned 50 98.7% 1,900 213,600
Texas
Sycamore....... Managed 48 83.2% 470,000 1,400,000
Wyoming
Laramie........ Leased 144 82.1% 26,700 30,800
Saratoga....... Leased 52 89.4% 2,000 16,700
Worland........ Leased 100 86.3% 5,700 8,400
</TABLE>
In addition, the Company operates, in owned premises, a 22-bed hospital, two
physician practices and a home healthcare agency in Georgiana, Alabama (town
population, 2,000; county population, 21,900); two outpatient head trauma
rehabilitation units in Bangor, Maine (town population, 33,100; county
population, 146,600) and in Lewiston, Maine (town population, 39,757; county
population, 105,259); and a certified rural healthcare clinic in Arcadia,
Florida (town population, 6,600; county population, 26,300).
To date, the Company's major acquisitions have been financed principally
through mortgage and lease financing by Health and Retirement Properties Trust
("HRPT"). The Company has granted to HRPT an option to purchase all of the
capital stock of the Company's subsidiaries which own the 17 facilities subject
to HRPT mortgages. See Note 6 of the Notes to the Company's Consolidated
Financial Statements contained elsewhere in this Report. Of the Company's 35
leased long-term care facilities (one of which is a capital lease), 30 are under
leases with HRPT for terms expiring on December 31, 2010, with options entitling
the Company to extend each lease, on a premises by premises basis, for two
additional consecutive periods of 6 and 13 years. The Company's three long-term
care facilities in Alabama are under leases for terms expiring June 30, 2007,
with options entitling the Company to extend each lease, on a premises by
premises basis, for an additional period of five years. The remaining lease (in
Campbell, Nebraska) expires on February 1, 2006. See Note 7 of the Notes to the
Company's Consolidated Financial Statements contained elsewhere in this Report.
ITEM 3: LEGAL PROCEEDINGS
From time to time, the Company is party to certain claims and legal
proceedings which arise in the ordinary course of business. Currently, there are
no claims or legal proceedings which, in the opinion of the Company, would have
a material adverse effect on the Company's financial position or results of
operation.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
13
<PAGE>
EXECUTIVE OFFICERS
The executive officers of the Company are:
Deborah A. Lau joined the Company as Executive Vice President and Chief
Operating Officer in October 1995 and became President and Chief Executive
Officer of the Company on April 4, 1997. From March 1989 until she joined the
Company, Ms. Lau served in various capacities with IHS, serving as Vice
President of Financial Operations from January 1995, Vice President Healthcare
Controller from November 1993 to December 1994 and Regional Vice President from
March 1989 to November 1993. Prior thereto, Ms. Lau served as Assistant
Controller at Continental Medical Systems. Ms. Lau received a B.S. degree in
Accounting and Business Administration from Towson State University.
William J. Krystopowicz joined the Company in July 1993, serving as interim
President until February 1994, since which time he has been Executive Vice
President. Mr. Krystopowicz also served as the Company's Chief Financial Officer
from February 1994 until June 1995. Prior to joining the Company, Mr.
Krystopowicz served as IHS's Senior Vice President of Financial Services from
August 1988 and Vice President -- Controller from June 1986 to July 1988. From
July 1985 until he joined IHS, Mr. Krystopowicz was Director of Finance and
Reimbursement of Genesis Health Ventures, Inc., a long-term care operator. Mr.
Krystopowicz received a B.S. degree in Accounting from LaSalle University.
Officers are elected by the Board of Directors and may be removed at any time
by the Board. The officers of the Company are elected annually by the Board of
Directors at its meeting held immediately after the annual meeting of the
stockholders, and hold their respective offices until their successors are duly
elected and qualified.
14
<PAGE>
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock was initially offered to the public on August 9,
1995 and has been traded, since that date, on the Nasdaq Stock Market's National
Market under the symbol "CCAI." The following table sets forth the high and low
sale prices for the Common Stock as reported by Nasdaq for the periods
indicated.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
Fiscal 1995:
Third Quarter (from August 9)..... $ 14 $ 9 3/4
Fourth Quarter................... . 14 5/8 9 3/4
</TABLE>
<TABLE>
<CAPTION>
HIGH LOW
-------- --------
<S> <C> <C>
Fiscal 1996:
First Quarter .................... $15 1/2 $ 9
Second Quarter.................... 13 5/8 9 1/4
Third Quarter..................... 12 3/8 6
Fourth Quarter.................... 8 1/8 3 1/2
</TABLE>
As of March 31, 1997, the Company had approximately 75 stockholders of record
(which does not include stockholders whose shares are held in "street name" by
brokers, depositaries or nominees).
The Company has never paid cash dividends on the Common Stock and does not
anticipate paying cash dividends in the foreseeable future, but intends instead
to retain any future earnings for reinvestment in its business. The Company's
$15.0 million bank revolving credit facility prohibits the payment of cash
dividends on the Common Stock, and each of the Company's leases for its
long-term care facilities contain provisions that may limit the amount of cash
dividends that the Company may pay. Any future determination to pay cash
dividends will be at the discretion of the Board of Directors and will be
dependent upon the Company's financial condition, results of operations, capital
requirements, the terms of the Company's debt instruments and leases then in
effect and such other factors as the Board of Directors deems relevant.
ITEM 6: SELECTED FINANCIAL DATA
The selected consolidated financial data for CCA set forth below as of
December 31, 1995 and 1996 and for each of the years in the three year period
ended December 31, 1996 have been derived from the consolidated financial
statements of the Company, which have been audited by KMPG Peat Marwick LLP,
independent certified public accountants, included elsewhere in this Report. The
selected consolidated financial data presented below for MeritWest, the
Company's predecessor, as of June 30, 1992 and 1993 and for each of the years
then ended have been derived from the consolidated financial statements of
MeritWest, which have been audited by Arthur Andersen LLP, independent public
accountants. The selected consolidated financial data set forth below for
MeritWest for the period from July 1, 1993 to December 30, 1993 (the date of
acquisition by the Company) have been derived from the consolidated financial
statements of MeritWest for such period, which have been audited by KPMG Peat
Marwick LLP, independent certified public accountants. The following tables
should be read in conjunction with the Company's Consolidated Financial
Statements, the related Notes to such financial statements and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Report.
15
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PREDECESSOR COMPANY(1) CCA(2)
------------------------------------ ----------------------------------
PERIOD PERIOD
FROM FROM
JULY 1, INCEPTION
YEARS ENDED JUNE 30, TO DEC. 30, TO DEC. 31, YEARS ENDED DEC. 31,
---------------------- ----------------------
1992 1993 1993 1993 1994 1995 1996
------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues..................................... $53,905 $57,103 $29,431 $ -- $57,492 $94,178 $127,512
Facility operating expenses........................ 45,113 46,069 26,638 -- 46,035 73,693 111,171
Corporate administrative and general expenses ..... 2,137 2,455 1,332 914 2,935 4,765 5,226
Rent............................................... -- -- -- -- 3,806 6,404 8,999
Depreciation and amortization...................... 3,585 3,587 1,657 -- 1,465 2,033 3,021
Interest, net...................................... 5,064 4,616 2,453 -- 2,857 3,795 5,337
Loss on impairment of investments and other
non-recurring charges(3)........................... -- -- -- -- -- -- 22,128
---------- --------- ------------- ------------- --------- --------- --------
Operating income (loss)............................ (1,994) 376 (2,649) (914) 394 3,488 (28,370)
Non-operating losses, net.......................... (508) (3) (193) -- -- -- --
---------- --------- ------------- ------------- --------- --------- --------
Earnings (loss) before income taxes and
extraordinary charge.............................. (2,502) 373 (2,842) (914) 394 3,488 (28,370)
Income taxes....................................... -- 33 19 -- -- 1,047 (9,465)
---------- --------- ------------- ------------- --------- --------- --------
Earnings (loss) before extraordinary charge ....... (2,502) 340 (2,861) (914) 394 2,441 (18,905)
Extraordinary charge(4)............................ -- -- (173) -- -- (992) --
---------- --------- ------------- ------------- --------- --------- --------
Net earnings (loss)................................ $(2,502) $ 340 $(3,034) (914) 394 1,449 $(18,905)
========== ========= =============
Dividends-preferred stock(5)....................... -- (653) (408) --
------------- --------- --------- --------
Net earnings (loss) applicable to common stock .... $ (914) $ (259) $ 1,041 (18,905)
============= ========= ========= ========
Per common share:
Earnings (loss) before extraordinary charge....... $(0.52) $ (0.13) $ .42 $ (2.56)
Extraordinary charge.............................. -- -- (.20) --
------------- --------- --------- --------
Net earnings (loss)............................... $(0.52) $ (0.13) $ .22 $ (2.56)
============= ========= ========= ========
Weighted average number of common and common
equivalent shares outstanding..................... 1,755 2,041 4,840 7,385
============= ========= ========= ========
</TABLE>
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY(1) CCA(2)
-------------------- -----------------------------------------
JUNE 30, DECEMBER 31,
-------------------- -----------------------------------------
1992 1993 1993 1994 1995 1996
---------- --------- ---------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)............................... $(1,170) $ (223) $(3,444) $ 2,276 $ 4,488 $(10,952)
Total assets............................................ 54,867 54,328 59,541 62,375 93,290 102,119
Long-term debt, including current portion............... 57,068 56,628 26,600 33,086 35,665 60,371
Redeemable preferred stock and common stock subject to
repurchase.............................................. -- -- 5,536 5,908 2,181 --
Shareholders' equity (deficit).......................... (8,487) (8,147) 3,910 4,745 31,241 16,003
</TABLE>
- - ----------
(1) Effective December 30, 1993, the Company acquired all of the outstanding
common stock of the Predecessor Company, MeritWest. During the year ended
June 30, 1993, MeritWest operated 30 long-term care facilities, one of
which was sold to Integrated Health Services, Inc. and another of which
was sold to the prior manager of the facility in connection with the
MeritWest Transaction. Accordingly, the Company's operations for the year
ended December 31, 1994 include only 28 of the 30 facilities operated by
MeritWest prior to December 30, 1993.
(2) The Company had no significant operations prior to the MeritWest
Transaction. The Company believes that results of operations and
financial positions of the Company and MeritWest, and of the Company's
period-to-period results, are not comparable because (a) while MeritWest
financed its facilities through mortgages under which it paid interest,
the Company refinanced the facilities utilizing a combination of mortgage
and lease financing under which it pays interest and rent at rates
determined at the time of the refinancing which varied from the rates
applicable to MeritWest's debt; (b) MeritWest and the Company had
significantly different capital structures; (c) the financial statements
of the Company reflect a new basis of accounting for the acquisition of
MeritWest and the related depreciation and amortization on such new
basis; (d) two facilities operated by MeritWest, which contributed
revenues of approximately $8.8 million and contribution margin (operating
income before fixed charges and corporate administrative and general
expenses) of approximately $1.7 million during the 12-month period
immediately prior to the MeritWest Transaction, were not acquired by the
Company; (e) during the year ended December 31, 1994, the Company made
substantial improvements to, and operational changes in, the former
MeritWest facilities and obtained Medicare certification for the 19
MeritWest facilities which were not previously certified for
participation in the Medicare program; (f) the Company's operations are
managed directly by employees of the Company, while the facilities of
MeritWest were managed for MeritWest by a management company which had an
equity interest in MeritWest and earned management fees of $2.4 million
for the year ended June 30, 1993; and (g) MeritWest's fiscal year ended
on June 30 (the latest of which ended six months prior to the MeritWest
Transaction) while the Company's fiscal year ends on December 31.
(3) See note 12 of Notes to Consolidated Financial Statements.
(4) See note 15 of Notes to Consolidated Financial Statements.
(5) Neither the Company nor MeritWest declared any common stock dividends
during the periods presented.
16
<PAGE>
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
RESULTS OF OPERATIONS
General
The Company began operations in December 1993 with its acquisition of the
business of MeritWest, Inc. and subsequently consummated a series of
acquisitions and entered into various lease and management agreements, which
transactions are discussed in Note 2 of the Company's Notes to the Consolidated
Financial Statements. As of March 31, 1997, the Company owned, leased or managed
an aggregate of 54 licensed long-term care facilities, one 22-bed rural
hospital, two physician practices, two primary care clinics, one rural
healthcare clinic, one outpatient rehabilitation center, one child day care
center, a home healthcare agency and 115 assisted living units within six of the
communities which the Company serves.
The following table shows, for the periods indicated, certain items from the
Company's and MeritWest's Consolidated Statements of Operations, expressed as a
percentage of total revenues:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1994 1995 1996
-------- -------- ----------
<S> <C> <C> <C>
Total revenues........................................ 100.0% 100.0% 100.0%
Facility operating expenses........................... 80.1 78.2 87.2
Corporate administrative and general expenses ........ 5.1 5.1 4.1
Rent.................................................. 6.6 6.8 7.0
Depreciation and amortization......................... 2.5 2.2 2.4
Interest, net......................................... 5.0 4.0 4.2
Non-recurring charges................................. -- -- 17.3
-------- -------- ----------
Earnings (loss) before income taxes and extraordinary
charge................................................ 0.7 3.7 (22.2)
Income taxes.......................................... -- 1.1 7.4
-------- -------- ----------
Earnings (loss) before extraordinary charge .......... 0.7 2.6 (14.8)
Extraordinary charge.................................. -- (1.1) --
-------- -------- ----------
Net earnings (loss)................................... 0.7% 1.5% (14.8)%
======== ======== ==========
</TABLE>
17
<PAGE>
Summary of Write-offs and Non-recurring Charges
As previously announced, the Company recorded $19.2 million and $10.7 million
of write-offs in the second and fourth quarters of 1996, respectively, for a
total year-end pre-tax adjustment of $29.9 million. The following is a summary
of these charges (in millions):
<TABLE>
<CAPTION>
<S> <C>
Termination of the Sandy River management contract:
Loss on investment in purchase option deposit and transaction costs.................. $ 5.4
Write-off of receivables and other exit costs........................................ 4.2
--------
9.6
Closure of physician practices, primary care clinics, adult day care centers,
and facility shutdowns:
Impairment of long-lived assets related to Toledo and Aurora facilities.............. 1.5
Investment, asset and receivable write-downs for the physician practices, primary
care clinics and adult day care programs............................................ 4.0
Exit costs, employee termination costs and other operating closing costs............. 4.1
--------
9.6
--------
Total Second Quarter charges.......................................................... 19.2
Termination of proposed Memorial Health Group acquisition
Loss on investment................................................................... 3.9
Asset write-offs and other exit costs................................................ .5
--------
4.4
Terminated debt and equity offering costs............................................. 1.6
Contractual allowance and other revenue adjustments................................... 1.9
Other financing write-offs, balance sheet adjustments and revisions to second
quarter estimates.................................................................... 2.8
--------
Total Fourth Quarter charges.......................................................... 10.7
--------
Total 1996 Write-offs and Charges..................................................... $29.9
The charges were classified in the statements of operations as adjustments to
the following line items:
Revenue reduction..................................................................... $ 1.9
Operating expense increase............................................................ 5.9
Loss from impairment of investments and other non-recurring charges (see
note 12 of Notes to Consolidated Financial Statements)................................ 22.1
--------
$29.9
</TABLE>
The $5.9 million operating expense increase relates to the bad debt allowance
adjustment and operating and certain closure costs associated with the
discontinued clinics, physician practices and day care programs. Also included
in such operating charges are the write down of costs associated with developing
higher acuity programs and the write-off of costs associated with the
termination of employment of the Chief Executive Officer during 1996 and Chief
Operating Officer during 1995.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Revenues prior to the $1.9 million adjustment to revenue referred to above
which related to a change in the allowance for contractual adjustments for
certain third party receivables, increased $35.2 million, or 37.4%, to $129.4
million in 1996 from $94.2 million in 1995. This growth was attributable to
acquisitions and increases in revenues per patient day and management fee
revenue. Revenues,
18
<PAGE>
in 1996 included $17.3 million related to 6 long term care facilities, one
hospital and a physician practice acquired in 1996 and the operation of 17 long
term care facilities and a head trauma unit acquired in 1995 contributed $15.7
million more to 1996 revenues than they did from their respective dates of
acquisitions through December 31, 1995. Management fees were $3.4 million in
1996 as compared to $1.3 million in 1995. Long-term care facilities accounted
for 87.0% of total revenues in 1996, a decrease from 93.2% in 1995. The decrease
was primarily the result of revenues totaling $4.4 million, or 3.4% of total
revenues from Smith Hospital (acquired on April 29, 1996 and sold on December
31, 1996); $1.6 million, or 1.2% of total revenues from Maine Head Trauma
Center; and $.5 million, or .4% of total revenues from Family Medical Center.
Net operating revenues per patient day for long-term and assisted living
facilities increased 8.0% to $91.18 in 1996 from $84.42 in 1995, resulting from
an increased proportion of higher acuity patients. Medicare days increased 20.9%
to 61,291 in 1996 from 50,670 in 1995 as a result of operations acquired in 1995
and 1996. Occupancy rates were 85.8% in 1996 compared to 87.4% in 1995. Patient
days increased to 1,234,518, or by 18.4%, in 1996 from 1,042,692 in 1995,
primarily due to the facilities acquired subsequent to December 31, 1995 and the
inclusion for a full year in 1996 of operations acquired at various times during
1995.
Facility operating expenses increased by $37.5 million, or 50.9%, to $111.2
million in 1996 from $73.7 million in 1995 and increased as a percent of
revenues to 87.2% in 1996 from 78.2% in 1995. The increase from 1995 includes
$5.9 million, or 8.0%, resulting from write-offs and charges incurred in the
second and fourth quarters related to operating expenses, as discussed
previously. The remaining increase resulted primarily from a full year impact
($16 million) of operations acquired in 1995 as well as the impact of operations
acquired in 1996 ($14.1 million). The payroll related component of facility
operating expenses increased by $17.8 million, or 36.2%, to $67.0 million from
$49.2 million in 1995, primarily relating to acquisitions.
Corporate administrative and general expenses increased by $461, or 9.7%, to
$5.2 million in 1996 from $4.8 million in 1995. Corporate administrative and
general expenses as a percent of revenues were 4.1% in 1996 as compared to 5.1%
in 1995. The percentage decrease was primarily the result of increased revenue
related to acquisitions in 1996.
The Company has engaged Integrated Health Services, Inc. ("IHS") under a
management agreement to assist in the provision of certain financial,
accounting, MIS, reimbursement and ancillary services for a term of five years
commencing on January 1, 1997. The Company believes that this will provide
access to more sophisticated and responsive systems at a lower cost enabling the
Company to reduce its overhead. The management agreement provides for IHS to
receive a maximum of (subject to possible increase to 2.5% by mutual agreement
following a review by IHS) 2% of the Company's gross revenues for its services.
Rent expense increased by $2.6 million or 40.5%, to $9.0 million in 1996 from
$6.4 million in 1995. The dollar increase was due primarily due to additional
rental costs associated with the inclusion of 5 additional operating leases
acquired during 1996, 17 facilities acquired during 1995 for which a full year's
lease expense was incurred in 1996, and an increase of $549,000 in additional
rental costs resulting from landlord financed renovations at certain leased
facilities.
Depreciation and amortization expenses increased by $988, or 48.6%, to $3.0
million in 1996 from $2.0 million in 1995 and increased to 2.4% of revenues in
1996 from 2.2% of revenues in 1995. The increase was primarily the result of
1995 and 1996 acquisitions and renovations of certain owned facilities.
Net interest expense increased by $1.5 million, or 40.6%, to $5.3 million in
1996 from $3.8 million in 1995. Net interest expense as a percent of revenues
increased to 4.2% in 1996 from 4.0% in 1995. The dollar increase was primarily
due to the increase in debt obligations during the year, primarily relating to
acquisitions and the $10.0 million loan from HRPT (see note 6 of Notes to
Financial Statements), to $60.4 million at December 31, 1996 from $35.7 million
at December 31, 1995. The percentage increase was the result of the increase in
debt obligations offset, in part, by an increase in revenues.
Federal and state income taxes were a $9.5 million benefit in 1996 related
entirely to deferred taxes. Federal and state income taxes were $1.0 million in
1995 after utilization of $260,000 of net operating loss carryforwards which
resulted in an estimated annualized effective tax rate of 30%.
19
<PAGE>
Earnings before income taxes and before the impact of the second and fourth
quarter 1996 write-offs and non-recurring charges of $29.9 million discussed
above, were $1.5 million as compared to $3.5 million in 1995. After the impact
of the non-recurring charges, the net loss applicable to common stock for the
year ended December 31, 1996 was $18.9 million or $2.56 per share compared to
net earnings applicable to common stock of $1.0 million or $0.22 per share for
the year ended December 31, 1995. Weighted average shares outstanding for 1996
increased to 7,384,697 from 4,840,457 in 1995.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Revenues increased by $36.7 million, or 63.8%, to $94.2 million in 1995 from
$57.5 million in 1994. This growth was attributable to acquisitions, an increase
in revenues per patient day, an increase in management fees and an increase in
revenues from the Company's expanded network services, other than long-term care
facilities, including primary care clinics, adult day care, hospital and home
healthcare operations. Revenues included in 1995 from operations acquired
subsequent to December 31, 1994 approximated $28.1 million. Management fees were
$1.3 million in 1995 (of which $487,000 represents the portion of the management
fee that is subordinated to certain obligations of the facilities and which was
earned but unpaid at December 31, 1995 because cash flows from the facilities
being managed have been insufficient to pay the subordinated portion of the
management fees) compared to $126,000 in 1994. Long-term care facilities
accounted for 93.2% of total revenues in 1995, a decrease from 97.7% in 1994.
The Company expects the proportion of revenues from long-term care facilities to
continue to decline as it further establishes its networks to provide an
expanded range of services in its communities. In connection with a litigation
brought by the Company to recover depreciation recapture of Medicaid revenues
related to the MeritWest Transaction, a court awarded the Company $1.0 million.
The Company recorded revenues of $600,000 in the fourth quarter of 1995,
representing the portion of the court-awarded refund which the Company believes
to be the minimum probable outcome. This award has been appealed. The ultimate
outcome of this matter may result in additional revenue being recognized or in a
reversal of some or all of the amount recorded.
Net operating revenues per patient day for long-term care and assisted living
facilities increased 10.2% to $84.42 in 1995 from $76.63 in 1994, primarily
resulting from increased Medicare occupancy and an increased proportion of
higher acuity patients. Medicare days increased 18.2% to 50,670 in 1995 from
42,875 in 1994 as a result of operations acquired subsequent to December 31,
1994 and the certification of 19 additional facilities into the Medicare program
during the second and third quarters of 1994. Occupancy rates were 87.4% in 1995
compared to 88.5% in 1994. This decrease resulted from a lower occupancy
percentage for those operations acquired subsequent to December 31, 1994.
Patient days increased to 1,042,692, or 39.0%, in 1995 from 750,168 in 1994,
primarily due to the facilities acquired subsequent to December 31, 1994.
Facility operating expenses increased by $27.7 million, or 60.2%, to $73.7
million in 1995 from $46.0 million in 1994, but decreased as a percent of
revenues to 78.2% in 1995 from 80.1% in 1994. The percentage decrease resulted
from higher margins derived from the higher acuity patients and the increase in
operations other than long-term care. Facility operating expenses from
operations acquired subsequent to December 31, 1994 were approximately $23.0
million in 1995. The payroll related component of facility operating expenses
increased by $21.1 million, or 75.1%, to $49.2 million from $28.1 million in
1994, primarily as a result of an increased proportion of higher acuity patients
and an increased level of rehabilitation and ancillary long-term care services
provided.
Corporate administrative and general expenses increased by $1.8 million, or
62.4%, to $4.8 million in 1995 from $2.9 million (including start-up costs) in
1994. Corporate administrative and general expenses as a percent of revenues
were 5.1% in both 1995 and 1994. The dollar increase was primarily due to
staffing increases related to the Company's expansion and, to some extent, wage
increases.
Rent expense increased by $2.6 million, or 68.3%, to $6.4 million in 1995
from $3.8 million in 1994. Rent expense as a percent of revenues increased to
6.8% in 1995 from 6.6% in 1994. The dollar increase was primarily due to $1.9
million of additional rental costs resulting from inclusion of 14 additional
leased facilities and $235,000 of additional rental costs resulting from
landlord financed renovations at certain leased facilities.
20
<PAGE>
Depreciation and amortization expenses increased by $568,000, or 38.8%, to
$2.0 million in 1995 from $1.5 million in 1994, but decreased to 2.2% of
revenues in 1995 from 2.5% of revenues in 1994. The dollar increase was due to a
$306,000 increase related to facilities acquired subsequent to December 31, 1994
and to renovations of certain owned facilities. The percentage decrease was due
to a higher percentage of leased facilities to total facilities in 1995 than in
1994.
Net interest expense increased by $938,000, or 32.8%, to $3.8 million (net of
interest income of $96,000) in 1995 from $2.8 million (net of $63,000 of
interest income) in 1994. Net interest expense as a percent of revenues
decreased to 4.0% in 1995 from 5.0% in 1994. The dollar increase was primarily
due to the indebtedness incurred for the renovation of certain owned facilities.
The percentage decrease was due to a lower percentage of owned facilities to
total facilities in 1995 than in 1994.
Federal and state income taxes were $1.0 million in 1995. The utilization of
net operating loss carryforwards of $260,000 in 1995 resulted in estimated
annualized effective rate of approximately 30% for 1995. In 1994, there was no
provision for income taxes as the provision was offset by net operating loss
carry forwards of approximately $150,000.
Net earnings before extraordinary charge increased $2.0 million to $2.4
million in 1995 from $394,000 in 1994. Net earnings applicable to common stock
was $1.0 million, or $.22 per share in 1995. This compares to a loss of $259,000
or $.13 per share for 1994.
The early extinguishment of $15.4 million of long-term debt (resulting from
the application of a portion of the proceeds from the Company's initial public
offering and the repayment of certain indebtedness with borrowings from the
Company's revolving credit facility) resulted in extraordinary charges to
earnings totaling $992,000, net of income tax benefit of $404,000 in 1995. The
extraordinary charge was comprised of $683,000 of unamortized debt placement
costs and $713,000 of prepayment penalties and charges.
SEASONALITY
The admittance of patients to long-term care facilities and demand for
certain of the Company's other core services tends to be lower during the
Thanksgiving through January period. Accordingly, revenues and earnings are
generally lower in the Company's fourth fiscal quarter and, to a lesser degree,
in its first fiscal quarter.
INFLATION
The Company's business may be affected by increases in the cost of labor,
food and medical and other supplies. To date, inflation has not had a material
effect on the Company's operations. The Company cannot predict its ability to
recover increases in operating costs.
LIQUIDITY AND CAPITAL RESOURCES
General
To date, the Company's principal sources of cash have been from financing
activities. Based upon the operations of the Company, management believes that
available cash and funds generated from operations, as well as revolving credit
facilities, the refund of the HRPT deposit, and the renegotiation of payment
terms with Daiwa, Sandy River and IHS (see note 13 of the Notes to the
Consolidated Financial Statements) will be sufficient to enable the Company to
satisfy its capital expenditure and working capital requirements for its current
operations for at least the next year. The Company will seek to satisfy its
capital requirements for internal growth and acquisition activities through
borrowings from commercial lenders, seller-financed debt, financing obtained
from sale-leaseback transactions with real estate investment trusts, the public
and private equity, debt capital markets and proceeds from the sale of
discontinued operations and, to the extent available, internally generated cash
from operations. On a longer term basis, management believes the Company will be
able to satisfy the principal repayment requirements on its indebtedness with a
combination of funds generated from operations and from
21
<PAGE>
securing refinancings with existing or new commercial lenders. Management has
also engaged Smith Barney, as financial advisor, to review interest from
potential acquirers, joint venture partners and other sources of capital
infusion. There can be no assurance that any necessary funds will be available
to the Company or, if available, the terms thereof.
At December 31, 1996, the Company had a working capital deficiency of $11.0
million, compared with positive working capital of $4.5 million at December 31,
1995.
Net cash used in operating activities in 1996 was $2.4 million compared to
$3.0 million provided by operating activities in 1995. Net cash used in
operating activities in 1996 resulted from the Company's net loss ($18.9
million) and non-cash charges for depreciation and amortization ($3.4 million)
and the loss on impairment of investments and other non-recurring charges ($22.1
million), offset by non-cash credit for the deferred income tax benefit ($9.5
million).
Net accounts receivable (patients accounts receivable, third-party payor
settlements receivable and other receivables) were $16.4 million at December 31,
1996, compared with $12.9 million at December 31, 1995. The $3.5 million
increase was primarily attributable to the inclusion of $2.9 million of accounts
receivable of operations acquired subsequent to December 31, 1995. The number of
days average net revenues in net receivables was 47.0 at December 31, 1996,
compared to 50.1 at December 31, 1995. The decrease from 1995 to 1996 resulted
primarily from the total revenue increase from 1995 to 1996, as compared to the
total accounts receivable increase during the same period. Medicare
reimbursements are typically received 90 to 100 days in arrears. The Company
anticipates that its number of days average net revenues in net receivables will
fluctuate in the future, and will depend, in large part, on the mix of revenues,
as well as the timing of payments by private, third-party, and governmental
payors.
The allowance for doubtful accounts and contractual adjustments as a
percentage of account receivables was 22.8% at December 31, 1996, compared to
13.3% at December 31, 1995. This increase is primarily attributable to adverse
settlements or related notices from third-party payor intermediaries, the
closure of facilities and programs discussed previously and 1996 acquisitions.
Net cash used in investing activities was $18.2 million in 1996 primarily for
property, plant and equipment additions of $12.1 million and business
acquisitions of $6.1 million.
Net cash provided by financing activities was $19.9 million in 1996. Net cash
provided by financing activities in 1996 resulted from the receipt of proceeds
from the Company's long term debt borrowings ($41.9 million), offset by the use
of $2.4 million to pay transaction costs associated with borrowings and debt
repayments of $19.8 million.
At December 31, 1996, the Company had total debt outstanding of $60.4
million, of which $43.4 million bears interest at fixed rates, primarily ranging
from 7.0% to 15.1%. The Company's remaining debt is drawn under its $15.0
million revolving credit facility with Daiwa Securities of America, Inc.
("Daiwa") entered into in December 1996, and its $5.0 million revolving credit
facility with IHS entered into in December 1996, both of which are discussed
below.
To date, the Company's major acquisitions have been financed principally
through mortgage and lease financing by Health and Retirement Properties Trust.
At December 31, 1996, the Company was obligated to Health and Retirement
Properties Trust ("HRPT") under installment notes with respect to 17 facilities
having an outstanding aggregate principal balance of approximately $36.4 million
and as a tenant under three master leases covering 30 facilities having an
aggregate minimum rent of approximately $197 million (subject to increase)
during the remainder of their initial terms and first renewal period. The
Company was required to pay $5.7 million of refundable deposits under these
leases. In accordance with a waiver and amendment agreement dated April 14,
1997, CCA is required to pay a financing fee of $870,000, maintain a deposit
balance of $1.5 million and utilize the remaining deposits, net of payments in
arrears, up to 50% of the monthly lease expense, not to exceed a total deposit
return of approximately $4.1 million. In connection therewith, IHS guaranteed
$10.0 million of obligations to HRPT. See Note 13 to the Notes to the Company's
Consolidated Financial Statements. The master leases require the Company to
maintain consolidated tangible net worth of at least $5.0 million and a current
ratio (ratio of current assets to current liabilities) of at least one to one.
At December 31, 1996, the Company was in default with these financial covenants
but has obtained the
22
<PAGE>
necessary waivers of these covenants from HRPT through February 1998. Certain
debt instruments with HRPT (aggregating approximately $19.5 million in principal
amount) have been modified to provide that interest only will be payable until
July 31, 1998, at which time principal will again become payable, with interest,
in installments. The notes and leases contain cross default provisions, such
that a default under any note or lease would entitle HRPT to accelerate payment
of all of such notes and terminate all of such leases (and, subject to
mitigation of damages, to receive future rents).
Included in the installment notes is $10.0 million which the Company borrowed
from HRPT pursuant to an 11% promissory note ("the HRPT Note") on April 4, 1996,
to provide additional renovation and acquisition funding and general working
capital. No principal payments are required until the maturity date of December
31, 2008 with interest payments made monthly. However, this loan, together with
a $2.6 million prepayment premium, must be prepaid from the first proceeds of
certain equity or debt (or any combination thereof) issued by the Company after
August 30, 1996. The HRPT Note is secured by all of the collateral security
which secure the Company's current obligations to HRPT and is subject to cross
default with other obligations to HRPT. As a result of closing this loan, the
Company increased the security deposit held by HRPT for all obligations by
$550,000.
On December 27, 1996, the Company entered into a Healthcare Receivables
Purchase and Transfer Agreement with Daiwa providing for a 36 month revolving
credit facility pursuant to which the Company may borrow from time to time up to
$15.0 million, subject to a borrowing base formula. The Loan Agreement is
secured by all patient and third-party settlement receivables. This facility
replaces, and the proceeds from the line of credit were used to repay, a $15.0
million revolving credit facility with NationsBank of Florida, N.A., of which
$14.5 million was outstanding on December 27, 1996. As of December 31, 1996,
Daiwa advanced the Company approximately $4.8 million in excess of the borrowing
base. In accordance with a waiver and amendment agreement dated April 14, 1997
the Company is required to pay such amount in monthly installments of $300,000.
The $4.8 million has been guaranteed by IHS. In connection therewith, the
Company issued a five year warrant to Daiwa to purchase 1,787,568 shares of
Common Stock (subject to reduction as $300,000 payments are made) at an initial
price of $2.25 per share (subject to adjustment in certain circumstances). See
Note 13 to the Notes to the Company's Consolidated Financial Statements. The
remaining outstanding loan will mature on December 27, 1999. Each amount
advanced is to bear interest at a rate equal to the LIBO Rate at the time of the
revolving advance plus 2.00% per annum. The Company's interest rate at December
31, 1996 was 7.9065%.
Additionally, the Company entered into a subordinated revolving credit
agreement with IHS Financial Holdings, Inc., a subsidiary of IHS, pursuant to
which, as of December 27, 1996, the Company may borrow up to $5.0 million for
additional working capital until December 27, 1998. Borrowings under this line
of credit are to bear interest at a rate equal to the annual rate set forth in
IHS's revolving credit agreement with Citibank, N.A. plus 2% per annum. The
Company's interest rate at December 31, 1996 was 10.25% per annum. In connection
therewith, the Company issued warrants to purchase an aggregate of 752,182
shares of the Company's Common Stock, one-half of which are exercisable at $3.22
per share (the average of the high and low trading price of the Company's Common
Stock on January 14 and 15, 1997) for a two-year period and the remaining
one-half of which are exercisable at $6.44 per share for a five-year period. The
Company has granted IHS registration rights relating to the shares underlying
the warrants. In connection with certain guarantees issued by IHS to HRPT and
Daiwa of obligations of the Company on April 14, 1997, the Company issued a
warrant to IHS to purchase 379,900 shares of Common Stock at $1.937 per share.
See Notes 13 and 14 of the Notes to the Company's Consolidated Financial
Statements.
In addition to borrowings, the liquidity of the Company is dependent on the
timing of payments by governmental and private third-party payors. The Company's
operations could be adversely affected if it experiences significant delays in
reimbursement of its costs. Continued efforts by governmental and third-party
payors to contain or reduce the acceleration of costs, as well as any
significant increase in the Company's proportion of Medicare and Medicaid
patients, could adversely affect the Company's liquidity and results of
operations.
23
<PAGE>
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements are annexed to this Report starting at
page F-2:
Consolidated Balance Sheets as of December 31, 1995 and 1996
Consolidated Statements of Operations for the Years Ended December 31, 1994,
1995 and 1996
Consolidated Statements of Shareholders' Equity for the Years Ended December
31, 1994, 1995 and 1996
Consolidated Statements of Cash Flows for the Years Ended December 31, 1994,
1995 and 1996
Notes to Consolidated Financial Statements
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable
24
<PAGE>
PART III
The information called for by Part III (Items 10, 11, 12 and 13) of Form 10-K
(except information as to the Company's executive officers, which information
follows Item 4 in this Report) is incorporated herein by reference to such
information which will be contained in the Company's definitive Proxy Statement
to be used in connection with the Company's 1997 Annual Meeting, which Proxy
Statement will be filed pursuant to Regulation 14A under the Securities Exchange
Act of 1934, or in an amendment to this Report, which Proxy Statement or
amendment will be filed within 120 days following the end of the year covered by
this Report.
25
<PAGE>
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
COMMUNITY CARE OF AMERICA, INC.
Independent Auditors' Report............................................................. F-1
Consolidated Balance Sheets as of December 31, 1995 and 1996............................. F-2
Consolidated Statements of Operations for the Years Ended December 31, 1994, 1995 and
1996.................................................................................... F-3
Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1994,
1995 and 1996........................................................................... F-4
Consolidated Statements of Cash Flows for the Years Ended December 31, 1994, 1995 and
1996.................................................................................... F-5
Notes to Consolidated Financial Statements............................................... F-6
</TABLE>
(2) The following financial statement schedules are filed herewith on the
page indicated:
<TABLE>
<CAPTION>
SCHEDULE PAGE
- - ----------------------------------------------------------------------------- -------
<S> <C>
Community Care of America, Inc. Schedule II -- Valuation and Qualifying
Accounts....................................................................... S-1
</TABLE>
(b) Reports on Form 8-K.
The only Report on Form 8-K filed during the fourth quarter of the Company's
year ended December 31, 1996 was dated October 8, 1996 (date of earliest event
reported), reporting Item 5, Other Events. In January 1997, the Company filed a
report on Form 8-K dated December 23, 1996 (date of earliest event report),
reporting Item 5, Other Events, and Item 7, Financial Statements, Pro Forma
Financial Information and Exhibits. No financial statements were filed with
either Report.
(c) Exhibits:
EXHIBIT
NUMBER DESCRIPTION
- - ------------- -----------------------------------------------------------------
2.01 Stock Purchase Agreement dated as of July 1, 1993 among the
Company and PNC Venture Corp., Primus Capital Fund I Limited
Partnership, Primus Capital Fund II Limited Partnership, PNC
Venture Group I, New York Life Insurance Company and MeritWest,
Inc.
2.02(a) Amended and Restated Agreement and Plan of Reorganization dated
as of May 10, 1996 among the Company, Newco, Southern Care, and
Wallace Olson and Michael Himmelstein, the shareholders of
Southern Care. (Incorporated by reference to Exhibit 2.1 to the
Company's Current Report on Form 8-K, date of earliest reported
event: May 16, 1996, File No. 0-26502.)
2.02(b) Consulting and Advisory Services Agreement effective as of
January 1, 1996 among the Company, Southern Care Centers, Inc.
and its Shareholders. (Incorporated by reference to Exhibit
2.02(b) to the Company's Annual Report on Form 10-K for the year
ended December 31, 1995 1996, File No. 0-26502.)
26
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- - ------------- -----------------------------------------------------------------
2.02(c) Management Agreement dated as of May 10, 1996 between CCA of
Texas, Inc. and Southern Care Centers of Texas, Inc.
(Incorporated by reference to Exhibit 2.3 to the Company's
Current Report on Form 8-K, date of earliest reported event: May
16, 1996, File No. 0-26502.)
2.02(d) Agreement to Provide Accounting and Auditing Services and Rural
Healthcare Provider Network Services dated as of May 10, 1996
among Newco and Buchanan/SCC, Inc. (Incorporated by reference to
Exhibit 2.4 to the Company's Current Report on Form 8-K, date of
earliest reported event: May 16, 1996, File No. 0-26502.)
3.01(a) Certificate of Incorporation of the Company, as filed with the
Secretary of State of the State of Delaware on December 28, 1992.
3.01(b) Certificate of Amendment of Certificate of Incorporation of the
Company, as filed with the Secretary of State of the State of
Delaware on October 13, 1993.
3.01(c) Certificate of Amendment of Certificate of Incorporation of the
Company, as filed with the Secretary of State of the State of
Delaware on December 28, 1993.
3.01(d) Certificate of Designations, Preferences and Rights of Series A
8% Cumulative Preferred Stock, as filed with the Secretary of
State of the State of Delaware on December 28, 1993.
3.01(e) Certificate of Amendment of Certificate of Incorporation of the
Company, as filed with the Secretary of State of the State of
Delaware on June 7, 1994.
3.01(f) Certificate of Amendment of Certificate of Incorporation of the
Company, as filed with the Secretary of State of the State of
Delaware on July 28, 1995.
3.02 By-laws of the Company, as amended to date.
4.01(a) Healthcare Receivables Purchase and Transfer Agreement dated
December 23, 1996 among the Company and each of the providers
named in the Agreement and CCA Funding, LLC. (Incorporated by
reference to Exhibit 4.1 to the Company's Current Report on Form
8-K, date of earliest reported event: December 23, 1996.)
4.01(b) Loan and Security Agreement dated December 23, 1996 between CCA
Funding, LLC and Daiwa Healthco-2, LLC. (Incorporated by
reference to Exhibit 4.2 to the Company's Current Report on Form
8-K, date of earliest reported event: December 23, 1996.)
4.01(c) Assignment of Healthcare Receivables Purchase and Transfer
Agreement as Collateral Security. (Incorporated by reference to
Exhibit 4.3 to the Company's Current Report on Form 8-K, date of
earliest reported event: December 23, 1996.)
*4.01(d) Waiver and Amendment dated April 14, 1997 between CCA Funding,
LLC and Daiwa Healthco-2, LLC.
*4.01(e) Warrant Acquisition Agreement dated April 14, 1997 between CCA,
Inc. and Daiwa Healthco-2, LLC.
4.02 Promissory Note dated December 30, 1993 in the principal amount
of $7,000,000 made by ECA payable to HRPT, with Allonge and
Amendment dated April 1, 1995.
4.03(a) Promissory Note dated December 30, 1993 in the principal amount
of $13,600,000 made by ECA payable to HRPT, with Allonge and
Amendment dated April 1, 1995.
4.03(b) Allonge and Amendment dated as of May 10, 1996 to Promissory Note
dated December 30, 1993 in the principal amount of $13,600,000
made by ECA Holdings, Inc. ("ECA") payable to HRPT. (Incorporated
by reference to Exhibit 4.1 to the Company's Current Report on
Form 8-K, date of earliest reported event: May 16, 1996, File No.
0-26502.)
27
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- - ------------- -----------------------------------------------------------------
4.04(a) Promissory Note dated December 30, 1993 in the principal amount
of $6,000,000 made by Community Care of Nebraska Inc. ("CCN")
payable to HRPT, with Allonge and Amendment dated April 1, 1995.
4.04(b) Allonge and Amendment dated as of May 10, 1996 to Promissory Note
dated December 30, 1993 in the principal amount of $6,000,000
made by CCN payable to HRPT. (Incorporated by reference to
Exhibit 4.2 to the Company's Current Report on Form 8-K, date of
earliest reported event: May 16, 1996, File No. 0-26502.)
4.05 Promissory Note dated April 1, 1995 in the principal amount of
$3,800,000 made by the Company payable to HRPT.
4.06(a) Promissory Note dated April 1, 1995 in the principal amount of
$2,045,000 made by CCN and certain of its subsidiaries payable to
HRPT.
4.06(b) Allonge and Amendment to Promissory Note dated as of May 10, 1996
to Promissory Note dated April 1, 1995 in the principal amount of
$2,045,000, made by CCN and certain of its subsidiaries payable
to HRPT. (Incorporated by reference to Exhibit 4.3 to the
Company's Current Report on Form 8-K, date of earliest reported
event: May 16, 1996, File No. 0-26502.)
4.07(a) Renovation Funding Agreement dated April 1, 1995 between ECA and
HRPT.
4.07(b) ECA Holdings Renovation Funding Promissory Note dated April 1,
1995 in the principal amount of $6,466,700 made by ECA payable to
HRPT.
4.07(c) Allonge and Amendment to Promissory Note dated as of May 10, 1996
to ECA Holdings Renovation Funding Promissory Note dated April 1,
1995 in the principal amount of $6,466,700 made by ECA payable to
HRPT. (Incorporated by reference to Exhibit 4.4 to the Company's
Current Report on Form 8-K, date of earliest reported event: May
16, 1996, File No. 0-26502.)
4.08(a) Renovation Funding Agreement dated April 1, 1995 between CCN and
HRPT.
4.08(b) CCN Group Renovation Funding Promissory Note dated April 1, 1995
in the principal amount of $2,833,300 made by CCN and its
subsidiaries payable to HRPT.
4.08(c) Allonge and Amendment to Promissory Note dated as of May 10, 1996
to CCN Group Renovation Funding Promissory Note dated April 1,
1995 in the principal amount of $2,833,300 made by CCN and its
subsidiaries payable to HRPT. (Incorporated by reference to
Exhibit 4.5 to the Company's Current Report on Form 8-K, date of
earliest reported event: May 16, 1996, File No. 0-26502.)
4.09(a) Amended and Restated Revolving Credit Agreement dated as of
December 27, 1996 between the Company and Integrated Health
Services, Inc ("IHS"). (Incorporated by reference to Exhibit 4.4
to the Company's Current Report on Form 8-K, date of earliest
reported event: December 23, 1996.)
4.09(b) Subordinated Note dated December 27, 1996 from the Company to IHS
in the principal sum of $5,000,000. (Incorporated by reference to
Exhibit 4.5 to the Company's Current Report on Form 8-K, date of
earliest reported event: December 23, 1996.)
10.01 Stockholders Agreement dated June 30, 1993 among Robert N.
Elkins, Robert N. Elkins, as voting trustee, Equity-Linked
Investors, L.P. ("ELI-I"), Equity-Linked Investors, L.P.-II
("ELI-II") and the Company.
10.02 Voting Agreement dated January 26, 1996 among Robert N. Elkins
and certain stockholders of the Company.
10.03(c)+ Restated Employment Agreement between the Company and William J.
Krystopowicz.
28
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- - ------------- -----------------------------------------------------------------
10.03(d)+ Employment Agreement between the Company and David H. Fater.
(Incorporated by reference to Exhibit 10.03(d) to the Company's
Annual Report on Form 10-K for the year ended December 31, 1995,
File No. 0-26502.)
10.03(e)+ Employment Agreement between the Company and Deborah Lau.
(Incorporated by reference to Exhibit 10.03(e) to the Company's
Annual Report on Form 10-K for the year ended December 31, 1995,
File No. 0-26502.)
*10.03(f)(i)+ Employment Agreement dated April 19, 1996 between the Company and
Gary W. Singleton.
*10.03(f)(ii)+ Severance Agreement dated April 4, 1997 between the Company and
Gary W. Singleton.
10.04(a)+ 1993 Stock Option Plan, as amended to date.
10.04(b)+ 1993 Senior Executive Stock Option Plan, as amended to date.
10.04(c)+ 1995 Stock Option Plan, as amended to date.
10.04(d)+ 1995 Non-Employee Director Stock Option Plan, as amended to date.
10.05(a) Master Lease Document, General Terms and Conditions dated
December 30, 1993 between Health and Rehabilitation Properties
Trust (currently known as Health and Retirement Properties Trust,
"HRPT"), as landlord, and ECA Holdings, Inc., a wholly-owned
subsidiary of the Company ("ECA"), as tenant, as amended by a
First Amendment dated July 22, 1994, a Second Amendment dated
November 1, 1994 and a Third Amendment dated April 1, 1995.
10.05(b) Fourth Amendment dated as of May 10, 1996 to Master Lease
Document, General Terms and Conditions dated December 30, 1993
between HRPT and ECA. (Incorporated by reference to Exhibit 99.1
to the Company's Current Report on Form 8-K, date of earliest
reported event: May 16, 1996, File No. 0-26502.)
10.06(a) Master Lease Document, General Terms and Conditions dated April
1, 1995 between HRPT, as landlord, and ECA, as tenant.
10.06(b) First Amendment dated as of May 10, 1996 to Master Lease
Document, General Terms and Conditions dated April 1, 1995
between HRPT and ECA. (Incorporated by reference to Exhibit 99.2
to the Company's Current Report on Form 8-K, date of earliest
reported event: May 16, 1996, File No. 0-26502.)
10.7(a) Purchase Agreement dated September 15, 1994 among the Company,
Leonard Louis Healthcare Properties, Prospect Lake Healthcare
Center, Inc. and Valley View Healthcare Center, Inc.
10.7(b) Amendment to Purchase Agreement dated October 31, 1994 among the
Company, Leonard Louis Healthcare Properties, Leonard Louis
Healthcare Properties I, Leonard Louis Healthcare Properties II,
Prospect Lake Healthcare Center, Inc. and Valley View Healthcare
Center, Inc.
10.08(a) Stock Purchase Agreement dated November 16, 1994 among the
Company and Quality Health Care, Inc. and Timothy J. Juilfs,
Sally M. Juilfs and Brighton Place West, Inc., Quality Care of
Topeka, Inc., W.R.T. Care, Inc., Care Centers, Inc., Quality Care
of Council Bluffs North, Inc., Quality Care of Council Bluffs
South, Inc., Oak Grove Medical Center, Inc., Quality Care of
Pacific Junction, Inc., Quality Care of Glenwood, Inc. and
W.T.F.D.R. Care, Inc.
10.08(b) Stock Purchase Agreement dated November 16, 1994 among the
Company and Quality Health Care, Inc., and Timothy J. Juilfs,
Sally M. Juilfs and W.S.T. Care, Inc., Quality Care of Lyons,
Inc., Quality Care of Columbus, Inc. and Quality Care of Grand
Island, Inc.
10.09 Asset Purchase Agreement dated February 1, 1995 among the
Company, Georgiana Doctors Hospital, Inc., Reliable Home Health
Services, Inc., Herbert Kinsey, M.D. and Mary Kinsey.
29
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- - ------------- -----------------------------------------------------------------
10.10 Stock Purchase Agreement dated as of November 1, 1995 among
Community Care of America, Inc., CCA of Maine, Inc., Maine Head
Trauma Center, Inc., and the shareholders of Maine Head Trauma
Center, Inc. (Incorporated by reference to Exhibit 2.1 to the
Company's Current Report on Form 8-K, date of earliest event
reported: November 3, 1995, File No. 0-26502).
10.11(a) Implementation Contract dated January 19, 1994 between the
Company and Health Care Consulting, Inc.
10.11(b) Agreement dated August 17, 1994 between the Company and Health
Care Consulting, Inc.
10.12 Mortgage Facilities Fee Agreement (ECA) dated April 1, 1995
between the Company and HRPT.
10.13 Mortgage Facilities Fee Agreement (CCN) dated April 1, 1995
between the Company and HRPT.
10.14 Right of First Refusal and Option Agreement dated December 30,
1993 between ECA and HRPT with respect to certain of the
Company's facilities in Colorado.
10.15 Right of First Refusal Agreement dated December 30, 1993 between
CCN and HRPT with respect to certain of the Company's facilities
in Nebraska.
10.16 Right of First Refusal Agreements dated April 1, 1995 between
W.S.T. Care, Inc., Quality Care of Lyons, Inc. and Quality Care
of Columbus, Inc., respectively, and HRPT with respect to certain
of the Company's facilities in Nebraska.
10.17 Amended and Restated Option Agreement dated April 1, 1995 between
ECA and HRPT with respect to the capital stock of CCN.
10.18(a) Lease dated June 21, 1995 between Midwest Health Enterprises of
Bessemer, Inc. ("Bessemer") and Community Care of America of
Alabama, Inc. ("CCAA").
10.18(b) Lease Guaranty dated June 21, 1995 by the Company for the benefit
of Bessemer.
10.18(c) Subordination, Non-Disturbance, Attornment and Security Agreement
among Bessemer, CCAA and Bankers Trust Company of California,
N.A. ("BT").
10.19(a) Lease dated June 21, 1995 between South Gate Village, Inc.
("'South Gate") and CCAA.
10.19(b) Lease Guaranty dated June 21, 1995 by the Company for the benefit
of South Gate.
10.20(a) Lease dated June 21, 1995 between Greensboro Health Care, Inc.
("Greensboro") and CCAA.
10.20(b) Lease Guaranty dated June 21, 1995 by the Company for the benefit
of Greensboro.
10.20(c) Subordination, Non-Disturbance, Attornment and Security Agreement
among Greensboro, CCAA and BT.
10.21 Non-Competition and Secrecy Agreement dated June 21, 1995 among
the Company, CCAA and Stanley L. Stein.
10.22(a) Form of nine Management Agreements dated June 23, 1995 pursuant
to which the Company is to mangemen nine long-term care
facilities in Maine, together with a schedule pursuant to
Instruction 2 to Item 601(a) of Regulation S-K setting forth
material details that differ from the attached form of Managment
Agreement.
10.22(b) Management Agreement dated June 23, 1995 among Nursing
Administrators, Inc., David L. Friedmman, Mary Bayer, Leon
Bresloff and CCA of Maine, Inc.
10.22(c) Purchase Option Agreement dated June 23, 1995 relating to the ten
long-term facilities in Maine to be managed by the Company.
10.22(d) Services Agreement dated June 23, 1995 between CCA of Maine, Inc.
and Sandy River Development, Inc.
10.22(e) Letter Agreement dated June 23, 1995 from the Company to David I
Friedman regarding the Purchase Option Agreement dated June 23,
1995 relating to the ten long-term care facilities in Maine to be
managed by the Company.
10.22(f) Agreement dated June 23, 1995 between the Company and Harbor Hill
Limited Liability Company.
10.23(a) Letter of Intent dated July 12, 1995 between the Company and Jeff
Voreis, M.D.
10.23(b) Employment Agreement dated July 11, 1995 between Jeff Voreis,
M.D. and the Company.
10.23(c) Amended and Restated Employment Agreement dated August 4, 1995
between the Company and Jeff Voreis, M.D.
10.23(d) Asset Purchase Agreement dated August 4, 1995 between Jeff
Voreis, M.D. and Community Care of America of Alabama, Inc.
30
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- - ------------- -----------------------------------------------------------------
10.25 Master Lease Document, General Terms and Conditions dated as of
May 10, 1996 between HRPT and Marietta/SCC, Inc., Glenwood/SCC,
Inc., Dublin/SCC, Inc., Macon/SCC, Inc., and College Park/SCC,
Inc. (Incorporated by reference to Exhibit 99.3 to the Company's
Current Report on Form 8-K, date of earliest reported event: May
16, 1996, File No. 0-26502.)
*10.26 Waiver Agreement dated April 14, 1997 between CCA, Inc. and its
Subsidiaries and HRPT.
10.27(a) Warrant Acquisition Agreement dated as of January 13, 1997,
between the Company and IHS, including Form of Series A Warrants,
Form of Series B Warrants and Registration Rights Agreement.
(Incorporated by reference to Exhibit 4.6 to the Company's
Current Report on Form 8-K, date of earliest reported event:
December 23, 1996.)
*10.27(b) Warrant Acquisition Agreement dated April 14, 1997 between CCA,
Inc. and IHS, Inc.
10.28(a) Management Agreement dated as of December 27, 1996 between the
Company and IHS (Incorporated by reference to Exhibit 99.0 to the
Company's Current Report on Form 8-K, date of earliest reported
event: December 23, 1996).
*10.28(b) Amendment No. 1 to Management Agreement dated April 14, 1997
between CCA, Inc. and IHS, Inc.
*11.01 Calculation of Earnings per Share.
*21.01 Subsidiaries of the Company.
*23.01 Consent of KPMG Peat Marwick LLP
UNDERTAKING
The Company hereby undertakes to furnish to the Securities and Exchange
Commission, upon request, all constituent instruments defining the rights of
holders of long-term debt of the Company and its consolidated subsidiaries not
filed herewith. Such instruments have not been filed since none are, nor are
being, registered under Section 12 of the Securities Exchange Act of 1934 and
the total amount of securities authorized under any such instruments does not
exceed 10% of the total assets of the Company and its subsidiaries on a
consolidated basis.
- - ----------
* Filed herewith. All other exhibits, unless otherwise noted by parenthetical
cross references, are incorporated by reference to the corresponding
numbered exhibit to Company's Registration Statement on Form S-1,
Registration No. 33-92692.
+ Management contract or compensatory plan.
31
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned thereunto duly authorized on the 14th day of
April, 1997.
COMMUNITY CARE OF AMERICA, INC.
By: /s/ DEBORAH A. LAU
---------------------------------------------
Deborah A. Lau
President
Chief Executive Officer & Chief Financial Officer
Pursuant to the requirements of 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 dates indicated.
SIGNATURE TITLE DATE
- - ------------------------- ------------------------------------ ----------------
/s/ DEBORAH A. LAU President, Chief Executive Officer
- - ------------------------- and Chief Financial Officer April 14, 1997
Deborah A. Lau
/s/ MICHAEL S. BLASS Director April 14, 1997
- - -------------------------
Michael S. Blass
/s/ ROBERT N. ELKINS Director April 14, 1997
- - -------------------------
Robert N. Elkins
- - ------------------------- Director
John L. Silverman
32
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Community Care of America, Inc.:
We have audited the accompanying consolidated balance sheets of Community
Care of America, Inc. and subsidiaries (the Company) as listed in the
accompanying index. We also have audited the financial statement schedule listed
in the accompanying index. These consolidated financial statements and the
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Community
Care of America, Inc. and subsidiaries as of December 31, 1995 and 1996 and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996 in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
As discussed in notes 1 (m) and 12 to the consolidated financial statements,
in 1996 the Company adopted the provisions of the Financial Accounting Standards
Board's Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
KPMG PEAT MARWICK LLP
Baltimore, Maryland
April 14, 1997
F-1
<PAGE>
COMMUNITY CARE OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1996
--------- -----------
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents............................................... $ 2,485 $ 1,709
Accounts receivable (note 3)............................................ 12,934 16,407
Inventories............................................................. 1,534 1,761
Prepaid expenses and other current assets............................... 3,662 1,095
--------- -----------
Total current assets................................................... 20,615 20,972
Property, plant and equipment, net of accumulated depreciation (notes 4
and 6).................................................................. 54,327 58,424
Notes receivable (note 16)............................................... 2,533 --
Deposits................................................................. 10,244 6,637
Excess of cost over fair value of net assets acquired, net of
accumulated amortization of $139 in 1995 and $710 in 1996 (note 2)...... 3,299 13,666
Deferred financing costs................................................. 948 1,066
Other assets............................................................. 1,324 1,354
--------- -----------
$93,290 $102,119
========= ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt (note 6)........................... $ 1,258 $ 6,341
Accounts payable and accrued expenses (note 5).......................... 14,869 23,402
Put option contracts payable (219,798 shares)(note 16).................. -- 2,181
--------- -----------
Total current liabilities.............................................. 16,127 31,924
--------- -----------
Long-term debt, less current maturities (note 6)......................... 34,407 54,030
Deferred income taxes (note 8)........................................... 9,334 162
Commitments and contingencies (notes 2, 7, 12, 13 and 16)................
Common stock subject to repurchase (219,798 shares) (notes 2 and 16) .... 2,181 --
Shareholders' equity (notes 10 and 15):
Common stock, $.0025 par value; authorized 15,000,000 shares; issued and
outstanding 6,982,789 shares in 1995 and 7,597,801 shares in 1996
(including 219,798 shares subject to repurchase)....................... 17 19
Additional paid-in capital.............................................. 31,356 36,465
Deficit................................................................. (132) (19,037)
Receivable from shareholders (note 2)................................... -- (1,444)
--------- -----------
Net shareholders' equity............................................... 31,241 16,003
--------- -----------
$93,290 $102,119
========= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
COMMUNITY CARE OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1994 1995 1996
----------- ----------- ------------
<S> <C> <C> <C>
Operating revenues:
Net patient service revenues........................... $ 56,699 $ 92,259 $ 123,143
Other operating revenues............................... 793 1,919 4,369
----------- ----------- ------------
Total operating revenues.............................. 57,492 94,178 127,512
----------- ----------- ------------
Operating expenses:
Facility operating expenses............................ 46,035 73,693 111,171
Corporate administrative and general................... 2,935 4,765 5,226
Rent (note 7).......................................... 3,806 6,404 8,999
Depreciation and amortization.......................... 1,465 2,033 3,021
Interest, net of interest income (note 6).............. 2,857 3,795 5,337
Loss on impairment of investments and other
non-recurring charges (note 12)....................... -- -- 22,128
----------- ----------- ------------
Total operating expenses.............................. 57,098 90,690 155,882
----------- ----------- ------------
Earnings (loss) before income taxes and extraordinary
charge............................................... 394 3,488 (28,370)
Federal and state income taxes (note 8)................. -- 1,047 (9,465)
----------- ----------- ------------
Earnings (loss) before extraordinary charge........... 394 2,441 (18,905)
Extraordinary charge, net of income taxes (note 15) .... -- (992) --
----------- ----------- ------------
Net earnings (loss)................................... 394 1,449 (18,905)
Dividends-preferred stock............................... (653) (408) --
----------- ----------- ------------
Net earnings (loss) applicable to common stock........ $ (259) $ 1,041 $ (18,905)
=========== =========== ============
Per common share:
Earnings (loss) before extraordinary charge............ $ (0.13) $ 0.42 $ (2.56)
Extraordinary charge................................... -- (0.20) --
----------- ----------- ------------
Net earnings (loss).................................... $ (0.13) $ 0.22 $ (2.56)
=========== =========== ============
Weighted average number of common and common equivalent
shares outstanding..................................... 2,041,154 4,840,457 7,384,697
=========== =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
COMMUNITY CARE OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL RECEIVABLE
COMMON PAID IN ACCUMULATED FROM
STOCK CAPITAL (DEFICIT) SHAREHOLDERS TOTAL
-------- ------------ ------------- -------------- -----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993............................. $ 4 $ 5,251 $ (914) $ -- $ 4,341
Issuance of 216,428 shares of common stock at $6.19 per
share, net of stock issuance costs....................... 1 1,034 -- -- 1,035
Accretion of discount on redeemable preferred stock
(note 9)................................................. -- (372) -- -- (372)
Dividends declared -- redeemable preferred stock ........ -- -- (653) -- (653)
Net earnings............................................. -- -- 394 -- 394
-------- ------------ ------------- -------------- -----------
Balance at December 31, 1994............................. 5 5,913 (1,173) -- 4,745
Issuance of 3,450,000 shares of common stock at $9.50
per share, net of stock issuance costs (note 13) ........ 9 27,580 -- -- 27,589
Redemption of preferred stock of $8,167 and exercise of
warrants for 1,331,814 shares of common stock at par
value.................................................... 3 (2,006) -- -- (2,003)
Amortization of restricted stock awards.................. -- 100 -- -- 100
Accretion of discount on redeemable preferred stock
(note 9)................................................. -- (231) -- -- (231)
Dividends declared -- redeemable preferred stock ........ -- -- (408) -- (408)
Net earnings............................................. -- -- 1,449 -- 1,449
-------- ------------ ------------- -------------- -----------
Balance at December 31, 1995............................. 17 31,356 (132) -- 31,241
Exercise of employee stock options for 33,385 shares of
common stock at prices ranging from $3.71 to $10.11 per
share.................................................... -- 160 -- -- 160
Issuance of 581,627 shares of common stock in connection
with acquisitions at prices ranging from $8.44 to $11.77
per share (note 2)....................................... 2 4,949 -- (1,444) 3,507
Net loss................................................. -- -- (18,905) -- (18,905)
-------- ------------ ------------- -------------- -----------
Balance at December 31, 1996............................. $ 19 $36,465 $(19,037) $(1,444) $ 16,003
======== ============ ============= ============== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
COMMUNITY CARE OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1994 1995 1996
---------- ---------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss).......................................... $ 394 $ 1,449 $(18,905)
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities:
Loss on impairment of investments and other non-recurring
charges.................................................... -- -- 22,128
Depreciation and amortization............................... 1,465 2,033 3,021
Amortization of deferred financing costs.................... 68 123 399
Extraordinary charge, net of tax............................ -- 992 --
Amortization of restricted stock award...................... -- 100 --
Deferred income taxes....................................... -- 541 (9,465)
Net change in operating assets and liabilities:
Increase in accounts receivables........................... (4,479) (4,609) (3,615)
Decrease (increase) in inventory, prepaid expenses and
other current assets...................................... (89) (1,787) 2,999
Increase (decrease) in accounts payable and accrued
liabilities............................................... (4,154) 4,179 993
---------- ---------- ------------
Net cash provided by (used in) operating activities........ (6,795) 3,021 (2,445)
---------- ---------- ------------
Cash flows from investing activities:
Property, plant and equipment additions, including costs of
terminated activities of $9,258 in 1996 .................... (2,472) (6,647) (12,117)
Business acquisitions (note 2)............................... (78) (10,719) (6,132)
Notes receivable............................................. -- (2,533) (233)
Deposits..................................................... 2,000 (3,194) (519)
Other assets................................................. (443) (877) 798
---------- ---------- ------------
Net cash used in investing activities...................... (993) (23,970) (18,203)
---------- ---------- ------------
Cash flows from financing activities:
Proceeds from issuances of common stock, net of stock
issuance costs.............................................. 402 27,589 160
Redemption of preferred stock and warrants (notes 9 and 15).. -- (8,142) --
Dividends on preferred stock................................. (490) (571) --
Principal reductions on long-term debt....................... (24,233) (60,404) (19,782)
Proceeds from long-term debt borrowings...................... 30,719 61,733 41,931
Deferred financing costs, including terminated offerings of
$1,677 in 1996.............................................. (1,179) (696) (2,437)
---------- ---------- ------------
Net cash provided by financing activities.................. 5,219 19,509 19,872
---------- ---------- ------------
Decrease in cash.............................................. (2,569) (1,440) (776)
Cash and cash equivalents, beginning of period................ 6,494 3,925 2,485
---------- ---------- ------------
Cash and cash equivalents, end of period...................... $ 3,925 $ 2,485 $ 1,709
========== ========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
COMMUNITY CARE OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Organization and Basis of Presentation
Community Care of America, Inc. (CCA) is a Delaware corporation originally
incorporated on December 28, 1992. CCA began incurring start-up expenses in 1993
but had no significant operations until its acquisition of all the capital stock
of MeritWest, Inc. ("MeritWest") on December 30, 1993. For accounting purposes,
this acquisition has been treated as effective as of December 31, 1993 and,
accordingly, the results of operations of this acquired company are included in
CCA's consolidated financial statements beginning on January 1, 1994.
The consolidated financial statements include the accounts of CCA and its
wholly-owned subsidiaries (collectively the Company). In consolidation, all
significant intercompany balances and transactions have been eliminated. At
December 31, 1996, CCA owned, leased or managed 54 long-term care facilities,
one hospital, two physician practices, two primary care clinics, one rural
healthcare clinic, one outpatient rehabilitation center, one child care center,
one home healthcare agency and an aggregate of 115 assisted living units in six
communities the Company serves.
(b) Patient Service Revenues
Patient service revenues are recorded at established rates and adjusted for
differences between such rates and estimated amounts reimbursable by third-party
payors. Estimated settlements under third-party payor retrospective rate setting
programs (primarily Medicare and Medicaid) are accrued in the period the related
services are rendered. Settlements receivable and related revenues under such
programs are based on annual cost reports prepared in accordance with Federal
and state regulations, which reports are subject to audit and retroactive
adjustment in future periods. In the opinion of management, adequate provision
has been made in the consolidated financial statements for such adjustments;
however, the ultimate amount of adjustments could be in excess of amounts
provided.
(c) Management Fee Revenues
Management fee revenues are recognized when earned and collectibility is
reasonably assured.
(d) Cash and Cash Equivalents
Cash equivalents consist of highly liquid debt instruments with original
maturities of three months or less.
(e) Property, Plant and Equipment
The Company capitalizes costs associated with acquiring health care
facilities and related interests therein. Pre-acquisition costs represent direct
costs of the investigation and negotiation of the acquisition of operating
facilities; indirect and general expenses related to such activities are
expensed as incurred. Pre-acquisition costs and construction in progress are
transferred to depreciable asset categories when the related tasks are achieved
or are charged to operating expenses when it is determined that the related
acquisition will not be consummated. Interest costs incurred during construction
and renovation are capitalized.
The Company capitalizes development costs which represent the direct and
incremental costs of developing healthcare delivery networks using the Company's
long-term care facilities or rural hospitals as platforms for providing an
expanded range of services (i.e. primary care clinics, rehabilitation, home
health, etc.). Development costs include consulting fees, salaries and related
costs of development personnel and other direct costs of performing functions
such as market research and feasibility, promotion and marketing, recruitment of
physicians and other service providers, training and related costs during the
period the new facility or service attains complete operational status.
F-6
<PAGE>
COMMUNITY CARE OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Total costs of facilities acquired are allocated to land, land improvements,
equipment and buildings (or leasehold interests therein) based on their
respective fair values determined generally by independent appraisal.
(f) Depreciation and Amortization
Depreciation and amortization are provided on the straight-line basis over
the estimated useful lives of the assets, generally 40 years for buildings, 25
years for land improvements, 10 years for equipment, 5 years for development
costs and the initial term and expected renewal terms of the leases for costs of
leasehold interests and improvements.
(g) Deferred Financing Costs
The Company defers financing costs incurred to obtain long-term debt and
amortizes such costs using the interest method over the term of the related
debt.
(h) Excess of Cost Over Fair Value of Net Assets Acquired
The assets and liabilities of acquired entities accounted for under the
purchase method of accounting are adjusted to their estimated fair values as of
the acquisition dates. The amounts recorded as excess of cost over fair value of
net assets acquired represent amounts paid that exceed estimated fair values
assigned to the assets and liabilities of each acquired business. Such amounts
are being amortized on a straight-line basis over periods ranging from 10 to 40
years, depending on the specific circumstances of each acquisition.
(i) Income Taxes
Deferred income taxes are recognized for the tax consequences of temporary
differences between financial statement carrying amounts and the related tax
bases of assets and liabilities, primarily related to business acquisitions.
Such tax effects are measured by applying enacted statutory tax rates applicable
to future years in which the differences are expected to reverse, and the effect
of a change in tax rates is recognized in the period that includes the date of
enactment.
(j) Earnings per Common Share
Earnings per share is computed based on the weighted average number of common
and common equivalent shares outstanding during the periods. Common stock
equivalents include options and warrants to purchase common stock, assumed to be
exercised using the treasury stock method. Options and warrants issued from May
1994 through August 15, 1995 have been treated as outstanding for all periods
presented. Dividends related to the Company's 8% redeemable preferred stock,
Series A, of $653 in 1994 and $408 in 1995, are deducted from net earnings for
the purpose of calculating earnings per share. On August 15, 1995, the preferred
stock was redeemed with the proceeds of the initial public offering of the
Company's common stock and related warrants were exercised (see note 9). Had the
redemption of preferred stock and related issuance of common stock occurred on
January 1, 1995, earnings per common share for the year ended December 31, 1995
would be as follows:
Earnings before extraordinary charge................. $.45
Net earnings......................................... .26
F-7
<PAGE>
COMMUNITY CARE OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
(k) Accounting for Stock Options
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB No. 25"), in accounting for its stock
options. Additional information required by Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"),
is discussed in Note 10.
(l) Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
(m) Impairment of Long-Lived Assets
Management regularly evaluates whether events or changes in circumstances
have occurred that could indicate an impairment in the value of long-lived
assets. During the second quarter of 1996, the Company adopted SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." In accordance with the provisions of SFAS No. 121, if there is
an indication that the carrying amount of an asset is not recoverable, the
Company estimates the projected undiscounted cash flows, excluding interest, of
the related individual facilities to determine if an impairment loss should be
recognized. The amount of impairment loss is determined by comparing the
carrying value of the asset to its estimated fair value. Estimated fair value is
determined through an evaluation of recent financial performance and projected
discounted cash flows of its facilities using standard industry valuation
techniques, including the use of independent appraisals when considered
necessary. If an asset tested for recoverability was acquired in a business
combination accounted for using the purchase method, the related goodwill is
included as part of the carrying value and evaluated as described above in
determining the recoverability of that asset.
In addition to consideration of impairment upon the events or changes in
circumstances described above, management regularly evaluates the remaining
lives of its long-lived assets. If estimates are changed, the carrying value of
affected assets is allocated over the remaining lives.
Prior to adoption of SFAS No. 121 in 1996, the Company performed its analyses
of impairment of long-lived assets by consideration of the projected
undiscounted cash flows on an entity-wide basis. The effect of the adoption of
SFAS 121 in the second quarter of 1996 required the Company to perform this
analysis on a facility-by-facility basis (see note 12).
(2) BUSINESS ACQUISITIONS
The following is a summary of significant business acquisitions by year. Such
acquisitions have been accounted for by the purchase method and, accordingly,
the results of operations have been included in the Company's consolidated
financial statements from the respective dates of acquisition.
1994 ACQUISITIONS
In November 1994, the Company acquired leasehold interests in two long-term
care facilities located in Colorado and Wyoming (Tealwood) for a total cost of
approximately $400, including legal fees and other direct costs of the
acquisition of $78 and accrued liabilities of $322.
F-8
<PAGE>
COMMUNITY CARE OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)
(2) BUSINESS ACQUISITIONS -- (CONTINUED)
1995 ACQUISITIONS
Effective as of February 1, 1995, the Company acquired all the assets of the
Georgiana Doctor's Hospital, two primary care clinics and a home healthcare
agency (Georgiana) located in Alabama. The Company issued a 9% promissory note
for $1,250 to the seller at closing (see note 6).
Effective April 1, 1995, the Company acquired all of the capital stock of
three subsidiaries of Quality Health Care, Inc. (Quality), which owned and
operated three long-term care facilities located in Nebraska. In connection with
the transaction, Quality sold 11 facilities to Health and Retirement Properties
Trust (HRPT) for $14,200. The Company borrowed $5,845 from HRPT and leased the
latter facilities from HRPT as discussed more fully in notes 6 and 7.
Effective July 1, 1995, the Company obtained operating leases with
wholly-owned subsidiaries of American Health Corporation (American) for three
long-term care facilities in Alabama. The agreements provide for an initial term
of twelve years, with one five-year renewal option, annual minimum rental of
$1,200 and rights of first refusal with respect to the sale of the facilities.
Effective August 1, 1995, the Company purchased all the assets of a physician
practice, including a primary care clinic (Voreis), located in Alabama, and on
October 1, 1995, the Company acquired substantially all of the assets of a
39-bed long-term care facility in Palmer, Nebraska (Coolidge Center).
Effective November 1, 1995, the Company acquired all of the capital stock of
an outpatient rehabilitation head trauma clinic in Maine (MHTU). As partial
consideration in this transaction, the Company issued 25,061 shares of common
stock to the seller. These shares are subject to repurchase under the terms of a
settlement agreement dated October 27, 1996 as amended on March 1, 1997, at a
price equal to the greater of the average closing price of the stock for the 15
days prior to the date of repurchase or $13.21 per share (see note 13). In
addition, the Company may be required to make additional payments to the Seller
up to $200 if operating results for the five year period beginning January 1,
1996 exceed base year amounts.
Acquisitions in 1995 and the manner of payment are summarized as follows:
<TABLE>
<CAPTION>
CASH PAID
COOLIDGE FOR ACCRUED
DESCRIPTION GEORGIANA QUALITY AMERICAN VOREIS CENTER MHTU COSTS TOTAL
- - -------------------- ----------- --------- ---------- -------- ---------- ------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Seller financing ... $1,250 -- -- -- -- -- -- $ 1,250
Common stock
issued(1)........... -- -- -- -- -- 331 -- 331
Accrued
liabilities......... 540 1,000 50 -- 100 280 (1,970) --
Cash paid........... 372 5,864 500 925 450 638 1,970 10,719
----------- --------- ---------- -------- ---------- ------- ------------ ---------
Total cost.......... $2,162 6,864 550 925 550 1,249 -- $12,300
=========== ========= ========== ======== ========== ======= ============ =========
</TABLE>
- - ----------
(1) Represents 25,061 shares of common stock.
F-9
<PAGE>
COMMUNITY CARE OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)
(2) BUSINESS ACQUISITIONS -- (CONTINUED)
The allocation of the total cost of the 1995 acquisitions to the assets
acquired and liabilities assumed is summarized as follows:
<TABLE>
<CAPTION>
COOLIDGE
DESCRIPTION GEORGIANA QUALITY AMERICAN VOREIS CENTER MHTU TOTAL
- - -------------------------------- ----------- --------- ---------- -------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Current assets ................. $ 618 1,512 -- 140 -- 129 $ 2,399
Property, plant and equipment .. 2,040 4,818 -- 385 550 -- 7,793
Other assets ................... -- 1,241 400 -- -- -- 1,641
Intangible assets (10, 20 and 20
years) ......................... -- -- 150 400 -- 1,142 1,692
Current liabilities ............ (496) (525) -- -- -- (22) (1,043)
Long-term liabilities .......... -- (182) -- -- -- -- (182)
-------- -------- -------- -------- -------- -------- --------
Total cost ..................... $ 2,162 6,864 550 925 550 1,249 $ 12,300
======== ======== ======== ======== ======== ======== ========
</TABLE>
1996 ACQUISITIONS
Effective January 1, 1996, the Company purchased certain assets of the Family
Care Medical Center of Arcadia, Inc. (Arcadia), a certified rural healthcare
clinic in Florida. Pursuant to the asset purchase agreement, the Company issued
a promissory note for $110 and 12,739 shares of common stock with a fair value
of $150 to the seller at closing. The promissory note was paid in full as of
December 31, 1996.
On May 16, 1996, Southern Care Centers, Inc. ("Southern Care") was merged
into CCA Acquisition I, Inc., ("Newco"), a newly formed wholly-owned subsidiary
of the Company. As a result of the merger, the subsidiaries of Southern Care
("Acquired Subsidiaries"), which leased five long-term care facilities in
Georgia and one long-term care facility in Louisiana, became indirect
wholly-owned subsidiaries of the Company. In addition, another wholly-owned
subsidiary of the Company became the manager, under a Management Agreement dated
as of May 1, 1996, of a long-term care facility in Texas owned by a former
subsidiary of Southern Care which was not acquired by the Company. Additionally,
Newco is providing accounting, internal auditing, billing, accounts payable and
certain other services under an Agreement to Provide Accounting and Auditing
Services and Rural Healthcare Provider Network Services dated as of May 1, 1996
to a company owned by the former shareholders of Southern Care which operates
another long-term care facility in Georgia.
Pursuant to the merger agreement, the shareholders of Southern Care (the
selling shareholders) received $2,700 of cash and 568,888 shares of common stock
of the Company with a fair value of $4,800. In addition, the selling
shareholders were entitled to receive, on or before March 31, 1997, up to $2,000
in common stock of the Company based on the amount that Newco's annualized
contribution margin on a consolidated basis for the year ended December 31, 1996
exceeds $4,400. As of December 31, 1996, no such events occurred. The Company
has agreed to file two shelf registration statements under the Securities Act of
1933, as amended, covering the shares issued and issuable in the merger and,
upon request of the holders, to "piggyback" such shares in certain registration
statements filed by the Company.
The merger agreement provides that the consideration to the selling
shareholders shall be reduced to the extent that current liabilities exceeded
current assets by more than $1,850 at the closing date. The Company has
determined that such condition existed at the closing date and has recorded a
receivable from the selling shareholders of $1,444 at December 31, 1996. Such
claim has been disputed by the selling shareholders. The Company believes the
claim is valid and fully collectible; accordingly, no valuation allowance has
been recorded with respect to this matter. Because the receivable arose in
connection with the issuance of the Company's common stock, the related balance
at December 31, 1996 is presented as a reduction of stockholder's equity.
F-10
<PAGE>
COMMUNITY CARE OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)
(2) BUSINESS ACQUISITIONS -- (CONTINUED)
In a series of related transactions, the subsidiaries of Southern Care
acquired the five leased Georgia facilities and, in turn, sold those facilities
to Health and Retirement Properties Trust ("HRPT"). HRPT thereupon leased the
five Georgia facilities back to the Acquired Subsidiaries for an initial term
ending on December 31, 2010 with two renewal options for six year and thirteen
year terms, each at the option of the Acquired Subsidiaries. After the first
lease year, rent is subject to increase based on year over year increases, if
any, in net patient revenues and non-inpatient revenues, each as defined in the
master lease agreement. The Louisiana facility continues to be leased under the
terms of the lease existing prior to the merger.
Acquisitions in 1996 and the manner of payment are summarized as follows:
CASH PAID FOR
DESCRIPTION ARCADIA SOUTHERN CARE ACCRUED COSTS TOTAL
- - --------------------------- --------- -------------- --------------- ---------
Seller financing .......... $ 110 -- -- $ 110
Common stock issued(1) .... 150 4,800 -- 4,950
Accrued liabilities........ -- 2,500 (3,409) (909)
Cash paid.................. 40 2,683 3,409 6,132
Receivable from
shareholders............... -- (1,444) -- (1,444)
-------------- --------------- ---------
Total cost................. $ 300 8,539 -- $ 8,839
========= ============== =============== =========
- - ----------
(1) Represents shares of common stock as follows: 12,379 shares for Arcadia and
568,888 shares for Southern Care Centers, Inc.
The allocation of the total cost of the 1996 acquisitions to the assets
acquired and liabilities assumed is summarized as follows:
DESCRIPTION ARCADIA SOUTHERN CARE TOTAL
- - ------------------------------------ --------- -------------- ----------
Current assets...................... $ 36 753 $ 789
Property, plant, and equipment ..... 60 5,400 5,460
Other assets........................ -- 1,741 1,741
Intangible assets (10 and 20.67
years).............................. 204 10,855 11,059
Current liabilities................. -- (4,784) (4,784)
Long-term liabilities............... -- (5,426) (5,426)
--------- -------------- ----------
Total cost.......................... $ 300 8,539 $ 8,839
========= ============== ==========
The following unaudited pro forma consolidated results of operations
information is presented as if the acquisition transactions described above had
occurred as of the beginning of the respective periods presented, after giving
effect to certain adjustments, including depreciation and amortization of the
new cost basis of the assets acquired, increased interest and rent expense and
related income tax effects.
YEARS ENDED DECEMBER 31,
------------------------
1995 1996
-------- -----------
Total operating revenues............................ $122,495 $133,506
Earnings (loss) before extraordinary charge ........ 3,821 (18,652)
Earnings (loss) applicable to common stock before
extraordinary charge................................ 2,901 (18,652)
Earnings (loss) per common share before
extraordinary charge................................ $ .53 $ (2.53)
======== ===========
F-11
<PAGE>
COMMUNITY CARE OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)
(3) ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
1995 1996
---------- ---------
Patient accounts receivable.................... $ 10,909 $15,832
Third-party payor settlements.................. 2,696 4,228
Other.......................................... 1,307 1,180
---------- ---------
14,912 21,240
Allowance for doubtful accounts and
contractual adjustments........................ 1,978 4,833
---------- ---------
$ 12,934 $16,407
========== =========
The Company generally does not require collateral or other security in
extending credit to patients; however, the Company routinely obtains assignments
of (or is otherwise entitled to receive) benefits receivable under the health
insurance programs, plans or policies of patients (e.g., Medicare, Medicaid,
commercial insurance and managed care organizations). The Company's patient
service revenues derived from the Medicare and Medicaid programs were 17% and
52%, respectively, for the year ended December 31, 1995, and 20% and 50%,
respectively, for the year ended December 31, 1996. Patient accounts receivable
from the Federal government (Medicare) were $1,777 and $3,421 at December 31,
1995 and 1996, respectively. Amounts receivable from various states (Medicaid)
were $4,883 and $6,302, respectively, at December 31, 1995 and 1996.
Third-party payor settlements receivable from the Federal government
(Medicare) were approximately $1,718 and $2,794 at December 31, 1995 and 1996,
respectively; the remainder relates primarily to net amounts receivable from the
states of Colorado and Nebraska (Medicaid). Certain of the Medicaid and Medicare
cost reports for prior years were settled during 1995 and 1996, the impact of
which was not material. At December 31, 1996, the Company had open cost reports
for the 1993, 1994 and 1995 years which, after related allowances, are recorded
at estimated net realizable value.
The allowance for doubtful accounts and contractual adjustments is determined
by management using estimates of potential losses and contractual settlements
based on an analysis of current and past due accounts, collection experience in
relation to amounts billed, prior settlement experience and other relevant
information. Although the Company believes amounts provided are adequate, the
ultimate uncollectible amounts could be in excess of the amounts provided. The
Company's provision for bad debts was $658 in 1995 and $1,867 in 1996.
(4) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are summarized as follows:
1995 1996
--------- ---------
Land.......................................... $ 5,983 $ 5,926
Land improvements............................. 612 613
Buildings and improvements.................... 32,214 39,911
Leasehold improvements and leasehold
interests..................................... 8,598 9,135
Equipment..................................... 7,269 7,880
Construction in progress...................... 987 255
Pre-acquisition and development costs ........ 1,867 425
--------- ---------
57,530 64,145
Less accumulated depreciation and
amortization.................................. 3,203 5,721
--------- ---------
Net property, plant and equipment............. $54,327 $58,424
========= =========
F-12
<PAGE>
COMMUNITY CARE OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)
(5) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
DECEMBER 31,
--------------------
1995 1996
--------- ----------
Accounts payable ........................... $ 8,860 $15,595
Accrued compensation ....................... 4,422 3,473
Other accrued expenses ..................... 1,587 4,334
------- -------
$14,869 $23,402
======= =======
(6) LONG-TERM DEBT
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
--------- ----------
<S> <C> <C>
Mortgage notes:
11.5% note payable in monthly principal and interest installments of
$138 commencing January 31, 1996 through June 30, 1996; interest only
payments of $130 commencing July 31, 1996 through June 30, 1998;
principal and interest payments of $138 commencing on July 31, 1998
and maturing on December 31, 2016..................................... $13,600 $13,551
9% note payable in monthly principal and interest installments of $50
commencing January 31, 1996 through June 30, 1996; interest payments
of $45 commencing July 31, 1996 through June 30, 1998; principal and
interest payments of $50 commencing on July 31, 1998 and maturing on
December 31, 2016...................................................... 6,000 5,967
10% note payable in monthly interest only payments through December 31,
1996; principal and interest payments of $19 commence January 31, 1997
through December 31, 2021 ............................................. 2,045 2,045
9% note payable in semi-annual installments through March 9, 1998, plus
interest payable quarterly ............................................ 1,125 750
--------- ----------
Total mortgage notes payable............................................ 22,770 22,313
Revolving line of credit with bank, due on December 31, 1996 ............ 8,410 --
Revolving line of credit with bank, due on December 27, 1999 ............ -- 14,495
Revolving line of credit with Integrated Health Services, Inc., due on
December 27, 1998 (see note 14)......................................... -- 2,000
11% note secured by property and equipment, interest only due monthly;
principal due December 31, 2008......................................... -- 10,000
</TABLE>
F-13
<PAGE>
COMMUNITY CARE OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)
(6) LONG-TERM DEBT -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
--------- ----------
<S> <C> <C>
11% notes maturing December 30, 2016, interest and principal payable in
monthly installments of $47 commencing January 31, 1997; secured by a lien
on substantially all of the leasehold assets of several long-term care
facilities................................................................. 2,892 4,835
Notes payable, secured by equipment and land, maturing from June 19, 1997
to April 4, 2005; principal payable in monthly installments of $25, with
interest payable monthly at variable rates up to 15.13%.................... 740 512
13% capital lease payable in monthly principal and interest installments
ranging from $54 to $65 through April 30, 2015, with a final payment of
$2,414..................................................................... -- 5,401
7% unsecured note payable, due on demand................................... -- 600
10% unsecured note payable in monthly principal and interest installments
of $8, maturing on August 1, 1998.......................................... -- 141
Other...................................................................... 853 74
--------- ----------
35,665 60,371
Less current portion....................................................... 1,258 6,341
--------- ----------
$34,407 $54,030
========= ==========
</TABLE>
Mortgage notes aggregating $21,563 at December 31, 1996 are payable to Health
and Retirement Properties Trust ("HRPT") and are secured by deeds of trust on 18
long-term care facilities located in Colorado and Nebraska and liens on
substantially all of the common stock of certain of the Company's subsidiaries.
These mortgage notes are subject to cross-default provisions under the Company's
leases with HRPT (see note 7). The remaining mortgage note is secured by a deed
of trust on one hospital (Georgiana) located in Alabama. The mortgage notes also
provide for additional interest payable quarterly commencing in 1996 equal to
the greater of (a) 5% of excess net patient revenues over a base year amount or
(b) the amount of the additional interest for the immediately preceding loan
year.
On April 4, 1996, the Company borrowed $10,000 from HRPT, pursuant to an 11%
promissory note (the "HRPT Note"), to provide additional renovation and
acquisition funding and general working capital. No principal payments are
required until the maturity date of December 31, 2008 with interest payments
made monthly. The HRPT Note is secured by all of the collateral security which
secures the Company's current obligations to HRPT and is subject to cross
default with other obligations to HRPT. As a result of closing this loan, the
Company increased the refundable security deposit held by HRPT for all
obligations by $550.
F-14
<PAGE>
COMMUNITY CARE OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)
(6) LONG-TERM DEBT -- (CONTINUED)
REVOLVING LINES OF CREDIT
On August 7, 1995, the Company entered into a Revolving Credit and
Reimbursement Agreement with NationsBank of Florida, N.A. ("NationsBank")
providing for a revolving credit facility (the "Loan Agreement") pursuant to
which the Company was entitled to borrow from time to time up to $15,000,
subject to a borrowing base of 80% of eligible accounts receivable. In July
1996, the agreement was modified to reflect a revised scheduled maturity of
December 31, 1996. Outstanding loans bore interest equal to, as selected by the
Company, either a floating rate (the greater of the federal funds rate plus .50%
or NationsBank's prime rate) or a rate equal to the applicable Eurodollar rate
plus 1.75% (subject to adjustment after September 30, 1996 based on certain
financial ratios achieved by the Company). The Loan Agreement was secured by
substantially all of the unencumbered assets of the borrowing entities and the
capital stock of the Company's subsidiaries, Community Care of America of
Alabama, Inc. and CCA of Maine, Inc. The Loan Agreement required the Company to
maintain a prescribed level of tangible net worth (as defined), and current,
fixed charge coverage and leverage ratios, placed limitations on indebtedness,
liens, investments and transactions with affiliates and prohibited the payment
of dividends. The revolving credit facility was paid in full in December 1996
with the proceeds from the Daiwa Securities of America, Inc. revolving credit
facility (see below).
On December 27, 1996, the Company entered into a Healthcare Receivables
Purchase and Transfer Agreement with Daiwa Securities of America, Inc. ("Daiwa")
providing for a 36 month revolving credit facility pursuant to which the Company
may borrow from time to time up to $15,000, subject to a borrowing base formula.
The Loan Agreement is secured by the assignment to the lender of all patient and
third party settlement receivables. Proceeds from the line of credit were used
to repay borrowings and terminate the Revolving Credit and Reimbursement
Agreement with NationsBank discussed above. As of December 31, 1996, Daiwa
advanced the Company an amount in excess of the borrowing base by approximately
$4,800. Such amount has been classified as current portion of long term debt
since repayment is due upon demand. The remaining outstanding loan will mature
on December 27, 1999 and amounts advanced bear interest at a rate equal to the
LIBOR rate at the time of each revolving advance plus 2.00% per annum. The
interest rate at December 31, 1996 was 7.9065%. The agreement requires the
Company to maintain a prescribed tangible net worth ratio as well as various
other financial and non- financial covenants. (See Note 13 for further
information)
The Company and IHS entered into a loan agreement which, as amended, entitles
the Company to borrow, until December 27, 1998, amounts on a revolving credit
basis so that no more than $5,000 is outstanding at any time provided that,
unless such advance is applied to the payment of management fees that become due
to IHS under the Management Agreement (see Note 14), IHS consents to the making
of advances, which consent may not be unreasonably withheld. This revolving
credit facility bears interest at a rate per annum equal to the annual rate of
interest set forth in IHS's revolving credit agreement with Citibank, N.A., plus
2%. Repayment of amounts advanced under this line of credit are subordinated to
the payment of up to an aggregate of $30,000 of principal and interest on the
Company's obligations to HRPT and Daiwa.
F-15
<PAGE>
COMMUNITY CARE OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)
(6) LONG-TERM DEBT -- (CONTINUED)
In connection with entering into the revolving credit facility, the Company
issued warrants to purchase an aggregate of 752,182 shares of the Company's
Common Stock, one-half of which are exercisable until January 13, 1999 at $3.22
per share (the average of the high and low trading price of the Company's Common
Stock on January 14 and 15, 1997) and the remaining one-half of which are
exercisable until January 13, 2002 at $6.44 per share. The number of shares
subject to the warrants and the exercise prices are subject to adjustment in
certain instances, including the Company issuing shares of Common Stock (or
securities convertible into Common Stock) at less than the applicable exercise
price. In connection therewith, the Company has granted to IHS certain rights to
cause the shares issuable upon exercise of the warrants to be registered under
the Securities Act of 1933, as amended, at the Company's expense.
Aggregate principal maturities of long-term debt for the next five years are
as follows: 1997, $6,341; 1998, $2,666; 1999, $10,007; 2000, $328; 2001, $356
and thereafter $40,673.
Information concerning interest expense is as follows:
YEARS ENDED DECEMBER 31,
------------------------
1994 1995 1996
------ ------ -------
Interest income applied to reduce interest
expense........................................... $63 $ 96 $ 11
Interest capitalized to construction in progress . $92 $107 $277
(7) LEASES
The Company is lessee under operating leases of 34 long-term care facilities,
of which one expires in February 2006, three expire in June 2007, and 30 expire
in December 2010. The Company also leases certain office space and computer
equipment expiring in 1998 and 1999. Minimum rent payments due under operating
leases in effect at December 31, 1996 are summarized as follows:
1997 .................................................. $ 10,458
1998 .................................................. 10,369
1999 .................................................. 10,014
2000 .................................................. 10,043
2001 .................................................. 10,103
Thereafter ............................................ 146,363
--------
Total ................................................ $197,350
========
The leases for the 30 health care facilities are with HRPT and provide for
two consecutive renewal options of six and thirteen years, respectively, at fair
market rentals at the expiration of the initial term. In connection with these
lease agreements, the Company was required to pay refundable deposits totaling
$5,660 as of December 31, 1996 which has been subsequently reduced (see note
13). The leases for the three health care facilities, also with HRPT, provide
for one renewal option for five years. The lease for one facility does not
currently have a renewal option.
F-16
<PAGE>
COMMUNITY CARE OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)
(7) LEASES -- (CONTINUED)
With respect to the leases for the 30 health care facilities, the Company has
the right of first refusal and an option to purchase the facilities at a price
equal to the greater of a formula as defined in the lease agreement or the fair
market value of the facilities. Minimum rentals are generally subject to
adjustment for renovations made to the facilities by the lessor. Also, the
leases provide for contingent rentals, based on a percentage of gross revenues
of the facilities in excess of base year amounts. Contingent rentals were $150
in 1996; none were incurred during the period from inception to December 31,
1995. The lease agreements require the Company to maintain a current ratio of at
least one to one and a minimum tangible net worth, as defined, of $5,000, which
conditions were not met as of December 31, 1996. In addition, the lease
agreements restrict the Company's ability to pay dividends, incur indebtedness
or make distributions to affiliates. See note 13.
The lease for office space provides for two, one-year renewal options and the
equipment lease may be renewed for one year.
(8) INCOME TAXES
The income tax benefit for 1996, all of which relates to deferred taxes, is
summarized as follows:
Federal income taxes ......................... $(7,375)
State income taxes ........................... (2,090)
---------
$(9,465)
=========
In 1995, the Federal and state income tax provision was offset by net
operating loss carryovers of $280.
The expected income tax rate of 34% differs from the rate resulting from the
provision in the financial statements as follows:
1994 1995 1996
------- -------- --------
Income tax (benefit) at statutory rate
(34%)....................................... 34 % 34 % (34)%
State income tax, net of federal benefit.... 4 % 4 % (4)%
Tax benefit of net operating loss
carryover................................... (38)% (7)% -- %
Increase (decrease) in valuation allowance . -- % (1)% 3 %
Other....................................... -- % -- % 2 %
------- -------- --------
-- % 30 % $ (33)%
======= ======== ========
The sources of deferred income tax (assets) and liabilities are as follows:
1995 1996
---------- ----------
Excess of book over tax basis of assets................ $10,025 $11,179
Allowance for doubtful accounts........................ (651) (1,262)
Accrued expenses....................................... (803) (3,173)
Net operating loss carryovers ......................... (870) (8,717)
Pre-acquisition separate company net operating loss
carryovers............................................. (1,365) (1,406)
Other.................................................. 22 (184)
---------- ----------
$ 6,358 $(3,563)
Valuation allowance.................................... 2,976 3,725
---------- ----------
Deferred income tax liability.......................... $ 9,334 $ 162
========== ===========
F-17
<PAGE>
COMMUNITY CARE OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)
(8) INCOME TAXES -- (CONTINUED)
At December 31, 1996, the Company had net operating loss carryovers available
for Federal income tax purposes of approximately $26,293 which expire in the
years 2007 through 2011, including pre-acquisition net operating loss carryovers
of approximately $3,652 which expire in the years 2007 through 2011. The
utilization of the pre-acquisition net operating loss carryovers is subject to
certain annual limitations under the Internal Revenue Code and, under "change in
ownership" provisions of the Code, other net operating loss carryovers may be
subject to similar limitations.
The valuation allowance relates, in part, to deferred tax assets that, when
subsequently realized, will be applied to reduce goodwill and other intangible
assets acquired to the extent that such allowances resulted in intangible assets
when originally recorded in connection with acquisitions. As of December 31,
1996, the Company did not fully reserve all deferred tax assets since future
operations are expected to generate sufficient taxable income to realize these
assets. As of December 31, 1996, the portion of the valuation allowance to be
applied to reduce goodwill in future years is approximately $3,725.
(9) REDEEMABLE PREFERRED STOCK
On December 30, 1993, the Company issued Series A 8% Redeemable Cumulative
Preferred Stock and warrants to purchase 1,331,814 shares of common stock at a
price of $.0198 per share. The warrants were valued at $2,631 in accordance with
the agreement of the parties and recorded as additional paid-in capital. The
difference between the value allocated to the preferred stock at issuance of
$5,536 and the aggregate redemption price of such shares of $8,167 was being
accreted to preferred stock and charged against common stockholders' equity
through the dates of mandatory redemption. Such accretion was $372 for the year
ended December 31, 1994 and $231 for the year ended December 31, 1995. The
preferred stock was redeemed at $100 per share and the warrants were exercised
in August 1995 (see note 15).
(10) CAPITAL STOCK
On July 28, 1995, the Company amended its certificate of incorporation
decreasing the Company's authorized common stock from 35,000,000 shares to
15,000,000 shares, increasing the authorized shares of preferred stock to
1,000,000 shares and effecting a reverse common stock split of one-for-7.9. All
share and per share data presented herein give effect to such changes.
At December 31, 1995 and 1996, the Company had outstanding stock options as
follows:
Stock options outstanding pursuant to:
1995 1996
--------- ---------
1993 Stock Option Plan ............................. 265,196 216,928
1993 Senior Executive Stock Option Plan ............ 57,799 16,565
1995 Stock Option Plan ............................. 153,910 208,894
1995 Non-Employee Directors Option Plan ............ 14,835 71,978
------- -------
Total Stock Options Outstanding .................... 491,740 514,365
======= =======
F-18
<PAGE>
COMMUNITY CARE OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)
(10) CAPITAL STOCK -- (CONTINUED)
The Company established the 1993 Stock Option Plan and the 1993 Senior
Executive Stock Option Plan effective July 1, 1993. The 1993 Stock Option Plan
provides that up to 289,258 shares of common stock may be issued to certain key
employees and consultants of the Company. Options granted to date under this
plan vest either immediately or over three years and expire ten years from the
date of grant. The 1993 Senior Executive Stock Option Plan provides that up to
74,364 options may be issued to senior executive officers of the Company.
Options granted to date under this plan vest over a period of seven years, with
accelerated vesting in some instances, based upon the occurrence of certain
events, including the achievement of earnings targets. The outstanding options
at December 31, 1996 expire ten years from the date of grant subject to earlier
termination in certain cases.
In 1995, the Company established the 1995 Stock Option Plan and the 1995
Non-Employee Directors Option Plan. The 1995 Stock Option Plan provides that up
to 500,000 shares of common stock may be issued to certain key employees and
consultants of the Company pursuant to options granted from time to time under
this plan. Options granted to date under this plan vest either immediately or
over periods from three to seven years, with accelerated vesting in some
instances, based upon the occurrence of certain events, including the
achievement of earnings targets. The outstanding options at December 31, 1996
expire ten years from the date of grant subject to the earlier termination in
certain cases. The 1995 Non-Employee Directors Option Plan provides that up to
100,000 shares of common stock may be issued to non-employee directors pursuant
to options automatically granted under that plan upon election as a director and
annually following the annual meeting of shareholders electing directors.
Options granted to date under this plan vest in three equal semi-annual
installments beginning six months after the date of grant and expire ten years
from the date of grant subject to the earlier termination in certain cases.
All stock options issued by the Company have been granted with exercise
prices equal to or greater than the estimated fair market value of the common
stock on the date of grant. Stock option transactions are summarized as follows:
1995 1996
--------------------- ----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
---------- ---------- ----------- ----------
Outstanding at beginning of
year............................. 292,936 $ 4.44 491,740 $ 7.68
Granted.......................... 230,339 11.42 226,132 11.23
Exercised........................ -- -- (33,385) 4.62
Canceled......................... (31,535) 6.75 (170,122) 8.95
---------- ---------- ----------- ----------
Outstanding at end of year ...... 491,740 $ 7.68 514,365 $ 9.03
========== ========== =========== ==========
Options Exercisable at end of
year............................. 206,006 $ 5.10 222,310 $ 6.34
========== ========== =========== ==========
The following summarizes information about stock options outstanding as of
December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------- ------------------------------
WEIGHTED AVG.
RANGE OF NUMBER REMAINING WEIGHTED NUMBER WEIGHTED
EXERCISE OUTSTANDING CONTRACTUAL AVERAGE EXERCISABLE AVERAGE
PRICES AT 12/31/96 LIFE EXERCISE PRICE AT 12/31/96 EXERCISE PRICE
- - ---------------- ------------- ---------------- ---------------- ------------- ----------------
<C> <C> <C> <C> <C> <C>
$3.71 150,685 6.54 $ 3.71 141,219 $ 3.71
$9.50 - $10.50 210,048 8.93 9.84 61,567 10.11
$10.51 - $14.00 153,632 9.10 13.12 19,524 13.49
------------- ---------------- ---------------- ------------- ----------------
514,365 8.28 $ 9.03 222,310 $ 6.34
============= ================ ================ ============= ================
</TABLE>
F-19
<PAGE>
COMMUNITY CARE OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)
(10) CAPITAL STOCK -- (CONTINUED)
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its stock options. Accordingly, no compensation expense has been
recognized in connection with its stock options. Had compensation expense for
the Company's stock options been determined consistent with Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," the Company's net earnings and earnings per share would have been
reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1995 1996
------------------------- -------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
------------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Net earnings (loss) applicable to common stock $1,041 $ 890 $(18,905) $(19,283)
Per common share:
Earnings (loss) before extraordinary charge.. 0.42 0.49 (2.56) (2.61)
Extraordinary charge......................... (0.20) (0.26) 0.00 0.00
------------- ----------- ------------- -----------
Net earnings (loss).......................... 0.22 0.23 (2.56) (2.61)
============= =========== ============= ===========
</TABLE>
The fair value of the options for purposes of the above pro-forma disclosure
was calculated using the Black-Scholes option pricing model and the following
assumptions: risk free interest rate of 6.58%, weighted average expected lives
of 5 to 8.5 years, no dividend payments, and a volatility of 35.8% based on the
annualized 10 year industry average. The effects of applying SFAS No. 123 in the
pro forma net earnings and earnings per share for 1995 and 1996 may not be
representative of the effects on such pro-forma information for future years.
(11) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, patient accounts
receivable, other current assets, accounts payable, and accrued expenses
approximates fair value because of the short-term maturity of these instruments.
The fair value of third-party payor settlements receivable is estimated by
discounting anticipated cash flows using estimated market discount rates to
reflect the time value of money. The fair value of the Company's long term debt
is estimated based on current rates offered to the Company for similar
instruments with the same remaining maturities. Management of the Company
believes the carrying amount of the above financial instruments approximates the
estimated fair value.
(12) LOSS ON IMPAIRMENT OF LONG-LIVED ASSETS AND OTHER NON-RECURRING CHARGES
Operating expenses for 1996 include total non-recurring charges of $22.1
million and consist of the following:
<TABLE>
<CAPTION>
EXIT
LOSS ON OTHER COSTS AND
IMPAIRMENT OF ASSET EMPLOYEE
INVESTMENT WRITE-OFFS TERMINATIONS TOTAL
--------------- ------------ -------------- ---------
<S> <C> <C> <C> <C>
Sandy River management contract termination............. $ 5,453 $1,086 $3,360 $ 9,899
Aurora and Toledo facilities closed or voluntarily
decertified............................................. 1,450 -- 207 1,657
Costs of a physician practice, primary care clinics,
adult day care centers, and other programs closed ...... 3,013 -- 1,484 4,497
Memorial Health Group acquisition termination .......... 3,924 264 210 4,398
Termination of offerings of debt and equity securities . -- 1,677 -- 1,677
-------------- ------------- -------------- ---------
$13,840 $3,027 $5,261 $22,128
============== ============= ============== =========
</TABLE>
F-20
<PAGE>
COMMUNITY CARE OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)
(12) LOSS ON IMPAIRMENT OF LONG-LIVED ASSETS AND OTHER NON-RECURRING CHARGES
- - -- (CONTINUED)
In the second quarter of 1996, management made the decision to exit certain
activities, including the termination of the management agreement and related
purchase option for the Sandy River facilities and the closing of four primary
care clinics, four adult day care centers and one physician practice.
The Company terminated its management and purchase option agreements with the
Sandy River Group since the facilities were not generating sufficient cash flows
to pay the Company's management fees. As a result, management evaluated its
investment related to the management agreement and purchase option for
impairment. This analysis identified approximately $9,899 in write-offs,
including the write-offs of (1) the $5,000 purchase option deposit, (2)
unsecured management fees of $1,086, (3) direct acquisition costs of $453 and
(4) accrued exit and termination costs of $3,360 to transfer the properties back
to the Sandy River Group. As of December 31, 1996, substantially all exits costs
have been paid.
The four primary care clinics, four adult day care centers and one physician
practice were closed as a result of their unfavorable financial performance and
the negative impact these centers had on the Company's long-term care business.
As a result, the Company wrote-off development costs and property and equipment
relating to these activities of $3,013. In addition, the closure of these
clinics resulted in eliminating approximately 14 positions, primarily doctors
and clinical staff, through an involuntary severance program. Total employee
termination benefits provided in the financial statements were $454 as of
December 31, 1996, of which $138 was unpaid as of December 31, 1996 and will be
paid in 1997. Other costs to exit these activities include lease termination
costs of $964 which will paid over the remaining lease terms and other exit
costs of $66. Both of these obligations were incurred under contractual
obligations that existed prior to the commitment date and will continue after
the plan is completed with no economic benefit to the Company. Total lease
termination and other exit costs accrued but not paid as of December 31, 1996
was $873. Management anticipates that an additional $750 of costs will be
incurred in 1997 . Management expects the necessary activities to exit these
operations will be complete by December 31, 1997.
On December 31, 1996, the Company terminated an agreement to acquire other
rural hospitals in Georgia and transferred Memorial Healthcare, Inc. d/b/a Smith
Hospital (Smith) back to the sellers since CCA was not able to secure the
necessary financing to complete the transaction. The total non-recurring charge
to income related to this transaction was approximately $4,398 and consisted of
(1) the write-off of the investment in Smith's net assets, including transaction
costs of $3,924 (2) other asset write-offs of $264 and (3) exit costs of $210.
Other non-recurring charges represent the write-off of approximately $1,677
in deferred financing costs as a result of unsuccessful attempts to raise
capital through a secondary stock offering and a high yield debt offering. Also,
the Company reviewed the long-lived assets of the Aurora and Toledo facilities
for recoverability and determined that an additional write-down of $1,450 was
required. Such write-down has been reflected in non-recurring charges for the
period ended December 31, 1996.
The revenues and net operating losses from activities that will not be
continued are as follows:
<TABLE>
<CAPTION>
1994 1995 1996
------ -------- --------
<S> <C> <C> <C>
Revenue from primary care clinics, adult day care centers, a physician practice and other programs closed -- $1,177 $5,107
Net operating losses from primary care clinics, adult day care centers, a physician practice and
other programs closed.................................................................................... -- $ (95) $ (880)
Revenue from management contracts and agreements terminated.............................................. -- $1,318 $3,336
Net operating income from management contracts and agreements terminated ................................ -- $ 427 $1,126
</TABLE>
F-21
<PAGE>
COMMUNITY CARE OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)
(12) LOSS ON IMPAIRMENT OF LONG-LIVED ASSETS AND OTHER NON-RECURRING CHARGES
- - -- (CONTINUED)
In 1996, the Company adopted Financial Accounting Standard (SFAS) No. 121,
"Loss on Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of." As a result, the Company performed a review of the events and/or
changes in circumstances that would suggest that the carrying amount of the
Company's asset may not be recoverable. This analysis included a consideration
of (1) the business, legal and economic climate for events that could adversely
affect the carrying value of an asset, (2) any physical changes in assets, (3)
the accumulated costs in excess of the amounts originally expected to acquire
and/or construct an asset, (4) decreases in the market value of assets and (5)
current period operating or cash flow losses that demonstrate continuing losses
associated with an asset used for the purpose of producing revenue. In addition,
the Company estimated the future cash flows expected to result from assets to be
held and used.
In estimating the future cash flows for determining whether an asset is
impaired, the Company grouped its assets at the lowest level for which there are
identifiable cash flows independent of other groups of assets (i.e., by long
term care facility). The results of comparing future undiscounted cash flows to
historical carrying value, together with the evaluation of the facts and
circumstances that may indicate an asset may not be recoverable, indicated that
the Toledo and Aurora facilities were eligible for an impairment charge. None of
the Company's remaining facilities were reduced since the carrying value of the
assets were less than the undiscounted cash flows.
During 1996, the Company closed its Aurora facility and voluntary decertified
its Toledo facility from the Medicare program due to quality of care issues,
unfavorable market conditions, the reduction in reimbursement from third-party
payors and competition. Accordingly, these events and circumstances, together
with the unfavorable undiscounted future cash flows, caused the Company to
perform further evaluations of whether the carrying amount of these assets were
recoverable.
After determining that an impairment charge for Toledo and Aurora was
appropriate, the Company determined the estimated fair value of such facilities
using standard industry valuation techniques. The excess carrying value of
goodwill, buildings and improvements, leasehold improvements and equipment above
the fair value was $1,450 and is included in the statement of operations for
1996 as loss on impairment of long-lived assets.
Prior to the adoption of SFAS 121, the Company evaluated impairment on the
entity level. Such evaluation yielded no impairment charge.
(13) CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES
The Company has undergone major restructuring and reorganization in 1996
resulting in the closure or termination of certain business activities and
acquisitions and the termination of offerings of debt and equity securities.
During the year ended December 31, 1996 the Company incurred a loss of $18,905
and had negative cash flow from operating activities. As of December 31, 1996,
the Company had a working capital deficiency of $10,952 and was in default with
respect to certain of its debt, lease and other agreements. These circumstances
would naturally raise doubt about the Company's ability to continue as a going
concern. Management's plans with respect to this matter are discussed below.
F-22
<PAGE>
COMMUNITY CARE OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)
(13) CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES -- (CONTINUED)
In October 1996, management engaged Smith Barney, Inc. as financial adviser
to assist in evaluating debt and equity financing alternatives, including the
possible sale of the Company. Management is evaluating the possibilities with
respect to the interest expressed by potential acquirers, joint venture partners
and organizations which might provide an infusion of capital. Also, management
is pursuing a financial restructuring plan and, in order to obtain sufficient
financial resources, the Company has accomplished the following subsequent to
December 31, 1996:
1. Refinanced the revolving line of credit with its bank to extend the
payment terms related to $4,800 of debt due on demand at December 31,
1996 and issued five year warrants to purchase 1,787,568 shares of
Common Stock (subject to reduction as payments of such debt is made)
at $2.25 per share subject to adjustment in certain circmustances).
2. Obtained the release of approximately $4,000 of security deposits
through a modification of the lease with HRPT to reduce rental
payments.
3. Obtained a settlement agreement dated March 1, 1997 with the
shareholders of 219,798 shares of common stock subject to repurchase
(the put contract), which provides that, in lieu of repurchasing the
shares, the Company pay $500 and issue an 8.5% note payable due on
September 1, 1997 in an amount equal to $1,681 less the proceeds from
the sale of the shares by the shareholders..
4. Obtained waivers of financial covenant violations and related defaults
under debt and lease agreements through February 1998.
5. Obtained a guarantee from IHS with respect to debt payments of
approximately $4,800 and lease payments of up to $10,000 in exchange
for warrants which allow IHS to purchase up to 379,900 shares of the
Company's common stock at $1.937 per share.
6. Obtained an extension on the payment of fees payable to IHS under the
management agreement discussed in Note 14 through April 1998
(estimated to be $2,200 for 1997.)
In addition, the Company continues to pursue negotiations to obtain
additional debt or equity capital and anticipates finalizing its financial
restructuring plan soon. The Company believes it has obtained sufficient
financing commitments for the next year. However, other commitments will likely
be necessary to successfully accomplish the financial restructuring plan beyond
the next year.
The Company acquires or leases and operates long-term health care facilities
in medically-underserved rural communities, and uses such facilities as
platforms to develop networks offering a range of other healthcare services.
Facilities owned or leased by the Company are in the states of Alabama,
Colorado, Georgia, Iowa, Kansas, Louisiana, Missouri, Nebraska, Texas and
Wyoming. The Company and others in the healthcare business are subject to
certain inherent risks, including the following:
o Substantial dependence on revenues derived from reimbursement by the
Federal Medicare and state Medicaid programs;
o Government regulation, government budgetary constraints and proposed
legislative and regulatory changes; and
o Lawsuits alleging malpractice and related claims.
Such inherent risks require the use of certain management estimates in the
preparation of the Company's financial statements and it is reasonably possible
that a change in such estimates may occur.
F-23
<PAGE>
COMMUNITY CARE OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)
(13) CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES -- (CONTINUED)
The Medicare and various state Medicaid reimbursement programs represented
20% and 50%, respectively, of the Company's revenues for the year ended December
31, 1996, and the Company's operations are subject to a variety of other
Federal, state and local regulatory requirements. Failure to maintain required
regulatory approvals and licenses and/or changes in such regulatory requirements
could have a significant adverse effect on the Company. Changes in Federal and
state reimbursement funding mechanisms, related government budgetary constraints
and differences between final settlements and estimated settlements receivable
under Medicare and Medicaid retrospective reimbursement programs, which are
subject to audit and retroactive adjustment as discussed in note 3, could have a
significant adverse effect on the Company. Also, the Company is from time to
time subject to malpractice and related claims and lawsuits, which arise in the
normal course of business and which could have a significant effect on the
Company. The Company believes that adequate provision for these items has been
made in the accompanying consolidated financial statements and that their
ultimate resolution will not have a material effect on the consolidated
financial statements.
Since its inception, the Company has grown through acquisitions, and
realization of acquisition costs, including excess costs over fair value of net
assets acquired, is dependent initially upon the consummation of the
acquisitions and subsequently upon the Company's ability to successfully
integrate and manage acquired operations. Also, the Company's development of
integrated healthcare networks is dependent upon successfully effecting
economies of scale, the recruitment of skilled personnel and the expansion of
services and related revenues. The Company has not completed implementing its
network strategy at any facilities, and realization of related development costs
cannot be assured. Finally, see note 12 for certain significant risks and
uncertainties, resulting in the loss on impairment of investments and other
non-recurring charges in 1996.
(14) RELATED PARTY TRANSACTIONS
On January 19, 1994, the Company entered into a Medicare consulting agreement
with Symphony Care Consulting, Inc. (SCCI), a wholly-owned subsidiary of
Integrated Health Services, Inc., as amended on May 1, 1995. The consulting
agreement provided Medicare reimbursement and certification services including
training, cost report preparation and accounting services through January 1996.
Costs paid to SCCI were $410 in 1994, $453 in 1995, and $148 in 1996. In 1996,
the Company paid Symphony Rehabilitation Services (SRS) and Symphony Pharmacy
Services (SPS), wholly owned subsidiaries of IHS, $162 for therapy and $98 for
pharmacy services, respectively. Also, the Company paid IHS approximately $500
in 1994 and $186 in 1995 to reimburse IHS for expenses incurred on behalf of the
Company in connection with the start-up of CCA's operations, the acquisition of
MeritWest and due diligence service in connection with the public offering. No
amounts were paid to IHS in 1996. Two of the Company's directors are employees,
directors and stockholders of IHS. The Company believes that the terms of the
agreement with SCCI and the amounts paid to IHS, SRS and SPS for services are on
terms as favorable as could have been obtained from unaffiliated third parties.
Loans receivable from officers and directors of $425 at December 31, 1996
mature on various dates with accrued interest at 8% per annum.
F-24
<PAGE>
COMMUNITY CARE OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)
(14) RELATED PARTY TRANSACTIONS -- (CONTINUED)
On December 27, 1996, the Company and IHS entered into a loan agreement
which, as amended, entitles the Company to borrow, until December 27, 1998,
amounts on a revolving credit basis so that no more than $5,000 is outstanding.
Loan advances are subject to the consent of IHS making of advances, which
consent may not be unreasonably withheld. This revolving credit facility bears
interest at a rate per annum equal to the annual rate of interest set forth in
IHS's revolving credit agreement with Citibank, N.A., plus 2%. Repayment of
amounts advanced under this line of credit are subordinated to the payment of up
to an aggregate of $30,000 of principal and interest on the Company's
obligations to HRPT and Daiwa. As of December 31, 1996, IHS had advanced the
Company $2,000.
In connection with entering into the revolving credit facility, the Company
issued warrants to purchase an aggregate of 752,182 shares of the Company's
Common Stock, one-half of which are exercisable until January 13, 1999 at $3.22
per share (the average of the high and low trading price of the Company's Common
Stock on January 14 and 15, 1997) and the remaining one-half of which are
exercisable until January 13, 2002 at $6.44 per share. The number of shares
subject to warrants and the exercise prices are subject to adjustment in certain
instances, including if the Company issues shares of Common Stock (or securities
convertible into Common Stock) at less than the applicable exercise price. In
connection therewith, the Company has granted to IHS certain rights to cause the
shares issuable upon exercise of the warrants to be registered under the
Securities Act of 1933, as amended, at the Company's expense.
On December 27, 1996, the Company entered into a Management Agreement (the
"Management Agreement") with Integrated Health Services, Inc. ("IHS") pursuant
to which the Company is employing IHS to supervise, manage and operate the
financial, accounting, MIS, reimbursement and ancillary services contracting
functions for the Company until December 31, 2001. The Management Agreement
provides for the Company to pay to IHS for its services, until December 31,
1997, an amount equal to the lesser of 2% of the Company's gross revenues (as
defined) or the Company's annualized cost of performing those services itself
based on the period July 1, 1996 through December 31, 1996. Thereafter, the
management fee payable to IHS is to be the lesser of 2% of the Company's gross
revenues or a percentage of gross revenues determined by comparing the Company's
cost of performing such functions during the period July 1, 1996 through
December 31, 1996 to its gross revenues for that period. The gross revenues
percentage which is fixed may be increased from 2.0% to 2.5% by mutual agreement
of the parties following IHS's review of the Company.
(15) INITIAL PUBLIC OFFERING
In August 1995, the Company issued 3,450,000 shares of common stock to the
public in an initial public offering at a price of $9.50 per share. Net proceeds
after underwriting discounts and expenses of the offering were $27,589.
The Company used the net proceeds of the offering to, among other things, pay
$10,800 of indebtedness to HRPT plus a prepayment penalty of approximately $600
and redeem the Series A Preferred Stock for approximately $8,167. Concurrently
with the completion of the offering, the Series A Preferred Stockholders
purchased an aggregate of 1,331,814 shares of Common Stock through their
exercise of warrants by applying 263 shares of Series A Preferred Stock, having
an aggregate redemption value of $26,300, in payment of the full exercise price
of the warrants.
As a result of the repayment of certain indebtedness through the application
of a portion of the proceeds from the offering and the proceeds from a
concurrent borrowing, the Company recorded an extraordinary charge to earnings
of $1,398 related to prepayment penalties and the write-off of deferred
financing costs ($992, net of income tax benefit of $406).
F-25
<PAGE>
COMMUNITY CARE OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)
(16) SANDY RIVER TRANSACTION
Effective as of August 15, 1995, the Company entered into management
agreements for ten long-term care facilities (the "Sandy River Facilities"),
obtained an option to acquire all of the entities which own the ten facilities
(the "Option") and agreed to make fully secured loans to such entities for up to
$3,100. Effective as of August 15, 1996, the Company terminated the management
agreements since the Sandy River Facilities were not generating sufficient cash
flows to pay CCA's management fees.
Under the prior management agreements, the Company's monthly base management
fee was 7% of gross revenues (as defined) during the initial term. Management
fees were subordinated to the prior payment of all costs, expenses, certain
capital expenditures, lease payments and scheduled payments of principal and
interest on the indebtedness of the facilities, and a portion was subordinated
to certain advances and fees of approximately $400 per annum payable to Sandy
River Development, Inc. ("SRD"), a service company whose four principals were
also principals of certain owners of the Sandy River Facilities. In accordance
with the settlement agreement, unpaid management fees of $1,086 were waived by
the Company upon the termination of the management agreements. See note 12.
The Company recorded management fee revenue of $1,136 in 1995 and $1,266 in
1996. As part of the Company's strategy to make operational improvements at the
time it assumed the operations of facilities acquired or managed, the Company
implemented an action plan to improve the cash flows of the Sandy River
Facilities, which included specific steps to increase patient census, increase
Medicare utilization (which program has a higher per diem reimbursement rate),
maximize total third party reimbursement and introduce a cost savings program
through efficiencies and other professional management techniques. However,
despite the implementation of management's action plan, the Sandy River
Facilities did not generate sufficient cash flows to pay the entire management
fee, and it became apparent in 1996 that the facilities could not be managed on
a profitable basis.
The Company had also loaned $2,533 under secured revolving credit notes and
term promissory notes to certain entities (the "Borrowing Entities") which owed
indebtedness that was personally guaranteed by the principals of the entities
which own the Sandy River Facilities. The loans were primarily to enable the
Borrowing Entities to retire such indebtedness and thereby release such
principals from their personal guaranties. The loans to the Borrowing Entities
matured on August 10, 1996. The Company's loans to the Borrowing Entities bore
interest at the rate payable by the Company under the Company's revolving credit
facility and were secured (on a several basis) by, among other assets, the
accounts receivable of the Sandy River Facilities and mortgages on certain of
the Sandy River Facilities. Pursuant to the settlement agreement, CCA released
the Borrowing Entities from their obligations as consideration for the amounts
the Company owed to the Sandy River Group as a result of the termination of the
management agreement and related agreements.
Under a related option agreement, the Company had the right to purchase the
entities which own the ten facilities, during the initial three year term of the
management agreements, and the Company had a nonrefundable $5,000 purchase
option deposit, of which $1,850 was paid through the issuance of 194,737 shares
of Common Stock valued at $9.50 per share. In 1996, the Company terminated the
option and wrote-off the purchase option deposit of $5,000.
F-26
<PAGE>
COMMUNITY CARE OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)
(16) SANDY RIVER TRANSACTION -- (CONTINUED)
The Company granted the holders of the 194,737 shares of Common Stock, issued
as partial payment of the purchase option deposit, the right to "piggyback" such
shares on one occasion in certain registration statements filed by the Company
under the Securities Act. As of April 14, 1997 such shares have not been
included in certain registration statements filed by the Company under the
Securities Act. In addition, each holder was also granted the right to require
the Company to repurchase up to 25%, 25% and 50% of their shares during the one
month period following each of March 15, 1996, September 15, 1996 and March 15,
1997, respectively, at a price equal to $9.50 per share, or if higher and a
registration statement under the Securities Act with respect to such shares is
not then effective, the market price of the shares. On October 27, 1996, as a
result of the terminated management agreement, the holders of these shares
exercised rights under the Option agreement and required the Company to
repurchase the aforementioned shares for $9.50 per share. The total amount due
to holders of stock of $2,181 has been classified as a current liability as of
December 31, 1996. The agreement was superseded by a settlement agreement dated
March 1, 1997. See note 13 for further information.
(17) SUPPLEMENTAL CASH FLOW INFORMATION
Significant non-cash financing and investing activities are summarized in
notes 2 and 12 and as follows:
o Accretion of the discount on preferred stock resulted in an increase
in preferred stock and a decrease in additional paid-in capital of
$371 in 1994 and $231 in 1995.
o Preferred stock dividends of $163 in 1994 were accrued but not paid.
o Common Stock with fair value of $150 was issued for legal services in
connection with acquisitions in 1994.
o The realization of deferred tax assets relating to the MeritWest
acquisition and the corresponding reduction of the valuation allowance
decreased the excess of cost over fair value of net assets acquired by
$215 in 1995.
o The Sandy River transaction resulted in an increase in deposits of
$1,850 which was financed by issuance of common stock in 1995.
o The transfer in 1996 of Smith Hospital back to the prior owners
resulted in a non cash charge to income of $4,398 which consists of
the following:
Property, plant and equipment .................... $ 5,907
Long term debt ................................... (3,000)
Deferred financing costs ......................... 264
Other ............................................ 1,227
-------
$ 4,398
=======
Cash payments for interest, net of amounts capitalized, were $3,678 in 1995
and $5,008 in 1996. Cash payments for income taxes were $3 in 1995 and $32 in
1996.
F-27
<PAGE>
COMMUNITY CARE OF AMERICA, INC. AND SUBSIDIARIES
COMMUNITY CARE OF AMERICA, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1994 1995 1996
-------- -------- ---------
<S> <C> <C> <C>
Allowance for doubtful accounts and contractual adjustments:
Balance at beginning of period............................ $1,200 $1,100 $1,978
Provisions for bad debts charged to operations............ 52 658 1,867
Provisions for contractual adjustments charged to
operations............................................... -- 310 495
Acquired companies........................................ -- 307 984
Accounts receivable written off, net of recoveries........ (152) (397) (491)
-------- -------- ---------
Balance at end of period.................................. $1,100 $1,978 $4,833
======== ======== =========
</TABLE>
S-1
WAIVER AND AMENDMENT AGREEMENT WAIVER AND AMENDMENT AGREEMENT, dated as of
April 14, 1997 among Daiwa Healthco-2 LLC, a Delaware limited liability company
(the "Lender"), CCA Funding LLC, a Delaware limited liability company (the
"Borrower") and Community Care of America, Inc., a Delaware corporation (the
"CCA").
The Borrower, the Lender and CCA have entered into a Loan and Security
Agreement, dated as of December 23, 1996 (as the same may be amended, modified,
restated or supplemented, the "Loan Agreement") pursuant to which the Lender
makes revolving Loans to the Borrower secured by healthcare receivables.
Capitalized terms used but not defined herein shall have the meanings given such
terms in the Loan Agreement.
The Borrower has requested that the Lender waiver certain provisions of the
Loan Agreement and amend certain provisions of the Loan Agreement.
For valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, and subject to the fulfillment of the conditions set forth below,
the parties hereto agree as follows:
SECTION 1. AMENDMENTS TO THE LOAN AGREEMENT.
1.1 Clause (i) of Section 1.05(a) is amended in its entirety to read as
follows:
"(i) beginning March 10, 1997, on the Basic Borrowing Amount (or
any lesser principal amount outstanding from time to time), at an
interest rate per annum equal to the LIBO Rate for the Interest
Period in effect for such Revolving Advance plus a margin equal
to 2.25% which margin shall increase by 0.50% on April 1, 1997
and on the first Business Day of each month thereafter that this
clause (a) is applicable, and"
1.2 Clause (ii) of Section 1.05(a) is amended by deleting the phrase
"during the Special Period," where it appears therein.
1.3 Clause SECOND of Section 2.02 of the Loan Agreement is hereby amended
in its entirety to read as follows: "SECOND, to the Lender, (i) an amount in
cash equal to the payment, if any, of principal on the Revolving Loan up to the
Basic Borrowing Amount due and payable on such Funding Date, until such amount
has been paid in full and (ii) an amount in cash equal to the payment, if any,
of principal on the Revolving Loan in excess of the Basic Borrowing Amount until
such amount has been paid in full;"
1.4 The definition of "Special Period"
contained in Exhibit I is amended by deleting the phrase "the three month
anniversary of the Initial Funding Date" and inserting in its place the date
"April 1, 1996".SECTION 2. WAIVERS2.1 CCA has removed a Provider under the
Healthcare Receivables Purchase and Transfer Agreement, dated as of December 23,
1196 (as amended, modified, supplemented or restated, the "RPA") among CCA, each
of the Providers named therein and the Borrower. Such removal (the "Prohibited
Removal") constitutes an Event of Termination pursuant to Section
5.19(b)(iii)(x) and (y) of the RPA and an Event of Default under Clause (d) of
Exhibit V of the Loan Agreement. Subject to the fulfillment of the conditions
set forth below, the Lender hereby waives the Event of Default under the Loan
Agreement caused by the Prohibited Removal.2.2 the Borrower is in violation of
clause(j)(ix) of Exhibit IV of the Loan Agreement, the violation of which has
resulted in an Event of Default. The Lender hereby waives such Event of Default
solely for the 1996 fiscal year of the Borrower, provided that each of the
Borrower and CCA allow an agent of the Lender to conduct an audit of books and
records of CCA and the Borrower, in scope and substance necessary to reach the
conclusions that would otherwise have been covered by the certificate required
under clause(j)(ix) of Exhibit IV to the Loan Agreement. Should the Lender, in
its sole discretion, determine that CCA or the Borrower has not allowed the
Lender's agent access to its books and records or is otherwise not cooperating
with the audit, the waiver contained in this Section 2.2 shall be null and void
and the Event of Default described herein shall be reinstated. SECTION 3.
CONDITIONS PRECEDENT This Amendment Agreement (the "Agreement") shall be
effective upon the execution and delivery of counterparts hereof by the parties
listed below and the fulfillment of the following conditions.3.1 All
representations and warranties contained in this Agreement or otherwise made in
writing to the Lender in connection herewith shall be true and correct in all
material respects. 3.2 No unwaived event shall have occurred and be continuing
which constitutes a Default or an Event of Default. 3.3 The Primary Servicer
shall have issued a Warrant To Purchase Common Stock of Community Care of
America, Inc. in the form of Exhibit A attached hereto. 3.4 Integrated Health
Services shall have executed a Guaranty in favor of the Lender in the form of
Exhibit B attached hereto. SECTION 4. MISCELLANEOUS 4.1 Each of the Borrower and
CCA reaffirms and restates the representations and warranties set forth in the
Loan Agreement and the RPA, and all such representations and warranties shall be
true and correct on the date hereof with the same force and effect as if made on
such date. Each of the Borrower and CCA represents and warrants as to itself
(which representations and warranties shall survive the execution and delivery
hereof) to the Agent that: (a) No consent of any person, including, without
limitation, shareholders, members or creditors of the Borrower or CCA, and no
action of, or filing with any
18
<PAGE>
<PAGE>
governmental or public body or authority is required to authorize, or is
otherwise required in connection with the execution, delivery and performance of
this Agreement; (b) This Agreement has been duly executed and delivered by
a duly authorized officer on behalf of each of the Borrower and CCA, and
constitutes the legal, valid and binding obligations of each, enforceable in
accordance with its terms, except as enforcement thereof may be subject to the
effect of any applicable (i) bankruptcy, insolvency, reorganization,
moratorium or similar law affecting creditors' rights generally and (ii)
general principles of equity (regardless of whether enforcement is sought in
a proceeding in equity or at law); and (c) The execution, delivery and
performance of this Agreement will not violate any law, statute or regulation
applicable to the Borrower or CCA, or any order or decree of any court or
governmental instrumentality applicable to such company, or conflict with, or
result in the breach of, or constitute a default under any contractual
obligation of such company. 4.2 Except as herein expressly amended, the Loan
Agreement and the other Documents are each ratified and confirmed in all
respects and shall remain in full force and effect in accordance with their
respective terms. 4.3 Except as specifically set forth herein, nothing herein
contained shall constitute a waiver or be deemed to be a waiver, of any
existing Defaults or Events of Default or of any Events of Termination under
the RPA and the Lender reserves all rights and remedies granted to it by the
Loan Agreement and the other Documents, by law and otherwise. 4.4 All
references to the Loan Agreement in any Document shall mean the Loan
Agreement as amended hereby. 4.5 This Agreement may be executed by the
parties hereto individually or in combination, in one or more counterparts,
each of which shall be an original and all of which shall constitute one and
the same agreement. A facsimile signature page shall constitute an original
for the purposes hereof. 4.6 THIS AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW
YORK, WITHOUT GIVING EFFECT TO THE CONFLICTS OF LAWS PRINCIPLES THEREOF. IN
WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed and delivered by their proper and duly authorized officers as of the
day and year first above written. DAIWA HEALTHCO-2 LLC By: DAIWA SECURITIES
AMERICA, Its Manager By: Giles Hunt Vice President COMMUNITY CARE OF AMERICA,
INC. By: Name: Title: CCA FUNDING LLC By: Name: Title:
19
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made and entered into as of April 19, 1996, by and
between COMMUNITY CARE OF AMERICA, INC., a Delaware corporation (hereinafter
referred to as the "Company"), and GARY W. SINGLETON (hereinafter referred to as
the "Employee").
W I T N E S S E T H:
WHEREAS, the Company is engaged in the business of owning and operating
long-term care skilled nursing care facilities and other health care related
businesses through its subsidiaries and tradenames; and
WHEREAS, Company wishes to employ Employee, and Employee wishes to
accept such employment, on the terms and conditions set forth herein; and
WHEREAS, in the course of his employment, and as a necessary
consequence thereof, Employee will receive information and acquire knowledge of
special procedures, processes, business conduct, and knowledge that is private,
proprietary, and secret to the Company in its business; and
WHEREAS, the business, as well as the success and profits of the
Company, depend in large part upon the maintenance of secrecy as to such
information, processes, procedures and knowledge as to the conduct of the
Company's business generally.
NOW, THEREFORE, in consideration of the foregoing premises, the mutual
agreements herein contained, as well as the agreement to employ the Employee or
to continue to employ the
<PAGE>
Employee under the terms and conditions contained herein, the parties, intending
to be legally bound hereby, agree as follows:
ARTICLE I
EMPLOYMENT RELATIONSHIP
1.1 EMPLOYMENT. The Company hereby employs the Employee, and the
Employee hereby accepts such employment, as Chief Executive Officer and
President of the Company, with the authority and responsibility, personally or
through other officers and employees of the Company designated by him, for
directing and supervising the day-to-day operations of the Company. The Employee
shall report to and be responsible directly to the Board of Directors of the
Company.
1.2 EXCLUSIVE EMPLOYMENT. During the continuation of the Employee's
employment by the Company hereunder, the Employee will, unless the Employee has
first received the prior written consent of the Company, devote the Employee's
entire business time, energy, attention, and skill to the services of the
Company and to the promotion of its interests, and covenants that during such
time the Employee will not: (a) engage in, be employed by, be a director of or
be otherwise directly or indirectly interested in any business or activity
competing with or of a nature similar to the businesses of the Company (or any
of its subsidiaries or affiliates), or (b) take any part in any activities
detrimental to the best interests of the Company (and its subsidiaries and
affiliates). Notwithstanding the foregoing, the Company shall permit Employee to
act as a consultant for Integrated Health Services, Inc.; provided that such
consulting work will not interfere with Employee's duties and obligations under
this Agreement.
-2-
<PAGE>
ARTICLE II
PERIOD OF EMPLOYMENT
2.1 TERM. The initial term of employment under this Agreement (the
"Initial Term") shall begin as of the date hereof (the "Commencement Date"), and
shall end on the third anniversary of the Commencement Date, unless sooner
terminated pursuant to Article IV, below. Unless either party shall give the
other notice of its or his election not to renew this Agreement at least ninety
(90) days prior to the termination of the Initial Term or any subsequent renewal
term, as the case may be, the term of this Agreement shall automatically be
renewed for the one-year period commencing on the first day following the
termination of the Initial Term or the renewal term then ended, as the case may
be. The provisions of Article V and of Sections 4.3 and 4.6 shall continue in
effect in accordance with their respective terms, notwithstanding any
termination or expiration of this Agreement.
ARTICLE III
COMPENSATION
3.1 BASE SALARY. For services rendered by Employee under this
Agreement, the Employee shall receive a base salary at an initial rate of
$300,000.00 per year (the "Base Salary"), payable in accordance with the pay
period policy established by the Company from time to time. On each anniversary
of the Commencement Date, the Base Salary shall be increased by a percentage
which is equal to the percentage increase in the "Consumer Price Index for All
Urban Consumers -- All Cities" published by the United States Department of
Labor's Bureau of Labor Statistics for the then most recently ended 12-month
period as of the date of such adjustment, and by such additional amounts as may
be determined at the discretion of the Board of Directors.
-3-
<PAGE>
3.2 BONUSES.
(A) SIGN-ON BONUS. Employee acknowledges the receipt,
concurrently herewith, of a bonus in the amount of $70,000 from the
Company. In addition, the Company shall promptly pay to Employee upon
execution hereof the sum of $6,110 as reimbursement for certain prepaid
vacation expenses which were forfeited by employee by reason of his
acceptance of this position.
(B) PERFORMANCE BONUS. Within one hundred and twenty (120)
days of the close of each calendar year (beginning with calendar year
1996), the Company shall pay to the Employee a cash bonus in such
amount as may be determined at the discretion of the Board of Directors
but in no event will such bonus exceed the Base Salary of Employee for
that calendar year.
(C) SALE OR MERGER OF COMPANY. In the event of:
(I) a sale for consideration consisting solely of
cash and/or debt securities of all or substantially all of the
capital stock of the Company pursuant to a single transaction
or a series of related transactions to a person (within the
meaning of Section 13(d)(2) of the Securities Exchange Act of
1934, as amended (the "Exchange Act")); or
(II) the merger or consolidation of the Company
pursuant to which shares of the Company's stock are converted
into the right to receive solely cash and/or debt securities;
then in either such event, Employee shall receive a bonus based upon the present
value of the consideration payable per share of the capital stock of the Company
in respect of such transaction as set forth below: PER SHARE CONSIDERATION BONUS
AMOUNT less than $10.00 no bonus
-4-
<PAGE>
$10.00 - $10.49 $50,000
$10.50 - $10.99 $100,000
$11.00 - $11.49 $150,000
$11.50 - $11.99 $200,000
$12.00 - $12.49 $250,000
$12.50 and above $300,000
Notwithstanding the foregoing, the present value of the per share consideration
of the capital stock of the Company shall be appropriately adjusted to account
for stock splits, reverse stock splits,
stock dividends and other recapitalizations.
3.3 STOCK OPTIONS. As additional compensation for the performance by
the Employee of his services hereunder and as soon as practicable following the
approval by the Board of Directors of the Company of an amendment to the
Company's 1995 Stock Option Plan to increase the number of shares of the
Company's common stock for which options under the 1995 Stock Option Plan may be
exercised, the Employee will be granted options to purchase 100,000 shares of
common stock of the Company at a price equal to the lower of $9.50 per share or
the fair market value of the shares of common stock of the Company on the date
of grant; provided, that if the shareholders of the Company shall fail to ratify
said amendment to the 1995 Stock Option Plan at the next annual meeting of the
shareholders of the Company, then such grant of options will be deemed
automatically terminated and to be of no force or effect. Such options shall be
subject to level vesting over a period of three (3) years.
3.4 ADDITIONAL BENEFITS. Separate and apart from Employee's cash
compensation as set forth above, the Company shall be entitled to:
-5-
<PAGE>
(a) coverage under the Company's standard life and health insurance
package for executives;
(b) a monthly automobile allowance equal to $750;
(c) participation in the Company's Supplemental Employee Retirement
Pension Plan;
(d) a temporary housing allowance in the amount of $3,250 per month
for such period as shall be necessary for Employee to arrange suitable
housing in the Naples, Florida area, but in any event, such allowance shall
be provided for no less than six (6) months and for no more than eighteen
(18) months from the date of the execution of this Agreement;
(e) reimbursement of reasonable travel expenses for Employee and his
wife, from time to time, between Baltimore, Maryland and Naples, Florida;
(f) reimbursement for reasonable costs of relocating Employee and his
wife from Baltimore, Maryland to Naples, Florida in an amount not to exceed
$50,000, including any such expenses which were previously reimbursed by
the Company;
(g) indemnification for any loss arising out of the sale of Employee's
house in Baltimore, Maryland; and
(h) four (4) weeks paid vacation annually.
In addition to the benefits listed above, Employee shall be entitled to
participate in and receive any other benefits as may be established by the Board
of Directors, on the same terms and conditions as provided to other executives
of the Company generally (including, but not limited to, any deferred
compensation plan, hospital plan or major medical insurance).
ARTICLE IV
TERMINATION AND SEVERANCE
4.1 TERMINATION FOR CAUSE. Subject to Company's obligation to pay Non-
Competition Severance Pay to the extent provided in Section 4.3(a), Company may
terminate this Agreement with cause upon the occurrence of any one or more of
the following events:
-6-
<PAGE>
(A) Employee ceases to perform any of his material duties of
employment or breaches any material provision of this Agreement, which
event is not corrected within thirty (30) days after written notice is
delivered by the Company to the Employee specifying said failure or
breach. In the event Company and Employee cannot agree as to whether
any such duty or provision is material, and in the event Employee
fails to correct the condition within thirty (30) days as set forth
above, then the parties shall submit the dispute (only as to
materiality) only to arbitration for determination in accordance with
the rules of the American Arbitration Association under the
jurisdiction of the regional headquarters in or closest to Naples,
Florida as follows:
(I) Each party shall select one (1) arbitrator, and the two
(2) so designated shall select a third arbitrator. If either
party shall fail to designate an arbitrator within seven (7) days
after arbitration is requested then the one selected arbitrator
shall conduct the proceeding. If the two (2) arbitrators shall
fail to select a third arbitrator within fourteen (14) days after
arbitration is requested, then an arbitrator shall be selected by
the American Arbitration Association upon application of either
party. Arbitration proceedings shall be conducted in accordance
with the rules then prevailing of the American Arbitration
Association. Judgment upon an award of a sole arbitrator, or if
there shall be three arbitrators, upon an award of the majority
of the arbitrators shall be binding, and shall be entered in a
court of competent jurisdiction as a finding of that court for
purposes of adjudication of the disputes between the parties on
the issue of materiality.
(II) After expiration of the thirty (30) day cure period set
forth above, the Company may treat the Employee as terminated
during the arbitration period subject to full reinstatement with
full back-pay and compensation as provided for in this Agreement
in the event the judgment of the arbitrators is in favor of the
Employee and against the Company.
(B) Employee commits a felony or commits theft, larceny or
embezzlement of Company's tangible or intangible property; or
(C) Employee becomes disabled or is unable to perform his normal
duties, which condition persists for a period of ninety (90) days or more,
and Company has provided Employee with disability insurance which shall
begin to pay after said ninety (90) day period expires. 4.2 TERMINATION
WITHOUT CAUSE. Subject to the Company's obligation to pay Non-
Competition Severance Pay to the extent provided in Section 4.3(b), Company may
terminate this Agreement at any time without cause.
-7-
<PAGE>
4.3 SEVERANCE PAY.
(A) In the event that this Agreement is terminated by the
Company at any time for cause, the Company shall pay to Employee
non-competition severance pay of Employee's Base Salary and additional
benefits described in this Agreement on a monthly basis
("Non-Competition Severance Pay") for a period of eighteen (18) months;
provided, however, that while Employee is receiving Non-Competition
Severance Pay, Employee shall be bound by the non-competition
restrictions of Section 5.2.
(B) In the event that this Agreement is terminated at any time
by the Company without cause, Company shall pay to Employee
Non-Competition Severance Pay for a period of twenty-four (24) months
as liquidated damages. In addition, upon a termination of the Employee
by the Company at any time without cause, all stock options then held
by the Employee will automatically become fully vested and Employee
shall be bound by the non-competition restrictions of Section 5.2
during the applicable period that Non- Competition Severance Pay is
being received by Employee.
(C) In the event that this Agreement is terminated at any time
by the Employee due to a Change of Control in accordance with Section
4.4, the Company shall pay to Employee non-competition severance pay
for a period of thirty-six (36) months; provided, however, while
Employee is receiving Non-Competition Severance Pay, Employee shall be
bound by the non-competition restrictions of Section 5.2. In addition,
upon a termination of this Agreement pursuant to Section 4.4, all stock
options then held by the Employee will automatically become fully
vested.
-8-
<PAGE>
4.4 CHANGE OF CONTROL.
(A) In the event of a Change of Control of the Company should
occur during the term of the Employee's employment hereunder, the
Employee shall have the right, upon the giving of thirty (30) days'
notice to the Company within one hundred eighty (180) days following
such event, to terminate his employment under this Agreement. For
purposes of this Agreement, a "Change of Control of the Company" shall
be deemed to occur if (i) there shall be consummated (x) any
consolidation or merger of the Company in which the Company is not the
continuing or surviving corporation other than a merger of the Company
in which the holders of the Company's Common Stock immediately prior to
the merger have the same proportionate ownership of common stock of the
surviving corporation immediately after the merger, or (y) any sale,
lease, exchange or other transfer (in one transaction or a series of
related transactions) of all, or substantially all, of the assets of
the Company, or (ii) the stockholders of the Company shall approve any
plan or proposal for liquidation or dissolution of the Company, or
(iii) any person (as such term is used in Sections 13(d) and 14(d)(2)
of the Exchange Act), other than Robert N. Elkins or any institutional
investor, shall become the beneficial owner (within the meaning of Rule
13d-3 under the Exchange Act) of 20% or more of the Company's
outstanding Common Stock, or (iv) Robert N. Elkins shall cease to be a
director of the Company.
(B) Notwithstanding anything herein to the contrary, the
present value of the payments and benefits to Employee, whether under
this Agreement or otherwise, which are includable in the computation of
"parachute payments" (as defined in Section 280G of the Internal
Revenue Code) shall not exceed 2.99 times the Employee's base amount,
all within the meaning and as computed under Section 280G of the Code.
Such determination
-9-
<PAGE>
shall be made by the regular independent accountants retained by the
Company immediately prior to the Change of Control, whose
determination shall be conclusive and binding on the parties.
4.5 DEATH OF THE EMPLOYEE. In the event of the death of the Employee
during the term of his employment hereunder, this Agreement shall terminate
immediately and the Employee's estate shall thereupon be entitled to receive
such portion of the Employee's Base Salary as has been accrued through the date
of his death.
4.6 CONTINUATION OF BENEFITS. Whenever under the provisions of this
Article IV the Employee shall be entitled to receive a continuation of his Base
Salary for a period of time following a termination or nonrenewal of his
employment under this Agreement, it is agreed that the Company also shall
continue to pay for or provide during such period of salary continuation any
hospital plan or major medical insurance and the automobile allowance provided
for in subparagraph (b) of Paragraph 3.4 of this Agreement.
ARTICLE V
COVENANTS OF THE EMPLOYEE
5.1 CONFIDENTIAL INFORMATION. In connection with employment at the
Company, Employee will have access to confidential information consisting of
some or all of the following categories of information. Company and Employee
consider their relation one of confidence with respect to such information:
(A) FINANCIAL INFORMATION, including but not limited to
information relating to the Company's earnings, assets, debts, prices,
pricing structure, volume of purchases or sales or other financial data
whether related to the Company or generally, or to particular products,
services, geographic areas, or time periods;
-10-
<PAGE>
(B) SUPPLY AND SERVICE INFORMATION, including but not limited
to information relating to goods and services, suppliers' names or
addresses, terms of supply or service contracts or of particular
transactions, or related information about potential suppliers to the
extent that such information is not generally known to the public, and
the extent that the combination of suppliers or use of a particular
supplier, though generally known or available, yields advantages to the
Company details of which are not generally known;
(C) MARKETING INFORMATION, including but not limited to
information relating to details about ongoing or proposed marketing
programs or agreements by or on behalf of the Company, sales forecasts,
advertising formats and methods or results of marketing efforts or
information about impending transactions;
(D) PERSONNEL INFORMATION, including but not limited to
information relating to any employee's personal or medical history,
compensation or other terms of employment actual or proposed
promotions, hirings, resignations, disciplinary actions, terminations
or reasons therefor, training methods, performance, or other employee
information; and
(E) CUSTOMER INFORMATION, including but not limited to
information relating to past, existing or prospective customers' names,
addresses or backgrounds, records of agreements and prices, proposals
or agreements between customers and the Company, status of customers'
accounts or credit, or related information about actual or prospective
customers as well as customer lists.
All of the foregoing are hereinafter referred to as "Trade Secrets."
During and after the employment by the Company, regardless of the reasons that
such employment ends, Employee agrees:
(AA) To hold all Trade Secrets in confidence and not discuss,
communicate or transmit to others, or make any unauthorized copy of or
use the Trade Secrets in any capacity, position or business except as
it directly relates to Employee's employment by the Company;
(BB) To use the Trade Secrets only in furtherance of proper
employment related reasons of the Company to further the interests of
the Company;
(CC) To take all reasonable actions that Company deems
necessary or appropriate, to prevent unauthorized use or disclosure of
or to protect the Company's interest in the Trade Secrets; and
-11-
<PAGE>
(DD) That any of the Trade Secrets, whether prepared by
Employee or which may come into Employee's possession during Employee's
employment hereunder, are and remain the property of the Company and
its affiliates, and all such Trade Secrets, including copies thereof,
together with all other property belonging to the Company or its
affiliates, or used in their respective businesses, shall be delivered
to or left with the Company. This Agreement does not apply to (i)
information that by means other than Employee's
deliberate or inadvertent disclosure becomes generally known to the public; and
(ii) disclosure compelled by judicial or administrative proceedings after
Employee diligently tries to avoid each disclosure and affords the Company the
opportunity to obtain assurance that compelled disclosures will receive
confidential treatment.
5.2 NON-COMPETITION. In consideration of the Employee's employment
hereunder, the Employee hereby agrees that, without the express written consent
of the Company, during the applicable period set forth in Article IV hereof
following a termination or nonrenewal of this Agreement, the Employee will not,
directly or indirectly, for the Employee or on behalf of any other person, firm,
entity or other enterprise (a) hire, or directly or indirectly solicit for
employment or recommend to any subsequent employer of the Employee the
solicitation for employment of, any person who, at the time of such hiring or
solicitation is, or during the prior three months was, employed by Company, (b)
directly or indirectly solicit, divert, or endeavor to entice away any customer
of the Company, or otherwise engage in any activity intended to terminate,
disrupt, or interfere with the Company's relationship with any customer,
supplier, lessor or other person, or (c) be employed by, be a director, officer
or manager of, act as a consultant for (other than as permitted under Section
1.2), be a partner in, have a proprietary interest in, give advice to, loan
money to or otherwise associate with, any person, enterprise,
-12-
<PAGE>
partnership, association, corporation, joint venture or other entity which is
directly in the business of owning, operating or managing any facility which
competes with any such type of facility then operated by the Company. This
provision shall not be construed to prohibit the Employee from owning up to five
(5%) percent of the issued shares of any company whose common stock is listed
for trading on any national securities exchange or on the NASDAQ System.
5.3 REMEDIES FOR BREACH. The Employee acknowledges that the covenants
contained in Article V of this Agreement are independent covenants and that any
failure by the Company to perform its obligations under this Agreement (other
than the act of nonpayment which is not cured by the Company within thirty (30)
days of the receipt of written notice of said condition from the Employee) shall
not be a defense to enforcement of the covenants contained in Article V,
including but not limited to a temporary or permanent injunction. The Employee
acknowledges that damages in the event of Employee's breach of this Article V
will be difficult, if not impossible, to ascertain and it is therefore agreed
that the Company, in addition to, and without limiting any other remedy or right
it may have, shall have the right to an injunction enjoining the said breach.
Notwithstanding anything to the contrary contained in this Agreement, and in
addition to any other remedy available to the Company at law or in equity or
otherwise, the Company's obligation to make payments of Non-Competition
Severance Payments shall cease if Employee shall violate any provision of this
Article V and such violation shall continue uncured for a period of thirty (30)
or more days.
5.4 AFFILIATES. For purposes of this Article V, the term "Company"
shall be deemed to include each of the Company's subsidiaries and other
affiliates.
-13-
<PAGE>
ARTICLE VI
ASSIGNMENT
6.1 PROHIBITION OF EMPLOYMENT ASSIGNMENT. The Employee agrees on behalf
of the Employee and the Employee's heirs and executors, personal
representatives, and any other person or persons claiming any benefit under the
Employee by virtue of this Agreement, that this Agreement and the rights,
interests, and benefits hereunder shall not be assigned, transferred, pledged or
hypothecated in any way by the Employee or the Employee's heirs, executors and
personal representatives, and shall not be subject to execution, attachment or
similar process. Any attempt to assign, transfer, pledge, hypothecate or
otherwise dispose of this Agreement or any such rights, interests and benefits
thereunder contrary to the foregoing provision, or the levy of any attachment or
similar process thereupon shall be null and void and without effect and shall
relieve the Company of any and all liability hereunder.
6.2 RIGHT OF COMPANY TO ASSIGN. This Agreement shall be assignable and
transferable by the Company to Company's transferee, assignee or any
successor-in-interest, parent, subsidiary or affiliate of Company, and shall
inure to the benefit of and be binding upon the Employee, the Employee's heirs
and personal representatives, and the Company and its successors and assigns.
Employee agrees to execute all documents necessary to ratify and effectuate such
assignment. An assignment of this Agreement by the Company shall not release the
Company from its monetary and stock obligations under this Agreement.
-14-
<PAGE>
ARTICLE VII
GENERAL
7.1 GOVERNING LAW. This Agreement shall be subject to and governed by
the laws of the State of Florida, irrespective of the fact that the Employee may
be or become a resident of a different state.
7.2 BINDING EFFECT. This Agreement shall be binding upon and inure to
the benefit of the Company and the Employee and their respective heirs, legal
representatives, executors, administrators, successors and permitted assigns.
7.3 ENTIRE AGREEMENT. This Agreement constitutes the entire Agreement
between the parties and contains all of the agreements between the parties with
respect to the subject matter hereof; this Agreement supersedes any and all
other agreements, either oral or in writing, between the parties hereto with
respect to the subject hereof. No change or modification of this Agreement shall
be valid unless the same be in writing and signed by both parties hereto. No
waiver of any provisions of this Agreement shall be valid unless in writing and
signed by the person or party to be charged.
7.4 SEVERABILITY. If any portion of this Agreement shall be for any
reason, invalid or unenforceable, the remaining portion or portions shall
nevertheless be valid, enforceable and carried into effect, unless to do so
would clearly violate the present legal and valid intention of the parties
hereto.
7.5 NOTICES. All notices, demands, requests, consents, approvals or
other communications required or permitted hereunder shall be in writing and
shall be delivered by hand, registered or certified mail with return receipt
requested or by a nationally recognized
-15-
<PAGE>
overnight delivery service, in each case with all postage or other delivery
charges prepaid, and to the address of the party to whom it is directed as
indicated below, or to such other address as such party may specify by giving
notice to the other in accordance with the terms hereof. Any such notice shall
be deemed to be received (a) when delivered, if by hand, (b) on the next
business day following timely deposit with a nationally recognized overnight
delivery service or (c) on the date shown on the return receipt as received or
refused or on the date the postal authorities state that delivery cannot be
accomplished, if sent by registered of certified mail, return receipt requested.
IF TO THE COMPANY: Community Care of America, Inc.
3050 North Horseshoe Drive, Suite 260
Naples, FL 33942
Attention: Chairman of the Board
WITH A COPY TO: Blass & Driggs
461 Fifth Avenue
New York, NY 10017
Attention: Michael S. Blass
IF TO THE EMPLOYEE: Gary W. Singleton
IN WITNESS WHEREOF, the Company has caused this Agreement to be signed
by its duly authorized officer and its corporate seal to be hereunto affixed,
and the Employee has hereunto set Employee's hand on the day and year first
above written.
COMPANY EMPLOYEE
COMMUNITY CARE OF AMERICA, INC.
By: /s/ David H. Fater /s/ Gary W. Singleton
------------------------------- ---------------------------------
David H. Fater, Gary W. Singleton
Executive Vice President
-16-
April 14, 1997
Community Care of America, Inc.
3050 N. Horseshoe Drive, Suite 260
Naples, FL 33942
Attn.: Deborah A. Lau
President and Chief Executive Officer
Gentlemen:
Community Care of America, Inc. and its subsidiaries (collectively,
"CCA") have entered into certain loan and lease financings with Health and
Retirement Properties Trust ("HRP"). CCA has requested that HRP (a) consent to
the waiver through February 28, 1998 of the covenants in the loan and lease
documentation with HRP (the "CCA Documents") requiring CCA (i) to maintain a
ratio of current assets to current liabilities of at least 1.0 to 1.0 and (ii)
not to permit its tangible net worth to be less than $5,000,000 and (b) agree to
apply a portion of the $6,185,000 security deposit held by HRP as collateral for
the obligations of CCA under the CCA Documents (the "Security Deposit") to the
payment of existing arrearages under the CCA Documents, to pay a restructuring
fee to HRP and to pay 50% of monthly payments of regularly scheduled
installments of Minimum and Additional Rent, Mortgage Facilities Fees and
principal and interest on loans by HRP, as and when due.
After consideration, HRP is willing to agree as follows:
1. Waiver. Subject to the effectiveness hereof as provided in paragraph
3 below,
(a) HRP hereby agrees, during the period from the date hereof
through February 28, 1998, to waive compliance by CCA with the
covenants in the CCA Documents that require CCA (a) to maintain a ratio
of current assets to current liabilities of at least 1.0 to 1.0 and (b)
not to permit its tangible net worth to be less than $5,000,000
(provided that in no event may the tangible net worth of CCA be less
than $1,000,000 at any time, and provided further that HRP shall treat
that certain note receivable from a shareholder in the amount of
$1,444,000, as a tangible asset of CCA for the purposes of determining
CCA's compliance with such tangible net worth covenant); and
<PAGE>
Community Care of America, Inc.
April 14, 1997
Page 2
(b) CCA and HRP agree that HRP shall apply $5,035,000 of the
Security Deposit (the "Relevant Amount") to the payment of the
following obligations, at the times set forth below:
(i) First, upon the effectiveness hereof as provided
in paragraph 3 below, to the payment of all past due amounts
payable to HRP under the CCA Documents as of the date hereof;
(ii) Second, upon the effectiveness hereof as
provided in paragraph 3 below, to pay a non-refundable
restructuring fee to HRP in the amount of $865,732; and
(iii) Third, as and when such instalments become due
under the CCA Documents, HRP shall apply the balance of the
Relevant Amount to the payment of 50% of each regularly
scheduled installment of Minimum and Additional Rent, Mortgage
Facilities Fees and principal and interest on loans by HRP;
and each such application by HRP shall reduce the obligation
of CCA to pay such installment on a dollar-for-dollar basis.
2. Amendment to CCA Documents. Subject to the effectiveness hereof as
provided in paragraph 3 below, the IHS Guaranty (as defined below), as in effect
from time to time, shall be deemed included within the term "Transaction
Documents" (and in other terms of like import) used in the various CCA
Documents.
3. Effectiveness. Paragraphs 1 and 2 of this letter shall become
effective on the date and time that a counterpart to this letter shall have been
accepted by CCA, and each of the following conditions shall have been satisfied:
(a) Integrated Health Services, Inc., a Delaware corporation
("IHS") shall have executed and delivered to HRP a Guaranty in the form
attached hereto as Exhibit A (the "IHS Guaranty");
(b) giving effect to the effectiveness of this letter, no
Event of Default under and as defined in the CCA Documents, or event or
condition that with the giving of notice or lapse of time or both could
become such an Event of Default, shall have occurred and be continuing,
and the representations contained in the CCA Documents and in the IHS
Guaranty shall be true and correct on the date of the effectiveness
hereof as if made on and as of such date (except to the extent that
such representation and warranties expressly related to an earlier
date);
(c) HRP shall have received a certificate of a senior
executive officer of CCA and IHS confirming satisfaction of the
condition described in paragraph (b) above; and
(d) HRP shall have received such other documents, opinions and
certificates (including without limitation, opinions of counsel to IHS
and CCA, and certificates of public
<PAGE>
Community Care of America, Inc.
April 14, 1997
Page 3
officials and of officers of IHS and CCA) as HRP shall have requested,
each of which shall be in form and substance satisfactory to HRP in its
sole discretion
4. Confirmation. All CCA Documents shall remain in full force and
effect, as specifically modified hereby, and are hereby ratified and confirmed.
The waivers and modifications set forth herein do not constitute waivers or
modifications of any term, condition or covenant of the CCA Documents other than
as expressly set forth herein, and shall not prejudice any rights which HRP may
now or hereafter have under or in connection with any CCA Documents.
5. No Counterclaims, Etc.; Release. CCA acknowledges that immediately
prior to its acceptance of this letter, it is obligated to pay all indebtedness
and obligations arising under the CCA Documents without a right of set-off,
counterclaim or defense with respect thereto. In consideration of HRP's
agreements contained herein, CCA does hereby release and forever discharge HRP
and its affiliates, officers, directors, agents, attorneys, employees,
successors and assigns, of and from all manner of actions, causes of action,
suits, judgments, claims and demands whatsoever, in law or in equity, which have
arisen from the beginning of time up and including the date hereof, whether
arising in connection with the transactions contemplated hereby or by the CCA
Documents, or otherwise.
6. Expenses. You agree to pay on demand all costs and expenses of HRP
in connection with the preparation, reproduction, execution and delivery of this
letter, including the reasonable fees and out-of-pocket expenses of Sullivan &
Worcester LLP, special counsel for HRP with respect thereto. This letter may be
signed in one or more counterparts each of which taken together shall constitute
one and the same instrument.
7. GOVERNING LAW. THIS LETTER SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS.
8. NO LIABILITY OF TRUSTEES, ETC. THE DECLARATION OF TRUST ESTABLISHING
HRP, DATED OCTOBER 9, 1986, A COPY OF WHICH, TOGETHER WITH ALL AMENDMENTS
THERETO (THE "DECLARATION"), IS DULY FILED WITH THE DEPARTMENT OF ASSESSMENTS
AND TAXATION OF THE STATE OF MARYLAND, PROVIDES THAT THE NAME "HEALTH AND
RETIREMENT PROPERTIES TRUST" REFERS TO THE TRUSTEES UNDER THE DECLARATION
COLLECTIVELY AS TRUSTEES, BUT NOT INDIVIDUALLY OR PERSONALLY, AND THAT NO
TRUSTEE, OFFICER, SHAREHOLDER, EMPLOYEE OR AGENT OF HRP SHALL BE HELD TO ANY
PERSONAL LIABILITY, JOINTLY OR SEVERALLY, FOR ANY OBLIGATION OF, OR CLAIM
AGAINST, HRP. ALL PERSONS DEALING WITH HRP IN ANY WAY SHALL LOOK ONLY TO THE
ASSETS OF HRP FOR THE PAYMENT OF ANY SUM OR THE PERFORMANCE OF ANY OBLIGATION.
<PAGE>
Community Care of America, Inc.
April 14, 1997
Page 4
HEALTH AND RETIREMENT
PROPERTIES TRUST
By: /s/ David J. Hegarty
----------------------------
David J. Hegarty
President
ACCEPTED
COMMUNITY CARE OF AMERICA, INC.
By /s/ Deborah Lau
---------------------------
Deborah Lau
President
ECA HOLDINGS, INC.
ECA PROPERTIES, INC.
CCA ACQUISITION I, INC.
MARIETTA/SCC, INC.,
GLENWOOD/SCC, INC.
DUBLIN/SCC, INC.
MACON/SCC, INC.
COLLEGE PARK/SCC, INC.
COMMUNITY CARE OF NEBRASKA, INC.,
W.S.T. CARE, INC.
QUALITY CARE OF LYONS, INC.
QUALITY CARE OF COLUMBUS, INC.
By /s/ Deborah Lau
---------------------------
Deborah Lau
President
By signing above the foregoing
officers certify that this action
has been duly authorized.
<PAGE>
EXHIBIT A
<PAGE>
WARRANT NO. C-1 379,900 SHARES
NO SALE, OFFER OR TRANSFER OF THIS WARRANT SHALL BE MADE
UNLESS A REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF
1933, AS AMENDED, WITH RESPECT TO SUCH
TRANSACTION IS THEN IN EFFECT OR SUCH TRANSFER IS EXEMPT FROM
REGISTRATION UNDER SUCH ACT.
WARRANT
TO SUBSCRIBE FOR AND PURCHASE SHARES OF
COMMON STOCK OF
COMMUNITY CARE OF AMERICA, INC.
This certifies that, for value received, Integrated Health Services,
Inc., a Delaware corporation (the "Holder") or its registered assigns, is
entitled, subject to the terms and conditions of this Warrant, at any time or
from time to time at or after the time the Purchase Price (as defined herein)
has been established (the "Commencement Date") and at or before 5:00 P.M., New
York time, on April 15, 2002 (the "Expiration Date"), to subscribe for and
purchase an aggregate of Three Hundred Seventy Nine Thousand Nine Hundred
(379,900) fully paid and non assessable shares of the common stock, $.0025 par
value ("Common Stock"), of Community Care of America, Inc. (the "Company"), at
the Purchase Price (as defined herein), upon surrender of this Warrant and
payment of the Purchase Price to the Company at the address set forth herein for
notices to the Company or at such other place as the Company may designate by
written notice to the Registered Holder. The number of shares of Common Stock
issuable upon exercise of this Warrant and the Purchase Price are subject to
adjustment and change as provided herein (any reference hereinafter to Purchase
Price shall mean the Purchase Price as adjusted pursuant the terms of this
Warrant). This Warrant is issued pursuant to that certain Warrant Acquisition
Agreement, dated of even date herewith, between the Company and the Holder (the
"Purchase Agreement").
1. CERTAIN DEFINITIONS.
As used in this Warrant the following terms shall have the following
respective meanings:
"Common Stock Deemed Outstanding" means, at any given time, the number
of shares of Common Stock actually outstanding at such time, plus the number of
shares of Common Stock deemed to be outstanding pursuant to Sections 4.1(i) and
4.l(ii) hereof regardless of whether the Options or Convertible Securities are
actually exercisable at such time, but excluding any shares of Common Stock
issuable upon exercise of the IHS Warrants.
"Convertible Securities" shall mean any stock or securities directly or
indirectly convertible into Common Stock.
<PAGE>
"IHS Warrants" shall mean this Warrant and Warrant No. W-2, issued to
the Holder on even date herewith, and any warrants delivered in substitution or
exchange therefor as provided herein and therein.
"Market Price" as to any security on any day shall mean the closing
sale price of such security as reported for such day pursuant to the
consolidated quotation system or any other transaction reporting plan under
Section 11A of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), or, if there have been no sales so reported for such day, the average of
the best bid and best offer prices quoted under the consolidated quotation
system or any other such transaction reporting plan as of 4:00 P.M., New York
time, on such day, or, if on any day such security is not so quoted, the average
of the best bid and best offered prices on such day in the domestic
over-the-counter market as reported by any electronic communications network, as
such term is used in Rule 11Acl-1(a)(8) under the Exchange Act or by the
National Quotation Bureau, Incorporated, or any similar successor or comparable
organization. If at any time such security is not listed on any domestic
securities exchange or quoted under a transaction reporting plan or in the
domestic over-the-counter market, the "Market Price" shall be the fair value
thereof determined jointly by the Company and the Registered Holders; provided
that if such parties are unable to reach agreement as to the Market Price, the
Market Price shall be determined by appraisal as set forth in Section 12 of this
Warrant.
"Note" shall mean the Subordinated Note, dated as of December 27, 1996,
executed by the Company pursuant to that certain Revolving Credit Agreement,
dated as of December 27, 1996, between the Company and the Holder.
"Options" means any rights, warrants or options to subscribe for or
purchase Common Stock or Convertible Securities.
"Person" shall mean any natural person and any corporation,
partnership, limited liability company, limited liability partnership, joint
venture, association, joint-stock partnership, trust, unincorporated
organization or government or other agency or political subdivision thereof.
"Purchase Price" shall mean the price per share equal to the average of
the high and low trading price of the Common Stock reported in The Wall Street
Journal, Eastern edition, for the first two full trading days following the Date
of Issuance (as such term is defined in Section 7.2 hereof) of this Warrant, as
such price may be adjusted from time to time pursuant to Section 4 hereof
"Registered Holder" shall mean any Person in whose name this Warrant is
registered upon the books and records maintained by the Company.
-2-
<PAGE>
"Subsidiary" shall mean, with respect to any Person, any corporation,
limited liability company, partnership, association or other business entity of
which (i) if a corporation, a majority of the total voting power of shares of
stock entitled (without regard to the occurrence of any contingency) to vote in
the election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by that Person or one or more of the other
Subsidiaries of that Person or a combination thereof, or (ii) if a limited
liability company, partnership, association or other business entity, a majority
of the partnership or other similar ownership interest thereof is at the time
owned or controlled, directly or indirectly, by that Person or one or more
Subsidiaries of that Person or a combination thereof. For purposes hereof, a
Person or Persons shall be deemed to have a majority ownership interest in a
limited liability company, partnership, association or other business entity if
such Person or Persons shall be allocated a majority of limited liability
company, partnership, association or other business entity gains or losses or
shall be or control any managing director or general partner of such limited
liability company, partnership, association or other business entity.
"Underlying Common Stock" shall mean (i) the shares of Common Stock
issued or issuable upon exercise of the Warrant and (ii) any Common Stock issued
or issuable with respect to the securities referred to in clause (i) above by
way of stock dividend or stock split or in connection with a combination of
shares, recapitalization, merger, consolidation, or other reorganization.
"Warrant" as used herein, shall include this Warrant and any warrant
delivered in substitution or exchange therefor as provided herein.
2. EXERCISE.
2.1 EXERCISE PERIOD. The Warrant shall be exercisable in whole or in
part from and after 9:00 A.M., New York time, on the Commencement Date.
2.2 EXERCISE PROCEDURE.
(I) This Warrant shall be deemed to have been exercised when the
Company has received all of the following items:
(A) an Election to Purchase in the form attached hereto as
Exhibit A, properly completed and executed by the Person (the
"Purchaser") exercising all or part of the purchase rights represented
by this Warrant;
(B) this Warrant;
(C) if this Warrant is not registered in the name of the
Purchaser, an Assignment or Assignments in the form set forth in
Exhibit B hereto evidencing the assignment of this Warrant to the
Purchaser, in which case the Registered Holder shall have complied with
the provisions set forth in Section 7.1 hereof; and
-3-
<PAGE>
(D) either (1) a check or wire transfer payable to the Company
in an amount equal to the product of the Purchase Price multiplied by
the number of shares of Common Stock being purchased upon such exercise
(the "Aggregate Exercise Price"), (2) a written notice to the Company
that the Purchaser is exercising the Warrant (or a portion thereof) by
authorizing the Company to withhold from issuance a number of shares of
Common Stock issuable upon such exercise of the Warrant which when
multiplied by the Market Price of Common Stock is equal to the
Aggregate Exercise Price (and such withheld shares of Common Stock
shall no longer be issuable under this Warrant), or (3) if the Holder
holds the Note, a written notice to the Company that the Holder is
exercising the Warrant (or a portion thereof) by authorizing the
Company to withhold and apply such amount of principal or accrued but
unpaid interest under the Note (whether or not then due) as is equal to
the Aggregate Purchase Price (and such amount of principal or accrued
and unpaid interest under the Note shall no longer be payable to the
Holder).
(II) Certificates for shares of Common Stock purchased upon exercise of
this Warrant shall be delivered by the Company to the Purchaser within three (3)
business days after the date of the exercise, together with cash in lieu of any
fraction of a share of Common Stock that would be issuable upon such exercise in
an amount equal to the Market Price of such fractional share as of the date of
exercise. No fractional shares of Common Stock or scrip representing fractional
shares of Common Stock shall be issued upon an exercise of this Warrant. Unless
this Warrant has expired or all of the purchase rights represented hereby have
been exercised, the Company shall prepare a new Warrant, substantially identical
hereto, representing the rights formerly represented by this Warrant which have
not expired or been exercised and shall within such three (3) business day
period deliver such new Warrant to the Purchaser.
(III) The shares of Common Stock issuable upon the exercise of this
Warrant shall be deemed to have been issued to the Purchaser at the time of
exercise, and the Purchaser shall be deemed for all purposes to have become the
record holder of such Common Stock at such time.
(IV) The Company shall not close its books against the transfer of this
Warrant or of any share of Common Stock issued or issuable upon the exercise of
this Warrant in any manner which interferes with the timely exercise of this
Warrant. The Company shall from time to time take all such action as may be
necessary to assure that the par value per share of the unissued Common Stock
acquirable upon exercise of this Warrant is at all times equal to or less than
the Purchase Price then in effect.
(V) The Company shall assist and cooperate with any Registered Holder
or Purchaser to make any governmental filings or obtain any governmental
approvals required prior to or in connection with any exercise of this Warrant
(including, without limitation, making at the Company's own expense any filings
required to be made by the Company).
-4-
<PAGE>
3. EXPIRATION DATE.
The Warrant evidenced hereby may not be exercise after 5:00 P.M., New
York time, on the Expiration Date with respect to the shares of the Common Stock
as to which the Warrant may be exercised and, to the extent not exercised by the
Expiration Date, the Warrant evidenced hereby shall become void.
4. ADJUSTMENTS.
Subject to the provisions of this Section 4, the Purchase Price and the
number of shares of the Common Stock as to which the Warrant may be exercised
shall be subject to adjustment from time to time as hereinafter set forth:
4.1 EFFECT ON PURCHASE PRICE AND NUMBER OF SHARES OF CERTAIN EVENTS. If
and whenever on or after the Commencement Date, the Company issues or sells, or
in accordance with this Section 4.1 is deemed to have issued or sold, any share
of Common Stock for a consideration per share less than the Purchase Price in
effect immediately prior to such time, then immediately upon such issuance or
sale the Purchase Price shall be reduced pursuant to this Section 4.1 to a new
Purchase Price determined by dividing (A) the sum of (x) the product derived by
multiplying the Purchase Price in effect immediately prior to such issue or sale
times the number of shares of Common Stock Deemed Outstanding immediately prior
to such issue or sale, plus (y) the consideration, if any, received by the
Company upon such issue or sale, by (13) the number of shares of Common Stock
Deemed Outstanding immediately after such issue or sale. Upon each such
adjustment of the Purchase Price, the number of shares of Common Stock issuable
upon the exercise of this Warrant (to the extent not theretofore exercised)
shall be increased to a number determined by multiplying the number of such
shares so purchasable immediately prior to such adjustment by a fraction, the
numerator of which shall be the Purchase Price in effect immediately prior to
such adjustment and the denominator of which shall be the Purchase Price in
effect immediately after such adjustment. For purposes of determining the
Purchase Price as adjusted under this Section 4.1, the following shall be
applicable:
(I) ISSUANCE OF RIGHTS OR OPTIONS. If on or after the Commencement Date
the Company in any manner issues, grants or sells any Options and the price per
share for which a share of Common Stock is issuable upon the exercise of any
such Option, or upon conversion or exchange of any Convertible Security issuable
upon exercise of such Option, is less than the Purchase Price in effect
immediately prior to the time of the granting or sale of such Option, then the
total maximum number of shares of Common Stock issuable upon the exercise of
such Options, or upon conversion or exchange of the total maximum amounts of
such Convertible Securities issuable upon the exercise of such Options, shall be
deemed to be outstanding for purposes of determining the Common Stock Deemed
Outstanding and to have been issued and sold by the Company at such time for
such price per share. For purposes of this Section 4. l(i), the "price per share
for which a share of Common Stock is issuable" shall be equal to the sum of the
amount of consideration (if any) received or receivable by the Company with
respect to the
-5-
<PAGE>
issuance, grant, or sale of the Option, plus the amount of consideration (if
any) that would be received by the Company with respect to exercise of the
Option in full plus the amount of consideration (if any) that would be received
by the Company with respect to conversion or exchange in full of any Convertible
Security issuable upon exercise of such Option, all divided by the total number
of shares of Common Stock issuable upon exercise of the Option and conversion or
exchange of the Convertible Security. No further adjustment of the Purchase
Price shall be made upon the actual issue of such Common Stock or of such
Convertible Security upon the exercise of such Options or upon the actual issue
of such Common Stock upon conversion or exchange of such Convertible Security.
(II) ISSUANCE OF CONVERTIBLE SECURITIES. If on or after the
Commencement Date the Company in any manner issues, grants, or sells any
Convertible Security and the price per share for which a share of Common Stock
is issuable upon conversion or exchange thereof is less than the Purchase Price
in effect immediately prior to the time of such issue or sale, then the maximum
number of shares of Common Stock issuable upon conversion or exchange of such
Convertible Securities shall be deemed to be outstanding for purposes of
determining the Common Stock Deemed Outstanding and to have been issued and sold
by the Company at such time for such price per share. For the purposes of this
Section 4. l(ii), the "price per share for which a share of Common Stock is
issuable" shall be equal to the sum of the amount of consideration (if any)
received or receivable by the Company with respect to the issuance, grant or
sale of the Convertible Security plus the amount of consideration (if any) that
would be received by the Company with respect to the conversion or exchange of
such Convertible Security in full, all divided by the total number of shares of
Common Stock issuable upon conversion or exchange of the Convertible Security.
No further adjustment of the Purchase Price shall be made upon the actual issue
of such Common Stock upon conversion or exchange of any Convertible Security,
and if any such issue or sale of such Convertible Security is made upon exercise
of any Options for which adjustments of the Purchase Price has been or is to be
made pursuant to other provisions of this Section 4, no further adjustment of
the Purchase Price shall be made under this Section 4.
l(ii) by reason of such issue or sale.
(III) CHANGE IN OPTION PRICE OR CONVERSION RATE. If the amount to be
received by the Company upon the exercise of any Options outstanding as of the
Commencement Date, the additional consideration, if any, payable upon the
issuance, conversion, or exchange of any Convertible Securities outstanding as
of the Commencement Date, or the rate at which any Convertible Securities
outstanding as of the Commencement Date are convertible into or exchangeable for
Common Stock changes at any time after the Commencement Date, then such Option
or Convertible Security and the Common Stock deemed issuable upon exercise,
conversion or exchange thereof shall be deemed for purposes of this Section 4.1
to have been issued, granted or sold as of the date of such changes and the
Purchase Price shall be adjusted as provided herein; provided that no such
change shall at any time cause the Purchase Price hereunder to be increased.
-6-
<PAGE>
(IV) TREATMENT OF EXPIRED OPTIONS AND UNEXERCISED CONVERTIBLE
SECURITIES. Upon the expiration of any Option described in Section 4. l(i) or
the termination of any right to convert or exchange any Convertible Securities
described in Section 4.1(ii) without the exercise or conversion in whole or in
part of such Option or Convertible Security, the Purchase Price then in effect
and the number of shares of Common Stock issuable hereunder shall be adjusted
immediately to the Purchase Price and the number of shares of Common Stock which
would have been in effect at the time of such expiration or termination had such
Option or Convertible Securities, never been issued, granted or sold; provided
that if such expiration or termination would result in an increase in the
Purchase Price then in effect, such increase shall not be effective until thirty
(30) days after written notice thereof has been given to the Registered Holder.
For purposes of this Section 4.1, the expiration or termination of any Option or
Convertible Security which was outstanding as of the Commencement Date shall not
cause the Purchase Price hereunder to be adjusted unless, and only to the extent
that, a change in the term of such Option or Convertible Security caused it to
be deemed to have been issued after the Commencement Date pursuant to Section
4.1(iii).
(V) CALCULATION OF CONSIDERATION RECEIVED. If any Common Stock, Options
or Convertible Securities are issued or sold or deemed to have been issued or
sold for cash, the consideration received therefor shall be deemed to be the net
amount received by the Company therefor. In case any Common Stock, Options or
Convertible Securities are issued or sold for a consideration other than cash,
the amount of the consideration other than cash received by the Company shall be
the fair value of such consideration, except where such consideration consists
of securities, in which case the amount of consideration received by the Company
shall be the Market Price thereof as of the date of receipt. In case any Common
Stock Options or Convertible Securities are issued to the owners of the
non-surviving entity in connection with any merger in which the Company is the
surviving corporation, the amount of consideration therefor shall be deemed to
be the fair value of such portion of the net assets and business of the
non-surviving entity as is attributable to such Common Stock Options or
Convertible Securities, as the case may be. The fair value of any consideration
other than cash or securities shall be determined jointly by the Company and the
Registered Holder. If such parties are unable to reach agreement, such fair
value shall be determined by appraisal pursuant to Section 12.
(VI) INTEGRATED TRANSACTIONS. In case any Option is issued in
connection with the issue or sale of other securities of the Company, together
comprising one integrated transaction in which no specific consideration is
allocated to such Options by the parties thereto, the Options shall be deemed to
have been issued without consideration.
(VII) EACH SERIES A SEPARATE SECURITY. In case an agreement relating to
Options or Convertible Securities provides that more than one Purchase Price,
conversion or exchange provisions are applicable to the securities issuable
thereunder, then the securities subject to each different exercise price,
conversion or exchange provisions shall be deemed to be subject to separate
Options or Convertible Securities for purposes of applying this Section 4.1.
-7-
<PAGE>
(VIII) TREASURY SHARES. The Common Stock outstanding at any given time
does not include shares owned or held by or for the account of the Company or
any Subsidiary, and the disposition of any shares so owned or held shall be
considered an issue or sale of Common Stock.
(IX) RECORD DATE. If the Company takes a record of the holders of
Common Stock for the purpose of entitling them (A) to receive a dividend or
other distribution payable in Common Stock, Options or in Convertible Securities
or (B) to subscribe for or purchase Common Stock, Options or Convertible
Securities, then such record date shall be deemed to be the date of the issue or
sale of the shares of Common Stock deemed to have been issued or sold upon the
declaration of such dividend or the making of such other distribution or the
date of the granting of such right of subscription or purchase, as the case may
be.
4.2 SUBDIVISION OR COMBINATION OF COMMON STOCK. If the Company at any
time subdivides (by any stock split, stock dividend, recapitalization or
otherwise) one or more classes of its outstanding shares of Common Stock into a
greater number of shares, the Purchase Price in effect immediately prior to such
subdivision shall be proportionately reduced and the number of shares of Common
Stock obtainable upon exercise of this Warrant (to the extent not theretofore
exercised) shall be proportionally increased. If the Company at any time
combines (by reverse stock split or otherwise) one or more classes of its
outstanding shares of Common Stock into a smaller number of shares, the Purchase
Price shall be proportionately increased and the number of shares of Common
Stock issuable upon exercise of this Warrant (to the extent not theretofore
exercised) shall be proportionally decreased.
4.3 REORGANIZATION RECLASSIFICATION, CONSOLIDATION, MERGER, OR SALE.
Any recapitalization, reorganization, reclassification, spin-off, consolidation,
merger, sale, or distribution of the Company's assets or other transaction, in
each case which is effected in such a way that the holders of Common Stock are
entitled to receive (either directly or upon subsequent liquidation) stock
securities or assets with respect to or in exchange for Common Stock is referred
to herein as "Organic Change." Prior to the consummation of any Organic Change,
the Company shall make appropriate provision (in form and substance satisfactory
to the Registered Holders) to insure that each of the Registered Holders shall
thereafter have the right to acquire and receive, in lieu of or in addition to
(as the case may be) the shares of Common Stock immediately theretofore
acquirable and receivable upon the exercise of such Warrant, such shares of
stock securities or assets as may be issued or payable with respect to or in
exchange for the number of shares of Common Stock immediately theretofore
issuable upon exercise of the Warrant had such Organic Change not taken place.
In any such case, the Company shall make appropriate provision (in form and
substance satisfactory to the Registered Holders) with respect to such Holders'
rights and interests to insure that the provisions of this Section 4, Section 5,
and Section 6 hereof shall thereafter be applicable to the Warrant (including,
in the case of any such consolidation, merger or sale in which the successor
entity or purchasing entity is other than the Company, an immediate reduction in
the Purchase Price to the value of the Common Stock reflected by the terms of
such consolidation, merger or sale, and a corresponding immediate adjustment in
the number of shares of Common Stock issuable upon exercise of this Warrant (to
the extent not theretofore exercised),
-8-
<PAGE>
if the value so reflected is less than the Purchase Price in effect immediately
prior to such consolidation, merger or sale). The Company shall not effect any
such spin-off, consolidation, merger or sale, unless prior to the consummation
thereof, the successor entity (if other than the Company) resulting from
spin-off, consolidation, or merger or the entity purchasing such assets assumes
by written instrument (in form and substance satisfactory to the Registered
Holders), the obligation to deliver to each such holder such shares of stock
securities or assets as, in accordance with the foregoing provisions, such
holder may be entitled to acquire.
4.4 CERTAIN EVENTS. If any event occurs of the type contemplated by the
provisions of this Section 4 but not expressly provided for by such provisions
(including, without limitation, the granting of stock appreciation rights,
phantom stock rights or other rights with equity features or equity-based
valuation or any dividend or distribution of the capital stock issued by any
Person other than the Company), then the Company's Board of Directors shall make
an appropriate adjustment in the Purchase Price and the number of shares
issuable upon exercise of this Warrant (to the extent not theretofore exercised)
so as to protect the rights of the Registered Holders; provided that no such
adjustment shall increase the Purchase Price as otherwise determined Pursuant to
this Section 4.
4.5 CALCULATION OF PURCHASE PRICE: NOTICES.
(I) All calculations of the Purchase Price under this Section 4 shall
be computed to the nearest One-Thousandth (1/l000th) of a cent.
(II) Immediately upon any adjustment of the Purchase Price, the Company
shall give written notice thereof to the Registered Holder, setting forth in
reasonable detail and certifying the calculation of such adjustment, provided
however, that such notice shall not be deemed to be conclusive as to the
Purchase Price calculation. At the request of the Registered Holder, the Company
shall certify the Purchase Price of and the number of shares for which a Warrant
at the time may be exercised.
(III) The Company shall give written notice to the Registered Holder at
least thirty (30) days prior to the date on which the Company closes its books
or takes a record (A) with respect to any subdivision or combination of the
Common Stock that is subject to Section 4.2, or any other dividend or
distribution upon the Common Stock, (B) with respect to any pro rata
subscription offer to holders of Common Stock or (C) for determining rights to
vote with respect to any Organic Change, dissolution or liquidation.
(IV) The Company shall also give written notice to the Registered
Holder at least thirty (30) days prior to the date on which any Organic Change,
dissolution or liquidation shall take place.
4.6 EXCLUDED TRANSACTIONS. The provisions of this Section 4 shall not
apply to the exercise of the IHS Warrants.
-9-
<PAGE>
4.7 EXPRESSION OF PURCHASE PRICE AND NUMBER OF SHARES. Irrespective of
any adjustments or change in the Purchase Price or the number of securities
actually purchasable under the Warrant, the Warrants theretofore and thereafter
issued may continue to express the purchase price and the number of securities
purchasable thereunder as the Purchase Price and the number of securities
purchasable were expressed in the Warrant when initially issued.
5. NO RIGHTS OR LIABILITIES AS STOCKHOLDERS AND NOTICE TO REGISTERED
HOLDER.
Nothing contained herein shall be construed as conferring upon the
Registered Holder the right to vote or to consent or to receive notice as a
stockholder in respect of the meetings of stockholders for the election of
directors of the Company or any other matter, or any other rights whatsoever as
a stockholder of the Company; provided, however, that in the event that:
(A) the Company shall take a record of the holders of its Common Stock
or other stock or securities for the purpose of entitling them to receive any
dividend or other distribution, or any right to subscribe for or purchase any
shares of stock of any class or any other securities or to receive any other
right;
(B) the Company shall take action to accomplish any capital
reorganization, or reclassification of the capital stock of the Company, or a
consolidation or merger of the Company into, or a sale of all or substantially
all of its assets to, another corporation;
(C) the Company shall take action to redeem or convert any or all of
outstanding Common Stock or other stock or securities of the Company; or
(D) the Company shall take action looking to a voluntary dissolution,
liquidation or winding up of the Company;
then, and in each such case, the Company shall mail or cause to be mailed to the
Registered Holder of this Warrant a notice specifying, as the case may be, (i)
the date on which a record is to be taken for the purpose of such dividend,
distribution or right, or (ii) the date on which such reorganization,
reclassification, spin-off, consolidation, merger, conveyance, dissolution,
liquidation, winding-up, redemption or conversion is to take place, and the
time, if any, is to be fixed, as of which the holders of record of Common Stock
or such other stock or securities shall be entitled to exchange their shares of
Common Stock or such other stock or securities for securities or other property
deliverable upon such reorganization, reclassification, consolidation, merger,
conveyance, dissolution, liquidation, winding-up, conversion or redemption. Such
notice shall be delivered at least thirty (30) days prior to the date therein
specified.
6. DUTY TO REGISTER COMMON STOCK.
The shares of Common Stock issuable under this Warrant are subject to a
Registration Rights Agreement with the Company dated of even date herewith.
-10-
<PAGE>
7. TRANSFERS AND EXCHANGES.
7.1 WARRANT TRANSFERABLE. Subject to the transfer conditions referred
to in the legend endorsed hereon, this Warrant and all rights hereunder
(including those under the Purchase Agreement) are transferable, in whole or in
part, without charge to the Registered Holder, upon surrender of this Warrant
with a properly executed Assignment (in the form of Exhibit B hereto) at the
principal office of the Company. The Company shall record on its books the
transferee as the Registered Holder of the portion of this Warrant transferred
pursuant to this Section 7.1.
7.2 WARRANT EXCHANGEABLE FOR DIFFERENT DENOMINATIONS. This Warrant is
exchangeable, upon the surrender hereof by the Registered Holder at the
principal office of the Company, for new Warrants of like teens representing in
the aggregate the purchase rights hereunder, and each of such new Warrants shall
represent such portion of such rights as is designated by the Registered Holder
at the time of such surrender. The date the Company initially issues this
Warrant shall be deemed to be the "Date of Issuance" hereof regardless of the
number of times new certificates representing the unexpired and unexercised
rights formerly represented by this Warrant shall be issued. All Warrants
representing portions of the rights hereunder are referred to herein as the
"Warrants."
8. VALID ISSUANCE AND PAYMENT OF TAXES.
All shares of Common Stock issued upon the exercise of this Warrant
shall be validly issued, fully paid and non-assessable, and the Company shall
pay all taxes and other governmental charges that may be imposed in respect of
the issue or delivery thereof. The Company shall not be required to pay any tax
or other charge imposed in connection with any transfer involved in the issuance
of any certificate for shares of Common Stock in any name other than that of the
Registered Holder of this Warrant, and in such case the Company shall not be
required to issue or deliver any stock certificate or security until such tax or
other charge has been paid, or it has been established that no tax or other
charge is due.
9. MUTILATED OR MISSING WARRANTS.
In case any of the Warrants shall be mutilated, lost, stolen or
destroyed, the Company shall issue and deliver in exchange and substitution for,
and upon cancellation of the mutilated Warrant, or in lieu of, and in
substitution for, the Warrant lost, stolen or destroyed, a new Warrant of like
tenor and representing an equivalent right or interest, but only upon receipt of
reasonable evidence of such loss, theft, or destruction of such Warrant.
10. RESERVE.
The Company hereby represents and covenants that it has reserved and at
all times there shall be reserved for issuance such number and type of
securities as the Registered Holders are entitled to receive upon exercise of
the IHS Warrants. Prior to the issuance of any equity
-11-
<PAGE>
securities (or any instrument exercisable for or convertible into equity
securities) and whenever otherwise required to satisfy this Section 10, the
Company will amend its Certificate of Incorporation to the extent necessary to
ensure that there is reserved for issuance a sufficient number and type of
securities as the Registered Holders of the IHS Warrants are entitled to receive
upon exercise thereof.
11. NO IMPAIRMENT.
The Company will not, by amendment of its Certificate of Incorporation
or bylaws, or through reorganization, consolidation, merger, dissolution, issue
or sale of securities, sale of assets or any other voluntary action, avoid or
seek to avoid the observance or performance of any of the terms of this Warrant,
but will at all times in good faith assist in the carrying out of all such terms
and in the taking of all such action as may be necessary or appropriate in order
to protect the rights of the Registered Holders against impairment. Without
limiting the generality of the foregoing, the Company (a) shall not increase the
par value of any shares issuable upon exercise of this Warrant above the
Purchase Price and (b) will take all such action as may be necessary or
appropriate in order that the Company may validly and legally issue fully paid
and non-assessable shares of Common Stock upon exercise of this Warrant.
12. APPRAISAL.
In case of any dispute as to valuation of a security under this
Agreement, the fair value of such security shall be determined by an appraiser
without any discount for liquidity or restrictions under the Securities Act.
This appraisal process shall be instituted within fourteen (14) days after a
party to this Agreement notifies the other party of its desire to submit the
issue to an appraiser. In the event that, within seven (7) days after a party to
this Agreement notifies the other party of its desire to submit the issue to an
appraiser, the parties do not agree on a single appraiser to determine the fair
value of such security, the fair value of such security shall be determined,
without any discount for liquidity or restrictions under the Securities Act, by
the majority determination of a panel of three (3) appraisers who shall be
selected in the following manner: the Company shall select one (1) appraiser and
the Registered Holder entitled to exercise this Warrant for the greatest number
of shares of Common Stock (in the event there shall be more than one Registered
Holder), on behalf of all of the Registered Holders, shall select one (1)
appraiser and the two (2) appraisers selected by the Company and the Registered
Holder shall jointly select a third appraiser. The appraiser selected jointly by
the parties and, if applicable, each member of the appraisal panel shall be an
individual who personally and whose Affiliates shall not have a previous
business relationship with either party. The appraiser and, if applicable, the
appraisal panel shall endeavor to complete the appraisal as soon as practicable.
The determination of such appraiser and, if applicable, the appraisal panel
shall be final and binding on the Company and the Registered Holders, and the
fees and expenses of such appraisal shall be borne equally by the Company, on
the one hand, and the Registered Holders on the other.
-12-
<PAGE>
13. NOTICES.
Except as may be otherwise provided herein, all notices and other
communications required or permitted hereunder shall be in writing and shall be
conclusively deemed to have been duly given (a) when hand delivered to the other
party, (b) when received when sent by facsimile to number set forth below
(provided, however, that notices given by facsimile shall not be effective
unless either (i) a duplicate copy of such facsimile notice is promptly given by
one of the other methods described in this Section 13, or (ii) the receiving
party delivers a written confirmation of receipt for such notice either by
facsimile or any other method described in this Section 13) and (c) the next
business day after deposit with a national overnight delivery service, postage
prepaid, addressed to the parties as set forth below with next-business-day
delivery guaranteed, provided that the sending party receives a confirmation of
delivery from the delivery service provider.
TO: THE REGISTERED HOLDER TO: THE COMPANY
Integrated Health Services, Inc. Community Care of America, Inc.
10065 Red Run Boulevard 3050 North Horseshoe Drive
Owings Mills, MD 21117 Naples, FL 33942
Fax No.: (410) 998-8747 Fax No.: (941) 435-0087
Attn: Marshall A. Elkins, Esq. Attn: Deborah A. Lau, President
A party may change or supplement the addresses given above, or designate
additional addresses, for purposes of this Section 13 by giving the other party
written notice of the new address in the manner set forth above.
14. HEADINGS.
The headings in this Warrant are for purposes of convenience in
reference only, and shall not be deemed to constitute a part hereof.
15. GOVERNING LAW.
This Warrant shall be construed and enforced in accordance with, and
governed by, the laws of the State of New York without regard to provisions
regarding choice of laws.
16. SEVERABILITY.
If any term, provision, covenant or restriction of this Warrant is held
by a court of competent jurisdiction to be invalid, void or unenforceable, the
remainder of the terms, provisions, covenants and restrictions of this Warrant
shall remain in full force and effect and shall in no way be affected, impaired
or invalidated.
-13-
<PAGE>
17. NO INCONSISTENT AGREEMENTS.
The Company will not on or after the date of this Warrant enter into
any agreement which is inconsistent with the rights granted to the Registered
Holders of this Warrant or otherwise conflicts with the provisions hereof. The
Company hereby represents and warrants that the rights granted to the Registered
Holders hereunder do not in any way conflict with and are not inconsistent with
the rights granted to holders of the Company's securities under any other
agreements, except rights that have been waived.
18. SATURDAYS, SUNDAYS, AND HOLIDAYS.
If the Expiration Date falls on a Saturday, Sunday, or legal holiday,
the Expiration Date shall automatically be extended until 5:00 p.m. the next
business day.
IN WITNESS WHEREOF, Community Care of America, Inc. has caused this
Warrant to be signed manually by a duly authorized officer of the Company on
this ______ day of _____________________________ , 1997.
COMMUNITY CARE OF
AMERICA, INC.
By:
----------------------------------
Deborah A. Lau, President
-14-
<PAGE>
EXHIBIT A
ELECTION TO PURCHASE
To: Community Care of America, Inc.
--------------------------------
--------------------------------
--------------------------------
The undersigned hereby elects to exercise the Warrant represented by
the within Warrant Certificate to purchase shares of the Common Stock issuable
upon the exercise of the Warrant and requests that certificates for such shares
shall be issued in the name of:
--------------------------------
(Name)
--------------------------------
(Address)
--------------------------------
(Taxpayer number)
and be delivered to:
------------
--------------------------------
(Name)
--------------------------------
(Address)
and, if said number of shares of the Common Stock shall not be all the shares of
the Common Stock evidenced by the within Warrant Certificate, that a new Warrant
Certificate for the balance remaining of such said shares be registered in the
name of:
--------------------------------
(Name)
--------------------------------
(Address)
--------------------------------
(Taxpayer number)
-15-
<PAGE>
and delivered to the undersigned at the address below stated.
Dated: , 19
-------------- --
Name of holder of Warrant Certificate
--------------------------------
(please print)
--------------------------------
(Address)
--------------------------------
(Signature)
-16-
<PAGE>
EXHIBIT B
ASSIGNMENT
(to be executed by the registered holder
to effect a transfer of the within Warrant)
FOR VALUE RECEIVED _____________________________________________________________
hereby sells, assigns, and transfers unto_______________________________________
________________________________________________________________________________
(Name)
________________________________________________________________________________
(Address)
________________________________________________________________________________
the right to purchase the _________ shares of Common Stock evidenced by this
Warrant, and does hereby irrevocably constitute and appoint
________________________ to transfer the said right on the books of the Company,
with full power of substitution.
Dated: ________________________
___________________________________
(Signature)
-17-
<PAGE>
AMENDMENT NO. 1
TO
MANAGEMENT AGREEMENT
This Amendment No. 1 (this "Amendment") is made and entered into as of
April 14, 1997, by and between COMMUNITY CARE OF AMERICA, INC., a Delaware
corporation ("Owner"), and INTEGRATED HEALTH SERVICES, INC., a Delaware
corporation ("Manager").
WHEREAS, Owner and Manager entered into a Management Agreement, dated
as of December 27, 1996 (the "Management Agreement"), pursuant to which Owner
engaged the Manager to manage the financial, accounting, and ancillary services
contracting functions for Owner during the term of the Management Agreement; and
WHEREAS, Owner and Manager wish to amend the Management Agreement as
set forth herein.
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, the parties agree as follows:
1. Section 5.3 of the Management Agreement is hereby amended to read in
its entirety as follows:
"5.3 Notwithstanding the foregoing,
(a) Owner shall be entitled to defer payment of all Management Fees to
May 1, 1998; provided that, prior to such date, if Business Funds are available
for payment of any Management Fee in accordance with the priority of payment
provisions of Section 3.3 and such available Business Funds are not paid toward
the accrued Management Fee, the amount that was so available for payment and not
paid shall bear interest from the Payment Date on which such Management Fee
would otherwise have been paid (pursuant to subparagraph (b), below), at the
rate of fifteen (15%) percent per annum.
(b) From and after May 1, 1998, the Management Fee (including any
amount carried over pursuant to the succeeding sentence hereof) shall be payable
on each Payment Date only to the extent that the Business Funds (as defined in
Section 3.3) shall be sufficient as of such date; provided that after April 30,
1998, the Manager shall be entitled to cause a drawdown under any revolving
credit facility of the Owner to make payment of any Management Fee then payable
or accrued from prior periods. Any portion of the Management Fee not paid in
accordance with this subparagraph shall be carried over and be payable on the
immediately succeeding Payment Date; provided, however, that Owner shall pay
Manager interest on such unpaid portion of the Management Fee at the rate
specified in the Subordinated Note of even date herewith made by Owner in favor
of IHS Financial Holdings, Inc.
(c) All payments of Management Fees shall be applied against
outstanding fees in the order in which they have accrued."
<PAGE>
2. Except as modified by this Amendment, the Management Agreement
remains in full force and effect.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
date first above written.
COMMUNITY CARE OF AMERICA,
INC.
By:__________________________________
Deborah A. Lau, President
INTEGRATED HEALTH SERVICES,
INC.
By:_________________________________
Name:_______________________________
Title:______________________________
2
Exhibit 11.01
COMMUNITY CARE OF AMERICA, INC.
CALCULATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Earnings (loss) before extraordinary charge ......... $ 394,000 $ 2,441,000 $(18,905,000)
Extraordinary charge, net of income taxes ........... -- (992,000) --
------------ ------------ ------------
Net earnings (loss) ................................. 394,000 1,449,000 (18,905,000)
8% cumulative dividends on redeemable preferred
stock, Series A ..................................... (653,000) (408,000) --
------------ ------------ ------------
Net earnings (loss) applicable to common stock ...... $ (259,000) $ 1,041,000 $(18,905,000)
============ ============ ============
Weighted average shares outstanding ................. 2,041,154 3,859,586 7,384,697
Weighted average common stock equivalents
outstanding ......................................... -- 980,871 --
------------ ------------ ------------
Total weighted average common stock and common stock
equivalents outstanding ........................... 2,041,154 4,840,457 7,384,697
============ ============ ============
Per common share:
Earnings (loss) before extraordinary charge ........ $ (0.13) $ 0.42 $ (2.56)
Net earnings (loss) ................................ $ (0.13) $ 0.22 $ (2.56)
</TABLE>
Note: Common stock equivalents of 1,591,387 shares and 514,365 shares in 1994
and 1996 respectively, are not considered in the weighted average shares
outstanding because their effect is anti-dilutive.
Exhibit 21.01
SUBSIDIARIES OF THE COMPANY
<TABLE>
<CAPTION>
JURISDICTION OF NAME(S) UNDER WHICH
SUBSIDIARY+ INCORPORATION SUBSIDIARY DOES BUSINESS
- - ---------------------------------- ------------------- ------------------------------------
<S> <C> <C>
ECA Holdings, Inc. Delaware *
ECA Properties, Inc. Delaware *
CCA of Nebraska, Inc. Nebraska *
W.S.T. Care, Inc. Nebraska Crestview Care Center
Quality Care of Lyons, Inc. Nebraska Logan Valley Manor
Quality Care of Columbus, Inc. Nebraska Val Morys Care Center
MeritWest, Inc. Pennsylvania *
MTC West, Inc. Delaware *
Community Care of America Georgiana Doctors Hospital;
of Alabama, Inc Delaware Kinsey Clinic; Family Rural
Medical Clinic; Jeff Voreis,
M.D., in association with
Community Care of
America, Inc.
CCA of Maine, Inc. Delaware Harbor Hill; Windward
Gardens, Sedgewood
Commons; Sandy River
Nursing Care Center; Pine
Point Nursing Care Center;
Marshwood Nursing Care
Center; Woodford Park
Nursing Care Center; Cedar
Ridge Nursing Care Center;
Springbrook Nursing Care Center
</TABLE>
- - ----------
+ Indirect subsidiary is indicated by indentation.
* Not applicable
Each subsidiary is wholly-owned by its immediate parent.
The name of particular subsidiaries which, if considered in the aggregate as
a single subsidiary, would not have constituted a significant subsidiary (as
defined in Rule 1-02(w) of Regulation S-X) as of December 31, 1994 are omitted.
Exhibit 23.01
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Community Care of America, Inc.:
We consent to incorporation by reference in the registration statements (No.
333-01686, 333-01688, 333-01690 and 333-01692) on Form S-8 of Community Care of
America, Inc. of our reports on the consolidated financial statements and
schedule of Community Care of America, Inc. and subsidiaries, which report
appears in the December 31, 1996 annual report on Form 10-K of Commuity Care of
America, Inc.
KPMG Peat Marwick LLP
Baltimore, Maryland
April 15, 1997
