-----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, Uj2ZYWOlaGJKklT4DEqNixnJ9X/cNxeIZ2EeI9ATXEW0ZEKMt8Yuo/DPJ8Vu0Pl6 kSgyrlLjY6kSaHbc39fkSQ== 0000950129-97-003810.txt : 19970918 0000950129-97-003810.hdr.sgml : 19970918 ACCESSION NUMBER: 0000950129-97-003810 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19970917 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: LIVING CENTERS OF AMERICA INC CENTRAL INDEX KEY: 0000882287 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-SKILLED NURSING CARE FACILITIES [8051] IRS NUMBER: 742012902 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K405/A SEC ACT: SEC FILE NUMBER: 001-10968 FILM NUMBER: 97681952 BUSINESS ADDRESS: STREET 1: 15415 KATY FREEWAY STREET 2: SUITE 800 CITY: HOUSTON STATE: TX ZIP: 77094 BUSINESS PHONE: 7135784700 MAIL ADDRESS: STREET 1: 15415 KATY FREEWAY STREET 2: SUITE 800 CITY: HOUSTON STATE: TX ZIP: 77094 10-K405/A 1 LIVING CENTERS OF AMERICA, INC. - AMENDMENT 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K/A [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1996 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No. 1-10968 LIVING CENTERS OF AMERICA, INC. (Exact name of registrant as specified in its Charter) DELAWARE 74-2012902 (State or other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 15415 KATY FREEWAY, SUITE 800 77094 HOUSTON, TEXAS (Zip Code) (Address of principal executive office) (281) 578-4600 (Registrant's Telephone Number, Including Area Code) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT Name of each exchange on Title of each class which registered --------------------- ------------------------ Common Stock, $.01 Par Value New York Stock Exchange SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None 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 ---------- ---------- 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 the Form 10-K. [X] The aggregate market value of the outstanding Common Stock of the registrant held by non-affiliates of the registrant as of November 25, 1996, based on the closing sale price of the Common Stock on the New York Stock Exchange on said date, was $369,851,000. For purpose of the foregoing sentence only, all directors and officers of the registrant are assumed to be affiliates. There were 19,500,867 shares of Common Stock of the registrant outstanding as of November 25, 1996. DOCUMENTS INCORPORATED BY REFERENCE
INCORPORATED DOCUMENT PART OF FORM 10-K --------------------- ----------------- Proxy Statement for the 1997 Part III Annual Meeting of Stockholders
1 2 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Item 7 of Part II is hereby amended in its entirety to read as follows: OVERVIEW The Company provides a diverse range of services in the health care continuum including long-term health care, rehabilitation therapy, and pharmaceutical services. Services provided at the Company's long-term care facilities, which comprise approximately 70% of the Company's total revenue, include long-term nursing services and specialty care services including assisted living services, subacute care, and care for individuals with Alzheimer's disease. The Company is currently expanding or developing additional specialty care services such as hospice care, geriatric physician management services and home health care. See Business - Long-Term Care Services Group. The Company's rehabilitation therapy group provides services to over 600 skilled nursing and other health care facilities, offers therapy program management services to long-term health care companies, and operates approximately 134 outpatient clinics. The pharmaceutical group operates 31 institutional pharmacies and provides services to more than 100,000 long-term health care beds through its various product lines. When the Company began its operations as a separate, publicly-traded company in 1992, it provided primarily long-term nursing services. From fiscal year 1992 through fiscal year 1995 it grew rapidly through acquisitions, adding specialty care services, rehabilitation therapy, and pharmaceutical services, as well as additional long-term care facilities. During this period the Company's net revenue increased from $351 million to $894 million and its net income, adjusted for non-recurring merger and acquisition costs in 1995, increased from $10.5 million to $36.1 million. During the fiscal year ending September 30, 1995 the Company completed several significant acquisitions including The Brian Center Corporation ("BCC"), Rehability, and TMI. Accordingly, the fiscal year ended September 30, 1996 was the first year that fully reflected the financial results from all of the Company's major acquisitions. The Company's net revenue for the fiscal year ended September 30, 1996 increased to $1.1 billion and net income, excluding non-recurring items, increased to $45.0 million. During the fiscal year ended September 30, 1996, the Company turned its focus to integrating the BCC, Rehability, and TMI operations and divesting its DevCon subsidiary, which provided training and habilitation services to individuals with mental retardation and developmental disabilities. During fiscal year 1996, the Company finalized a plan originating in June 1995 to restructure the operations and exit certain activities of ARS, including closing or downsizing unprofitable clinics and offsite contracts. See Note 9 to the Consolidated Financial Statements. The divestiture of DevCon was completed in September 1996 through the recapitalization and subsequent sale of the majority of DevCon's stock for $47.5 million in cash. The Company's results for the fiscal year ended September 30, 1996 and prior years reflect the inclusion of the DevCon operations. DevCon's net revenue and income from operations for fiscal year 1996 were $47.6 million and $5.7 million, respectively. The Company expects its reported earnings to reflect the effects of this divestiture until the proceeds from the divestiture are reinvested. The Company's strategy is to utilize its core long-term care facilities as a platform to deliver a comprehensive array of senior health care services. As a consequence, the Company seeks to control the significant components of its care continuum, while diversifying its sources of revenue and positioning itself to be responsive to a variety of payors. Through the provision of cost-effective quality care, the Company believes that it can enhance profitability. However, future operating performance will continue to be affected by the issues facing the senior health care industry including quality of care, occupancy levels, availability of nursing, therapy and other personnel, adequacy of funding of federal and state reimbursement programs in addition to the Company's continued expansion of its non-nursing home operations and its ability to control costs. 2 3 RESULTS OF OPERATIONS The following table sets forth data from the statement of income expressed as a percentage of net revenues:
YEARS ENDED SEPTEMBER 30, -------------------------------------------------------- 1996 1995 1994 Net Revenues: Nursing home 69.7% 82.6% 94.3% Non-nursing home: Pharmacy 11.4 10.4 4.0 Therapy 18.5 6.6 1.1 Other .4 .4 .5 ----- ----- ----- 100.0 100.0 100.0 ----- ----- ----- Costs and Expenses: Salaries and wages 40.9 40.3 42.0 Employee benefits 8.7 9.1 11.7 Nursing, dietary, and other supplies 5.4 6.3 6.6 Ancillary services 16.9 16.6 11.2 General and administrative 15.1 15.1 17.5 Depreciation and amortization 3.5 3.5 3.7 Provision for bad debts 1.5 1.3 .4 Life insurance proceeds ( .2) - - Gain on sale (2.0) - - Impairment of long-lived assets 2.3 - - Other .3 - - Mergers and acquisition cost - 1.4 - ----- ----- ----- Income from operations 7.6 6.4 7.0 Interest expense, net 1.1 1.2 1.5 ----- ----- ----- Income before income taxes and equity earnings/ 6.5 5.2 5.5 minority interest Provision for income taxes 2.8 2.4 1.9 ----- ----- ----- Income before equity earnings/minority interest 3.7 2.8 3.6 Equity earnings/minority interest - - .2 ----- ----- ----- Net income 3.7 2.8 3.8 Pro forma taxes (unaudited) - .1 .1 ----- ----- ----- Pro forma net income (unaudited) 3.7% 2.7% 3.7% ===== ===== =====
3 4 Nursing home revenues are derived from two basic sources: routine services ($630.7 million or 81.2 % in fiscal year 1996) and ancillary services ($145.8 million or 18.8 % in fiscal year 1996) and are a function of occupancy rates in the long-term care facilities and the payor mix. Occupancy rates, as identified in the following table, decreased in fiscal year 1996 partially due to an increase in hospital-operated skilled units in key markets. The Company has invested in the marketing and managed care areas and has implemented an aggressive marketing program to increase census and improve quality mix.
Years Ended September 30, ----------------------------- 1996 1995 1994 Weighted licensed bed count 25,498 26,355 26,617 Total average residents 21,405 22,428 22,669 Average occupancy 83.9% 85.1% 85.2%
Payor mix is the source of payment for the services provided and consists of private pay, Medicare and Medicaid. Private pay includes revenue from individuals who pay directly for services without governmental assistance, managed care companies, commercial insurers, health maintenance organizations, and Veteran's administration contractual payments. Managed care as a payor source to health care providers is expected to increase over the next several years. The Company has increased its managed care contracting capabilities and has created a system which allows the centralized case management of these patients within targeted markets. However, the impact to the Company of this increasing payor source can not be determined at this time. Reimbursement rates from government sponsored programs, such as Medicare and Medicaid, are strictly regulated and subject to funding appropriations from federal and state governments. To the extent unfavorable changes in economic conditions impact payments under governmental or third-party payor programs, the Company would be adversely affected. See Business - Government Regulation. Revenues derived from the Company's pharmacy and therapy groups are also influenced by payor mix. The table below presents the approximate percentage of the Company's net patient revenues derived from the various sources of payment for the periods indicated:
Years Ended September 30, ----------------------------- 1996 1995 1994 Private pay 31.9% 25.5% 23.7% Medicare 25.5% 23.9% 17.5% Medicaid 42.6% 50.6% 58.8%
The increasing trend in the percentage of revenues derived from private pay and Medicare sources is attributable primarily to the growth in the Company's pharmacy and therapy operations. The revenue from these operations, which is generated primarily from private pay and Medicare sources, results in a reduction of the percentage of net revenue derived from the Medicaid program. In addition, average reimbursement rates for Medicare patients have increased more rapidly than for Medicaid residents due primarily to the higher reimbursement rates associated with the increase in acuity levels. Although cost reimbursement for Medicare residents generates a higher level of revenue per patient day, profitability is not proportionally increased due to the additional costs associated with the required higher level of care and other services for such residents. The administrative procedures associated with the Medicare cost reimbursement program generally preclude final determination of amounts due the Company until cost reports are audited or otherwise reviewed and settled with the applicable administrative agencies. The Company does not expect any differences between revenue recorded and as finally determined to have a significant effect on the Company's results of operations or financial position. See Note 1 to the Consolidated Financial Statements. 4 5 Costs and expenses, excluding depreciation and amortization, primarily consist of salaries, wages, and employee benefits. Various federal, state, and local regulations impose, depending on the services provided, a variety of regulatory standards for the type, quality and level of personnel required to provide care or services. These regulatory requirements have an impact on staffing levels, as well as the mix of staff, and therefore impact total costs and expenses. See Business-Government Regulation. The cost of ancillary services, which includes pharmaceuticals, is also affected by the level of service provided and patient acuity. General and administrative expenses include the cost of the Company's various insurance programs, except worker's compensation. See Note 12 to the Consolidated Financial Statements. FISCAL 1996 COMPARED TO FISCAL 1995. Net revenues comprising nursing home and non-nursing home operations totaled $1.1 billion for the year ended September 30, 1996, an increase of $220.6 million or 24.7%, as compared to fiscal 1995. Nursing home operations contributed $38.1 million of the increase which included rate increases of $37.2 million and higher ancillary service billings resulting from the improvement in patient mix, primarily Medicare, of $22.6 million. Divesture of nursing home operations decreased revenue $19.6 million and lower census reduced revenue by $7.6 million. Non-nursing home operations contributed $182.5 million of the increase, consisting of $34.6 million from pharmacy operations, $146.5 million from therapy services and $1.4 million from medical supplies. Acquisitions, primarily Rehability, provided $177.0 million of the $182.5 million increase in non-nursing home revenue. Costs and expenses, including non-recurring items totaled, $1.0 billion for the year ended September 30, 1996, an increase of $188.1 million or 22.5%, as compared to fiscal 1995. Acquisitions, primarily Rehability and TMI, were $171.0 million of the increase and divestitures reduced total expenses by $24.3 million. Other increases include payroll and related ($15.8 million) and ancillary services ($28.4 million). The increase in ancillary services corresponds to the increase in ancillary revenue and the higher level of patient acuity as well as an increase in the cost of pharmaceuticals related to higher pharmacy services revenue. Non-recurring items reduced total costs and expenses in fiscal year 1996 by $1.1 million compared to the $12.4 million of merger and acquisition costs from the BCC purchase in fiscal 1995. Non-recurring items included a $2.0 million gain from the receipt of life insurance proceeds on the former President of the Rehabilitation Services Group. In addition the Company recognized a $22.5 million gain in September 1996 on the sale of its DevCon operations, which provided training and habilitation services to individuals with mental retardation and developmental disabilities, through the recapitalization and subsequent sale of the majority of DevCon's stock for $47.5 million. The Company also recorded non-recurring charges of $2.9 million primarily related to the closure of its medical supplies business and the write-off of unamortized loan acquisition costs related to the Second Amended and Restated Credit Agreement. The adoption of SFAS 121, which occurred in the fourth quarter, resulted in the identification and measurement of an impairment loss of $20.5 million related to nursing facilities with a history of cash flow losses ($1.8 million), certain other nursing facilities where management believed an impairment existed as a result of the competitive environment ($0.6 million), goodwill, primarily TMI, ($9.7 million), and other assets to be disposed ($8.4 million). Management estimated the undiscounted cash flows to be generated by each of these assets and compared them to their carrying value. If the undiscounted future cash flow estimates were less than the carrying value of the asset then the carrying value was written down to estimated fair value. Goodwill associated with an impaired asset was included with the carrying value of that asset in performing both the impairment test and in measuring the amount of impairment loss related to the asset. Fair value was estimated based on either management's estimate of fair value, present value of future cash flows, or market value less estimated cost to sell for certain facilities to be disposed. The facilities with a history of cash flow losses operated at a loss for periods ranging from one to four years. The undiscounted cash flows for TMI were estimated based on the operating results of TMI subsequent to the death of the President of the rehabilitation services group (founder of TMI) and adjusted for the loss of contracts and impending business changes as a result of his death (See Note 7 to the Consolidated Financial Statements). The decision regarding the disposition of certain nursing facilities, which had operating losses of $0.4 million during fiscal 1996, was completed at the time of adoption of SFAS 121. See Note 8 to the Consolidated Financial Statements. Net interest expense totaled $12.5 million for the year ended September 30, 1996, an increase of $1.6 million or 15.2%, as compared to the same period for fiscal 1995. The increase reflects a full year of interest expense for fiscal 1996 versus three months of interest expense for fiscal 1995 on the additional debt incurred to acquire Rehability. 5 6 The provision for income taxes increased $12.0 million in fiscal year 1996 but resulted in a lower effective tax rate of 43.8% compared to 47.1% in fiscal year 1995. The decrease in non-deductible merger and acquisition costs reduced the effective tax rate by 7.2% while the elimination of the Targeted Jobs Tax Credit, increased non-deductible goodwill amortization, and other items resulted in an increase of 3.9%. FISCAL 1995 COMPARED TO FISCAL 1994. Net revenues totaled $893.9 million for the year ended September 30, 1995, an increase of $185.0 million or 26.1%, as compared to fiscal 1994. Nursing home operations contributed $69.7 million of the increase, which includes $18.7 million of acquisitions and approximately $32.4 million in rate increases and improvements in patient mix over the prior period (primarily in the area of Medicaid and Medicare services). Ancillary revenue in the nursing home operations increased approximately $29.7 million due to higher acuity levels and an increase in Medicare patients. Nursing home revenues were lower by $11.1 million due to divestitures. Non-nursing home operations contributed $115.3 of the increase, which includes $68.0 million of pharmacy acquisitions, primarily APS, and $51.2 million in therapy services, primarily Rehability and TMI. Costs and expenses totaled $836.9 million for the year ended September 30, 1995, an increase of $177.5 million or 26.9%, as compared to the same period for fiscal 1994. Acquisitions contributed $125.3 million of the increase, which includes acquisitions, primarily APS($60.0 million), Rehability ($41.2 million), TMI ($5.3 million) and nursing homes ($18.8 million). Other major expense increases included $22.5 million in payroll related expenses, $3.0 million in nursing dietary and other supplies, $19.1 million in ancillary services (primarily from the higher resident acuity level and the increase in the number of Medicare residents in the Company's nursing home operations), $2.4 million in general and administrative expenses and $2.0 million in bad debt expense. All fiscal 1995 expense categories expressed as a percentage of revenues reflect a significant change from fiscal 1994. This percentage shift in expense categories is attributable to the inclusion of APS's cost of products sold in the expense category "operating and administrative" and, to a lesser extent, the lower labor intensity of the APS operation. Non-recurring merger and acquisition and related costs were $14.3 million due to the acquisition of Rehability. Also, divestitures decreased total expenses by $11.1 million. Net interest expense totaled $10.8 million for the year ended September 30, 1995, a decrease of $.01 million or .7%, as compared to the same period for fiscal 1994. Interest income from the Company's insurance subsidiary increased and the Company used the proceeds from the February 1995 public offering of Common Stock to retire existing debt. However, the effects of the common stock offering were partially offset by additional debt incurred to acquire Rehability. Equity earnings/minority interests incurred a loss of $.2 million for the year ended September 30, 1996, a decrease of $1.8 million, as compared to the same period for fiscal 1994. This decrease is the result of APS recorded as a fully consolidated subsidiary for fiscal 1995 as opposed to an unconsolidated equity investment (49% ownership) for fiscal 1994. Net income totaled $24.2 million for the year ended September 30, 1995, a decrease of $2.4 million, or 8.9%, as compared to the same period for fiscal 1994. The decrease reflects the impact of the nonrecurring merger and acquisition and related costs of $14.3 million, most of which is non-deductible for federal income tax purposes. Excluding non-recurring merger and acquisition and related costs, net income would have increased $7.8 million or 27.0% from fiscal 1994. SEASONALITY The Company's revenues and operating income generally fluctuate from quarter to quarter. This seasonality is related to a combination of factors which include the timing of Medicaid rate increases, the number of work days in the period, and seasonal census cycles. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents were $21.4 million at September 30, 1996, a $3.5 million increase from September 30, 1995 and working capital was $101.0 million, an increase of $66.5 million during fiscal year 1996. Cash provided by operations was $31.8 million or $34.6 million less than fiscal year 1995. Net income of $43.1 million, non-cash items totaling $44.9 million and an increase in accrued expenses of $17.5 million contributed to the cash provided by operations. The increase in income taxes payable is primarily the taxes due on the gain on the sale of DevCon stock which will be paid 6 7 in the first quarter of fiscal year 1997. These items were offset by the reduction in accounts payable of $13.8 million due to the timing of payments and an increase in receivables of $69.6 million. The increase in receivables was primarily attributable to acquisitions ($15.6 million), timing of collections on Medicare cost reports and other rate adjustments ($13.1 million), receivables due to LCA Insurance Company, Ltd. (see Note 12 to the Consolidated Financial Statements) from third-party insurance companies ($11.7 million), and an increase in average days outstanding, net of allowance, ($13.0 million). The increase in receivables due to timing of collections on Medicare cost reports and other rate adjustments is related to the Company filing a large number of requests for exception to Medicare routine cost limits in fiscal 1996. Review by the fiscal intermediary, approval by the Health Care Financing Administration and processing for payment by the intermediaries of the filed requests generally takes 12 to 18 months. In addition, Medicaid rate increases in Colorado, which are normally collected in the fourth quarter of each fiscal year, were not collected. These rate increases are expected to be collected in the second quarter of fiscal 1997. The increase in receivables resulting from an increase in average days outstanding is primarily related to the Company's pharmacy and therapy operations. The increase in receivables for the pharmacy operations primarily reflects the requirement to obtain new provider numbers for certain pharmacy acquisitions that occurred late in fiscal year 1996 and changes in the procedures for processing Certificates of Medical ("CMN") on new or changed prescriptions. The change in CMN procedures has temporarily increased the billing cycle for the Medicare collection process on new or changed prescriptions. The increase in receivables for the therapy operations is related to the centralization of billing and collection (resulting in temporarily delayed billing and a longer billing cycle), and focused billing review, primarily in Texas. Focused billing review substantially increases the processing time for payment of therapy services by fiscal intermediaries. Excluding the $47.5 million in proceeds from the disposition of DevCon, cash used in investing activities was $114.2 million in fiscal 1996 compared to $139.9 million in fiscal year 1995. Investing activities in fiscal year 1996 included six pharmacy related acquisitions ($60.3 million), conversion of five previously leased long-term care facilities to an ownership position ($14.8 million), construction of five assisted living facilities and expansion of existing facilities ($13.3 million), the acquisition of a 50% interest in a hospice operation ($2.8 million), and routine capital expenditures. Capital commitments on four assisted living facilities remaining under construction and expansion of existing long-term care facilities totaled $9.6 million at September 30, 1996. These commitments are expected to be funded by cash from operations or the Bank Credit Facility. Financing activities provided $38.4 million during fiscal 1996. During the fourth quarter the Company entered into an amended bank credit facility (the "Bank Credit Facility") with a group of banks pursuant to which the banks agreed to provide $500 million to the Company. A complete description of the Bank Credit Facility is included in Note 5 to the Consolidated Financial Statements. Total debt increased $57.4 million as funds were used in investing activities and the purchase of $20.0 million of the Company's common stock in accordance with a share repurchase program. The shares are to be utilized over the next several years to fulfill the Company's obligations under its various employee benefit programs. In October 1996 the Company entered into a leasing program, initially totaling $70.0 million, to be used as a funding mechanism for future assisted living and skilled nursing facility construction, lease conversions, and other facility acquisitions. This leasing program allows the Company to complete these projects without committing significant financing resources. The lease is an unconditional "triple net" lease for a period of seven years with the annual lease obligation a function of the amount spent by the lessor to acquire or construct the project, a variable interest rate, and commitment and other fees. The Company guarantees a minimum of approximately 83% of the residual value of the leased property and also has an option to purchase the properties at any time prior to the maturity date at a price sufficient to pay the entire amount financed, accrued interest, and certain expenses. The leasing program will be accounted for as an operating lease. The company's long-term strategy in managing working capital is to maintain substantial available commitments under bank credit agreements or other financial agreements to finance short-term capital requirements in excess of internally generated cash. 7 8 INSURANCE COVERAGES The Company insures auto, general, and professional liability and workers' compensation risks through insurance policies with third parties. Some of these third-party policies subsequent to February 21, 1994 are subject to reinsurance agreements between the insurer and LCA Insurance Company, Ltd., a wholly-owned subsidiary of the Company that was formed during 1994. The business written by LCA Insurance Company, Ltd. is the reinsurance of policies providing coverage for nursing home professional liability, automobile liability, and workers' compensation. All of these are occurrence policies which cover only the Company and its subsidiaries and their employees. Pursuant to the reinsurance agreements, LCA Insurance Company, Ltd. is responsible to pay all losses which are incurred by the company issuing the policies. The maximum loss exposure with respect to these polices is $0.5 million per occurrence (policy periods prior to July 1, 1996) and $1.0 million per occurrence (policy periods subsequent to July 1, 1996) for nursing home professional liability; $0.25 million per occurrence for automobile liability; and $0.5 million per occurrence for workers' compensation liability. The liabilities for incurred losses are estimated by independent actuaries on an undiscounted basis. The obligations of LCA Insurance Company, Ltd. under the reinsurance agreements are collateralized through a security trust account which has been designated as restricted investments to pay for future claims experience applicable to policy periods subsequent to February 21, 1994. Restricted investments at September 30, 1996 and 1995 designated to pay such claims were $31.0 million and $36.6 million, respectively. In 1992, the Company elected under Texas law to decline to participate in the Texas workers' compensation insurance program. As part of the election, the Company implemented an employee benefit plan providing for employer-paid benefits comparable to those provided under the Texas workers' compensation program and obtained insurance that limits the Company's exposure for any individual injury. During 1994, the Company established a trust in which to fund the amount applicable to actuarially determined claims to be incurred for fiscal year 1994 and subsequent years. The BCC Entities are insured for current and past workers' compensation claims under various types of insurance and financial plans, certain of which are loss-sensitive in nature and design, which subject the Companies to additional future premiums for losses incurred in a prior year but paid in a subsequent fiscal period, as losses develop. The BCC Entities have recorded expenses under these plans based upon actual and estimated losses based on the available incurred loss structure. Additionally, certain of these loss-sensitive workers' compensation plans in which the Companies have participated were organized as pools or funds, with joint and several or pro rata liability ascribed to its members. Such plans may lead to the potential of future loss assessments for the BCC Entities; however, the amount of such additional potential assessments, if any, is not determinable at this time. It is the opinion of management that any additional assessments will not have a material adverse effect on the financial position or results of operations of the Companies. See Note 12 to the Consolidated Financial Statements. IMPACT OF INFLATION The health care industry is labor intensive. Wages and other labor-related costs are especially sensitive to inflation. Increases in wages and other labor-related costs as a result of inflation, or the increase in minimum wage requirements effective October 1996, without a corresponding increase in Medicaid and Medicare reimbursement rates would adversely impact the Company. 8 9 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this amendment to be signed on its behalf by the undersigned, thereunto duly authorized. September 6, 1997 LIVING CENTERS OF AMERICA, INC. (Registrant) By: /s/ Charles B. Carden ---------------------------- Charles B. Carden Executive Vice President and Chief Financial Officer By: /s/ Ronald W. Fleming ---------------------------- Ronald W. Fleming Vice President and Controller (Principal Accounting Officer) 9 -----END PRIVACY-ENHANCED MESSAGE-----