-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, W2CpzOZD8DxubgSyAejjC/Dl16hkALf/FH3FtUXi5kljrjL8+QlymaSltOO23iU6 uBfUdaZetjG32/pkzCh53Q== 0000950144-97-010891.txt : 19971016 0000950144-97-010891.hdr.sgml : 19971016 ACCESSION NUMBER: 0000950144-97-010891 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19971014 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: RETIREMENT CARE ASSOCIATES INC /CO/ CENTRAL INDEX KEY: 0000798540 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-SKILLED NURSING CARE FACILITIES [8051] IRS NUMBER: 431441789 STATE OF INCORPORATION: CO FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-14114 FILM NUMBER: 97695530 BUSINESS ADDRESS: STREET 1: 6000 LAKE FORREST DR STE 200 CITY: ATLANTA STATE: GA ZIP: 30328 BUSINESS PHONE: 4042557500 MAIL ADDRESS: STREET 1: 6000 LAKE FORREST DR STREET 2: STE 200 CITY: ATLANTA STATE: GA ZIP: 30328 10-K 1 RETIREMENT CARE ASSOCIATES 1 U. S. 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 [FEE REQUIRED] For the Fiscal Year ended: June 30, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from: Commission File No. 1-14114 RETIREMENT CARE ASSOCIATES, INC. (Exact Name of Registrant as Specified in its Charter) COLORADO 43-1441789 (State or Other Jurisdiction of (I.R.S. Employer Identi- Incorporation or Organization) fication Number) 6000 Lake Forrest Drive, Suite 200, Atlanta, Georgia 30328 (Address of Principal Executive Offices, Including Zip Code) Registrant's telephone number, including area code: (404) 255-7500 Securities registered pursuant to Section 12(b) of the Act: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED Common Stock, $.0001 Par Value New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: Common Stock $.0001 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. Yes [X] No [ ] As of September 18, 1997, 14,749,441 shares of common stock were outstanding. The aggregate market value of the common stock of the Registrant held by nonaffiliates on that date was approximately $84,064,500. 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 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. [ ] Documents incorporated by reference: None. 2 PART I ITEM 1. BUSINESS. THE COMPANY Retirement Care Associates, Inc. is a leading provider in the southeastern United States of senior residential care services, which include long-term care, assisted living and independent living services. The Company's long-term care facilities provide skilled nursing care, specialty care services and ancillary services to patients, while its assisted/independent living centers provide services to residents in need of varying degrees of assistance with the activities of daily living. Its facilities are located primarily in rural and non-urban areas in the United States, and it is the largest provider of senior residential care services in Georgia. As of September 19, 1997, the Company operated 101 facilities which it owned or leased, and managed an additional nine facilities for others. The Company's headquarters are located in Atlanta, Georgia. Its executive offices are located at 6000 Lake Forrest Drive, Suite 200, Atlanta, Georgia 30328. Its telephone number at that address is (404) 255-7500. The Company was formed under the laws of the State of Colorado on March 24, 1986, under the name "New Frontiers Investments, Inc." to create a corporate vehicle to seek and acquire a business opportunity. In February 1987, the Company completed a public offering of units consisting of shares and warrants. The gross proceeds to the Company from the offering were approximately $236,455. On April 2, 1987, the Company acquired 100% of the outstanding shares of Retirement Care Associates, Inc. ("RetireCare") in exchange for shares of the Company's common stock, $.0001 par value per share (the "Common Stock"). RetireCare is a corporation formed in 1987 to engage in the business of consulting to, marketing and managing retirement centers. RetireCare eventually planned to expand its operations to include acquisition and syndication of retirement centers. At the time of the acquisition, the Company changed its name to "Retirement Care Associates, Inc." Also as a result of the acquisition, there was a complete change in control of the Company. The Company attempted to operate in several facets of the retirement industry, including development, contract management, acquisition and consulting. Although the Company had some success turning around distressed properties, it was not able to retain long-term management contracts. In September 1988, the Company narrowed its goals to focus on long-term marketing and management contracts of distressed properties. In October 1988, the Company purchased The Paxton Manor, a 250 unit retirement facility located in Omaha, Nebraska. This property, constituting essentially all of the assets of the Company at the time, was subsequently sold on November 12, 1991, with shareholder approval. In September 1991, Christopher F. Brogdon and Edward E. Lane agreed to become Directors of the Company and the existing directors and several major shareholders of the Company verbally agreed that if Messrs. Brogdon and Lane would invest $50,000 in the Company, the Company would issue to them 1,447,031 shares of the Company's Common Stock. The $50,000 was used to pay the expenses of preparing and filing the Company's delinquent SEC -2- 3 reports and tax returns, and paying the state and federal taxes owed as a result of the sale of the Paxton Manor during 1991. During this period of time, the Company's Officers and Directors resigned and Chris Brogdon and Edward Lane became Officers and Directors of the Company. From November 1991 to November 1992, the Company had no significant activities other than the filing of delinquent SEC reports and tax returns. In November 1992, the Company merged with Capitol Care Management Company, Inc. ("CCMC"), a Georgia corporation engaged in the business of providing management services to retirement facilities, personal care facilities and nursing homes. In connection with the merger, the Company issued 964,688 shares of the Company's Common Stock and Promissory Notes in the aggregate amount of $1,000,000 to the CCMC shareholders. Simultaneously with the merger, all of the assets, liabilities and operations of CCMC were placed into a newly formed Georgia corporation named Capitol Care Management Company, Inc. ("Capitol Care") which is a wholly-owned subsidiary of the Company. On December 31, 1992, the promissory notes aggregating $1 million were novated and in consideration therefor the holders of the promissory notes were issued 1,000,000 shares of Series C Convertible Preferred Stock which were subsequently converted into 964,688 shares of Common Stock. In December 1993, the Company acquired Retirement Management Corporation, a Nevada corporation engaged in the business of providing management and marketing services to retirement care facilities, in a merger transaction whereby it was merged into Capitol Care. Immediately after the merger, all of the assets, liabilities and operations of Retirement Management Corporation were transferred into Retirement Management Corporation ("RMC"), a newly formed Georgia corporation and a subsidiary of Capitol Care. On September 30, 1994, the Company acquired approximately 63% of the outstanding capital stock of Contour Medical, Inc., a publicly-held, Nevada corporation located in Alpharetta, Georgia, which distributes a full line of disposable medical supplies to nursing homes, home health agencies and other healthcare providers. The Company currently owns approximately 60% of the outstanding capital stock of Contour Medical, Inc. In July, 1993, the Company effected a 1 for 12 reverse stock split of the shares of the Company's outstanding Common Stock. The Company paid 5% stock dividends on its outstanding Common Stock in February 1994, February 1995 and May 1996. All financial information and share data in this Report give retroactive effect to the reverse split and stock dividends. On February 17, 1997, the Company entered into an Agreement and Plan of Merger and Reorganization (the "Merger Agreement") by and among Sun Healthcare Group, Inc. ("Sun"), Peach Acquisition Corporation, a Colorado corporation and wholly-owned subsidiary of Sun, and the Company, pursuant to which the subsidiary of Sun would be merged with and into the Company. The Merger Agreement was subsequently amended on May 27 and August 21, 1997. Subject to the terms and conditions of the Merger Agreement (including, without limitation, approval by the stockholders of Sun and the shareholders of the Company), upon the effective time of the Merger, each outstanding share of common stock of the Company (other than shares held in the treasury of the Company, owned by Sun or any subsidiary of Sun, or held by persons who exercise their dissenter's rights under Colorado law) will be cancelled and extinguished and converted automatically into the right to receive 0.520 shares of the common stock of Sun. As a result of the Merger, the Company will become a wholly-owned subsidiary of Sun. -3- 4 On February 17, 1997, Sun also entered into a Stockholders Stock Option and Proxy Agreement (the "Option Agreement") by and among Sun and Christopher F. Brogdon, Connie B. Brogdon, Edward E. Lane, Darrell C. Tucker and Winter Haven Homes, Inc., collectively owners of approximately 36% of the outstanding shares of common stock of the Company. Pursuant to the Option Agreement, each of these shareholders granted to Sun an irrevocable option to purchase such shareholder's shares at a price per share equal to $9.27 under certain circumstances. In addition, each shareholder agreed to vote, and granted to Sun an irrevocable proxy to vote, all voting securities of the Company held by such shareholder in favor of approval of the Merger Agreement and the Merger and against any merger, consolidation, sale of assets, reorganization or recapitalization of the Company with any party other than Sun and its affiliates and against any liquidation or winding up of the Company. On February 17, 1997, Sun also entered into a merger agreement to acquire Contour Medical, Inc. The Company and Sun have filed with the Securities and Exchange Commission (the "SEC"), on a confidential basis, a preliminary proxy statement with respect to the Merger, and Sun and Contour Medical, Inc. filed with the SEC, on a confidential basis, a preliminary information statement with respect to the proposed merger of a wholly-owned subsidiary of Sun with and into Contour Medical, Inc. The Merger is subject to the approval of the shareholders of the Company and the stockholders of Sun and will be considered at separate meetings now anticipated to occur in the fourth quarter of calendar year 1997. The Merger will be effective promptly following shareholder approval, assuming satisfaction of other conditions to the Merger. INTRODUCTION The Company is a leading provider in the southeastern United States of senior residential care services, which include long-term care, assisted living and independent living services. The Company's long-term care facilities provide skilled nursing care, specialty care services and ancillary services to patients while the Company's assisted/independent living centers provide services to residents in need of varying degrees of assistance with the activities of daily living. Most of the Company's facilities are located in rural and non-urban areas in the southeastern United States, and the Company is the largest provider of senior residential long term care services in Georgia. The Company's strategy is to increase the number of facilities that it operates (i) primarily by acquiring by purchase or lease independently-owned long-term care facilities and assisted/independent living centers located in the Southeast and (ii) secondarily by developing assisted/independent living centers adjacent or complementary to it existing facilities. Upon the acquisition of a facility, the Company implements its management information and control systems and provides capital for necessary physical plant improvements to enable its professionals to increase occupancy and attain the Company's standards for quality of care. The Company's operating strategy with respect to its assisted/independent living centers is to increase its center occupancy rates by maintaining high quality social and support services for its residents, to develop relationships with community leaders and other referral sources and to implement a strong -4- 5 marketing program, including direct mail marketing and advertising and special events. Assisted living is an increasingly popular form of senior housing which offers seniors who need or desire help with the activities of daily living and limited health care services a residential alternative which allows them more independence and is less costly than a long-term care facility. The Company's independent living centers offer residents complete independence and provide basic support services as well as customized services to meet their individual needs. The Company's operating strategy with respect to its long-term care facilities is to improve its payer mix by (i) making capital improvements which the Company believes are necessary to attract more private pay residents, (ii) aggressively marketing such facilities to prospective private pay residents and (iii) seeking Medicare certification for newly acquired facilities. The Company seeks to enhance the revenue of its existing facilities by offering its long-term care patients physical, speech, occupational and respiratory therapy, wound care and other ancillary services. At June 30, 1997, all of the Company's long-term care facilities were Medicare certified. The following table sets forth the approximate percentage of the Company's total revenue attributable to each of Medicare, Medicaid and private payors during each of the last three fiscal years.
FISCAL 1997 FISCAL 1996 FISCAL 1995 Medicaid 50% 55% 65% Medicare 10% 10% 10% Private 40% 35% 25% --- --- --- Total 100% 100% 100%
SENIOR RESIDENTIAL CARE INDUSTRY GENERAL. The senior residential care industry encompasses a broad range of residential and health care services provided to the elderly and to patients who can be cared for outside the acute care hospital environment. The Company believes that demand for the services provided by long-term care facilities and assisted/independent living centers will increase substantially during the next decade primarily due to demographic and social trends and, to a lesser extent, the growth of private insurance and governmental payment sources for assisted living services. Other factors which affect the senior residential care industry are (i) the limited supply of long-term care facilities, (ii) the effects of government cost containment measures and (iii) the fragmentation of the long-term care industry. Furthermore, given the cost containment pressure at the federal, state and local levels, government and private payers are attracted to, and motivated to support, long-term care facilities as a more cost effective alternative to subacute care facilities and to hospitals and assisted living centers as a less expensive and still effective alternative to traditional long-term care facilities when ongoing care is needed. DEMOGRAPHIC AND SOCIAL TRENDS. The consumers of the Company's senior residential care services are persons generally over 65 years of age. In the United States, the number of individuals over 65 years of age has increased from approximately 25 million in 1980 to more than 31 million in 1990. The number of persons 65 years of age and over is expected to grow to approximately 35 million in 2000. GROWTH OF LONG-TERM CARE INSURANCE. Numerous insurance companies currently offer long-term care insurance which provides the beneficiary coverage for -5- 6 expenses associate with long-term care and assisted/independent living services. Furthermore, the number of long-term care policies in existence is increasing rapidly. According to the Health Insurance Association of America, approximately 2.4 million long-term care policies were in existence as of December 1991, representing a compound average annual growth rate of 31.5% from 1987 to 1991. In calendar 1994, 1.4 million long-term care policies were purchased as compared to 0.6 million in 1991. In addition, employers have started to offer long-term care insurance in their "cafeteria plans," and Congress is considering a proposal to make long-term care insurance premiums tax deductible. Based upon these factors and the demographic and social trends of the United States population, the Company expects more people to be covered by long-term care insurance. LIMITED SUPPLY OF LONG-TERM CARE BEDS. The Company believes that certain factors impacting the available supply of long-term care beds will favorably impact the demand for the services offered by the Company in the future. All of the states in the southeastern United States, including the states in which the Company operates, have enacted certificate of need ("CON") or similar legislation which restricts the supply of licensed long-term care facility beds. These laws generally limit the construction of long-term care facilities, and the addition of beds or services to existing long-term care facilities, and hence tend to limit the available supply of traditional long-term care beds. In addition, some long-term care facilities have started to convert traditional long-term care beds into sub-acute beds. FRAGMENTED INDUSTRY. Market share data indicate that the long-term care industry is a highly fragmented and competitive industry in which the 30 largest providers operate approximately 352,000 beds, or 22% of total industry beds. Competitive dynamics in the industry, including increasing complexity of medical needs, growing regulatory and compliance requirements and increasingly complicated reimbursement systems, have resulted in smaller operators (who lack the sophisticated management information systems, operating efficiencies and financial resources necessary to compete effectively) selling their businesses and operations to companies, such as the Company, that have the management information systems, operating efficiencies and financial resources necessary to compete effectively. The result of these factors is a relative increase in the demand for long-term facility care, which, in turn, increases the demand for residential options, such as assisted living facilities, to serve patients historically served by long-term care facilities. In addition, long-term care facility operators are continuing to focus on expanding services to sub-acute patients requiring very high levels of nursing care. As such, the supply of long-term care beds likely will be increasingly occupied by patients with higher acuity levels, thereby increasing the supply of lower acuity patients who may be served by assisted living facilities. The Company believes that, as a result of these trends, there will be opportunities for assisted living to more cost effectively provide accommodation and service facilities to provide accommodations and services on a cost-effective basis to residents requiring lower levels of care than is generally provided to patients in long-term care facilities. STRATEGY The Company's strategy is to increase the number of facilities that it operates primarily by (i) acquiring by purchase or lease independently-owned long-term care facilities and assisted/independent living centers located in the southeastern United States and secondarily by (ii) developing assisted/independent living centers adjacent or complementary to its existing facilities. Key elements of this strategy include: (i) acquiring and developing -6- 7 additional long-term care and assisted/independent living facilities; (ii) increasing facility occupancy rates; (iii) improving the payer mix at the Company's long-term care facilities; and (iv) achieving operating efficiencies. ACQUIRE AND DEVELOP FACILITIES. The Company intends to acquire and develop additional long-term care facilities and assisted/independent living facilities in its existing markets and contiguous areas. Management believes that such expansion will allow the Company to take better advantage of its existing expertise and organizational resources and improve margins by reducing overhead costs. As a result of the growing complexity of regulatory requirements and the continued pressure on reimbursement rates, the Company believes that other smaller, independent providers may be more willing to consider selling or leasing their facilities on terms acceptable to the Company. The Company believes it is well positioned to make acquisitions because of its reputation and established geographic presence. In addition, the Company intends to offer a broad range of senior residential care services. Towards that end, the Company has recently implemented a strategy to develop assisted living centers adjacent to its long-term care facilities or independent living centers, thereby creating senior residential care campuses which offer a greater variety of senior residential care services in one location. At September 17, 1997, the Company had 11 of these senior residential care campuses. In evaluating an existing facility for acquisition, the Company primarily considers the facility's historical occupancy rates and payor mix, reputation and compliance history, physical condition and appearance, labor force stability, the availability of financing on acceptable terms and, in the case of assisted/independent living facilities, the demographics of the surrounding area. In evaluating a development project, the Company primarily considers the strength of the market demand for the senior residential care services. Upon the acquisition of a facility, the Company implements its management information and control systems and provides capital for necessary physical plant improvements to enable its professionals to increase occupancy and attain the Company's standards for quality of care. The Company's strategy with respect to its long-term care facilities is to seek Medicare certification while simultaneously marketing the facility to attract more Medicare and private pay residents. The Company believes that with effective cost controls, the Company's facilities can continue to be profitable with a highly concentrated Medicaid payer mix. INCREASE FACILITY OCCUPANCY RATES. The Company believes its occupancy rates in existing assisted/independent living centers should increase primarily due to three factors: (i) an enhanced emphasis on facility-specific marketing efforts; (ii) the continued growth of the elderly segment of the population in the Company's markets; and (iii) the limited supply of long-term care beds and assisted/independent living units. Increasing occupancy rates will allow the Company to further reduce its fixed costs per patient day. IMPROVE PAYOR MIX. The Company seeks to improve its payer mix at its long-term care facilities by making capital improvements which management believes are necessary to attract more private pay residents, by aggressively marketing such facilities to prospective private pay residents and by seeking Medicare certification for newly acquired facilities. The Company has recently implemented a strategy to develop assisted living centers adjacent to its long-term care facilities or independent living centers, thereby creating a senior residential care campus which offers a greater variety of senior residential care services in one location. Management believes that providing a "continuum of care" to its residents enhances the marketing efforts of its assisted/independent -7- 8 living centers and that these centers should provide a referral source to the other facilities on the same campus. The Company also has intensified efforts to provide the full range of Medicare services to eligible patients and is increasingly concentrating its marketing efforts on private third party payers, such as managed care and insurance companies, as well as hospital discharge planners, thereby developing referral sources for both its long-term care and assisted/independent living centers. ACHIEVE OPERATING EFFICIENCIES. The Company seeks to reduce its ratio of general and administrative expenses to total operating revenue as a result of economies of scale resulting from acquisitions and as a result of efforts to more efficiently control and manage its businesses. The effective operation of the Company's managerial and financial information and control systems are fundamental to its performance. These systems allow the Company, among other things, to assimilate acquisitions and control costs by achieving reductions of administrative staff, economies in purchasing, efficient management of patient care personnel and reduced use of nurses from employment agencies. LONG-TERM CARE SERVICES. Basic resident services are those traditionally provided to elderly patients in long-term care facilities with respect to daily living activities and general medical needs. The Company provides in all of its facilities room and board, 24-hour skilled nursing care by registered nurses, licensed practical nurses and certified nursing aides, and a broad range of support services, including dietary services, therapeutic recreational activities, social services, housekeeping and laundry services, pharmaceutical and medical supplies, physical, speech, occupational and respiratory therapy, wound care and other ancillary services. ASSISTED LIVING SERVICES. The Company's assisted living centers are designed to assist those persons generally 75 years of age or over who may require assistance with any of the five basic activities of daily life (i.e., bathing, dressing, eating, walking and toileting). The Company assesses incoming residents and develops an individualized care plan based on their acuity level. The Company reassesses each of its residents on a regular basis to determine if they require additional care. Each of the Company's assisted living facilities offers its residents with private or semi-private accommodations, ongoing health assessments, three meals per day and snacks approved by a registered dietician, as well as 24-hour assistance with activities of daily life, housekeeping service, linen and personal laundry service, organized social activities and transportation. The Company's assisted living services are provided in freestanding assisted living centers and in certain units in each of the Company's independent living centers. INDEPENDENT LIVING SERVICES. The Company's independent living centers offer independent living to seniors. Each center offers a standard package of services that typically include meal service, laundry and linen service, housekeeping, organized social activities and transportation. In addition, each of the Company's independent living facilities offers a menu of separately priced additional services available at the option of the resident. LONG-TERM CARE OPERATIONS FACILITY OPERATIONS. The Company's facilities are currently divided into 10 regions, each of which is supervised by a regional director of operations and contains four to eight facilities. The regional director of operations monitors and supervises all aspects of operations of the facilities in the region and acts as liaison between such facilities and corporate headquarters. The regional director of operations is responsible for, among other things, ensuring -8- 9 compliance with federal, state and local regulations, reviewing and monitoring compliance with corporate policies and procedures and monitoring adherence to budgets. In addition, each region has a quality assurance nurse and a dietary consultant who meet regularly with their regional director of operations and report to the vice president of compliance. The regional and facility personnel are supported by a corporate staff based at the Company's headquarters. Corporate personnel work with regional directors of operations and facility administrators with respect to the establishment of facility goals and strategies; quality assurance oversight; reimbursement, accounting, cash management and treasury functions; development of monitoring systems and operational procedures; human resources management; and development and implementation of new programs. Each facility is managed by an on-site, state licensed administrator who is responsible for the overall operation of the facility, including quality of care, marketing and financial performance. The administrator is assisted by various professional and nonprofessional personnel (some of whom may be independent contractors), including a medical director, nurses and nursing assistants, social workers, dietary personnel, therapeutic recreation staff and housekeeping, laundry and maintenance personnel. The medical treatment of residents is the responsibility of the residents' attending physicians, who are not employed by the Company and bill their patients directly for services. The support services provided by the Company, including therapeutic recreation, speech, occupational, respiratory and physical therapy, wound care and other ancillary services, are provided primarily by independent providers under contractual commitments with the facility. MARKETING. The Company engages in facility-specific marketing efforts to maintain and improve occupancy rates and to promote the services, including a full range of medical services offered by the Company's long-term care facilities. The Company's marketing activities are conducted primarily by each facility's admissions director and administrator who together seek to establish relationships with potential referral sources, such as hospital discharge planners and managed health care organizations. The Company believes that many of the services and programs provided by its facilities in the normal course of business supplement formal marketing efforts by promoting the reputation of each facility in the community as a provider of quality care. Each facility offers a variety of community programs and activities which are designed primarily as a service to the community and as a means to enhance the quality of patient life. QUALITY ASSURANCE. The Company's quality assurance program with respect to its long-term care facilities involves personnel at all levels. The Company has established a quality assurance team comprised of the vice president of compliance and the facility's senior medical professionals that periodically visits and inspects each of the Company's long-term care facilities and evaluates all aspects of the facility's operations, including patient care, physical environment, patients' rights, patient activities and dietary regimen. The Company's corporate director of nursing receives quarterly quality assurance reports from each facility, reviews them against prior quarterly reports and against applicable state survey results for the facility, and works with the relevant regional director of operations and the facility's quality assurance committee to address any deficiencies and work toward continual improvement. All regional directors of operations, medical and other consulting personnel are required to prepare and submit reports at the end of each scheduled visit identifying any patient care or other quality related issues. -9- 10 ASSISTED/INDEPENDENT LIVING OPERATIONS CENTER OPERATIONS. The Company's assisted/independent living centers are currently divided into five regions, each of which is supervised by a regional director of operations and contains four to seven centers. The regional director of operations monitors and supervises all aspects of operations of the centers in the region and acts as liaison between such facilities and corporate headquarters. The regional director of operations is responsible for, among other things, ensuring compliance with applicable federal, state and local regulations, reviewing and monitoring compliance with corporate policies and procedures and monitoring adherence to budgets. Each of the Company's assisted/independent living centers is managed by an executive director who is responsible for monitoring the day-to-day operations of the center and the resident assistants who provide the personal care to the center's residents. Each center also has a social activities coordinator, a community service representative, a kitchen manager and dietary staff. The regional and center personnel are supported by a corporate staff based at the Company's headquarters. Corporate personnel work with regional directors of operations and the executive director of each center with respect to the establishment of goals and strategies; quality assurance oversight; budgeting, accounting, cash management and treasury functions; development of monitoring systems and operational procedures; human resources management; and development and implementation of new marketing programs. In connection with the Company's delivery of services to its assisted living residents, a resident assistant is responsible for the personal care, medication supervision (when state law so permits), meal service, housekeeping, laundry and linen service and social activities of a small number of residents. In addition, management believes that its method of service delivery permits the care-giver to establish a better relationship with the resident and in some cases become an extension of the resident's family. The Company's Extended Care Program reassesses each of its assisted living residents on a regular basis to develop a daily care plan that provides each of the residents with the appropriate level of care and assistance. The Company has adopted an objective assessment system whereby each resident receives points based upon his or her acuity level. The Company is then able to determine the appropriate level of care based on this point acuity assessment. MARKETING. The Company develops a comprehensive marketing plan for each of its assisted/independent living centers. The marketing plan identifies the strengths and weaknesses of the center, the demographic and competitive profile of the geographic area in which the center is located and provides a strategy for marketing the center in light of these factors. The plan consists of a combination of advertising, primarily directed to the adult children of potential residents, special events, direct mail and community networking, all of which are designed to generate a sufficient number of inquiries to fill the center. The Company's marketing effort sets goals for the number of inquiries, facility tours, deposits and new residents resulting from such efforts on a monthly basis. With this targeted marketing approach, management believes that it has been successful in marketing its assisted/independent living centers. QUALITY ASSURANCE. The Company's quality assurance program with respect to its assisted independent living centers involves personnel at all levels. The Company has established a quality assurance team that periodically visits and inspects each of the Company's assisted/independent living centers and evaluates -10- 11 all aspects of the center's operations, including resident care, physical environment, staff appearance, residents' rights, resident activities and dietary regimen. The management receives the reports from the quality assurance team, reviews them against prior reports, and works with the relevant regional director of operations and the facility's administrators to address any deficiencies and work toward continual improvement. GENERAL FACILITY OPERATION MANAGEMENT AND FINANCIAL CONTROLS. The Company has developed integrated management and financial information systems and controls intended to maximize operating efficiency. These systems enable management to monitor key operations and financial data on a timely basis. Key operating data, such as payables and billing data, cash collections and admissions/discharge data, are entered into the system daily. This information forms the basis for a variety of management and financial reports, including monthly financial statements, for each facility. PURCHASING. The Company's focus in purchasing is to develop national pricing contracts for nursing supplies and dietary, housekeeping and laundry products. Each facility, however, is responsible for purchasing the required supplies and products pursuant to those contracts. MANAGEMENT AND MARKETING SERVICES The Company provides management services to all its owned or leased facilities, as well as to eight facilities owned by its affiliates and one facility owned by unaffiliated third parties. See "ITEM 2. PROPERTIES." Pursuant to its management agreements with the owners of each facility, the Company supervises the management of the facility as to staffing, accounting, billing, collections, rate setting and general administration, and provides marketing services, which include identifying target markets, developing appropriate marketing strategies and procedures, hiring, training and supervising qualified leasing counselors as employees of the manager and budgeting and controlling costs. The Company is responsible for hiring, on behalf of the owner, all staff, including a facility administrator or executive director. The management agreements provide for management fees of a flat rate per month, a percentage of net operating revenues (total revenues less deductions and allowances for contractual adjustments to third party payors and charitable allowances) or a combination of a flat rate and a percentage of net operating revenues. For long-term care facilities, which require the greatest amount of management services, the Company charges management fees of $4,000 to $24,000 per month, depending primarily on the number of beds, or, in some cases, 6% of net operating revenues. For assisted/independent living centers, which involve fewer management services, the Company charges $1,000 to $15,000 per month, depending primarily on the amount of revenues of the center. The management agreements also provide a separate fee for the marketing services provided by the Company to assisted/independent living centers. The obligations to pay management fees to the Company are general obligations of the owners of the facilities. In many cases the facilities have incurred substantial debt in the form of municipal bonds, debentures or similar debt instruments. The payment of management fees to the Company is generally subordinated to the payment of these obligations. -11- 12 SOURCES OF REVENUES The Company derives its patient service revenue primarily from a combination of state Medicaid programs, the federal Medicare program and private payment sources. The Company's revenues are determined by a number of factors, including the licensed bed capacity of its facilities, occupancy rates at the facilities and the payer mix. While management believes that it has been successful in obtaining reimbursement, there can be no assurance that reimbursement rates will remain at present levels or increase at rates necessary to offset the effects of inflation. In particular, cost containment proposals at both the state and federal levels may impact the Company's ability to recover its costs of providing services to Medicaid and Medicare patients. See "-- Government Regulation." MEDICAID. Medicaid refers to the various state-administered reimbursement programs that are eligible for matching federal funds. Each of the Company's long-term care facilities participates in the Medicaid program of the state in which it is located. Under the federal Medicaid statute and regulations, state Medicaid programs must provide reimbursement rates that are reasonable and adequate to cover the costs that would be incurred by efficiently and economically-operated facilities in providing services in conformity with state and federal laws, regulations and quality and safety standards. Furthermore, payments must be sufficient to enlist enough providers so that services under the state's Medicaid plan are available to recipients at least to the extent that those services are available to the general population. The Medicaid programs in which the Company's facilities participate pay a per diem rate based on each facility's reasonable allowable costs incurred in providing services, subject to cost ceilings applicable to both operating and fixed costs, plus a return on equity. Reimbursement rates are typically determined by the state, on a prospective or retrospective basis, from cost reports filed by each facility. Under a prospective system, per diem rates are established (generally on an annual basis) based on 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; no subsequent adjustment is made to reflect variations in actual costs from the rates established. All of the Company's long-term care facilities are reimbursed on a prospective rate system. Providers must accept reimbursement from Medicaid as payment in full for the services rendered. The Georgia and Tennessee Medicaid programs currently include incentive allowances for providers whose costs are less than certain ceilings and who meet other requirements. See "-- Government Regulation." All Medicaid programs conduct periodic financial audits of participating facilities. To date, adjustments from Medicaid audits have not had a material adverse effect on the Company. While there can be no assurance that future adjustments will not have such an effect, the Company believes that the actual reimbursable amounts determined after audit will approximate the estimated reimbursable amounts at which Medicaid revenue has been recorded. MEDICARE. Medicare is a federally-funded and administered health insurance program primarily designed for individuals who are age 65 or over and are entitled to receive Social Security benefits. The Medicare program consists of two parts: Part A covers in-patient hospital services and services furnished by other institutional health care providers, such as long-term care facilities; Part B covers the services of doctors, suppliers of medical items and services, and various types of outpatient services. Part B services include physical, speech and occupational therapy, pharmaceuticals and medical supplies, certain intensive rehabilitation and psychiatric services and ancillary diagnostic and other services of the type provided by long-term care or acute care facilities. -12- 13 Part A coverage is limited to a specified term (generally 100 days in a long-term care facility) and requires beneficiaries to share some of the cost of covered services through the payment of a deductible and a co-insurance payment. There are no limits on duration of coverage for Part B services, but there is a co-insurance requirement for most services covered by Part B. The majority of the Company's long-term care beds are certified for Medicare services. Generally, the Company's Medicare participating facilities receive monthly reimbursement payments during the year at interim rates based on historical costs. These rates are later adjusted to reflect actual allowable direct and indirect costs of services based on the submission of a cost report at the end of each year. Actual costs incurred and reported by each facility are subject to retrospective audits which can result in upward or downward adjustments of payments received. To date, adjustments from Medicare audits have not had a material adverse effect on the Company. While there can be no assurance that future adjustments will not have such an effect, the Company believes that the actual reimbursable amounts determined after audit will approximate the estimated reimbursable amounts at which Medicare revenue has been recorded. PRIVATE PAY. Private pay revenues include payments from individuals who pay directly for services without governmental assistance and include payments from commercial insurers, Blue Cross organizations, health maintenance organizations, preferred provider organizations, workers' compensation programs and other similar payment sources. The Company's rates for private pay residents are typically higher than rates for patients eligible for assistance under governmental reimbursement programs. The amount the Company charges to private pay residents is not subject to regulatory control in any state in which the Company operates. However, the private pay rates charged by the Company are influenced primarily by the rates charged by other providers in the local market and by Medicaid and Medicare reimbursement rates. All of the Company's patient service revenue attributable to its assisted/independent living centers is derived exclusively from private pay sources. Monthly resident fees for the Company's independent living centers typically range from approximately $1,250 to $1,800 and monthly resident fees for the Company's assisted living centers typically range from $1,500 to $3,000 based upon the resident's level of required care. Government payments for assisted living services have been limited and are not material to the Company's assisted/independent living operations. ANCILLARY BUSINESSES On September 30, 1994, the Company acquired approximately 63% of the outstanding capital stock of Contour Medical, Inc. ("Contour") from certain shareholders of Contour. In exchange for such shares, the Company issued 125,000 shares of the Company Common Stock and 300,000 shares of the Company's Series AA Convertible Preferred Stock. The Company currently owns approximately 60% of Contour's outstanding capital stock. Contour is a publicly-held company based in Alpharetta, Georgia which distributes a full line of disposable medical supplies to nursing homes, home health agencies and other healthcare providers. These supplies include disposable surgical procedure products for outpatient surgery, X-ray, radiology, and other imaging technology within the hospital, emergency room, integrated care facilities and clinic markets. These supplies, such as pads, bags, equipment covers and drapes, are used to protect equipment, patients and attending personnel in the surgery or emergency room environment, and are designed to meet -13- 14 the requirements of infection control for medical, industrial and institutional applications. In addition, Contour markets its REDI NURSE SYSTEMS product line, which provides custom-packaged procedural trays for use in clinics and long-term care centers as well as by home health care nurses, and distributes medical supplies and equipment produced by other manufacturers. In March 1996, Contour acquired AmeriDyne Corporation, a bulk medical supply company based in Jackson, Tennessee, which has annual sales of approximately $10 million. In August 1996, Contour acquired all of the outstanding stock of Atlantic Medical Supply Company, Inc. ("Atlantic Medical"), a distributor of disposable medical supplies and a provider of third-party billing services to the nursing home and home health care markets. Contour paid $1,400,000 in cash and promissory notes totaling $10,500,000 for the stock of Atlantic Medical. The promissory notes bore interest at 7% per annum and were paid in full by the Company on January 10, 1997. In consideration for the Company's payment of such promissory notes, Contour issued to the Company 1,950,000 shares of the common stock of Contour Retirement Care holds approximately 27% of the outstanding capital stock of In-House Rehab, Inc., a publicly held company based in Louisville, Kentucky, whose wholly owned subsidiary, In-House Rehab, Inc., provides rehabilitation services to approximately 36 of the Company's long-term care facilities. COMPETITION The senior residential care industry is highly competitive. The Company competes with other providers of senior residential care services on the basis of the breadth and quality of its services, the quality of its facilities and, with respect to private pay patients or residents, price. The Company also competes in the acquisition and development of additional facilities. The Company's current and potential competitors include national, regional and local operators of long-term care facilities, acute care hospitals and rehabilitation hospitals, extended care centers, assisted/independent living centers, retirement communities, home health agencies and similar institutions, many of which have significantly greater financial and other resources than the Company. In addition, the Company competes with a number of tax-exempt nonprofit organizations which can finance capital expenditures on a tax-exempt basis or receive charitable contributions unavailable to the Company and which are generally exempt from paying income tax. There can be no assurance that the Company will not encounter increased competition which could adversely affect the Company's operating results. While the Company's competitive standing varies from market to market, management believes that the Company competes favorably in substantially all of the markets it serves based on key competitive factors such as the breadth and quality of services it offers, the quality of its facilities, its recruitment and retention of qualified health care personnel and its reputation among local referral sources. Competition for the acquisition of long-term care facilities has remained steady in recent years, but is expected to increase as the demand for long-term care increases. Construction of new long-term care facilities near the Company's facilities could adversely affect its business. However, state laws generally require a CON, which is only issued if the applicant proves that the need for additional long-term care beds exists under the state devised formula, before a -14- 15 new long-term care facility can be built or beds can be added to existing facilities. The Company believes that these laws reduce the possibility of overbuilding and promote higher utilization of existing facilities. CON laws are in place in all states where the Company operates. While such measures may limit the Company's expansion of current facilities and possible future acquisitions, they may also reduce competition in the affected service area. The Company competes with other health care providers for both professional and nonprofessional employees and with non-health care providers for non-professional employees. In recent years the health care industry has experienced a shortage of qualified health care personnel. While the Company has been able to retain the services of an adequate number of qualified personnel to staff its facilities appropriately and maintain its standards of quality care, there can be no assurance that continued shortages will not affect the ability of the Company to maintain the desired staffing levels. A lack of qualified personnel at any facility could result in significant increases in labor costs or otherwise adversely affect the operations at that facility. Any of these developments could adversely affect the Company's operating results or expansion plans. GOVERNMENT REGULATION The federal government and all states in which the Company operates regulate various aspects of the Company's business. In addition to the regulation of rates by governmental payer sources, the development and operation of long-term care and assisted living facilities and the provision of long-term care services are subject to federal, state and local licensure and certification laws which regulate with respect to a facility, among other matters, the number of beds, the services provided, the distribution of pharmaceuticals, the condition and use of medical equipment, staffing requirements, operating policies and procedures, fire prevention measures and compliance with building and safety codes and environmental laws. There can be no assurance that federal, state or local governments will not impose additional restrictions which might impact the Company's business. LICENSURE AND CERTIFICATION. All of the facilities operated by the Company are licensed under applicable state laws and have all required CONs from responsible state authorities. All of the Company's long-term care facilities are certified or approved as providers under the Medicaid program, and the majority of its long-term care facilities are certified or approved as providers under the Medicare program. Both initial and continuing qualification of a long-term care facility to participate in the Medicaid and Medicare programs depend on many factors, including accommodations, equipment, services, non-discrimination policies against indigent patients, patient care, quality of life, residents' rights, safety, personnel, physical environment and adequacy of policies, procedures and controls. Licensing, certification and other applicable standards vary from jurisdiction to jurisdiction and are revised periodically. State agencies survey or inspect 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 payer programs. In some cases or upon repeat violations, the reviewing agency has the authority to take various adverse actions against a facility, including the imposition of fines, temporary suspension of admission of new patients to the facility, suspension or decertification from participation in the state Medicaid or the Medicare program, denial of payment under Medicaid for new admissions, reduction of payments, and, in extreme circumstances, revocation of a facility's license or closure of a facility. The compliance history of a prior operator may be used by state or federal regulators in determining possible action against a successor operator. -15- 16 REGULATORY COMPLIANCE AND ENFORCEMENT. The Company believes that its facilities comply in all material respects with all applicable statutes, regulations, standards and requirements, including applicable Medicaid and Medicare regulatory requirements. However, in the ordinary course of its business, the Company's long-term care facilities are surveyed from time to time for regulatory compliance and receive notices of deficiencies for failure to comply with various regulatory requirements. In most cases, the Company and the reviewing agency will agree upon corrective measures to be taken to bring the facility into compliance. To date, statements of deficiency received by the Company have not had any material adverse effect on its operations, and there is no pending or threatened decertification of or moratorium on admissions at any of its facilities. While there can be no assurance that future surveys will not have a material adverse effect on the Company, based on its operating policies and compliance procedures, quality assurance programs and past experience, the Company does not expect to receive any statements of deficiency which would, either individually or in the aggregate, have a material adverse effect on its operations. FRAUD AND ABUSE LAWS. Various federal and state laws regulate the relationship between providers of health care services and physicians, including employment or service contracts and investment relationships. These laws include the broadly-worded fraud and abuse provisions of the Medicaid and Medicare statutes, which prohibit payments for the referral of Medicaid or Medicare patients. Violations of these provisions may result in civil or criminal penalties for individuals or entities or exclusion from participation in the Medicaid and Medicare programs. Management believes that in the past the Company has been, and in the future it will be, able to arrange its business relationships so as to comply with these provisions. OBRA - 87. Effective October 1, 1990, the Omnibus Budget Reconciliation Act of 1987 ("OBRA") 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 and increases training requirements for nurse's aides by requiring a minimum number of training hours and a certification test before a nurse's aide can commence work. States must continue to certify that nursing facilities provide "skilled care" in order to obtain Medicare reimbursement. Management is unable to predict how individual state licensure laws win conform to this change but believes that the Company will not be materially adversely affected. RESTRICTIONS ON ACQUISITIONS, CONSTRUCTION AND ADDITIONS. All states in which the Company operates have adopted CON or similar laws which generally require that, with respect to long-term care facilities, a state agency determine that a need exists prior to the addition or reduction of beds or services, the implementation of other changes, the incurrence of certain capital expenditures or, in certain states, the closure of a facility. State approvals are generally issued for a specified maximum expenditure and require implementation of the proposal within a specified period of time. Failure to obtain the necessary state approval can result in the inability of the facility to provide the service, operate the facility or complete the acquisition, addition or other change in a facility and in the imposition of sanctions or other adverse action on the facility's license and reimbursement eligibility. GOVERNMENTAL BUDGETARY RESTRAINTS. Both the federal government and various states are considering imposing limitations on the amount of funding available for various health care services. Among the proposals being considered by the -16- 17 United States Congress is a "block grant" funding mechanism for the disbursement of the federal share of Medicaid payments to the individual states. If enacted, this could cause a reduction in the availability of Medicaid funds in future years to the states which, in turn, provide reimbursement to Medicaid-certified long-term care facilities. In addition, various states are themselves considering reduced levels of spending in various areas which also could affect the amount of available Medicaid funding. In November 1995, the United States Senate and House of Representatives passed a budget reconciliation bill which would establish a framework for balancing the federal budget in seven years. While the President vetoed the bill, the Administration has agreed to achieve a balanced budget in this time frame. The bill passed by the Senate and House would have resulted in a major restructuring of the current Medicaid program. Rather than operating as an entitlement program, the new "MediGrant" program would provide federal block grants to the states for medical assistance programs to low income individuals and families. While the states would be subject to certain federal requirements, states would also have broad flexibility to establish their coverage, eligibility and payment standards. Given the fixed federal funds that would be available to support state MediGrant programs, there would be no assurance that, if enacted, these provisions would not have a material adverse effect on the results of operations of the Company. While Medicare and Medicaid reimbursements may not continue at the current levels or rates of increase, it is not possible to predict with certainty the effect of any legislation upon the Company's operations. EMPLOYEES. As of June 30, 1997, the Company employed in the aggregate approximately 7,320 employees, including 106 employees at the Company's executive offices. The Company believes that its relationship with its employees is satisfactory. The Company has collective bargaining agreements with unions representing two of the facilities that the Company operates. The Company is currently negotiating an agreement with the union representing employees at one other facility operated by the Company. The employees at the remaining facilities operated by the Company have not elected to be covered by collective bargaining agreements. The Company believes that the attraction and retention of dedicated, skilled and experienced nursing and other professional staff has been and will continue to be a critical factor in the successful development of its business. In response to this challenge, a compensation program which provides for regular merit and cost-of-living reviews and a variety of financial and other incentives have been implemented to promote facility staff motivation and productivity and to reduce turnover rates. The Company believes that its wage rates for nursing and other professional staff are commensurate with market rates. INSURANCE Providing health care services entails an inherent risk of liability. The Company maintains liability insurance providing coverage which it believes to be adequate. In addition, the Company maintains property, business interruption and workers' compensation insurance covering all facilities in amounts deemed adequate by the Company. The Company carries malpractice insurance coverage for each of the facilities that it owns, operates or manages in the amount of $1 million per incident per facility and $3 million annual aggregate per facility. The Company also carries an umbrella excess liability insurance policy which has a $20 million per incident limit with an aggregate limit of $20 million. There can be no assurance that any future claims will not exceed applicable insurance coverage or that the Company will be able to continue its present insurance coverage on satisfactory terms, if at all. -17- 18 ITEM 2. PROPERTIES. The Company currently leases approximately 20,000 square feet of office space for its corporate offices at 6000 Lake Forrest Drive, Suite 200, Atlanta, Georgia, from an unaffiliated party. This lease expires in October 2000, and currently requires base monthly lease payments of approximately $36,015. The Company believes that these facilities are suitable and adequate to meet its present and anticipated needs. The following table summarizes certain information regarding facilities leased, owned and managed by the Company as of September 19, 1997. With regard to facilities leased from or managed for affiliated companies, the name of the affiliate is indicated using the following abbreviations: Winter Haven Homes, Inc. - WHH; Gordon Jensen Health Care Associates, Inc. - GJ; National Assistance Bureau, Inc. - NAB; Southeastern Cottages, Inc. - SCI; Chamber Health Care Society - CHCS; and Retirement Group, L.L.C. - RG.
Leased/ Owned/ Occupancy Number Managed As of Type of of Beds (Name of September 19, Name Location Facility or Units Affiliate) 1997 - ------------------ ---------- ----------- -------- --------- ---------- GEORGIA Twin View Health Twin City Long-Term 110 Leased 96% Care Center Care (RG) Griffin Health Griffin Long-Term 148 Owned 99% Care Center Care Midway Health Midway Long-Term 169 Managed 94% Care Center Care (GJ) Dearfield Nursing Columbus Long-Term 210 Owned 95% Facility Care Summer's Landing- Vidalia Assisted/ 24 Managed 100% Vidalia Independent (SCI) Living Summer's Landing- Cordele Assisted/ 36 Owned 89% Cordele Independent Living Summer's Landing- Douglas Assisted/ 58 Leased 95% Douglas Independent (GJ) Living Summer's Landing- Dublin Assisted/ 56 Owned 89% Dublin Independent Living Summer's Landing- Dahlonega Assisted/ 24 Leased 83% Dahlonega Independent Living Summer's Landing- Griffin Assisted/ 30 Owned 31% Griffin Independent Living
-18- 19 Summer's Landing- Plains Assisted/ 40 Owned Under Plains Independent Construction Living Twelve Oaks Health Riverdale Long-term 152 Leased 93% Care Care Cedartown Health Cedartown Long-term 116 Leased 97% Care Center Care Floyd Health Care Rome Long-term 100 Leased 91% Center Care Friendship Health Cleveland Long-term 89 Leased 97% Care Center Care Gateway Health Cleveland Long-term 60 Leased 98% Care Center Care Gold City Health Dahlonega Long-term 102 Leased 97% Care Center Care Mountain View Clayton Long-term 117 Leased 91% Health Care Center Care Sandmont Health Trenton Long-term 71 Leased 97% Care Center Care Rome Health Care Rome Long-term 100 Leased 97% Center Care Sun Mountain Rome Long-term 100 Leased 95% Health Care Center Care Arrowhead Nursing Jonesboro Long-term 115 Owned 92% Center Care Roberta Nursing Roberta Long-term 100 Leased 93% Home Care West View Health Port Long-term 99 Leased 98% Care Center Wentworth Care Peachbelt Health Warner Long-term 106 Leased 87% Care Center Robins Care Dogwood Retirement Warner Assisted/ 18 Leased 100% Village Robins Independent Living New Beginnings Covington Long-term 158 Managed 96% Health & Rehab Care (CHCS)
-19- 20 Springdale Conva- Atlanta Long-term 109 Owned 95% lescent Center of Care Atlanta Springdale Conva- Carters- Long-term 118 Leased 96% lescent Center ville Care of Bartow County Summer's Landing- Carters- Long-term 50 Owned 46% Springdale ville Care Brunswick Nursing Brunswick Long-term 204 Leased 97% Center Care Tattnall Nurse Reidsville Long-term 92 Leased 87% Care Center Care Altamaha Conva- Jesup Long-term 62 Leased 100% lescent Center Care Summer's Landing- Rome Assisted/ 60 Owned 95% Rome Independent Living Riverview Health- Rome Long-term 115 Owned 93% care Center Care Marietta Health Marietta Long-term 119 Leased 98% Care Care Brown's Health- Statesboro Long-term 64 Leased 95% care Center Care Clinch Healthcare Homerville Long-term 92 Leased 88% Center Care Jeff Davis Health Hazelhurst Long-term 73 Leased 93% Care Center Care Charlton Health Folkston Long-term 92 Leased 85% Care Center Care Hartley Woods Macon Long-term 147 Leased 92% Health & Rehab Care (RG) Center The Renaissance - Warner Assisted/ 132 Owned Under Warner Robbins Robbins Independent Construction Living Total for Georgia 4,037 (42 facilities)* - --------------- * Excludes facilities under construction. FLORIDA Renaissance of Sebring Assisted/ 170 Owned 89% Sebring Independent Living
-20- 21 The Garden at Green Cove Assisted/ 28 Leased 39% Magnolia Manor Springs Independent (RG) Living Magnolia Manor Green Cove Long-term 60 Leased 92% Nursing Center Springs Care (RG) Lake Forrest Jackson- Long-term 60 Leased 98% Health Care ville Care (WHH) Center Summer's Landing- Lynn Haven Assisted/ 51 Managed 73% Lynn Haven Independent (NAB) Living The Renaissance Titusville Assisted/ 101 Leased 96% Independent (WHH) Living Renaissance of Sanford Assisted/ 94 Managed 86% Sanford Independent (WHH) Living The Atrium Jackson- Assisted/ 178 Managed 95% ville Independent and 75% Care Owned The Atrium Jackson- Long-term 84 Managed 71% Nursing Home ville Care and 75% Owned The Preserve Pompano Assisted/ 297 Managed 99% Beach Independent Living The Renaissance Destin Assisted/ 116 Owned 97% of Sandestin Independent Living The Edwinola Dade City Assisted/ 214 Owned 76% Independent Living Westwood Fort Walton Assisted/ 208 Owned 93% Retirement Independent Living Southside Health Jackson- Long-term 120 Leased 64% Care Center ville Care The Renaissance Lakeland Assisted/ 104 Owned 77% of Lakeland Independent Living
-21- 22 Bayou Villa Pensacola Assisted/ 106 Leased 50% Independent Living Westwood Nursing Fort Walton Long-term 60 Owned 97% Center Care Summer's Landing- Jackson- Assisted/ 39 Managed 87% Atrium ville Independent and 75% Living Owned Summer's Landing- Titusville Assisted/ 28 Leased Under of Titusville Independent (WHH) Con- Living struc- tion Orlando Health Orlando Long-term 132 Leased 92% Care Center Care Gainesville Health Gainesville Long-term 180 Leased 82% & Rehab Center Care Coventry Square Ocala Long-term 132 Leased 89% Health & Rehab Care Center St. Cloud Health St. Cloud Long-term 131 Leased 86% Care Center Care North Jacksonville Jackson- Long-term 60 Leased Under Rehab and Nursing ville Care Con- Center struc- tion Total for Florida 2,753 (24 facilities)* - --------------- *Excludes facilities under construction. TENNESSEE Marshall C. Voss Harriman Long-term 139 Managed 89% Health Care Care (NAB) Trenton Health Trenton Long-term 58 Leased 95% Care Center Care (RG) Summer's Landing- Trenton Assisted/ 22 Leased 100% Trenton Independent (RG) Living Jackson Oaks Jackson Assisted/ 178 Owned 97% Retirement Independent Living
-22- 23 Cumberland Green Henderson- Assisted/ 140 Owned 90% Retirement ville Independent Living Winchester Health Winchester Long-term 80 Leased 100% Care Care Health Care Ardmore Long-term 79 Leased 99% Center of Care Ardmore Fayetteville Fayetteville Long-term 79 Leased 98% Health Care Care Center River Park Health Nashville Long-term 78 Leased 90% Care Center Care Palmyra Inter- Palmyra Long-term 75 Leased 97% mediate Care Care Center Milan Health Milan Long-term 66 Leased 83% Care Center Care Pleasant View Bolivar Long-term 67 Leased 100% Health Care Care Center Lauderdale Ripley Long-term 71 Owned 87% Healthcare Care Oak Manor Health McKenzie Long-term 66 Leased 99% Care Center Care Parkway Health Memphis Long-term 100 Managed 96% and Rehab Care (CHCS) Hillview Nursing Dresden Long-term 70 Owned 100% Home Care Crestwood Nursing Manchester Long-term 59 Owned 100% Home Care Reelfoot Manor Tiptonville Long-term 120 Leased 85% Care Maplewood Health Jackson Long-term 172 Leased 87% Care Center Care (RG) Laurelwood Health Laurelwood Long-term 74 Leased 85% Care Center Care (RG) Total for Tennessee 1,793 (20 facilities)
-23- 24 ALABAMA Gardendale Gardendale Long-term 148 Leased 98% Health Care Care Center Summer's Landing- Gardendale Assisted/ 26 Leased 100% Gardendale Independent Living Summer's Landing- Hanceville Assisted/ 46 Leased 70% Hanceville Independent Living Sea Breeze Mobile Long-term 140 Managed 99% Health Care Care (WHH) Center The Renaissance Decatur Assisted/ 120 Leased 99% of Decatur Independent Living Total for Alabama 480 (5 facilities) NORTH CAROLINA Wilkinson Health Gastonia Long-term 50 Leased 98% Care Center Care Len-Care Fayetteville Assisted/ 152 Leased 92% Rest Home Independent Living East Carolina Greenville Long-term 150 Leased 85% Care Care Len-Care Nursing Elizabeth- Long-term 120 Leased 98% and Convalescent town Care Center Carolina Greenville Assisted/ 120 Leased 71% Care Independent Living Maplewood Nursing Reidsville Long-term 110 Leased 97% Center Care Willow Springs Carboro Assisted/ 108 Leased 73% Health Care Independent Center Living Fayetteville Fayetteville Long-term 100 Leased 55% Health Care Care Center Pemberton Place Pembrooke Long-term 84 Leased 98% Nursing Center Care
-24- 25 Brookshire Health Brookshire Long-term 80 Leased 96% Care Center Total for North 1,074 (10 facilities) Carolina VIRGINIA West Hampton Richmond Long-term 195 Owned 83% Health and Rehab Care Center New River Health- Dublin Long-term 132 Leased 74% care Center Care Tappahannock Tappahannock Long-term 118 Owned 78% Health and Rehab Care Center Summer's Landing- Tappahannock Assisted/ 42 Owned 97% Tappahannock Independent Living Brentlox Health & Chesapeake Long-term 120 Owned 98% Rehab Center Care Lynn Shores Manor Virginia Long-term 242 Leased 83% Care Total for Virginia 849 (6 facilities) OHIO Hamlet Chagrin Assisted/ 222 Owned 87% Retirement Falls Independent Care Hamlet Nursing Chagrin Long-term 88 Owned 85% Manor Falls Care Total for Ohio 310 (2 facilities) ARIZONA The Carillons Sun City Assisted/ 76 Owned 90% Independent Care Total for Arizona 76 (1 facility)
ITEM 3. LEGAL PROCEEDINGS. As of October 7, 1997 the Company and certain of its officers and directors have been named as defendants in nine putative class action lawsuits which were commenced during the period from August 25, 1997 through October 2, 1997. In -25- 26 these actions the plaintiffs allege that the Company and the individual defendants disseminated materially false and misleading information and failed to disclose material information concerning the Company's operating condition and future business prospects. Generally each of the complaints seeks unspecified compensatory damages, pre-judgment and post-judgment interest, reasonable attorneys' fees, expert witness fees and other costs, equitable and injunctive relief. Following is a list of these class actions: 1. Solomon Jacob on behalf of himself and all others similarly situated, Plaintiff v. Retirement Care Associates, Inc., Chris Brogdon, Darrell C. Tucker and Edward E. Lane, Defendants. This complaint was filed on August 29, 1997 in the United States District Court, Northern District Court of Georgia, Atlanta Division, Civil Action No. 1:97-CV-2529. 2. Joseph Goldstein, on behalf of himself and all others similarly situated, Plaintiff v. Retirement Care Associates, Inc., Chris Brogdon and Darrell C. Tucker, Defendants. This class action complaint was filed on September 28, 1997 in the United States District Court, Northern District Court of Georgia, Atlanta Division, Civil Action No. 1:97-CV-2503. 3. Southland Securities, Inc. on behalf of himself and all others similarly situated, Plaintiff v. Retirement Care Associates, Inc., Chris Brogdon, Darrell C. Tucker and Edward E. Lane, Defendants. This class action complaint was filed on August 27, 1997 in the United States District Court, Northern District Court of Georgia, Atlanta Division, Civil Action No. 1:97-CV-2494-MHS. 4. Pankai Shah, on behalf of himself and all others similarly situated, Plaintiff v. Retirement Care Associates, Inc., Chris Brogdon, Darrell C. Tucker, Julian S. Daley and Harlan Mathews, Defendants. This class action complaint was filed on September 10, 1997 in the United States District Court, Central District of California, Case Number CV-97-6768-GHK (JGx). 5. Israel Shurkin, on behalf of himself and all others similarly situated, Plaintiff v. Retirement Care Associates, Inc., Chris Brogdon, Darrell C. Tucker, Julian S. Daley and Harlan Mathews, Defendants. This class action complaint was filed on August 25, 1997 in the United States District Court, Northern District Court of Georgia, Civil Action No. 1:97-CV-2558. 6. Michael Gerber, on behalf of himself and all others similarly situated, Plaintiff v. Retirement Care Associates, Inc., Chris Brogdon and Darrell C. Tucker, Defendants. This class action complaint was filed on September 12, 1997 in the United States District Court, Northern District Court of Georgia, Atlanta Division, Civil Action No. 1:97-CV-2680. 7. David Applestein, on behalf of himself and all others similarly situated, Plaintiff v. Retirement Care Associates, Inc., Chris Brogdon and Darrell C. Tucker, Defendants. This class action complaint was filed on September 22, 1997 in the United States District Court, Northern District Court of Georgia, Atlanta Division, Civil Action No. 1:97-CV-2850. 8. Jean Poulsen, on behalf of himself and all others similarly -26- 27 situated, Plaintiff v. Retirement Care Associates, Inc., Chris Brogdon and Darrell C. Tucker, Defendants. This class action complaint was filed on October 2, 1997 in the United States District Court, Northern District Court of Georgia, Atlanta Division, Civil Action No. 1:97-CV-3009. 9. Tim Semple, on behalf of himself and all others similarly situated, Plaintiff v. Retirement Care Associates, Inc., Chris Brogdon and Darrell C. Tucker, Defendants. This class action complaint was filed on October 1, 1997 in the United States District Court, Northern District Court of Georgia, Atlanta Division, Civil Action No. 1:97-CV-2998. The Company intends to defend the above actions vigorously. The Company cannot predict the financial impact of the costs of defending these actions, or their settlement, with any certainty, but believes that the costs to the Company could have a material adverse effect on the Company and its operations. On April 30, 1997 a complaint was filed by Theratx, Inc. against the Company, Darrell C. Tucker, Capitol Care Management Company, Inc. et. al. in the Superior Court of Fulton County, Georgia (Civil Action File No. E-59089). The complaint seeks approximately $1,600,000 in damages plus interest of approximately $239,000 and costs and fees of approximately $24,500 in connection with past due accounts for therapy services and rehabilitation services. The Company is attempting to settle this matter and has submitted a settlement offer to Theratx. The amount at issue is attributable to seven (7) facilities, six (6) of which are operated by the Company and one (1) of which is operated by Chamber Health Care Society, Inc. The amount claimed relating to the six facilities operated by the Company is less than $500,000. On July 1, 1997 a complaint was filed by CMS Therapies, Inc. against the Company in the Superior Court of Mecklenburg County, North Carolina (Civil Action File No. 97-CVS-8434). The complaint seeks approximately $1,277,000 plus interest and fees in connection with therapy services agreements. On July 1, 1997, a complaint was filed by CMS Therapies, Inc. against the Company's subsidiary, Capitol Care Management Company, Inc. in the Superior Court of Mecklenburg County, North Carolina (Civil Action File No. 97-CVS-8435). The complaint seeks $597,553.80 in damages plus interest and fees in connection with the alleged breach of a settlement agreement relating to the payment for therapy services. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. -27- 28 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. (a) MARKET INFORMATION. Since December 18, 1995, the Company's Common Stock has been listed on the New York Stock Exchange under the symbol "RCA". The Company's Common Stock was previously traded in the over-the-counter market, and from April 7, 1994 through December 15, 1995, it was quoted on the NASDAQ National Market System. Prior to April 7, 1994, quotations were carried on the NASD's OTC Bulletin Board. The following table sets forth the high and low sale prices for the Company's Common Stock as reported on the NASDAQ National Market System through December 15, 1995, and on the New York Stock Exchange after that date, for the periods indicated:
QUARTER ENDED HIGH* LOW* September 30, 1995 $16.65 $10.12 December 31, 1995 $12.74 $ 8.15 March 31, 1996 $11.31 $ 9.46 June 30, 1996 $13.25 $10.00 September 30, 1996 $11.125 $ 7.00 December 31, 1996 $10.00 $ 5.25 March 31, 1997 $10.375 $ 7.625 June 30, 1997 $12.375 $ 8.125
- ---------------------- * As adjusted to give retroactive effect to a 5% stock dividend that was effected on May 1, 1996. (b) APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK. The number of record holders of the Company's Common Stock at October 3, 1997, was 320, and the number of beneficial holders is estimated to be approximately 4,500. (c) DIVIDENDS. The Company has paid no cash dividends on its Common Stock and has no present intention of paying cash dividends in the foreseeable future. In February 1994, the Company declared a 5% stock dividend on its outstanding Common Stock, in January 1995, the Company declared an additional 5% stock dividend on its outstanding Common Stock, and in April 1996, the Company declared an additional 5% stock dividend on its outstanding Common Stock. It is the present policy of the Board of Directors to retain all earnings to provide for the growth of the Company. Payment of cash dividends in the future will depend, among other things, upon the Company's future earnings, requirements for capital improvements and financial condition. The Company does, however, intend to consider additional stock dividends in the future. The Company's ability to pay any cash dividends on the Company's Common Stock in the future will be limited by the dividend and redemption requirements of the Company's Series AA Convertible Preferred Stock. ITEM 6. SELECTED FINANCIAL DATA. The following selected financial information for the fiscal years ended June 30, 1996 and 1997, is derived from financial statements of the Company audited by Cherry, Bekaert & Holland, L.L.P., independent certified public accountants. The selected financial information for the fiscal years ended June 30, 1995, 1994 and 1993, is derived from financial statements of the Company audited by BDO Seidman, LLP, independent certified public accountants. As described more fully in the Company's financial statements, financial information prior to the date of the Company's merger with Capitol Care Management Company, Inc. -28- 29 reflects the financial information of Capitol Care Management Company, Inc. BALANCE SHEET DATA (in thousands):
AT JUNE 30, 1997(1)(2) 1996(1)(2) 1995(1)(2) 1994(1)(2) 1993(1) Current Assets $ 64,911 $ 29,479 $25,783 $12,450 $1,404 Total Assets 255,371 177,492 80,258 31,230 2,453 Current Liabili- ties 75,401 30,975 22,857 9,329 1,677 Working Capital (Deficit) (10,490) (1,496) 2,925 3,121 (273) Long-Term Debt 141,674 108,481 32,426 8,200 -0- Redeemable Pre- ferred Stock 1,800 2,400 3,000 -0- -0- Shareholders' Equity 30,695 30,866 19,733 13,400 776
- --------------------- (1) Effective November 30, 1992, the Company acquired the stock of CCMC in a reverse acquisition in which CCMC's stockholders acquired voting control of the Company. The transaction was accounted for as a purchase with CCMC as the acquiring company because CCMC's stockholders acquired a majority of the voting rights in the combined company. Accordingly, the results of operations prior to November 30, 1992, are those of CCMC. See Note 2 to the Company's financial statements. (2) On May 1, 1993, the Company entered into operating lease agreements for seven licensed nursing homes and one personal care facility. Prior to May 1, 1993, the Company and its predecessor, Capitol Care Management Company, Inc., were engaged exclusively in the management of retirement facilities and nursing homes. Subsequent to May 1, 1993, the Company, through the operating leases on such facilities, began to operate facilities resulting in the recognition of $2,399,906 of patient service revenues and $222,610 of other revenues for the year ended June 30, 1993. During the year ended June 30, 1993, such facilities incurred $2,037,694 of operating expenses resulting in an operating margin of $584,822. During the year ended June 30, 1994, the Company continued its expansion into the operation of facilities, with the acquisition of two retirement facilities and two nursing home facilities accounted for using the purchase method of accounting and new operating lease commitments for eleven nursing homes and one retirement facility. The addition of these 16 facilities either through direct acquisition or operating leases increased patient service revenues by $16,520,401, total revenues by $136,124 and operating expenses by $12,774,764. During the year ended June 30, 1995, the Company purchased three nursing homes and two retirement facilities and leased seven more nursing homes. During the fiscal year ended June 30, 1996, the Company purchased seven nursing homes and four retirement facilities and leased eight nursing homes and three retirement facilities. During the fiscal year ended June 30, 1997, the Company purchased three retirement homes and leased 21 nursing homes and 14 retirement homes. -29- 30 STATEMENT OF INCOME DATA (in thousands, except per share data):
FOR THE YEARS ENDED JUNE 30, 1997 1996 1995 1994 1993 ------- ------- ------- ------- ------ Revenues $253,228 $134,011 $79,616 $37,971 $4,554 Operating Expenses 249,527 124,631 70,599 32,994 3,615 Net Income (Loss) (7,536) (520) 5,059 2,918 574 Net Income (Loss) Per Common and Common Equivalent Share(1) $ (.71) $ (.05) $ .38 $ .30 $ .11 Weighted Average Shares(1) 13,710 11,325 12,617 9,840 5,010 Cash Dividends Per Common Share $ -0- $ -0- $ -0- $ -0- $ -0- - -----------------
The Company has retroactively restated net income per share and weighted average shares outstanding for the effect of stock dividends, stock splits and reverse stock splits. See "Notes to Financial Statements." ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. YEAR ENDED JUNE 30, 1997 COMPARED TO YEAR ENDED JUNE 30, 1996 The Company's total revenues for the year ended June 30, 1997 were $253,227,861 compared to $134,011,369 for the year ended June 30, 1996. Management fee revenue decreased from $3,781,433 in the year ended June 30, 1996, to $2,629,329 in the year ended June 30, 1997. The Company purchased or leased nine facilities in the year ended June 30, 1997, that it managed in the year ended June 30, 1996. Included in the Company's management fee revenue is $2,212,500 and $3,472,900 from affiliates during the year ended June 30, 1997 and 1996, respectively. Due to the increased number of facilities owned or leased by the Company, patient service revenue increased from $119,499,849 for the year ended June 30, 1996 to $202,603,841 for the year ended June 30, 1997. The cost of patient services in the amount of $148,520,849 for the year ended June 30, 1997, represent 73% of patient service revenue, as compared to $81,082,972 or 68%, of patient service revenue during the year ended June 30, 1996. The increase in the percentage is attributed to an increase in the number of nursing facilities to retirement facilities operated during the current year. Nursing facilities require more skilled patient services than retirement homes. Owning or leasing a facility is distinctly different from managing a facility with respect to operating results and cash flows. For an owned or leased facility, the entire revenue/expense stream of the facility is recorded on the Company's income statement. In case of a management agreement, only the management fee is recorded. The expenses associated with management revenue are somewhat indirect as the infrastructure is already in place to manage the facility. Therefore, the profitability of managing a facility appears more lucrative on a margin basis than that of an owned/leased facility. However, the risk of managing a facility is that the contract generally can be canceled on a relatively short notice, which results in loss of all revenue attributable to the contract. Furthermore, with an owned or leased property the Company benefits from the increase in value of the facility as its performance increases. With a management contract, the owner of the facility maintains the equity value. From a cash flow standpoint, a management contract is more lucrative because the -30- 31 Company does not have to support the ongoing operating cash flow of the facility. The Company owned or leased 35 additional facilities during fiscal year ended June 30, 1997 compared to fiscal year ended June 30, 1996, which resulted in a corresponding increase in net revenues of $36 million during the fiscal year ended June 30, 1997. The number of leased or owned properties at year end are presented in the following table (which does not include managed facilities):
Type Fiscal 1995 Fiscal 1996 Fiscal 1997 Nursing 30 48 69 Retirement 8 18 32 Total 38 66 101
For facilities that were in place for the entire year ended June 30, 1996 and June 30, 1997, revenue increased approximately $1 million, or 2%, during the year ended June 30, 1997. For these same facilities, average rates increased approximately 4% while patient-days decreased approximately 2%. During the year ended June 30, 1997, the Company had revenue from medical supply sales of $45,500,712, an approximately $35 million increase compared to fiscal year ended June 30, 1996. The Company had cost of goods sold of $31,832,734 for the fiscal year ended June 30, 1997 as compared to $5,773,934 for the fiscal year ended June 30, 1996. The increase in sales reflects the acquisition of AmeriDyne Corporation on April 1, 1996 and Atlantic Medical, Inc. on July 1, 1996 by Contour Medical, Inc. Lease expense increased from $8,442,671 in the year ended June 30, 1996, to $14,117,392 in the year ended June 30, 1997. This increase is primarily attributable to the increased numbers of facilities leased during the year, as well as the full year effect of leased facilities that started during the year ended June 30, 1996. General and administrative expenses for the year ended June 30, 1997 were $46,346,051, representing 18% of total revenues, as compared to $23,192,250 representing 17% of total revenues, for the year ended June 30, 1996. During the year ended June 30, 1997, the Company recorded a $2,982,063 provision for bad debts. The amount of the provision for bad debts was based upon the aging and estimated collectibility of receivables from Medicare, Medicaid and private payors. During the year ended June 30, 1997, the aging of receivables increased compared with the aging of receivables at June 30, 1996. During the year ended June 30, 1997, the Company had $673,655 in interest income and financing fees as compared to $1,847,868 in interest income and financing fees for the year ended June 30, 1996. The decrease in interest income is a result of the decreased amount of advances to related parties during the current year. Interest expense increased from $7,948,091 in the year ended June 30, 1996 to $14,111,843 in the year ended June 30, 1997. This increase is primarily attributable to the increased numbers of facilities acquired by the Company during the year, as well as the full year effect of facilities that were acquired by the Company during the year ended June 30, 1996. For the year ended June 30, 1997, the Company incurred benefits for income taxes of $2,343,256 which represents an effective tax benefit rate of 25% as compared to expenses for income taxes of $1,307,091, which represents an effective tax rate of 48% for the year ended June 30, 1996. The net loss of $7,535,810 for the year ended June 30, 1997 is lower than the net income of $1,746,808 for the year ended June 30, 1996, due to the fact that the Company's operations have deteriorated due to the delay in the -31- 32 consummation of the merger transaction with Sun Healthcare Group, Inc. Turnover of the Company's personnel, such as nursing home administrators, regional administrators, as well as all staff functions within the Company's nursing homes and the assisted living facilities has been higher than normal because of the uncertainty of the Company's future. Occupancy rates have also impacted the Company's profitability this fiscal year versus fiscal year 1996. Occupancy rates have declined because of the turnover of administrators, social workers, and nurses. With both the expansion of the number of facilities the Company operated during fiscal year 1997 and the higher than normal staff turnover, the Company's existing management staff was spread very thin. Most of the revenue from the management services division of the Company's business is received pursuant to management agreements with entities controlled by Messrs. Brogdon and Lane, two of the Company's officers and directors. These management agreements have five year terms, however, they are all subject to termination on 60 days notice, with or without cause, by either the Company or the owners. Therefore, Messrs. Brogdon and Lane have full control over whether or not these management agreements, and thus the management services revenue, continue in the future. These fees represent .87% and 2.82% of the total revenues of the Company for the years ended June 30, 1997 and 1996, respectively. YEAR ENDED JUNE 30, 1996 COMPARED TO YEAR ENDED JUNE 30, 1995 The Company's total revenues for the year ended June 30, 1996, were $134,011,369 compared to $79,616,053 for the year ended June 30, 1995. Management fee revenue decreased from $4,169,694 in the year ended June 30, 1995, to $3,781,433 in the year ended June 30, 1996. The Company purchased or leased six facilities in the year ended June 30, 1996, that it managed in the year ended June 30, 1995. Included in the Company's management fee revenue is $3,472,900 and $3,517,500 from affiliates during the years ended June 30, 1996 and 1995, respectively. Due to the increased number of facilities owned or leased by the Company, patient service revenue increased from $69,949,822 for the year ended June 30, 1995 to $119,499,849 for the year ended June 30, 1996. The cost of patient services in the amount of $81,082,972 for the year ended June 30, 1996, represents 68% of patient service revenue, as compared to $47,778,410, or 68%, of patient service revenue during the year ended June 30, 1995. The decrease in the percentage is attributed to an increase in the ratio of retirement facilities to nursing facilities operated during the current year. Retirement facilities require less patient services than nursing homes. The ratio of nursing facilities to retirement facilities decreased to 2.7 from 3.8 during the year ended June 30, 1996. Owning or leasing a facility is distinctly different from managing a facility with respect to operating results and cash flows. For an owned or leased facility, the entire revenue/expense stream of the facility is recorded on the Company's income statement. In the case of a management agreement, only the management fee is recorded. The expenses associated with management revenue are somewhat indirect as the infrastructure is already in place to manage the facility. Therefore, the profitability of managing a facility appears more lucrative on a margin basis than that of an owned/leased facility. However, the risk of managing a facility is that the contract generally can be canceled on a relatively short notice, which results in loss of all revenue attributable to the contract. Furthermore, with an owned or leased property the Company benefits from the increase in value of the facility as its performance increases. With a management contract, the owner of the facility maintains the equity value. From a cash flow standpoint, a management contract is more lucrative because the Company does not have to support the ongoing operating cash flow of the facility. -32- 33 The Company converted four managed properties to leased properties during the fiscal year ended June 30, 1996, which resulted in an increase in net revenues of $1 million during the fiscal year ended June 30, 1996 compared to the fiscal year ended June 30, 1995. The number of leased or owned properties at year-end are presented in the table below (the table does not included managed facilities):
TYPE FISCAL 1994 FISCAL 1995 FISCAL 1996 ---- ----------- ----------- ----------- Nursing 20 30 48 Retirement 6 8 18 ----- ----- ------ Total 26 38 66
For facilities that were in place for the entire year ended June 30, 1995 and June 30, 1996, revenue increased approximately $3 million, or 5%, during the year ended June 30, 1996. For these same facilities, average rates increased approximately 3% while patient-days increased approximately 2%. During the year ended June 30, 1996, the Company had revenue from medical supply sales of $14,542,421, an approximately $6.2 million increase compared to fiscal year ended June 30, 1995, of which $4,717,169 was intercompany sales which were eliminated in consolidation. These sales reflect the operations of Contour Medical, Inc., of which the Company acquired a majority interest on September 30, 1994. Because the Company acquired Contour on September 30, 1994, only nine months of activity were recorded for fiscal year ended June 30, 1995. Sales for those nine months of $3,617,439 have been annualized and recorded for the year ended June 30, 1995 and comprise $1.2 million of the $6.2 million increase in medical supplies revenue for the fiscal year ended June 30, 1995. Sales for the nine month period following the Contour acquisition have been annualized so as not to distort the net increase in revenues from the fiscal year ended June 30, 1995 to the fiscal year ended June 30, 1996. Moreover, Contour acquired AmeriDyne on March 1, 1996, which contributed $3.6 million of revenue for the fiscal year ended June 30, 1996 (see Contour 6/30/96 10-K, page 16). While AmeriDyne contributed $3.6 million of revenue for the fiscal year ended June 30, 1996 (as set forth correctly in Contour's 6/30/96 10-K), Contour's $4.7 million in sales should not have been labeled intercompany because this amount was not attributable to sales to RCA. The remaining $1.4 million increase in sales increase is attributable to the internal growth of the business. The change in costs of goods sold as a percentage of sales during fiscal year ended June 30, 1996 versus fiscal year ended June 30, 1995 is not meaningful because the method of recording intercompany elimination changed during the fiscal year ended June 30, 1996. During the fiscal year ended June 30, 1995, intercompany sales of $4,995,346 were recorded as an elimination of medical supply revenue and an elimination of routine and ancillary costs. During the fiscal year ended June 30, 1996, intercompany sales of $4,717,169 was recorded as an elimination of medical supply revenue and an elimination of medical supply costs of goods sold. If fiscal year ended June 30, 1996 is treated identically to fiscal year ended June 30, 1995, the costs of goods sold margin would be 107% of sales as compared to 87% of sales during fiscal year ended June 30, 1995. The increase in costs of goods sold margin is primarily attributable to the fact that sales to RCA comprised 32% of Contour's sales during fiscal year ended June 30, 1996 (representing costs without associated revenues), while sales to RCA comprised only 22% of Contour's sales during fiscal year ended June 30, 1995. The Cost of Goods Sold for the year ended June 30, 1996, was $5,773,934. Lease expense increased from $5,769,232 in the year ended June 30, 1995, to $8,442,671 in the year ended June 30, 1996. This increase is primarily attributable to the increased numbers of facilities leased during the year, as well as the full year effect of leased facilities that started during the year ended June 30, 1995. There were ten new facilities leased during the fiscal year ended June 30, 1996. -33- 34 General and administrative expenses for the year ended June 30, 1996, were $23,192,250, representing 17% of total revenues, as compared to $12,769,582 representing 16% of total revenues, for the year ended June 30, 1995. During the year ended June 30, 1996, the Company recorded a $3,423,117 provision for bad debts. The amount of the provision for bad debts was based upon the aging and estimated collectibility of receivables from Medicare, Medicaid and private payors. During the year ended June 30, 1996, the aging of receivables increased compared with the aging of receivables at June 30, 1995. In addition, at June 30, 1996, a larger amount of the receivables was deemed to be uncollectible than at June 30, 1995. As of June 30, 1995, the estimated allowance for bad debts was immaterial to the financial statements and was, therefore, not recorded. The Company's consideration of several factors related to the current accounts receivable balance for fiscal year 1996 resulted in the Company recording a $2.7 million bad debt reserve. The Company considered the overall increase in patient account balances (approximately 80%) resulting from the Company's acquisitions during fiscal year 1996, the deterioration in the aging categories due to untimely collection practices by individual facilities which in several cases resulted in the expiration of allowable time periods to bill accounts, the significant rise in accounts receivable net days, the growth in self-pay balances and the lack of timely write-off of uncollectible accounts throughout the fiscal year. During the year ended June 30, 1996, the Company had $1,847,868 in interest income and financing fees as compared to $658,215 in interest income and financing fees for the year ended June 30, 1995. Financing fees, which totaled $150,000 for the year ended June 30, 1996, represents fees received by the Company for assisting other companies to obtain financing for nursing homes and retirement facilities. The increase in interest income is a result of the increased amount of advances to related parties during the current year. Interest expense increased from $1,179,052 in the year ended June 30, 1995, to $7,948,091 in the year ended June 30, 1996. This increase is primarily attributable to the increased numbers of facilities acquired by the Company during the year, as well as the full year effect of facilities that were acquired by the Company during the year ended June 30, 1995. For the year ended June 30, 1996, the Company incurred expenses for income taxes of $1,307,091, which represents an effective tax rate of 48%, as compared to expenses for income taxes of $3,419,092, which represents an effective tax rate of 40%, for the year ended June 30, 1995. The increase in the effective tax rate is mainly the result of a non-deductible tax penalty of approximately $400,000 which was assessed during the year ended June 30, 1996. The net income of $1,746,808 for the year ended June 30, 1996, is less than the net income of $5,058,503 for the year ended June 30, 1995, due to the provision of an additional allowance for bad debts and increased interest expense because of the larger number of facilities acquired during the most recent fiscal year. Most of the revenue from the management services division of the Company's business is received pursuant to management agreements with entities controlled by Messrs. Brogdon and Lane, two of the Company's officers and directors. These management agreements have five year terms; however, they are all subject to termination on 60 days notice, with or without cause, by either the Company or the owners. Therefore, Messrs. Brogdon and Lane have full control over whether or not these management agreements, and thus the management services revenue, continue in the future. These fees represent 2.82% and 5.24% of total revenues of the Company for the years ended June 30, 1996 and 1995, respectively. -34- 35 LIQUIDITY AND CAPITAL RESOURCES At June 30, 1997, the Company had a deficit of $10,489,285 in working capital compared to a $1,280,270 deficit at June 30, 1996. During the year ended June 30, 1997, cash provided by or used in operating activities was ($3,532,919) as compared to $5,279,626 for the year ended June 30, 1996. The $8,812,545 decrease was primarily due to the increases in deferred income taxes of $11,111,558, and increases in accounts receivable of $20,200,604. Cash provided by operating activities was primarily attributed to an increase in accounts payable and accrued expenses of $29,187,587. Cash used in investing activities during the year ended June 30, 1997, was $23,886,904. The expenditures primarily related to acquisitions to purchases of property and equipment of $12,734,389, and acquisitions of facilities of $19,113,658. Cash provided by financing activities during the year ended June 30, 1997, totaled $31,012,336. Sources of cash included proceeds from the issuance of preferred stock of $9,340,000, proceeds from stock options and warrants exercised of $1,900,306, and proceeds from long-term debt and lines of credit of $33,919,190. Cash used in financing activities primarily consisted of $13,329,520 in payments of long-term debt, $600,000 in redemption of preferred stock, $841,318 in purchases of treasury stock, and $240,000 for dividends on preferred stock. At June 30, 1996, the Company had $(1,496,160) in working capital compared to $2,925,302 at June 30, 1995. During the year ended June 30, 1996, cash provided by operating activities was $5,279,626 as compared to $4,208,048 for the year ended June 30, 1995. The $1,071,578 increase was primarily due to the increased accounts payable associated with acquiring facilities in the year ended June 30, 1996 and an increase in depreciation and amortization from 1,128,183 for the year ended June 30, 1995 to $3,406,986 for the year ended June 30, 1996. Cash used in investing activities during the year ended June 30, 1996, was $44,711,326. The expenditures primarily related to acquisitions to purchases of property and equipment of $12,490,298, and advances to affiliates and non-affiliates of $8,935,686 due to capital expenditures and working capital deficits of the affiliates. At June 30, 1996, advances to affiliates had increased to $14,316,661 from $7,328,222 at June 30, 1995, due to additional capital expenditures and working capital deficits of the affiliates. These advances were repaid subsequent to year end. The repayment transactions included the transfer of two facilities to the Company at fair market value, as established by an independent appraisal. The proceeds of this transfer reduced the balance to approximately $2.8 million. The balance was eliminated by the contribution of shares of the Company's common stock by affiliated shareholders. The stock will be retired. Cash provided by financing activities during the year ended June 30, 1996, totaled $34,769,880. Sources of cash included capital investment by minority shareholders of a subsidiary of $2,088,492, proceeds from issuance of preferred stock of $9,300,000, proceeds from stock options and warrants exercised of $559,595, and proceeds from long-term debt and lines of credit of $35,329,244. Cash used in financing activities primarily consisted of $9,443,626 in payments of long-term debt, $2,419,783 in payments of debt issuance costs, and $600,000 in redemption of preferred stock, $274,040 in purchases of treasury stock, and $270,000 for dividends on preferred stock. During the year ended June 30, 1995, cash provided by operating activities -35- 36 was $4,208,048 as compared to $1,523,311 for the year ended June 30, 1994. The $2,684,737 increase was primarily due to the increased net income for the year ended June 30, 1995. Cash used in investing activities during the year ended June 30, 1995, was $(10,644,726). The expenditures primarily related to purchases of property and equipment of $6,079,610, purchases of bonds receivable of $4,487,936, increases in investments and advances to The Atrium Ltd. of $2,985,833 and advances to affiliates of $1,742,147 due to capital expenditures and working capital deficits of the affiliates. These were partially offset by the proceeds from a sale-leaseback transaction of $4,500,000. At June 30, 1995, advances to affiliates had increased to $7,328,222 from $5,605,250 at June 30, 1994, due to additional capital expenditures and working capital deficits of the affiliates. Cash provided by financing activities during the year ended June 30, 1995, totalled $10,683,801. Sources of cash included capital investment by minority shareholders of a subsidiary of $1,729,469, net borrowings under lines of credit of $1,745,316 and proceeds from long-term debt of $9,564,670. Cash used in financing activities primarily consisted of $2,130,654 in payments of long-term debt and $225,000 for dividends on preferred stock. Management's objective is to acquire only those facilities it believes will be able to generate sufficient revenue to pay all operating costs, management fees, lease payments or debt service, and still return a 3% to 4% cash flow. Management believes that the Company's cash flow from operations, together with lines of credit and the sale of securities described below, will be sufficient to meet the Company's liquidity needs for the current year. The Company maintains various lines of credit with interest rates ranging from prime plus .25% to prime plus 1.25%. At June 30, 1997, the Company had approximately $4,115,000 in unused credit available under such lines. On September 30, 1994, the Company purchased a majority of the stock of Contour Medical, Inc. in exchange for shares of the Company's common stock and preferred stock. The Company is obligated to redeem the preferred stock issued in the transaction over the five years for $3,000,000 in cash. $600,000 was paid on September 30, 1996 pursuant to this obligation. Management intends to fund these redemptions from cash flow generated from operations. The Company believes that its long-term liquidity needs will generally be met by income from operations. If necessary, the Company believes that it can obtain an extension of its current line of credit and/or other lines of credit from commercial sources. Except as described above, the Company is not aware of any trends, demands, commitments or understandings that would impact its liquidity. The Company intends to use long-term debt financing in connection with the purchase of additional retirement care facilities and nursing homes on terms which can be paid out of the cash flow generated by the property. -36- 37 The Company intends to continue to lease or purchase additional retirement care and/or nursing home facilities in the future. IMPACT OF INFLATION AND PENDING FEDERAL HEALTH CARE LEGISLATION Management does not expect inflation to have a material impact on the Company's revenues or income in the foreseeable future so long as inflation remains below the 9% level. The Company's business is labor intensive and wages and other labor costs are sensitive to inflation. Management believes that any increases in labor costs in its management services segment can be offset over the long term by increasing the management fees. With respect to the operations segment, approximately 52% of the Company's net patient service revenue is received from state Medicaid programs. The two states which make Medicaid payments to the Company have inflation factors built into the rates which they will pay. Georgia's inflation factor is nine percent and Tennessee's inflation is eleven percent. Therefore, increases in operating costs due to inflation should be covered by increased Medicaid reimbursements. Management is uncertain what the final impact will be of pending federal health care reform packages since the legislation has not been finalized. However, based on information which has been released to the public thus far, Management doesn't believe that there will be cuts in reimbursements paid to nursing homes. Legislative and regulatory action, at the state and federal level, has resulted in continuing changes in the Medicare and Medicaid reimbursement programs. The changes have limited payment increases under these programs. Also, the timing of payments made under the Medicare and Medicaid programs are subject to regulatory action and governmental budgetary constraints. Within the statutory framework of the Medicare and Medicaid programs, there are substantial areas subject to administrative rulings and interpretations which may further affect payments made under these programs. Further, the federal and state governments may reduce the funds available under those programs in the future or require more stringent utilization and quality review of health care facilities. ACCOUNTING PRONOUNCEMENT The Financial Accounting Standard Board has adopted Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (SFAS No. 115). The Company has adopted this standard in fiscal 1995. In management's opinion, adopting SFAS No. 115 did not materially affect the Company's financial statements for the year ended June 30, 1995. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The Independent Auditors' Reports appear at pages F-1 and F-2, and the Financial Statements and Notes to Financial Statements appear at pages F-3 through F-28 hereof. Effective July 1, 1996, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and SFAS No. 123 "Accounting for Stock Based Compensation." These pronouncements had no effect on the Company's financial position or operations for the year ended June 30, 1997. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. In August 1997, the accounting firm of Coopers & Lybrand, L.L.P. resigned as the Company's independent accountants and notified the Company that its report on its audit of the Company's financial statements for the fiscal year ended June 30, 1996 should no longer be relied upon. -37- 38 The Company engaged the accounting firm of Cherry, Bekaert & Holland, L.L.P. to reaudit the Company's financial statements for the fiscal year ended June 30, 1996 and audit the Company's financial statements for the fiscal year ended June 30, 1997. These changes in the Company's independent accountants were previously reported in the Company's Current Report on Form 8-K dated August 14, 1997 (as amended by an amendment to such Current Report on Form 8-K/A filed with the Commission on September 9, 1997). -38- 39 PART III ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT. The Directors and Executive Officers of the Company are as follows:
NAME AGE POSITION AND OFFICES HELD - ----------------- --- ------------------------------------------- Chris Brogdon 48 President and a Director since October 1991 Edward E. Lane 61 Secretary and a Director since October 1991 Darrell C. Tucker 39 Treasurer since November 1993, and a Director since November 1991 Julian S. Daley 70 Director since November 1993 Harlan Mathews 70 Director since July 1996
There is no family relationship between any Director or Executive Officer of the Company. The Company has no Nominating Committee, but does have a Compensation Committee and an Audit Committee. The Compensation Committee consists of Edward E. Lane, Julian S. Daley and Harlan Mathews. The Compensation Committee reviews the compensation arrangements for each of the Company's Executive Officers and makes recommendations to the Board of Directors. The Audit Committee consists of Julian S. Daley and Harlan Mathews. The Audit Committee reviews audit plans, reports on material changes in accounting principles and audit reports. Set forth below are the names of all Directors and Executive Officers of the Company, all positions and offices with the Company held by each such person, the period during which he has served as such, and the principal occupations and employment of such persons during at least the last five years: CHRIS BROGDON - PRESIDENT AND A DIRECTOR. Mr. Brogdon has served as President and a Director of the Company since October 1991. He also served as Treasurer of the Company from October 1991, to November 1993. He served as Secretary of Capitol Care from October 1990, until it was merged into the Company in November 1992, and now serves in these same capacities with Capitol Care. Mr. Brogdon has been involved in financing and operating nursing homes and retirement communities since 1982. From 1969 until 1982, Mr. Brogdon was employed in the securities business as a retail salesman. Mr. Brogdon attended Georgia State University in Atlanta, Georgia. Since March 1987, Mr. Brogdon has been Secretary/Treasurer of Winter Haven Homes, Inc. ("WHH") and since August 1990, he has been Secretary/Treasurer of National Assistance Bureau, Inc. ("NAB"). Both WHH and NAB are engaged in the business of owning and operating nursing homes and retirement communities. These two companies either own or operate pursuant to long-term leases with options to purchase, or are the sole or managing general partner of limited partnerships that own or lease, a total of five properties. Mr. Brogdon also serves as a Director and Chairman of the Board of Contour Medical, Inc., a publicly-held company, of which the Company is a majority shareholder. He is also a Director of In-House Rehab Corporation, a publicly-held company of which the Company is a minority shareholder which -39- 40 provides physical, speech and occupational therapy services to nursing home and other long-term care providers. Mr. Brogdon is also a Director and Chairman of the Board of NewCare Health Corporation, a publicly-held company which provides senior residential care services, primarily as an operator of long-term care facilities. EDWARD E. LANE - SECRETARY AND A DIRECTOR. Mr. Lane has served as Secretary and a Director of the Company since October 1991. Mr. Lane attended the University of Iowa from 1954 to 1958. From 1961 until 1968, he was self- employed as Gene Lane & Associates where he was engaged in industrial financing with municipal tax exempt bonds. From 1968 until 1971, he was employed by the investment banking firm of Johnson, Lane, Space, Smith & Co. in Atlanta, Georgia. From 1972 until 1984, he was self-employed as Gene Lane & Associates where he was involved with private investment banking principally in the areas of municipal and industrial finance. In 1984, he was involved in the creation of the full service investment banking firm of Lane, McNally & Jackson where he was a principal until the firm was sold and merged into Bay City Securities, Inc. in 1987. In 1988, Mr. Lane co-founded Winter Haven Homes, Inc. to acquire defaulted retirement centers and nursing homes. Mr. Lane also serves as President and a Director of Gordon Jensen Health Care Association, Inc., a nonprofit corporation that owns eight nursing homes and personal care facilities and National Assistance Bureau, Inc., a nonprofit corporation that owns two health care facilities. Mr. Lane is also a Director of Contour Medical, Inc., a publicly-held company, of which the Company is a majority shareholder. DARRELL C. TUCKER - TREASURER AND A DIRECTOR. Mr. Tucker has been a Director of the Company since November 1991, and Treasurer since November 1993. Mr. Tucker has also served as President of the Company's Capitol Care subsidiary since November 1992. He also served as President of Capitol Care from October 1990, until it was merged into the Company in November 1992. From July 1990 to October 1990, he was a consultant to Winter Haven Homes, Inc., an affiliate of the Company. From September 1988, to July 1990, he was a risk manager for Pruitt Corporation where he was involved in insurance management for 30 long-term health care facilities. From April 1987 to August 1988, he was Chief Financial Officer for Allgood Health Care, Inc. which managed 12 nursing home facilities. Mr. Tucker received a Bachelors Degree in Accounting from the University of Georgia in 1980. Mr. Tucker is also a Director of Contour Medical, Inc., a publicly-held company, of which the Company is a majority shareholder. JULIAN S. DALEY - DIRECTOR. Mr. Daley has been a Director of the Company since November 1993. Since 1975, he has been a real estate broker and developer in Atlanta, Georgia. From 1969 to 1975, he was engaged in financial analysis of companies in the Southeastern United States for Reynolds Securities, Inc. (1969 to 1974) and Fundamental Service Corporation (1974 to 1975). From 1950 to 1969, he was a senior financial analyst with Courts & Co. in Atlanta, Georgia. Mr. Daley received a B.B.A. Degree from the University of Georgia in 1950. HARLAN MATHEWS - DIRECTOR. Mr. Mathews has been a Director of the Company since July 1996. Since 1994 he has been a partner in the law firm of Farris, Mathews, Gilman, Branan & Hellen, P.L.C., in Nashville, Tennessee. From 1993 to 1994, he served as a United States Senator from the State of Tennessee. From 1987 to 1993, he was Deputy to the Governor of Tennessee and Cabinet Secretary. From 1974 to 1987, Mr. Mathews was Treasurer of the State of Tennessee. He received a Bachelor's Degree in Business from Jacksonville State University in Alabama in 1949 and a Master's Degree in Public Administration from Vanderbilt University in 1950. Mr. Mathews received a law degree from the Nashville School of Law in 1962. Mr. Mathews currently serves as a Director of Murray Guard, Inc., and NewCare Health Corporation, which are publicly-held companies. -40- 41 SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Based solely on a review of Forms 3 and 4 and amendments thereto furnished to the Company during its most recent fiscal year, and Forms 5 and amendments thereto furnished to the Company with respect to its most recent fiscal year and certain written representations, the following persons who were either a director, officer or beneficial owner of more than 10% of the Company's Common Stock, failed to file on a timely basis reports required by Section 16(a) of the Exchange Act during the most recent fiscal year: Chris Brogdon, Connie Brogdon and Edward E. Lane each filed two Form 4 filings one day late which reported a total of three transactions late each. Darrell C. Tucker filed one Form 4 two weeks late reporting one transaction. ITEM 11. EXECUTIVE COMPENSATION. The following table sets forth information regarding the executive compensation for the Company's President and each other executive officer who received compensation in excess of $100,000 for the fiscal year ended June 30, 1997, 1996 and 1995:
SUMMARY COMPENSATION TABLE LONG-TERM COMPENSATION ANNUAL COMPENSATION AWARDS PAYOUTS SECURITIES OTHER UNDERLYING ANNUAL RESTRICTED OPTIONS/ ALL NAME AND PRINCIPAL COMPEN- STOCK SARs LTIP OTHER POSITION YEAR SALARY BONUS SATION AWARD(S) (NUMBER) PAYOUTS COMPENSATION - ------------------ ---- -------- ----- ------ -------- -------- ------- ------------ Chris Brogdon, 1997 $240,000 -0- -0- -0- -0- -0- -0- President 1996 $171,000 -0- -0- -0- 105,000 -0- -0- 1995 $ 90,000 -0- -0- -0- -0- -0- -0- Darrell C. Tucker, 1997 $245,000 $30,000 $14,400(1) -0- 100,000 -0- $ 765(2) Treasurer 1996 $234,103 -0- $14,400(1) -0- 52,500 -0- $2,000(2) 1995 $160,000 -0- $ 6,000(1) -0- -0- -0- $ 665(2) Edward E. Lane, 1997 $240,000 -0- -0- -0- -0- -0- -0- Secretary 1996 $180,000 -0- -0- -0- 105,000 -0- -0-
- --------------------- (1) Represents an automobile allowance paid to Mr. Tucker. (2) Represents amounts paid for a term life insurance policy for Mr. Tucker. -41- 42 2 OPTION GRANTS IN LAST FISCAL YEAR The following table sets forth certain information concerning individual grants of stock options made to each of the Executive Officers named above during the fiscal year ended June 30, 1997:
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF STOCK PRICE APPRECIATION FOR INDIVIDUAL GRANTS OPTION TERM(1) ---------------------------------------------- --------------------- NUMBER OF SECURITIES % OF TOTAL UNDERLYING OPTIONS/SARs OPTIONS/ GRANTED TO EXERCISE EXPIR- SARs EMPLOYEES IN OR BASE ATION NAME GRANTED(#) FISCAL YEAR PRICE($/SH) DATE 5%($) 10%($) ---- ---------- ------------ ----------- ------- -------- ------- Chris Brogdon -0- 0.0% -- -- -- -- Darrell C. Tucker 100,000 29.2% $8.50 7/16/01 $234,800 $394,500 Edward E. Lane -0- 0.0% -- -- -- --
- -------------- (1) Gains are reported net of the option exercise price, but before taxes associated with exercise. These amounts represent assumed rates of appreciation only. Actual gains, if any, on stock option exercise are dependent on the future performance of the Company's Common Stock as well as the option holder's continued employment. The amounts reflected in this table may not necessarily be achieved. -42- 43 AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES The following table sets forth information as to the value of stock options held by the Executive Officers named above as of June 30, 1997. None of these Executive Officers exercised any options during the year ended June 30, 1997.
SECURITIES VALUE OF UNDERLYING UNEXERCISED UNEXERCISED IN-THE-MONEY OPTIONS OPTIONS/SARs SARs AT FY-END AT FY-END EXERCISABLE/ EXERCISABLE/ NAME UNEXERCISABLE UNEXERCISABLE ----------------- -------------- ------------- Chris Brogdon 394,406/0 $2,510,894/0 Darrell C. Tucker 268,264/0 $1,419,307/0 Edward E. Lane 394,406/0 $2,510,894/0
Effective July 1, 1995, Mr. Tucker entered into a two year employment agreement which will continue on a year-to-year basis thereafter unless either party decides to terminate prior to an annual renewal. Pursuant to the agreement he will receive an annual salary of $220,000 during the first year, $245,000 during the second year, and his salary will increase by 10% per year thereafter. Effective July 1, 1997, Mr. Tucker receives an annual salary of $269,500. He also receives a $1,200 per month automobile allowance, a $1,000,000 term life insurance policy paid for by the Company, and full family health insurance paid for by the Company. He is also entitled to receive options to purchase 50,000 shares of common stock under the Company's stock option plan each year. However, such options will only be granted in years in which the Company increases its profits over the previous year's profit. Mr. Tucker has agreed that during the term of his employment, and for a period of two years thereafter he will not engage in the business of, or be employed by a business entity engaged in, the management of health care facilities in the areas in which the Company does business. Mr. Tucker has also agreed not to disclose any confidential information or trade secrets of the Company which he may acquire during the course of his employment. -43- 44 Until January 1, 1994, Edward E. Lane and Chris Brogdon received no salaries for their services as Officers of the Company and they received no other compensation, directly or indirectly, from the Company. Messrs. Lane and Brogdon have received compensation from Winter Haven Homes, Inc., which owns or controls three of the facilities which are currently managed by the Company. Some of this compensation is in the form of financial advisory fees which are earned by Messrs. Lane and Brogdon in connection with the financing related to the ownership of these facilities and the rest of the compensation is related to the fees derived by Winter Haven from its ownership and operation of the facilities. Effective January 1, 1994, Edward E. Lane and Chris Brogdon each received a salary of $60,000 per year for their services as Officers of the Corporation. Effective January 1, 1995, their salaries were each increased to $120,000 per year. Effective January 1, 1996, their salaries were each increased to $240,000 per year. COMPENSATION OF DIRECTORS Commencing in the year ended June 30, 1994, outside Directors of the Company received $1,000 for each Board meeting attended. Effective July 1, 1996, outside Directors receive $500 per month. In addition, Directors are entitled to receive reimbursement for reasonable out-of-pocket expenses incurred by them in attending meetings of the Board of Directors. STOCK OPTION PLAN In December, 1993, the Company's Board of Directors adopted the Company's 1993 Stock Option Plan (the "1993 Plan"). The 1993 Plan allows the Board to grant stock options from time to time to employees, officers and directors of the Company and consultants to the Company. The Board has the power to determine at the time the option is granted whether the option will be an Incentive Stock Option (an option which qualifies under Section 422 of the Internal Revenue Code of 1986) or an option which is not an Incentive Stock Option. However, Incentive Stock Options will only be granted to persons who are key employees of the Company. Vesting provisions are determined by the Board at the time options are granted. The option price must be satisfied by the payment of cash. The total number of shares of Common Stock subject to options under the 1993 Plan currently may not exceed 2,182,625, subject to adjustment in the event of certain recapitalizations, reorganizations and similar transactions. The Board of Directors may amend the 1993 Plan at any time, provided that the Board may not amend the 1993 Plan to materially increase the number of shares available under the 1993 Plan, materially increase the benefits accruing to Participants under the 1993 Plan, or materially change the eligible class of employees without shareholder approval. As of June 30, 1997, options to purchase 1,584,610 shares of Common Stock were outstanding under the 1993 Plan exercisable at prices ranging from $4.647 to $15.95 per share. The exercise prices of all of the options granted under the 1993 Plan are at least equal to the market value of the Company's Common Stock on the date of grant. Included in options granted on December 14, 1993, are non-qualified stock options granted to Chris Brogdon and Edward E. Lane, Officers and Directors of the Company, to purchase 289,406 shares each; an incentive stock option granted to Darrell C. Tucker, an Officer and Director of the Company, to purchase 115,764 shares; and non-qualified stock options granted to Michael P. Traba, a former Director, and Julian S. Daley, a Director of the Company, to purchase 11,576 -44- 45 shares each. These options are exercisable at $4.647 per share. Included in options granted on November 3, 1995, are non-qualified stock options granted to Chris Brogdon and Edward E. Lane to purchase 105,000 shares each; to Darrell C. Tucker to purchase 52,500 shares; and to Michael P. Traba and Julian S. Daley to purchase 10,500 shares each. These options are exercisable at $9.762 per share. In July 1996, the Company granted non-qualified stock options to Julian S. Daley and Harlan Mathews each to purchase 10,000 shares of common stock at $8.875 per share. In addition, the Company granted non-qualified stock options to Darrell C. Tucker to purchase 100,000 shares, and to two employees to purchase an aggregate of 125,000 shares, at an exercise price of $8.50 per share. EMPLOYEE RETIREMENT PLAN During the year ended June 30, 1996, the Company established a defined contribution retirement plan. Employees qualify for the plan upon the completion of three months of service with the Company and reaching the age of twenty-one. Company contributions to the plan represent a matching percentage of certain employee contributions. The matching percentage is subject to management's discretion based upon consolidated financial performance. For the year ended June 30, 1997, the Company did not make any contributions to the plan. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following table sets forth as of September 18, 1997, as to the shares of the Common Stock beneficially owned by each person who is the beneficial owner of more than five percent (5%) of the Company's shares, each of the Company's Directors and by all of the Company's Directors and Executive Officers as a group. Each person has sole voting and investment power with respect to the shares shown, except as noted.
NAME AND ADDRESS AMOUNT OF BENEFICIAL PERCENTAGE OF BENEFICIAL OWNER OWNERSHIP OF CLASS - ------------------------ -------------------- ---------- Chris Brogdon 2,733,404 (1) 18.0% Suite 200 6000 Lake Forrest Drive Atlanta, GA 30328 Edward E. Lane 2,673,941 (2) 17.7% Suite 200 6000 Lake Forrest Drive Atlanta, GA 30328 Darrell C. Tucker 655,664 (3) 4.4% Suite 200 6000 Lake Forrest Drive Atlanta, GA 30328 Julian S. Daley 46,243 (4) 0.3% 805 Edgewater Trail Atlanta, GA 30328
-45- 46 Harlan Mathews 10,000 (5) 0.1% 420 Hunt Club Road Nashville, TN 37221 Connie Brogdon 2,733,404 (6) 18.0% Suite 200 6000 Lake Forrest Drive Atlanta, GA 30328 All Officers and Directors 6,119,252 38.6% as a Group (5 Persons)
- ------------------------- (1) Includes 927,948 shares of Common Stock owned by Mr. Brogdon; 1,164,160 shares of Common Stock owned by Mr. Brogdon's wife, Connie Brogdon; 1,159 shares of Common Stock held by Mr. Brogdon's daughter; 245,731 shares of Common Stock which represents 50% of the shares held by Winter Haven Homes, Inc. of which Mr. Brogdon's wife, Connie Brogdon, is a 50% owner; and 394,406 shares underlying stock options held by Mr. Brogdon. (2) Includes 2,033,804 shares of Common Stock owned by Mr. Lane; 245,731 shares of Common Stock which represents 50% of the shares held by Winter Haven Homes, Inc. of which Mr. Lane is a 50% owner; and 394,406 shares underlying stock options held by Mr. Lane. (3) Includes 370,128 shares of Common Stock owned by Mr. Tucker, 12,268 shares held by Mr. Tucker's wife, and 268,268 shares underlying stock options held by Mr. Tucker. (4) Includes 1,603 shares held directly by Mr. Daley, 12,497 shares held by Mr. Daley's wife, 67 shares held by a partnership, and 32,076 shares underlying stock options held by Mr. Daley. (5) Represents 10,000 shares underlying stock options held by Mr. Mathews. (6) Includes 1,164,160 shares of Common Stock owned by Connie Brogdon; 927,948 shares of Common Stock owned by Mrs. Brogdon's husband, Chris Brogdon; 1,159 shares of Common Stock held by Mrs. Brogdon's daughter; 245,731 shares of Common Stock which represents 50% of the shares held by Winter Haven Homes, Inc., of which Connie Brogdon is a 50% owner; and 394,406 shares underlying stock options held by her husband. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The Company has agreements to provide management and accounting services for nursing homes and personal care facilities which are owned or controlled by entities which are owned or controlled by Officers, Directors and principal shareholders of the Company. As of October 1, 1997, the Company had agreements to manage two facilities owned or controlled by Winter Haven Homes, Inc. ("Winter Haven"); one facility owned or controlled by Gordon Jensen Health Care Associates, Inc. ("Gordon Jensen"); two facilities owned or controlled by National Assistance Bureau, Inc. ("NAB"); one facility owned by Southeastern Cottages, Inc. ("SCI"); and two facilities owned by Chamber Health Care Society, Inc. ("Chamber"). The Company previously managed a facility owned by Senior Care, Inc. ("Senior Care"). Winter Haven is owned by a corporation which is owned 50% by Edward E. Lane, an Officer and Director of the Company, and 50% by -46- 47 Connie Brogdon, the wife of an Officer and Director of the Company. Gordon Jensen is a non-profit corporation of which Edward E. Lane is President. NAB is also a non-profit corporation of which Edward E. Lane is President and Chris Brogdon is Secretary/Treasurer. Chamber and Senior Care are non-profit corporations. Edward E. Lane is President and a director of Chamber. SCI is a corporation owned 50% by Chris Brogdon and 50% by Edward E. Lane. The agreements to provide management and accounting services to the affiliated entities are for periods of five years but are cancelable upon 60 days' notice by either party. The agreements provide for monthly fees ranging from $1,000 to $24,000 per facility and expire in 1998. During the fiscal year ended June 30, 1997, these agreements resulted in revenue to the Company of $2,212,500. The Company currently manages eight facilities owned or controlled by affiliates of the Company, and as part of its duties, the Company also manages the cash and pays the bills for the facilities. In doing so, the Company maintains a cash management system where the deposits of all properties are swept into an investment account daily. The Company also advances working capital to these properties when needed. At June 30, 1996, aggregate amounts were due from the following entities: Winter Haven - $8,887,833; Gordon Jensen - $2,982,975; SCI - $679,144; NAB - $1,326,391; Chamber - $336,857; Senior Care - $84,095; and other affiliates - $19,366. Subsequent to June 30, 1996, entities controlled by Winter Haven assumed the liabilities of NAB, SCI, Chamber and Senior Care. On October 14, 1996, Winter Haven sold two retirement facilities to the Company for their fair value, based on an independent appraisal, for a total purchase price of $19,200,000. These include the Jackson Oaks retirement facility in Jackson, Tennessee, which the Company previously leased, and the Cumberland Green retirement facility which the Company previously managed. The purchase prices for these facilities were $12,400,000 and $6,800,000, respectively. These facilities were acquired subject to total bond debt of $7,670,000, resulting in $11,530,000 due to Winter Haven, which was applied to eliminate the $11,214,320 owed to the Company by Winter Haven. On September 27, 1996, Gordon Jensen transferred 399,426 shares of the Company's Common Stock to the Company with a fair market value of $3,000,000 in exchange for the cancellation of its debt totaling $2,982,000. These shares were loaned to Gordon Jensen by Edward E. Lane, Chris Brogdon and Connie Brogdon. In February 1996, the Company purchased a 36-unit retirement facility known as Summers Landing-Cordele, from Gordon Jensen for $2,000,000. In May 1996, the Company leased the 60-bed Lake Forest Health Care Center from a partnership controlled by Winter Haven. The lease is for a period of 10 years at $25,000 per month. On June 30, 1996, the Company leased the 158-unit Jackson Oaks retirement facility from Winter Haven for a period of 15 years. The Company paid Winter Haven $50,000 per month under this lease. As noted above, Winter Haven subsequently sold this facility to the Company in October 1996 to retire a portion of its debt to the Company. On September 1, 1996, the Company leased the 58-unit Summer's Landing- Douglas facility from Gordon Jensen. The Company paid $300,000 to Gordon Jensen on execution of the lease and is paying the debt service on an existing mortgage -47- 48 each month during the first year. During year two, there will be an additional payment of $500 per month; in year three - $750 per month; in year four - $1,000 per month; and in year five (and any extension of the lease) - $1,250 per month. The lease is for an initial term of five years, but the Company may extend the lease for additional terms of five years each. The Company has guaranteed the debts of two facilities owned by Winter Haven totaling approximately $6,000,000. On September 30, 1996, the Company leased the 101-unit (with 28 additional units under construction) retirement facility known as The Renaissance - Titusville in Titusville, Florida from a partnership controlled by Winter Haven for a period of 10 years. The Company has the right to extend the lease for an additional five year term. The Company paid Winter Haven $1,500,000 on execution of the lease, and will pay monthly rent equal to 1.1 times the debt service requirements on the facility. For the purposes of this calculation, the principal debt will not exceed $6,000,000. During the year ended June 30, 1997, the Company entered into leases on eight facilities with Retirement Group, L.L.C., the owner of these facilities. Retirement Group, L.L.C. is owned 41.1% by an entity controlled by Edward E. Lane; 41.8% by Chris Brogdon and his wife, Connie Brogdon; 10.0% by Winter Haven Homes; 3.5% by Darrell C. Tucker; and 3.6% by James J. Andrews, an officer of a subsidiary of the Company. Each of these leases are for an initial term of ten (10) years, with the Company having the right to extend each lease for an initial five (5) year term. The amount of the rent payment under each lease is equal to 110% of the principal and interest that Retirement Group, L.L.C. is required to pay to the lenders of the respective properties. During the fiscal year ended June 30, 1997, $1,355,217 was paid to Retirement Group, L.L.C. under these leases. -48- 49 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) 1. FINANCIAL STATEMENTS. The following financial statements are filed as part of this report:
Page(s) Independent Auditors' Report................................... F-1 Report of Independent Certified Public Accountants............. F-2 Consolidated Balance Sheets as of June 30, 1997 and 1996....... F-3 - F-4 Consolidated Statements of Income for the years ended June 30, 1997, 1996 and 1995................................. F-5 Consolidated Statements of Shareholders' Equity for the years ended June 30, 1997, 1996 and 1995..................... F-6 - F-7 Consolidated Statements of Cash Flows for the years ended June 30, 1997, 1996 and 1995................................. F-8 - F-9 Notes to Financial Statements.................................. F-10 - F-28
(a) 2. FINANCIAL STATEMENT SCHEDULES. All schedules have been omitted, as the required information is inapplicable or the information is presented in the financial statements or the notes thereto. (a) 3. Exhibits: [TO BE UPDATED]
EXHIBIT NO. DESCRIPTION LOCATION 2.1 Agreement and Plan of Incorporated by reference Merger and Reorganization to Exhibit 2.1 to the Company's dated February 17, 1997, Current Repot on Form 8-K among Sun Healthcare Group, dated February 17, 1997 Peach Acquisition Corporation 2.2 Amendment No. 1 to the Agree- Incorporated by reference ment and Plan of Merger and to Exhibit 2.1 to the Company's Reorganization dated as of Current Report on Form 8-K February 17, 1997, among Sun dated May 23, 1997 Healthcare Group, Inc., Peach Acquisition Corporation and Retirement Care Associates, Inc. 2.3 Amendment No. 2 to the Agree- Incorporated by reference ment and Plan of Merger and to Exhibit 2.1 to the Company's Reorganization dated as of Current Report on Form 8-K February 17, 1997, among Sun dated August 21, 1997 Healthcare Group, Inc., Peach Acquisition Corporation and Retirement Care Associates, Inc.
-49- 50 3.1 Articles of Incor- Incorporated by reference poration, as amended to Exhibit No. 3.1 to the Company's Form S-18 Regis- tration Statement No. 33-7666-D 3.2 Bylaws, as amended Incorporation by reference to Exhibit No. 3.2 to the Company's Form S-18 Regis- tration Statement No. 33-7666-D 3.3 Articles of Amendment Incorporated by reference to Articles of Incor- to Exhibit 3.3 to the poration Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1993 3.4 Statements Establish- Incorporated by reference ing Series A and Series to Exhibit 3.4 to the D Convertible Preferred Company's Annual Report on Stock Form 10-K for the fiscal year ended June 30, 1994 3.5 Articles of Amendment to Incorporated by reference Articles of Incorporation to Exhibit 3.5 to the (Series AA Convertible Company's Annual Report on Preferred Stock) Form 10-K for the fiscal year ended June 30, 1994 3.6 Articles of Amendment to Incorporated by reference Incorporation (Series E to Exhibit 3.6 to the Convertible Preferred Company's Annual Report on Stock) Form 10-K for the fiscal year ended June 30, 1996 3.7 Articles of Amendment to Incorporated by reference Articles of Incorporation to Exhibit 3.7 to the (Series F Convertible Pre- Company's Annual Report on ferred Stock) and Certif- Form 10-K for the fiscal icate of Correction to year ended June 30, 1996 same 10.1 Employment Agreement Incorporated by reference with Darrell C. Tucker to Exhibit 10.1 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1996 10.2 Management and Marketing Filed herewith electronically Agreement with Affiliates 10.3 Nursing Home Management Filed herewith electronically Agreements with Affiliates 10.4 Lease Agreements with Filed herewith electronically Affiliates
-50- 51 10.5 Loan Agreement between Incorporated by reference Residential Care Facilities to Exhibit 10.1 to the for the Elderly Authority of Company's Current Report the City of Dublin and the on Form 8-K dated February 3, Company 1994 10.6 Deed to Secured Debt and Incorporated by reference Security between Residen- to Exhibit 10.2 to the tial Care Facilities for Company's Current Report the Elderly Authority of on Form 8-K dated February 3, the City of Dublin and 1994 the Company 10.7 Trust Indenture between Incorporated by reference Residential Care Facili- to Exhibit 10.3 to the ties for the Elderly Company's Current Report Authority of the City of on Form 8-K dated February 3, Dublin and the Sentinel 1994 Trust Company 10.8 Loan Agreement between Incorporated by reference Highlands County (Florida) to Exhibit 10.2 to the Industrial Development Company's Current Report Authority and the Company on Form 8-K dated March 3, 1994 10.9 Trust Indenture between Incorporated by reference Highlands County (Florida) to Exhibit 10.3 to the Industrial Development Company's Current Report Authority and the Company on Form 8-K dated March 3, 1994 10.10 Asset Purchase Agreement Incorporated by reference between the Company and to Exhibit 10.1 to the Springdale Convalescent Company's Current Report Center of Atlanta, Ltd., et on Form 8-K dated April 29, al., and Springdale Conva- 1994 lescent Center Purchase Agreement between the Company and Bartow River L.L.C. 10.11 Promissory Note from the Incorporated by reference Company to Winter Haven to Exhibit 10.46 to the Homes Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1994 10.12 Promissory Note from the Incorporated by reference Company to Tiffany Indus- to Exhibit 10.3 to the tries, Inc. Company's Current Report on Form 8-K dated April 29, 1994
-51- 52 10.13 Loan Agreement with Cave Incorporated by reference Spring Housing Develop- to Exhibit 10.57 to the ment Corporation Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1994 10.14 Trust Indenture between Incorporated by reference Cave Spring Housing to Exhibit 10.58 to the Development Corporation Company's Annual Report and Sentinel Trust Company on Form 10-K for the fiscal year ended June 30, 1994 10.15 Transfer and Assignment of Incorporated by reference to Loan Asset and Forbearance to Exhibit 10.67 to the Agreement with R. Wayne Company's Annual Report Lowe, et al. on Form 10-K for the fiscal year ended June 30, 1994 10.16 Promissory Note from South- Incorporated by reference eastern Cottages, Inc. and to Exhibit 10.67 to the related Mortgage and Company's Registration Security Agreement Statement on Form S-1 File No. 33-85886 10.17 Promissory Note from Gordon Incorporated by reference Jensen Health Care, Inc. to Exhibit 10.68 to the and related Deed to Secure Company's Registration Debt Statement on Form S-1 File No. 33-85886 10.18 Promissory Note from Incorporated by reference Renaissance Retirement, to Exhibit 10.69 to the Ltd. and related Mortgage Company's Registration and Security Agreement Statement on Form S-1 File No. 33-85886 10.19 Promissory Note from Incorporated by reference Retirement Village of to Exhibit 10.70 to the Jackson, Ltd. and related Company's Registration Deed of Trust Statement on Form S-1 File No. 33-85886 10.20 Promissory Note from Incorporated by reference Hendersonville Retirement to Exhibit 10.71 to the Village, Ltd. and related Company's Registration Deed of Trust Statement on Form S-1 File No. 33-85886 10.21 Agreement and Amendment Incorporated by reference to Agreement with The to Exhibit 10.77 to the Atrium of Jacksonville, Company's Annual Report Ltd. and Assignment to on Form 10-K for the fiscal the Company year ended June 30, 1994 10.22 Guaranties and Stock Pledge Incorporated by reference and Maintenance Agreements to Exhibit 10.80 to the with Edward E. Lane and Company's Registration Connie B. Brogdon Statement on Form S-1 File No. 33-85886
-52- 53 10.23 Dearfield Nursing Home Incorporated by reference Purchase Agreement to Exhibit 10.1 to the Com- pany's Report on Form 8-K dated April 28, 1995 10.24 Loan Agreement Incorporated by reference to Exhibit 10.2 to the Com- pany's Report on Form 8-K dated April 28, 1995 10.25 Promissory Note Secured by Incorporated by reference Security Deed to Exhibit 10.3 to the Com- pany's Report on Form 8-K dated April 28, 1995 10.26 Security Agreement Incorporated by reference to Exhibit 10.4 to the Com- pany's Report on Form 8-K dated April 28, 1995 10.27 Deed to Secure Debt, Incorporated by reference Security Agreement, to Exhibit 10.5 to the Com- Assignment of Rents and pany's Report on Form 8-K Filing for Dearfield dated April 28, 1995 Nursing Home 10.28 Edwinola Retirement Incorporated by reference Community Purchase Agree- to Exhibit 10.93 to the ment Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1995 10.29 Loan Agreement between Incorporated by reference Dade City, Florida and to Exhibit 10.94 to the the Company Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1995 10.30 Promissory Note from The Incorporated by reference Atrium Nursing Home, Inc. to Exhibit 10.95 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1995 10.31 Promissory Note from Incorporated by reference Hendersonville Retirement to Exhibit 10.96 to the Village, Ltd. Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1995 10.32 Second Amendment to Incorporated by reference Agreement with The Atrium to Exhibit 10.97 to the of Jacksonville, Ltd. Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1995
-53- 54 10.33 Promissory Note from Incorporated by reference National Assistance to Exhibit 10.98 to the Bureau Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1995 10.34 Letter Agreement with Incorporated by reference R. Wayne Lowe, et al., to Exhibit 10.99 to the Amending Forebearance Company's Annual Report on Agreement Form 10-K for the fiscal year ended June 30, 1995 10.35 Hillview Nursing Home Incorporated by reference Purchase Agreement to Exhibit 10.100 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1995 10.36 Crestwood Nursing Home Incorporated by reference Purchase Agreement and to Exhibit 10.101 to the Lease Assignment Agree- Company's Annual Report on ment Form 10-K for the fiscal year ended June 30, 1995 10.37 Florida Retirement Villa Incorporated by reference Purchase Agreement to Exhibit 10.102 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1995 10.38 Loan Agreement dated Incorporated by reference September 29, 1995, with to Exhibit 10.103 to the LTC Properties, Inc. Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1995 16 Letter re Change in Incorporated by reference Certifying Accountant to Exhibit 16.1 to the Company's Current Report on Form 8-K/A dated as of August 14, 1997 21 Subsidiaries of the Filed herewith electronically Registrant 23.1 Consent of Cherry, Bekaert & Filed herewith electronically Holland, L.L.P. (See Item 14(a)1. hereof) 23.2 Consent of BDO Seidman, LLP Filed herewith electronically (See Item 14(a)1. hereof) 27 Financial Data Schedule Filed herewith electronically
(b) REPORTS ON FORM 8-K. The Company filed one Report on Form 8-K during the last quarter of the period covered by this Report as follows: The Company filed a Report on Form 8-K dated May 27, 1997, reporting information under Item 5 - Other Events and Item 7 - Financial Statements, Pro Forma Financial Information and Exhibits, reporting an amendment to the Company's Agreement and Plan of Merger with Sun Healthcare Group, Inc. -54- 55 REPORT OF CHERRY, BEKEART & HOLLAND INDEPENDENT AUDITORS' REPORT Board of Directors and Shareholders of Retirement Care Associates, Inc. We have audited the accompanying consolidated balance sheets of Retirement Care Associates, Inc. and subsidiaries as of June 30, 1997 and 1996 and the related consolidated statements of income, shareholders' equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsiblity is to express an opinion on these financial statements based on our audits. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Retirement Care Associates, Inc. and subsidiaries as of June 30, 1997 and 1996 and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. As described in Note 6 to the consolidated financial statements, the Company changed its method of accounting for certain costs in inventory. /s/ Cherry, Bekaert & Holland, L.L.P. CHERRY, BEKAERT & HOLLAND, L.L.P. Greensboro, North Carolina October 10, 1997 F-1 56 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors and Shareholders of Retirement Care Associates, Inc. We have audited the accompanying consolidated statements of income, shareholders' equity and cash flows of Retirement Care Associates, Inc. and Subsidiaries for the year ended June 30, 1995. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Retirement Care Associates, Inc. and Subsidiaries for the year ended June 30, 1995, in conformity with generally accepted accounting principles. /s/ BDO Seidman, LLP BDO SEIDMAN, LLP Atlanta, Georgia October 9, 1995, except for Note 1 which is as of May 1, 1996 F-2 57 FINANCIAL STATEMENTS Retirement Care Associates, Inc. & Subsidiaries Consolidated Balance Sheets June 30, 1997 and 1996
1997 1996 Assets: Current Assets Cash and cash equivalents $ 3,637,878 $ 45,365 Accounts receivable, net 40,391,377 18,845,780 Inventories 7,255,289 3,998,991 Note and accrued interest receivable 75,000 613,750 Deferred tax asset 4,408,733 2,008,430 Income tax receivable 4,065,431 -- Restricted bond funds 3,068,276 2,342,565 Prepaid expenses and other assets 2,009,467 1,623,679 Total current assets 64,911,451 29,478,560 Property and equipment, net of accumulated depreciation 150,492,221 111,420,486 Marketable equity securities -- 33,645 Investment in unconsolidated affiliates 734,514 496,800 Deferred lease and loan costs 13,065,759 7,665,891 Goodwill, net of accumulated amortization 16,357,532 6,636,675 Notes and advances due from non-affiliates 1,421,405 1,372,247 Notes and advances due from affiliates 1,411,379 14,316,661 Restricted bond funds 3,689,969 3,514,969 Other assets 3,286,736 2,556,353 Total assets $255,370,966 $177,492,287
The accompanying notes are an integral part of the consolidated financial statements F-3 58 Retirement Care Associates, Inc. & Subsidiaries Consolidated Balance Sheets June 30, 1997 and 1996
1997 1996 Liabilities and Shareholders' Equity Current liabilities: Lines of credit $ 9,935,036 $ 3,556,535 Current maturities of long-term debt 11,454,059 2,220,491 Loans Payable to Affiliates 1,478,368 -- Accounts payable 34,076,015 10,115,347 Accrued expenses 18,417,258 11,316,030 Income taxes payable -- 3,726,317 Deferred gain 40,000 40,000 Total current liabilities 75,400,736 30,974,720 Deferred gain 181,370 371,370 Deferred income taxes 1,098,929 277,000 Long-term debt, less current 141,674,131 108,481,040 Minority interest 4,520,953 4,122,039 Commitments and contingencies Redeemable convertible preferred stock 1,800,000 2,400,000 Shareholders' equity Common stock, $.0001; 300,000,000 shares authorized; 14,489,888 and 12,145,875 shares issued, respectively 1,450 1,214 Preferred stock 3,250,000 7,408,279 Additional paid-in capital 43,799,617 28,329,625 Retained earnings (deficit) (16,356,220) (4,752,880) Treasury stock, at cost -- (120,120) 30,694,847 30,866,118 $ 255,370,966 $ 177,492,287
The accompanying notes are an integral part of the consolidated financial statements. F-4 59 Retirement Care Associates, Inc. & Subsidiaries Consolidated Statements of Income For the years ended June 30, 1997, 1996 and 1995
1997 1996 1995 Revenues: Net patient service revenue 202,603,841 $ 119,499,849 $ 69,949,822 Medical supply revenue 45,500,712 9,825,252 3,617,439 Management fee revenue: From affiliates 2,212,500 3,472,900 3,517,500 From others 446,829 308,533 652,194 Other revenue 2,463,979 904,835 1,879,098 Total revenues 253,227,861 134,011,369 79,616,053 Expenses: Cost of patient services 148,520,849 80,815,511 47,778,410 Cost of medical supplies sold 31,045,671 5,350,817 3,153,430 Lease expense 14,117,392 8,442,671 5,769,232 General and administrative 46,346,051 23,192,250 12,769,582 Depreciation and amortization 6,514,713 3,406,986 1,128,183 Provision for bad debts 2,982,063 3,423,117 -- Total expenses 249,526,739 124,631,352 70,598,837 Operating income 3,701,122 9,380,017 9,017,216 Other income (expense): Interest income 673,655 1,847,868 658,215 Interest expense (14,111,843) (7,948,091) (1)179,052 Income before minority interest, income taxes, extraordinary item and cumulative effect of change in accounting principle (9,737,066) 3,279,794 8,496,379 Minority interest 348,000 (597,895) (18,784) Income before income taxes, extraordinary item item and cumulative effect of change in accounting principle (9,389,066) 2,681,899 8,477,595 Income taxes (2,343,256) 1,307,091 3,419,092 Income before extraordinary item and cumulative effect of change in accounting principle (7,045,810) 1,374,808 5,058,503 Extraordinary Charge - loss on extinguishment of debt, net of tax benefit of $300,000 490,000 -- -- Cumulative effect of change in accounting principle, net of income taxes of $228,000 -- 372,000 -- Net income (loss) (7,535,810) $ 1,746,808 $ 5,058,503 Preferred stock dividends 2,236,777 2,266,777 225,000 Income (loss) applicable to common stock $ (9,772,587) $ (519,969) $ 4,833,503 Income (loss) per common and common equivalent share: Income (loss) before extraordinary item and cumulative effect of change in accounting principle $ (0.68) $ (.08) $ 0.38 Extraordinary Charge-loss on extinguishment of debt (.03) -- -- Cumulative effect of change in accounting principle -- 0.03 -- Net income (loss) (.71) (.05) 0.38 Weighted average shares outstanding 13,709,590 11,324,755 12,616,835
The accompanying notes are an integral part of the consolidated financial statements. F-4 60 Retirement Care Associates, Inc. & Subsidiaries Consolidated Statements of Shareholders' Equity For the Years Ended June 30, 1997, 1996 and 1995
Preferred Stock Common Stock Series A Series E Series F Shares Amount Balance June 30, 1994 $ 364,083 $ -- $ -- 9,526,166 $ 952 Issuance of common stock upon conversion of Series A preferred stock (364,083) -- -- 69,508 7 Issuance of common stock upon conversion of Series D preferred stock -- -- -- 125,000 12 Issuance of common stock upon Contour Medical, Inc. acquisition -- -- -- 105,000 11 Stock dividend, 5% -- -- -- 491,409 49 Balance June 30, 1995 $ -- $ -- $ -- 10,317,083 $ 1,031 Issuance of Series E preferred stock -- 9,300,000 -- -- -- Issuance of common stock upon conversion of Series E preferred stock -- (534,750) -- 54,516 5 Unamortized balance on imputed Series E Preferred stock dividend -- (1,356,971) -- -- -- Treasury stock purchased -- -- -- -- -- Retirement of treasury stock -- -- -- (15,500) (2) Stock issued in exchange for cancellation of warrants and stock warrants exercised -- -- -- 1,198,894 120 Stock options exercised -- -- -- 22,076 2 Preferred stock, 10% dividend -- -- -- -- -- Stock dividend, 5% -- -- -- 568,806 58 Balance June 30, 1996 $ -- $ 7,408,279 $ -- 12,145,875 $ 1,214 Issuance of Series F preferred stock -- -- 9,340,000 -- -- Amortization of imputed Series E preferred stock dividend -- 1,356,971 -- -- -- Issuance of common stock upon conversion of Series E preferred stock -- (8,765,250) -- 1,318,533 132 Issuance of common stock upon conversion of Series F preferred stock -- -- (6,090,000) 1,148,698 115 Treasury stock purchased Retirement of treasury stock -- -- -- (520,272) (52) Stock issued in exchange for Cancellation of warrants and new stock warrants exercised -- -- -- 144,872 15 Stock options exercised -- -- -- 252,182 26 Preferred stock, 10% dividend -- -- -- -- -- Balance June 30, 1997 $ -- $ -- $ 3,250,000 14,489,888 $ 1,450
The accompanying notes are an integral part of the consolidated financial statements. F-5 61 Retirement Care Associates, Inc. & Subsidiaries Consolidated Statements of Shareholders' Equity For the Years Ended June 30, 1997, 1996 and 1995
Retained Paid-In Earnings Treasury Capital (Deficit) Stock Balance June 30, 1994 $ 12,391,673 $ 643,043 $ -- Issuance of common stock upon conversion of Series A preferred stock 364,076 -- -- Issuance of common stock upon conversion of Series D preferred stock 499,989 -- -- Issuance of common stock upon Contour Medical, Inc. acquisition 999,988 -- -- Preferred stock, 10% dividend -- (225,000) -- Stock dividend, 5% 4,299,951 (4,300,000) -- Net income -- 5,058,503 -- Balance June 30, 1995 $ 18,555,677 $ 1,176,546 $ -- Issuance of Series E preferred stock -- -- -- Issuance of common stock upon conversion of Series E preferred stock 534,743 -- -- Unamortized balance on imputed Series E preferred stock dividend 1,356,971 -- -- Treasury stock purchased -- -- (274,040) Retirement of treasury stock -- (153,918) 153,920 Stock issued in exchange for cancellation of warrants and stock warrants exercised 473,673 -- -- Stock options exercised 156,303 -- -- Preferred stock, 10% dividend -- (270,000) -- Stock dividend, 5% 7,252,258 (7,252,316) -- Net income -- 1,746,808 -- Balance June 30, 1996 $ 28,329,625 $ (4,752,880) $ (120,120) Issuance of Series F preferred stock -- -- -- Amortization of imputed Series E Preferred stock dividend (1,356,971) -- -- Issuance of common stock upon conversion of Series E preferred stock 8,768,297 -- -- Issuance of common stock upon conversion of Series F preferred stock 6,086,446 -- Treasury stock purchased -- -- (3,707,410) Retirement of treasury stock -- (3,827,530) 3,827,530 Stock issued in exchange for Cancellation of warrants and new stock warrants exercised 70,966 -- -- Stock options exercised 1,901,254 -- -- Preferred stock, 10% dividend -- (240,000) -- Net income -- (7,535,810) -- Balance June 30, 1997 $ 43,799,617 $(16,356,220) $ --
The accompanying notes are an integral part of the consolidated financial statements. F-6 62 Retirement Care Associates, Inc. & Subsidiaries Consolidated Statements of Cash Flows For the Years Ended June 30, 1997, 1996 and 1995
1997 1996 1995 Cash flows from operating activities Net income (loss) $ (7,535,810) $ 1,746,808 $ 5,058,503 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Gain on sale of assets (608,423) -- -- Depreciation and amortization 6,514,713 3,406,986 1,128,183 Loss on sale of marketable securities -- 29,085 -- Cumulative effect of change in accounting principles -- (372,000) -- Amortization of deferred gain (40,000) (40,000) (40,000) Provision for bad debt 2,982,063 3,423,117 -- Equity in income from investees -- 146,800 -- Minority interest (348,000) 597,895 18,784 Deferred income taxes (11,111,558) (1,297,613) 261,092 Changes in assets and liabilities net of effects of acquisitions Accounts receivable (20,987,667) (10,672,485) (6,012,900) Inventories (960,447) (2,245,194) (996,139) Prepaid expenses and other assets (970,008) 703,690 (642,013) Accrued interest receivable 38,750 157,917 (196,667) Accounts payable and accrued expenses 29,187,587 9,964,620 6,608,148 Deferred lease and loan costs -- -- (978,943) Net cash provided by (used in) operating activities (3,838,800) 5,549,626 4,208,048 Cash flows from investing activities: Purchases of property and equipment (12,734,389) (12,490,298) (6,079,610) Proceeds from sale leaseback transaction -- -- 4,500,000 Proceed from repayment of notes receivable 13,500,000 2,200,000 -- Issuance of notes receivable and advances to affiliates and non-affiliates (143,876) (8,935,677) (1,742,147) Purchase of bonds receivable -- -- (4,487,936) Investments in unconsolidated affiliates (237,714) 3,787,635 (3,335,833) Restricted bond funds (900,711) (4,720,047) (17,317) Proceed from sale of fixed assets 3,350,000 -- -- Cash acquired in acquisition of Contour Medical, Inc. -- -- 73,254 Decrease in marketable equity securities -- -- 444,863 Proceed from sale of marketable equity securities 33,645 36,780 -- Goodwill paid in acquisitions (2,109,852) (2,327,736) -- Acquisitions, net of cash required (18,807,777) (21,938,513) -- Payment of deferred lease costs (5,530,349) (593,470) -- Net cash used in investing activities $(23,581,023) $(44,981,326) $(10,644,726)
The accompanying notes are an integral part of the consolidated financial statements. F-7 63 Retirement Care Associates, Inc. & Subsidiaries Consolidated Statements of Cash Flows (continued) For the Years Ended June 30, 1997, 1996 and 1995
1997 1996 1995 Cash flows from financing activities Capital investment by minority shareholders of subsidiary $ -- $ 2,088,492 $ 1,729,469 Redemption of preferred stock (600,000) (600,000) -- Purchase of treasury stock (841,318) (274,040) -- Dividends on preferred stock (240,000) (270,000) (225,000) Proceeds from issuance of preferred stock 9,340,000 9,300,000 -- Proceeds from stock options and warrants exercised 1,900,306 559,593 -- Proceeds from long-term debt and net borrowings under line of credit 33,919,190 35,329,244 11,309,986 Payments on long-term debt (13,329,520) (9,443,626) (2,130,654) Payments on deferred loan costs (614,690) (2,419,783) -- Proceeds from L/P to affiliates 1,478,368 -- -- Net cash provided by financing activities 31,012,336 34,269,880 10,683,801 Net increase (decrease) in cash and cash equivalents 3,592,513 (5,161,820) 4,247,123 Cash and cash equivalents, beginning of year 45,365 5,207,185 960,062 Cash and cash equivalents, end of year $ 3,637,878 $ 45,365 $ 5,207,185
The accompanying notes are an integral part of the consolidated financial statements. F-8 64 RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 1997 and 1996 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: NATURE OF BUSINESS AND BASIS OF PRESENTATION Retirement Care Associates, Inc. ("RCA" or the "Company") operates 101 leased and owned nursing and retirement facilities in the Southeast United States and manages, for both related and unaffiliated third parties, an additional 9 nursing and retirement facilities. The Company also owns a majority interest in Contour Medical, Inc. ("Contour") whose principal operations consist of distributing medical supplies to healthcare facilities. PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, as well as its majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. CASH AND CASH EQUIVALENTS For purposes of financial statement presentation, the Company considers all highly liquid investments with maturities of three months or less at issuance to be cash equivalents. INVENTORIES Inventories, consisting mainly of medical supplies, are valued at the lower of cost (first-in, first-out) or market. ALLOWANCE FOR POSSIBLE LOAN LOSSES The Company periodically reviews the adequacy of the allowance for possible loan losses on affiliate notes receivable by considering various factors, among others, such as the fair value of the underlying facility collateral in excess of prior and senior liens, the periodic results of operations of the underlying collateral, the fair value of other collateral or guarantees pledged as security for the notes receivable, and the Company's ability to foreclose, if necessary, against prior and senior liens to protect the collateral value. During 1996, the Company adopted Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" (SFAS No. 114). All affiliated notes receivable were liquidated subsequent to June 30, 1996 (see Note 19). PROPERTY, EQUIPMENT AND DEPRECIATION Property and equipment are recorded at cost less accumulated depreciation. Depreciation, which includes amortization of assets under capital leases, is computed using the straight-line method over the estimated useful lives of the related assets (five to thirty years). Maintenance and repairs are charged to expense as incurred. Upon sale, retirement or other disposition of these assets the cost and the related accumulated depreciation are removed from the respective accounts and any gain or loss on the disposition is included in income. INVESTMENT IN UNCONSOLIDATED AFFILIATES During the year ended June 30, 1995, the Company acquired a 35% interest in In-House Rehab, Inc. ("In-House"), a therapy service company, for $350,000. The F-9 65 Company accounts for its investment in In-House on the equity method. The Company's share of In-House's net income was $327,714 and $146,800 for the years ended June 30, 1997 and 1996, respectively. DEFERRED LEASE AND LOAN COSTS Deferred lease and loan costs, consisting of lease acquisition fees paid to lessors and loan commitment fees and related expenditures, are amortized over the respective terms of the lease or loan using the interest method. The related amortization of the lease and loan cost is recorded as lease and interest expense, respectively. RESTRICTED BOND FUNDS Restricted bond funds relate to the debt service requirements of RCA's outstanding bond obligations. RCA has several industrial revenue bonds, housing development mortgage revenue bonds and municipal revenue bonds, which relate to the restricted bond funds. Current restricted bond funds include principal and interest funds which are used for payment of principal and interest on or before the dates required by the trust indenture. Non-current restricted bond funds include debt service reserve funds (used for payment of principal and interest when principal and interest funds are insufficient) and project funds (used for payment of construction, improvement and equipment costs at facilities under construction). GOODWILL Goodwill arises in connection with business combinations accounted for as purchases where the purchase price exceeds the fair value of the net assets of the acquired businesses. Goodwill is amortized on a straight-line basis over 15 years. The carrying value of goodwill is reviewed if the facts and circumstances suggest that it may be impaired. Any permanent impairment would be recognized by a charge against earnings. Accumulated amortization of goodwill approximated $719,000 and $233,000 as of June 30, 1997 and 1996, respectively. ASSESSMENT OF LONG-LIVED ASSETS Effective July 1, 1996, the Company adopted FAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of. The Company periodically reviews the carrying values of its long-lived assets (primarily property and equipment and intangible assets) whenever events or circumstances provide evidence that suggests that the carrying amount of long-lived assets may not be recovered. If this review indicates that the long-lived assets may not be recoverable, the Company reviews the expected undiscounted future net operating cash flows from its facilities, as well as valuations obtained in connection with various refinancings. Any permanent impairment of value is recognized as a charge against earnings in the statement of income. As of June 30, 1997, the Company does not believe there is any indication that the amortization period of its long-lived assets needs to be adjusted. DEFERRED GAIN Deferred gain on a sale-leaseback transaction is recorded at cost and is amortized into income on a straight-line basis over 10 years, the life of the lease. The related amortization is recorded as a reduction of lease expense. STOCK DIVIDENDS During January 1995 and April 1996, the Company declared 5% stock dividends which were payable on February 15, 1995 and May 15, 1996, respectively, to shareholders of record on February 15, 1995 and May 1, 1996, respectively. All common stock information presented has been retroactively restated to reflect these stock F-10 66 dividends. NET PATIENT SERVICE REVENUE Net patient service revenue is derived primarily from services to retirement center residents and nursing home patients. Retirement center residents typically pay rent in advance of the month for which it is due. Nursing home patients are predominately beneficiaries of the Medicare and Medicaid programs. The Medicare program reimburses nursing homes on the basis of allowable costs, subject to certain limits. Payments are received throughout the year at amounts estimated to approximate costs. Following year end, cost reports are filed with the Medicare program and final settlements are made. Provisions for Medicare settlements are provided in the financial statements in the period the related services are rendered. Differences between amounts accrued and final settlements are reported in the year of settlement. State Medicaid programs pay nursing homes primarily on a per diem basis with no retroactive settlement. Revenues from services to Medicaid patients are recorded at payment rates established by the various state programs in the period services are rendered. There has been, and the Company expects that there will continue to be, a number of proposals to limit Medicare and Medicaid payments for long-term and rehabilitative services. The Company cannot predict at this time whether any of these proposals will be accepted or, if adopted and implemented, what effect such proposals would have on the Company. TAXES ON INCOME Deferred income taxes are recognized for the tax consequences of temporary differences between the financial reporting bases and the tax bases of the Company's assets and liabilities. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable for the period and the change during the period in deferred tax assets and liabilities. NET INCOME PER SHARE Net income per share is computed on the basis of net income applicable to common stock and the weighted average number of common and common equivalent shares outstanding during each year, retroactively adjusted to give effect to the stock dividends. Shares used in the calculation consist of the weighted average number of shares actually outstanding as well as the weighted average number of common share equivalents which include dilutive convertible preferred stock, stock options and warrants. Common stock equivalents for the years ended June 30, 1997 and 1996 have not been included since the effect would be antidilutive. Shares used in the calculation for the year ended June 30, 1995 consisted of the weighted average number of shares actually outstanding (10,798,292), as well as, the weighted average number of common share equivalents (1,818,543) which include dilutive stock options and warrants. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The Financial Accounting Standards Board released SFAS No. 123, "Accounting for F-11 67 Stock Based Compensation." SFAS No. 123 encourages, but does not require, companies to recognize compensation expense based on the fair value of grants of stock, stock options, and other equity investments to employees. Although expense recognition for employee stock-based compensation is not mandatory, SFAS No. 123 requires that companies not adopting must disclose pro forma net income and earnings per share. The Company will continue to apply the prior accounting rules and make pro forma disclosures. RECLASSIFICATIONS Certain 1995 amounts have been reclassified to conform with the 1997 and 1996 presentations. 2. BUSINESS ACQUISITIONS: ENCORE On December 15, 1995, the Company obtained both a sole general and a limited partnership interest, totaling a 74.25% interest, in Encore Partners, L.P. ("Encore") in exchange for a capital contribution to Encore of $3.5 million. Encore owns three retirement facilities, totaling 527 beds, and two nursing homes, totaling 157 beds. The acquisition was accounted under the purchase method of accounting. The consolidated financial statements include the results of operations since the date of acquisition. Profits and losses of Encore are allocated 74.25% to the Company and 25.75% to other partners. Available cash, if any, is distributed 74.25% to the Company and 25.75% to the other partners. ATRIUM During the year ended June 30, 1995, Winter Haven Homes, Inc. ("Winter Haven"),an affiliated entity, assigned to the Company its rights under an agreement between Atrium and Winter Haven. The agreement granted Winter Haven the right to acquire up to a 75% ownership interest in Atrium in exchange for and upon meeting certain performance requirements. In addition to the assignment, Winter Haven and the Company entered into a separate Compensation Agreement requiring the Company to pay Winter Haven an amount equal to 25% of the appraised values of Atrium upon each transfer of a 25% interest in Atrium to the Company. Through June 30, 1996, the payment of each 25% interest in Atrium was reflected as an increase in Investment in Unconsolidated Affiliates and a decrease in Notes and Advances Due From Affiliates in the accompanying financial statements. At June 30, 1995, a 50% interest in Atrium had been transferred to the Company at a carrying value of $1,913,000 plus advances made by the Company to Atrium of $2,149,060. This investment was accounted for under the equity method. In May 1996, the Company obtained an additional 25% interest for $1,230,000, bringing the total investment to $3,143,000 plus advances made by the Company to Atrium of $2,602,942, and the total ownership interest to 75%. Effective May 1996, the accounts of Atrium have been consolidated with those of the Company. The minority partners of Atrium are allocated 25% of the profits and losses and 25% of available cash flow, if any, is distributed to the minority partners. ATLANTIC MEDICAL On August 6, 1996, Contour acquired all of the outstanding stock of Atlantic Medical Supply Company, Inc. ("Atlantic Medical"), a distributor of disposable medical supplies and a provider of third-party billing services to the nursing home and home health care markets. The acquisition was accounted for as a purchase and made retroactively to July 1, 1996. Contour paid $1.4 million in cash and $10.5 million in promissory notes for all of the outstanding stock of F-12 68 Atlantic Medical. The purchase price exceeded fair value of the net assets acquired by approximately $1.3 million. The resulting goodwill is being amortized on the straight-line method over forty years. The consolidated financial statements include the results of operation of Atlantic Medical subsequent to June 30, 1996. The promissory notes bore interest at 7% per annum and were due in full on January 10, 1997. In the event of a default in the payment of the promissory notes, they were convertible into shares of common stock of RCA. On January 10, 1997, Contour retired all outstanding notes due to sellers of Atlantic Medical in the aggregate principal amount of $10,850,000, along with accrued interest. The retirement of these notes was funded by a loan of $9,750,000 from the Company, with the balance funded from Contour's existing line of credit with Barnett Bank. The loan from the Company was evidenced by a convertible promissory note bearing interest at 9% per annum and payable upon demand. This note was convertible into 1,950,000 shares of Contour's Common Stock, and on January 10, 1997, the Company exercised this conversion right. OTHER During the year ended June 30, 1996, the Company purchased a number of other facilities. Such purchases included both nursing and retirement facilities. The data related to these purchases is as follows:
1996 Number of Facilities Purchased: Nursing 7 Retirement 3 Total 10 Cost of acquired facilities: Cash paid $ 223,000 Debt incurred 19,811,000 Total $20,034,000
The Company typically obtains financing in excess of the purchase price paid for acquired facilities. The excess funds are used to cover certain closing costs associated with the transactions with any residual amounts retained by the Company. The acquisitions referred to above have been accounted for using the purchase method of accounting. The operating results of those acquired facilities have been included in the consolidated statement of operations from the date of acquisition. The following table presents unaudited pro forma results of operations data as if the acquisitions described above had occurred on July 1, 1995. The pro forma amounts are provided for information purposes only. It is based on historic information and does not necessarily reflect the actual results that would have occurred, nor is it necessarily indicative of future results of operations of the combined enterprise.
For the year ended June 30, (Unaudited) 1997 1996 Revenues $254,410,713 $158,534,082 Net income (7,537,686) 1,798,053 Net income (loss) per share (.71) (.04)
The pro forma information includes adjustments for interest expense that would have been incurred to finance the acquisitions, additional depreciation based on the fair market value of the facilities and other adjustments, together with related income tax effects. The pro forma financial information is not F-13 69 necessarily indicative of the results of operations as they would have been had the transactions been effected on the assumed dates. 3. RELATED PARTY TRANSACTIONS: The Company provides management and administrative services for eight facilities in addition to leasing eleven facilities, all owned by affiliates. These affiliates are owned and controlled by two individuals who are officers and directors of the Company. The management and administrative services to affiliate facilities are provided pursuant to agreements which have five- to ten-year terms and are cancelable with sixty days written notice by either party. The agreements provided for monthly fees ranging from $4,000 to $28,000 per facility and expire through 2007. Revenue from these management services totaled $1,993,000, $3,472,900 and $3,517,500 for the years ended June 30, 1997, 1996 and 1995, respectively. CCMC maintains a cash management account where all operating cash funds of the managed facilities are pooled into one bank account and invested daily. Notes and advances due from (to) affiliates consist of advances to facilities, net of advances from facilities, owned by the following affiliated entities:
June 30, 1997 1996 Gordon Jensen Health Care Association, Inc. $(1,019,474) $2,982,975 Winter Haven Homes, Inc. (458,894) 8,887,833 Southeastern Cottages, Inc. 295,642 679,144 National Assistance Bureau, Inc. 149,815 1,326,391 Chamber Health Care Society, Inc. 964,240 336,857 Senior Care, Inc. 1,682 84,095 Other Affiliates - 19,366 (66,989) $14,316,661 Less current portion (payable) (1,478,368) - Noncurrent receivable $ 1,411,379 $14,316,661
The above amounts receivable from affiliates as of June 10, 1996 were satisfied during the acquisition by the Company of two facilities from related parties and the return of approximately 400,000 shares of Company stock held by Gordon Jensen to the Company treasury, discussed in following paragraphs. These notes required quarterly interest payments at 8% per annum. The notes were collateralized by second mortgages on facilities owned by affiliates, and certain notes were guaranteed by the principals of Winter Haven, who are shareholders of the Company. The amounts receivable from and payable to affiliates as of June 30, 1997 were unsecured. The amounts receivable of $1,411,379 are noncurrent. The amounts payable of $1,478,368 are current and payable upon demand. The Company's exposure to credit loss in the event of nonperformance by its related parties totaled $1,411,379 and $14,316,661 as of June 30, 1997 and 1996, respectively. FACILITY ACQUISITIONS FROM AFFILIATES On February 27, 1996, the Company purchased a 36-unit retirement facility from an affiliate. The purchase price was $2,000,000 and was financed with $400,000 from the Company and a $1,600,000 mortgage loan from an unrelated third-party real estate investment trust. On May 5, 1996, the Company entered into a lease agreement with an affiliate to rent a 60-unit nursing home. Terms of the agreement are ten years at $300,000 per year beginning on June 1, 1996. The total lease payments in 1996 were $25,000. F-14 70 On October 14, 1996, the Company acquired two retirement facilities from related parties, individuals who control the Company and its affiliates, for their fair value, based on independent appraisals, totaling $19,200,000. The facilities were subject to bond debt of $7,670,000. The remaining balance due from the Company was $11,530,000. For the purpose of this transaction, Winter Haven had assumed the amounts due to the Company in the amount of $2,426,487, from Southeastern Cottages, Inc., National Assistance Bureau, Inc., Chamber Health Care Society, Inc. and Senior Care, Inc. which, in combination with the amount of $8,887,833 previously due from Winter Haven to the Company, totaled $11,314,320. As part of the exchange agreement, the Company and Winter Haven agreed to offset the Company's debt incurred of $11,530,000 with the Company's receivable of $11,314,320. FACILITIES LEASED FROM AFFILIATES During the years ended June 30, 1997 and 1996, the Company leased nursing homes and retirement homes from affiliates. In 1996, one facility was leased with an annual rental of $300,000, expiring in 2006 with one ten-year renewal. In 1997, a total of eleven facilities were leased with annual rentals ranging from approximately $290,000 to $850,000, expiration dates through 2007, and renewal periods of five to ten years. The annual rentals of the ten leases acquired in 1997 are based upon 110% of the outstanding debt balance, so the future annual rentals are expected to decline during the lease terms. ADDITIONAL TRANSACTIONS On September 27, 1996, Gordon Jensen Health Care Association, Inc. (Gordon Jensen) returned approximately 400,000 shares of stock in the Company which had a fair market value of $3,000,000 in payment of Gordon Jensen's debt of $2,982,000 due to the Company. The retirement of these shares reduced stockholders' equity of the Company by $3,000,000. In 1997, the Company received a guarantee fee of $500,000 for guarantee of Contour's $10,500,000 note payable which arose in connection with its acquisition of Atlantic Medical. As payment, the Company received 100,000 shares of Contour common stock. Contour's note payable was paid off in January, 1997 and the guarantee was released. As of June 30, 1997 the Company had guaranteed debt in the amount of approximately $30,000,000 related to eight facilities of affiliates which the Company leases or manages. The debt is collateralized by the facilities, bears interest ranging from approximately 10% to 11.5% with due dates through 2007. The Company was paid fees of $150,000 by affiliates in connection with locating financing for three facilities in 1996. These fees were included in interest income on the accompanying statements of income. The Company has service and consulting agreements whereby In-House provides to facilities therapy and case management for a fixed monthly fee plus a charge per treatment unit provided. In 1997, the Company purchased approximately $5,129,000 or 77% of the total sales of In-House, and the Company's account payable to In-House of $1,528,000 was 49% of the total accounts receivable of In-House. For 1996, total sales and accounts receivable of In-House related to the Company. 4. ACCOUNTS RECEIVABLE: Patient accounts receivable and net patient service revenue include amounts estimated by management to be payable by Medicaid and Medicare under the provisions of payment formulas in effect. Medicaid and Medicare programs accounted for approximately 72% and 68% of net patient service revenue during 1997 and 1996, respectively. The Company grants credit without collateral to its patients most of whom are local residents of the respective nursing home and retirement facilities and are insured under third-party payor agreements. The mix of receivables from patients and third party payors is as follows:
June 30, 1997 1996 Medicaid $17,452,025 $10,644,368 Medicare 9,728,258 4,304,368 Other third-party payors 1,084,008 1,598,816 Patients 12,315,451 3,113,145 Trade receivables - Contour 7,811,635 2,595,083 48,391,377 22,255,780 Allowance for doubtful accounts 8,000,000 3,410,000 $40,391,377 $18,845,780
F-15 71 In the opinion of management, any differences between the net revenue recorded and final determination will not materially affect the consolidated financial statements. The activity in the allowance for doubtful accounts is as follows:
June 30, 1997 1996 1995 Beginning of Period $3,410,000 $ -- $ -- Provision 2,982,063 3,423,117 -- Other Additions-Contour 1,995,386 -- -- Write Offs (387,449) (13,117) -- End of Period $8,000,000 $3,410,000 --
5. NOTE RECEIVABLE: On February 7, 1996, the Company loaned $500,000 to an unaffiliated company. The note, plus interest at 9% per annum, was due on February 7, 1997 and was collateralized by a first lien on a 38-bed nursing home in Atlanta, Georgia. This note was paid in full with interest on May 15, 1997. 6. CHANGE IN ACCOUNTING FOR SUPPLIES INVENTORY: During the year ended June 30, 1996, the Company changed its method of accounting for facility supplies inventory from expensing when purchased to capitalizing and expensing as used. The Company believes that this change is preferable in the circumstances because it more closely matches inventory costs with net patient service revenue. In connection with the capitalization of facility supplies inventory at June 30, 1996, the Company recorded additional inventory and reduced supplies expense by approximately $1.0 million, of which approximately $600,000 related to inventory on hand as of June 30, 1995. Accordingly, the cumulative effect of this change in accounting principle on beginning retained earnings has been shown, net of tax, as a separate component of the statement of operations for the year ended June 30, 1996. Although the cumulative effect on retained earnings at June 30, 1995 resulting from the change can be determined, the pro forma effects of retroactive application cannot be computed for individual prior periods. Accordingly, net income and income per common share computed on a pro forma basis have not been presented for the years ended June 30, 1995 and 1994. 7. PROPERTY AND EQUIPMENT: Property and equipment consisted of the following:
Estimated Useful Lives 1997 1996 Land - $ 8,330,565 $ 7,184,001 Buildings 30 107,901,652 83,281,050 Equipment 5-10 16,115,893 12,179,912 Leasehold improvements 5-10 3,373,755 2,193,228 Buildings and equipment under capital leases 5-30 18,642,560 8,111,801 154,364,425 112,949,992 Less accumulated depreciation 13,897,697 8,518,084 140,466,728 104,431,908 Construction in progress 10,025,493 6,988,578 Net property and equipment $150,492,221 111,420,486
Construction in progress, consisting of the development of four facilities, includes approximately $607,000 and $605,000 of capitalized interest costs as of June 30, 1997 and 1996, respectively. The total contract price of construction in progress was approximately $13,500,000 for the year ended June 30, 1997. Substantially all property and equipment is pledged as collateral for long-term debt. 8. DEFERRED LEASE AND LOAN COST: In connection with the execution of certain lease transactions and financing of F-16 72 acquisitions, the Company incurred lease and loan commitment fees, which are included in deferred lease and loan costs in the accompanying balance sheets, as follows:
June 30, 1997 1996 Lease cost: Affiliated $ 2,000,000 $ 500,000 Non-affiliated 5,831,968 1,801,619 Loan cost: Affiliated 410,000 410,000 Non-affiliated 6,414,978 5,800,288 14,656,946 8,511,907 Less accumulated amortization 1,591,187 846,016 Net deferred lease and loan cost 13,065,759 $7,665,891
9. SHAREHOLDERS' EQUITY: STOCK PURCHASE WARRANTS During the year ended June 30, 1997, the Company issued warrants to an investment banker and consultants to purchase 250,000 shares of its common stock at prices ranging from $6.96875 to $9.25 per share. The warrants were exercisable at varying dates through June 1999. None of the warrants were exercised during the year ended June 30, 1997. The Company has issued Class A warrants in connection with a private offering and Class B and Class C warrants in connection with an offer to Class A warrant holders to convert their warrants. The Class A and Class C warrants are exercisable at $1.00 per share of common stock, the Class B warrants are exercisable at $6.00 per share of common stock. At any time during the period the warrants are exercisable, the Company may redeem the warrants at $.05 per warrant upon 45 days written notice in the event certain listing and registration requirements are achieved, and the closing bid price of the common stock exceeds $7.00 per share for the Class A and Class C Warrants, and $10.00 per share for the Class B Warrants, for 20 of 30 consecutive trading days. During the year ended June 30, 1997, Class A Warrants were exercised to purchase approximately 136,180 shares of common stock and Class C Warrants were exercised to purchase approximately 8,692 shares of common stock. As of June 30, 1997, there were Class A warrants outstanding which entitle the holders to purchase 101,581 shares of common stock, Class B warrants outstanding which entitle the holders to purchase 426,432 shares of common stock and Class C Warrants outstanding which entitle the holders to purchase 186,956 shares of common stock. STOCK OPTIONS Stock option plans In October 1995 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation." This new standard defines a fair value based method of accounting for an employee stock option or similar equity instrument. This statement gives entities a choice of recognizing related compensation expense by adopting the new fair value method or to continue to measure compensation using the intrinsic value approach under Accounting Principals Board (APB) Opinion No. 25, the former standard. If the former standard for measurement is elected SFAS No. 123 requires supplemental disclosure to show the effects of using the new measurement criteria. This statement is effective for the Company's 1997 fiscal year. The Company intends to continue using the measurement practices prescribed by APB Opinion No. 25, and accordingly, this pronouncement will not affect the Company's financial position or results of operations. In December 1993, the Company adopted the 1993 Stock Option Plan (the "Plan"). A total of 1,682,625 shares of the Company's common stock have been reserved for F-17 73 issuance under the Plan. Under the Plan, options are granted at an exercise price of not less than 100% of the fair market value of the shares on the date of grant. Certain options are exercisable immediately, while others are subject to vesting provisions as specified by the Board of Directors on the date of grant. Each option grant under the Plan automatically expires ten years after the date of grant or at such earlier time as may be determined by the Board of Directors. The following is a summary of stock option activity and related information for the years ended June 30:
1997 1996 1995 Weighted Avg. Weighted Avg. Weighted Avg. Options Exercise Price Options Exercise Price Options Exercise Price Outstanding: Beginning 1,498,368 $6.77 1,066,818 $5.24 882,110 $4.74 Granted 364,025 $7.44 489,300 $9.90 239,138 $7.42 Exercised (246,973) $4.59 (22,076) $4.65 - - Canceled (30,810) $4.65 (35,674) $5.36 (54,430) $6.67 End of year 1,584,610 $5.40 1,498,368 $6.77 1,066,818 $5.24 Exercisable: End of year 1,584,610 $5.40 1,498,368 $6.77 1,066,818 $5.24 Weighted average fair value of options granted during the year: $6.72 $7.56 $5.82
Exercise prices for options outstanding as of June 30, 1997 ranged from $4.65 to $10.24. The weighted average remaining contractual life of those options is 7.35 years. Because the Company has adopted the disclosure-only provisions of SFAS No. 123, no compensation cost has been recognized for the stock option plans. Had compensation cost for the Company's stock option plan been determined based on the fair value at the grant date of the awards consistent with the provisions of SFAS No. 123, the Company's net earnings and earnings per share would have been reduced to the pro forma amounts indicated below:
1997 1996 Net income (loss) as reported $(7,535,810) 1,746,808 Net loss - pro forma net (8,908,810) (513,192) Loss per share - as reported (.71) (.05) Loss per share - pro forma (.81) (.25)
The fair value of each option grant is estimated on the date of grant using Black-Scholes option-pricing model with the following weighted average assumptions used for grants in 1996 and 1995; dividend yield of 0%, expected volatility of 66%, risk-free interest rates of 6.0% for 1997 and 5.4% for 1996 and expected lives of four years for 1996 options and five years for 1995 options. PREFERRED STOCK As of June 30, 1997, the Company has authorized 40,000,000 shares of preferred stock and has designated the following series of preferred stock: - - SERIES AA REDEEMABLE CONVERTIBLE PREFERRED STOCK 300,000 shares of Series AA Redeemable Convertible Preferred Stock are authorized. These shares were issued in connection with the acquisition of a majority interest in Contour. Holders of the Series AA Redeemable Convertible Preferred Stock are entitled to receive cumulative dividends of $1.00 per share (10%) annually, and are convertible into common stock at any time at the rate of F-18 74 5.5125 shares of common stock for each six shares of Series AA Redeemable Convertible Preferred Stock. Each share is entitled to one vote and has a preferred rate of $10.00 per share upon voluntary or involuntary liquidation, dissolution, or winding up of affairs of the Company. The Company may redeem shares of Series AA Redeemable Convertible Preferred Stock, in whole or in part, at any time at its option at a price of $10.00 per share plus any unpaid dividends (the "Redemption Price"). In addition, to the extent that such funds are legally available, the Company is required to redeem, at the Redemption Price, at least 20% of each holder's initial number of shares of Series AA Redeemable Convertible Preferred Stock by September 30, 1995; 40% by September 30, 1996; 60% by September 30, 1997; 80% by September 30, 1998; and 100% by September 30, 1999. In the event that a holder of Series AA Redeemable Convertible Preferred Stock shall have converted a portion of his shares into common stock, such converted shares shall be counted toward the redemption requirement and shall be deemed redeemed for the purposes of the mandatory redemption requirement. In addition, in the event that the Company fails to pay any dividend on the Series AA Redeemable Convertible Preferred Stock within 30 days of the due date, the Company is required to redeem all of the outstanding Series AA Redeemable Convertible Preferred Stock. During the year ended June 30, 1996, the Company redeemed 60,000 shares of Series A Redeemable Preferred Stock. - - SERIES A CONVERTIBLE PREFERRED STOCK 2,000,000 shares of Series A Convertible Preferred Stock, par value $.10 per share, are authorized. Each share is entitled to 10 votes and has a preference rate of $.01 per share with no dividend rights. 750,000 shares of Series A Preferred Stock were issued in connection with a 1992 acquisition transaction between the Company and Capitol Care Management Company, Inc. The preferred shares were converted into common stock in 1994 and 1995. - - SERIES C CONVERTIBLE PREFERRED STOCK 1,000,000 shares of Series C Convertible Preferred Stock are authorized. Each share is entitled to one vote per share and had a preference rate of $1.00 per share with no dividend rights. The shares of Series C Convertible Preferred Stock were converted in 1994 into common stock. - - SERIES E CONVERTIBLE PREFERRED STOCK 1,000,000 shares of Series E Convertible Preferred Stock are authorized. These shares were sold in an offering to foreign investors in April 1996 at $10.00 per share. Holders of the Series E Preferred Stock have no voting rights except as required by law, and have a liquidation preference of $10.00 per share plus 4% per annum from the date of issuance. The shares of Series E Preferred Stock are convertible into shares of common stock at a conversion price of $11.55 or 85% of the average closing bid price for the five trading days prior to the date of conversion, whichever is lower (but no lower than $5.00). At the time of conversion, the holder is also entitled to additional shares equal to $10.00 per share of Series E Preferred Stock converted multiplied by 8% per annum from the date of issuance divided by the applicable conversion price. As of June 30, 1997, the remaining 942,500 shares of Series E Convertible Preferred Stock were converted into 1,318,533 shares of common stock. - - SERIES F CONVERTIBLE PREFERRED STOCK 1,000,000 SHARES of Series F Convertible Preferred Stock are authorized. These shares were sold in an offering to foreign investors in September, 1996 at $10.00 per share. Holders of the Series F Preferred Stock have no voting rights except as required by law, and have a liquidation preference of $10.00 per share plus F-19 75 4% per annum from the date of issuance. The shares of Series F Preferred Stock are convertible into shares of common stock at a conversion price of $7.425 or 85% of the average closing bid price for the five trading days prior to the date of conversion, whichever is lower. At the time of conversion, the holder is also entitled to additional shares equal to $10.00 per share of Series F Preferred Stock converted multiplied by 8% per annum from the date of issuance divided by the applicable conversion price. During the year ended June 30, 1997, the 651,666 shares of Series F Convertible Preferred Stock were converted into 1,148,698 shares of common stock. TREASURY STOCK During the year ended June 30, 1997, the Company purchased and retired 520,326 shares of its common stock at an aggregate cost of $3,923,222. 10. LONG-TERM DEBT: Long-term debt at June 30, 1997 and 1996 is summarized as follows:
1997 1996 Non-affiliates: Notes payable to a real estate investment trust ("REIT") $ 40,700,380 $ 39,623,938 Industrial development revenue bonds 22,615,000 20,060,000 Municipal revenue bonds 26,265,000 18,170,000 Housing development mortgage revenue bonds 25,795,000 21,750,000 Notes payable to banks (8.5% or prime plus 1% to 10% due through 2003) 15,780,008 3,049,012 Capitalized lease obligations 21,972,802 8,048,581 153,128,190 110,701,531 Less current maturities 11,454,059 2,220,491 $141,674,131 $108,481,040
Future maturities of debt and capital lease obligations are as follows:
Capital Year Lease Debt Total 1998 $ 2,408,701 $ 11,980,406 $ 14,389,107 1999 2,416,138 2,538,317 4,954,455 2000 2,423,272 2,963,682 5,386,954 2001 2,430,508 3,455,739 5,886,247 2002 2,437,846 3,552,304 5,990,150 Thereafter 36,798,942 106,664,940 143,463,882 Total 48,915,407 131,155,388 180,070,795 Less amount representing imputed interest at 11% to 12% 26,942,605 - 26,942,605 Total obligations $ 21,972,802 $131,155,388 $153,128,190
The notes payable to the REIT consist of mortgage notes on sixteen facilities. Principal amounts are amortized over a 25-year period with monthly installments payable through 2006. Interest ranges on these notes from 9.75% to 11.28% and increases annually at rates ranging from 0.1% to 0.25%. The notes are collateralized by property and equipment of the sixteen facilities. The industrial development revenue bonds consist of bonds on two facilities: a retirement community located in San Destin, Florida and Atrium, a nursing and retirement community located in Jacksonville, Florida. The San Destin facility serves as collateral for $11,925,000 of bonds payable to the Walton County Industrial Development Authority. Principal payments range from $150,000 to $1,300,000 annually through 2019 and interest accrues at 10.5%. The Atrium facility serves as collateral for three City of Jacksonville Industrial Development Revenue Refunding bonds totaling $10,690,000. Principal payments F-20 76 range from $65,000 to $375,000 annually through 2024, $6,060,000 due in 2011, and interest accrues at rates ranging from 6.5% to 11.5%. The housing development mortgage revenue bonds include approximately $18,525,000 of bond debt assumed by the Company in connection with the acquisition of Encore. The bond debt, which is collateralized by property and equipment of five facilities, includes Okaloosa County, Florida Retirement Rental Housing Revenue Series A bonds totaling $7,925,000 with semi-annual interest payments at 10.75% due in 2003 and Ohio Rental Housing Revenue Series A bonds totaling $9,800,000 with semi-annual interest at 10.38% due in 2009. The remainder of the housing development mortgage revenue bonds consist of bonds totaling $8,070,000 collateralized by three facilities with interest ranging from 7% to 11.0% with maturities through 2026. The housing development mortgage revenue bonds require annual principal payments ranging from $150,000 to $2,000,000. The municipal revenue bonds, which are collateralized by property and equipment of seven facilities and require annual principal payments ranging from $370,000 to $1,635,000, consist of the following: Dade City, Florida Series A and B bonds totaling $6,395,000, with principal payments due through 2025 and interest ranging from 6.75% to 8%. Highland County Series A and B bonds totaling $4,230,000, with principal payments due through 2024 and interest ranging from 6.5% to 8.5%. City of Dublin Series A and B bonds totaling $2,740,000, with principal payments due through 2024 and interest ranging from 8.5% to 10.5% Rome-Floyd County Development Authority Revenue Series A and B bonds totaling $2,655,000, with principal payments due through 2011 and interest rates ranging from 7.5% to 10%. Americus-Sumter Series A and B bonds totaling $1,900,000, with principal payments due through 2026 and interest rates ranging from 8.0% to 10.25%. Houston County Series A and B bonds totaling $5,650,000 with principal payments due through 2026 and interest rates ranging from 7% to 8.4%. Sumner, TN Series A and B bonds totaling $2,695,000 with principal payments due through 2010 and interest rates ranging from 10.5% to 12.5%. The Company recorded an extraordinary charge of $490,000, net of income tax benefit of $300,000, associated with the early extinguishment of approximately $9.2 million of long-term debt on the Company's retirement facility located in Destin, Florida. In connection with the bond indentures, the Company is required to meet certain covenants, including monthly sinking fund deposits, adequate balances in debt service reserve funds, timely payment of tax obligations and adequate insurance coverage. At June 30, 1997 and 1996, the Company was in violation of several of these covenants including the failure to make monthly payments to the bond sinking funds for certain of these facilities and inadequate debt service reserves for certain of the facilities. The Company is also delinquent with regard to the payment of property taxes at several facilities. The trustees have not called the bonds in the past for these violations and management does not foresee the bonds being called at this time. All semi-annual interest and principal payments have been made in a timely fashion. 11. LINES OF CREDIT: The Company maintains various lines of credit with interest rates ranging from prime plus .25% to prime plus 1.25%. Available borrowings under the lines of credit totaled $14,050,000 and $5,075,000 for the years ended June 30, 1997 and 1996, respectively. Total borrowings against the lines of credit were $9,935,036 and $3,556,535 at June 30, 1997 and 1996, respectively. 12. COMMITMENTS AND CONTINGENCIES: OPERATING LEASES The Company leases nursing homes and retirement care facilities from unaffiliated entities (in addition to leasing eleven nursing and retirement facilities from affiliated entities. (see Note 3). The lease agreements commenced on various dates with terms extending through February 2016. The Company has options to extend most of the leases for an additional five to ten years. The Company also leases certain facilities under agreements classified as capital leases. These agreements include purchase options exercisable at the Company's discretion during, or at the end of, each of the lease terms. The capital lease agreements commenced on various dates with terms extending through October 2008. Included in the above agreements are seven leases whereby a sale to the lessor F-21 77 preceded the lease agreement ("sale/leaseback transaction"). The Company has accounted for six of these sale/leaseback transactions as sales with no gains or losses recognized on the transactions. The remaining sale/leaseback transaction was capitalized and included a deferred gain of $381,370 to be amortized over the term of the lease. Future minimum payments, by year and in the aggregate, under noncancelable operating leases with initial or remaining terms of one year or more consist of the following at June 30, 1997:
Year Amount 1998 $ 19,484,267 1999 19,264,153 2000 19,243,829 2001 19,159,033 2002 18,710,901 Future years 119,850,928 Total $215,713,111
The Company's rental expense under operating leases for nursing homes and retirement care facilities amounted to approximately $13,200,000, $6,040,000 and $5,750,000 for the years ended June 30, 1997, 1996 and 1995, respectively. The Company leases office space under a noncancelable operating lease which expires in October 2000. At June 30, 1997, minimum future rental payments under the noncancelable lease were as follows:
Year Amount 1998 $325,455 1999 341,683 2000 358,673 2001 120,509
Total amounts paid for rental of office facilities totaled approximately $306,000, $317,000, and $60,000 for the years ended June 30, 1997, 1996 and 1995, respectively. OTHER The Company has guaranteed 20% to 100%, or approximately $9,000,000, of debt on six facilities owned by unaffiliated entities that are currently operated by the Company under operating leases. The Company is involved in legal proceedings arising in the ordinary course of business. In addition, the Company is in dispute with the Internal Revenue Service ("IRS") concerning the application of certain income and payroll tax liabilities and payments. The IRS contends that the Company is delinquent in the payment of certain taxes and has charged penalties and interest in connection with the alleged underpayment. The Company contends that the IRS has misapplied payments between income and payroll taxes and between the Company and its affiliates. The Company has estimated in the accompanying financial statements amounts for ultimate settlement of this dispute. The Company has filed lawsuits against the IRS related to this matter. In the opinion of management, the ultimate resolution of pending legal proceedings and the IRS dispute will not have a material effect on the Company's financial positions or results of operations. F-22 78 13. INCOME TAXES: The components of the provision for income taxes were as follows:
Year ended June 30, 1997 1996 1995 Current: Federal $(1,097,110) $2,671,891 $2,659,000 State (240,648) 501,600 499,000 (1,337,758) 3,173,491 3,158,000 Deferred (benefit): Federal (846,568) (1,571,500) 221,928 State (158,930) (294,900) 39,164 $(1,005,498) (1,866,400) 261,092 Total income tax provision $(2,343,256) $1,307,091 $3,419,092
The income tax provisions (benefit) included in the consolidated statements of income are as follows:
1997 1996 1995 Income before extraordinary item and cumulative effect of change in accounting principle $(2,343,256) $1,307,091 $3,419,092 Cumulative effect of change in accounting principle - 228,000 - Extraordinary Item (300,000) - - (2,643,256) $1,535,091 $3,419,092
Deferred income taxes are provided to reflect temporary differences between financial and income tax bases of assets and liabilities. The sources of the temporary differences and their effect on the net deferred taxes at June 30, 1997 and 1996 are as follows:
1997 1996 Current deferred taxes: Deferred tax assets: Workers' compensation accrual $1,936,000 $1,062,900 Provision for losses on accounts receivable 2,039,200 811,300 Health insurance accrual 227,800 227,800 Net operating loss 444,500 355,100 Total current deferred tax asset 4,647,500 2,457,100 Less valuation allowance (444,500) (355,100) 4,203,000 2,102,000 Deferred tax liability - other (137,569) (93,570) Net current deferred tax asset 4,065,431 $2,008,430 Noncurrent deferred taxes: Deferred tax asset - deferred gain 276,700 $ 276,700 Deferred tax liabilities: Property and equipment 673,900 352,600 Deferred lease cost 568,200 201,100 Other 133,529 - Net noncurrent deferred tax liability $1,098,929 $ 277,000
The provision for income taxes for the year ended June 30, 1996 and 1995 varies from the amount determined by applying the Federal statutory rate to pretax income as a result of the following:
1997 1996 Income tax expense (benefit) at federal statutory rate (3,310,600) $1,115,130 Nondeductible tax penalties 305,800 417,700 State income taxes, net of federal tax benefit (192,000) 331,100 Other, net 668,801 (556,839) $(2,527,999) $1,307,091
The primary difference between the actual income tax rate of approximately 40% for the year ended June 30, 1995 and the Federal income tax rate of 34% is the F-23 79 amount paid for state income taxes. 14. FAIR VALUES OF FINANCIAL INSTRUMENTS AND INVESTMENTS: The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments. CASH AND CASH EQUIVALENTS The carrying amount reported in the balance sheet for cash and cash equivalents approximates fair value because of the short maturity of these instruments. MARKETABLE EQUITY SECURITIES The carrying amount reported in the balance sheet for marketable equity securities approximates fair value. All marketable equity securities are classified as "available for sale" for accounting purposes and, therefore, are carried at fair value with unrealized gains and losses recorded directly in equity. There were no significant unrealized gains or losses at June 30, 1996. NOTES RECEIVABLE The carrying amount approximates fair value for the notes receivable based on the fair value being estimated as the net present value of cash flows that would be received on the notes over the remaining notes' terms using the current market interest rates rather than stated interest rates. SHORT- AND LONG-TERM DEBT The fair value of all debt has been estimated based on the present value of expected cash flows related to existing borrowings discounted at rates currently available to the Company for debt with similar terms and remaining maturities. The cost basis and estimated fair values of the Company's financial instruments at June 30 are as follows:
June 30, 1997 Carrying Fair Amount Value Financial assets: Cash and cash equivalents $ 3,637,878 $ 3,637,878 Financial liabilities: Short-term debt 21,389,095 21,389,095 Long-term debt 141,674,131 128,718,000
June 30, 1996 Carrying Fair Amount Value Financial assets: Cash and cash equivalents $ 45,365 $ 45,365 Marketable equity securities 33,645 33,645 Financial liabilities: Short-term debt 5,777,026 5,777,026 Long-term debt 108,481,040 112,338,000
As of June 30, 1995, the carrying amount of all financial instruments approximated fair value. F-24 80 15. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: As described in Note 2, the Company acquired certain businesses during 1997. The fair value of the assets acquired was $30,411,391 and the fair value of the liabilities assumed was $11,603,614, which resulted in net cash payments of $18,807,777. As described in Note 2, the Company acquired certain businesses during 1996. The fair value of assets acquired was $69,826,951 and the fair value of liabilities assumed was $47,888,438, which resulted in net cash payments of $21,938,513. During 1997, the Company entered into approximately $14,000,000 of capital lease agreements. Contour acquired Atlantic Medical Supply Company, Inc. and sold CFI with noncash transactions of $16,073,970 and $624,252, respectively. Cash paid for interest during the years ended June 30, 1997, 1996 and 1995 was $13,851,484, $6,561,954, and $1,172,883, respectively. Cash paid for income taxes during the years ended June 30, 1997, 1996 and 1995 was $3,265,632, $3,561,089, and $829,292, respectively. Dividends on preferred stock of $15,000 and $1,996,777 were accrued but not paid at June 30, 1996. Dividends on preferred stock of $1,966,777 were accrued but not paid at June 30, 1997. During 1997 and 1996, approximately $13,730,000 and $8,112,000, respectively, of lease assets and obligations were capitalized. 16. ACCRUED EXPENSES: Accrued expenses consisted of the following as of June 30:
1997 1996 Payroll and payroll taxes $ 5,808,124 $ 3,587,217 Interest 2,129,164 1,868,805 Workers Compensation 5,275,000 2,975,000 Other 5,204,970 2,885,008 Total $18,417,258 $11,316,030
17. EMPLOYEE RETIREMENT PLAN: During the year ended June 30, 1996, the company established a defined contribution retirement plan. Employees qualify for the plan upon the completion of three months of service with the Company and reaching the age of twenty-one. Company contributions to the plan represent a matching percentage of certain employee contributions. The matching percentage is subject to management's discretion based upon consolidated financial performance. For the years ended June 30, 1997 and 1996, the Company has not made any contributions to the plan. 18. BUSINESS SEGMENT INFORMATION: Retirement Care Associates; Inc. and Subsidiaries is a long-term health care provider which engages in two distinct business segments. The Retirement Care Associates entity operates and manages nursing homes and retirement facilities throughout the Southeast. As of June 30, 1997, approximately 11,100 beds were owned or operated by this entity. The Contour entity manufacturers a full line of orthopedic care and F-25 81 rehabilitation products and distributes them to nursing facilities throughout the Southeast. The Contour entity was acquired in 1995. The following represents business segment information for the years ended June 30, 1997, 1996 and 1995.
1997 1996 1995 Operating revenues: Retirement Care Associates $204,612,388 $124,951,954 $76,656,829 Contour Medical 48,615,473 9,059,415 2,959,224 253,227,861 $134,011,369 $79,616,053 Depreciation and amortization expense: Retirement Care Associates $ 5,653,472 $ 2,806,637 $ 1,051,842 Contour Medical 861,241 600,349 76,341 $ 6,514,713 $ 3,406,986 $ 1,128,183 Identifiable assets: Retirement Care Associates $227,984,979 $165,094,536 $72,644,179 Contour Medical 27,385,987 12,397,751 7,613,367 $255,370,966 $177,492,287 $80,257,546 Capital expenditures: Retirement Care Associates $ 11,764,903 $ 11,741,135 $ 5,763,553 Contour Medical 969,486 749,163 316,057 $ 12,734,389 $ 12,490,298 $ 6,079,610 Operating Income Retirement Care Associates $ 3,006,819 $ 8,540,815 $ 8,865,388 Contour Medical 694,303 839,202 151,820 $ 3,701,122 $ 9,380,017 $ 9,017,208
19. SUBSEQUENT EVENTS The board of directors of RCA has unanimously approved and adopted the Agreement and Plan of Merger and reorganization, dated as of February 17, 1997, as amended by Amendment No. 1 thereto dated as of May 27, 1997, and also amended by Amendment No. 2 thereto dated as of August 21, 1997, with Sun Healthcare Group, Inc. ("Sun"). The proposed RCA merger is contingent upon, among other things, the approval of the holders of the requisite number of shares of Sun Common Stock and RCA Capital Stock, which is described in a Joint Proxy Statement/Prospectus/Information Statement. The proposed RCA Merger will be consummated as soon as practicable after such approvals are obtained and the other conditions to the RCA Merger are satisfied or waived. The Company renewed debt of $9,750,000 and obtained $5,000,000 of additional debt with Sun Healthcare Group, Inc. on July 10, 1997. Interest accrues at rates ranging from 11% to 12% and would increase from 15% to 16% during any period of default. Principal is due 120 days following the termination of the agreement or merger with Sun. Subsequent to June 30, 1997, the Company became obligated on approximately $2,500,000 bonds to construct a twenty-five unit addition to its Jackson, Tennessee facility. 20. ADJUSTMENTS TO 1996 FINANCIAL STATEMENTS As discussed in Note 19, on February 17, 1997, following a series of meetings and negotiations, the company agreed to be acquired by Sun Healthcare Group, Inc. (Sun) through an exchange of shares of Sun for shares of the Company. During due diligence procedures associated with the transaction, certain adjustments to previously issued financial statements were discovered to be required. Those adjustments, together with additional amounts, have been applied to the financial statements for the year ended June 30, 1996 as restatements and corrections as follows: F-26 82
Additional provision for uncollectible accounts $1,705,000 Additional accrual for claims incurred, but not reported for self-insured worker's compen- sation and health care 3,400,000 Accrual for compensated absences 300,000 Adjustment of previously recorded inventory 809,219 Adjustment to lease expense 530,000 6,744,219 Less: Adjustment to income taxes (2,921,219) Decrease in net income before extraordinary item $3,823,000 Decrease in net income per share $ .34
21. LIQUIDITY During the period ending June 30, 1997, the Company experienced a significant net operating loss and at the same time a decline in liquidity, resulting from the operating loss and a heightened level of investment in new facilities. Management believes that the operating loss is the result of a decline in the overall census of residents and patients in the Company's facilities, together with losses at Contour Medical, Inc. resulting from costs of consolidation of subsidiaries acquired during the period. Closing of the merger of the Company with Sun as discussed in Note 19 will provide access to additional sources of liquidity as the Company's facility proceed through a combination of new admissions to nursing facilities and set-up of retirement facilities. In the event the merger does not take place, management's plans include a complete reorganization of operations of the nursing home segment, assisted living segment and Contour Medical, Inc. This reorganization plan would include new personnel to implement increased census, develop and implement ancillary business (i.e., pharmacy, therapy, etc.) which would be beneficial from an operations point of view as well as increase profits for the Company. A comprehensive plan is being developed to implement these changes if necessary. The personnel for this plan have been identified and could be brought on board quickly. The funds to implement this plan would be provided from a new line of credit, sale and lease-back transactions for certain identified properties of the Company as well as refinancing of other Company targeted facilities. F-27 83 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. RETIREMENT CARE ASSOCIATES, INC. Dated: October 14, 1997 By: /s/ Christopher F. Brogdon --------------------------------- Chris Brogdon, President Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date /s/ Christopher F. Brogdon President and Director October 14, 1997 - -------------------------- Chris Brogdon /s/ Edward E. Lane Secretary and Director October 14, 1997 - -------------------------- Edward E. Lane /s/ Darrell C. Tucker Treasurer (Chief Financial October 14, 1997 - -------------------------- Officer and Principal Darrell C. Tucker Accounting Officer) Director /s/ Julian S. Daley Director October 14, 1997 - -------------------------- Julian S. Daley Director - -------------------------- Harlan Mathews EX-10.2 2 MANAGEMENT & MARKETING AGREEMENT 1 EX-10.2 MANAGEMENT AND MARKETING AGREEMENT This agreement (the "Agreement") is made and entered into as of the 1st day of January 1996, by and between Winter Haven Homes, Inc. ("Owner"), which owns a retirement community known as Renaissance of Sanford, located at 300 West Airport Road, Sanford, Florida (the "Facility"), and Capitol Care Management Company, Inc., a Georgia corporation ("CCMC"). This Agreement shall take effect on January 1, 1996, or on such other date as the parties agree in writing (the "Effective Date@). In consideration of the mutual covenants, promises and conditions contained herein, the parties hereby agree as follows: I. APPOINTMENT Owner hereby appoints CCMC as its exclusive agent and manager for the marketing and management of the Facility during the term of this Agreement and any extensions or renewals thereof. II. TERM; TERMINATION 1. The term of this Agreement shall commence as of the Effective Date and shall continue for a period of five (5) years. In addition, the Owner shall have the option to renew this Agreement for additional terms of One (1) year each. Such renewals shall be automatic unless Owner gives Manager written notice of cancellation at least sixty (60) days prior to the expiration of the then current contract term. 2. Owner may terminate this Agreement upon giving CCMC sixty (60) days written notice after the end of the third year of this Agreement. CCMC may terminate this Agreement at any time by giving the Owner, sixty (60) days written notice. III. COMPENSATION 1. As compensation for the services to be performed by CCMC under this Agreement CCMC shall receive a monthly marketing fee (the AMarketing Fee@) of: $.00 and receive a monthly management fee (the "Management Fee") of: $14,000.00, and receive a monthly accounting fee (the "Accounting Fee") of: $1,000.00. 2. In addition to the Marketing and Management Fee, the Manager shall be entitled to reimbursement of all reasonable out-of-pocket expenses incurred in connection with management of the Facility and documented in a reasonable manner; provided, however, that any such expenses in excess of $250 shall require the Owner's prior approval. Expense reimbursements shall be due and payable within 30 days of Management's submission of an invoice therefore. 3. If any time during the term of this agreement Owner terminates as Owner of facility this agreement shall terminate upon receipt of notice of Owner's termination. 2 IV. RESPONSIBILITIES OF CCMC As Exclusive Agent and Manager of the Facility, CCMC shall have the authority to and shall operate, market and manage the Facility on behalf of and as agent for the Owner, including, but not limited to the following: 1. General Authority and Policies a. Subject to Owner's prior approval, CCMC shall have the authority to establish and change all resident rents, fees and other charges with respect to the Facility. b. CCMC is authorized to and shall establish and enforce operating policies and procedures for the Facility with a view of promoting a safe and comfortable residential environment consistent with maximizing the net cash flow to Owner from the Facility. Such policies shall cover all aspects of management including leasing, tenant relations, food service, public relations, advertising, maintenance, social activities, accounting and regulatory compliance. c. CCMC is authorized to and shall, on the Owner's behalf, take all action necessary in order to assure that such policies and procedures are correctly followed. d. CCMC is hereby granted exclusive authority by Owner to advertise the availability of units in the Facility or any room, space, or apartment thereon for rental and to display same; to execute, renew, mollify and/or cancel leases for the Owner for any part of the Facility on such terms and conditions as CCMC reasonably deems best and to collect on Owner's behalf, rents and other income clue or to become due and given written acknowledgment of payment. Subject to prior written approval of Owner, given at the direction of the Owner, the Manager shall have the authority to terminate tenancies as Owner's agent and to sign and serve in the name of Owner such direction and shall have authority to institute and prosecute legal actions, evict tenants, and settle, compromise and release such actions or suits or reinstate such tenancies. e. CCMC shall establish procedures for collection of rentals and other income from the Facility and shall deposit all such amounts in the operating account maintained by Manager for the benefit of Owner. 2. Marketing Manager's marketing responsibilities shall include: identifying target markets; developing appropriate marketing strategies and procedures; hiring, training and supervising qualified leasing counselors as employees of Owner, and budgeting and cost control Subject to Owner's prior approval, Manager shall have the authority as agent for Owner to retain the services of marketing professionals to assist in the marketing of the 2 3 Facility. The costs incurred in retaining such professionals shall be included in the proposed operational budget to be approved by Owner. 3. Accounting CCMC, on the effective date of this Agreement, shall have implemented a system of accounting controls and procedures for timely monthly reporting of all accounts, including an analysis versus budget. CCMC shall make its accounting system available for review by Trustee. All costs associated with the accounting for the Facility shall be at Owner's sole cost and expense. Manager shall make all accounting records available to Owner's auditors upon reasonable notice. 4. Standard of Care In performing its obligations under this Agreement, CCMC shall act in good faith and with the prudence and care required of health professionals situated in similar circumstances in this industry. Notwithstanding any other provision contained herein, whether express or implied, neither the Owner nor the Bondholders shall be responsible for any claims, liabilities, or expenses arising from CCMC's negligence or willful misconduct. 5. Employees Manager shall hire as employees of Owner and discharge, maintain and supervise, to the extent the same are available in the community, an adequate staff of employees at competitive wage and salary rates for the various job classifications approved from time to time by Owner. Release of employees shall be at the discretion of Manager. Manager shall recommend and institute, subject to approval of Owner, appropriate employee benefits. Employee benefits may include pension plans (where applicable), insurance benefits, incentive plans for key employees and vacation policies. V. RESPONSIBILITIES OF OWNER Owner shall make itself or its designated representative available to meet with Manager on a monthly basis to review the progress of the Facility and approve or otherwise direct Manager's plans and strategies. Owner agrees that it will review and evaluate all proposals within a reasonable time to assure the uninterrupted operation of the property. Owner also agrees as follows: 1. Employment Owner agrees and acknowledges that all Facility employees shall be employees of Owner. Owner accepts hill responsibility for all costs and expenses associated with employment of such employees. Owner agrees to pay, and to indemnity and hold Manager harmless with respect to, all salary, benefits, taxes and regulatory costs with respect to such employees, including, but not limited to, payroll taxes, wages, worker's compensation 3 4 insurance, unemployment insurance, health and benefit plan costs, salaries, any extended benefits, and other charges or insurance provided to such employees or levied or required by federal, state or local statutes related to the employment of the Facility's employees. 2. Indemnification Owner agrees to indemnify and hold Manager harmless from and against any and all liabilities, claims, laws, damages or actions arising out of or relating to the Facility or the operation thereof, including without limitation any liabilities arising out of violations of any antipollution or environmental protection or remediation laws, the Occupational Safety and Health Act of 1970, the Fair Labor Standards Act, as amended, Title VI of the Civil Rights Act of 1964, as amended, the Age Discrimination in Employment Act of 1967, as amended, and any rules and regulations thereunder, except for any liabilities, claims, laws, damages or actions arising directly out of (a) any actions taken by Manager contrary to the express written instructions or specific written policy of Owner relating to the operation of the Facility, or 3. Designated Representatives of Owner The name of the officer, agent or employee of Owner designated by the Owner as Owner's representative for purposes of this Agreement are as follows: Christopher F. Brogdon, President Retirement Care Associates, Inc. 6000 Lake Forrest Drive, Suite 200 Atlanta, Georgia 30328 (404) 255-7500 fax (404) 843-9677 Owner may change its designated representative(s) from time to time by giving written notice to Manager. In any situation in which Owner is required or permitted under the terms of this Agreement to take any action, or to give any consent or approval, Manager shall be entitled to rely conclusively upon the statement of any of such designated representative(s). In the event Owner, through its designated representative(s) does not respond to a request by Manager for approval or consent under this Agreement within 15 business days after receipt of such request, the request shall be deemed approved. If any action is required in a shorter period of time in order to comply with legal requirements or other emergency circumstances, Owner shall be so notified and shall be required to respond within such shorter period of time. Owner agrees that it will not unreasonably withhold or delay any approvals or consents requested by Manager hereunder. VI. PROPRIETARY MATERIALS The Owner acknowledges that in managing the Facility under this Agreement, the Manager will use certain proprietary materials which are the exclusive property of the Manager, including computer software used for accounting, marketing and food service functions, as well as marketing, 4 5 accounting and food services operations manuals. The Owner understands that these materials will remain the sole and exclusive property of the Manager and that the Owner will not acquire any rights or license in such materials. Upon expiration or termination of this Agreement for any reason, all such materials in tangible form, including all copies, shall be returned to Manager, and all such materials or copies stored by electronic means shall be purged or erased. VII. MISCELLANEOUS PROVISIONS The following provisions are an integral part of this Agreement. 1. The Agreement shall be binding upon and shall inure to the benefit of the successors and assigns of the respective parties hereto. Either party may assign this contract after obtaining the prior written consent of the other party, which consent shall not be unreasonably withheld or delayed. 2. The headings used in the Agreement are inserted for reference purposes only and shall not be deemed to limit or affect the meaning or interpretation of any of the terms or provisions of this Agreement. 3. This Agreement constitutes the entire understanding and agreement between the patties with respect to the subject matter hereof and supersedes all prior agreements, representations or understandings between the parties relating to such subject matter. 4. The provisions of this Agreement are severable and should any provision hereof be void, unenforceable, or invalid, such void, unenforceable or invalid provision shall not affect any other portion or provision of this Agreement. 5. Any waiver by either party hereto or any breach of this Agreement of any kind or character whatsoever by the other party, whether such waiver be direct or implied, shall not be construed as a continuing waiver or as a consent to any subsequent breach or waiver of this Agreement on the part of the other party. 6. The several tights and remedies herein expressly reserved to each of the parties shall be construed as cumulative; none of them shall be exclusive or in lieu or Dictation of any other right, remedy, or priority allowed by law. 7. This Agreement shall be interpreted, construed and enforced according to the laws of the State of Georgia. 8. This Agreement may not be modified except by an instrument in writing signed by the party against whom enforcement is sought. 9. In the event arty action or proceeding is brought by either party against the other under this Agreement, the prevailing party shall be entitled to recover reasonable attorney's fees such amounts as the courts may deem just. 5 6 10. Unless otherwise specified, all notices, demands and requests required or permitted to be given hereunder shall be deemed duly given at the time of delivery if delivered in person on the date of delivery if sent and receipted for by Federal Express or other nationally recognized overnight service, or three (3) business day=s following mailing if mailed by registered or certified mail, return receipt requested, addressed to the following: If to Owner, to: Christopher F. Brogdon, President Retirement Care Associates, Inc. 6000 Lake Forrest Drive, Suite 200 Atlanta, Georgia 30328 If to Manager, to: Jeff Andrews, President Retirement Management Company, Inc. 6000 Lake Forrest Drive, Suite 525 Atlanta, Georgia 30328 Either party shall have the right to specify in writing, in the manner above provided other address to which subsequent notices to such parties be given. Any notice given hereunder shall be deemed to have been given as of the date delivered or mailed 11. Nothing contained in this Agreement shall constitute or be construed to be or to create a joint venture, partnership or lease between Owner and Manager with respect to the Facility or any equity interest in the Facility on the part of Manager. The relationship of Manager to Owner under this Agreement is that of an independent contractor. 12. Manager shall not, by entering into and performing this Agreement or by managing the Facility, assume or become liable for any of the existing or future obligations, liabilities or debts of the Facility or Owner. Manager's sole liability to Owner hereunder will be for actual damages incurred by Owner due to Manager's breach of the standard of care described in paragraph V.9. Under no circumstances shall Manager be liable for any incidental, consequential or special damages suffered by Owner for any reason whatsoever, whether arising out of breach of contract, negligence, tort or otherwise. 13. Neither party shall be deemed to be in violation of this Agreement if it is prevented from performing any of its obligations hereunder for any reason beyond its reasonable control, including without limitation, acts of God or of the public enemy, flood or stone, fire or explosion, labor trouble or statutes, regulations or rules of any federal, state or local government, or any agency thereof. 6 7 IN WITNESS WHEREOF, the parties hereto have signed this agreement as of the date first stated above. CAPITOL CARE MANAGEMENT WINTER HAVEN HOMES, INC. COMPANY, INC. By: /s/ Darrell Tucker By: /s/ Edward E. Lane Its: President Its: President 7 8 ADDITIONAL MANAGEMENT & MARKETING AGREEMENTS OMITTED The Registrant has additional Management and Marketing Agreements with affiliates substantially identical to the foregoing. The material details of such agreements which differ are as follows:
Monthly Fees ---------------------------- Name of Date of Manage- Facility Location Owner* Agreement ment Marketing Accounting - --------------- ----------- ------ --------- ------- --------- ---------- Summer=s Landing Lynn Haven, NAB 12/10/96 $ 1,000 -0- $1,000 - - Lynn Haven FL Summer=s Landing Vidalia, GA SCI 12/10/93 $ 1,000 -0- $1,000 - - Vidalia - ---------------
* The names of the owners are abbreviated as follows: National Assistance Bureau, Inc. - NAB; Southeastern Collages, Inc. - SCI 8 EX-10.3 3 NURSING HOME MANAGEMENT AGREEMENT 1 EX-10.3 NURSING HOME MANAGEMENT AGREEMENT THIS MANAGEMENT AGREEMENT (the "Agreement") is made and entered into this 1st day of January 1995, by and between National Assistance Bureau, Inc., (hereinafter called "Owner"), and Capitol Care Management Company, Inc. (hereinafter called "CCMC"). Owner and CCMC agree that CCMC shall manage Marshall C. Voss Care Center, HIarriman, Tennessee (the "Facility"), owned by Owner, containing 138 licensed nursing home beds, on the following tens and conditions: SECTION ONE: MANAGEMENT DUTIES AND OBLIGATIONS 1.01 Management of Facility. During the term of this Agreement, CCMC shall supervise the management of the Facility including but not limited to staffing, accounting, billing, collections, setting of rates and charges and general administration. In connection therewith CCMC (either directly or through supervision of employees of the Facility) shall: (a) Hire on behalf of Owner and maintain (to the extent such personnel are reasonably available in the community in which the Facility is located) an adequate staff of nurses, technicians, office and other employees, including an administrator, at wage and salary rates for various job classifications approved Dom time to time by Owner; and release employees at CCMC's discretion. (b) Recommend and institute, subject to approval of Owner, appropriate employee benefits. Employee benefits may include pension and profit-sharing plans, insurance benefits, incentive plans for key employees and vacation policies. (c) Design and maintain accounting, billing, patient and collection records; prepare and file insurance, Medicaid and any and all other necessary or desirable reports and claims related to revenue production. (d) Order, supervise and conduct a program of regular maintenance and repair of the Facility except that physical improvements costing more than $500.00 shall be subject to prior approval of Owner which shall not be unreasonably withheld. (e) Purchase supplies, drugs, solutions, equipment, Furniture and furnishings on behalf of Owner' except that purchases of items of equipment which cost more than $500.00 shall be subject to prior approval of Owner which shall not be unreasonably withheld. (f) Administer and schedule all services of the Facility. (g) Supervise and provide the operation of food service facilities. 2 (h) Provide for the orderly payment (to the extent funds of Owner are available therefore) of accounts payable, employee payroll, taxes and insurance premiums. (i) Institute standards and procedures for admitting patients, for charging patients for services, and for collecting the charges from the patients or third parties. 2 3 (j) Advise and assist Owner in obtaining and maintaining adequate insurance coverage with Owner, Manager and such other persons as requested by Owner named as insured for the Facility. CCMC shall advise Owner with regard to the availability, nature and desirable policy limits of insurance coverage for the Facility, and shall request and receive bids for such coverage. (k) Negotiate on behalf of Owner (and in conjunction with Owner's counsel) with any labor union lawfully entitled to represent employees of the Owner who work at the Facility, but any collective bargaining agreement of labor contact must be submitted to Owner for approval and execution. (1) Make periodic evaluation of the performance of all departments of the facility paying particular attention to those departments where there is an inconsistency between expenditures and budget. (m) Establish and maintain books of account using accounts and classifications consistent with those used by CCMC at other facilities owned or leased by it or its affiliates. (n) Advise and assist Owner in designing an adequate and appropriate public and personnel relations program. 1.02 Reports to Owner. CCMC shall prepare and deliver to Owner monthly financial statements (unaudited) containing a balance sheet and statement of income in reasonable detail, and such monthly financial statements will be delivered to Owner within 30 days after the close of each calendar month. CCMC shall submit to Owner each 12 months a proposed budget for the operation of the Facility during the succeeding 12-month period, and shall use its best efforts to operate the Facility in accordance with the provisions of the budget submitted to and approved by Owner. CCMC shall submit to Owner each week a vacancy report for the Facility. 1.03 Bank Accounts and Working Capital. CCMC shall deposit all funds received from the operation of the Facility in an Operating Account in a bank or banks presently being used by the Facility or such other banks as are designated from time to time by CCMC. Owner shall provide sufficient working capital for the operation of the Facility and shall make deposits in the Operating Accounts of such working capital from time to time upon the request of CCMC. All costs and expenses incurred in the operation of the Facility shall be paid out of the Operating Accounts. All checks or other documents withdrawal must be signed by the Comptroller of CCMC or his designate. Deposits may be made by the Comptroller of CCMC or his designate. 1.04 Access to Records and Facility. The books and records kept by CCMC for the Facility shall be maintained at the Facility, although CCMC shall have the right to maintain copies of such records at its home office for the purpose of providing services under this Agreement. CCMC shall make available to Owner, its agents, accountants and attorneys, during normal business hours, all books and records pertaining to the Facility and CCMC shall promptly respond to any questions of Owner with respect to such books and records and 3 4 shall confer with Owner at all reasonable times, upon request, concerning operation of the Facility. In addition, Owner shall have access to the Facility at all reasonable hours for the purpose of examining or inspecting the Facility. 1.05 Licenses. (a) CCMC shall use its best efforts to manage the Facility in a manner necessary to maintain all necessary licenses, permits, consents, and approvals from all governmental agencies which have jurisdiction over the operation of the Facility. CCMC shall not assume the liability for any employee action, failure to act or negligence prohibiting the intent of this provision to be met. (b) Neither Owner nor CCMC shall knowingly take any action which may (1) cause any governmental authority having jurisdiction over the operation of the Facility to institute any proceeding for the rescission or revocation of any necessary license, permit, consent or approval, or (2) adversely affect Owner's right to accept and obtain payments under Medicare, Medicaid, or any other public or private medical payment program; however, this Agreement in no way guarantees or warrants that any or all of the above will not or could not occur. (c) CCMC shall, with the written approval of Owner, have the right to contest by appropriate legal proceedings, diligently conducted in good faith, in the name of the Owner, the validity or application of any law, ordinance, rule, ruling, regulation, order or requirement of any governmental agency having jurisdiction over the operation of similar facilities. Owner, after having given its written approval, shall cooperate with CCMC with regard to the contest, and Owner shall pay the reasonable attorney's fees incurred win regard to the contest. Counsel for any such contest shall be mutually selected by CCMC and Owner. CCMC shall have the right, without the written consent of the Owner, to process all third-party payment claims for the services of the Facility, including the full right to contest adjustments and denials by governmental agencies (or their fiscal intermediaries) as third-party payer. 1.06 Taxes. Any taxes or other governmental obligations properly imposed on the Facility are the obligations of the Owner, not of CCMC, and shall be paid out of the operating Accounts of the Facility. With the Owner's written consent, CCMC may contest the validity or amount of any such tax or imposition on the Facility in the same manner as described in Section 1.05(c). 1.07 Use of CCMC's Personnel. CCMC shall actively utilize CCMC staff specialists in such areas as accounting, auditing, budgeting, computer services, dietary services, housekeeping, industrial engineering, interior design, legal, nursing, personnel, pharmaceutical, purchasing, systems and procedures, and third-party payments for services of facilities in the management of the Facility when considered desirable by CCMC or upon the reasonable request of Owner. 4 5 SECTION TWO: TERM AND TERMINATION 2.01 Term. The term of this Agreement shall commence on July 1, 1995 and shall terminate at Midnight on June 30, 2001, unless an earlier date is mutually agreed upon during the provision of section 2.02. This Agreement shall automatically renew for an additional three year term unless either party shall terminate this Agreement in accordance with Section 2.02. 2.02 Termination. Owner may terminate this Agreement upon giving CCMC sixty (60) days written notice after the end of the third year of this Agreement. CCMC may terminate this Agreement at any time by giving the Owner sixty (60) days written notice. SECTION THREE: MANAGEMENT FEE 3.01 Fee to CCMC. During each term of this Agreement the Facility shall pay CCMC a fee equal to Fourteen Thousand dollars ($14,000.00) per month for the term of this Agreement. During the term of this Agreement, the management fee shall comply with Revenue Procedure 93-19. 3.02 Timing of Payments to CCMC. Within twenty (20) days after the end of each month of the term, CCMC shall be paid the fee computed in accordance with the provisions of Section 3.01. The amount of such fee shall be calculated on the basis of monthly financial statements regularly prepared by CCMC in accordance with Section 1.02 hereof. SECTION FOUR: COVENANTS OF OWNER 4.1 Insurance. Owner shall provide and maintain throughout the Term, the following insurance with responsible companies naming Owner and CCMC (as its interest may appear) as insured thereunder in amounts approved by CCMC and Owner. (a) public liability insurance and insurance against theft of or damage to patient's property in the Facility or its Premises; (d) workman's compensation, employers' liability or similar insurance as may be required by law; (c) insurance against loss or damage to the Facility Down fire and such other risks and casualties now or hereafter embraced by "Extended Coverage," as well as such other risks and casualties with respect to which insurance is customarily carried for similar facilities; (d) business interruption insurance against loss of income due to the risks insured against under this Section 4.01; (e) personal injury liability insurance against claims of bodily injury or death or otherwise arising out of the operations of the Facility 5 6 such insurance to afford minimum protection of not less than $1,000,000 in respect to bodily injury or death to any one person; (f) such other insurance or additional insurance as CCMC and Owner together shall reasonably deem necessary for protection against claims, liabilities and losses arising from the operation or ownership of the Facility. If Owner fails to effect or maintain any such insurance, Owner will indemnify CCMC against damage, loss or liability resulting from all risks for which such insurance should have been maintained, and CCMC may, but shall not be liable for its failure so to do, effect the same as the agent of Owner by taking our policies in such insurance companies as may be selected by CCMC, running for a period not to exceed one year. 4.02 Convalescent Services. Owner covenants and agrees that Facility is and will continue to be a fully licensed nursing home containing the number of licensed beds set forth on the first page of this Agreement. CCMC and Owner agree that the services rendered by the Facility will not, during the term thereof, be changed in any material respect, unless there shall first have been mutual agreement between CCMC and Owner to such change. SECTION FIVE: MISCELLANEOUS 5.01 Assignment by CCMC. CCMC shall not assign its rights or obligations under this Agreement without the consent of Owner. 5.02 Assignment by Owner. Owner shall not assign its rights or obligations under this Agreement without the notice to CCMC. 5.03 Binding on Successors and Assigns. The terms, covenants, conditions, provisions and agreements herein contained shall be binding upon and inure to the benefit of the parties hereto, their heirs, administrators, executors, successors and assigns, subject to provisions of Section 5.01 and 5.02 above. 5.04 Negation of Partnership. Joint Venture and Agency. Nothing in this Agreement contained shall constitute or be construed to be or to create a partnership, joint venture or lease between Owner and CCMC with respect to the Facility. The parties intent for the relationship of CCMC to Owner under this Agreement to be that of an independent contractor, nor that of an agent. Owner shall not have the power to control the time method or manner of CCMC's performance hereunder, Owner shall look solely to the results to be achieved by CCMC, and nothing contained herein shall be construed to create a relationship of agency between CCMC and Owner. 5.05 Notices. All notices hereunder by either party to the other shall be in writing. All notices, demands and request shall be deemed given when mailed, postage prepaid, registered, or certified mail, return receipt requested, (a) to Owner: Edward E. Lane 6 7 National Assistance Bureau, Inc. 6000 Lake Forrest Drive, Suite 200 Atlanta, GA 30328 (b) to CCMC: Capitol Care Management Company, Inc. 6000 Lake Forrest Drive, Suite 225 Atlanta, GA 30398 or to such other address or to such other person as may be designated by notice given from time to time during the term by one party to the other. 5.06 Entire Agreement. This Agreement contains the entire agreement between the parties hereto, and no representations or agreements, oral or otherwise, between the parties not embodied herein or attached hereto shall be of any force and effect. Any additions or amendments to this Agreement subsequent hereto shall be of no force and effect unless in writing and signed by the party to be bound. 5.07 Governing Law. This Agreement has been executed and delivered in the State of Georgia, all the teas and provisions hereof and the rights and obligations of the parties hereto shall be construed and enforced in accordance with the laws hereof. 5.08 Captions and Headings. The captions and headings throughout this Agreement are for convenience and reference only, and the words contained therein shall in no way be held or deemed to define, limit, describe, explain, modify, amplify or add to the interpretation, construction or meaning of any provision of or the scope or intent of this Agreement nor in any way affect this Agreement. 5.09 Disclaimer of Employment of Facility Employees. No person employed by Owner in operation of the Facility will be an employee of CCMC, and CCMC will have no liability for payment of wages, payroll taxes and other expenses of employment, except that CCMC shall have the obligation to exercise reasonable care in its management of the Facility to properly apply available Facility funds to the payment of such wages and payroll taxes. 5.10 Impossibility of Performance. Neither party to this Agreement shall be deemed to be in violation of this Agreement if it is prevented from performing any of its obligations hereunder for any reason beyond its control, including without limitation, acts of God or of the public enemy, flood or storm, strikes or statutory regulation or rule of any federal, state, or local government, or any agency thereof. 5.11 Non-assumption of Liabilities. CCMC shall not, by entering into and performing this Agreement, become liable for any of the existing or future obligations, liabilities or debts of Owner, and CCMC shall not be managing the Facility assume or become liable for any of the obligations, debts and liabilities of Owner, and CCMC will in its role as manager of the Facility have only the obligation to exercise reasonable care in its management and handling of the funds generated from the operation of the Facility. 7 8 5.12 Responsibility for Misconduct of Employees and Other Personnel. CCMC will have no liability whatever for damages suffered on account of the dishonesty, willful misconduct or negligence of any employee of the Owner regarding the Facility in connection with damage or loss directly sustained by it by reason of the dishonesty, willful misconduct and gross negligence of CCMC employees in the operation of the Facility during the teen of this Agreement. 5.13 Rights Cumulative, No Waiver. No right or remedy herein conferred upon or reserved to either of the parties hereto is intended to be exclusive of any other right or remedy, and each and every right and remedy shall be cumulative and in addition to any other right or remedy given hereunder, or now or hereafter legally existing upon the occurrence of any event of default hereunder. The failure of either party hereto to insist at any time upon the strict observance or performance of any of the provisions of this Agreement or to exercise any right or remedy as provided in this Agreement shall not impair any such right or remedy to be construed as a waiver or relinquishment thereof. Every right and remedy given by this Agreement to the parties hereto may be exercised from time to time and as often as may be deemed expedient by the parties hereto, as the case may be. 5.14 Time of Essence. Time is of the essence of this Agreement. 5.15 Invalid or Unenforceable Provisions. If any terms, covenants or conditions of this Agreement or the application thereIof to any person or circumstances other than those to which it is held invalid or unenforceable, shall not be affected thereby and each term, covenant or condition of this Agreement shall be valid and shall be enforced to the fullest extent permitted by law. 5.16 Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed an original and all such counterparts together shall constitute one and the same instrument. 5.17 Authorization of Agreement. CCMC and Owner represent and warrant, each to the other, thIat this Agreement has been duly authorized by its respective Board of Directors and, if required by law, shareholders; and that this Agreement consulates a valid and enforceable obligation of CCMC and Owner in accordance with its terms. 5.18 Designation. Owner agrees that, during the term of this Agreement, CCMC shall have the right to designate and make public reference to the Facility as a Capitol Care ManaIgement Company, Inc., managed facility. IN WITNESS WHEREOF, the parties hereto have executed this Agreement, the day and year first above written. CAPITOL CARE MANAGEMENT COMPANY, INC. By:/s/ Darrell C. Tucker NATIONAL ASSISTANCE BUREAU, INC. By: /s/ Edward E. Lane 8 9 ADDITIONAL NURSING HOME MANAGEMENT AGREEMENTS The Registrant has additional Nursing Home Management Agreements with affiliates substantially identical to the foregoing. The material details of such agreements which differ are as follows:
Owner Date of Termination Monthly Name of Facility Location (1) Agreement Date Fee - ---------------- ------------- ----- --------- ----------- ----------- Midway H.C.C. Midway, GA GJ(1) 7/1/95 12/31/00 $24,000 New Beginnings Covington, GA CHCS(1) 7/1/95 12/31/00 $28,000 Health & Rehab Sea Breeze H.C.C. Mobile, AL WHH(1)(2) 7/1/94 7/31/00 $12,000 Parkway H.C.C. Memphis, TN CHCS(1) 4/1/95 3/31/00 3% of Gross Revenues(3) - -------------
(1) The names of the owners are abbreviated a follows: Gordon Jensen Health Care Associates, Inc. - GJ; Chamber Health care Society, Inc. - CHCS; Winter Haven Homes, Inc. - WHH. (2) Owned by Sea Breeze Health Care Center, Inc., a subsidiary of Winter Haven Homes, Inc. (3) In addition, the owner paid an initial fee of $100,000. 9 EX-10.4 4 LEASE AGREEMENT 1 EX-10.4 LEASE AGREEMENT This lease agreement made and entered into this 5 day of May, 1996, by and between PHEO MED LIMITED PARTNERSHIP a partnership organized under the laws of the State of Georgia, hereinafter referred to as LESSOR and LAKE FOREST HEALTH CARE CENTER, INC., a corporation organized under the laws of the State of Georgia, hereinafter referred to as LESSEE; WITNESSETH That for and in consideration of the mutual promises and benefits hereinafter stipulated and agreed to, the parties mutually agree and bind themselves as follows: SECTION 1. Lease of Property. The Lessor hereby leases unto the Lessee and the Lessee hereby leases from the Lessor the premises described as follows: that 60-bed licensed nursing home facility, located in Jacksonville, Florida commonly known as "Lake Forest Health Care Center" located at 1771 Edgewood Avenue, Jacksonville, Florida 32208, including all furnishings, equipment and attachments thereto. It is understood that the leased premises include such inventories, supplies and other items as are incident to the operation of the facility in accordance with the requirements of the Department of Human Resources, and that comparable inventories, supplies and other items will be returned to the Lessor upon the expiration of this lease. SECTION 2. Term of Lease. The term of this lease shall commence on June 1, 1996, and the same shall continue for a period of ten(10) years thereafter, terminating at midnight on May 31, 2006,or until the same is sooner terminated according to the provisions hereinafter contained. At the expiration of the original term of this lease, Lessee shall have the option to renew upon a thirty (30) day written notice to Lessor prior to the expiration of the original term of this lease for an additional ten year period through May 31, 2012 at a rate to be mutually agreeable. SECTION 3. Lease Payments. The Lessee shall pay to the Lessor as rental the sum of $25,000.00 on June 1, 1996 and at the 1st of every month thereafter up to and including May 1, 2006. The monthly Lease payments are due on the first day of each month beginning June 1, 1996, with the last payment due on May 1, 2006, or 2016, as the case may be. SECTION 4. Supplies and Inventory. Lessee shall be permitted to utilize the inventory of consumable items located on the Property at the commencement of the term, including but not limited to food, beverages, medicines, drugs, linens and cleaning supplies and other items incident to the operation of the nursing home (collectively the "Supplies and Inventory") and Lessee shall replenish the Supplies and Inventory as they are consumed, and a comparable inventory of supplies shall be returned to the Lessor upon the expiration of this Lease. 2 SECTION 5. Payables and Receivables. (a) All accounts payables chargeable to the nursing home prior to the month of June, 1996 shall remain the liability of Lessor. Lessee shall accumulate such payables as received and forward to Lessor for payment within 10 days of receipt of same. (b) Uncollected receivables prior to the month of June, 1996 will be received by Lessee and immediately forwarded to Lessor. SECTION 6. Use and Operation. (a) The Lessee agrees to use and operate said property during the entire term of this lease as a nursing home and shall operate the same in a business like and professional manner as is generally acceptable and normal in the operation of a nursing home for the elderly. The same shall be open for business and in operation continuously each and every day for the entire term hereof unless otherwise mutually agreed upon in writing by the parties hereto. Provided, however, that the business office may be closed on Saturday and Sunday of each week, but such closure shall not prevent admission or dismissal of residents. (b) The Lessee agrees that said premises shall at all times be kept and used in accordance with laws of the State of Florida, and the rules and regulations of the Florida Agency for Health Care Administration or any successor agency and in accordance with the ordinances, resolutions, rules, and regulations of all local, state, and federal governments. The Lessee will permit no waste, damage or injuries to the premises and at Lessee's own cost and expense will keep all drainage pipes free and open. (c) The Lessee shall not make any alterations, additions, or improvements in and to the leased premises, including the improvements placed thereon by the Lessor, without the consent of the Lessor in writing first being had and obtained. The Lessor shall not withhold approval of any alterations, additions, or improvements required by the Florida Agency for Health Care Administration or any successor agency thereof for the continued use of the premises as a nursing home. Lessee will make appropriate alterations, additions, or improvements as may be required by the Florida Agency for Health Care Administration or any successor agency. All alterations, additions, or improvements made to the nursing home, and/or grounds, shall become a part of the leased premises and shall be and remain the sole property of the Lessor, subject to the terms of this lease. (d) All personal property brought upon the leased premises during the term of this lease shall be at the risk of the Lessee. The Lessor shall not be liable for any damage, either to persons or to property, sustained by Lessee or others, caused by any defect in the leased premises or the sidewalks adjoining the same, now existing or hereafter arising therein, including any improvements placed thereon by Lessor or any part or appurtenance thereof, nor by reason of the same becoming out of repair, nor by reason of any bursting or leaking water, gas, steam or other pipes or from any act of neglect of employees, co-tenants or other occupants of said building or buildings, if any, or any other persons whomsoever, in and upon or about the leased premises or sidewalks adjoining the same, or the occurrence of any accident or event from whatever cause in and about the leased premises and the improvements 2 3 thereon and sidewalks or areas adjoining the same. The Lessee agrees to defend and hold Lessor harmless from any and all lawful claims, demands, liabilities, or judgements for damages suffered or alleged to be suffered in or about the leased premises by any person, firm, or corporation, including reasonable costs incurred by Lessor in investigating and/or defending against the same in the event the Lessee does not do so. (e) The Lessee shall keep the leased premises including all improvements therein free from any liens arising out of any work performed, material furnished or obligations incurred by Lessee. In the event Lessee becomes insolvent, voluntarily or involuntarily bankrupt, or if a receiver, assignee, or other liquidating officer is appointed for the business of Lessee, then Lessor may cancel this lease at Lessor's option. (f) All signs or symbols placed in the windows or doors of the premises or upon any exterior part of the buildings on the leased premises by Lessee, shall be subject to the approval of Lessor. In the event Lessee shall place signs or symbols on the exterior of said building or in the windows or doors where they are visible from the street that are not satisfactory to the Lessor, the Lessor may immediately demand removal of said signs or symbols, and refusal of Lessee to comply with such demand within a period of ten (10) days shall constitute a breach of this lease and entitle Lessor to immediately recover possession of said premises in the manner provided by law. (g) The Lessee agrees to immediately forward a copy of all licensure surveys, cost reports, any disciplinary action, fines or penalties, or default of any bed tax, or tax or licensed assessed by any government agency. In absence of a timely agreement with that agency, this shall constitute a default of lease agreement and Lessor shall have the right to immediately and without further demand or legal process retake the leased property. SECTION 7. Insurance Requirements (a) The Lessee agrees to and shall carry liability insurance including malpractice insurance with limits and liability of at least one million dollars ($1,000,000) for property damages and personal injury limits of at least one million ($1,000,000) dollars, and Lessor may require of the Lessee that said limits be adjusted upward in such amounts as may be required by law, ordinance, state or federal rules and regulations. In the event the Lessee fails to obtain the insurance hereinabove mentioned, then, the Lessor may obtain the same at the expense of and to the charge of the Lessee or the Lessor may at its option treat such failure as a breach of this lease and terminate the same and take possession of the premises and fixtures and hold the Lessee liable for such damages as the Lessor may show itself entitled to as a result of such breach. The Lessee agrees to and shall hold the Lessor harmless on account of any or all liability which may result as a result of the use, occupancy, and operation of the nursing home on the premises. The Lessee agrees to carry workers compensation insurance on all employees of the Facility. (b) The Lessee shall furnish and carry at its expense, fire and extended coverage insurance with Lessor as named insured in the amount of $1,950,000 on the building, equipment and furnishings in an amount sufficient to replace the 3 4 entire building, equipment and furnishings in the same condition as before they were destroyed or damaged with not more than Five Thousand ($5,000) Dollars deductible and shall insure the Lessor's interest therein and furnish a copy of the policy to the Lessor. The Lessee shall be liable to the Lessor for any losses occasioned by the Lessor resulting from the Lessee's failure to provide and maintain such insurance. Upon the failure of the Lessee to provide such insurance, the Lessor may at its option terminate the original lease and the lease as herein amended or may purchase such insurance at the charge and expense of the Lessee. (c) Lessee shall furnish, at its expense, use and occupancy insurance in an amount sufficient to pay Lessor its monthly rental fee for up to not less than twelve months should Lessee experience the loss of use of any part or all of the facility caused by the perils covered by fire and extended coverage insurance. A copy of said policy shall be furnished to Lessor. SECTION 8. Maintenance. The Lessee assumes responsibility to maintain and repair the building, including the roof and outside structure, equipment, fixtures and furnishings in a good state of repair during the entire period of this lease and shall bear the expense of all the same except those expenses that may be compensated for by insurance carried by either party hereto. At the expiration or termination of this lease, the Lessee will return the premises to the Lessor in as good a condition as that which existed at the commencement of this lease, except for ordinary and usual wear and tear. SECTION 9. Property Taxes. The Lessee shall be responsible for any real estate, personal property, or intangible taxes during the term of this lease. Taxes for the year 1993 shall be prorated between Lessor and Lessee with each paying for their respective share. SECTION 10. Fees and Charges. All fees and charges due and owing to any agency, firm, city, county, state, or federal government on account of any required inspection made of the facility or the leased premises by any officer or employee of such inspection shall be paid by the Lessee. SECTION 11. Utilities. The Lessee hereby covenants and agrees to pay all charges for heat, lights, water, telephone and all other utilities which shall be used in or charged against the leased premises during the entire term of this lease. SECTION 12. Access to Property. Lessee will allow Lessor or Lessor's agent free access at all reasonable times to said premises for the purpose of inspecting the buildings and premises or any allegations made by a governing agency. This right shall not be construed as an agreement on the part of the Lessor to make any repairs, all of such repairs to be made by Lessee as aforesaid. SECTION 13. Damage by Casualty. In the event the nursing home is damaged by fire, windstorm, or other casualty to the extent of not more than fifty (50%) percent of the value of the facility, the Lessee shall rebuild, remodel, repair, and restore said facilities to the condition existing immediately preceding said fire or casualty within a reasonable time. In the event the 4 5 premises are destroyed by fire, windstorm, or other casualty in excess of fifty (50) percent of its value, it shall be optional with the Lessor as to whether it rebuilds, repairs, or restores the facilities. If the facility is so repaired, rebuilt, or repaired, then it is agreed that during any period of time within which the premises may be untenable and after such restoration the term of this lease herein provided for shall be extended over and above the original term or any extension thereof by the amount of time necessary to restore the premises. If the Lessor does not elect to rebuild, repair, or restore the same, then, in such event this lease shall terminate and be of no force and effect except for the rights and obligations which shall have accrued prior to the date of such termination. SECTION 14. Assignment and Subletting. Lessee shall not let, sublease, or sublet the whole leased premises, or any part thereof, or assign this lease without the written consent of Lessor which shall not be unreasonably withheld. SECTION 15. Waivers. (a) Failure of Lessor to insist upon strict performance of any of the covenants and agreements of this lease, or to exercise any option herein conferred in any one or more instances, shall not be construed to be a waiver or relinquishment of any such or any other covenants or agreements, but the same shall be and remain in full force and effect. (b) In the event of any suit or action instituted on account of any default or to enforce any provisions of this agreement, both Lessor and Lessee agree that the court may award to the prevailing party such amount as the court may consider necessary and reasonable as the attorney fees, together with court costs, and this provision shall also apply in connection with any appeal thereof. SECTION 16. Defaults. If the Lessee shall default in payment of any rent, additional rent, or other sum required by this lease, and Lessee fails to cure such default for a period of ten (10) days after receipt by Lessee of written demand by Lessor for payment, Lessee shall immediately return the leased property back to Lessor. In the event Lessee defaults in the performance of any other provision of this lease, for a period of thirty (30) days after Lessee's receipt of written demand by Lessor for performance of such other provision of this lease (provided, however, that if such non-monetary default may not be reasonable cured within thirty (30) days after Lessee receives Lessors written demand therefor, Lessee shall immediately cure said default with due diligence, unless by mutual written agreement said time is extended), Lessor may cancel this lease by giving a fifteen (15) day written notice to Lessee, whereupon the expiration of the said fifteen (15) day notice period, Lessee shall return the leased property to Lessor. Lessor may immediately reenter property at the end of fifteen (15) day period without legal process if Lessor has not remitted proper payment. No further notice to Lessee shall be necessary before reentry by Lessor or commencement of legal actions. SECTION 17. Binding Effect. Subject to the provisions hereof pertaining to assignment and subletting, the covenants and agreements of this lease shall be 5 6 binding upon the heirs, legal representatives, successors, and assigns of any or all of the parties hereto. SECTION 18. Notices. Any notice required to be served in accordance with the terms of this lease shall be sent by registered mail, to the last known address of either the Lessor or the Lessee, or their agents or representatives, and such notice shall be deemed and treated as notice to all of them, their heirs, legal representatives or assigns. Lessee will forward within fifteen (15) days of receipt of any State Licensure Inspection a copy of such Licensure inspection as well as plans of corrections to Lessor. SECTION 19. Regulatory Approval. This lease is subject to approval and continued approval of all applicable state and federal regulatory agencies. SECTION 20. Right of First Refusal to Purchase. Lessee has the first right of refusal to purchase this facility from Lessor at any time during the period of this lease provided Lessor receives a bona fide offer for the Facility. Lessee has thirty days to respond in writing to Lessor of its intentions of exercising its Right of Refusal to purchase the Facility. In any event if Lessor chooses to sell this Facility the new purchaser is bound by this Lease. SECTION 21. Acceptance of the Premises. Lessee has inspected the facility and the operations thereof, and herewith agree to accept the facility in its current condition, as is, and subject only to the terms of this Lease Agreement. Lessee agrees to hold Lessor, its Agents, Officers, and Directors harmless for any acts or omissions of actions arising out of or in connection with this Lease Agreement so long as it shall remain in full force and effect. IN TESTIMONY WHEREOF, the parties hereunto have executed this contract in duplicate originals as of the day and date first above mentioned. PHEO MED LIMITED PARTNERSHIP By: Winter Haven Homes, Inc. Its General Partner By: /s/ Edward E. Lane Its President (Lessor) [Corporate Seal] LAKE FOREST HEALTH CARE CENTER, INC. By: /s/ Chris Brogdon Its President (Lessee) [Corporate Seal] 6 7 ADDITIONAL LEASE AGREEMENTS WITH AFFILIATES The Registrant has additional Lease Agreements with affiliates substantially identical to the foregoing. The material details of such agreements which differ are as follows:
Owner Date of Name of Facility Location (1) Agreement Lease Lease Payment - ---------------- ---------- ----- --------- ------- ------------------------ Summer=s Landing Douglas, GJ 9/1/96 5 years $300,000 on execution of - - Douglas GA (2) the lease plus debt pay- ment on existing mort- gage each month (3) Magnolia Manor Green Cove RG 2/28/97 10 years 1.1 times payment of Springs, FL (4) principal and interest on debt, debt not to ex- ceed $3,200,000 (initial monthly payment - $34,144.30) Macon Health Macon, GA RG 2/28/97 10 years 1.1 times payment of Care Center (4) principal and interest (Hartley Woods on debt, debt not to ex- H.& R.C.) ceed $2,700,000 (initial monthly payment - $30,026.66) Trenton Health Trenton, RG 1/8/97 10 years 1.1 times payment of Care Center TN (4) principal and interest on debt, debt not to ex- ceed $3,500,000 Twin View Twin City, RG 2/28/97 10 years 1.1 times payment of Health Care GA (4) principal and interest Center on debt, debt not to ex- ceed $2,750,000 (initial monthly payment - $29,342.75) Laurelwood Jackson, RG 4/8/97 10 years 1.1 times payment of Health Care TN (4) principal and interest Center on debt, debt not to ex- ceed $2,300,000 Maplewood Jackson, RG 4/8/97 10 years 1.1 times payment of Health Care TN (4) principal and interest Center on debt, debt not to ex- ceed $6,375,000 Renaissance - Titusville, WHH 9/30/96 10 years $1,500,000 upon execu- Titusville FL (4) tion of the lease plus 1.1 times payment of principal and interest on debt not to exceed $6,000,000 - --------------
(1) The names of the owners are abbreviated as follows: Gordon Jensen Health Care associates, Inc. - GJ, Winter Haven Homes, Inc. - WHH, and Retirement Group, L.L.C. - RG. (2) The Registrant may extend up to two additional terms of five years each. (3) Beginning in year two there will be an additional payment of $500 per month; in year three $750 per month; in year four $1,000 per month and in year five $1,250 per month. During any extensions the additional amount will be $1,250 per month. (4) The Registrant may extend for one additional term of five years. 7 EX-21 5 LIST OF SUBSIDIARIES 1 EX-21 SUBSIDIARIES OF THE REGISTRANT Atrium Nursing Home, Inc. Florida Bibb Health & Rehabilitation, Inc. Georgia Brent-Lox Hall Nursing Home, Inc. Virginia Capitol Care Management Company, Inc. Georgia Charlton Healthcare, Inc. Georgia Crescent Medical Services, Inc. Georgia Duval Healthcare Center, Inc. Georgia Encore Retirement Partners, Ltd. New York F & L Associates, Inc. Virginia Gainesville Healthcare Center, Inc. Georgia Gardendale Health Care Center, Inc. Georgia Jeff Davis Healthcare, Inc. Georgia Lake Forest Healthcare Center, Inc. Georgia Lake Health Care Center, Inc. Georgia Libbie Rehabilitation Center, Inc. Virginia Maplewood Health Care Center of Jackson, Tennessee, Inc. Tennessee Mid-Florida, Inc. Georgia Phoenix Associates, Inc. Virginia Pine Manor Rest Home, Inc. North Carolina Pro-Scription, Inc. Georgia Quality N.H.F. Leasing, Inc. Georgia Retirecare, Inc. Colorado Retirement Management Corp. Georgia Riviera Retirement, Inc. Georgia Roberta Health Care Center, Inc. Georgia Sea Side Retirement, Inc. Georgia Southside Health Care Center, Inc. Georgia Statesboro Health Care Center, Inc. Georgia Summers Landing, Inc. Georgia Sun Coast Retirement, Inc. Georgia The Atrium of Jacksonville, Ltd. Florida W.R. Partners (Warner Robins) L.P. Georgia West Tennessee, Inc. Georgia Willow Way, Inc. Georgia Woodbury Health Care Center, Inc. Georgia Contour Medical, Inc. Nevada Contour Medical - Michigan Michigan Contour Medical of Central Florida, Inc. Florida AmeriDyne Corporation Tennessee Atlantic Medical Supply Company, Inc. Georgia Americare Health Services Corp. Delaware Facility Supply, Inc. Florida Gerimed, Inc. Florida Florida ACLF, Inc. Florida Quest Medical Supply, Inc. Georgia EX-27 6 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF INCOME FOUND ON PAGES F-3 THROUGH F-5 OF THE COMPANY'S FORM 10-K FOR THE FISCAL YEAR ENDED JUNE 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR JUN-30-1997 JUN-30-1997 3,637,878 0 40,391,377 0 7,255,289 64,911,451 150,492,221 0 255,370,966 75,400,736 141,674,131 1,800,000 3,250,000 1,450 27,443,397 255,370,966 45,500,712 253,227,861 31,832,734 217,694,005 0 0 (14,111,843) (9,389,066) (2,343,256) 0 0 490,000 0 (7,535,810) (.71) 0
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