SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 8-K
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CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) September 25, 1997
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INTEGRATED HEALTH SERVICES, INC.
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(Exact Name of Registrant as Specified in its Charter)
Delaware 1-12306 23-2428312
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(State or Other Jurisdiction (Commission (IRS Employer
of Incorporation) File Number) Identification No.)
10065 Red Run Boulevard, Owings Mills, Maryland 21117
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (410) 998-8400
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Not Applicable
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(Former Name or Former Address, if Changed Since Last Report)
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On September 25, 1997, Integrated Health Services, Inc. ("IHS") acquired,
through a cash tender offer and subsequent merger, Community Care of America,
Inc. ("CCA") for a purchase price of approximately $34.3 million in cash (the
"CCA Acquisition"). In addition, in connection with the CCA Acquisition IHS
repaid approximately $58.0 million of indebtedness assumed in the CCA
Acquisition with the proceeds from the term loans under its new credit facility
and assumed approximately $27.2 million of indebtedness. CCA develops and
operates skilled nursing facilities in medically underserved rural communities.
CCA currently operates 54 licensed long-term care facilities with 4,450 licensed
beds (of which 20 facilities are being held for sale), one rural healthcare
clinic, two outpatient rehabilitation centers, one child day care center and 124
assisted living units within seven of the facilities which CCA operates. CCA
currently operates in Alabama, Colorado, Florida, Georgia, Iowa, Kansas,
Louisiana, Maine, Missouri, Nebraska, Texas and Wyoming. According to CCA's
filings with the Securities and Exchange Commission, CCA had revenues of $127.5
million, earnings before interest, taxes, depreciation and amortization
("EBITDA") of $2.1 million and a net loss of $18.9 million for the year ended
December 31, 1996 and revenues of $65.5 million, EBITDA of $4.0 million and a
net loss of $2.4 million for the six months ended June 30, 1997. Dr. Robert N.
Elkins, Chairman of the Board and Chief Executive Officer of IHS, beneficially
owned approximately 21.0% of CCA's outstanding common stock (excluding warrants
owned by IHS to purchase approximately 13.5% of CCA's common stock).
In connection with the CCA Acquisition, IHS, CCA and Health and Retirement
Properties Trust ("HRPT"), CCA's principal landlord and a significant lender to
CCA, restructured the lease and loan agreements between CCA and HRPT. Under the
agreement, (i) CCA purchased for $33.5 million 14 facilities, aggregating 1,238
beds, previously owned by HRPT and leased to CCA, (ii) approximately $12.2
million principal amount of loans from HRPT to CCA was prepaid and the
collateral security released, (iii) three facilities mortgage financed by HRPT
were sold to HRPT and leased to CCA, and (iv) the leases and mortgages were
modified to reduce future rent and mortgage interest rate increases and release
cash security deposits. IHS has guaranteed all lease and mortgage obligations to
HRPT, which received a $3.7 million modification fee.
ITEM 5. OTHER EVENTS.
IHS acquired, effective September 30, 1997, substantially all of the assets
of the Lithotripsy Division (the "Coram Lithotripsy Division") of Coram
Healthcare Corporation ("Coram"), which operates 20 mobile lithotripsy units and
13 fixed-site machines in 180 locations in 18 states. The Coram Lithotripsy
Division also provides maintenance services to its own and third-party
equipment. Lithotripsy is a non-invasive technique that utilizes shock waves to
disintegrate kidney stones.
2
IHS paid approximately $130.0 million in cash for the Coram Lithotripsy
Division, and assumed $1.0 million of intercompany debt to Coram. The Coram
Lithotripsy Division had revenues of $49.0 million and EBITDA of $28.8 million
(before minority interest) for the year ended December 31, 1996 and revenues of
$23.9 million and EBITDA of $14.3 million (before minority interest) for the six
months ended June 30, 1997.
IHS has assumed Coram's agreements with its lithotripsy partners, which
contemplate that IHS will acquire the remaining interest in each partnership at
a defined price in the event that legislation is passed or regulations are
adopted or interpreted that would prevent the physician partners from owning an
interest in the partnership and using the partnership's lithotripsy equipment
for the treatment of his or her patients.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(A) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED.
1. The consolidated balance sheet of Community Care of
America, Inc. and subsidiaries as of December 31, 1996, and
the related consolidated statements of operations,
shareholders' equity and cash flows for the year ended
December 31, 1996, and the notes thereto, audited by KPMG Peat
Marwick LLP, independent certified public accountants, are
included herein.
2. The unaudited consolidated balance sheet of Community Care
of America, Inc. and subsidiaries as of June 30, 1997 and the
related unaudited consolidated statements of operations,
shareholders' equity and cash flows for the six months ended
June 30, 1996 and 1997 are included herein.
(B) PRO FORMA FINANCIAL INFORMATION.
It is impracticable for IHS to provide the required pro forma
financial information on the date this report is being filed.
IHS intends to file the required financial information under
cover of Form 8-K/A as soon as practicable, but not later than
60 days after the date this report must have been filed.
(C) EXHIBITS.
2. Agreement and Plan of Merger, dated as of August 1, 1997,
among Integrated Health Services, Inc., IHS Acquisition XXVI,
Inc. and Community Care of America, Inc. (incorporated herein
by reference to Exhibit (c)(2) to Integrated Health Services,
Inc.'s Tender Offer Statement
3
on Schedule 14D-1 filed with the Securities and Exchange
Commission on August 7, 1997).
23. Consent of KPMG Peat Marwick LLP.
4
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Community Care of America, Inc.:
We have audited the accompanying consolidated balance sheets of Community
Care of America, Inc. and subsidiaries (the Company) as of December 31, 1995 and
1996 and the related consolidated statements of operations, shareholders' equity
and cash flows for each of the years in the three-year period ended December 31,
1996. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Community
Care of America, Inc. and subsidiaries as of December 31, 1995 and 1996 and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996 in conformity with generally accepted
accounting principles.
As discussed in notes 1 (m) and 12 to the consolidated financial statements,
in 1996 the Company adopted the provisions of the Financial Accounting Standards
Board's Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
KPMG PEAT MARWICK LLP
Baltimore, Maryland
April 14, 1997
5
COMMUNITY CARE OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
DECEMBER 31,
---------------------
1995 1996
--------- -----------
ASSETS
Current Assets:
Cash and cash equivalents............................................... $ 2,485 $ 1,709
Accounts receivable (note 3)............................................ 12,934 16,407
Inventories............................................................. 1,534 1,761
Prepaid expenses and other current assets............................... 3,662 1,095
--------- -----------
Total current assets................................................... 20,615 20,972
Property, plant and equipment, net of accumulated depreciation (notes 4
and 6).................................................................. 54,327 58,424
Notes receivable (note 16)............................................... 2,533 --
Deposits................................................................. 10,244 6,637
Excess of cost over fair value of net assets acquired, net of
accumulated amortization of $139 in 1995 and $710 in 1996 (note 2)...... 3,299 13,666
Deferred financing costs................................................. 948 1,066
Other assets............................................................. 1,324 1,354
--------- -----------
$93,290 $102,119
========= ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt (note 6)........................... $ 1,258 $ 6,341
Accounts payable and accrued expenses (note 5).......................... 14,869 23,402
Put option contracts payable (219,798 shares)(note 16).................. -- 2,181
--------- -----------
Total current liabilities.............................................. 16,127 31,924
--------- -----------
Long-term debt, less current maturities (note 6)......................... 34,407 54,030
Deferred income taxes (note 8)........................................... 9,334 162
Commitments and contingencies (notes 2, 7, 12, 13 and 16)................
Common stock subject to repurchase (219,798 shares) (notes 2 and 16) .... 2,181 --
Shareholders' equity (notes 10 and 15):
Common stock, $.0025 par value; authorized 15,000,000 shares; issued and
outstanding 6,982,789 shares in 1995 and 7,597,801 shares in 1996
(including 219,798 shares subject to repurchase)....................... 17 19
Additional paid-in capital.............................................. 31,356 36,465
Deficit................................................................. (132) (19,037)
Receivable from shareholders (note 2)................................... -- (1,444)
--------- -----------
Net shareholders' equity............................................... 31,241 16,003
--------- -----------
$93,290 $102,119
========= ===========
See accompanying notes to consolidated financial statements.
6
COMMUNITY CARE OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31,
------------------------------------
1994 1995 1996
----------- ----------- ------------
Operating revenues:
Net patient service revenues........................... $ 56,699 $ 92,259 $ 123,143
Other operating revenues............................... 793 1,919 4,369
----------- ----------- ------------
Total operating revenues.............................. 57,492 94,178 127,512
----------- ----------- ------------
Operating expenses:
Facility operating expenses............................ 46,035 73,693 111,171
Corporate administrative and general................... 2,935 4,765 5,226
Rent (note 7).......................................... 3,806 6,404 8,999
Depreciation and amortization.......................... 1,465 2,033 3,021
Interest, net of interest income (note 6).............. 2,857 3,795 5,337
Loss on impairment of investments and other
non-recurring charges (note 12)....................... -- -- 22,128
----------- ----------- ------------
Total operating expenses.............................. 57,098 90,690 155,882
----------- ----------- ------------
Earnings (loss) before income taxes and extraordinary
charge............................................... 394 3,488 (28,370)
Federal and state income taxes (note 8)................. -- 1,047 (9,465)
----------- ----------- ------------
Earnings (loss) before extraordinary charge........... 394 2,441 (18,905)
Extraordinary charge, net of income taxes (note 15) .... -- (992) --
----------- ----------- ------------
Net earnings (loss)................................... 394 1,449 (18,905)
Dividends-preferred stock............................... (653) (408) --
----------- ----------- ------------
Net earnings (loss) applicable to common stock........ $ (259) $ 1,041 $ (18,905)
=========== =========== ============
Per common share:
Earnings (loss) before extraordinary charge............ $ (0.13) $ 0.42 $ (2.56)
Extraordinary charge................................... -- (0.20) --
----------- ----------- ------------
Net earnings (loss).................................... $ (0.13) $ 0.22 $ (2.56)
=========== =========== ============
Weighted average number of common and common equivalent
shares outstanding..................................... 2,041,154 4,840,457 7,384,697
=========== =========== ============
See accompanying notes to consolidated financial statements.
7
COMMUNITY CARE OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS)
ADDITIONAL RECEIVABLE
COMMON PAID IN ACCUMULATED FROM
STOCK CAPITAL (DEFICIT) SHAREHOLDERS TOTAL
-------- ------------ ------------- -------------- -----------
Balance at December 31, 1993............................. $ 4 $ 5,251 $ (914) $ -- $ 4,341
Issuance of 216,428 shares of common stock at $6.19 per
share, net of stock issuance costs....................... 1 1,034 -- -- 1,035
Accretion of discount on redeemable preferred stock
(note 9)................................................. -- (372) -- -- (372)
Dividends declared -- redeemable preferred stock ........ -- -- (653) -- (653)
Net earnings............................................. -- -- 394 -- 394
-------- ------------ ------------- -------------- -----------
Balance at December 31, 1994............................. 5 5,913 (1,173) -- 4,745
Issuance of 3,450,000 shares of common stock at $9.50
per share, net of stock issuance costs (note 13) ........ 9 27,580 -- -- 27,589
Redemption of preferred stock of $8,167 and exercise of
warrants for 1,331,814 shares of common stock at par
value.................................................... 3 (2,006) -- -- (2,003)
Amortization of restricted stock awards.................. -- 100 -- -- 100
Accretion of discount on redeemable preferred stock
(note 9)................................................. -- (231) -- -- (231)
Dividends declared -- redeemable preferred stock ........ -- -- (408) -- (408)
Net earnings............................................. -- -- 1,449 -- 1,449
-------- ------------ ------------- -------------- -----------
Balance at December 31, 1995............................. 17 31,356 (132) -- 31,241
Exercise of employee stock options for 33,385 shares of
common stock at prices ranging from $3.71 to $10.11 per
share.................................................... -- 160 -- -- 160
Issuance of 581,627 shares of common stock in connection
with acquisitions at prices ranging from $8.44 to $11.77
per share (note 2)....................................... 2 4,949 -- (1,444) 3,507
Net loss................................................. -- -- (18,905) -- (18,905)
-------- ------------ ------------- -------------- -----------
Balance at December 31, 1996............................. $ 19 $36,465 $(19,037) $(1,444) $ 16,003
======== ============ ============= ============== ===========
See accompanying notes to consolidated financial statements.
8
COMMUNITY CARE OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEARS ENDED DECEMBER 31,
----------------------------------
1994 1995 1996
---------- ---------- ------------
Cash flows from operating activities:
Net earnings (loss).......................................... $ 394 $ 1,449 $(18,905)
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities:
Loss on impairment of investments and other non-recurring
charges.................................................... -- -- 22,128
Depreciation and amortization............................... 1,465 2,033 3,021
Amortization of deferred financing costs.................... 68 123 399
Extraordinary charge, net of tax............................ -- 992 --
Amortization of restricted stock award...................... -- 100 --
Deferred income taxes....................................... -- 541 (9,465)
Net change in operating assets and liabilities:
Increase in accounts receivables........................... (4,479) (4,609) (3,615)
Decrease (increase) in inventory, prepaid expenses and
other current assets...................................... (89) (1,787) 2,999
Increase (decrease) in accounts payable and accrued
liabilities............................................... (4,154) 4,179 993
---------- ---------- ------------
Net cash provided by (used in) operating activities........ (6,795) 3,021 (2,445)
---------- ---------- ------------
Cash flows from investing activities:
Property, plant and equipment additions, including costs of
terminated activities of $9,258 in 1996 .................... (2,472) (6,647) (12,117)
Business acquisitions (note 2)............................... (78) (10,719) (6,132)
Notes receivable............................................. -- (2,533) (233)
Deposits..................................................... 2,000 (3,194) (519)
Other assets................................................. (443) (877) 798
---------- ---------- ------------
Net cash used in investing activities...................... (993) (23,970) (18,203)
---------- ---------- ------------
Cash flows from financing activities:
Proceeds from issuances of common stock, net of stock
issuance costs.............................................. 402 27,589 160
Redemption of preferred stock and warrants (notes 9 and 15).. -- (8,142) --
Dividends on preferred stock................................. (490) (571) --
Principal reductions on long-term debt....................... (24,233) (60,404) (19,782)
Proceeds from long-term debt borrowings...................... 30,719 61,733 41,931
Deferred financing costs, including terminated offerings of
$1,677 in 1996.............................................. (1,179) (696) (2,437)
---------- ---------- ------------
Net cash provided by financing activities.................. 5,219 19,509 19,872
---------- ---------- ------------
Decrease in cash.............................................. (2,569) (1,440) (776)
Cash and cash equivalents, beginning of period................ 6,494 3,925 2,485
---------- ---------- ------------
Cash and cash equivalents, end of period...................... $ 3,925 $ 2,485 $ 1,709
========== ========== ============
See accompanying notes to consolidated financial statements.
9
COMMUNITY CARE OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Organization and Basis of Presentation
Community Care of America, Inc. (CCA) is a Delaware corporation originally
incorporated on December 28, 1992. CCA began incurring start-up expenses in 1993
but had no significant operations until its acquisition of all the capital stock
of MeritWest, Inc. ("MeritWest") on December 30, 1993. For accounting purposes,
this acquisition has been treated as effective as of December 31, 1993 and,
accordingly, the results of operations of this acquired company are included in
CCA's consolidated financial statements beginning on January 1, 1994.
The consolidated financial statements include the accounts of CCA and its
wholly-owned subsidiaries (collectively the Company). In consolidation, all
significant intercompany balances and transactions have been eliminated. At
December 31, 1996, CCA owned, leased or managed 54 long-term care facilities,
one hospital, two physician practices, two primary care clinics, one rural
healthcare clinic, one outpatient rehabilitation center, one child care center,
one home healthcare agency and an aggregate of 115 assisted living units in six
communities the Company serves.
(b) Patient Service Revenues
Patient service revenues are recorded at established rates and adjusted for
differences between such rates and estimated amounts reimbursable by third-party
payors. Estimated settlements under third-party payor retrospective rate setting
programs (primarily Medicare and Medicaid) are accrued in the period the related
services are rendered. Settlements receivable and related revenues under such
programs are based on annual cost reports prepared in accordance with Federal
and state regulations, which reports are subject to audit and retroactive
adjustment in future periods. In the opinion of management, adequate provision
has been made in the consolidated financial statements for such adjustments;
however, the ultimate amount of adjustments could be in excess of amounts
provided.
(c) Management Fee Revenues
Management fee revenues are recognized when earned and collectibility is
reasonably assured.
(d) Cash and Cash Equivalents
Cash equivalents consist of highly liquid debt instruments with original
maturities of three months or less.
(e) Property, Plant and Equipment
The Company capitalizes costs associated with acquiring health care
facilities and related interests therein. Pre-acquisition costs represent direct
costs of the investigation and negotiation of the acquisition of operating
facilities; indirect and general expenses related to such activities are
expensed as incurred. Pre-acquisition costs and construction in progress are
transferred to depreciable asset categories when the related tasks are achieved
or are charged to operating expenses when it is determined that the related
acquisition will not be consummated. Interest costs incurred during construction
and renovation are capitalized.
The Company capitalizes development costs which represent the direct and
incremental costs of developing healthcare delivery networks using the Company's
long-term care facilities or rural hospitals as platforms for providing an
expanded range of services (i.e. primary care clinics, rehabilitation, home
health, etc.). Development costs include consulting fees, salaries and related
costs of development personnel and other direct costs of performing functions
such as market research and feasibility, promotion and marketing, recruitment of
physicians and other service providers, training and related costs during the
period the new facility or service attains complete operational status.
10
COMMUNITY CARE OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Total costs of facilities acquired are allocated to land, land improvements,
equipment and buildings (or leasehold interests therein) based on their
respective fair values determined generally by independent appraisal.
(f) Depreciation and Amortization
Depreciation and amortization are provided on the straight-line basis over
the estimated useful lives of the assets, generally 40 years for buildings, 25
years for land improvements, 10 years for equipment, 5 years for development
costs and the initial term and expected renewal terms of the leases for costs of
leasehold interests and improvements.
(g) Deferred Financing Costs
The Company defers financing costs incurred to obtain long-term debt and
amortizes such costs using the interest method over the term of the related
debt.
(h) Excess of Cost Over Fair Value of Net Assets Acquired
The assets and liabilities of acquired entities accounted for under the
purchase method of accounting are adjusted to their estimated fair values as of
the acquisition dates. The amounts recorded as excess of cost over fair value of
net assets acquired represent amounts paid that exceed estimated fair values
assigned to the assets and liabilities of each acquired business. Such amounts
are being amortized on a straight-line basis over periods ranging from 10 to 40
years, depending on the specific circumstances of each acquisition.
(i) Income Taxes
Deferred income taxes are recognized for the tax consequences of temporary
differences between financial statement carrying amounts and the related tax
bases of assets and liabilities, primarily related to business acquisitions.
Such tax effects are measured by applying enacted statutory tax rates applicable
to future years in which the differences are expected to reverse, and the effect
of a change in tax rates is recognized in the period that includes the date of
enactment.
(j) Earnings per Common Share
Earnings per share is computed based on the weighted average number of common
and common equivalent shares outstanding during the periods. Common stock
equivalents include options and warrants to purchase common stock, assumed to be
exercised using the treasury stock method. Options and warrants issued from May
1994 through August 15, 1995 have been treated as outstanding for all periods
presented. Dividends related to the Company's 8% redeemable preferred stock,
Series A, of $653 in 1994 and $408 in 1995, are deducted from net earnings for
the purpose of calculating earnings per share. On August 15, 1995, the preferred
stock was redeemed with the proceeds of the initial public offering of the
Company's common stock and related warrants were exercised (see note 9). Had the
redemption of preferred stock and related issuance of common stock occurred on
January 1, 1995, earnings per common share for the year ended December 31, 1995
would be as follows:
Earnings before extraordinary charge................. $.45
Net earnings......................................... .26
11
COMMUNITY CARE OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
(k) Accounting for Stock Options
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB No. 25"), in accounting for its stock
options. Additional information required by Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"),
is discussed in Note 10.
(l) Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
(m) Impairment of Long-Lived Assets
Management regularly evaluates whether events or changes in circumstances
have occurred that could indicate an impairment in the value of long-lived
assets. During the second quarter of 1996, the Company adopted SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." In accordance with the provisions of SFAS No. 121, if there is
an indication that the carrying amount of an asset is not recoverable, the
Company estimates the projected undiscounted cash flows, excluding interest, of
the related individual facilities to determine if an impairment loss should be
recognized. The amount of impairment loss is determined by comparing the
carrying value of the asset to its estimated fair value. Estimated fair value is
determined through an evaluation of recent financial performance and projected
discounted cash flows of its facilities using standard industry valuation
techniques, including the use of independent appraisals when considered
necessary. If an asset tested for recoverability was acquired in a business
combination accounted for using the purchase method, the related goodwill is
included as part of the carrying value and evaluated as described above in
determining the recoverability of that asset.
In addition to consideration of impairment upon the events or changes in
circumstances described above, management regularly evaluates the remaining
lives of its long-lived assets. If estimates are changed, the carrying value of
affected assets is allocated over the remaining lives.
Prior to adoption of SFAS No. 121 in 1996, the Company performed its analyses
of impairment of long-lived assets by consideration of the projected
undiscounted cash flows on an entity-wide basis. The effect of the adoption of
SFAS 121 in the second quarter of 1996 required the Company to perform this
analysis on a facility-by-facility basis (see note 12).
(2) BUSINESS ACQUISITIONS
The following is a summary of significant business acquisitions by year. Such
acquisitions have been accounted for by the purchase method and, accordingly,
the results of operations have been included in the Company's consolidated
financial statements from the respective dates of acquisition.
1994 ACQUISITIONS
In November 1994, the Company acquired leasehold interests in two long-term
care facilities located in Colorado and Wyoming (Tealwood) for a total cost of
approximately $400, including legal fees and other direct costs of the
acquisition of $78 and accrued liabilities of $322.
12
COMMUNITY CARE OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)
(2) BUSINESS ACQUISITIONS -- (CONTINUED)
1995 ACQUISITIONS
Effective as of February 1, 1995, the Company acquired all the assets of the
Georgiana Doctor's Hospital, two primary care clinics and a home healthcare
agency (Georgiana) located in Alabama. The Company issued a 9% promissory note
for $1,250 to the seller at closing (see note 6).
Effective April 1, 1995, the Company acquired all of the capital stock of
three subsidiaries of Quality Health Care, Inc. (Quality), which owned and
operated three long-term care facilities located in Nebraska. In connection with
the transaction, Quality sold 11 facilities to Health and Retirement Properties
Trust (HRPT) for $14,200. The Company borrowed $5,845 from HRPT and leased the
latter facilities from HRPT as discussed more fully in notes 6 and 7.
Effective July 1, 1995, the Company obtained operating leases with
wholly-owned subsidiaries of American Health Corporation (American) for three
long-term care facilities in Alabama. The agreements provide for an initial term
of twelve years, with one five-year renewal option, annual minimum rental of
$1,200 and rights of first refusal with respect to the sale of the facilities.
Effective August 1, 1995, the Company purchased all the assets of a physician
practice, including a primary care clinic (Voreis), located in Alabama, and on
October 1, 1995, the Company acquired substantially all of the assets of a
39-bed long-term care facility in Palmer, Nebraska (Coolidge Center).
Effective November 1, 1995, the Company acquired all of the capital stock of
an outpatient rehabilitation head trauma clinic in Maine (MHTU). As partial
consideration in this transaction, the Company issued 25,061 shares of common
stock to the seller. These shares are subject to repurchase under the terms of a
settlement agreement dated October 27, 1996 as amended on March 1, 1997, at a
price equal to the greater of the average closing price of the stock for the 15
days prior to the date of repurchase or $13.21 per share (see note 13). In
addition, the Company may be required to make additional payments to the Seller
up to $200 if operating results for the five year period beginning January 1,
1996 exceed base year amounts.
Acquisitions in 1995 and the manner of payment are summarized as follows:
CASH PAID
COOLIDGE FOR ACCRUED
DESCRIPTION GEORGIANA QUALITY AMERICAN VOREIS CENTER MHTU COSTS TOTAL
- -------------------- ----------- --------- ---------- -------- ---------- ------- ------------ ---------
Seller financing ... $1,250 -- -- -- -- -- -- $ 1,250
Common stock
issued(1)........... -- -- -- -- -- 331 -- 331
Accrued
liabilities......... 540 1,000 50 -- 100 280 (1,970) --
Cash paid........... 372 5,864 500 925 450 638 1,970 10,719
----------- --------- ---------- -------- ---------- ------- ------------ ---------
Total cost.......... $2,162 6,864 550 925 550 1,249 -- $12,300
=========== ========= ========== ======== ========== ======= ============ =========
- ----------
(1) Represents 25,061 shares of common stock.
13
COMMUNITY CARE OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)
(2) BUSINESS ACQUISITIONS -- (CONTINUED)
The allocation of the total cost of the 1995 acquisitions to the assets
acquired and liabilities assumed is summarized as follows:
COOLIDGE
DESCRIPTION GEORGIANA QUALITY AMERICAN VOREIS CENTER MHTU TOTAL
- -------------------------------- ----------- --------- ---------- -------- ---------- ------- ----------
Current assets ................. $ 618 1,512 -- 140 -- 129 $ 2,399
Property, plant and equipment .. 2,040 4,818 -- 385 550 -- 7,793
Other assets ................... -- 1,241 400 -- -- -- 1,641
Intangible assets (10, 20 and 20
years) ......................... -- -- 150 400 -- 1,142 1,692
Current liabilities ............ (496) (525) -- -- -- (22) (1,043)
Long-term liabilities .......... -- (182) -- -- -- -- (182)
-------- -------- -------- -------- -------- -------- --------
Total cost ..................... $ 2,162 6,864 550 925 550 1,249 $ 12,300
======== ======== ======== ======== ======== ======== ========
1996 ACQUISITIONS
Effective January 1, 1996, the Company purchased certain assets of the Family
Care Medical Center of Arcadia, Inc. (Arcadia), a certified rural healthcare
clinic in Florida. Pursuant to the asset purchase agreement, the Company issued
a promissory note for $110 and 12,739 shares of common stock with a fair value
of $150 to the seller at closing. The promissory note was paid in full as of
December 31, 1996.
On May 16, 1996, Southern Care Centers, Inc. ("Southern Care") was merged
into CCA Acquisition I, Inc., ("Newco"), a newly formed wholly-owned subsidiary
of the Company. As a result of the merger, the subsidiaries of Southern Care
("Acquired Subsidiaries"), which leased five long-term care facilities in
Georgia and one long-term care facility in Louisiana, became indirect
wholly-owned subsidiaries of the Company. In addition, another wholly-owned
subsidiary of the Company became the manager, under a Management Agreement dated
as of May 1, 1996, of a long-term care facility in Texas owned by a former
subsidiary of Southern Care which was not acquired by the Company. Additionally,
Newco is providing accounting, internal auditing, billing, accounts payable and
certain other services under an Agreement to Provide Accounting and Auditing
Services and Rural Healthcare Provider Network Services dated as of May 1, 1996
to a company owned by the former shareholders of Southern Care which operates
another long-term care facility in Georgia.
Pursuant to the merger agreement, the shareholders of Southern Care (the
selling shareholders) received $2,700 of cash and 568,888 shares of common stock
of the Company with a fair value of $4,800. In addition, the selling
shareholders were entitled to receive, on or before March 31, 1997, up to $2,000
in common stock of the Company based on the amount that Newco's annualized
contribution margin on a consolidated basis for the year ended December 31, 1996
exceeds $4,400. As of December 31, 1996, no such events occurred. The Company
has agreed to file two shelf registration statements under the Securities Act of
1933, as amended, covering the shares issued and issuable in the merger and,
upon request of the holders, to "piggyback" such shares in certain registration
statements filed by the Company.
The merger agreement provides that the consideration to the selling
shareholders shall be reduced to the extent that current liabilities exceeded
current assets by more than $1,850 at the closing date. The Company has
determined that such condition existed at the closing date and has recorded a
receivable from the selling shareholders of $1,444 at December 31, 1996. Such
claim has been disputed by the selling shareholders. The Company believes the
claim is valid and fully collectible; accordingly, no valuation allowance has
been recorded with respect to this matter. Because the receivable arose in
connection with the issuance of the Company's common stock, the related balance
at December 31, 1996 is presented as a reduction of stockholder's equity.
14
COMMUNITY CARE OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)
(2) BUSINESS ACQUISITIONS -- (CONTINUED)
In a series of related transactions, the subsidiaries of Southern Care
acquired the five leased Georgia facilities and, in turn, sold those facilities
to Health and Retirement Properties Trust ("HRPT"). HRPT thereupon leased the
five Georgia facilities back to the Acquired Subsidiaries for an initial term
ending on December 31, 2010 with two renewal options for six year and thirteen
year terms, each at the option of the Acquired Subsidiaries. After the first
lease year, rent is subject to increase based on year over year increases, if
any, in net patient revenues and non-inpatient revenues, each as defined in the
master lease agreement. The Louisiana facility continues to be leased under the
terms of the lease existing prior to the merger.
Acquisitions in 1996 and the manner of payment are summarized as follows:
CASH PAID FOR
DESCRIPTION ARCADIA SOUTHERN CARE ACCRUED COSTS TOTAL
- --------------------------- --------- -------------- --------------- ---------
Seller financing .......... $ 110 -- -- $ 110
Common stock issued(1) .... 150 4,800 -- 4,950
Accrued liabilities........ -- 2,500 (3,409) (909)
Cash paid.................. 40 2,683 3,409 6,132
Receivable from
shareholders............... -- (1,444) -- (1,444)
-------------- --------------- ---------
Total cost................. $ 300 8,539 -- $ 8,839
========= ============== =============== =========
- ----------
(1) Represents shares of common stock as follows: 12,379 shares for Arcadia and
568,888 shares for Southern Care Centers, Inc.
The allocation of the total cost of the 1996 acquisitions to the assets
acquired and liabilities assumed is summarized as follows:
DESCRIPTION ARCADIA SOUTHERN CARE TOTAL
- ------------------------------------ --------- -------------- ----------
Current assets...................... $ 36 753 $ 789
Property, plant, and equipment ..... 60 5,400 5,460
Other assets........................ -- 1,741 1,741
Intangible assets (10 and 20.67
years).............................. 204 10,855 11,059
Current liabilities................. -- (4,784) (4,784)
Long-term liabilities............... -- (5,426) (5,426)
--------- -------------- ----------
Total cost.......................... $ 300 8,539 $ 8,839
========= ============== ==========
The following unaudited pro forma consolidated results of operations
information is presented as if the acquisition transactions described above had
occurred as of the beginning of the respective periods presented, after giving
effect to certain adjustments, including depreciation and amortization of the
new cost basis of the assets acquired, increased interest and rent expense and
related income tax effects.
YEARS ENDED DECEMBER 31,
------------------------
1995 1996
-------- -----------
Total operating revenues............................ $122,495 $133,506
Earnings (loss) before extraordinary charge ........ 3,821 (18,652)
Earnings (loss) applicable to common stock before
extraordinary charge................................ 2,901 (18,652)
Earnings (loss) per common share before
extraordinary charge................................ $ .53 $ (2.53)
======== ===========
15
COMMUNITY CARE OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)
(3) ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
1995 1996
---------- ---------
Patient accounts receivable.................... $ 10,909 $15,832
Third-party payor settlements.................. 2,696 4,228
Other.......................................... 1,307 1,180
---------- ---------
14,912 21,240
Allowance for doubtful accounts and
contractual adjustments........................ 1,978 4,833
---------- ---------
$ 12,934 $16,407
========== =========
The Company generally does not require collateral or other security in
extending credit to patients; however, the Company routinely obtains assignments
of (or is otherwise entitled to receive) benefits receivable under the health
insurance programs, plans or policies of patients (e.g., Medicare, Medicaid,
commercial insurance and managed care organizations). The Company's patient
service revenues derived from the Medicare and Medicaid programs were 17% and
52%, respectively, for the year ended December 31, 1995, and 20% and 50%,
respectively, for the year ended December 31, 1996. Patient accounts receivable
from the Federal government (Medicare) were $1,777 and $3,421 at December 31,
1995 and 1996, respectively. Amounts receivable from various states (Medicaid)
were $4,883 and $6,302, respectively, at December 31, 1995 and 1996.
Third-party payor settlements receivable from the Federal government
(Medicare) were approximately $1,718 and $2,794 at December 31, 1995 and 1996,
respectively; the remainder relates primarily to net amounts receivable from the
states of Colorado and Nebraska (Medicaid). Certain of the Medicaid and Medicare
cost reports for prior years were settled during 1995 and 1996, the impact of
which was not material. At December 31, 1996, the Company had open cost reports
for the 1993, 1994 and 1995 years which, after related allowances, are recorded
at estimated net realizable value.
The allowance for doubtful accounts and contractual adjustments is determined
by management using estimates of potential losses and contractual settlements
based on an analysis of current and past due accounts, collection experience in
relation to amounts billed, prior settlement experience and other relevant
information. Although the Company believes amounts provided are adequate, the
ultimate uncollectible amounts could be in excess of the amounts provided. The
Company's provision for bad debts was $658 in 1995 and $1,867 in 1996.
(4) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are summarized as follows:
1995 1996
--------- ---------
Land.......................................... $ 5,983 $ 5,926
Land improvements............................. 612 613
Buildings and improvements.................... 32,214 39,911
Leasehold improvements and leasehold
interests..................................... 8,598 9,135
Equipment..................................... 7,269 7,880
Construction in progress...................... 987 255
Pre-acquisition and development costs ........ 1,867 425
--------- ---------
57,530 64,145
Less accumulated depreciation and
amortization.................................. 3,203 5,721
--------- ---------
Net property, plant and equipment............. $54,327 $58,424
========= =========
16
COMMUNITY CARE OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)
(5) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
DECEMBER 31,
--------------------
1995 1996
--------- ----------
Accounts payable ........................... $ 8,860 $15,595
Accrued compensation ....................... 4,422 3,473
Other accrued expenses ..................... 1,587 4,334
------- -------
$14,869 $23,402
======= =======
(6) LONG-TERM DEBT
Long-term debt is summarized as follows:
DECEMBER 31,
--------------------
1995 1996
--------- ----------
Mortgage notes:
11.5% note payable in monthly principal and interest installments of
$138 commencing January 31, 1996 through June 30, 1996; interest only
payments of $130 commencing July 31, 1996 through June 30, 1998;
principal and interest payments of $138 commencing on July 31, 1998
and maturing on December 31, 2016..................................... $13,600 $13,551
9% note payable in monthly principal and interest installments of $50
commencing January 31, 1996 through June 30, 1996; interest payments
of $45 commencing July 31, 1996 through June 30, 1998; principal and
interest payments of $50 commencing on July 31, 1998 and maturing on
December 31, 2016...................................................... 6,000 5,967
10% note payable in monthly interest only payments through December 31,
1996; principal and interest payments of $19 commence January 31, 1997
through December 31, 2021 ............................................. 2,045 2,045
9% note payable in semi-annual installments through March 9, 1998, plus
interest payable quarterly ............................................ 1,125 750
--------- ----------
Total mortgage notes payable............................................ 22,770 22,313
Revolving line of credit with bank, due on December 31, 1996 ............ 8,410 --
Revolving line of credit with bank, due on December 27, 1999 ............ -- 14,495
Revolving line of credit with Integrated Health Services, Inc., due on
December 27, 1998 (see note 14)......................................... -- 2,000
11% note secured by property and equipment, interest only due monthly;
principal due December 31, 2008......................................... -- 10,000
17
COMMUNITY CARE OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)
(6) LONG-TERM DEBT -- (CONTINUED)
DECEMBER 31,
--------------------
1995 1996
--------- ----------
11% notes maturing December 30, 2016, interest and principal payable in
monthly installments of $47 commencing January 31, 1997; secured by a lien
on substantially all of the leasehold assets of several long-term care
facilities................................................................. 2,892 4,835
Notes payable, secured by equipment and land, maturing from June 19, 1997
to April 4, 2005; principal payable in monthly installments of $25, with
interest payable monthly at variable rates up to 15.13%.................... 740 512
13% capital lease payable in monthly principal and interest installments
ranging from $54 to $65 through April 30, 2015, with a final payment of
$2,414..................................................................... -- 5,401
7% unsecured note payable, due on demand................................... -- 600
10% unsecured note payable in monthly principal and interest installments
of $8, maturing on August 1, 1998.......................................... -- 141
Other...................................................................... 853 74
--------- ----------
35,665 60,371
Less current portion....................................................... 1,258 6,341
--------- ----------
$34,407 $54,030
========= ==========
Mortgage notes aggregating $21,563 at December 31, 1996 are payable to Health
and Retirement Properties Trust ("HRPT") and are secured by deeds of trust on 18
long-term care facilities located in Colorado and Nebraska and liens on
substantially all of the common stock of certain of the Company's subsidiaries.
These mortgage notes are subject to cross-default provisions under the Company's
leases with HRPT (see note 7). The remaining mortgage note is secured by a deed
of trust on one hospital (Georgiana) located in Alabama. The mortgage notes also
provide for additional interest payable quarterly commencing in 1996 equal to
the greater of (a) 5% of excess net patient revenues over a base year amount or
(b) the amount of the additional interest for the immediately preceding loan
year.
On April 4, 1996, the Company borrowed $10,000 from HRPT, pursuant to an 11%
promissory note (the "HRPT Note"), to provide additional renovation and
acquisition funding and general working capital. No principal payments are
required until the maturity date of December 31, 2008 with interest payments
made monthly. The HRPT Note is secured by all of the collateral security which
secures the Company's current obligations to HRPT and is subject to cross
default with other obligations to HRPT. As a result of closing this loan, the
Company increased the refundable security deposit held by HRPT for all
obligations by $550.
18
COMMUNITY CARE OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)
(6) LONG-TERM DEBT -- (CONTINUED)
REVOLVING LINES OF CREDIT
On August 7, 1995, the Company entered into a Revolving Credit and
Reimbursement Agreement with NationsBank of Florida, N.A. ("NationsBank")
providing for a revolving credit facility (the "Loan Agreement") pursuant to
which the Company was entitled to borrow from time to time up to $15,000,
subject to a borrowing base of 80% of eligible accounts receivable. In July
1996, the agreement was modified to reflect a revised scheduled maturity of
December 31, 1996. Outstanding loans bore interest equal to, as selected by the
Company, either a floating rate (the greater of the federal funds rate plus .50%
or NationsBank's prime rate) or a rate equal to the applicable Eurodollar rate
plus 1.75% (subject to adjustment after September 30, 1996 based on certain
financial ratios achieved by the Company). The Loan Agreement was secured by
substantially all of the unencumbered assets of the borrowing entities and the
capital stock of the Company's subsidiaries, Community Care of America of
Alabama, Inc. and CCA of Maine, Inc. The Loan Agreement required the Company to
maintain a prescribed level of tangible net worth (as defined), and current,
fixed charge coverage and leverage ratios, placed limitations on indebtedness,
liens, investments and transactions with affiliates and prohibited the payment
of dividends. The revolving credit facility was paid in full in December 1996
with the proceeds from the Daiwa Securities of America, Inc. revolving credit
facility (see below).
On December 27, 1996, the Company entered into a Healthcare Receivables
Purchase and Transfer Agreement with Daiwa Securities of America, Inc. ("Daiwa")
providing for a 36 month revolving credit facility pursuant to which the Company
may borrow from time to time up to $15,000, subject to a borrowing base formula.
The Loan Agreement is secured by the assignment to the lender of all patient and
third party settlement receivables. Proceeds from the line of credit were used
to repay borrowings and terminate the Revolving Credit and Reimbursement
Agreement with NationsBank discussed above. As of December 31, 1996, Daiwa
advanced the Company an amount in excess of the borrowing base by approximately
$4,800. Such amount has been classified as current portion of long term debt
since repayment is due upon demand. The remaining outstanding loan will mature
on December 27, 1999 and amounts advanced bear interest at a rate equal to the
LIBOR rate at the time of each revolving advance plus 2.00% per annum. The
interest rate at December 31, 1996 was 7.9065%. The agreement requires the
Company to maintain a prescribed tangible net worth ratio as well as various
other financial and non- financial covenants. (See Note 13 for further
information)
The Company and IHS entered into a loan agreement which, as amended, entitles
the Company to borrow, until December 27, 1998, amounts on a revolving credit
basis so that no more than $5,000 is outstanding at any time provided that,
unless such advance is applied to the payment of management fees that become due
to IHS under the Management Agreement (see Note 14), IHS consents to the making
of advances, which consent may not be unreasonably withheld. This revolving
credit facility bears interest at a rate per annum equal to the annual rate of
interest set forth in IHS's revolving credit agreement with Citibank, N.A., plus
2%. Repayment of amounts advanced under this line of credit are subordinated to
the payment of up to an aggregate of $30,000 of principal and interest on the
Company's obligations to HRPT and Daiwa.
19
COMMUNITY CARE OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)
(6) LONG-TERM DEBT -- (CONTINUED)
In connection with entering into the revolving credit facility, the Company
issued warrants to purchase an aggregate of 752,182 shares of the Company's
Common Stock, one-half of which are exercisable until January 13, 1999 at $3.22
per share (the average of the high and low trading price of the Company's Common
Stock on January 14 and 15, 1997) and the remaining one-half of which are
exercisable until January 13, 2002 at $6.44 per share. The number of shares
subject to the warrants and the exercise prices are subject to adjustment in
certain instances, including the Company issuing shares of Common Stock (or
securities convertible into Common Stock) at less than the applicable exercise
price. In connection therewith, the Company has granted to IHS certain rights to
cause the shares issuable upon exercise of the warrants to be registered under
the Securities Act of 1933, as amended, at the Company's expense.
Aggregate principal maturities of long-term debt for the next five years are
as follows: 1997, $6,341; 1998, $2,666; 1999, $10,007; 2000, $328; 2001, $356
and thereafter $40,673.
Information concerning interest expense is as follows:
YEARS ENDED DECEMBER 31,
------------------------
1994 1995 1996
------ ------ -------
Interest income applied to reduce interest
expense........................................... $63 $ 96 $ 11
Interest capitalized to construction in progress . $92 $107 $277
(7) LEASES
The Company is lessee under operating leases of 34 long-term care facilities,
of which one expires in February 2006, three expire in June 2007, and 30 expire
in December 2010. The Company also leases certain office space and computer
equipment expiring in 1998 and 1999. Minimum rent payments due under operating
leases in effect at December 31, 1996 are summarized as follows:
1997 .................................................. $ 10,458
1998 .................................................. 10,369
1999 .................................................. 10,014
2000 .................................................. 10,043
2001 .................................................. 10,103
Thereafter ............................................ 146,363
--------
Total ................................................ $197,350
========
The leases for the 30 health care facilities are with HRPT and provide for
two consecutive renewal options of six and thirteen years, respectively, at fair
market rentals at the expiration of the initial term. In connection with these
lease agreements, the Company was required to pay refundable deposits totaling
$5,660 as of December 31, 1996 which has been subsequently reduced (see note
13). The leases for the three health care facilities, also with HRPT, provide
for one renewal option for five years. The lease for one facility does not
currently have a renewal option.
20
COMMUNITY CARE OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)
(7) LEASES -- (CONTINUED)
With respect to the leases for the 30 health care facilities, the Company has
the right of first refusal and an option to purchase the facilities at a price
equal to the greater of a formula as defined in the lease agreement or the fair
market value of the facilities. Minimum rentals are generally subject to
adjustment for renovations made to the facilities by the lessor. Also, the
leases provide for contingent rentals, based on a percentage of gross revenues
of the facilities in excess of base year amounts. Contingent rentals were $150
in 1996; none were incurred during the period from inception to December 31,
1995. The lease agreements require the Company to maintain a current ratio of at
least one to one and a minimum tangible net worth, as defined, of $5,000, which
conditions were not met as of December 31, 1996. In addition, the lease
agreements restrict the Company's ability to pay dividends, incur indebtedness
or make distributions to affiliates. See note 13.
The lease for office space provides for two, one-year renewal options and the
equipment lease may be renewed for one year.
(8) INCOME TAXES
The income tax benefit for 1996, all of which relates to deferred taxes, is
summarized as follows:
Federal income taxes ......................... $(7,375)
State income taxes ........................... (2,090)
---------
$(9,465)
=========
In 1995, the Federal and state income tax provision was offset by net
operating loss carryovers of $280.
The expected income tax rate of 34% differs from the rate resulting from the
provision in the financial statements as follows:
1994 1995 1996
------- -------- --------
Income tax (benefit) at statutory rate
(34%)....................................... 34 % 34 % (34)%
State income tax, net of federal benefit.... 4 % 4 % (4)%
Tax benefit of net operating loss
carryover................................... (38)% (7)% -- %
Increase (decrease) in valuation allowance . -- % (1)% 3 %
Other....................................... -- % -- % 2 %
------- -------- --------
-- % 30 % $ (33)%
======= ======== ========
The sources of deferred income tax (assets) and liabilities are as follows:
1995 1996
---------- ----------
Excess of book over tax basis of assets................ $10,025 $11,179
Allowance for doubtful accounts........................ (651) (1,262)
Accrued expenses....................................... (803) (3,173)
Net operating loss carryovers ......................... (870) (8,717)
Pre-acquisition separate company net operating loss
carryovers............................................. (1,365) (1,406)
Other.................................................. 22 (184)
---------- ----------
$ 6,358 $(3,563)
Valuation allowance.................................... 2,976 3,725
---------- ----------
Deferred income tax liability.......................... $ 9,334 $ 162
========== ===========
21
COMMUNITY CARE OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)
(8) INCOME TAXES -- (CONTINUED)
At December 31, 1996, the Company had net operating loss carryovers available
for Federal income tax purposes of approximately $26,293 which expire in the
years 2007 through 2011, including pre-acquisition net operating loss carryovers
of approximately $3,652 which expire in the years 2007 through 2011. The
utilization of the pre-acquisition net operating loss carryovers is subject to
certain annual limitations under the Internal Revenue Code and, under "change in
ownership" provisions of the Code, other net operating loss carryovers may be
subject to similar limitations.
The valuation allowance relates, in part, to deferred tax assets that, when
subsequently realized, will be applied to reduce goodwill and other intangible
assets acquired to the extent that such allowances resulted in intangible assets
when originally recorded in connection with acquisitions. As of December 31,
1996, the Company did not fully reserve all deferred tax assets since future
operations are expected to generate sufficient taxable income to realize these
assets. As of December 31, 1996, the portion of the valuation allowance to be
applied to reduce goodwill in future years is approximately $3,725.
(9) REDEEMABLE PREFERRED STOCK
On December 30, 1993, the Company issued Series A 8% Redeemable Cumulative
Preferred Stock and warrants to purchase 1,331,814 shares of common stock at a
price of $.0198 per share. The warrants were valued at $2,631 in accordance with
the agreement of the parties and recorded as additional paid-in capital. The
difference between the value allocated to the preferred stock at issuance of
$5,536 and the aggregate redemption price of such shares of $8,167 was being
accreted to preferred stock and charged against common stockholders' equity
through the dates of mandatory redemption. Such accretion was $372 for the year
ended December 31, 1994 and $231 for the year ended December 31, 1995. The
preferred stock was redeemed at $100 per share and the warrants were exercised
in August 1995 (see note 15).
(10) CAPITAL STOCK
On July 28, 1995, the Company amended its certificate of incorporation
decreasing the Company's authorized common stock from 35,000,000 shares to
15,000,000 shares, increasing the authorized shares of preferred stock to
1,000,000 shares and effecting a reverse common stock split of one-for-7.9. All
share and per share data presented herein give effect to such changes.
At December 31, 1995 and 1996, the Company had outstanding stock options as
follows:
Stock options outstanding pursuant to:
1995 1996
--------- ---------
1993 Stock Option Plan ............................. 265,196 216,928
1993 Senior Executive Stock Option Plan ............ 57,799 16,565
1995 Stock Option Plan ............................. 153,910 208,894
1995 Non-Employee Directors Option Plan ............ 14,835 71,978
------- -------
Total Stock Options Outstanding .................... 491,740 514,365
======= =======
22
COMMUNITY CARE OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)
(10) CAPITAL STOCK -- (CONTINUED)
The Company established the 1993 Stock Option Plan and the 1993 Senior
Executive Stock Option Plan effective July 1, 1993. The 1993 Stock Option Plan
provides that up to 289,258 shares of common stock may be issued to certain key
employees and consultants of the Company. Options granted to date under this
plan vest either immediately or over three years and expire ten years from the
date of grant. The 1993 Senior Executive Stock Option Plan provides that up to
74,364 options may be issued to senior executive officers of the Company.
Options granted to date under this plan vest over a period of seven years, with
accelerated vesting in some instances, based upon the occurrence of certain
events, including the achievement of earnings targets. The outstanding options
at December 31, 1996 expire ten years from the date of grant subject to earlier
termination in certain cases.
In 1995, the Company established the 1995 Stock Option Plan and the 1995
Non-Employee Directors Option Plan. The 1995 Stock Option Plan provides that up
to 500,000 shares of common stock may be issued to certain key employees and
consultants of the Company pursuant to options granted from time to time under
this plan. Options granted to date under this plan vest either immediately or
over periods from three to seven years, with accelerated vesting in some
instances, based upon the occurrence of certain events, including the
achievement of earnings targets. The outstanding options at December 31, 1996
expire ten years from the date of grant subject to the earlier termination in
certain cases. The 1995 Non-Employee Directors Option Plan provides that up to
100,000 shares of common stock may be issued to non-employee directors pursuant
to options automatically granted under that plan upon election as a director and
annually following the annual meeting of shareholders electing directors.
Options granted to date under this plan vest in three equal semi-annual
installments beginning six months after the date of grant and expire ten years
from the date of grant subject to the earlier termination in certain cases.
All stock options issued by the Company have been granted with exercise
prices equal to or greater than the estimated fair market value of the common
stock on the date of grant. Stock option transactions are summarized as follows:
1995 1996
--------------------- ----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
---------- ---------- ----------- ----------
Outstanding at beginning of
year............................. 292,936 $ 4.44 491,740 $ 7.68
Granted.......................... 230,339 11.42 226,132 11.23
Exercised........................ -- -- (33,385) 4.62
Canceled......................... (31,535) 6.75 (170,122) 8.95
---------- ---------- ----------- ----------
Outstanding at end of year ...... 491,740 $ 7.68 514,365 $ 9.03
========== ========== =========== ==========
Options Exercisable at end of
year............................. 206,006 $ 5.10 222,310 $ 6.34
========== ========== =========== ==========
The following summarizes information about stock options outstanding as of
December 31, 1996:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------- ------------------------------
WEIGHTED AVG.
RANGE OF NUMBER REMAINING WEIGHTED NUMBER WEIGHTED
EXERCISE OUTSTANDING CONTRACTUAL AVERAGE EXERCISABLE AVERAGE
PRICES AT 12/31/96 LIFE EXERCISE PRICE AT 12/31/96 EXERCISE PRICE
- ---------------- ------------- ---------------- ---------------- ------------- ----------------
$3.71 150,685 6.54 $ 3.71 141,219 $ 3.71
$9.50 - $10.50 210,048 8.93 9.84 61,567 10.11
$10.51 - $14.00 153,632 9.10 13.12 19,524 13.49
------------- ---------------- ---------------- ------------- ----------------
514,365 8.28 $ 9.03 222,310 $ 6.34
============= ================ ================ ============= ================
23
COMMUNITY CARE OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)
(10) CAPITAL STOCK -- (CONTINUED)
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its stock options. Accordingly, no compensation expense has been
recognized in connection with its stock options. Had compensation expense for
the Company's stock options been determined consistent with Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," the Company's net earnings and earnings per share would have been
reduced to the pro forma amounts indicated below:
1995 1996
------------------------- -------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
------------- ----------- ------------- -----------
Net earnings (loss) applicable to common stock $1,041 $ 890 $(18,905) $(19,283)
Per common share:
Earnings (loss) before extraordinary charge.. 0.42 0.49 (2.56) (2.61)
Extraordinary charge......................... (0.20) (0.26) 0.00 0.00
------------- ----------- ------------- -----------
Net earnings (loss).......................... 0.22 0.23 (2.56) (2.61)
============= =========== ============= ===========
The fair value of the options for purposes of the above pro-forma disclosure
was calculated using the Black-Scholes option pricing model and the following
assumptions: risk free interest rate of 6.58%, weighted average expected lives
of 5 to 8.5 years, no dividend payments, and a volatility of 35.8% based on the
annualized 10 year industry average. The effects of applying SFAS No. 123 in the
pro forma net earnings and earnings per share for 1995 and 1996 may not be
representative of the effects on such pro-forma information for future years.
(11) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, patient accounts
receivable, other current assets, accounts payable, and accrued expenses
approximates fair value because of the short-term maturity of these instruments.
The fair value of third-party payor settlements receivable is estimated by
discounting anticipated cash flows using estimated market discount rates to
reflect the time value of money. The fair value of the Company's long term debt
is estimated based on current rates offered to the Company for similar
instruments with the same remaining maturities. Management of the Company
believes the carrying amount of the above financial instruments approximates the
estimated fair value.
(12) LOSS ON IMPAIRMENT OF LONG-LIVED ASSETS AND OTHER NON-RECURRING CHARGES
Operating expenses for 1996 include total non-recurring charges of $22.1
million and consist of the following:
EXIT
LOSS ON OTHER COSTS AND
IMPAIRMENT OF ASSET EMPLOYEE
INVESTMENT WRITE-OFFS TERMINATIONS TOTAL
--------------- ------------ -------------- ---------
Sandy River management contract termination............. $ 5,453 $1,086 $3,360 $ 9,899
Aurora and Toledo facilities closed or voluntarily
decertified............................................. 1,450 -- 207 1,657
Costs of a physician practice, primary care clinics,
adult day care centers, and other programs closed ...... 3,013 -- 1,484 4,497
Memorial Health Group acquisition termination .......... 3,924 264 210 4,398
Termination of offerings of debt and equity securities . -- 1,677 -- 1,677
-------------- ------------- -------------- ---------
$13,840 $3,027 $5,261 $22,128
============== ============= ============== =========
24
COMMUNITY CARE OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)
(12) LOSS ON IMPAIRMENT OF LONG-LIVED ASSETS AND OTHER NON-RECURRING CHARGES
- -- (CONTINUED)
In the second quarter of 1996, management made the decision to exit certain
activities, including the termination of the management agreement and related
purchase option for the Sandy River facilities and the closing of four primary
care clinics, four adult day care centers and one physician practice.
The Company terminated its management and purchase option agreements with the
Sandy River Group since the facilities were not generating sufficient cash flows
to pay the Company's management fees. As a result, management evaluated its
investment related to the management agreement and purchase option for
impairment. This analysis identified approximately $9,899 in write-offs,
including the write-offs of (1) the $5,000 purchase option deposit, (2)
unsecured management fees of $1,086, (3) direct acquisition costs of $453 and
(4) accrued exit and termination costs of $3,360 to transfer the properties back
to the Sandy River Group. As of December 31, 1996, substantially all exits costs
have been paid.
The four primary care clinics, four adult day care centers and one physician
practice were closed as a result of their unfavorable financial performance and
the negative impact these centers had on the Company's long-term care business.
As a result, the Company wrote-off development costs and property and equipment
relating to these activities of $3,013. In addition, the closure of these
clinics resulted in eliminating approximately 14 positions, primarily doctors
and clinical staff, through an involuntary severance program. Total employee
termination benefits provided in the financial statements were $454 as of
December 31, 1996, of which $138 was unpaid as of December 31, 1996 and will be
paid in 1997. Other costs to exit these activities include lease termination
costs of $964 which will paid over the remaining lease terms and other exit
costs of $66. Both of these obligations were incurred under contractual
obligations that existed prior to the commitment date and will continue after
the plan is completed with no economic benefit to the Company. Total lease
termination and other exit costs accrued but not paid as of December 31, 1996
was $873. Management anticipates that an additional $750 of costs will be
incurred in 1997 . Management expects the necessary activities to exit these
operations will be complete by December 31, 1997.
On December 31, 1996, the Company terminated an agreement to acquire other
rural hospitals in Georgia and transferred Memorial Healthcare, Inc. d/b/a Smith
Hospital (Smith) back to the sellers since CCA was not able to secure the
necessary financing to complete the transaction. The total non-recurring charge
to income related to this transaction was approximately $4,398 and consisted of
(1) the write-off of the investment in Smith's net assets, including transaction
costs of $3,924 (2) other asset write-offs of $264 and (3) exit costs of $210.
Other non-recurring charges represent the write-off of approximately $1,677
in deferred financing costs as a result of unsuccessful attempts to raise
capital through a secondary stock offering and a high yield debt offering. Also,
the Company reviewed the long-lived assets of the Aurora and Toledo facilities
for recoverability and determined that an additional write-down of $1,450 was
required. Such write-down has been reflected in non-recurring charges for the
period ended December 31, 1996.
The revenues and net operating losses from activities that will not be
continued are as follows:
1994 1995 1996
------ -------- --------
Revenue from primary care clinics, adult day care centers, a physician practice and other programs closed -- $1,177 $5,107
Net operating losses from primary care clinics, adult day care centers, a physician practice and
other programs closed.................................................................................... -- $ (95) $ (880)
Revenue from management contracts and agreements terminated.............................................. -- $1,318 $3,336
Net operating income from management contracts and agreements terminated ................................ -- $ 427 $1,126
25
COMMUNITY CARE OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)
(12) LOSS ON IMPAIRMENT OF LONG-LIVED ASSETS AND OTHER NON-RECURRING CHARGES
- -- (CONTINUED)
In 1996, the Company adopted Financial Accounting Standard (SFAS) No. 121,
"Loss on Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of." As a result, the Company performed a review of the events and/or
changes in circumstances that would suggest that the carrying amount of the
Company's asset may not be recoverable. This analysis included a consideration
of (1) the business, legal and economic climate for events that could adversely
affect the carrying value of an asset, (2) any physical changes in assets, (3)
the accumulated costs in excess of the amounts originally expected to acquire
and/or construct an asset, (4) decreases in the market value of assets and (5)
current period operating or cash flow losses that demonstrate continuing losses
associated with an asset used for the purpose of producing revenue. In addition,
the Company estimated the future cash flows expected to result from assets to be
held and used.
In estimating the future cash flows for determining whether an asset is
impaired, the Company grouped its assets at the lowest level for which there are
identifiable cash flows independent of other groups of assets (i.e., by long
term care facility). The results of comparing future undiscounted cash flows to
historical carrying value, together with the evaluation of the facts and
circumstances that may indicate an asset may not be recoverable, indicated that
the Toledo and Aurora facilities were eligible for an impairment charge. None of
the Company's remaining facilities were reduced since the carrying value of the
assets were less than the undiscounted cash flows.
During 1996, the Company closed its Aurora facility and voluntary decertified
its Toledo facility from the Medicare program due to quality of care issues,
unfavorable market conditions, the reduction in reimbursement from third-party
payors and competition. Accordingly, these events and circumstances, together
with the unfavorable undiscounted future cash flows, caused the Company to
perform further evaluations of whether the carrying amount of these assets were
recoverable.
After determining that an impairment charge for Toledo and Aurora was
appropriate, the Company determined the estimated fair value of such facilities
using standard industry valuation techniques. The excess carrying value of
goodwill, buildings and improvements, leasehold improvements and equipment above
the fair value was $1,450 and is included in the statement of operations for
1996 as loss on impairment of long-lived assets.
Prior to the adoption of SFAS 121, the Company evaluated impairment on the
entity level. Such evaluation yielded no impairment charge.
(13) CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES
The Company has undergone major restructuring and reorganization in 1996
resulting in the closure or termination of certain business activities and
acquisitions and the termination of offerings of debt and equity securities.
During the year ended December 31, 1996 the Company incurred a loss of $18,905
and had negative cash flow from operating activities. As of December 31, 1996,
the Company had a working capital deficiency of $10,952 and was in default with
respect to certain of its debt, lease and other agreements. These circumstances
would naturally raise doubt about the Company's ability to continue as a going
concern. Management's plans with respect to this matter are discussed below.
26
COMMUNITY CARE OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)
(13) CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES -- (CONTINUED)
In October 1996, management engaged Smith Barney, Inc. as financial adviser
to assist in evaluating debt and equity financing alternatives, including the
possible sale of the Company. Management is evaluating the possibilities with
respect to the interest expressed by potential acquirers, joint venture partners
and organizations which might provide an infusion of capital. Also, management
is pursuing a financial restructuring plan and, in order to obtain sufficient
financial resources, the Company has accomplished the following subsequent to
December 31, 1996:
1. Refinanced the revolving line of credit with its bank to extend the
payment terms related to $4,800 of debt due on demand at December 31,
1996 and issued five year warrants to purchase 1,787,568 shares of
Common Stock (subject to reduction as payments of such debt is made)
at $2.25 per share subject to adjustment in certain circmustances).
2. Obtained the release of approximately $4,000 of security deposits
through a modification of the lease with HRPT to reduce rental
payments.
3. Obtained a settlement agreement dated March 1, 1997 with the
shareholders of 219,798 shares of common stock subject to repurchase
(the put contract), which provides that, in lieu of repurchasing the
shares, the Company pay $500 and issue an 8.5% note payable due on
September 1, 1997 in an amount equal to $1,681 less the proceeds from
the sale of the shares by the shareholders..
4. Obtained waivers of financial covenant violations and related defaults
under debt and lease agreements through February 1998.
5. Obtained a guarantee from IHS with respect to debt payments of
approximately $4,800 and lease payments of up to $10,000 in exchange
for warrants which allow IHS to purchase up to 379,900 shares of the
Company's common stock at $1.937 per share.
6. Obtained an extension on the payment of fees payable to IHS under the
management agreement discussed in Note 14 through April 1998
(estimated to be $2,200 for 1997.)
In addition, the Company continues to pursue negotiations to obtain
additional debt or equity capital and anticipates finalizing its financial
restructuring plan soon. The Company believes it has obtained sufficient
financing commitments for the next year. However, other commitments will likely
be necessary to successfully accomplish the financial restructuring plan beyond
the next year.
The Company acquires or leases and operates long-term health care facilities
in medically-underserved rural communities, and uses such facilities as
platforms to develop networks offering a range of other healthcare services.
Facilities owned or leased by the Company are in the states of Alabama,
Colorado, Georgia, Iowa, Kansas, Louisiana, Missouri, Nebraska, Texas and
Wyoming. The Company and others in the healthcare business are subject to
certain inherent risks, including the following:
o Substantial dependence on revenues derived from reimbursement by the
Federal Medicare and state Medicaid programs;
o Government regulation, government budgetary constraints and proposed
legislative and regulatory changes; and
o Lawsuits alleging malpractice and related claims.
Such inherent risks require the use of certain management estimates in the
preparation of the Company's financial statements and it is reasonably possible
that a change in such estimates may occur.
27
COMMUNITY CARE OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)
(13) CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES -- (CONTINUED)
The Medicare and various state Medicaid reimbursement programs represented
20% and 50%, respectively, of the Company's revenues for the year ended December
31, 1996, and the Company's operations are subject to a variety of other
Federal, state and local regulatory requirements. Failure to maintain required
regulatory approvals and licenses and/or changes in such regulatory requirements
could have a significant adverse effect on the Company. Changes in Federal and
state reimbursement funding mechanisms, related government budgetary constraints
and differences between final settlements and estimated settlements receivable
under Medicare and Medicaid retrospective reimbursement programs, which are
subject to audit and retroactive adjustment as discussed in note 3, could have a
significant adverse effect on the Company. Also, the Company is from time to
time subject to malpractice and related claims and lawsuits, which arise in the
normal course of business and which could have a significant effect on the
Company. The Company believes that adequate provision for these items has been
made in the accompanying consolidated financial statements and that their
ultimate resolution will not have a material effect on the consolidated
financial statements.
Since its inception, the Company has grown through acquisitions, and
realization of acquisition costs, including excess costs over fair value of net
assets acquired, is dependent initially upon the consummation of the
acquisitions and subsequently upon the Company's ability to successfully
integrate and manage acquired operations. Also, the Company's development of
integrated healthcare networks is dependent upon successfully effecting
economies of scale, the recruitment of skilled personnel and the expansion of
services and related revenues. The Company has not completed implementing its
network strategy at any facilities, and realization of related development costs
cannot be assured. Finally, see note 12 for certain significant risks and
uncertainties, resulting in the loss on impairment of investments and other
non-recurring charges in 1996.
(14) RELATED PARTY TRANSACTIONS
On January 19, 1994, the Company entered into a Medicare consulting agreement
with Symphony Care Consulting, Inc. (SCCI), a wholly-owned subsidiary of
Integrated Health Services, Inc., as amended on May 1, 1995. The consulting
agreement provided Medicare reimbursement and certification services including
training, cost report preparation and accounting services through January 1996.
Costs paid to SCCI were $410 in 1994, $453 in 1995, and $148 in 1996. In 1996,
the Company paid Symphony Rehabilitation Services (SRS) and Symphony Pharmacy
Services (SPS), wholly owned subsidiaries of IHS, $162 for therapy and $98 for
pharmacy services, respectively. Also, the Company paid IHS approximately $500
in 1994 and $186 in 1995 to reimburse IHS for expenses incurred on behalf of the
Company in connection with the start-up of CCA's operations, the acquisition of
MeritWest and due diligence service in connection with the public offering. No
amounts were paid to IHS in 1996. Two of the Company's directors are employees,
directors and stockholders of IHS. The Company believes that the terms of the
agreement with SCCI and the amounts paid to IHS, SRS and SPS for services are on
terms as favorable as could have been obtained from unaffiliated third parties.
Loans receivable from officers and directors of $425 at December 31, 1996
mature on various dates with accrued interest at 8% per annum.
28
COMMUNITY CARE OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)
(14) RELATED PARTY TRANSACTIONS -- (CONTINUED)
On December 27, 1996, the Company and IHS entered into a loan agreement
which, as amended, entitles the Company to borrow, until December 27, 1998,
amounts on a revolving credit basis so that no more than $5,000 is outstanding.
Loan advances are subject to the consent of IHS making of advances, which
consent may not be unreasonably withheld. This revolving credit facility bears
interest at a rate per annum equal to the annual rate of interest set forth in
IHS's revolving credit agreement with Citibank, N.A., plus 2%. Repayment of
amounts advanced under this line of credit are subordinated to the payment of up
to an aggregate of $30,000 of principal and interest on the Company's
obligations to HRPT and Daiwa. As of December 31, 1996, IHS had advanced the
Company $2,000.
In connection with entering into the revolving credit facility, the Company
issued warrants to purchase an aggregate of 752,182 shares of the Company's
Common Stock, one-half of which are exercisable until January 13, 1999 at $3.22
per share (the average of the high and low trading price of the Company's Common
Stock on January 14 and 15, 1997) and the remaining one-half of which are
exercisable until January 13, 2002 at $6.44 per share. The number of shares
subject to warrants and the exercise prices are subject to adjustment in certain
instances, including if the Company issues shares of Common Stock (or securities
convertible into Common Stock) at less than the applicable exercise price. In
connection therewith, the Company has granted to IHS certain rights to cause the
shares issuable upon exercise of the warrants to be registered under the
Securities Act of 1933, as amended, at the Company's expense.
On December 27, 1996, the Company entered into a Management Agreement (the
"Management Agreement") with Integrated Health Services, Inc. ("IHS") pursuant
to which the Company is employing IHS to supervise, manage and operate the
financial, accounting, MIS, reimbursement and ancillary services contracting
functions for the Company until December 31, 2001. The Management Agreement
provides for the Company to pay to IHS for its services, until December 31,
1997, an amount equal to the lesser of 2% of the Company's gross revenues (as
defined) or the Company's annualized cost of performing those services itself
based on the period July 1, 1996 through December 31, 1996. Thereafter, the
management fee payable to IHS is to be the lesser of 2% of the Company's gross
revenues or a percentage of gross revenues determined by comparing the Company's
cost of performing such functions during the period July 1, 1996 through
December 31, 1996 to its gross revenues for that period. The gross revenues
percentage which is fixed may be increased from 2.0% to 2.5% by mutual agreement
of the parties following IHS's review of the Company.
(15) INITIAL PUBLIC OFFERING
In August 1995, the Company issued 3,450,000 shares of common stock to the
public in an initial public offering at a price of $9.50 per share. Net proceeds
after underwriting discounts and expenses of the offering were $27,589.
The Company used the net proceeds of the offering to, among other things, pay
$10,800 of indebtedness to HRPT plus a prepayment penalty of approximately $600
and redeem the Series A Preferred Stock for approximately $8,167. Concurrently
with the completion of the offering, the Series A Preferred Stockholders
purchased an aggregate of 1,331,814 shares of Common Stock through their
exercise of warrants by applying 263 shares of Series A Preferred Stock, having
an aggregate redemption value of $26,300, in payment of the full exercise price
of the warrants.
As a result of the repayment of certain indebtedness through the application
of a portion of the proceeds from the offering and the proceeds from a
concurrent borrowing, the Company recorded an extraordinary charge to earnings
of $1,398 related to prepayment penalties and the write-off of deferred
financing costs ($992, net of income tax benefit of $406).
29
COMMUNITY CARE OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)
(16) SANDY RIVER TRANSACTION
Effective as of August 15, 1995, the Company entered into management
agreements for ten long-term care facilities (the "Sandy River Facilities"),
obtained an option to acquire all of the entities which own the ten facilities
(the "Option") and agreed to make fully secured loans to such entities for up to
$3,100. Effective as of August 15, 1996, the Company terminated the management
agreements since the Sandy River Facilities were not generating sufficient cash
flows to pay CCA's management fees.
Under the prior management agreements, the Company's monthly base management
fee was 7% of gross revenues (as defined) during the initial term. Management
fees were subordinated to the prior payment of all costs, expenses, certain
capital expenditures, lease payments and scheduled payments of principal and
interest on the indebtedness of the facilities, and a portion was subordinated
to certain advances and fees of approximately $400 per annum payable to Sandy
River Development, Inc. ("SRD"), a service company whose four principals were
also principals of certain owners of the Sandy River Facilities. In accordance
with the settlement agreement, unpaid management fees of $1,086 were waived by
the Company upon the termination of the management agreements. See note 12.
The Company recorded management fee revenue of $1,136 in 1995 and $1,266 in
1996. As part of the Company's strategy to make operational improvements at the
time it assumed the operations of facilities acquired or managed, the Company
implemented an action plan to improve the cash flows of the Sandy River
Facilities, which included specific steps to increase patient census, increase
Medicare utilization (which program has a higher per diem reimbursement rate),
maximize total third party reimbursement and introduce a cost savings program
through efficiencies and other professional management techniques. However,
despite the implementation of management's action plan, the Sandy River
Facilities did not generate sufficient cash flows to pay the entire management
fee, and it became apparent in 1996 that the facilities could not be managed on
a profitable basis.
The Company had also loaned $2,533 under secured revolving credit notes and
term promissory notes to certain entities (the "Borrowing Entities") which owed
indebtedness that was personally guaranteed by the principals of the entities
which own the Sandy River Facilities. The loans were primarily to enable the
Borrowing Entities to retire such indebtedness and thereby release such
principals from their personal guaranties. The loans to the Borrowing Entities
matured on August 10, 1996. The Company's loans to the Borrowing Entities bore
interest at the rate payable by the Company under the Company's revolving credit
facility and were secured (on a several basis) by, among other assets, the
accounts receivable of the Sandy River Facilities and mortgages on certain of
the Sandy River Facilities. Pursuant to the settlement agreement, CCA released
the Borrowing Entities from their obligations as consideration for the amounts
the Company owed to the Sandy River Group as a result of the termination of the
management agreement and related agreements.
Under a related option agreement, the Company had the right to purchase the
entities which own the ten facilities, during the initial three year term of the
management agreements, and the Company had a nonrefundable $5,000 purchase
option deposit, of which $1,850 was paid through the issuance of 194,737 shares
of Common Stock valued at $9.50 per share. In 1996, the Company terminated the
option and wrote-off the purchase option deposit of $5,000.
30
COMMUNITY CARE OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)
(16) SANDY RIVER TRANSACTION -- (CONTINUED)
The Company granted the holders of the 194,737 shares of Common Stock, issued
as partial payment of the purchase option deposit, the right to "piggyback" such
shares on one occasion in certain registration statements filed by the Company
under the Securities Act. As of April 14, 1997 such shares have not been
included in certain registration statements filed by the Company under the
Securities Act. In addition, each holder was also granted the right to require
the Company to repurchase up to 25%, 25% and 50% of their shares during the one
month period following each of March 15, 1996, September 15, 1996 and March 15,
1997, respectively, at a price equal to $9.50 per share, or if higher and a
registration statement under the Securities Act with respect to such shares is
not then effective, the market price of the shares. On October 27, 1996, as a
result of the terminated management agreement, the holders of these shares
exercised rights under the Option agreement and required the Company to
repurchase the aforementioned shares for $9.50 per share. The total amount due
to holders of stock of $2,181 has been classified as a current liability as of
December 31, 1996. The agreement was superseded by a settlement agreement dated
March 1, 1997. See note 13 for further information.
(17) SUPPLEMENTAL CASH FLOW INFORMATION
Significant non-cash financing and investing activities are summarized in
notes 2 and 12 and as follows:
o Accretion of the discount on preferred stock resulted in an increase
in preferred stock and a decrease in additional paid-in capital of
$371 in 1994 and $231 in 1995.
o Preferred stock dividends of $163 in 1994 were accrued but not paid.
o Common Stock with fair value of $150 was issued for legal services in
connection with acquisitions in 1994.
o The realization of deferred tax assets relating to the MeritWest
acquisition and the corresponding reduction of the valuation allowance
decreased the excess of cost over fair value of net assets acquired by
$215 in 1995.
o The Sandy River transaction resulted in an increase in deposits of
$1,850 which was financed by issuance of common stock in 1995.
o The transfer in 1996 of Smith Hospital back to the prior owners
resulted in a non cash charge to income of $4,398 which consists of
the following:
Property, plant and equipment .................... $ 5,907
Long term debt ................................... (3,000)
Deferred financing costs ......................... 264
Other ............................................ 1,227
-------
$ 4,398
=======
Cash payments for interest, net of amounts capitalized, were $3,678 in 1995
and $5,008 in 1996. Cash payments for income taxes were $3 in 1995 and $32 in
1996.
31
Community Care of America, Inc.
and Subsidiaries
Consolidated Balance Sheets
(unaudited)
December 31, June 30,
1996 1997
------------- -------------
Assets
Current assets:
Cash and cash equivalents $ 1,709,000 $ 1,593,000
Accounts receivable net of allowance for doubtful accounts and
contractual adjustments of $4,833,000 and $4,899,000 at
December 31, 1996 and June 30, 1997: 16,407,000 18,855,000
Inventories 1,761,000 1,496,000
Prepaid expenses and other current assets 1,095,000 1,383,000
------------- -------------
Total current assets 20,972,000 23,327,000
Property, plant, and equipment, net of accumulated depreciation 58,424,000 57,288,000
Notes receivable -- 1,500,000
Deposits 6,637,000 1,995,000
Excess of cost over fair value of net assets acquired, net of
accumulated amortization of $710,000 and $1,001,000 at December
31, 1996 and June 30, 1997 13,666,000 13,376,000
Deferred financing costs 1,066,000 2,429,000
Other assets 1,354,000 1,477,000
------------- -------------
$ 102,119,000 $ 101,392,000
============= =============
Liabilities and shareholders' equity Current liabilities:
Current maturities of long-term debt, net of unamortized
debt discount of $0 and $600,000 at December 31, 1996 and
June 30, 1997 $ 6,341,000 $ 3,643,000
Accounts payable and accrued expenses 23,402,000 24,296,000
Put option contracts payable (219,798 shares) 2,181,000 1,681,000
------------- -------------
Total current liabilities 31,924,000 29,620,000
Long-term debt, less current maturities, net of
unamortized debt discount of $0 and $765,000 at
December 31, 1996 and June 30, 1997 54,030,000 56,672,000
Deferred income taxes 162,000 --
Shareholders' equity:
Common stock, $.0025 par value; authorized
15,000,000 shares; issued and outstanding
7,597,801 at December 31, 1996 and June 30, 1997 19,000 19,000
Additional paid-in capital 36,465,000 38,004,000
Deficit (19,037,000) (21,479,000)
Receivable from shareholders (1,444,000) (1,444,000)
------------- -------------
Total shareholders' equity 16,003,000 15,100,000
------------- -------------
$ 102,119,000 $ 101,392,000
============= =============
See accompanying notes to consolidated financial statements.
32
Community Care of America, Inc.
and Subsidiaries
Consolidated Statements of Operations
(unaudited)
Six Months Ended
June 30,
1996 1997
------------ ------------
(Unaudited) (Unaudited)
Operating revenues:
Net patient service revenues $ 56,865,000 $ 64,939,000
Other operating revenues 4,517,000 603,000
------------ ------------
Total operating revenues 61,382,000 65,542,000
------------ ------------
Operating expenses:
Facility operating expenses 47,431,000 54,604,000
Corporate administrative and general 2,559,000 1,642,000
Rent 3,853,000 5,248,000
Depreciation and amortization 1,286,000 1,802,000
Interest, net of interest income 1,920,000 3,383,000
Unusual charges 19,185,000 1,467,000
------------ ------------
Total operating expenses 76,234,000 68,146,000
------------ ------------
Loss before income taxes (14,852,000) (2,604,000)
Federal and state income taxes (5,645,000) (162,000)
------------ ------------
Loss applicable to common stock $ (9,207,000) $ (2,442,000)
============ ============
Loss per common share $ (1.25) $ (0.32)
============ ============
Weighted average number of common and
common equivalent shares outstanding 7,350,441 7,597,801
============ ============
See accompanying notes to consolidated financial statements.
33
Community Care of America, Inc.
and Subsidiaries
Consolidated Statement of Shareholders' Equity
(unaudited)
Receivable
Total Additional From Shareholders'
Common Stock Paid-in Capital Deficit Shareholder Equity
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1996 $ 19,000 $ 36,465,000 $(19,037,000) $ (1,444,000) $ 16,003,000
Warrants issued in connection
with debt refinancing -- 1,539,000 -- -- 1,539,000
Net loss -- -- (2,442,000) -- (2,442,000)
------------ ------------ ------------ ------------ ------------
Balance at June 30, 1997 (Unaudited) $ 19,000 $ 38,004,000 $(21,479,000) $ (1,444,000) $ 15,100,000
============ ============ ============ ============ ============
See accompanying notes to consolidated financial statements.
34
Community Care of America, Inc.
and Subsidiaries
Consolidated Statements of Cash Flows
(unaudited)
Six Months Ended
June 30,
----------------------------
1996 1997
------------ ------------
(Unaudited) (Unaudited)
Net cash provided by (used in) operating activities $ 15,000 $ (1,804,000)
Cash flows from investing activities:
Property, plant and equipment additions (5,551,000) (3,007,000)
Business acquisitions (4,986,000) --
Notes receivable (75,000) --
Deposits held by lessor (516,000) 4,642,000
Sale of Georgiana Hospital -- 315,000
Other assets (942,000) (215,000)
------------ ------------
Net cash provided by (used in) investing activities (12,070,000) 1,735,000
------------ ------------
Cash flows from financing activities:
Principal reductions of long-term debt (1,940,000) (2,005,000)
Proceeds from long-term debt borrowings 14,123,000 4,064,000
Proceeds from Issuance of Stock 162,000 --
Put option contracts payable -- (500,000)
Deferred financing costs (1,667,000) (1,606,000)
------------ ------------
Net cash provided by (used in) financing activities 10,678,000 (47,000)
------------ ------------
Decrease in cash and cash equivalents (1,377,000) (116,000)
Cash and cash equivalents, beginning of period 2,485,000 1,709,000
------------ ------------
Cash and cash equivalents, end of period $ 1,108,000 $ 1,593,000
============ ============
See accompanying notes to consolidated financial statements.
35
COMMUNITY CARE OF AMERICA, INC.
Notes to Consolidated Financial Statements
(Unaudited)
June 30, 1997
(1) Basis of presentation
The interim unaudited consolidated financial statements of Community Care of
America, Inc. and subsidiaries (the "Company") presented herein have been
prepared in accordance with generally accepted accounting principles for interim
financial statements and with the instructions to Form 10- Q and Regulation S-X
pertaining to interim financial statements. The interim financial statements
presented herein reflect all adjustments (consisting of normal recurring
adjustments) which, in the opinion of management, are considered necessary for a
fair presentation of the Company's financial condition as of June 30, 1997 and
results of operations for the three and six months ended June 30, 1997 and 1996.
The Company's financial statements should be read in conjunction with the
Company's audited consolidated financial statements and the notes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1996. The results of operations for the three and six months ended June 30,
1997 and 1996 are not necessarily indicative of the results that may be expected
for the full year.
(2) Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings Per Share ("SFAS 128"), which simplifies the standards for
computing earnings per share ("EPS"). SFAS 128 is effective for the Company's
fourth quarter and year ending December 31, 1997. Early application is not
permitted and prior period EPS data will be restated.
Under SFAS 128, primary EPS will be replaced with basic EPS. Basic EPS excludes
the dilutive effect of common stock equivalents. Also, under SFAS 128, fully
diluted EPS will be replaced by diluted EPS. Diluted EPS is calculated similarly
to fully diluted EPS pursuant to Accounting Principles Board Opinion 15.
The change in calculation method is not expected to have a material impact on
previously reported earnings per common share data.
(3) Sale of Georgiana Hospital
On June 11, 1997, the Company sold its 22-bed Georgiana Hospital and the related
clinics and physician practices for cash of $315,000, net of closing costs, a
note receivable of $1.5 million and a reduction of debt of $750,000. The sale
resulted in a non-recurring charge to earnings of $1,467,000.
36
COMMUNITY CARE OF AMERICA, INC.
Notes to Consolidated Financial Statements
(Unaudited)
June 30, 1997
(4) Stock Warrants
In accordance with Statement of Financial Accounting Standards No. 123,
Accounting for Stock- Based Compensation ("SFAS No. 123"), the Company recorded
the fair value of stock warrants issued in connection with its financial
restructuring plan of $1.5 million in the second quarter of 1997. The fair value
of these stock warrants was estimated using the Black-Scholes option pricing
model and was recorded as an increase to additional paid in capital and
unamortized debt discount. The related unamortized debt discount was $1.4
million at June 30, 1997, net of accumulated amortization of $174,000 which was
charged to interest expense in the second quarter of 1997.
(5) Sandy River Transaction
In April 1997, the Company paid $500,000 to the Sandy River Group shareholders
pursuant to the settlement agreement dated March 1, 1997, to repurchase 219,798
shares of common stock. As of June 30, 1997 the Company is obligated under a
note payable to the Sandy River Group shareholders for $1,681,000.
(6) Subsequent Event
On July 18, 1997, the Company and IHS Holdings, Inc. entered into a second loan
agreement, which entitles the Company to borrow for working capital purposes,
until July 18, 1999, amounts on a revolving credit basis so that no more than
$5.0 million is outstanding at any time. Loan advances are to be made directly
to creditors of the Company, including IHS, in payment of the Company's
obligations to such creditors. Proceeds used to pay the Company's obligations
are directed by IHS in accordance with the management agreement. This revolving
credit facility bears interest at a rate per annum equal to the annual rate of
interest set forth in IHS's revolving credit agreement with Citibank, N.A., plus
4%. Repayment of amounts advanced under this line of credit are subordinated to
the payment of up to an aggregate of $13.6 million of principal and interest on
the Company's obligations to one of the Company's principal unaffiliated
third-party lenders. The revolving credit facility is guaranteed in full by
Community Care of Nebraska, Inc., ECA Holdings, Inc., CCA of Midwest, Inc.,
Quality Care of Columbus, Inc., Quality Care of Lyons, Inc., and W.S.T. Care,
Inc., each wholly-owned subsidiaries of the Company. The revolving line of
credit is secured by the real property assets of the Company and its
subsidiaries. At July 31, 1997, no borrowings were outstanding under this
facility.
37
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
INTEGRATED HEALTH SERVICES, INC.
Date: October 9, 1997 By: /s/ W. Bradley Bennett
----------------------
Name: W. Bradley Bennett
Title: Executive Vice President--Chief
Accounting Officer
38
EXHIBIT INDEX
2. Agreement and Plan of Merger, dated as of August 1, 1997,
among Integrated Health Services, Inc., IHS Acquisition XXVI,
Inc. and Community Care of America, Inc. (incorporated herein
by reference to Exhibit (c)(2) to Integrated Health Services,
Inc.'s Tender Offer Statement of Schedule 14D-1 filed with the
Securities and Exchange Commission on August 7, 1997).
23. Consent of KPMG Peat Marwick LLP.