EXHIBIT 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the fiscal year ended December 31, 1996.
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from ______ to ______
Commission file number: 1-11144
Regency Health Services, Inc.
(Exact name of Registrant as specified in its charter)
Delaware 33-0210226
(State of incorporation) (I.R.S. Employer Identification No.)
2742 Dow Avenue
Tustin, California 92780
(Address of principal executive offices)
Registrant's telephone number, including area code: (714) 544-4443
Securities registered pursuant to Section 12(b) of the Act:
Title of Securities Name of Exchange on 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 this
Form 10-K. [ ]
Based on the closing price of $10 5/8 per share on February 28, 1997, the
aggregate market value of the registrant's voting stock held by non-affiliates
was $106,661,000. Solely for purposes of this computation, the registrant's
directors and executive offers have been deemed to be affiliates. Such treatment
is not intended to be, and should not be construed to be, an admission by the
registrant or such directors and officers that any of such persons are
"affiliates," as that term is defined under the Securities Act of 1934.
The number of shares of common stock outstanding as of February 28, 1997 was
15,792,157.
Documents Incorporated by Reference:
Portions of Regency's 1996 Annual Report to Shareholders are incorporated by
reference into Part II of this Form 10-K.
Portions of Regency's Notice of Annual Meeting of Stockholders and Proxy
Statement to be held May 8, 1997 are incorporated by reference into Part III of
this Forms 10-K.
TABLE OF CONTENTS
PART I
ITEM 1 BUSINESS 1
ITEM 2 PROPERTIES 16
ITEM 3 LEGAL PROCEEDINGS 17
ITEM 4 SUBMISSION OF MATTERS
TO A VOTE OF SECURITY HOLDERS 17
PART II
ITEM 5 MARKET FOR REGENCY HEALTH
SERVICES, INC. COMMON STOCK
AND RELATED STOCKHOLDER MATTERS 18
ITEM 6 SELECTED FINANCIAL DATA 18
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS 19
ITEM 8 FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA 30
ITEM 9 CHANGES IN AND DISAGREEMENTS
WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE 55
PART III
ITEM 10 DIRECTORS AND EXECUTIVE
OFFICERS OF REGENCY HEALTH
SERVICES, INC. 56
ITEM 11 EXECUTIVE COMPENSATION 56
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT 56
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS 56
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K 57
SIGNATURES 64
PART I
ITEM 1. BUSINESS
General
This Annual Report on Form 10-K of Regency Health Services, Inc. ("the
Company" or "Regency") contains statements which constitute "forward looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such statements appear in a number of places in this Annual Report
including, without limitation, under the headings General, Business Strategy,
Business Units, Manner of Operation, Sources of Payment, Regulation, Competition
and Tax Audits of the Section entitled "Business" and in Management's Discussion
and Analysis of Financial Condition and Results of Operations. Such forward
looking statements include the views, opinions and expectations of the Company,
its officers and directors with respect to the matters there discussed, and as
to the intent, belief and anticipation of such persons expressed in this Annual
Report. Readers are cautioned that any such forward looking statements involve
risks, uncertainties and factors that may impact on the actual results or
activities of the Company. These risks and items are discussed below in greater
detail in the portion of this Annual Report entitled "Factors Which May Affect
the Company".
Regency is a national provider of an array of healthcare services from acute
rehabilitation to home health care. As of February 28, 1997, the Company
delivered care from 116 Company operated inpatient facilities in five states.
These facilities provide a spectrum of services including acute rehabilitation,
neurological care, subacute treatment, basic and intermediate skilled nursing
care, assisted living and ancillary services such as rehabilitation and pharmacy
services. Additionally, the Company provides outpatient rehabilitation through
10 clinics. It also continues to expand its contract rehabilitation therapy,
pharmacy and home health operations. As of February 28, 1997, the Company
provided contract rehabilitation therapy services in 15 states to 63 affiliated
and 116 non-affiliated facilities, pharmacy services in four states to 70
affiliated and 84 non-affiliated facilities and home health care services
through 28 operating locations in California and Ohio.
In order to meet the challenges of healthcare reform, industry consolidation
and other changes, the Company plans to enhance the continuum of care it
provides in defined markets to suit the needs of those markets. The Company
believes adding various inpatient and outpatient services to the continuum,
while expanding the availability of current services like subacute care, will
attract managed care organizations seeking to build relationships with
integrated delivery systems. The Company expects the more diverse services
offered will provide "one stop" shopping for payors and will bring patients into
the Company's delivery system sooner, often either immediately following or in
lieu of invasive treatment. The Company also sees strategic joint operating
relationships with tertiary care institutions, payors and physicians as enabling
it to establish closer ties to the medical community.
Regency was incorporated in Delaware in 1986 and grew rapidly through
acquisitions. In April 1994, Regency merged with Care Enterprises, Inc. ("Care")
in a stock transaction accounted for as a pooling of interests ("the Merger").
The Merger more than doubled the number of facilities and beds operated by the
Company and made the Company a leading provider of long-term and specialty
healthcare services in California. It established a presence for Regency in West
Virginia, Ohio and New Mexico. Additionally, it provided a significant base for
the expansion of both the ancillary services offered by Regency and the home
health care services offered by Care. Following the Merger, management focused
on integrating Regency and Care operations. This included instituting
standardized systems, operating procedures and cost controls. The Company added
several experienced senior officers. Others were replaced, along with a number
of administrators at under-performing facilities. During 1995, the Company
exchanged leasehold interests in three nursing facilities in New Mexico for
leasehold interests in four nursing facilities in Ohio which were operated by
another company; opened a newly constructed facility; and acquired SCRS &
Communicology, Inc. ("SCRS"), a contract rehabilitation therapy company. In
1996, the Company disposed of 7 healthcare facilities in California. It also
acquired 19 healthcare facilities in Tennessee and North Carolina; pharmacy
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operations in California, Tennessee and North Carolina, and entered into a joint
venture with a pharmacy in Ohio. To complete the roster of contract
rehabilitation services provided by SCRS, the subsidiary acquired a respiratory
therapy company. In early 1997, the Company acquired four acute rehabilitation
hospitals, six neurological treatment centers and eleven outpatient
rehabilitation clinics in California.
Industry Overview
Healthcare is one of the largest industries in the United States,
representing total expenditures of approximately $884.0 billion or 13.9% of the
1993 gross domestic product, according to the Health Care Financing
Administration ("HCFA"). This 1993 figure represents a 7.8% increase over 1992
expenditures of $820.0 billion recorded by HCFA. Historically, these increases
have outpaced inflation. This is due, in part, to the increased availability and
use of high-technology medicine and to the diverse medical needs of an aging
population.
The post-acute care industry encompasses a broad range of healthcare
services, including basic and intermediate skilled nursing, assisted living,
ambulatory businesses, subacute care, rehabilitation therapy including acute
rehabilitation, home healthcare and pharmacy services provided to patients with
medically complex needs who can be cared for outside of the acute care hospital
environment. The Company's management believes that demand for these services
will increase substantially during the next decade, primarily due to emphasis on
healthcare cost containment and to the growing senior population.
The senior population is growing at a faster rate than the overall population
as a result of the baby boom and advances in medical technology that extend
life. According to the United States Census Bureau ("the Census Bureau"), the
number of individuals in the United States over 64 has grown from approximately
25.6 million in 1980, or approximately 11.3% of the population, to approximately
31.1 million in 1990, or approximately 12.5% of the population. Census Bureau
projections indicate that the number of individuals in this age group is
expected to increase to approximately 34.9 million, to approximately 12.7% of
the population, by the year 2000. Additionally, individuals 85 years of age and
older are one of the fastest growing segments of the population. The Census
Bureau projects that the number of individuals in that age group will increase
from approximately 3.0 million in 1990 to approximately 4.3 million by the year
2000.
Cost containment procedures that encourage reduced lengths of stay in acute
care hospitals are prevalent. In 1983, the federal government changed the
reimbursement for acute care hospitals from a retrospective cost-based system to
a prospective reimbursement system based upon rates established for diagnosis
related groups ("DRGs"). Additionally, many private insurers limit acute care
reimbursement to "reasonable and customary" charges while health maintenance
organizations ("HMOs") and preferred-provider organizations ("PPOs") attempt to
contain costs by negotiating reduced rates for acute care hospital services.
These factors have resulted in reduced lengths of stay in acute care hospitals,
with many patients being discharged to lower level facilities where their
skilled needs can be met more cost-effectively. Accordingly, the Company
believes that the healthcare industry will experience increased demand for post-
acute care. The Company is well positioned to benefit from these developments
due to its expanding capability to provide post-acute and subacute specialty
services. Additionally, industry consolidation is expected to present the
Company with opportunities for growth and expansion of its continuum of care.
Although the Company believes that the demand for the services it provides
will increase over the next decade, it anticipates competition to meet this
demand. In addition, the regulatory framework in which healthcare providers will
operate, including parameters for payment of services, is uncertain. Depending
on the nature of such regulation, the healthcare industry may be subject to
increased pressure to lower operating costs and may face more stringent
requirements regarding reimbursement.
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Business Strategy
The Company's strategy is to enhance its position as an integrated delivery
provider recognized for cost-effective, high-quality healthcare services in
selected geographic areas. Implementation of this strategy means adding certain
inpatient and outpatient services along with growing ancillary businesses based
on the needs of the markets where it currently has operations, and involves
certain risks. See "Factors Which May Affect Company". In addition, the Company
plans to develop the information technology infrastructure necessary to support
the cost-effective operation of this integrated delivery system. The fundamental
elements of the Company's strategy include:
. expanding the continuum of care and overall scope of services provided
by the Company through such means as strategic alliances, diversifying
services in inpatient facilities, increasing outpatient ambulatory
business and growth of home healthcare services;
. in-sourcing ancillary services such as pharmacy and rehabilitation
services;
. increasing the Company's marketing of ancillary services to third party
facilities;
. acquiring new businesses to complete the continuum in selected markets
where the Company currently operates;
. engineering operating models and investment in information technology
to reduce administrative and operating costs and develop an integrated
delivery system.
Management believes Regency has certain competitive strengths which support
its strategy. Foremost among these is the Company's market position and
experience operating long-term care facilities in California. The California
market is characterized by a high degree of regulatory oversight and cost
controls imposed by third party payors. With 64% of its revenues in this
environment, the Company has considerable experience controlling operating costs
while continuing to deliver high-quality healthcare. The Company believes it
will be able to utilize this experience as a competitive advantage as it
broadens the continuum of care offered to its patients in existing markets and
expands its ancillary service businesses in new markets. The Company has reduced
revenues from Medi-Cal from 32.3% of total revenues in 1995 to 21.7% (pro-forma
for the acquisition of four acute rehabilitation hospitals, six neurological
care centers and 10 outpatient clinics on January 1, 1997 and the disposition of
six long term care facilities in 1996 and one on January 1, 1997) for 1996.
Expanding the Continuum of Care. A significant component of Regency's growth
strategy is expanding the continuum of care. By increasing its scope of
services, the Company believes that it will attract additional managed care
payors and other insurers as participants in its regional, integrated delivery
systems. Given the current industry consolidation, the Company believes this
strategy is necessary to establish a significant market position in the
geographic areas it has targeted for expansion. Moreover, expanding the
continuum of care should increase business for higher margin ancillary services
and attract greater numbers of patients whose care is reimbursed by other than
government sources.
An important component of this strategy is supplementing current services
offered by the Company. The Company intends to do so through strategic alliances
or by developing new programs. A prime example of a strategic alliance to
reinforce the continuum is the joint venture relationship the Company now enjoys
with two acute medical centers in California. Subacute services also continue to
grow. As of February 28, 1997, 46 of the Company's facilities had subacute
programs in place, up from 42 at the end of 1995. Additionally, the Company
intends to continue to emphasize the growth of its home health care division.
The provision of home health care services complements the Company's facility-
based services and substantially broadens the continuum of care which it is able
to provide. Furthermore, the Company will emphasize the growth in outpatient
services. The Company believes that its ability to package a broad array of
services in this manner is attractive to managed care payors.
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Another important industry factor prompting the Company to expand its
continuum is the growing marketing penetration of managed care organizations
both across the nation and in the regions where the Company operates. As managed
care market share increases, it is important for healthcare providers like the
Company to enter into managed care contracts in order to maintain and build
their patient base. In determining which providers to contract with, payors
consider, among other factors, quality of care, range of services, geographic
coverage and the cost-effectiveness of the care. These payors control costs
through stringent utilization review systems, increased use of discounted and
capitated fee arrangements and, when appropriate, directing patients to lower
acuity alternatives along the continuum of patient care. The Company believes
that development of its integrated delivery system in selected regions gives it
the scope of services, quality of care, geographic coverage and cost control
that will enable it to compete more effectively for managed care contracts.
As of January 1, 1997, the Company added 4 acute rehabilitation hospitals, 6
neurological care centers and 10 outpatient clinics to its roster of operations.
With this, it formed a new division, Regency Rehabilitation and Specialty
Services, to mark the significance of rehabilitation services in the strategic
development of the continuum of care.
To implement its strategy, the Company intends to: (i) continue to enhance
the continuum of services it offers; (ii) develop market concentration for its
continuum of inpatient, outpatient and home health services in targeted states
and regions to parallel increasing payor consolidation; (iii) consider strategic
alliances with managed care payors, hospital groups, physicians and other
healthcare providers; (iv) explore acquisitions which could further expand the
services provided by the Company; and (v) upgrade its management information
systems to develop connections between systems and geographic locations which
will assist in integrating financial and clinical data across all business lines
in order to meet the future information needs the managed care environment will
require.
In-Sourcing Patient Services. Regency expects to continue to in-source such
patient services as pharmacy and rehabilitation services. The Company's existing
facilities provide a ready market and could generate additional growth for the
Company's ancillary service businesses. The Company believes that continued in-
sourcing of these services could enhance revenues and solidify its market
position by broadening the base of potential patients from which it is able to
draw and by creating stronger platforms from which it can offer additional
services. Moreover, these types of services should enhance the Company's
profitability by attracting greater numbers of patients who pay directly for
services without the benefit of government assistance programs. Generally, the
profitability of caring for these patients is higher than for patients under
government assistance programs. Historically, the Company has realized higher
profit margins on the ancillary services it is targeting for in-sourcing.
The August 1996 acquisition of Managed Respiratory Care Services by SCRS
enabled the Company to insource additional respiratory therapy rehabilitation
that was previously furnished by non-affiliated providers. During 1996, the
Company acquired Assist A Care pharmacy to expand the growth in the delivery of
pharmacy services in California. The Company expects to complete development of
a hub and satellite network for distribution within its California pharmacy
operations during 1997. The acquisition of Executive Pharmacy provided for the
in-sourcing of pharmacy services to the Company's facilities in Tennessee and
North Carolina and expanded the Company's pharmacy services to non-affiliated
facilities as well. In 1996, a strategic alliance was initiated with Vrable
pharmacy to enable the Company to in-source pharmacy services in Ohio. The
Company believes that continued expansion of the pharmacy network outside of
California and to non-related facilities both in California and in other states
will occur primarily through acquisitions.
Marketing Ancillary Services. In addition to expanding the range of ancillary
services provided directly to its patients, Regency intends to expand the
marketing of its ancillary services to third party facilities. The development
and marketing of ancillary services should enable the Company to serve greater
numbers of higher revenue patients. Expansion of ancillary services marketed to
non-affiliated facilities is an important component of the Company's goal to
increase the quality of its payor mix. Moreover, management believes the
4
selective acquisition and marketing of ancillary services supports the continued
growth of the Company in targeted market segments and locations and should
produce synergies as the Company expands both the number of facilities it
operates and the continuum of care it provides to its patients.
Expanding Through Acquisition. Regency has grown primarily through the
selective acquisition of new facilities and ancillary service providers. The
Company expects to continue to grow principally through such acquisitions and
the synergies these new facilities and ancillary services may provide. The
Company intends to focus its acquisition and expansion efforts in those markets
where the Company already has a presence that provide an attractive opportunity
for the expansion, geographic and otherwise, of the continuum of care the
Company offers to its patients. By such expansion, the Company intends to
develop a significant market presence, which will enable it to better take
advantage of the opportunities for synergies provided by new acquisitions and to
enhance further the range of services provided to its patients. The Company will
continue to assess the viability of expansion into other areas as economically
attractive acquisitions become available. The Company actively seeks acquisition
opportunities in the ordinary course of its business and is currently reviewing
prospective acquisitions.
Business Units
The Company's business operations consist of four basic units: long-term care
facilities including subacute specialty units, rehabilitation services, pharmacy
services and home healthcare.
Nursing Center Operations. As of February 28, 1997, 103 of the Company's
healthcare facilities are licensed as skilled nursing facilities and provide
skilled nursing care for patients who do not require more extensive treatment at
an acute care hospital. Seven of these facilities and one additional facility
are also approved by the California Department of Health Services to provide
mental health services. The Company's skilled nursing facilities provide 24-hour
nursing care, room and board, social services and activity programs, as well as
special diets and other services that may be specified by a patient's physician.
Patients at these facilities often have been discharged from acute care
hospitals and require substantial medical attention. In some cases, the
facilities also provide assisted living arrangements. In addition to skilled
nursing facilities, the Company operates three facilities for the
developmentally disabled, one of which is also licensed as a skilled nursing
facility and is included above. The Company believes that its substantial
California presence, together with the expansion of its continuum of services
and greater market penetration for its ancillary services, will increase the
Company's ability to obtain contracts and referrals from managed care companies.
For the year ended December 31, 1996, approximately 5.1% of the Company's
revenues were attributable to managed care; management expects this percentage
to increase.
As of February 28, 1997, 25 of the Company's skilled nursing facilities were
accredited by the Joint Commission on Accreditation of Healthcare Organizations
("JCAHO"), an independent organization that reviews facilities and accredits
those that achieve certain standards for quality control and assurance. The
Company has applied for accreditation at additional facilities.
As of February 28, 1997, 46 of the Company's healthcare facilities included
subacute specialty units which serve the needs of patients of all ages who have
medically complex conditions which require ongoing nursing and medical
supervision and access to specialized equipment and services, but do not require
many of the other services provided by acute care hospitals. The Company
increased the number of its facilities containing dedicated subacute units to 46
during 1996 from 42 at the end of 1995. The units provide such services as
respiratory therapy, ventilator care, oncology services, infusion therapy, post-
surgical wound management and care to patients with auto-immune deficiency
syndrome (AIDS). In addition, as of February 28, 1997, the Company provided
specialized services at three of its facilities to patients diagnosed with
Alzheimer's disease. Based upon its experience within the industry and its
knowledge of acute care hospital rates, as disclosed by such institutions,
management believes that it is able to provide subacute care at rates
5
substantially below the rates typically charged by acute care hospitals for
comparable services and still earn higher average revenues per patient day than
it receives for basic nursing services.
Rehabilitation Services. Ninety-six of the Company's skilled nursing
facilities provide special rehabilitation services including physical, speech,
occupational, and respiratory therapy. These ancillary services are administered
by licensed therapists and rehabilitation aides. Currently, these services are
provided by several contract therapy providers, including SCRS.
The objective of these programs is to help patients achieve their highest
level of functional independence. Rehabilitation services are instrumental in
lowering the overall cost of care by reducing the length of a patient's stay and
improving a patient's quality of life. Specialized management staff oversee
these rehabilitation programs to ensure high-quality service delivery, program
compliance and achievement of maximum outcomes for the patient.
In August 1996, the Company's rehabilitation services subsidiary, SCRS,
acquired Managed Respiratory Care Services, a respiratory therapy provider.
Beyond the services it provides the Company, as of February 28, 1997, SCRS
delivers rehabilitation services at 116 non-affiliated healthcare facilities in
14 states and to home healthcare patients under four contracts with non-
affiliated healthcare providers.
As of January 1, 1997, the Company added four acute rehabilitation hospitals,
six neurological care centers and 10 outpatient clinics to the continuum of
rehabilitation services it offers. The Company believes this enhancement
increases its appeal to managed care payors seeking providers who are able to
effectively manage the cost and quality of care delivered to their patients.
Pharmacy Services. For the past six years, the Company has operated its own
institutional pharmacy, First Class Pharmacy, Inc. In 1996, the Company acquired
or opened four additional pharmacy operations to expand its service to Company-
operated facilities and non-affiliated facilities in California, Ohio, Tennessee
and North Carolina. As of December 31, 1996, the Company's pharmacy operations
provided prescription services and basic pharmaceutical dispensing programs to
68 Company-operated facilities with approximately 7,257 licensed beds and to 84
non-affiliated facilities with approximately 7,428 licensed beds. In addition,
the Company's pharmacy operations provide certain specialty services such as
infusion therapy, enteral nutrition, and urological and ostomy supply programs.
The Company has also developed certain specialty consulting and ancillary
programs to help each facility comply with state and federal regulations.
Additionally, the Company is pursuing development of an automated hub and
satellite network of pharmacy operations within California to reduce the cost of
supplying pharmacy services.
Home Health Services. The Company provides home health care services in
selected areas in California and Ohio through two operating divisions, Care Home
Health and Care At Home. The Company has provided home health care services
since 1983. Care Home Health primarily serves Medicare patients while Care At
Home provides services to private pay, managed care and Medicaid patients. The
services offered include skilled nursing, rehabilitation services, infusion
therapy, ventilator care, care for patients with AIDS, and other specialty
services.
Manner of Operation
Nursing Center Operations. Each healthcare facility operated by the Company
is supervised by a licensed administrator who is responsible for all aspects of
facility operations. A facility administrator typically oversees a director of
nursing, a director of admissions and other department supervisors. The director
of nursing supervises a staff of registered nurses, licensed practical nurses
and nurses' aides. The director of admissions is responsible for developing
local marketing strategies and programs. To supervise the medical management of
patients, the Company also contracts with licensed physicians to act as medical
directors at each facility. The Company's corporate staff provides support to
facility administrators in, among other things, quality improvement, management
6
reporting, marketing, management training, legal services, human resources, risk
management, reimbursement, data processing, cash management, and accounting.
The Company has a professional services department which includes field
consultants who represent the corporate philosophy to each professional
discipline providing patient care. The department coordinates the development
and implementation of corporate and administrative policies and procedures and
authors most clinical manuals used in direct patient care. To ensure regulatory
compliance and high-quality clinical services, the department is actively
involved in location-specific and Company-wide quality improvement activities
and education through interdisciplinary consulting services to all of the
Company's operational areas. In 1996, the department introduced a continuous
quality improvement program to the division that is designed to identify
opportunities to improve quality before negative outcomes can occur.
Contract Rehabilitation Therapy Operations. The Company's contract
rehabilitation therapy operations are directed by the senior vice president of
Rehabilitation and managed by two divisional executive vice presidents; one who
oversees field operations, clinical services, corporate support, finance and a
recruiting division known separately as Therapy International and one who
oversees all sales, marketing and the PulsePoint Technologies information
service. Field operations are controlled by divisional vice presidents who
supervise state regional directors and a team of area clinical managers who
typically oversee three to seven facilities each.
Pharmacy Operations. The Company's pharmacy operations are managed by the
senior vice president of Home Health and Pharmacy Operations, who is responsible
for all aspects of home health and pharmacy operations. Each pharmacy is managed
by either a general manager or pharmacy manager, who is a pharmacist, and
supported by a business manager who oversees the billing department staff, a
professional staff of consulting and dispensing pharmacists, nurses and
dietitians, and a support staff of technicians and delivery personnel. The
division corporate staff includes a regional controller, regional vice
presidents of operations, a vice president of business development, a vice
president of acquisitions, and a director of pharmacy support services who
provide financial accounting, management oversight, new program implementation,
acquisitions, marketing, sales support, new business assimilation, and other
management support services to each pharmacy manager.
Home Health Operations. The Company's home health operations are divided
geographically into two regions, each managed by a regional vice president. The
regional vice presidents report to the senior vice president of Home Health and
Pharmacy Services and are supported by regional directors of quality
improvement, consumer education, finance and Infusion. Each of the Medicare
certified agencies is managed by a director of professional services.
Sources of Payment
The Company receives payment for healthcare services from (i) the federally
assisted Medicaid program, (ii) the federal Medicare program, (iii) private
sources, including HMOs and commercial insurance, and (iv) other sources,
including special programs sponsored by local governments and the Veterans
Administration. Because private and Medicare reimbursement rates historically
have been higher than Medicaid reimbursement rates, the Company has targeted the
private-pay market and has worked to make available Medicare-eligible services
in its healthcare facilities. Changes in the mix of the Company's patient
population between Medicaid and a combination of Medicare, private and other
sources can significantly affect profitability. Governmental reimbursement
programs are subject to change, which also can affect profitability.
As of February 28, 1997, 102 of the Company's facilities are certified for
participation in Medicaid. Medicaid is a medical assistance program for the
indigent and is operated by state governments with financial assistance
(approximately 50% of the funds available) from the federal government under a
matching program. Medicaid is subject to federally imposed requirements. Medi-
Cal, California's version of Medicaid, currently provides for reimbursement
7
at established daily rates, as determined by the California Department of Health
Services, based on median costs of nursing facilities, classified by number of
licensed beds and geographic location. Medi-Cal primarily pays for long-term
custodial care for patients who qualify for welfare benefits. In Ohio and West
Virginia Medicaid reimbursement is a prospective cost-based system with an
adjustment factor to account for patient acuity. Medicaid reimbursement is
primarily provided under a prospective cost-based system in Tennessee and in
North Carolina is provided under a system that has both a cost reimbursement
component, subject to limitations, as well as a prospective cost-based
component. Twelve of the Company's home healthcare agencies are eligible to
participate in the Medicare program and all of the Company's home healthcare
agencies are eligible to participate in the Medicaid program.
As of February 28, 1997, 96 of the Company's skilled nursing facilities are
certified for participation in Medicare. Medicare is a health insurance program
operated by the federal government for the aged and certain chronically disabled
individuals. Medicare reimbursement rates for the Company's healthcare
facilities are regulated by the federal government and generally utilize a cost-
based reimbursement system, subject to geographic cost limits. Medicare pays
both the allowed direct costs and allowed overhead costs related to services
provided to patients covered by the Medicare program. Medicare specific rates
are dependent upon the cost and volume of the services provided as calculated on
the cost reports that each facility is required to submit annually to Medicare.
Reimbursement from Medicare is subject to retrospective adjustment to reconcile
payments made to a facility on an interim basis with subsequently determined
allowable costs. Overpayments may be recovered directly from the facility at the
time the adjustment is made or by reducing future payments to the facility or
other facilities operated by the Company.
The Company's cost of care for its Medicare patients sometimes exceeds
regional reimbursement limits established by Medicare. The Company submits
exception requests for its excess costs annually. Exception requests for all
cost report periods through December 31, 1994 have been filed. The Company's
final rates as approved by the Health Care Financing Administration ("HCFA")
represent, on average, approximately 84% of the requested rates as submitted in
the exception requests. During 1994, the Company recognized 50% of the 1994
estimated exception requests anticipated to be received, which represented
revenues of approximately $1,550,000. Commencing January 1, 1995, the Company
recognized 70% of the estimated exception requests anticipated to be received,
which represented revenues of approximately $3,563,000 and $3,001,000 for 1996
and 1995, respectively. Amounts received in respect of exception requests
relating to periods prior to December 31, 1994 will continue to be recorded on
the cash basis. The Company believes that it will be able to recover its excess
costs under any pending exception requests or under any exception requests that
may be submitted in the future; however, there can be no assurance that it will
be able to do so.
The Company has a broad customer base. There are no customers or related
groups of customers that account for a significant portion of the Company's
revenue. The loss of a single customer or group of related customers would not
have a material adverse effect on the operations of the Company taken as a
whole. However, two non-affiliated healthcare providers represented 24% of SCRS
total revenues during 1996. For a detail of revenue by business unit, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Reimbursement rates for HMOs are negotiated by the Company and the
organization. Charges for other private-pay patients are established by the
Company from time to time and are determined by market conditions and costs.
Veterans Administration contracts are generally at negotiated daily rates. The
Company also receives reimbursement, generally at negotiated daily rates,
pursuant to five contracts with county governments relating to certain of the
Company's facilities which provide services to the mentally disordered. These
contracts may be terminated by either party upon 60 days', or less, prior
notice.
8
The following table sets forth the Company's percentage of net operating
revenue provided by source of payor for the periods indicated:
1996 1995 1994
--------- --------- ---------
Medicaid 40.6% 39.9% 42.7%
Medicare 29.3 31.9 31.3
Private 11.6 13.6 15.2
Managed care 5.1 5.4 4.6
Other 13.4 9.2 6.2
========= ========= =========
Total 100.0% 100.0% 100.0%
========= ========= =========
As of February 28, 1997, the Company had in effect agreements with nearly all
major HMOs operating in California to provide skilled nursing care and ancillary
services to patients at its facilities who are enrolled as members in the HMO.
Payment by HMOs for services provided by the Company is based on negotiated
contract rates that vary by HMO. Reimbursement is based upon the level of
patient acuity, irrespective of the actual services provided. Thus, if a patient
requires a greater level of healthcare services than that normally provided a
patient of the agreed acuity level, the Company will not be reimbursed for such
additional services.
Contract Rehabilitation Therapy Services to Non-affiliates. Revenues from
contract rehabilitation services to non-affiliates are generally received
directly from the long-term care facility where the patient being treated
resides, which in turn are paid by Medicare or other payors. These revenues are
included in other sources of revenue. Revenue from contract rehabilitation
therapy services provided to Regency operated facilities are included in the
Medicaid, Medicare and private pay sources of revenues for Regency for each of
the applicable facilities. Charges to non-affiliates, though not directly
regulated, are effectively limited by regulatory reimbursement policies imposed
on the long-term care facilities that receive these therapy services, as well as
competitive market factors.
Pharmacy Services to Non-affiliates. Revenue from the Company's pharmacy
services are derived from the provision of such services to patients at long-
term care facilities not operated by Regency and patients at Regency facilities
billed directly to third-party payors. Regency enters into non-exclusive
contracts with non-affiliated facilities, and personnel at such facilities
submit prescriptions to Regency on behalf of patients at such facilities.
Regency is in most cases paid directly by Medicare, Medicaid or private pay
sources, and not by the long-term care facility. The amounts that can be charged
for prescriptions are often limited by Medicaid regulations.
Home Health Operations. Revenue from the Company's home health operations
come from a variety of payors including the Medicare and Medicaid programs,
commercial insurance, health maintenance organizations, private sources and
special county/state programs. In January 1996, two of the Company's California
home health agencies entered the HCFA "Prospective Pay" pilot program. This is a
three year program under which reimbursement will be determined on an "episode"
basis not on a fee for service (per visit) basis. An "episode" is defined as a
120 day period of home health benefit, inclusive of all necessary services
(including ancillary services).
Related Party Transactions. Medicare regulations that apply to transactions
between related parties, such as Regency and its subsidiaries, are relevant to
the amount of Medicare reimbursement that the Company is entitled to receive for
contract rehabilitation therapy and pharmacy services that it provides to
Regency operated facilities. These Medicare regulations generally require that,
among other things, (i) the Company's rehabilitation therapy and pharmacy
subsidiaries must each be a bona fide separate organization; (ii) a substantial
part of the contract rehabilitation therapy services or pharmacy services, as
the case may be, of the relevant subsidiary must be transacted with non-
affiliated entities, and there is an open, competitive market for the relevant
services; (iii) contract rehabilitation therapy services and pharmacy
9
services, as the case may be, are services that commonly are obtained by long-
term care facilities from other organizations and are not a basic element of
patient care ordinarily furnished directly to patients by such long-term care
facilities; and (iv) the prices charged to the Company's long-term care
facilities by its contract rehabilitation therapy operations subsidiary and
pharmacy operations subsidiaries are in line with the charges for such services
in the open market and no more than the prices charged by its contract
rehabilitation therapy operations subsidiary and pharmacy operations
subsidiaries under comparable circumstances to non-affiliated long-term care
facilities. Regency believes that each of the foregoing requirements are
presently being satisfied with respect to its contract rehabilitation therapy
and pharmacy subsidiaries, and therefore, Regency believes it presently
satisfies the requirements of these regulations. Consequently, it has claimed
and received reimbursement under Medicare for contract rehabilitation therapy
services (since the acquisition of SCRS in July 1995) and pharmacy services
(beginning in January 1996) provided to patients in its own facilities at a
higher rate than if it did not satisfy these requirements. If the Company is
unable to satisfy these regulations, the reimbursement the Company receives for
contract rehabilitation therapy and pharmacy services provided to its own
facilities would be materially adversely affected. If, upon audit by relevant
reimbursement agencies such agencies find that each of these regulations has not
been satisfied, and if, after appeal, such findings are sustained, the Company
could be required to refund some or all of the difference between its cost of
providing these services and the higher amount actually received. While the
Company believes that it has satisfied and will continue to satisfy these
regulations, there can be no assurance that its position would prevail if
contested by relevant reimbursement agencies.
Marketing
Recognizing the growing influence of managed care upon healthcare delivery,
the Company's Marketing and Managed Care departments were combined in 1996. The
integration of these areas allows a synergistic approach to marketing the
Company's services to payors, providers and patients. Long-term strategies and
Company-wide marketing programs are developed by the corporate Marketing &
Managed Care staff. However, primary marketing responsibility rests with field
personnel for each of the Company's business lines.
The Company has developed various marketing and managed care training
programs and manuals for use by staff who are involved in service delivery.
Software programs, statistical data, and field interview responses aid in
development of materials to support marketing efforts. Recognizing that
healthcare decisions are made at the local level by physicians, case managers,
discharge planners, family members and patients, the Company attempts to
identify, develop and maintain relationships with the primary referral sources
in each of the areas it serves. Marketing personnel also research, analyze and
advise the Company concerning opportunities in each of its local market areas.
From this, the Company's marketing staff seeks to develop programs to maximize
occupancy and financial performance in each of the Company's facilities.
Complementing these efforts, Managed Care staff identify and pursue
opportunities to develop relationships with managed care providers.
Quality Management
The Company believes that an essential element of its business strategy is to
focus on the quality of service provided. This depends in large measure on the
existence of a trained and educated work force. The Company views quality
management as a two-pronged system: Continuous Quality Improvement and Total
Quality Management.
In 1996, the Company introduced a Continuous Quality Improvement program into
its long-term care operations. This program places the responsibility for
quality improvement in the hands of those who most greatly impact quality - the
facility staffs. It is a facility-based system of identifying opportunities to
improve quality before negative events can occur. As system weaknesses are
identified, they are resolved through a problem-solving procedure that is based
on Total Quality Management.
10
With initial assistance from the Richard Rodgers Consulting Group, the
Company has, since 1993, trained over 9,000 employees in the principles of Total
Quality Management ("TQM"). In addition, certain executive and mid-level
managers have been trained in the use of Statistical Process Control and data
analysis in sound business decision-making.
In implementing its TQM initiative, the Company did not create additional
layers of bureaucracy, but instead developed and communicated to its employees
the simple message that the Company's vision, mission and culture are dedicated
to meeting and exceeding the expectations of its customers.
Because the Company believes that quality planning is an important component
of the strategic planning process and integral to the successful realization of
its strategic objectives, TQM is results-oriented. At all levels of the Company,
rewards are tied to specific agreed-upon result statements that directly support
the Company's strategic objectives. Employee performance is evaluated based upon
achievement of stated quantitative measures. In this way, the Company's focus is
continually directed back to its strategic objectives.
Regulation
The healthcare industry is subject to extensive federal, state and local
statutes and regulations. The regulations include licensure requirements,
reimbursement rules and standards and levels of services of care. Changes in
applicable laws and regulations or new interpretations of existing laws and
regulations could have a material adverse effect on licensure of Company
facilities, eligibility for participation in federal and state programs,
permissible activities, costs of doing business, or the levels of reimbursement
from governmental, private, and other sources. To date such changes have not had
a material adverse effect on the Company's business. However, there can be no
assurance that regulatory authorities will not adopt changes or interpretations
that adversely affect the Company's business.
Licensing. The Company's healthcare facilities and pharmacy services are
subject to licensing requirements by state and local authorities. The Company's
healthcare facilities are licensed by each state's licensing agency. In granting
licenses, an agency considers, among other factors, the physical condition of
the facility, the qualifications of the administrative and nursing staffs, the
quality of care, and compliance with applicable statutes and regulations. The
failure to maintain or renew any required regulatory approvals or licenses could
prevent the Company from offering its existing services or from obtaining
reimbursement.
As of February 28, 1997, 96 of the Company's skilled nursing facilities are
certified for participation in Medicare and 102 of the Company's facilities are
certified for participation in Medicaid. Twelve of the home healthcare agencies
operated by the Company are eligible to participate in the Medicare program and
all of the Companies home healthcare agencies are eligible to participate in the
Medicaid program. The Company, through its subsidiaries, holds licenses to
operate long-term care facilities in California, West Virginia, Ohio, Tennessee
and North Carolina. Ohio does not require that a new license be issued on a
yearly basis. The Company, through its subsidiaries, participates in the
Medicare and Medicaid programs in California, West Virginia, Ohio, Tennessee and
North Carolina.
Most states in which SCRS operates permit a corporation to provide
rehabilitation services provided that the individual therapist is licensed. The
Company's rehabilitation services at facilities not operated by the Company are
offered under the individual license of Sherri L. Medina, the Company's Senior
Vice President-Rehabilitation Services and through the licenses of individual
therapists. In California and Indiana, services are provided either through Ms.
Medina's professional corporation or through a professional corporation of
another employee. The failure by Ms. Medina to maintain her individual license
would prevent the Company from offering such services to other facilities until
a replacement supervising officer were employed.
11
In certain states, statutes require that a state agency approve certain
acquisitions, the addition of beds and services and certain capital
expenditures. Such state approvals generally require implementation of the item
being approved within a specified time period. The failure to obtain the state
approval can result in the inability to make the acquisition, to add the
service, to operate the facility or complete the addition or other change
requested, and can result in the imposition of sanctions or adverse
reimbursement action.
The Omnibus Budget Reconciliation Act of 1987 ("OBRA") was implemented
effective October 1, 1990. Among other things, 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.
OBRA also mandated an increase in the level of services nursing facilities must
provide to participate in Medicare and Medicaid. This change, the cost of which
was partially offset by reimbursement rate increases for Medicaid and an
increase in the routine cost limits under Medicare, thus far has not had a
significant impact on the Company.
Effective July 1, 1995, new regulations under OBRA dealing with enforcement
policies and procedures and a new survey process became operative. These
regulations provide for a variety of penalties for noncompliance with other
substantive regulations and minimum standards of care, including required
preparation and submission of plans of correction, new patient admission
moratoriums, denial of reimbursement, decertification of Medicare reimbursement
eligibility, delicensing, forced facility shutdown and loss of provider status.
While the Company believes that it is in substantial compliance with the current
requirements of OBRA, it is unable to predict how the enforcement regulations
will be implemented, or how future interpretations of current regulations or
future regulations promulgated under OBRA may affect it. In addition, there can
be no assurance that the Company's facilities and the provision of services and
supplies by the Company now or in the future will initially meet or continue to
meet the requirements for participation in Medicare or Medicaid programs.
The Company and its healthcare facilities are subject to routine inspections,
at any time, to monitor compliance with government regulations. Based on such
inspections, the Company receives, from time to time in the ordinary course of
its business, notices of failure to comply with various requirements. The
Company endeavors to take prompt corrective action and, in most cases, the
Company and the reviewing agency agree on remedial steps. The reviewing agency
may take action against a facility, which can include the imposition of fines,
recovery of Medicare payments paid with respect to deficient care, temporary
suspension of admission of new patients to the facility, decertification from
participation in the Medicare or Medicaid programs and, in extreme
circumstances, revocation of the facility's license. In certain circumstances,
failure of compliance at one facility may affect the ability of the Company to
obtain or maintain licenses or approvals under Medicare and Medicaid programs at
other Company facilities.
Reimbursement. Governmental reimbursement programs are subject to statutory
and regulatory changes, administrative rulings and interpretations, government
funding restrictions, and retroactive reimbursement adjustments, all of which
could materially increase or decrease the services covered or the rates paid to
the Company for its services. There have been and the Company expects that there
will continue to be, a number of proposals to limit governmental programs such
as Medicare and Medicaid reimbursement for healthcare services. The Company
cannot predict at this time whether any of these proposals will be adopted or,
if adopted and implemented, what effect such proposals would have on the
Company. There can be no assurance that payments under governmental programs
will remain at levels comparable to present levels or will be sufficient to
cover the cost allocable to patients eligible for reimbursement pursuant to such
programs. In addition, governmental reimbursement programs require strict
compliance with both patient eligibility and acuity requirements, and timely
payment requests. The failure to adhere to these requirements is a basis for
denial of reimbursement or for a required refund, with interest, of any sums
paid by the program.
In addition, the Company's cash flow could be adversely affected by periodic
government program funding delays, shortfalls, or other difficulties, such as
that which occurred in 1995 when the State of California failed to adopt a new
12
budget prior to the end of the 1994-1995 fiscal year and, as a result, Medi-Cal
delayed reimbursement payments for several weeks. Medi-Cal also delayed payments
and rate increases for several weeks in 1990 and 1991. Medi-Cal has on a number
of recent occasions delayed payments and rate increases, including for several
weeks in each of 1990, 1991 and 1995. The Company has mitigated the effects of
such payment delays by monitoring the related activities of the California
legislature, expediting billings through its electronic billing arrangement and
agreeing with creditors to extend the due date for payables. See Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources." There can be no assurance,
however, that the Company will be able to mitigate the effects of any future
funding delays. During 1996, the Company averaged approximately $8.1 million per
month in cash receipts from the Medi-Cal program.
Antifraud and Self-Referral Regulations. Various Federal and state laws
regulate the relationship between providers of health care services and
physicians or others able to refer medical services, including employment or
service contracts, leases and investment relationships. These laws include the
fraud and abuse provisions of the Medicare and Medicaid and similar state
statutes (the "Fraud and Abuse Laws"), which prohibit the payment, receipt,
solicitation or offering of any direct or indirect remuneration intended to
induce the referral of Medicare and Medicaid patients or for the ordering or
providing of Medicare or Medicaid covered services, items or equipment.
Violations of these provisions may result in civil and criminal penalties and/or
exclusion from participation in the Medicare and Medicaid programs and from
state programs containing similar provisions relating to referrals of privately
insured patients. The United States Department of Health and Human Services
("HHS") has interpreted these provisions broadly to include the payment of
anything of value to influence the referral of Medicare or Medicaid business.
HHS has issued regulations which set forth certain "safe harbors," representing
business relationships and payments that can safely be undertaken without
violation of the Fraud and Abuse Laws. In addition, certain Federal and state
requirements generally prohibit certain providers from referring patients to
certain types of entities in which such provider has an ownership or investment
interest or with which such provider has a compensation arrangement, unless an
exception is available. The Company considers all applicable laws in planning
marketing activities and exercises care in an effort to structure its
arrangements with health care providers to comply with these laws. However,
because there is no procedure for obtaining advisory opinions from government
officials, the Company is unable to provide assurances that all of its existing
or future arrangements will withstand scrutiny under the Fraud and Abuse Laws,
safe harbor regulations or other state or federal legislation or regulations,
nor can it predict the effect of such rules and regulations on these
arrangements in particular or on the Company's operations in general. The
Company systematically reviews its operations on a periodic basis and has
adopted policies intended to ensure that it complies with the Fraud and Abuse
Laws and similar state statutes.
Environmental Regulations. The Company's healthcare operations generate
medical waste that must be disposed of in compliance with Federal, state and
local environmental laws, rules and regulations. The Company's operations are
also subject to compliance with various other environmental laws, rules and
regulations. Such compliance does not, and the Company anticipates that such
compliance will not, materially affect the Company's capital expenditures,
earnings or competitive position.
Competition
The Company, and the healthcare industry in general, faces the challenge of
continuing to provide quality patient care while contending with rising costs,
strong competition for patients and a general reduction of reimbursement rates
by both private and public payors. As both private and public payors reduce the
scope of services which may be reimbursed and reduce reimbursement levels for
covered services, national and state efforts to reform the healthcare system may
further impact reimbursement rates. Changes in medical technology, existing and
future legislation, regulations, contracting innovations and industry
consolidation may require changes in the Company's facilities, equipment,
personnel, rates and/or services in the future.
13
The Company competes with a variety of other providers of healthcare
services, including other rehabilitation hospitals, other skilled nursing
facilities, other home health providers, hospitals offering long-term care
services and personal care or residential facilities. Competition has become
more intense as alternatives for nursing and rehabilitation patients has
increased. Many hospitals now have skilled nursing units and home health
agencies. Community-based programs such as assisted living and congregate living
centers also compete for residents with the Company's skilled nursing facilities
and congregate living centers. With the movement from `institutional', skilled
nursing facilities to residential living facilities and congregate living
centers, maintaining occupancy rates becomes increasingly difficult.
As of February 28, 1997, the Company operated 83 inpatient facilities
(including 4 acute rehabilitation facilities and 6 neurological care centers)
with 7,521 licensed beds in California. The Company estimates that there are
approximately 1,300 free-standing long-term care facilities with approximately
125,000 licensed beds in California. The Company also operates 33 facilities
with 3,943 beds in West Virginia, Ohio, Tennessee, and North Carolina. The
Company's competitive position varies across statewide and local markets. Some
of the significant factors relating to individuals' selection of the Company's
healthcare facilities include quality of care, reputation, physical appearance,
services offered, family preferences, benefit plan preferences and price. The
Company's facilities and home health agencies operate in communities that are
served by similar entities. Some competing facilities, home health agencies and
pharmacies offer services not offered by the Company. Furthermore, competitors
may benefit from greater financial resources, longer operating histories,
charitable endowments, favorable tax status and other resources not available to
the Company. There can be no assurance that the Company will not encounter
increased competition in the future that would adversely affect the Company's
results of operations.
Contract therapy services, like those offered by SCRS, are provided by other
rehabilitation service companies, many of whom are larger and have greater
resources than the Company. In addition, many of SCRS's existing customers have
begun to develop the capability of directly providing such services, rather than
contracting with other providers for these services.
The long term care pharmacy market is rapidly consolidating and this has
resulted in numerous large institutional pharmacies. These pharmacies are larger
and have greater resources than the Company.
Employees
As of February 28, 1997, the Company had approximately 16,170 full-time and
part-time employees. Of these employees, approximately 12,080 were employed at
its healthcare facilities, approximately 850 at its home health agencies,
approximately 240 in its pharmacy operations, approximately 2,680 in
rehabilitation services and approximately 320 at its regional administrative and
corporate offices. Approximately 1,600 of the employees were covered by 12
collective bargaining agreements. The Company believes that it maintains
productive relations with its employees in general and with the 12 collective
bargaining units. The Company is subject to both federal and state minimum wage
and wage and hour laws and maintains various employee benefit plans.
Tax Audits
A State of Ohio income tax audit for the years 1991 through 1994 is ongoing
and a California Franchise Tax Board income tax audit for 1994 is pending.
Although it is not possible to predict with certainty the outcomes of the
audits, in the opinion of the Company, adequate provision for the matters under
review has been made, and the results of the audits are not expected to have a
material adverse effect on the Company's consolidated financial position.
14
Insurance
The Company maintains general and professional liability insurance on a
claims-made basis subject to a $100,000 per occurrence self-insured retention
limited to an aggregate stop loss of $500,000. All-risk property insurance,
including earthquake and flood, is carried for all Company operations.
The Company self-insures its workers' compensation programs for its nursing
facilities in California and Ohio, pharmacy operations, home health operations
and its corporate office employees. For all other operations, the Company
purchases insurance for this risk. The Company is required to maintain standby
letters of credit with the state insurance departments for its self-insurance
workers' compensation programs, which as of December 31, 1996 aggregated
approximately $8.4 million. These letters of credit assure that benefits payable
by the Company to its covered employees (which estimated benefits are reflected
as liabilities on the Company's books and records) are paid when required. The
Company has not defaulted in its workers' compensation benefit payment
obligations since the Company began its self-insurance program in 1983.
Factors Which May Affect Company
The following important factors, among others, in the past have affected and
in the future could affect, the financial results, business strategy, and
business operations of healthcare providers including the Company, and could
materially impact the various forward looking statements contained elsewhere in
this Annual Report. Readers are cautioned to review such forward looking
statements in the context of these factors. A number of these items are
summarized as follows:
Dependence on Reimbursement from Medicare and Medicaid. The Company's
business is dependent upon its ability to obtain and maintain reimbursement from
Medicare and Medicaid. These government-sponsored healthcare programs are highly
regulated and are subject to budgetary and other constraints. In addition, these
government programs have instituted cost-containment measures designed to limit
payments made to healthcare providers. Furthermore, government reimbursement
programs are subject to statutory and regulatory changes, administrative rulings
and interpretations, determinations of intermediaries, government funding
restrictions and retroactive reimbursement adjustments, all of which could
materially increase or decrease the services covered by such programs, the rates
paid to healthcare providers for their services, or the eligibility of providers
to receive reimbursement. In addition, there can be no assurance that the
Company's facilities and the provisions of services by the Company in the future
will continue to meet the requirements for participation in Medicare or Medicaid
programs as presently enacted or as they may be changed.
Governmental Regulation. The long-term care industry is subject to extensive
federal, state and local licensure and certification laws. Long-term care
facilities and home health agencies are subject to annual and routine interim
inspections to monitor compliance with governmental regulations. Certain laws
establish minimum healthcare standards and provide for significant remedies for
non-compliance including fines, refunds of prior payments, new patient admission
moratoriums, federal or state monitoring of operations, and closure of
facilities.
The Company is also subject to federal and state laws that govern financial
and other arrangements involving healthcare providers. These laws often prohibit
certain direct and indirect payments or fee-splitting arrangements between
healthcare providers that are designed to induce or encourage the referral of
patients to, or the recommendation of, a particular provider for medical
products and services. Possible sanctions for violations of any of these or
similar restrictions or prohibitions, include loss of eligibility to participate
in reimbursement programs, as well as civil and criminal penalties. Changes in
interpretation or manner of enforcement of these laws or regulations could
adversely affect the Company.
Dependence on California. A substantial portion of the Company's billings are
to the California Medicaid program, Medi-Cal. California has a less generous and
15
more heavily regulated healthcare reimbursement system that typically provides
for lower reimbursement rates than do a majority of other states. And,
California historically has enforced its regulations more strictly than most
other jurisdictions. In addition, California has a higher applicable minimum
wage and higher workers' compensation costs than most other states. The Company
may be materially and adversely affected by the failure of Medi-Cal
reimbursement rates to increase in proportion to cost increases, by any
reduction in the levels of reimbursement, or by healthcare reform measures that
substantially increase its operating costs. Further, there have been, and there
are likely to continue to be, strong legislative pressures to avoid increases in
Medi-Cal reimbursement levels and to impose reductions in such payments.
Uncertainty of Litigation. The Company regularly is made a defendant in
lawsuits by or on behalf of patients at one or more of its facilities or to whom
healthcare services were provided seeking to recover for injuries sustained as a
result of alleged errors and omissions. Often these suits also allege that the
injuries resulted from intentional actions or omissions of healthcare personnel
for whom the Company is asserted to have legal responsibility, and consequently
seek awards of punitive damages. The Company also on a regular basis, is sued by
persons claiming that their employment by the Company was improperly terminated,
that they were denied employment or promotions because of their race, creed,
religion, gender, ethnic origin or sexual orientation, or that they suffered
sexual harassment or other tortuous conduct, which suits seek awards of
compensatory, incidental and punitive damages. Although the Company maintains
insurance for its professional errors and omissions, it is not insured for
damages sustained as a result of intentional torts committed, for punitive
damages or for awards of damages in wrongful termination cases. The Company's
financial condition and results of operations could be adversely affected by a
significant award for damages that is not covered by insurance.
ITEM 2. PROPERTIES
The following table sets forth information regarding the healthcare
facilities owned or leased by the Company as of February 28, 1997:
Facilities Beds
----------------------------------------- ------------------------------------------
Owned Leased Managed Total Owned Leased Managed Total
--------- --------- ------------ -------- --------- --------- ------------ ---------
California 32 50 1 83 2,098 5,175 248 7,521
Ohio 4 4 -- 8 402 461 -- 863
North Carolina 1 10 -- 11 86 1,278 -- 1,364
Tennessee -- 8 -- 8 -- 1,097 -- 1,097
West Virginia 5 1 -- 6 554 65 -- 619
--------- --------- ------------ -------- --------- --------- ------------ ---------
42 73 1 116 3,140 8,076 248 11,464
========= ========= ============ ======== ========= ========= ============ =========
Nine of the Company's healthcare facilities are encumbered by deeds of trusts
or mortgages.
The Company's home health subsidiaries, Home Health Services, Inc. and
Americare Homecare, Inc. lease office space aggregating 51,549 square feet for
its 28 home health locations in California and Ohio.
The Company's pharmacy subsidiaries, First Class Pharmacy, Inc. and Assist-A-
Care, Inc. lease approximately 51,934 square feet for its locations in
California, North Carolina and Tennessee.
The Company's rehabilitation subsidiary, South Coast Rehabilitation Services,
Inc. leases an 8,035 square foot office in Aliso Viejo, California.
16
The Company leases office space aggregating 65,608 square feet for its
corporate and regional offices in California and West Virginia.
The Company also leases space for its outpatient clinics aggregating
approximately 16,500 square feet in California.
In the facilities that are leased, subleased, or managed, the Company's
rights as lessee or sublessee could be subject to termination if the lessor or
sublessor of a facility fails to pay its rent, taxes, loan obligations that are
secured by the facility, if any, or other similar obligations. The Company has
not experienced any such lease terminations, although there can be no assurance
that the Company's rights to operate its leased or subleased facilities will not
be so affected in the future.
The Company's facilities are subject to various governmental zoning and use
restrictions. One of the Company's facilities that provides services for the
mentally disordered is currently operating pursuant to a deemed to be approved
conditional use permit. In July 1992, the facility filed an application for a
conditional use permit and is currently appealing the recent denial of said
application. A mediator has been appointed to monitor this matter. Although
there can be no assurance, the Company believes it will prevail with its appeal
and that the conditional use permit will be renewed.
ITEM 3. LEGAL PROCEEDINGS
In 1995, a class action lawsuit, captioned Standish and Miriam Mallory and
Claire Bauman vs. Regency Health Services, Inc., which had been filed against
the Company in July 1994, was settled for $9,000,000. The Company's portion of
this settlement, together with related legal fees and other costs, resulted in a
pre-tax charge of $3,098,000, which is included in the consolidated statement of
operations for the year ended December 31, 1995.
Additionally, the Company is subject to claims and legal actions by patients
and others in the ordinary course of business. The Company has insurance
policies in varying amounts covering most of the outstanding lawsuits. If a
judgment were awarded in excess of the insurance coverage, the burden would fall
on the Company. The Company does not expect that the ultimate outcome of an
unfavorable judgment in any of the pending legal matters would result in a
material adverse effect on the Company's consolidated financial position or
results of operations. However, there can be no assurances that an unfavorable
judgment in future claims and legal actions would not have a material adverse
effect on the Company's consolidated financial position or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded under the symbol "RHS" on the New York
Stock Exchange.
The quarterly price range of common stock for 1996 and 1995 are included on
page 47 of the 1996 Regency Annual Report under the caption "Stock Market
Information" and are incorporated herein by reference.
At February 28, 1997, 15,792,157 shares of Company common stock were held of
record by approximately 1,000 stockholders as reported by the Company's transfer
agent.
The Company has not declared or paid cash dividends on common stock since its
inception, and does not currently plan to declare or pay any dividends in the
foreseeable future. Covenants in a note agreement between the Company and its
lenders limit the payment of cash dividends on Company common stock. Among such
restrictions is a provision limiting the payment of dividends and other
restricted payments, as defined, to no more than 50% of consolidated net income
from and after January 1, 1996, on a cumulative basis, plus $5,000,000.
ITEM 6. SELECTED FINANCIAL DATA
On April 4, 1994, Regency and Care completed their merger ("Merger")
accounted for as a pooling-of-interests. Consequently, the historical financial
statements for periods prior to the Merger are restated as though the companies
had been merged since inception. The calculation of income per share for each
period presented prior to the Merger reflects the issuance of .71 of a share of
Regency common stock for each share of common and common equivalent share of
Care common stock.
The following consolidated financial data as of and for the years ended
December 31, 1996, 1995, 1994, 1993 and 1992, have been derived from the
Company's audited Consolidated Financial Statements. The selected consolidated
financial data set forth below should be read in conjunction with Item 7
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and with the Consolidated Financial Statements and the notes thereto
included elsewhere in this Report.
Year Ended December 31,
---------------------------------------------------------
1996 (2) 1995 (3) 1994 (4) 1993 1992 (5)
-------- -------- -------- ---- --------
(in thousands except per share data)
Net operating revenue (1).................... $558,050 $416,093 $377,336 $336,954 $295,340
Income (loss) before extraordinary item...... 6,399 4,454 (800) 11,790 10,419
Net income (loss)............................ 5,206 2,845 (800) 11,742 10,330
Income (loss) per common share before
extraordinary item (fully diluted)........ .39 .27 (.05) .69 .76
Net income (loss) per common share (fully
diluted).................................. .32 .17 (.05) .69 .75
Total assets................................. 353,576 338,942 250,896 242,300 164,403
Total long-term debt......................... 184,908 183,986 101,941 103,245 53,638
- - ------
(1) In 1994, the Company changed its policy on recognizing revenue from
exception requests filed with the Health Care Financing Administration
("HCFA"). Previously, no revenue was recognized until payment in respect of
the exception request was actually received. In 1994, the Company began
recognizing 50% of the estimated exception requests anticipated to be filed
for the applicable period. In 1995 and 1996, the Company recognized 70% of
the estimated exception requests anticipated to be received for the
applicable period.
18
(2) In 1996, the Company redeemed all $48.9 million of its outstanding
Convertible Subordinated Debentures resulting in an extraordinary loss on
extinguishment of debt of $1,459,000 ($868,000 net of tax) and refinanced
three of its Industrial Revenue Bond Issues (IRBs) with a principal balance
of $7,560,000 resulting in an extraordinary loss of $546,000 ($325,000 net
of tax). In addition, the Company recorded an $11,283,000 ($6,769,000 net
of tax) charge, primarily related to severance, the write-off of property
which will have no value under the Company's new operating model,
allowances for certain notes and non-patient receivables and a reduction of
the reserve for assets held for sale recorded in 1995.
(3) In 1995, a class action lawsuit, which had been filed against the Company
in July 1994, was settled for $9,000,000. The Company's portion of this
settlement, together with related legal fees and other costs, resulted in a
pre-tax charge of $3,098,000 ($1,921,000 net of tax), which is included in
the consolidated statement of operations for the year ended December 31,
1995. In addition, the Company repaid its $30 million, 8.10% Senior Secured
Notes resulting in costs and a prepayment penalty of $2,681,000 ($1,609,000
net of tax), classified as an extraordinary item and the Company recorded a
$9,000,000 ($8,200,000 net of tax) charge, primarily related to the
disposition of certain facilities (see Note 14 to the Company's
Consolidated Financial Statements).
(4) As required under the pooling-of-interests accounting method, all fees and
expenses related to the Merger and restructuring of the combined companies
were reflected in the Consolidated Statement of Operations of the Company
for the year ended December 31, 1994, resulting in a pre-tax charge of
$14,700,000 ($10,600,000 net of tax), including a reserve for losses
associated with the disposal of duplicate facilities. Additionally, in 1994
the Company recorded a pre-tax charge of approximately $1,600,000 ($975,000
net of tax) related to the closure of a facility damaged by the Northridge,
California earthquake in 1994.
(5) During Care's reorganization period (prior to emergence from bankruptcy
proceedings on December 31, 1990), Care established a reserve for losses on
discontinuance of certain operations. These losses were originally included
as part of an overall provision/(credit) for reorganization items. During
the year ended December 31, 1992, the Company recognized pre-tax gains
resulting from the reversal of reserves for losses on the discontinuance of
certain operations of $461,000 and the reversal of reserves for expenses
and fees resulting from Care's Chapter 11 proceedings of $75,000.
Additionally, in 1992 the Company recognized a gain of $1,000,000 on the
disposal of a nursing facility.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
Overview of Strategic Plan
The healthcare industry continues to change as the government, commercial
payors and healthcare providers like the Company focus on rising healthcare
costs. It is the Company's belief, as well as that of the government and
commercial payors, that the most effective delivery system for reducing costs is
a regionally oriented market based model within the context of the evolving
managed care system. Presently, only 5.1% of the Company's revenues are
generated from managed care payors, however, management and other members of the
industry believe the Medicare system will be adopting a prospective pay system
in the coming years for skilled nursing facilities. Furthermore, the Company
believes more Medicare participants will be entering managed care plans as they
typically offer more services at a fixed price.
Considering the anticipated changes in the industry, the Company believes
19
that the most successful business strategy in the future will be to provide both
payors and patients, collectively the customers, cost effective delivery of care
with high customer satisfaction. This will mean significant changes in the
current delivery system. The Company believes its future delivery system will
need to have the following components:
o Focus on customers through a fully integrated delivery system which will
allow for "one-stop shopping". This means that the Company will need to
provide multiple low cost services across the continuum of care in each of
the regions in which it provides care. In the future, acquisitions will
focus on completing the continuum of care within the Company's various
regional markets.
o Name recognition as customers must be convinced that the Company provides
consistent service throughout the continuum of care.
o Regionally focus to ensure that diverse services are available in each
market and that those services are integrated rather than the traditional
focus on separate business lines.
o Focus on placing the patient in the most effective setting with the lowest
cost while demonstrating positive outcomes from the delivery of medicine and
care. Basically, the Company will strive to provide high quality service
across the continuum of care at a low cost.
o Focus on a low overhead cost structure. Reengineering to eliminate non-value
added services and investments in information technology will be required in
order to reduce costs and enable the Company to provide consistent,
integrated, low cost services. The investment in information technology will
also provide management critical information in a timely manner to
effectively manage its business in the managed care environment.
During 1996 the Company developed and began to implement its strategic plan
to address these issues. In connection with this plan, the Company acquired four
acute rehabilitation hospitals, ten outpatient rehabilitation clinics and six
neurological treatment centers effective January 1, 1997. The purchase price was
$43.0 million, made up of a cash payment of $36.3 million and notes payable
totaling $6.7 million. This acquisition was one of many steps in the Company's
plan to complete the continuum of care in its various regional markets. The
Company has also hired two individuals with extensive experience in acquisitions
to focus on the acquisition of home health agencies and outpatient clinics,
primarily in our existing nursing operations markets to complete the continuum
of care in those markets.
During 1996, the Company recorded a restructuring and other non-recurring
charge of $11.3 million primarily related to initiatives designed to reengineer
the operating model through which the Company manages its business and lower its
operating costs. Also included in the charge were amounts for consulting and
other obligations for which there is no future benefit, reductions in the assets
held for sale reserve established in 1995, additional reserves for notes and
non-patient receivables and a charge for the impairment of other long-term
assets.
A major component of the reengineering, in terms of importance and cost, will
involve integrating the Company's information systems to allow for the
integrated delivery of patient care across all service lines within the
continuum of care. The Company will therefore be making a significant investment
in information technology over the next five years. This investment will result
in cost savings in the future. The first phase of the investment in information
technology will be investments in the infrastructure such as a communications
network and servers combined with upgrades of the accounts payable software, the
acquisition of Kronos time clocks and other transaction systems, which are
expected to be completed during 1997. The second phase will be the integration
of the various computer systems used by the different divisions of the Company
to allow for a seamless transfer of patient care information across the entire
continuum of care. The integration of the various systems is expected to begin
during 1998.
The Company incurs certain costs and operating inefficiencies in connection
with acquisitions following such acquisition, relating to the integration of
such facility's financial and administrative systems, physical plant and other
aspects of its operations into those of the Company. In addition, the
introduction of a substantial portion of the Company's contract rehabilitation
therapy, pharmacy and other ancillary services to a new operation may take as
long 12 months to fully implement. There can be no assurance that each of the
20
service providers the Company may acquire will be profitable. In addition, there
can be no assurance that new acquisitions that result in significant integration
costs and inefficiencies will not adversely affect the Company's profitability.
General
In connection with the strategy and acquisitions discussed above, the Company
has created the Regency Rehabilitation and Specialty Services Division which
includes the Acute Rehabilitation Hospitals (and related outpatient clinics and
neurological treatment centers), the Contract Rehabilitation Therapy Operations
and future outpatient clinic acquisitions.
The following table sets forth certain operating data for the Company on the
dates indicated:
February 28, December 31,
1997 1996 1995 1994
Nursing center operations
Facilities............................ 106 107 94 93
Licensed beds......................... 11,119 11,200 9,178 9,134
Subacute beds......................... 1,108 1,108 1,040 879
Subacute units........................ 46 46 42 35
Regency rehabilitation and specialty services
division
Acute rehabilitation operations
Rehabilitation hospitals.............. 4 -- -- --
Neurological centers.................. 6 -- -- --
Licensed beds......................... 345 -- -- --
Outpatient clinics.................... 10 -- -- --
Contract rehabilitation therapy operations
Non-affiliated facilities served...... 116 114 79 --
Regency operated facilities served.... 63 57 27 --
======= ======= ======= =======
Total................................ 179 171 106 --
======= ======= ======= =======
Pharmacy operations
Non-affiliated facilities served....... 84 84 5 5
Regency operated facilities served..... 70 68 36 34
======= ======= ======= =======
Total................................. 154 152 41 39
======= ======= ======= =======
Home health agencies........................ 28 29 29 28
Nursing Center Operations
The Company's nursing center operations derive net operating revenue
from the performance of routine and ancillary services at the Company's
facilities. Revenue from routine services is comprised of charges for room and
board and basic nursing services for the care of patients, including those in
the Company's subacute specialty units. Revenue from ancillary services is
comprised of charges for rehabilitative services, subacute specialty services,
and pharmaceutical products and services provided to patients at the Company's
facilities. Nursing center operations derive most of its ancillary services
revenue from Medicare- and HMO-eligible patients. The Company has classified
revenue from nursing center operations as either basic nursing care revenue or
subacute revenue. Basic nursing care revenue includes charges for room and board
21
for non-Medicare and non-HMO patients. Subacute revenue includes room and board
and basic nursing services for Medicare and HMO patients and revenues from all
ancillary services provided to patients at the Company's facilities.
Effective July 1, 1994, the Company elected to dispose of two healthcare
facilities due to excess capacity in certain markets caused by the Regency and
Care merger (the "Merger") and to dispose of a residential facility operated by
Care (the "Dispositions"). The Company established a $2.7 million reserve in
1994 related to these dispositions, which consisted of a write-down of the
assets to estimated fair value, transaction costs, and a provision for
anticipated operating losses to the time the transactions were completed. These
facilities were disposed of in 1995 and the results of operations of these
facilities since July 1, 1994 are not reflected in the operations of the
Company.
During 1995 the Company exchanged leasehold interests in three healthcare
facilities with 360 beds in New Mexico for leasehold interests in four
healthcare facilities with 461 beds in Ohio previously operated by another
company. In 1995, the Company also opened a newly constructed facility and
disposed of one additional facility.
Effective December 31, 1995, the Company determined to dispose of 13
facilities located in California as part of its strategic plan of diversifying
from California Medicaid. The results of operations of these facilities continue
to be reflected in the Company's financial statements until each disposition is
completed. During 1996 the Company disposed of six of these facilities. On
January 1, 1997 the Company disposed of one additional facility.
Effective February 1, 1996, the Company acquired 18 healthcare facilities
with 2,375 beds in Tennessee and North Carolina, accounted for under the
purchase method of accounting.
Effective April 1, 1996, the Company acquired a healthcare facility with 64
nursing beds and 22 assisted living beds located in Lexington, North Carolina,
accounted for under the purchase method of accounting.
Ancillary Businesses Operations
In July 1995, the Company acquired SCRS & Communicology, Inc. ("SCRS")
accounted for under the purchase method of accounting. SCRS provides
rehabilitation services to Company operated and third party healthcare
facilities in 12 states in the West, Midwest, and Southeast. From July to
December 1995, 79% of SCRS revenues were derived from providing services to non-
affiliated healthcare providers. Two non-affiliated healthcare providers
represented approximately 38% of SCRS total revenues from July to December 1995
and approximately 24% in 1996. In 1996, 70% of SCRS revenues were derived from
providing services to non-affiliated healthcare providers.
The Company's pharmacy operations provide prescription services and basic
pharmaceutical dispensing programs to Company and third party healthcare
facilities. During 1995, 55% of revenues from pharmacy operations were derived
from providing services to non-affiliated healthcare providers and patients at
Regency facilities billed directly to third-party payors. In January and
February of 1996, the Company acquired three additional pharmacy operations
accounted for under the purchase method of accounting. During 1996, 65% of the
revenues of pharmacy operations were derived from providing services to non-
affiliated healthcare providers and patients at Regency facilities billed
directly to third party payors.
The Company's home health operations provide skilled nursing, rehabilitation
and other services in selected areas in California and Ohio. The Company has
positioned its home healthcare capabilities to serve its facilities' home health
needs. During January 1997, two of the home healthcare agencies were
consolidated resulting in a reduction of one agency.
22
Results of Operations
The following table sets forth the amounts of certain elements of net
operating revenue and the percentage of total net operating revenue for the
periods presented:
Year ended December 31,
1996 1995 1994
---------------------- --------------------- ---------------------
(Dollars in thousands)
Basic nursing care................. $285,819 51% $227,243 55% $216,623 58%
Subacute........................... 169,664 31 134,601 32 129,663 34
------------ -------- ----------- -------- ----------- --------
Total nursing center operations 455,483 82 361,844 87 346,286 92
Contract rehabilitation therapy
operations to non-affiliates (1). 42,577 8 12,240 3 -- --
Pharmacy operations to 21,994 4 7,157 2 4,697 1
non-affiliates (2)...............
Home healthcare operations......... 35,302 6 31,792 7 24,456 6
Interest........................... 2,694 -- 3,060 1 1,897 1
============ ======== =========== ======== =========== ========
Total......................... $558,050 100% $416,093 100% $377,336 100%
============ ======== =========== ======== =========== ========
(1) Net of intercompany billings of $18,004,000 and $3,267,000 for the years
ended December 31, 1996 and 1995, respectively.
(2) Net of intercompany billings of $11,912,000, $5,971,000, and $5,107,000, for
the years ended December 31, 1996, 1995 and 1994, respectively.
The following table sets forth certain operating data for the Company for the
periods presented:
Year ended December 31,
1996 1995 1994
--------- -------- ----------
Patient Days by Payor:
Medicare........................... 307,313 244,729 239,003
Private/Other...................... 760,992 678,310 708,477
Managed Care....................... 116,508 94,072 72,065
Medicaid........................... 2,476,530 1,905,571 1,926,451
========= ========= ==========
Total........................... 3,661,343 2,922,682 2,945,996
========= ========= ==========
Home Health Visits.................... 253,855 260,526 217,662
Home Health Hours (1)................. 448,717 395,871 --
Revenue Mix:
Medicare........................... 29.3% 31.9% 31.3%
Private/Other...................... 25.0% 22.8% 21.4%
Managed Care....................... 5.1% 5.4% 4.6%
Medicaid........................... 40.6% 39.9% 42.7%
(1) Information not compiled in 1994.
23
The following table presents the percentage of net operating revenue
represented by certain items reflected in the Company's Consolidated Statements
of Operations for the periods indicated:
For the year ended December 31,
1996 1995 1994
------ ------ ------
Net operating revenue.............................100.0% 100.0% 100.0%
------ ------ ------
Costs and expenses:
Operating expenses............................. 81.2 80.7 81.6
Corporate general and administrative........... 4.4 4.8 5.1
Rent expense................................... 4.5 4.0 4.1
Depreciation and amortization.................. 2.7 2.4 2.5
Interest expense............................... 3.2 2.3 2.1
Merger and restructuring expenses.............. -- -- 3.9
Class action lawsuit settlement................ -- 0.8 --
Restructuring and other non-recurring charges.. 2.0 2.2 0.4
------ ------ ------
Total costs and expenses....... 98.0 97.2 99.7
====== ====== ======
Income before provision for income taxes and
extraordinary item.......................... 2.0% 2.8% 0.3%
====== ====== ======
Fiscal Year Comparison 1996 to 1995
Net Operating Revenue
The Company's net operating revenue for the fiscal year ended December 31,
1996 ("Fiscal 1996") was $558.1 million compared to $416.1 million for the
fiscal year ended December 31, 1995 ("Fiscal 1995"), an increase of $142.0
million or 34.1%.
Net operating revenue from nursing center operations increased $93.7 million
or 25.9% to $455.5 million from $361.8 million primarily due to revenues of
$78.8 million from the 1996 acquisition of 19 nursing facilities and an increase
in same store revenues (including the impact of sold buildings) of $14.9
million. The increase in same store revenues (excluding sold buildings) was
primarily due to an increase in patient days of 3.9% and an increase in average
rates per patient day of 5.7%, on a same store basis. The increase in
reimbursement rates per patient day of 5.7% was primarily due to providing
services to higher acuity patients, an increase in the Medi-Cal reimbursement
rates beginning in August 1996 and the Company recognizing revenues associated
with the elimination of the Medicare Routine Cost Limit (RCL) inflationary
freeze. The increase in services provided to higher acuity patients is
demonstrated by the shift in payor mix on a same store basis from Medicaid
(43.2% to 42.3%) and private and other (20.4% to 19.5%) to Medicare (30.1% to
31.1%) and managed care (6.2% to 7.0%). The Medi-Cal rate increases in August
1996 resulted in approximately $1.0 million in revenues. The revenue associated
with the elimination of the RCL inflationary freeze totaled $1.5 million.
Net operating revenue from contract rehabilitation therapy operations to non-
affiliates increased $30.3 million or 247.8% in 1996 over 1995 primarily due to
the operations of SCRS being included for the full year in 1996 versus a half
year in 1995 and an increase in the number of non-affiliated facilities served
to 114 in 1996 from 79 in 1995. Net operating revenue from pharmacy operations
to non-affiliates and services to patients in the Company's facilities billed
directly to third parties increased $14.8 million or 207.3% in 1996 over 1995,
primarily due to the acquisitions of Assist-A-Care pharmacy in January 1996 and
Executive Pharmacy in February 1996 (collectively, the "Pharmacy Acquisitions").
Net operating revenue from the pharmacy acquisitions was approximately $12.0
million in 1996. Net operating revenue from home healthcare operations grew $3.5
million or 11.0% in 1996 over 1995 primarily due to an increase in treatment
hours from 395,871 in 1995 to 448,717 in 1996 and an increase in revenue per
visit.
24
Costs and Expenses
Total costs and expenses increased $142.7 million or 35.3% to $547.0 million
(98.0% of net operating revenue) in 1996 from $404.3 million (97.2% of net
operating revenue) in 1995.
Operating expenses as a percentage of net operating revenue increased from
80.7% in 1995 to 81.2% in 1996. The increase resulted from the incurrence of
increased labor costs in the nursing center operations while reimbursement rates
per patient day for room and board charges remained relatively flat for the
Medi-Cal and Medicare systems during the first and second quarters of 1996. In
addition, the home health agencies participating in the Medicare Prospective Pay
System pilot project beginning in 1996 did not adequately reduce costs at the
outset of this program in the first quarter of 1996. The Company made the
necessary cost reductions during the second and third quarters and realized the
benefits of the Medi-Cal rate increases and the elimination of the RCL freeze
discussed above in the third and fourth quarters. For the fourth quarter of
1996, operating costs as a percentage of revenue were 80.3%.
Corporate general and administrative expense is the corporate overhead and
regional costs related to the supervision of operations. The expense increased
from $19.8 million in 1995 to $24.3 million in 1996 due primarily to the
acquisition of 18 healthcare facilities effective February 1, 1996, the
acquisition of one healthcare facility effective April 1, 1996 and the Pharmacy
Acquisitions (collectively, the "1996 Acquisitions"). However, this expense
decreased as a percentage of revenue from 4.8% in 1995 to 4.4% in 1996. The
decrease as a percentage of revenue is attributed to achieving economies of
scale through acquisition, the reduction of certain corporate office expenses
and same store growth.
Rent expense as a percentage of revenue increased from 4.0% in 1995 to 4.5%
in 1996 primarily due to the assumption of lease obligations from the 1996
Acquisitions.
Depreciation and amortization expense as a percentage of net operating
revenue increased to 2.7% in 1996 from 2.4% in 1995 primarily due to goodwill
amortization related to the purchase of SCRS in July 1995 and the 1996
Acquisitions.
Interest expense increased as a percentage of net operating revenue to 3.2%
in 1996 from 2.3% in 1995 primarily due to the Company issuing the 9 7/8% Senior
Subordinated Notes (the "Senior Subordinated Notes") in October 1995 partially
offset by the repayment of the 8.1% Senior Secured Notes in that month, as well
as the issuance of the 12 (0)% Subordinated Notes in June 1996 partially offset
by the repayment of the 6 (OMEGA)% Convertible Subordinated Debentures in July
1996.
In Fiscal 1995, the Company settled its class action lawsuit resulting in a
pre-tax charge of $3.1 million ($1.9 million net of taxes).
As discussed above, the Company began the transition from development to the
implementation of its strategic plan to achieve lower operating costs and offer
an integrated delivery system during Fiscal 1996. Initiatives associated with
the restructuring include: making a significant investment in information
technology; integrating divisional operations within regional markets;
consolidating and automating the pharmacy operations; reducing the
administrative costs within the home healthcare operations; automating and
streamlining certain functions within the nursing operations; and streamlining
the corporate support structure. As a result of these initiatives, during the
fourth quarter of 1996 the Company recorded a restructuring charge of $6.6
million ($4.0 million after tax). The Company also recorded non-recurring
charges related to consulting fees owed for which there is no future benefit,
the establishment of additional reserves for certain notes and non-patient
receivables, the impairment of certain other long-term assets and a reduction
the assets held for sale reserve established in 1995 in an aggregate amount of
$4.7 million ($2.8 million after tax).
In Fiscal 1996, the Company recorded an extraordinary charge of $1.2 million,
net of tax, resulting from the redemption of all $48.9 million of the
outstanding Convertible Subordinated Debentures and the refinancing of the
25
Industrial Revenue Bond Issues (IRBs). The redemption of the Convertible
Subordinated Debentures produced an extraordinary loss on extinguishment of debt
of $868,000, net of tax, resulting from the write off of unamortized
underwriting costs and the refinancing of the IRBs resulted in an extraordinary
loss on extinguishment of debt of $325,000 net of tax, resulting from the write
off of unamortized underwriting costs and a call premium paid. In Fiscal 1995,
the Company repaid its $30.0 million Senior Secured Notes, resulting in costs
and a prepayment penalty totaling $2.7 million ($1.6 million net of taxes),
classified as an extraordinary item.
Fiscal Year Comparison 1995 to 1994
Net Operating Revenue
The Company's net operating revenue for Fiscal 1995 was $416.1 million
compared to $377.3 million for the fiscal year ended December 31, 1994 ("Fiscal
1994"), an increase of $38.8 million or 10.3%.
Net operating revenue from nursing operations increased $15.6 million or 4.5%
due to increased levels of reimbursement and a shift in payor mix from Medicaid
to Medicare and managed care, partially offset by a slight decrease in total
patient days. The average increase in reimbursement rates for all payors was
5.3% and was primarily due to providing services to higher acuity patients. The
Company experienced a 0.8% net decrease in total patient days in Fiscal 1995
from Fiscal 1994, consisting of a decrease of 20,880 and 30,167 from Medicaid
and private and other sources, respectively, and an increase of 5,726 and 22,007
from Medicare and managed care, respectively.
Net operating revenue from home health operations grew $7.3 million or 30.0%
in Fiscal 1995 over Fiscal 1994, primarily reflecting additional patient visits.
Pharmacy operations revenues increased $2.5 million or 52.4% in Fiscal 1995 over
Fiscal 1994, primarily as a result of increased pharmacy services provided to
patients serviced in the Company's facilities and billed directly to the
appropriate payors and not the facility. Net operating revenue from contract
rehabilitation therapy operations are a result of the purchase of SCRS in July
1995.
Interest income increased $1.2 million in Fiscal 1995 over Fiscal 1994 due to
investment of proceeds from the issuance of the Senior Subordinated Notes in an
aggregate amount of $110.0 million in October 1995 .
Costs and Expenses
Total costs and expenses for Fiscal 1995 increased $28.2 million, or 7.5%, to
$404.3 million (97.2% of net operating revenue) from $376.1 million (99.7% of
net operating revenue) for Fiscal 1994. This decrease in total costs and
expenses as a percentage of revenues was primarily a result of the merger and
restructuring expenses incurred in Fiscal 1994, partially offset by the class
action lawsuit settlement and the additional disposition of assets charge
recorded in Fiscal 1995. Excluding these non-recurring expenses, total costs and
expenses increased to $392.2 million (94.3% of net operating revenue) in Fiscal
1995 from $359.9 million (95.4% of net operating revenue) in Fiscal 1994,
primarily as a result of providing more services to patients.
Operating expenses as a percentage of net operating revenue decreased to
80.7% for Fiscal 1995, from 81.6% for Fiscal 1994. This decline was primarily
attributable to growth in the Company's higher margin businesses such as
subacute care, contract rehabilitation therapy and pharmacy services in Fiscal
1995.
Corporate general and administrative expense increased $0.4 million, or 2.2%
from Fiscal 1994 to Fiscal 1995, while decreasing as a percentage of net
operating revenue to 4.8% for Fiscal 1995, from 5.1% for Fiscal 1994. The
decrease as a percentage of revenues was attributable to the Company's achieving
12 months of economies of scale in 1995 by eliminating duplicate costs after the
Merger in 1994.
26
Interest expense as a percentage of net operating revenue increased to 2.3%
in Fiscal 1995 from 2.1% in Fiscal 1994, primarily as a result of the issuance
of the Senior Subordinated Notes in October 1995.
As a result of the Merger, in Fiscal 1994, the Company accrued $14.7 million
($10.6 million net of taxes) of estimated fees and expenses related to the
transaction as required under the pooling-of-interests accounting method. No
comparable fees and expenses were incurred during Fiscal 1995.
In Fiscal 1995, the Company settled its class action lawsuit resulting in a
pre-tax charge of $3.1 million ($1.9 million net of taxes).
In Fiscal 1995, the Company completed the disposition of previously
identified facilities and determined to dispose of an additional 13 nursing
facilities located in California, resulting in an additional pre-tax charge of
$9.0 million ($8.2 million net of taxes). In Fiscal 1994, the Company incurred a
loss of $1.6 million ($1.0 million net of taxes) resulting from closure of one
facility which was substantially damaged in the January 1994 Northridge,
California earthquake, and the abandonment of its leasehold interest.
In Fiscal 1995, the Company repaid its $30.0 million Senior Secured Notes,
resulting in costs and a prepayment penalty totaling $2.7 million ($1.6 million
net of taxes), classified as an extraordinary item.
Liquidity and Capital Resources
Working capital at December 31, 1996 decreased $50.0 million to $67.2 million
(including cash and cash equivalents of $22.9 million) from $117.2 million
(including cash and cash equivalents of $104.2 million) at December 31, 1995.
The decrease was primarily attributable to funding the 1996 Acquisitions
(including funding of working capital), funding of a workers' compensation trust
and the purchase of treasury stock. The Company established a revocable workers'
compensation claims payment trust to pre-fund its workers' compensation
obligations which was funded for Fiscal 1995 in March 1996 with approximately
$10.6 million from available cash. The Company anticipates funding an additional
$5 million to $6 million in March of 1997. During Fiscal 1996, the Company's
receivables increased approximately $29.7 million primarily related to the 1996
Acquisitions and growth in ancillary businesses. The estimated third party
settlements increased by $9.4 million partially due to recording revenue related
to RCL exceptions and the elimination of the RCL inflationary freeze. As of
December 31, 1996 and 1995, the Company had RCL exception request receivables
totaling $8.1 million and $4.5 million, respectively.
The Company's major requirements for liquidity relate to funding working
capital, capital improvements, and debt service obligations. The Company must
also provide funding to cover potential delays, temporary cessations or
interruption in payments by third-party payors due to political or budgetary
constraints. In addition, as part of its strategic plan, the Company anticipates
investing approximately $40 million in information technology over the next five
years. A significant portion of this investment will be financed through
operating leases. Management believes that these liquidity needs can be met from
available cash, internally generated funds and existing borrowing capacity under
the NationsBank credit agreement (discussed below).
The Company's healthcare facilities require capital improvements for
renovations and improvements in physical appearance. Future capital improvements
may be required as a result of routine regulatory inspections. In addition, the
Company is and will continue to invest in improving its information systems. The
Company's capital expenditures for the years ended December 31, 1996 and 1995
were approximately $12.6 million and $14.2 million, respectively. These capital
expenditures have been financed through a combination of internally generated
funds and debt. The Company expects to spend approximately an aggregate of $14.0
million for capital expenditures during 1997 to be financed through borrowings
under the NationsBank credit agreement (discussed below) and funds generated
from operations.
27
The Company has financed its acquisitions from a combination of borrowings
and funds generated by operations. The Company expects to finance future
acquisitions from a combination of existing cash, the NationsBank credit
agreement (discussed below) and alternative sources such as real estate
investment trusts. Depending on the numbers, size and timing of any such
transactions, the Company may in the future require additional financing in
order to continue to make acquisitions.
During 1996, the Company purchased 862,000 shares of Company common stock at
an average price of $9.56 per share. The transactions, accounted for using the
cost method, reduced stockholders' equity by $8.3 million.
On June 28, 1996 the Company issued 12(0)% Junior Subordinated Notes ("Junior
Subordinated Notes") in an aggregate amount of $50 million. Interest on the
Notes will be payable semi-annually on January 15 and July 15 of each year,
commencing January 15, 1997. The Junior Subordinated Notes will mature on July
15, 2003, unless previously redeemed. Net proceeds received by the Company
totaled approximately $48.4 million and funded the redemption of the Company's
outstanding 6(OMEGA)% Convertible Subordinated Debentures due 2003 on July 29,
1996 (see Note 3 to the Consolidated Financial Statements).
Effective September 30, 1996, the Company refinanced three of its Industrial
Revenue Bond Issues (IRBs) with an aggregate outstanding principal balance of
$7,560,000 with three new issues of tax exempt IRBs maturing through September
2012. One of the new issues bears interest at rates ranging from 4.2% to 6.0%
based on the maturity dates of the individual bonds. The other two IRBs bear
interest at a variable rate initially set at 4.0%, which is capped at 12.0% (see
Note 3 to the Consolidated Financial Statements). The IRBs are now secured by
irrevocable letters of credit rather than mortgages on the specific facilities.
In Fiscal 1996, the Company recorded an extraordinary charge of $1.2 million
resulting from the redemption of all $48.9 million of the outstanding
Convertible Subordinated Debentures and the refinancing of the IRBs. The
redemption of the Convertible Subordinated Debentures produced an extraordinary
loss on extinguishment of debt of $868,000, net of tax, resulting from the write
off of unamortized underwriting costs and the refinancing of the IRBs resulted
in an extraordinary loss on extinguishment of debt of $325,000 net of tax,
resulting from the write off of unamortized underwriting costs and a call
premium paid.
On December 28, 1995 the Company entered into a revolving credit loan
agreement ("Credit Agreement") with NationsBank of Texas, N.A. as agent for a
group of banks, which provided up to $50 million in a revolving line of credit
and letters of credit. No borrowings were drawn on the Credit Agreement at
December 31, 1995 and throughout 1996. On December 20, 1996, the Company
increased the available financing to $100 million and revised certain terms and
covenants through the Amended and Restated Credit Agreement ("Amended Credit
Agreement"). Borrowings bear interest at either the Base Rate plus up to .50% or
the Adjusted Eurodollar Rate plus .75% to 2.00%, depending on the Company's
Consolidated Adjusted Leverage Ratio, all as defined in the Amended Credit
Agreement. The Amended Credit Agreement has scheduled commitment reductions of
$25 million each on January 2, 1999 and 2000 and expires on January 2, 2001. The
Amended Credit Agreement is collateralized by accounts receivable, all of the
common stock of each of the Company's subsidiaries and certain other current
assets of the Company and its subsidiaries. The Amended Credit Agreement, among
other things, (a) requires the Company to maintain certain financial ratios, and
(b) restricts the Company's ability to incur debt and liens, make investments,
pay dividends, purchase treasury stock, prepay or modify certain debt of the
Company, liquidate or dispose of assets, merge with another corporation, and
create or acquire subsidiaries. As of December 31, 1996, $16.2 million of
standby letters of credit were issued in connection with the Company's self-
insured workers' compensation programs and refinanced Industrial Revenue Bonds
(discussed above) out of a total available of $35 million. On January 2, 1997
the Company borrowed $40 million under the Amended Credit Agreement principally
to fund the acquisition of four acute rehabilitation hospitals, ten outpatient
rehabilitation clinics and six neurological treatment centers for $36.3 million
in cash and notes payable totaling $6.7 million.
28
In October 1995, the Company issued the Subordinated Notes in an aggregate
amount of $110 million. Interest on the Subordinated Notes will be payable semi-
annually commencing April 15, 1996. The Subordinated Notes mature on October 15,
2002, unless previously redeemed. The net proceeds to the Company were
approximately $106.7 million, of which approximately $31.5 million were used to
repay the principal and prepayment penalty on the 8.1% Senior Secured Notes and
$47.4 million was used for acquisitions subsequent to December 31, 1995 (see
Notes 3 and 13 to the Company's Consolidated Financial Statements).
Seasonality
The Company's income from operations before fixed charges generally
fluctuates from quarter to quarter. The fluctuation is related to several
factors: the timing of Medicaid rate increases, seasonal census cycles, and the
number of calendar days in a given quarter. As a result, the Company's income
from operations before fixed charges tends to be higher in its third and fourth
quarters when compared to the first and second quarters.
Impact of Inflation
The healthcare industry is labor intensive. Wages and other labor costs are
especially sensitive to inflation. Increases in wages and other labor costs as a
result of inflation, or increases in federal or state minimum wages without a
corresponding increase in Medicare and Medicaid reimbursement rates, could
adversely impact the Company.
Reimbursement
The majority of the Company's net operating revenue is derived from services
provided under the Medicare and Medicaid programs. Numerous proposals relating
to healthcare reform have been or may be introduced in the United States
Congress, state legislatures or by governmental agencies who regulate the
Medicare and Medicaid programs. It is uncertain what reform will ultimately be
enacted by the federal government, any state government or governmental agencies
and therefore, the Company cannot predict at this time the impact on the Company
of any proposed reforms.
As discussed above, the Company provides contract rehabilitation and pharmacy
services to both Regency operated and non-affiliated facilities. Under current
Medicare regulations, reimbursement for these services provided to Medicare
eligible patients in Regency facilities is based upon the related entity's cost
to provide the services unless a significant portion of the related entity's
revenues are derived from non-affiliated facilities. If a significant portion of
the related entity's revenues are derived from non-affiliated facilities,
Medicare will reimburse the facility's cost, which includes a profit paid to the
related entity. During 1995 and prior years, the Company was reimbursed by
Medicare based on its pharmacy operation costs on billings to Regency
facilities, as it did not meet the significant portion criteria. After the
acquisition of Assist-A-Care Pharmacy and Executive Pharmacy in 1996, the
Company believes it meets the significant portion criteria and is recording a
profit on billings for pharmacy services provided to Medicare eligible patients
in Regency facilities. The Company believes it meets the significant portion
criteria for its contract rehabilitation therapy operations provided by SCRS,
and therefore has recorded a profit on billings to Regency facilities since the
acquisition of SCRS. Medicare regulations do not define a "significant portion,"
therefore, the Company's and Medicare's interpretations could differ, which
could result in retroactive adjustments related to the profit on billings to
Regency facilities for pharmacy and contract rehabilitation services.
In the federal budget deficit reduction bill, various reimbursement rules and
regulations were adopted by the federal government that pertain to the Company.
The changes to regulations promulgated under OBRA, some of which expand the
remedies available to enforce regulations mandating minimum healthcare
standards, may have an adverse effect on the Company's operations. The Company
is unable to predict the particular effect on the Company until the manner in
which these regulations are implemented becomes known.
29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements and Supplementary Data
Report of Independent Public Accountants.............................. 31
Consolidated Balance Sheets as of December 31, 1996 and 1995.......... 32
Consolidated Statements of Operations for the Years Ended
December 31, 1996, 1995 and 1994................................... 34
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1996, 1995 and 1994................................... 35
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1995 and 1994................................... 36
Notes to Consolidated Financial Statements............................ 38
30
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Regency Health Services, Inc.:
We have audited the accompanying consolidated balance sheets of REGENCY
HEALTH SERVICES, INC. (a Delaware corporation) and subsidiaries as of December
31, 1996 and 1995 and the related consolidated statements of operations,
stockholders' equity and cash flows for the three years in the period ended
December 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Regency Health Services, Inc.
and subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index of
financial statements is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not a required part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in our audits of the basic financial statements and, in our
opinion, fairly states in all material respects, the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
Orange County, California
February 14, 1997 ARTHUR ANDERSEN LLP
31
REGENCY HEALTH SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS
December 31,
1996 1995
---- ----
CURRENT ASSETS:
Cash and cash equivalents........................................... $ 22,875 $104,238
Restricted cash..................................................... 4,425 --
Accounts receivable, net of allowances of $4,723 and $3,757 at
December 31, 1996 and 1995, respectively.......................... 80,949 51,203
Estimated third party settlements................................... 10,180 800
Notes and other receivables......................................... 1,355 2,182
Deferred income taxes............................................... 6,898 5,447
Assets held for sale................................................ 6,915 8,970
Other current assets................................................ 7,819 6,396
--------- ---------
Total current assets........................................ 141,416 179,236
--------- ---------
PROPERTY AND EQUIPMENT:
Land................................................................ 21,207 21,249
Buildings and improvements.......................................... 100,120 96,396
Leasehold interests - other......................................... 17,640 17,556
Leasehold interests - related party................................. 1,989 2,075
Equipment........................................................... 38,054 24,610
--------- ---------
179,010 161,886
Less accumulated depreciation and amortization...................... (43,938) (34,679)
--------- ---------
Total property and equipment................................ 135,072 127,207
--------- ---------
OTHER ASSETS:
Mortgage notes receivable, net of allowances of $1,352 and $951 at
December 31, 1996 and 1995, respectively......................... 1,014 5,163
Goodwill, net of accumulated amortization of $3,700 and $563 at
December 31, 1996 and 1995, respectively......................... 53,753 13,621
Other assets, net of accumulated amortization of $3,736 and $2,206
at December 31, 1996 and 1995, respectively...................... 22,321 13,715
--------- ---------
Total other assets.......................................... 77,088 32,499
========= =========
$353,576 $338,942
========= =========
The accompanying notes are an integral part of these consolidated statements.
32
REGENCY HEALTH SERVICES, INC.
CONSOLIDATED BALANCE SHEETS (Continued)
(In thousands, except par value)
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31,
1996 1995
---- ----
CURRENT LIABILITIES:
Current portion of long-term debt................................... $ 2,418 $ 4,371
Accounts payable.................................................... 24,958 22,285
Accrued expenses.................................................... 8,290 5,946
Accrued compensation................................................ 26,253 18,051
Accrued workers' compensation....................................... 4,338 5,377
Deferred revenue.................................................... 2,407 1,743
Accrued interest.................................................... 5,578 4,231
--------- ---------
Total current liabilities................................... 74,242 62,004
LONG-TERM DEBT, NET OF CURRENT PORTION................................. 182,490 179,615
OTHER LIABILITIES AND NONCURRENT RESERVES.............................. 10,878 8,988
DEFERRED INCOME TAXES.................................................. 5,018 7,946
--------- ---------
Total liabilities........................................... 272,628 258,553
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; authorized - 35,000 shares;
15,919 and 16,670 shares issued and outstanding at December 31,
1996 and 1995, respectively, net of 862 shares held in treasury
in 1996.......................................................... 168 167
Additional paid-in capital.......................................... 52,031 56,679
Retained earnings................................................... 28,749 23,543
--------- ---------
Total stockholders' equity.................................. 80,948 80,389
========= =========
$353,576 $338,942
========= =========
The accompanying notes are an integral part of these consolidated statements.
33
REGENCY HEALTH SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Year Ended December 31,
1996 1995 1994
---- ---- ----
NET OPERATING REVENUE..................................... $558,050 $416,093 $377,336
------------ ------------- ------------
COSTS AND EXPENSES:
Operating expenses..................................... 453,131 335,849 307,807
Corporate general and administrative................... 24,292 19,811 19,392
Rent expense........................................... 24,956 16,767 15,555
Depreciation and amortization.......................... 15,317 10,122 9,295
Interest expense....................................... 18,060 9,676 7,844
Merger and restructuring expenses...................... -- -- 14,650
Class action lawsuit settlement........................ -- 3,098 --
Restructuring and other non-recurring charges.......... 11,283 9,000 1,600
------------ ------------ -----------
Total costs and expenses............................ 547,039 404,323 376,143
------------ ------------ -----------
INCOME BEFORE PROVISION FOR INCOME TAXES AND EXTRAORDINARY
ITEM................................................... 11,011 11,770 1,193
PROVISION FOR INCOME TAXES................................ 4,612 7,316 1,993
----------- ----------- ----------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 6,399 4,454 (800)
EXTRAORDINARY ITEM - Loss on extinguishment of debt, net of
applicable income taxes of $812 and $1,072 in 1996 and
1995, respectively..................................... (1,193) (1,609) --
----------- ----------- ----------
NET INCOME (LOSS)......................................... $ 5,206 $ 2,845 $ (800)
=========== =========== ==========
INCOME (LOSS) PER SHARE:
Income (loss) before extraordinary item................... $ .39 $ .27 $ (.05)
Extraordinary item........................................ (.07) (.10) --
------------ ------------ -----------
Net income (loss) per share............................... $ .32 $ .17 $ (.05)
============ ============ ===========
Weighted average shares of common stock and equivalents... 16,476 16,654 16,545
============ ============ ===========
The accompanying notes are an integral part of these consolidated statements.
34
REGENCY HEALTH SERVICES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
Additional
Common Stock Paid-In Retained
Shares Amount Capital Earnings Total
------ ------ -------- -------- -----
BALANCE, December 31, 1993................. 16,220 $162 $45,355 $21,498 $67,015
Exercise of stock options............... 95 1 475 -- 476
Conversion of Convertible Subordinated
Debentures........................... 87 1 1,031 -- 1,032
Charge in lieu of income taxes (1994)... -- -- 2,636 -- 2,636
Retroactive charge in lieu of income
taxes (1993)......................... -- -- 2,608 -- 2,608
Net loss................................ -- -- -- (800) (800)
------- ----- -------- -------- --------
BALANCE, December 31, 1994................. 16,402 164 52,105 20,698 72,967
Exercise of stock options............... 211 2 1,254 -- 1,256
Exercise of share appreciation rights... 55 1 614 -- 615
Conversion of Convertible Subordinated
Debentures........................... 2 -- 20 -- 20
Charge in lieu of income taxes.......... -- -- 2,686 -- 2,686
Net income.............................. -- -- -- 2,845 2,845
------- ----- -------- -------- --------
BALANCE, December 31, 1995................. 16,670 167 56,679 23,543 80,389
Exercise of stock options.............. 99 1 680 -- 681
Restricted Stock Distribution........... 12 -- 144 -- 144
Charge in lieu of income taxes.......... -- -- 2,814 -- 2,814
Repurchase of common stock ............. (862) -- (8,286) -- (8,286)
Net income ............................. -- -- -- 5,206 5,206
------- ----- -------- -------- --------
BALANCE, December 31, 1996................. 15,919 $168 $52,031 $28,749 $80,948
======= ===== ======== ======== ========
The accompanying notes are an integral part of these consolidated statements.
35
REGENCY HEALTH SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
1996 1995 1994
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).......................................... $ 5,206 $ 2,845 $ (800)
----------- ------------ -----------
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Extraordinary loss on extinguishment of debt............ 2,005 2,681 --
Depreciation and amortization........................... 15,317 10,122 9,295
Deferred income taxes and charge in lieu of taxes....... (1,317) 4,506 408
Restructuring and other non-recurring charges........... 9,749 9,000 6,052
Other, net.............................................. 122 649 (94)
Change in cash from changes in assets and liabilities,
excluding effects of acquisitions and dispositions:
Accounts receivable................................... (28,537) 1,481 (4,640)
Estimated third party settlements..................... (9,380) (3,569) 1,645
Other current assets.................................. (270) 6,748 (1,582)
Current and other liabilities......................... 11,308 (4,003) 814
----------- ------------ -----------
Net cash provided by operating activities............. 4,203 30,460 11,098
----------- ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions............................................... (50,800) (13,225) --
Proceeds from disposition of facilities.................... 3,682 -- 2,239
Purchases of property and equipment........................ (12,575) (14,223) (12,576)
Collection on mortgage notes receivable.................... 695 349 410
Changes in other assets, net............................... (1,623) (1,278) (2,585)
----------- ------------ -----------
Net cash used in investing activities................. (60,621) (28,377) (12,512)
----------- ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt................................. (62,598) (31,940) (2,705)
Proceeds from issuance of long-term debt................... 56,143 107,162 2,996
Workers compensation trust funding......................... (10,637) -- --
Purchase of treasury stock................................. (8,286) -- --
Proceeds from exercise of options.......................... 433 1,256 476
----------- ------------ -----------
Net cash provided by (used in) financing activities... (24,945) 76,478 767
----------- ------------ -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.......... (81,363) 78,561 (647)
CASH AND CASH EQUIVALENTS, beginning of period................ 104,238 25,677 26,324
----------- ------------ -----------
CASH AND CASH EQUIVALENTS, end of period...................... $ 22,875 $104,238 $25,677
=========== ============ ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest..................... $ 16,713 $ 8,334 $ 6,788
=========== ============ ===========
Cash paid during the year for income taxes................. $ 3,750 $ 2,152 $ 2,651
=========== ============ ===========
The accompanying notes are an integral part of these consolidated statements.
36
REGENCY HEALTH SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During the year ended December 31, 1996:
The Company acquired Assist-A-Care Pharmacy in San Diego,
California and issued a promissory note in the amount of $2.6
million as part of the purchase price.
The Company issued a promissory note in the amount of $2.2 million
in connection with the acquisition of 18 healthcare facilities in
Tennessee and North Carolina.
The Company acquired Executive Pharmacy and issued a promissory
note in the amount of $763,000.
During the year ended December 31, 1995:
$20,000 of the Company's Convertible Subordinated Debentures were
converted into 1,616 shares of common stock.
The Company issued a promissory note of $3,400,000 in connection
with the acquisition of SCRS and Communicology, Inc.
During the year ended December 31, 1994:
$1,076,000 of the Company's Convertible Subordinated Debentures
were converted into 86,946 shares of common stock. Unamortized
debenture fees of $44,000 were offset against additional paid-in
capital.
The accompanying notes are an integral part of these consolidated statements.
37
REGENCY HEALTH SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. MERGER AND BASIS OF PRESENTATION
On April 4, 1994, Regency Health Services, Inc. ("Regency" or the
"Company") and Care Enterprises, Inc. ("Care") completed the merger (the
"Merger"). Pursuant to the Agreement and Plan of Merger, dated as of December
20, 1993, as amended, Care Merger Sub, Inc., a wholly owned subsidiary of
Regency, was merged with and into Care, and Care became a wholly owned
subsidiary of Regency. Each share of common stock of Care was converted into
0.71 of a share of common stock of Regency. Approximately 9,400,000 shares of
common stock were issued in this transaction. At the time of the Merger, Regency
operated 43 healthcare facilities with 4,215 licensed beds and Care operated 51
healthcare facilities with 5,040 licensed beds.
The Merger qualified as a pooling-of-interests transaction under
generally accepted accounting principles. The pooling-of-interests method of
accounting is intended to present as a single interest two or more common
stockholder interests that were previously independent. The pooling-of-interests
method of accounting assumes that the combining companies have been merged from
inception. Consequently, the historical financial statements for periods prior
to the consummation of the combination are restated as though the companies had
been merged since inception. The calculation of income per share for 1994
presented reflects the issuance of .71 of a share of Regency Common Stock for
each share of common and common equivalent share of Care Common Stock. The
restated financial statements are adjusted to conform the accounting policies of
the separate companies.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business As of December 31, 1996, the Company operated 107
healthcare facilities with 11,200 licensed beds that provide nursing,
rehabilitative, subacute and other specialized medical services primarily in
California and in Ohio, West Virginia, North Carolina and Tennessee. Through its
wholly owned home health subsidiaries, the Company provides patients with
technical medical support at home such as infusion therapy, ventilator care and
respite services. The Company also provides ancillary services such as
rehabilitation programs and pharmaceutical services at certain of its healthcare
facilities as well as at non-affiliated facilities.
Principles of Consolidation The consolidated financial statements
include the accounts of the Company and all of its wholly owned subsidiaries.
All significant intercompany accounts and transactions have been eliminated.
Cash and Cash Equivalents For financial reporting purposes, the Company
considers all highly liquid instruments purchased with a maturity of three
months or less to be cash equivalents.
At December 31, 1996 and 1995, the Company held personal funds in trust
for patients approximating $1,505,000 and $690,000, respectively, which are not
reflected on the accompanying balance sheets.
Restricted Cash Restricted cash of $4,425,000 at December 31, 1996
represents the portion of the cash in the Company's pre-funded workers'
compensation claims payment trust expected to be paid during 1997.
Accounts Receivable Accounts receivable are recorded at the net
38
realizable value expected to be received from federal and state assistance
programs or from private sources including managed care organizations and third
party insurers. Receivables from government agencies represent the only
concentrated group of credit risk for the Company. Management does not believe
that there are any credit risks associated with these government agencies other
than possible funding delays. Non-government agency receivables consist of
receivables from various payors that are subject to differing economic
conditions and do not represent any concentrated credit risks to the Company.
Furthermore, management continually monitors and adjusts its reserves and
allowances associated with these receivables.
Property and Equipment At the time of Care's emergence from bankruptcy
on December 31, 1990, property and equipment owned by Care and certain leasehold
interests were adjusted to current fair market value. All other property and
equipment is recorded at cost. The assets are depreciated over their estimated
useful lives using the straight-line method as follows:
Buildings and improvements....................................... 7-40 years
Leasehold interests and improvements............................. Life of leases
Equipment........................................................ 5-10 years
Betterments, renewals, and extraordinary repairs that extend the life
of the asset are capitalized; other repairs and maintenance are expensed. The
cost and accumulated depreciation applicable to assets retired are removed from
the accounts and any gain or loss on disposition is recognized in income.
Assets Held for Sale During 1995, 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." The adoption
of SFAS No. 121 did not have a material effect on the Company's financial
statements. At December 31, 1995, assets held for sale represents the assets of
13 facilities which the Company determined to dispose of in 1995. At December
31, 1996, it represents the assets of the seven remaining facilities which the
Company intends to dispose of during 1997 (see Note 14). Such amounts are
carried at estimated fair value less selling costs.
Goodwill The excess of the purchase price over the value of the net
assets of the businesses acquired by the Company is amortized using the
straight-line method over periods ranging from 15 to 22 years. The Company
periodically evaluates the carrying value of goodwill in relation to the
operating performance and future undiscounted cash flows of the underlying
business to assess recoverability. Adjustments are made if the sum of expected
future net cash flows is less than book value of goodwill and other depreciable
or amortizable assets.
Asset Impairment The carrying values of long-lived assets are reviewed
if the facts and circumstances suggest that an item may be impaired. If this
review indicates that a long-lived asset will not be recoverable, as determined
based on the future undiscounted cash flows of the asset, the Company's carrying
value of the long-lived asset is reduced to fair value.
Other Long-Term Assets Costs incurred to obtain long-term financing are
amortized using the effective interest method. Costs to initiate and implement
subacute specialty units are amortized on a straight-line basis over 36 months.
Deferred Revenue Deferred revenue consists of patient billings recorded
in advance of services rendered.
Workers' Compensation The Company maintains self-insurance programs for
workers' compensation for its nursing facilities in California and Ohio,
pharmacy operations, home health operations and its corporate office employees.
For all other operations, the Company purchases insurance for this risk. The
self-insurance liability under these programs is based on claims filed and
actuarial estimates of claims incurred but not reported. Differences between the
amounts accrued and subsequent settlements are recorded in operations in the
year of settlement.
39
Net Operating Revenue Revenues are derived from the operation of
healthcare facilities, which are subject to federal and state regulation.
Approximately 69.9%, 71.8%, and 74.0%, percent of revenues were derived from
services provided under federal (Medicare) and state (Medicaid) medical
assistance programs for the years ended December 31, 1996, 1995 and 1994,
respectively. Revenues from Medicaid are recorded at the prescribed contract
rate. Revenues from Medicare are recorded based on an estimate of the Company's
reimbursable cost. Limitations on Medicare and Medicaid reimbursement for
healthcare services are continually proposed. Changes in applicable laws and
regulations could have an adverse effect on the levels of reimbursement from
governmental, private, and other sources. These revenues are based, in part, on
cost reimbursement principles and are subject to audit. Provisions for estimated
third-party payor settlements are provided in the period the related services
are rendered. Differences between the amounts accrued and subsequent settlements
are recorded in operations in the year of settlement.
Additionally, the Company's cost of care for its Medicare patients
sometimes exceeds regional reimbursement limits established by Medicare. The
Company has submitted exception requests for 156 cost reports, covering all cost
report periods through December 31, 1994. To date, final action has been taken
by the Health Care Financing Administration ("HCFA") on 105 exception requests.
The Company's final rates as approved by HCFA represent approximately 84% of the
requested rates as submitted in the exception requests. During 1994, the Company
recognized 50% of the 1994 estimated exception requests anticipated to be
received, which represented revenues of approximately $1,550,000. Commencing
January 1, 1995, the Company recognized 70% of the estimated exception requests
anticipated to be received, which represents revenues of approximately
$3,563,000 and $3,001,000 in 1996 and 1995, respectively. Management believes
that the Company will be able to recover its excess costs under any pending
exception requests or under any exception requests that may be submitted in the
future, however there can be no assurance that it will be able to do so.
Stock Based Compensation. Effective January 1, 1996, the Company
adopted the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 requires the Company to disclose proforma net income
and earnings per share as if the fair value based accounting method of SFAS No.
123 had been used to account for stock based compensation. These disclosures are
included in Note 9.
Use of Estimates The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Corporate General and Administrative Expenses During 1995, the Company
changed its classification of general and administrative expenses. Previously,
the Company classified all corporate overhead, regional costs related to the
supervision of operations, the administrative costs at the Company's facilities,
pharmacies, and home care operations as administrative and general expenses. The
Company now classifies corporate overhead and the regional costs related to the
supervision of operations as corporate general and administrative expenses. All
other costs which relate to the daily operations have been classified as
operating expenses for the periods presented. These costs in 1994 have been
reclassified to conform to the 1996 and 1995 presentation.
Financial Statement Presentation Estimated third party settlements
classified in accounts receivable, other assets and other liabilities and non-
current reserves in the 1995 financial statements have been reclassified to
estimated third party settlements in current assets to conform to the 1996
presentation. Certain other amounts have been reclassified in the 1995 and 1994
financial statements to conform to the 1996 presentation.
40
3. LONG-TERM DEBT
Long-term debt consists of the following (dollars in thousands):
December 31,
1996 1995
---- ----
Senior Subordinated Notes, interest at 9.875 percent, due October 2002. Interest
is payable semi-annually on October 15 and April 15, commencing
April 15, 1996; redeemable beginning October 15, 1999.................... $110,000 $110,000
Junior Subordinated Notes, interest at 12.25 percent, due July 2003, interest
payable semi-annually on January 15 and July 15, commencing January 1997;
redeemable beginning July 15, 2000....................................... 50,000 --
Industrial revenue bonds ("IRBs"), interest at rates from 4.0 to 8.25
percent, due through September 2012 in varying amounts................... 9,675 9,800
Note payable, collateralized by a deed of trust, interest at 8.75 percent;
interest and principal payable monthly through September 2033............ 4,697 4,714
Note payable, secured, interest at 9.0 percent, interest and principal
payable monthly, balance due November 2013............................... 4,276 4,308
Convertible Subordinated Debentures, interest at 6.5 percent, due March 2003,
redeemed in 1996......................................................... -- 48,904
Note payable, interest at 6.0 percent. Interest payable quarterly commencing
October 1, 1995; fully repaid in 1996.................................... -- 3,400
Other unsecured indebtedness, interest rates up to 13.0 percent, payable in
varying installments through August 2017................................. 646 1,014
Other secured long-term debt, interest rates up to 10.25 percent, payable in
varying installments through August 2014................................. 5,614 1,846
------------ -------------
184,908 183,986
Less current portion........................................................ 2,418 4,371
------------ -------------
$182,490 $179,615
============ =============
On June 28, 1996, the Company issued 12.25% Junior Subordinated Notes
(the "Junior Subordinated Notes") in an aggregate amount of $50 million. The
Junior Subordinated Notes will mature on July 15, 2003, unless previously
redeemed. Net proceeds received by the Company totaled approximately $48.4
million and funded the redemption of the Company's outstanding 6.5% Convertible
Subordinated Debentures due 2003 (the "Convertible Subordinated Debentures") on
July 29, 1996. The Junior Subordinated Notes contain certain covenants, which
are similar to the 9.875% Senior Subordinated Notes ("Subordinated Notes"),
including limitations on the ability of the Company to, among other things, (a)
incur additional indebtedness and issue redeemable preferred stock, (b) sell
equity interests in subsidiaries, (c) make certain restricted payments (as
defined), (d) create liens, and (e) engage in mergers, consolidations or
transfers of substantially all of the assets of the Company to another party.
Effective September 30, 1996, the Company refinanced three of its
Industrial Revenue Bond Issues (IRBs) with an aggregate outstanding principal
balance of $7,560,000 with three new issues of tax exempt IRBs maturing through
September 2012. One of the new issues has a principal balance of $2,830,000 and
bears interest at rates ranging from 4.2% to 6.0% based on the maturity dates of
the individual bonds. The other two IRBs bear interest at a variable rate
initially set at 4.0% which is capped at 12.0%. The refinancing resulted in an
extraordinary loss on extinguishment of debt of $325,000, net of tax resulting
from the write-off of unamortized underwriting costs and payment of a call
premium. The IRBs are secured by irrevocable standby letters of credit issued
against the Company's Amended Credit Agreement.
On December 28, 1995 the Company entered into a revolving credit loan
agreement ("Credit Agreement") with NationsBank of Texas, N.A. as agent for a
group of banks, which provided up to $50 million in a revolving line of credit
and letters of credit. No borrowings were drawn on the Credit Agreement at
41
December 31, 1995 and throughout 1996. On December 20, 1996, the Company
increased the available financing to $100 million and revised certain terms and
covenants through the Amended and Restated Credit Agreement ("Amended Credit
Agreement"). Borrowings bear interest at either the Base Rate plus up to .50% or
the Adjusted Eurodollar Rate plus .75% to 2.00%, depending on the Company's
Consolidated Adjusted Leverage Ratio, all as defined in the Amended Credit
Agreement. The Amended Credit Agreement has scheduled commitment reductions of
$25 million each on January 2, 1999 and 2000 and expires on January 2, 2001. The
Amended Credit Agreement is collateralized by accounts receivable, all of the
common stock of each of the Company's subsidiaries and certain other current
assets of the Company and its subsidiaries. The Amended Credit Agreement, among
other things, (a) requires the Company to maintain certain financial ratios, and
(b) restricts the Company's ability to incur debt and liens, make investments,
pay dividends, purchase treasury stock, prepay or modify certain debt of the
Company, liquidate or dispose of assets, merge with another corporation, and
create or acquire subsidiaries. As of December 31, 1996, $16.2 million of
standby letters of credit were issued in connection with the Company's self-
insured workers' compensation programs and refinanced Industrial Revenue Bonds
(discussed above) out of a total available of $35 million. On January 2, 1997
the Company borrowed $40 million under the Amended Credit Agreement.
On October 12, 1995, the Company issued Subordinated Notes in an
aggregate amount of $110 million. Net proceeds received by the Company totaled
approximately $106.7 million of which approximately $31.5 million was used to
repay the principal and a prepayment penalty on the Company's 8.10% Senior
Secured Notes (which resulted in a loss on extinguishment of debt of
approximately $1.6 million, net of tax) and $47.4 million was used for
acquisitions in 1996 (see Note 13). The Subordinated Notes contain certain
covenants, including limitations on the ability of the Company to, among other
things, (a) incur additional indebtedness and issue preferred stock, (b) sell
equity interests in subsidiaries, (c) make certain restricted payments (as
defined), (d) create liens, and (e) engage in mergers, consolidations or the
transfer of substantially all of the assets of the Company to another party.
In March 1993, the Company issued $50,000,000 aggregate principal
amount of its Convertible Subordinated Debentures resulting in net proceeds to
the Company of approximately $47,800,000. During the years ended December 31,
1995 and 1994, $20,000 and $1,076,000 of the Convertible Subordinated Debentures
were converted into 1,616 and 86,946 shares of common stock, respectively. On
July 29, 1996, the Company completed the redemption of all $48.9 million of its
outstanding Convertible Subordinated Debentures for cash at such amount from the
proceeds of the Junior Subordinated Notes and available cash. The redemption
reduces fully diluted shares by 3.9 million and produces an extraordinary loss
on extinguishment of debt of $868,000, net of tax, resulting from the write-off
of unamortized underwriting costs.
Each of the mortgage notes and certain IRBs are secured by a first deed
of trust on the related facility. Certain IRBs require the maintenance of debt
service reserve funds and all of the IRBs contain affirmative and negative
covenants.
Principal maturities on long-term debt are as follows (in thousands):
Year Ending December 31,
1997................................................................ $ 2,418
1998................................................................ 3,079
1999................................................................ 497
2000................................................................ 505
2001................................................................ 802
Thereafter.......................................................... 177,607
----------
Total............................................................... $184,908
==========
42
4. INCOME TAXES
The Company and its subsidiaries file consolidated federal and state
income tax returns and account for income taxes under the provisions of SFAS No.
109.
As a result of the Care bankruptcy proceedings, a "change in ownership"
occurred. Prior to the Merger, the Company had substantial net operating loss
carryforwards for tax purposes ("Tax NOL") and income tax credit carryforwards.
In March 1994, the Internal Revenue Service ("IRS") issued final regulations
relative to Tax NOL utilization when a "change in ownership" occurs in
bankruptcy proceedings. These regulations reduced the aggregate Tax NOL
available to the Company but did not limit its annual use.
As a result of the Merger, another "change in ownership" occurred and
the Company's Tax NOL and credit carryforward utilization became subject to a
combined annual limitation of approximately $7.9 million (on a pre-tax basis) in
periods after the Merger.
After considering the adjustments resulting from the IRS examination
for the years 1987 through 1990, the Company has a federal Tax NOL of $2,929,000
and income tax credit carryforwards of $5,503,000 available for use at December
31, 1996. As a result of Fresh Start Reporting, the tax benefits realized from
the pre-bankruptcy Tax NOL and income tax credit carryforwards are recorded as
an increase in additional paid-in capital and are not recorded in the statement
of operations.
The provision for income taxes is as follows (in thousands):
1996 1995 1994
---- ---- ----
Current provision:
Federal........................... $4,950 $ 722 $ 597
State............................. 1,315 1,016 988
--------- -------- ----------
6,265 1,738 1,585
Deferred provision:
Federal........................... (3,797) 2,459 (1,971)
State............................. (670) 433 (257)
--------- -------- ----------
(4,467) 2,892 (2,228)
Charge in lieu of income taxes....... 2,814 2,686 2,636
========= ======== ==========
$4,612 $7,316 $ 1,993
========= ======== ==========
A reconciliation of the federal statutory income tax rate with the
Company's effective tax rate follows:
1996 1995 1994
---- ---- ----
Federal statutory rate...................... 34.0% 34.0% 34.0%
State income taxes, net of federal benefit.. 6.0 6.0 6.0
Disposition of assets charges............... -- 19.6 --
Other non-deductible items.................. -- -- 21.4
Non-deductible merger related expenses...... -- -- 101.4
Goodwill amortization....................... 3.1 1.7 4.4
Other, net.................................. (1.2) 0.8 --
====== ===== =====
41.9% 62.1% 167.2%
===== ===== ======
43
Deferred income taxes arise from temporary differences in the
recognition of certain expenses for financial and tax reporting purposes. The
following is a summary of these differences and the tax effect of each (in
thousands):
1996 1995
---- ----
Deferred income tax assets:
Allowance for doubtful accounts................. $ 1,057 $ 1,054
Net operating loss carryforward................. 996 3,789
Loss contingencies and legal settlements........ 416 734
Workers' compensation claims.................... 5,370 4,827
Covenant not to compete......................... 901 --
Disposition of assets charges................... 4,166 2,844
Accrued interest................................ -- 598
Other reserves.................................. 3,389 1,035
Credit carryforwards............................ 5,519 4,883
Other........................................... 243 613
Valuation allowance............................. (5,207) (10,100)
--------- --------
Total deferred income tax assets................... 16,850 10,277
--------- --------
Deferred income tax liabilities:
Depreciation.................................... (9,417) (9,109)
Other........................................... (5,553) (3,667)
--------- --------
Total deferred income tax liabilities.............. (14,970) (12,776)
--------- --------
Net deferred income tax asset (liability).......... $ 1,880 $ (2,499)
========= ========
The valuation allowance primarily relates to the net operating loss and
income tax credit carryforwards of the Company for periods prior to its
emergence from bankruptcy. If and when such carryforwards are realized, the
offset will be to additional paid-in capital not to the provision for income
taxes.
5. DEFERRED RENT
Several of the Company's facilities and a home health office are leased
under long-term operating leases that specify scheduled rent increases over the
lease terms. Deferred rent of approximately $986,000 and $932,000, at December
31, 1996 and 1995, respectively, has been established to recognize the
difference between the rent expense paid and the straight-line recognition of
minimum rental expense and is classified in other liabilities and noncurrent
reserves.
6. COMMITMENTS AND CONTINGENCIES
Letters of Credit
The Company is contingently liable under letters of credit related to
deposit requirements on its self-insured workers' compensation plans and the
IRBs discussed in Note 3. State regulations require the maintenance of deposits
at specified percentages of estimated future workers' compensation claim
payments that can be satisfied through a combination of cash deposits, surety
bonds and letters of credit. The total amount of letters of credit outstanding
at December 31, 1996 and 1995, were $16,202,000 and $16,050,000, respectively.
At December 31, 1995, the letters of credit were collateralized by cash. The
cash collateral was subsequently released in connection with the Company's
Credit Agreement discussed in Note 3.
44
Leases
The Company leases certain facilities and offices under cancelable and
noncancelable agreements expiring at various dates through 2047. The leases are
generally triple-net leases and provide for the Company's payment of property
taxes, insurance, and repairs. Certain leases contain renewal options and rent
escalation clauses. Rent escalation clauses require either fixed increases or
increases tied to the Consumer Price Index ("CPI"). Six leases include purchase
options at fixed or market prices at various dates.
Future minimum lease payments for operating leases at December 31, 1996
are as follows (in thousands):
Year Ending December 31,
1997......................................... $ 24,402
1998......................................... 23,005
1999......................................... 22,358
2000......................................... 21,460
2001......................................... 20,127
Thereafter................................... 110,805
==========
$222,157
==========
Guarantee of Leases
The Company is contingently liable for certain operating leases assumed
by the purchasers of the Company's leasehold interests in facilities. With the
exception of a single facility re-entered on October 1, 1994, following the
filing of bankruptcy by the Company's sublessee, which has been operated by the
Company since November 1, 1994, the Company is not aware of any failure on the
part of these purchasers to meet the terms of their obligations, and does not
anticipate any expenditures to be incurred in connection with its guarantees. If
a default were to occur, the Company generally would be able to assume
operations of the facility and use the net revenues thereof to defray the
Company's expenditures on these guarantees.
The following is a schedule of future minimum lease payments at
December 31, 1996 for the operating leases for which the Company is contingently
liable (in thousands):
Year Ending December 31,
1997......................................... $ 3,165
1998......................................... 1,125
1999......................................... 1,128
2000......................................... 1,136
2001......................................... 1,023
Thereafter................................... 4,617
=========
$12,194
=========
Litigation
In 1995, a class action lawsuit, which had been filed against the
Company in July 1994, was settled for $9,000,000. The Company's portion of this
settlement, together with related legal fees and other costs, resulted in a pre-
tax charge of $3,098,000, which is included in the consolidated statement of
operations for the year ended December 31, 1995.
The Company is subject to claims and legal actions by patients and
others in the ordinary course of its business. The Company has insurance
policies related to patient care claims and legal actions. In the event
judgments were awarded for non-patient care legal actions or in excess of the
insurance coverage for patient care legal actions, the burden would fall on the
Company. The Company does not expect that the ultimate outcome of an unfavorable
judgment in any pending legal matters would result in a material adverse effect
on the Company's consolidated financial position or results of operations.
45
Employment Agreements
At December 31, 1996, the Company had employment agreements with its
president, and certain executive and senior vice presidents, which provide for
annual base salaries in the aggregate of $1,212,000. The agreements expire at
various dates through 1999.
Insurance
The Company maintains general and professional liability insurance on a
claims made basis, subject to a $100,000 self-insurance retention. In addition,
all-risk property insurance, including earthquake and flood, is maintained for
all Company locations.
The Company estimates its liability under the above described programs,
including potential legal fees and settlement amounts, with respect to incurred
but not reported claims on a monthly basis, based upon its historical
experience.
7. RELATED PARTY TRANSACTIONS
In February 1988, the Company entered into a 20-year lease with three five-
year option periods for its Heritage (Torrance) facility that is owned by a
former director of the Company. The lease provides for monthly payments,
currently $35,000, which are adjusted annually based on the CPI. Lease expense
for the years ended December 31, 1996, 1995 and 1994, was approximately
$419,000, $415,000, and $409,000, respectively.
In June 1990, the Company entered into a ten year lease with four five-
year option periods for its Glendora facility that is directly owned by one
former director and indirectly owned by another director. The lease provides for
equal monthly payments for three years, after which the monthly payment is
adjusted annually based on increases in the CPI. Lease expense for the years
ended December 31, 1996, 1995 and 1994, was approximately $446,000, $437,000,
and $420,000, respectively.
The Company leases from Newport Harbor Investments Limited, Inc. ("Newport
Harbor"), a corporation wholly-owned by a former director of the Company, two
nursing facilities located in Beaumont and Riverside, California. The leases
provide for monthly rent payments of $7,083 and $5,142, respectively, subject to
periodic adjustments based on certain increases in the CPI or Medi-Cal
reimbursement rates. The Riverside facility lease contains an option to purchase
the facility for $675,000, subject to adjustment based on increases in the CPI
from March 1992. In 1992, the Company paid Newport Harbor $120,000 as
consideration for the extension of the purchase option on the Riverside facility
for a five-year period. During 1996 the Company exercised the option and
acquired the facility for approximately $700,000, net of the consideration
already paid. Lease expense paid by the Company for the years ended December 31,
1996, 1995 and 1994, was approximately $133,000, $147,000 and $147,000,
respectively.
The Company had a 26% interest in a pharmacy partnership formed in April
1992, which provided products and services to several healthcare facilities
operated by the Company. For the year ended December 31, 1994 these purchases
totaled approximately $7,525,000. In August 1994, the Company sold its interest
in the pharmacy partnership to the other partner. The Company received its net
equity in the partnership plus $200,000 for goodwill. The total cash received by
the Company was $2,239,000.
8. INCOME (LOSS) PER SHARE
For the years ended December 31, 1996, 1995 and 1994, income (loss) per
share was calculated based on the weighted average number of common and common
equivalent shares outstanding during the periods of 16,476,000, 16,654,000, and
16,545,000, respectively. Fully diluted income (loss) per share for the years
ended December 31, 1996, 1995 and 1994 is not presented because the effect of
the assumed conversion of the Convertible Subordinated Debentures was anti-
dilutive.
46
The 1994 income per share calculation does not include the shares reserved
for issuance in connection with the Company's Share Appreciation Rights Plan,
which provides for settlement of the rights in cash or stock. Through December
31, 1994, all Share Appreciation Rights that had been settled were settled for
cash. During 1995, the Board of Directors settled all remaining outstanding
rights and issued shares which are included in the weighted average share
calculation for 1996 and 1995. (See Note 10.)
9. STOCK OPTIONS
Pursuant to the Merger, Care became a wholly owned subsidiary of Regency.
Stockholders of Care received 0.71 of a share of Regency common stock for each
share of Care common stock outstanding. Pursuant to the Merger, Regency's stock
option plan was amended to increase the number of shares of Regency common stock
available for grant to 1,937,991 shares. This amount does not include the
assumption of the Care stock option plan or share appreciation rights plan.
The Company has a Director Stock Plan whereby each non-employee director of
the Company receives on July 1 of each year 2,000 restricted shares of Company
Common Stock and options to purchase an additional 6,000 shares of Company
Common Stock. The period of restriction for each award of shares of restricted
stock expires on the last to occur of: the end of the six month period following
the grant date; participant's direct or indirect pecuniary ownership of shares
not subject to restrictions for at least 12 months, provided that the
restrictions shall lapse with respect to one restricted share granted for every
two shares of unrestricted shares; and participants attendance at 75% of the
scheduled board meetings during the 12 month period immediately preceding the
grant date. Any shares which remain restricted when a director's service on the
Company's Board terminates, will be forfeited. The stock options are granted at
fair market value on the date of grant and the participants are entitled to
exercise such options beginning six months and one day after grant and ending
ten years after grant. During the years ended December 31, 1996, 1995 and 1994,
the Company awarded 12,000, 14,000, and 12,000 shares of restricted stock,
respectively, and during the year ended December 31, 1994, 6,000 shares of
restricted stock were forfeited. At December 31, 1996 restrictions remained on
12,000 shares of stock. In January 1997, the period of restriction lapsed on
12,000 shares.
The following is a summary of options granted pursuant to Regency's
Employee and Director stock option plans (such amounts do not include restricted
stock awards):
For the year ended December 31,
1996 1995 1994
-------------------------- --------------------------- ----------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Options
outstanding at
the beginning
of the year... 1,226,214 $11.94 1,773,436 $12.37 659,058 $5.63
Granted....... 911,000 10.34 262,641 11.42 1,461,015 15.08
Exercised..... (99,491) 4.28 (210,004) 5.90 (94,736) 5.27
Canceled...... (288,612) 13.28 (599,859) 15.11 (251,901) 13.28
========== ====== ========= ====== ========= ======
Options
outstanding at
the end of the
year.......... 1,749,111 $11.32 1,226,214 $11.94 1,773,436 $12.37
========== ====== ========= ====== ========= ======
Options
Exercisable... 493,008 527,284 701,563
========== ========= =========
47
During 1996, 1995 and 1994, no compensation cost was recognized related to
the above stock options. The following outlines the significant assumptions used
to calculate the fair value information presented utilizing the Black-Scholes
Single Option approach with ratable amortization.
1996 1995
---- ----
Risk-free interest rate.................................... 5.90% 6.14%
Expected life.............................................. 7.65 6.50
Expected volatility........................................ 41% 41%
Expected dividends......................................... - -
Weighted average grant date fair value of options granted.. $5.61 $5.95
A detail of the options outstanding and exercisable as of December 31, 1996
is presented below:
Options outstanding Options exercisable
- - -------------------------------------------------------------------------- ------------------------------
Weighted
average Weighted Weighted
remaining average average
Range of exercise Number contractual exercise Number exercise
prices outstanding life in years price exercisable price
- - ----------------- ----------- ------------- -------- ----------- --------
$3.17 - $6.98 105,561 .84 $ 3.95 100,235 $ 3.94
9.15 - 10.75 821,112 8.83 10.04 86,796 10.15
11.00 - 12.88 389,000 8.72 11.69 71,250 11.68
15.00 - 15.38 433,438 7.34 15.22 234,727 15.21
- - --------------- --------- ---- ------ ------- ------
$3.17 - $15.38 1,749,111 7.96 $11.32 493,008 $11.52
=============== ========= ==== ====== ======= ======
As the Company has adopted the disclosure requirement of SFAS No. 123, the
following table shows pro-forma net income and earnings per share as if the fair
value based accounting method had been used to account for stock-based
compensation cost.
(in thousands, except earnings per share) 1996 1995
---- ----
Net income as reported...................... $5,206 $2,845
Pro forma compensation expense.............. (774) (235)
====== ======
Pro forma net income........................ $4,432 $2,610
====== ======
Pro forma earnings per share................ $.27 $.16
====== ======
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. At December 31, 1996, 2,123,897 shares of common
stock have been reserved for issuance under the Company's stock option plans.
10. SHARE APPRECIATION RIGHTS PLAN
In January 1991, Care's Board of Directors adopted a Share Appreciation
Rights Plan (the "SAR Plan"), which provided for the award of up to 710,000
units to certain key executives. The SAR Plan was amended by the Care Board of
Directors and stockholders in May 1992, and assumed by Regency at the time of
the Merger.
The SAR Plan provides that upon award, 25% of the units vest on each of the
first four anniversaries of the award date and vested units must be exercised
before the fifth anniversary of the award. All outstanding units fully vested on
January 1, 1995. Upon exercise, the awardee is entitled to receive the
difference between the base value and the market value on the
48
date the units are exercised, in cash or stock, at the Company's option. During
1995, the Company discontinued the SAR Plan and settled all outstanding units
for $1,628,000 cash and 55,310 shares. This resulted in a charge to income of
$534,000 during 1995.
The following is a summary of the SAR Plan (as adjusted by the Exchange
Ratio due to the Merger):
Year ended December 31,
1995 1994
---- ----
Units outstanding at beginning of the year...... 236,430 236,430
Granted......................................... -- --
Settled......................................... (236,430) --
Canceled........................................ -- --
======= =======
Units outstanding at end of the year............ -- 236,430
======= =======
Units exercisable at end of the year............ -- 177,322
======= =======
Unit price of outstanding units................. -- $1.41
======= =======
Unit price of settled units..................... $1.41 --
======= =======
11. RETIREMENT SAVINGS PLAN
Regency sponsors an employee retirement savings plan under Section 401(k)
of the Internal Revenue Code. All employees who are regularly scheduled to work
20 hours or more per week, and complete 90 days of service are eligible to
participate. Participants can contribute, on a pre-tax basis, up to 15% of their
earnings to the plan (subject to certain limitations), for which the Company
matched 15% of the first 3% of contributions made for persons with less than
three years of service and 25% of the first 5% for all others. The Company's
contributions are subject to a four-year vesting period. Matching contributions
made by the Company for the years ended December 31, 1996, 1995 and 1994 were
approximately $697,000, $471,000, and $279,000, respectively.
12. MERGER AND RESTRUCTURING EXPENSES
All fees and expenses related to the Merger and to the consolidation and
restructuring of the combining companies during the year ended December 31,
1994, were expensed as required under the pooling-of-interests accounting
method.
49
The following is a summary of the merger and restructuring expenses,
separated into cash and non-cash items (in thousands):
Cash Non-Cash Total
---- -------- -----
Severance..................................................... $ 4,394 $ -- $ 4,394
Management information, accounting,
and operational integration................................ 2,373 -- 2,373
Investment banking fees....................................... 1,400 -- 1,400
Value of assets written off................................... -- 777 777
Legal fees.................................................... 612 -- 612
Mailing and printing costs.................................... 501 -- 501
Merger bonuses................................................ 500 -- 500
Accounting fees............................................... 440 -- 440
Former Care director and officer liability insurance.......... 550 -- 550
Miscellaneous................................................. 453 -- 453
------- ------ -------
11,223 777 12,000
------- ------ -------
Duplicate facility disposals:
Operating losses........................................... 581 -- 581
Value of assets written off................................ -- 1,569 1,569
Loss on disposals.......................................... 500 -- 500
------- ------ -------
1,081 1,569 2,650
======= ====== =======
Total......................................................... $12,304 $2,346 $14,650
======= ====== =======
As of December 31, 1994, the remaining accrual relating to merger and
restructuring expenses was $4,452,000 including cash and non-cash items of
$2,800,000 and $1,700,000, respectively. The remaining accrual consisted of a
provision for duplicate facility disposals of $2.3 million, severance costs of
$1.5 million, investment banking fees of $126,000, and other costs totaling
$545,000. All remaining costs were utilized during 1995. (See Note 14.)
13. ACQUISITIONS
Effective January 2, 1996, the Company completed the acquisition of the
assets of Assist-A-Care, a pharmacy located in San Diego, California. The
purchase price was $5.8 million, composed of $3.2 million cash and a $2.6
million note payable.
Effective February 1, 1996, the Company acquired leasehold interests in 18
health care facilities in Tennessee and North Carolina with 2,375 beds from
Liberty Healthcare Limited Partnership ("Liberty") through an asset purchase for
$39.3 million cash and a note payable for $2.2 million. The Company also
acquired Executive Pharmacy (consisting of one pharmacy in North Carolina and
one in Tennessee) with a $763,000 note payable and an enteral feeding business
for $1.5 million cash from businesses affiliated with Liberty. In addition, the
Company paid $400,000 cash for the inventory of Liberty. A portion of the
purchase was funded with notes payable, which may be reduced as a result of
certain seller liabilities and audit adjustments. Escrow accounts established at
the time of purchase were funded with $2.96 million for payment on the notes
payable and are included in other assets on the accompanying consolidated
balance sheet as of December 31, 1996.
On April 1, 1996, the Company completed the acquisition of the assets of
Buena Vista Nursing Center ("Buena Vista"), a health care facility with 64
skilled nursing beds and 22 assisted living beds, located in Lexington, North
Carolina. The purchase price was $2.875 million, consisting of $2.675 million in
cash and a $200,000 note payable. Payment of the note is dependent upon Buena
Vista attaining certain financial targets.
50
On July 6, 1995, the Company acquired all of the stock of SCRS &
Communicology, Inc. ("SCRS") for a total purchase price of $13.5 million, of
which $3.4 million is represented by a promissory note which was paid in January
1996. SCRS provides contract rehabilitation services to Company operated and
third party healthcare facilities.
All acquisitions during 1995 and 1996 were accounted for under the
purchase method of accounting
The following unaudited pro forma condensed consolidated statements of
earnings present the summarized consolidated results of operations of the
Company after giving effect to the acquisitions of Liberty and Liberty-
affiliated businesses for the years ended December 31, 1996 and 1995, as if such
acquisitions had been consummated on January 1, 1995 (in thousands, except per
share data):
Year ended
December 31,
------------------
1996 1995
---- ----
(Unaudited)
Net operating revenue............................... $564,856 $495,690
Total costs and expenses............................ 553,264 483,020
------- --------
Income before provision for income taxes............ 11,592 12,670
Provision for income taxes.......................... 4,856 7,676
-------- --------
Net income before extraordinary item................ $ 6,736 $ 4,994
======== ========
Income before extraordinary item per common share... $ 0.41 $ 0.30
======== ========
The pro forma results are presented for informational purposes only and
are not necessarily indicative of what results of operations actually would have
been had such acquisitions been consummated at the beginning of such period or
of future operations or results. The effect of the other acquisitions is
immaterial.
14. RESTRUCTURING AND OTHER NON-RECURRING CHARGES
During 1996 the Company developed a comprehensive strategic plan
impacting all of its operating divisions. In connection with this strategic plan
the Company has undertaken initiatives designed to reengineer the operating
model through which it manages its business. This reengineering effort is
focused on identifying and implementing the most effective and efficient model
for managing the delivery of products and services to the Company's patients on
a local market by market basis. The plan includes consolidating and automating
the Pharmacy operations, consolidating the Home Health operations, automating
and streamlining certain functions in the nursing center operations, and
streamlining the corporate support structure. Through this process the Company
identified approximately 350 non-direct patient care positions across all
divisions, including the Corporate Office, which will be eliminated. Of the
positions identified, approximately 30 were eliminated during 1996. The Company
began the implementation phase of this plan during the fourth quarter of 1996.
Additionally, the Company has identified the implementation of
significant management information system (MIS) enhancements as a critical
component of its overall strategic plan. Implementing these MIS initiatives will
be an integral part of the realization of an effective and efficient management
model, through which the Company can monitor its patients, from both a cost and
a clinical perspective, seamlessly throughout the continuum of care and across
all divisions of the Company. Furthermore, these MIS initiatives will provide
management with complete patient information within each local market, which is
vital in the managed care environment of today and in the future. This
implementation is expected to continue during 1997 and into 1998. Several of the
51
Company's current management information systems will be replaced in connection
with the MIS initiatives. The Company has also identified certain impaired
property and equipment and intangible assets and future contractual obligations
that will have no value to the Company under the new operating model due to
obsolescence, consolidation of locations, and streamlining of processes.
Accordingly, the Company has written off certain long-term assets and accrued
certain obligations, including obligations related to leases.
The Company has evaluated the reserve established in 1995 for the
disposition of 13 facilities located in California discussed below and
allowances established for certain notes and other non-patient receivables.
Based on the actual sale of six of the 13 facilities, and the estimated sales
prices for the remaining seven facilities, the Company has reduced the reserve
for the disposition of 13 facilities as of December 31, 1996. Earnings before
income taxes for the remaining seven facilities were $940,000, $765,000 and
$316,000 for 1996, 1995 and 1994, respectively. In addition, an allowance was
established for certain notes and non-patient receivables that arose in prior
years, which were not collected as anticipated by the Company and certain long-
term assets were written down to net realizable value.
The following summarizes the impact of the above items on the Company's
results of operations for 1996:
Non-
Restructuring recurring Total
------------- ---------- ------------
MIS and other property and equipment written off
$2,057,000 $2,320,000 $ 4,377,000
Goodwill and other assets written off........... 2,300,000 1,255,000 3,555,000
Future lease and other obligations.............. 325,000 1,891,000 2,216,000
Severance (including $711,000 paid during 1996).
1,377,000 -- 1,377,000
Allowance for notes and other receivables....... -- 1,010,000 1,010,000
Reengineering costs incurred.................... 511,000 -- 511,000
Reduction of reserve for assets held for sale... -- (1,763,000) (1,763,000)
---------- ---------- -----------
$6,570,000 $4,713,000 $11,283,000
========== ========== ===========
In 1995, the Company determined to dispose of 13 facilities located in
California. In addition, during 1995 the Company completed the disposition of
duplicate facilities identified during 1994 as part of the merger and
restructuring costs, the Simi Valley healthcare facility damaged in the Southern
California (Northridge) earthquake and one other facility, and exchanged
leasehold interests in three nursing centers in New Mexico for leasehold
interest in four nursing centers in Ohio. These transactions resulted in a net
charge of $9,000,000 during 1995. This charge was based upon management's best
estimates of the amounts expected to be estimated fair value less selling costs.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments at
December 31, 1996 are as follows (in thousands):
Carrying
Amount Fair Value
-------- ----------
Cash and cash equivalents.................. $ 22,875 $ 22,875
======== ========
Mortgage notes receivable.................. $ 1,937 $ 1,937
======== ========
Long-term debt, including current portion.. $184,908 $190,139
======== ========
52
The carrying amount approximates fair value for cash and cash
equivalents because of the short maturity of these instruments. The fair value
of mortgage notes receivable was estimated based on the present value of future
cash flows using current rates the Company could obtain on notes with similar
characteristics and maturities. The fair value for the Company's long-term debt
was estimated based on the quoted market prices for the same or similar issues
or on the present value of future cash flows using current rates the Company
could obtain on debt with similar characteristics and maturities.
16. SUBSEQUENT EVENTS
Effective January 1, 1997, the Company acquired four acute
rehabilitation hospitals, eleven outpatient rehabilitation clinics and six
neurological treatment centers from Horizon/CMS Healthcare Corporation ("CMS").
The purchase price was $43.0 million, made up of a cash payment of $36.3 million
and notes payable totaling $6.7 million.
17. QUARTERLY FINANCIAL DATA (UNAUDITED):
Year Ended December 31, 1996
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -----
(in thousands, except per share amounts)
Net operating revenue.............. $129,963 $137,632 $144,103 $146,352 $558,050
======== ======== ======== ======== ========
Income (loss) before extraordinary
item............................ $ 2,737 $ 3,065 $ 3,641 $ (3,044) $ 6,399
======== ======== ======== ======== ========
Net income (loss).................. $ 2,737 $ 3,065 $ 2,448 $ (3,044) $ 5,206
======== ======== ======== ======== ========
Income (loss) per share - Primary:
Income (loss) before
extraordinary item........... $ .16 $ .19 $ .22 $ (.19) $ .39
======== ======== ======== ======== ========
Net income (loss)............... $ .16 $ .19 $ .15 $ (.19) $ .32
======== ======== ======== ======== ========
Income (loss) per share -
Fully Diluted:
Income (loss) before
extraordinary item........... $ .16 $ .18 $ .22 $ (.19) $ .39
======== ======== ======== ======== ========
Net income (loss)............... $ .16 $ .18 $ .15 $ (.19) $ .32
======== ======== ======== ======== ========
Effective January 2, 1996, the Company completed the acquisition of the
assets of Assist-A-Care, a pharmacy located in San Diego, California. The
purchase price was $5.8 million, composed of $3.2 million in cash and a $2.6
million note payable.
Effective February 1, 1996, the Company acquired leasehold interests in
18 health care facilities in Tennessee and North Carolina with 2,375 beds from
Liberty Healthcare Limited Partnership ("Liberty") through an asset purchase for
$39.3 million cash and a note payable for $2.2 million. The Company also
acquired Executive Pharmacy (consisting of one pharmacy in North Carolina and
one in Tennessee) with a $763,000 note payable and an enteral feeding business
for $1.5 million cash from businesses affiliated with Liberty. In addition, the
Company paid $400,000 cash for the inventory of Liberty.
53
On April 1, 1996, the Company completed the acquisition of the assets
of Buena Vista Nursing Center in Lexington, North Carolina. The purchase price
was $2.875 million, consisting of $2.675 million in cash and a note payable for
$200,000.
On July 29, 1996, the Company completed the redemption of all $48.9
million of its outstanding Convertible Subordinated Debentures for cash at such
amount. The redemption reduces fully diluted shares by 3.9 million shares and
results in an extraordinary loss on extinguishment of debt of $868,000, net of
tax, resulting from the write-off of unamortized underwriting costs.
Effective September 30, 1996, the Company refinanced three of its IRBs
with an aggregate outstanding principal balance of $7,560,000 with three new
issues of tax exempt IRBs. The refinancing resulted in an extraordinary loss on
extinguishment of debt of $325,000, net of tax, resulting from the write-off of
unamortized underwriting costs and a call premium paid.
During the fourth quarter of 1996, the Company recorded an $11.3
million charge related to restructuring and other non-recurring items as
discussed in Note 14.
Year Ended December 31, 1995
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -----
(in thousands, except per share amounts)
Net operating revenue.............. $97,548 $99,766 $107,492 $111,287 $416,093
======= ======= ======== ======== ========
Income (loss) before extraordinary
item............................ $ 3,087 $ 1,780 $ 4,042 $ (4,455) $ 4,454
======= ======= ======== ======== ========
Net income (loss).................. $ 3,087 $ 1,780 $ 4,042 $ (6,064) $ 2,845
======= ======= ======== ======== ========
Income (loss) per share - Primary:
Income (loss) before
extraordinary item........... $ .19 $ .11 $ .24 $ (.27) $ .27
======= ======= ======== ======== ========
Net income (loss)............... $ .19 $ .11 $ .24 $ (.36) $ .17
======= ======= ======== ======== ========
Income (loss) per share -
Fully Diluted:
Income (loss) before
extraordinary item........... $ .18 $ .11 $ .22 $ (.27) $ .27
======= ======= ======== ======== ========
Net income (loss)............... $ .18 $ .11 $ .22 $ (.36) $ .17
======== ======= ======== ======== ========
Effective July 6, 1995, the Company acquired all of the stock of SCRS &
Communicology, Inc. ("SCRS") for a total purchase price of $13.5 million, of
which $3.4 million is represented by a promissory note which was paid in January
1996. The acquisition was accounted for under the purchase method of accounting.
SCRS provides rehabilitation services to Company operated and third party
healthcare facilities.
54
In May 1995, a class action lawsuit which had been filed against the
Company in July 1994, was settled for $9,000,000. The Company's portion of this
settlement, together with related legal fees and other costs, resulted in a pre-
tax charge of $3,098,000, which is included in the consolidated statement of
operations for the quarter ended June 30, 1995.
In October 1995, the Company repaid its $30 million, 8.10% Senior
Secured Notes resulting in costs and prepayment penalties of $2,681,000
($1,609,000 net of tax), classified as an extraordinary item in the quarter
ended December 31, 1995.
In December 1995, the Company recorded a $9,000,000 charge, primarily
related to the disposition of certain facilities (See Note 14).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
55
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this item for the Company's directors and
executive officers will be contained in Regency's Notice of Annual Meeting of
Stockholders and Proxy Statement, pursuant to Regulation 14A, to be filed with
the Securities and Exchange Commission on or before April 14, 1997, and is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item will be contained in Regency's Notice
of Annual Meeting of Stockholders and Proxy Statement, pursuant to Regulation
14A, to be filed with the Securities and Exchange Commission on or before April
14, 1997, and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item will be contained in Regency's Notice
of Annual Meeting of Stockholders and Proxy Statement, pursuant to Regulation
14A, to be filed with the Securities and Exchange Commission on or before April
14, 1997 and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item will be contained in Regency's Notice
of Annual Meeting of Stockholders and Proxy Statement, pursuant to Regulation
14A, to be filed with the Securities and Exchange Commission on or before April
14, 1997, and is incorporated herein by reference.
56
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
The following are filed as part of this Report.
(a)(1) FINANCIAL STATEMENTS
Report of Independent Public Accountants.......................... 31
Consolidated Balance Sheets as of December 31, 1996 and 1995...... 32
Consolidated Statements of Operations for the Years Ended
December 31, 1996, 1995 and 1994................................ 34
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 1996, 1995 and 1994.......................... 35
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1995 and 1994................................ 36
Notes to Consolidated Financial Statements........................ 38
(a)(2) FINANCIAL STATEMENT SCHEDULES
Schedule II - Valuation and Qualifying Accounts
All other Financial Statement schedules have been omitted from this
Item 14(a)(2) because they are not applicable or not required or because the
information is included elsewhere in the financial statements or the notes
thereto.
(a)(3) EXHIBITS
Number Description
3.1 Restated Certificate of Incorporation of the Company. (7)
3.2 Restated Bylaws of the Company, and Amendment thereto dated
June 8, 1995 (11).
4.1 Restated Certificate of Incorporation and Restated Bylaws
filed as Exhibits 3.1 and 3.2. (7)(11)
4.2 Specimen of Common Stock Certificate. (1)
4.3 Indenture, dated as of October 12, 1995, for 9-7/8% Senior
Subordinated Notes due 2002, among Registrant, the
Subsidiary Guarantors named therein and U.S. Trust Company
of California, N.A., as Trustee. (originally filed as
Exhibit number 4.4) (12)
4.4 Form of 9 7/8% Senior Subordinated Note due 2003 of Regency
Health Services, Inc. (included in Exhibit 4.3)
4.5 Second Amended and Restated Registration Rights Agreement,
dated as of January 31, 1994, among Regency Health Services,
Inc., Care Enterprises, Inc. and the stockholders named
therein. (originally filed as Exhibit number 4.7) (7)
57
4.6* Registrant's Long-Term Incentive Plan. (originally filed as
Exhibit number 4.8) (4)
4.7* Amendment to Regency Health Services, Inc. Long-Term
Incentive Plan. (originally filed as Exhibit number 4.9)(7)
4.8* Regency Health Services, Inc. Director Stock Plan.
(originally filed as Exhibit number 4.10) (4)
4.9* Indenture, dated as of June 28, 1996, between Regency Health
Services, Inc. As Issuer, the Guarantors named therein and
U.S. Trust Company of California, N.A., as Trustee.
(originally filed as Exhibit number 4.11) (16)
4.10* Form of 12-1/4% Subordinated Note due 2003 of Regency Health
Services, Inc. (included in Exhibit 4.9). (originally filed
as Exhibit number 4.12) (16)
10.1* Registrant's 401 (K) Employee Retirement Savings Plan.
(originally filed as Exhibit number 10.1) (1)
10.2* Form of Indemnity Agreement between the Registrant and its
Directors. (originally filed as Exhibit number 10.3) (1)
10.3 Master Contract for Non-Public, Non-Secretarian School
Agency Services, dated September 16, 1991, between Regency
High School and Long Beach Unified School District.
(originally filed as Exhibit number 10.4) (1)
10.4 Mental Health Services Agreement for adolescent center for
1993, 1994 and 1995, between the County of Los Angeles,
Department of Mental Health and Harbor View, formerly Harbor
View Rehabilitation Center. (originally filed as Exhibit
number 10.5) (2)
10.5 Building Loan Agreement, dated November 20, 1992, by and
between Carmichael Convalescent Hospital and PFC
Corporation. (originally filed as Exhibit number 10.6) (3)
10.6 Security Agreement, dated as of November 20, 1992, between
Carmichael Convalescent Hospital and PFC Corporation.
(originally filed as Exhibit number 10.7) (3)
10.7* Employment Agreement between Regency Health Services, Inc.
and Richard K. Matros dated April 4, 1994. (originally filed
as Exhibit number 10.10) (7)
10.8* Letter agreement between the Registrant and Cecil Mays
(originally filed as Exhibit number 10.14) (9)
10.9* Employment agreement between Regency Health Services, Inc.
and Stephen W. Carlton dated January 9, 1995. (originally
filed as Exhibit number 10.17) (10)
10.10* Indemnification Agreement dated January 1, 1994, between the
Company and Brad L. Kerby. (originally filed as Exhibit
number 10.18) (10)
58
10.11 Stock Purchase Agreement dated as of July 5, 1995 among the
Company, Sherri Medina, Jamison Ashby, Daniel Larson and
Vivra Incorporated. (originally filed as Exhibit number
10.19) (11)
10.12 Promissory Note dated as of July 6, 1995 by the Company in
favor of Vivra Incorporated. (originally filed as Exhibit
number 10.20) (11)
10.13 Indemnification Escrow Agreement dated as of July 6, 1995
among the Company, Vivra Incorporated, SCRS & Communicology,
Inc., of Ohio and Mellon Bank, N.A. (originally filed as
Exhibit number 10.21) (11)
10.14 Form of Non-Competition and Non-Disclosure Agreement dated
as of July 6, 1995 between the Company and each of Sherri
Medina, Jamison Ashby and Daniel Larson. (originally filed
as Exhibit number 10.22) (11)
10.15 Non-Competition and Non-Disclosure Agreement dated as of
July 6, 1995 between the Company and Vivra Incorporated.
(originally filed as Exhibit number 10.23) (11)
10.16 Inducement Agreement dated as of July 6, 1995 among the
Company, Sherri Medina and SCRS & Communicology, Inc., of
Ohio. (originally filed as Exhibit number 10.24) (11)
10.17 Management Services Agreement dated January 1, 1995 between
SCRS & Communicology, Inc., of Ohio and SCRS &
Communicology, Inc. (originally filed as Exhibit number
10.25) (11)
10.18* Employment Agreement dated as of July 6, 1995 between the
Company and Sherri Medina. (originally filed as Exhibit
number 10.26) (11)
10.19* Employment Agreement dated as of June 8, 1995 between the
Company and David A. Grant. (originally filed as Exhibit
number 10.27) (11)
10.20* Severance Agreement and Release of Claims dated as of March
31, 1995 between the Company and Brad L. Kerby. (originally
filed as Exhibit number 10.29) (11)
10.21* Credit Agreement, dated as of December 28,1995, among
Registrant, the financial institutions listed therein as
Lenders, Nations Bank Capital Markets, Inc., as Arranger and
NationsBank of Texas, N.A., as Agent. (originally filed as
Exhibit number 10.31) (13)
10.22* Settlement Agreement and Release of All Claims dated as of
October 18, 1995 between the Company and James R. Wodach
(originally filed as Exhibit number 10.32) (14)
10.23* Employment Agreement dated as of December 15, 1995 between
the Company and Bruce D. Broussard (originally filed as
Exhibit number 10.33) (14)
10.24 Non-Qualified Stock Option Agreement between Regency Health
Services, Inc. and Richard K. Matros dated January 2, 1996.
10.25 Non-Qualified Stock Option Agreement between Regency Health
Services, Inc. and Bruce D. Broussard dated January 2, 1996.
59
10.26* Severance Letter Agreement dated as of February 22, 1996
between the Company and Barbara Garner (originally filed as
Exhibit number 10.34) (14)
10.27 Purchase and Sale Agreement, dated as of January 12, 1996,
between Registrant and Liberty Healthcare Limited
Partnership and Liberty Assisted Living Centers Limited
Partnership. (originally filed as Exhibit number 10.35)(15)
10.28 Stock Purchase and Sale Agreement dated February 1, 1996,
between First Class Pharmacy, Inc., a wholly-owned
subsidiary of the Registrant, and the owners of Common Stock
of Executive Pharmacy Services, Inc. (originally filed as
Exhibit number 10.36) (15)
10.29 Purchase and Sale Agreement - Fresno, dated as of November
19, 1996, between Regency Rehab Hospitals, Inc., a wholly-
owned subsidiary of the Registrant and Continental Medical
Systems, Inc. (originally filed as Exhibit number 2.1) (17)
10.30 Purchase and Sale Agreement - Kentfield, dated as of
November 19, 1996 between Regency Rehab Hospitals, Inc., a
wholly-owned subsidiary of the Registrant and Kentfield
Hospital Corporation. (originally filed as Exhibit number
2.2) (17)
10.31 Stock Purchase and Sale Agreement - Rehabworks of
California, dated as of November 19, 1996, between Regency
Rehab Hospitals, Inc., a wholly-owned subsidiary of the
Registrant and CMS Therapies, Inc. (originally filed as
Exhibit number 2.3) (17)
10.32 Purchase and Sale Agreement - San Bernardino, dated as of
November 19, 1996, between Regency Rehab Hospitals, Inc., a
wholly-owned subsidiary of the Registrant and Continental
Medical Systems, Inc. (originally filed as Exhibit number
2.4) (17)
10.33 Purchase and Sale Agreement - San Bernardino Real Estate,
dated as of November 19, 1996, between Regency Rehab
Properties, Inc., a wholly-owned subsidiary of the
Registrant and Rehab Concepts Corp. (originally filed as
Exhibit number 2.5) (17)
10.34 Purchase and Sale Agreement - San Diego, dated as of
November 19, 1996, between Regency Rehab Hospitals, Inc., a
wholly-owned subsidiary of the Registrant and San Diego
Rehab Limited Partnership. (originally filed as Exhibit
number 2.6) (17)
10.35 Purchase and Sale Agreement - San Diego Real Estate, dated
as of November 19, 1996, between Regency Rehab Properties,
Inc., a wholly-owned subsidiary of the Registrant and San
Diego Health Associates Limited Partnership. (originally
filed as Exhibit number 2.7) (17)
10.36 Purchase and Sale Agreement - Western Neurologic Residential
Centers, dated as of November 10, 1996, between Regency
Rehab Hospitals, Inc., a wholly-owned subsidiary of the
Registrant and Western Neurologic Residential Centers.
(originally filed as Exhibit number 2.8) (17)
60
10.37 First Amendment to Purchase and Sale Agreement - Western
Neurologic Residential Centers, Dated as of November 19,
1996, between Regency Rehab Hospitals, Inc., a wholly-owned
subsidiary of the Registrant and Western Neurologic
Residential Centers. (originally filed as Exhibit number
2.9) (17)
10.38 Regional Office Agreement, dated November 19, 1996, between
Regency Rehab Hospitals, Inc., a wholly-owned subsidiary of
the Registrant and Continental Medical Systems, Inc.
(originally filed as Exhibit number 2.10)(17)
10.39 Amended and Restated Credit Agreement dated as of December
20, 1996 among Regency Health Services, Inc., as borrower,
the Lenders listed, Nationsbanc Capital Markets, Inc., as
arranger, and Nationsbank of Texas, N.A., as agent.
(originally filed as Exhibit number 2.11) (17)
10.40 Amendment and confirmation of Collateral Account Agreement,
Company Pledge Agreement and Company Security Agreement.
(originally filed as Exhibit number 2.12) (17)
10.41 Amendment and Confirmation of Subsidiary Guaranty,
Subsidiary Pledge Agreement and Subsidiary Security
Agreement. (originally filed as Exhibit number 2.13) (17)
10.42 Asset Purchase Agreement among Managed Respiratory Care
Services, Inc. (MRCS), and Arizona corporation, Jean Mathews
and Joe Salazar (the sole stockholders, directors and
officers of MRCS) and SCRS & Communicology, Inc. of Ohio, a
wholly owned subsidiary of the Registrant.
10.43 Financing Agreement by and between the City of Beckley, West
Virginia and Beckley Health Care Corp. ("Beckley Financing
Agreement"), a wholly owned subsidiary of the Registrant,
dated as of September 1, 1996.
10.44 Indenture of Trust relating to $2,830,000 Nursing Facility
Refunding Revenue Bonds, Series 1996 by and between The City
of Beckley, West Virginia and One Valley Bank, National
Association, as Trustee, dated as of September 1, 1996
issued in connection with the Beckley Financing Agreement.
10.45 Financing Agreement by and between the Board of
Commissioners of the County of Perry, Ohio, by and on behalf
of the County of Perry, Ohio and New Lexington Health Care
Corp. ("New Lexington Financing Agreement"), a wholly owned
subsidiary of the Registrant, dated as of September 1, 1996.
10.46 Indenture of Trust relating to $2,545,000 Nursing Facility
Refunding Revenue Bonds, Series 1996 by and between County
of Perry, Ohio and SunTrust Bank, Central Florida, National
Association, as Trustee, dated as of September 1, 1996
issued in connection with the New Lexington Financing
Agreement.
10.47 Financing Agreement by and between the County Commission of
Harrison County by and on behalf of Harrison County, West
Virginia and Salem Health Care Corp. ("Salem Financing
Agreement"), a wholly owned subsidiary of the Registrant,
dated as of September 1, 1996.
10.48 Indenture of Trust relating to $2,185,000 Nursing Facility
Refunding Revenue Bonds, Series 1996 by and between the
County Commission of Harrison County by and on behalf of
Harrison County, West Virginia and One Valley Bank, National
Association, as Trustee, dated as of September 1, 1996
issued in connection with the Salem Financing Agreement.
13 1996 Annual Report to Security Holders
21 List of Subsidiaries of the Registrant
61
23 Consent of Independent Public Accountants
27 Financial Data Schedule
* Management or compensatory plan, contract or arrangement
(1) Incorporated by reference to Regency Health Services, Inc.'s Registration
Statement on Form S-1 (No. 33-45591).
(2) Incorporated by reference to Regency Health Services, Inc.'s 1992 Annual
Report on Form 10-K (File No. 1-11144).
(3) Incorporated by reference to Regency Health Services, Inc.'s Registration
Statement on Form S-1 (No. 33-53590).
(4) Incorporated by reference to Regency Health Services, Inc.'s 1993 Proxy
Statement dated December 10, 1993 (File No. 1-11144).
(5) Incorporated by reference to Regency Health Services, Inc.'s 1993 Annual
Report on Form 10-K (File No. 1-11144).
(6) Incorporated by reference to Regency Health Services, Inc.'s Report on Form
10-Q for the Quarter Ended September 30, 1993 (File No. 1-11144).
(7) Incorporated by reference to Regency Health Services, Inc.'s and Care
Enterprises, Inc.'s Joint Proxy Statement dated March 7, 1994.
(8) Incorporated by reference to Care Enterprises, Inc.'s 1993 Annual Report on
Form 10-K (File No. 1-9310).
(9) Incorporated by reference to Regency Health Services, Inc.'s Transition
Report on Form 10-K (File No. 1-11144).
(10) Incorporated by reference to Regency Health Services, Inc.'s 1994 Annual
Report on Form 10-K (File No. 1-11144).
(11) Incorporated by reference to Regency Health Services, Inc.'s Report on Form
10-Q for the Quarter Ended June 30, 1995 (File No. 1-11144).
(12) Incorporated by reference to Regency Health Services, Inc.'s Report on Form
8-K dated August 24, 1995 (File No. 1-11144).
(13) Incorporated by reference to Regency Health Services, Inc.'s Report on Form
8-K dated December 28, 1995 (File No. 1-11144).
(14) Incorporated by reference to Regency Health Services, Inc.'s 1995 Annual
Report on Form 10-K (File No. 1-11144).
(15) Incorporated by reference to Regency Health Services, Inc.'s Report on Form
8-K dated February 15, 1996 (File No. 1-11144).
(16) Incorporated by reference to Regency Health Services, Inc.'s Report on Form
10-Q for the Quarter Ended June 30, 1996 (File No. 1-11144).
(17) Incorporated by reference to Regency Health Services, Inc.'s Report on Form
8-K dated January 15, 1997.
(b) REPORTS ON FORM 8-K
None.
62
SCHEDULE II
REGENCY HEALTH SERVICES, INC.
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Balance Charged Charged
at to to Balance
Beginning Costs & Other at End
Description of Period Expenses Accounts Deductions of Period
----------- --------- --------- -------- ---------- ---------
FOR THE YEAR ENDED
DECEMBER 31, 1996
Allowance for doubtful
accounts............. $3,757 $2,890 $410 (a) $2,334 $4,723
Allowance for mortgage
loan losses.......... 951 689 -- 288 1,352
------ ------ ----- ------ ------
$4,708 $3,579 $410 $2,622 $6,075
====== ====== ===== ====== ======
FOR THE YEAR ENDED
DECEMBER 31, 1995
Allowance for doubtful
accounts............. $4,189 $1,922 $734 (b) $3,088 $3,757
Allowance for mortgage
loan losses.......... 951 -- -- -- 951
------ ------ ----- ------ ------
$5,140 $1,922 $734 $3,088 $4,708
====== ====== ===== ====== ======
FOR THE YEAR ENDED
DECEMBER 31, 1994
Allowance for doubtful
accounts............. $2,970 $1,344 $687 (c) $ 812 $4,189
Allowance for mortgage
loan losses.......... 1,664 -- -- 713 951
------ ------ ---- ------ ------
$4,634 $1,344 $687 $1,525 $5,140
====== ====== ==== ====== ======
(a) Includes (i) Executive Pharmacy acquired reserves and (ii) recoveries
(b) Includes (i) the reclassification of accruals established in 1994 for
receivables related to duplicate facility disposals, (ii) SCRS acquired
reserves, and (iii) recoveries
(c) Reclassification of reserve established against note received by Care
63
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.
REGENCY HEALTH SERVICES, INC.
Date: March 24, 1997 By /s/ Richard K. Matros
-------------------------
Richard K. Matros
President and Chief Executive Officer
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.
Name and Signature Title Date
By /s/ Richard K. Matros President and Chief March 24, 1997
----------------------------- Executive Officer(Principal
Richard K. Matros executive officer)
By /s/ Bruce D. Broussard Executive Vice President, March 24, 1997
----------------------------- and Chief Financial Officer
Bruce D. Broussard (Principal financial and
accounting officer)
By /s/ John W. Adams Chairman of the Board March 24, 1997
----------------------------- of Directors
John W. Adams
By /s/ Gregory S. Anderson Director March 24, 1997
-----------------------------
Gregory S. Anderson
By /s/ Tony Astorga Director March 24, 1997
-----------------------------
Tony Astorga
By /s/ Robert G. Coo Director March 24, 1997
-----------------------------
Robert G. Coo
By /s/ Richard K. Matros Director March 24, 1997
-----------------------------
Richard K. Matros
By /s/ John F. Nickoll Director March 24, 1997
-----------------------------
John F. Nickoll
By /s/ Arthur J. Pasmas Director March 24, 1997
-----------------------------
Arthur J. Pasmas
64