-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PmSDBNpmA1/24jg/PVpgem7LedLJudp6i/bFKYR1J7/ndV8Jtz1HaqxAn6hyvwdT u9j8HyE2hBKntMfO+QMJmw== 0000948830-96-000201.txt : 19961016 0000948830-96-000201.hdr.sgml : 19961016 ACCESSION NUMBER: 0000948830-96-000201 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19961015 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: RETIREMENT CARE ASSOCIATES INC /CO/ CENTRAL INDEX KEY: 0000798540 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-SKILLED NURSING CARE FACILITIES [8051] IRS NUMBER: 431441789 STATE OF INCORPORATION: CO FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-14114 FILM NUMBER: 96643662 BUSINESS ADDRESS: STREET 1: 6000 LAKE FORREST DR STE 200 CITY: ATLANTA STATE: GA ZIP: 30328 BUSINESS PHONE: 4042557500 MAIL ADDRESS: STREET 1: 6000 LAKE FORREST DR STREET 2: STE 200 CITY: ATLANTA STATE: GA ZIP: 30328 10-K 1 U. S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the Fiscal Year ended: June 30, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from: Commission File No. 1-14114 RETIREMENT CARE ASSOCIATES, INC. (Exact Name of Registrant as Specified in its Charter) COLORADO 43-1441789 (State or Other Jurisdiction of (I.R.S. Employer Identi- Incorporation or Organization) fication Number) 6000 Lake Forrest Drive, Suite 200, Atlanta, Georgia 30328 (Address of Principal Executive Offices, Including Zip Code) Registrant's telephone number, including area code: (404) 255-7500 Securities registered pursuant to Section 12(b) of the Act: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED Common Stock, $.0001 Par Value New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.0001 Par Value Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of September 18, 1996, 13,180,918 shares of common stock were outstanding. The aggregate market value of the common stock of the Registrant held by nonaffiliates on that date was approximately $67,925,000. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Documents incorporated by reference: Part III is incorporated by reference to the Registrant's Proxy Statement relating to the Annual Meeting of Shareholders to be held in December 1996. PART I ITEM 1. BUSINESS. THE COMPANY Retirement Care Associates, Inc. is a leading provider in the southeastern United States of senior residential care services, which include long-term care, assisted living and independent living services. The Company's long-term care facilities provide skilled nursing care, specialty care services and ancillary services to patients, while its assisted/independent living centers provide services to residents in need of varying degrees of assistance with the activities of daily living. Its facilities are located primarily in rural and non-urban areas in the United States, and it is the largest provider of senior residential care services in Georgia. As of August 20, 1996, the Company operated 69 facilities which it owned or leased, and managed an additional 24 facilities for others. The Company's headquarters are located in Atlanta, Georgia. Its executive offices are located at 6000 Lake Forrest Drive, Suite 200, Atlanta, Georgia 30328. Its telephone number at that address is (404) 255-7500. The Company was formed under the laws of the State of Colorado on March 24, 1986, under the name "New Frontiers Investments, Inc." to create a corporate vehicle to seek and acquire a business opportunity. In February, 1987, the Company completed a public offering of units consisting of shares and warrants. The gross proceeds to the Company from the offering were approximately $236,455. On April 2, 1987, the Company acquired 100% of the outstanding shares of Retirement Care Associates, Inc. ("RetireCare") in exchange for shares of the Company's Common Stock. RetireCare is a corporation formed in 1987 to engage in the business of consulting to, marketing and managing retirement centers. RetireCare eventually planned to expand its operations to include acquisition and syndication of retirement centers. At the time of the acquisition, the Company changed its name to "Retirement Care Associates, Inc." Also as a result of the acquisition, there was a complete change in control of the Company. The Company attempted to operate in several facets of the retirement industry including development, contract management, acquisition and consulting. Although the Company had some success turning around distressed properties, it was not able to retain long-term management contracts. In September, 1988, the Company narrowed its goals to focus on long-term marketing and management contracts of distressed properties. In October, 1988, the Company purchased The Paxton Manor, a 250 unit retirement facility located in Omaha, Nebraska. This property, constituting essentially all of the assets of the Company at the time, was subsequently sold on November 12, 1991, with shareholder approval. In September 1991, Chris Brogdon and Edward E. Lane agreed to become Directors of the Company and the existing directors and several major shareholders of the Company verbally agreed that if Messrs. Brogdon and Lane would invest $50,000 in the Company, the Company would issue to them 1,447,031 shares of the Company's Common -2- Stock. The $50,000 was used to pay the expenses of preparing and filing the Company's delinquent SEC reports and tax returns, and paying the state and federal taxes owed as a result of the sale of the Paxton Manor during 1991. During this period of time, the Company's Officers and Directors resigned and Chris Brogdon and Edward Lane became Officers and Directors of the Company. From November 1991 to November 1992, the Company had no significant activities other than the filing of delinquent SEC reports and tax returns. In November 1992, the Company merged with Capitol Care Management Company, Inc. ("CCMC"), a Georgia corporation engaged in the business of providing management services to retirement facilities, personal care facilities and nursing homes. In connection with the merger the Company issued 964,688 shares of the Company's Common Stock and Promissory Notes in the aggregate amount of $1,000,000 to the CCMC shareholders. Simultaneously with the merger, all of the assets, liabilities and operations of CCMC were placed into a newly formed Georgia corporation named Capitol Care Management Company, Inc. ("Capitol Care") which is a wholly-owned subsidiary of the Company. On December 31, 1992, the promissory notes aggregating $1 million were canceled and in consideration therefor the holders of the promissory notes were issued 1,000,000 shares of Series C Convertible Preferred Stock which were subsequently converted into 964,688 shares of Common Stock. In December 1993, the Company acquired Retirement Management Corporation, a Nevada corporation engaged in the business of providing management and marketing services to retirement care facilities, in a merger transaction in which it was merged into Capitol Care. Immediately after the merger, all of the assets, liabilities and operations of Retirement Management Corporation were transferred into Retirement Management Corporation ("RMC"), a newly formed Georgia corporation which is a subsidiary of Capitol Care. In this transaction, the Company issued 92,610 shares of its Common Stock and shares of preferred stock which were later converted into 115,763 shares of Common Stock and $100,000 in cash in exchange for all of the outstanding stock of RMC. During the period from January 1, 1993 to December 10, 1993, RMC had $668,861 in revenue and net income of $85,511. On September 30, 1994, the Company acquired approximately 63% of the outstanding stock of Contour Medical, Inc., a publicly-held Nevada corporation located in St. Petersburg, Florida, which manufactures a full line of orthopedic care and rehabilitation products. The Company currently owns approximately 60% of the outstanding stock of Contour Medical, Inc. In July, 1993, the Company effected a 1 for 12 reverse stock split of the shares of the Company's outstanding Common Stock. The Company paid 5% stock dividends on its outstanding Common Stock in February 1994, February 1995 and May 1996. All financial information and share data in this Report give retroactive effect to the reverse split and stock dividends. INTRODUCTION The Company is a leading provider in the southeastern United States of senior residential care services, which include long-term care, assisted living and independent living services. The Company's long-term care facilities provide skilled nursing care, specialty care services and ancillary services to patients while the Company's assisted/independent living centers provide services to residents in need of varying degrees of assistance with the activities of daily living. Most of the Company's facilities are located -3- in rural and non-urban areas in the southeastern United States, and the Company is the largest provider of senior residential long term care services in Georgia. The Company's strategy is to increase the number of facilities that it operates (i) primarily by acquiring by purchase or lease independently-owned long-term care facilities and assisted/independent living centers located in the Southeast and (ii) secondarily by developing assisted/independent living centers adjacent or complementary to it existing facilities. Upon the acquisition of a facility, the Company implements its management information and control systems and provides capital for necessary physical plant improvements to enable its professionals to increase occupancy and attain the Company's standards for quality of care. The Company's operating strategy with respect to its assisted/independent living centers is to increase its center occupancy rates by maintaining high quality social and support services for its residents, to develop relationships with community leaders and other referral sources and to implement a strong marketing program, including direct mail marketing and advertising and special events. Assisted living is an increasingly popular form of senior housing which offers seniors who need or desire help with the activities of daily living and limited health care services a residential alternative which allows them more independence and is less costly than a long-term care facility. The Company's independent living centers offer residents complete independence and provide basic support services as well as customized services to meet their individual needs. The Company's operating strategy with respect to its long-term care facilities is to improve its payer mix by (i) making capital improvements which the Company believes are necessary to attract more private pay residents, (ii) aggressively marketing such facilities to prospective private pay residents and (iii) seeking Medicare certification for newly acquired facilities. The Company seeks to enhance the revenue of its existing facilities by offering its long-tem care patients physical, speech, occupational and respiratory therapy, wound care and other ancillary services. At June 30, 1996, all of the Company's long-term care facilities were Medicare certified. SENIOR RESIDENTIAL CARE INDUSTRY GENERAL. The senior residential care industry encompasses a broad range of residential and health care services provided to the elderly and to patients who can be cared for outside the acute care hospital environment. The Company believes that demand for the services provided by long-term care facilities and assisted/independent living centers will increase substantially during the next decade primarily due to demographic and social trends and, to a lesser extent, the growth of private insurance and governmental payment sources for assisted living services. Other factors which affect the senior residential care industry are (i) the limited supply of long-term care facilities, (ii) the effects of government cost containment measures and (iii) the fragmentation of the long-term care industry. Furthermore, given the cost containment pressure at the federal, state and local levels, government and private payers are attracted to, and motivated to support, long-term care facilities as a more cost effective alternative to subacute care facilities and to hospitals and assisted living centers as a less expensive and still effective alternative to traditional long-term care facilities when ongoing care is needed. -4- DEMOGRAPHIC AND SOCIAL TRENDS. The consumers of the Company's senior residential care services are persons generally over 65 years of age. In the United States, the number of individuals over 65 years of age has increased from approximately 25 million in 1980 to more than 31 million in 1990. The number of persons 65 years of age and over is expected to grow to approximately 35 million in 2000. GROWTH OF LONG-TERM CARE INSURANCE. Numerous insurance companies currently offer long-term care insurance which provides the beneficiary coverage for expenses associate with long-term care and assisted/independent living services. Furthermore, the number of long-term care policies in existence is increasing rapidly. According to the Health Insurance Association of America, approximately 2.4 million long-term care policies were in existence as of December 1991, representing a compound average annual growth rate of 31.5% from 1987 to 1991. In calendar 1994, 1.4 million long-term care policies were purchased as compared to 0.6 million in 1991. In addition, employers have started to offer long-term care insurance in their "cafeteria plans," and Congress is considering a proposal to make long-term care insurance premiums tax deductible. Based upon these factors and the demographic and social trends of the United States population, the Company expects more people to be covered by long-term care insurance. LIMITED SUPPLY OF LONG-TERM CARE BEDS. The Company believes that certain factors impacting the available supply of long-term care beds will favorably impact the demand for the services offered by the Company in the future. All of the states in the southeastern United States, including the states in which the Company operates, have enacted certificate of need ("CON") or similar legislation which restricts the supply of licensed long-term care facility beds. These laws generally limit the construction of long-term care facilities, and the addition of beds or services to existing long-term care facilities, and hence tend to limit the available supply of traditional long- term care beds. In addition, some long-term care facilities have started to convert traditional long-term care beds into sub-acute beds. FRAGMENTED INDUSTRY. Market share data indicate that the long-term care industry is a highly fragmented and competitive industry in which the 30 largest providers operate approximately 352,000 beds, or 22% of total industry beds. Competitive dynamics in the industry, including increasing complexity of medical needs, growing regulatory and compliance requirements and increasingly complicated reimbursement systems, have resulted in smaller operators (who lack the sophisticated management information systems, operating efficiencies and financial resources necessary to compete effectively) selling their businesses and operations to companies, such as the Company, that have the management information systems, operating efficiencies and financial resources necessary to compete effectively. The result of these factors is a relative increase in the demand for long-term facility care, which, in turn, increases the demand for residential options, such as assisted living facilities, to serve patients historically served by long-term care facilities. In addition, long-term care facility operators are continuing to focus on expanding services to sub-acute patients requiring very high levels of nursing care. As such, the supply of long-term care beds likely will be increasingly occupied by patients with higher acuity levels, thereby increasing the supply of lower acuity patients who may be served by assisted living facilities. The Company believes that, as a result of these trends, there will be opportunities for assisted living to more cost effectively provide accommodation and service facilities to provide -5- accommodations and services on a cost-effective basis to residents requiring lower levels of care than is generally provided to patients in long-term care facilities. STRATEGY The Company's strategy is to increase the number of facilities that it operates primarily by (i) acquiring by purchase or lease independently-owned long-term care facilities and assisted/independent living centers located in the southeastern United States and secondarily by (ii) developing assisted/independent living centers adjacent or complementary to its existing facilities. Key elements of this strategy include: (i) acquiring and developing additional long-term care and assisted/independent living facilities; (ii) increasing facility occupancy rates; (iii) improving the payer mix at the Company's long-term care facilities; and (iv) achieving operating efficiencies. ACQUIRE AND DEVELOP FACILITIES. The Company intends to acquire and develop additional long-term care facilities and assisted/independent living facilities in its existing markets and contiguous areas. Management believes that such expansion will allow the Company to take better advantage of its existing expertise and organizational resources and improve margins by reducing overhead costs. As a result of the growing complexity of regulatory requirements and the continued pressure on reimbursement rates, the Company believes that other smaller, independent providers may be more willing to consider selling or leasing their facilities on terms acceptable to the Company. The Company believes it is well positioned to make acquisitions because of its reputation and established geographic presence. In addition, the Company intends to offer a broad range of senior residential care services. Towards that end, the Company has recently implemented a strategy to develop assisted living centers adjacent to its long-term care facilities or independent living centers, thereby creating senior residential care campuses which offer a greater variety of senior residential care services in one location. At August 31, 1996, the Company had nine of these senior residential care campuses. In evaluating an existing facility for acquisition, the Company primarily considers the facility's historical occupancy rates and payor mix, reputation and compliance history, physical condition and appearance, labor force stability, the availability of financing on acceptable terms and, in the case of assisted/independent living facilities, the demographics of the surrounding area. In evaluating a development project, the Company primarily considers the strength of the market demand for the senior residential care services. Upon the acquisition of a facility, the Company implements its management information and control systems and provides capital for necessary physical plant improvements to enable its professionals to increase occupancy and attain the Company's standards for quality of care. The Company's strategy with respect to its long-term care facilities is to seek Medicare certification while simultaneously marketing the facility to attract more Medicare and private pay residents. The Company believes that with effective cost controls, the Company's facilities can continue to be profitable with a highly concentrated Medicaid payer mix. INCREASE FACILITY OCCUPANCY RATES. The Company believes its occupancy rates in existing assisted/independent living centers should increase -6- primarily due to three factors: (I) an enhanced emphasis on facility-specific marketing efforts; (ii) the continued growth of the elderly segment of the population in the Company's markets; and (iii) the limited supply of long-term care beds and assisted/independent living units. Increasing occupancy rates will allow the Company to further reduce its fixed costs per patient day. IMPROVE PAYOR MIX. The Company seeks to improve its payer mix at its long-term care facilities by making capital improvements which management believes are necessary to attract more private pay residents, by aggressively marketing such facilities to prospective private pay residents and by seeking Medicare certification for newly acquired facilities. The Company has recently implemented a strategy to develop assisted living centers adjacent to its long-term care facilities or independent living centers, thereby creating a senior residential care campus which offers a greater variety of senior residential care services in one location. Management believes that providing a "continuum of care" to its residents enhances the marketing efforts of its assisted/independent living centers and that these centers should provide a referral source to the other facilities on the same campus. The Company also has intensified efforts to provide the full range of Medicare services to eligible patients and is increasingly concentrating its marketing efforts on private third party payers, such as managed care and insurance companies, as well as hospital discharge planners, thereby developing referral sources for both its long-term care and assisted/independent living centers. ACHIEVE OPERATING EFFICIENCIES. The Company seeks to reduce its ratio of general and administrative expenses to total operating revenue as a result of economies of scale resulting from acquisitions and as a result of efforts to more efficiently control and manage its businesses. The effective operation of the Company's managerial and financial information and control systems are fundamental to its performance. These systems allow the Company, among other things, to assimilate acquisitions and control costs by achieving reductions of administrative staff, economies in purchasing, efficient management of patient care personnel and reduced use of nurses from employment agencies. LONG-TERM CARE SERVICES. Basic resident services are those traditionally provided to elderly patients in long-term care facilities with respect to daily living activities and general medical needs. The Company provides in all of its facilities room and board, 24 hour skilled nursing care by registered nurses, licensed practical nurses and certified nursing aides, and a broad range of support services, including dietary services, therapeutic recreational activities, social services, housekeeping and laundry services, pharmaceutical and medical supplies, physical, speech, occupational and respiratory therapy, wound care and other ancillary services. ASSISTED LIVING SERVICES. The Company's assisted living centers are designed to assist those persons generally 75 years of age or over who may require assistance with any of the five basic activities of daily life (i.e., bathing, dressing, eating, walking and toileting). The Company assesses incoming residents and develops an individualized care plan based on their acuity level. The Company reassesses each of its residents on a regular basis to determine if they require additional care. Each of the Company's assisted living facilities offers its residents with private or semi-private accommodations, ongoing health assessments, three meals per day and snacks approved by a registered dietician, as well as 24-hour assistance with activities of daily life, housekeeping service, linen and personal laundry service, organized social activities and transportation. The Company's assisted living services are provided in freestanding assisted living centers and in certain units in each of the Company's independent living centers. -7- INDEPENDENT LIVING SERVICES. The Company's independent living centers offer independent living to seniors. Each center offers a standard package of services that typically include meal service, laundry and linen service, housekeeping, organized social activities and transportation. In addition, each of the Company's independent living facilities offers a menu of separately priced additional services available at the option of the resident. LONG-TERM CARE OPERATIONS FACILITY OPERATIONS. The Company's facilities are currently divided into eight regions, each of which is supervised by a regional director of operations and contains four to eight facilities. The regional director of operations monitors and supervises all aspects of operations of the facilities in the region and acts as liaison between such facilities and corporate headquarters. The regional director of operations is responsible for, among other things, ensuring compliance with federal, state and local regulations, reviewing and monitoring compliance with corporate policies and procedures and monitoring adherence to budgets. In addition, each region has a quality assurance nurse and a dietary consultant who meet regularly with their regional director of operations and report to the vice president of compliance. The regional and facility personnel are supported by a corporate staff based at the Company's headquarters. Corporate personnel work with regional directors of operations and facility administrators with respect to the establishment of facility goals and strategies; quality assurance oversight; reimbursement, accounting, cash management and treasury functions; development of monitoring systems and operational procedures; human resources management; and development and implementation of new programs. Each facility is managed by an on-site, state licensed administrator who is responsible for the overall operation of the facility, including quality of care, marketing and financial performance. The administrator is assisted by various professional and nonprofessional personnel (some of whom may be independent contractors), including a medical director, nurses and nursing assistants, social workers, dietary personnel, therapeutic recreation staff and housekeeping, laundry and maintenance personnel. The medical treatment of residents is the responsibility of the residents' attending physicians, who are not employed by the Company and bill their patients directly for services. The support services provided by the Company, including therapeutic recreation, speech, occupational, respiratory and physical therapy, wound care and other ancillary services, are provided primarily by independent providers under contractual commitments with the facility. MARKETING. The Company engages in facility-specific marketing efforts to maintain and improve occupancy rates and to promote the services, including a full range of medical services offered by the Company's long-term care facilities. The Company's marketing activities are conducted primarily by each facility's admissions director and administrator who together seek to establish relationships with potential referral sources, such as hospital discharge planners and managed health care organizations. The Company believes that many of the services and programs provided by its facilities in the normal course of business supplement formal marketing efforts by promoting the reputation of each facility in the community as a provider of quality care. Each facility offers a variety of community programs and activities which are designed primarily as a service to the community and as a means to enhance the quality of patient life. -8- QUALITY ASSURANCE. The Company's quality assurance program with respect to its long-term care facilities involves personnel at all levels. The Company has established a quality assurance team comprised of the facility's administrator and the facility's senior medical professionals that periodically visits and inspects each of the Company's long-term care facilities and evaluates all aspects of the facility's operations, including patient care, physical environment, patients' rights, patient activities and dietary regimen. The Company's corporate director of nursing receives quarterly quality assurance reports from each facility, reviews them against prior quarterly reports and against applicable state survey results for the facility, and works with the relevant regional director of operations and the facility's quality assurance committee to address any deficiencies and work toward continual improvement. All regional directors of operations, medical and other consulting personnel are required to prepare and submit reports at the end of each scheduled visit identifying any patient care or other quality related issues. ASSISTED/INDEPENDENT LIVING OPERATIONS CENTER OPERATIONS. The Company's assisted/independent living centers are currently divided into five regions, each of which is supervised by a regional director of operations and contains four to seven centers. The regional director of operations monitors and supervises all aspects of operations of the centers in the region and acts as liaison between such facilities and corporate headquarters. The regional director of operations is responsible for, among other things, ensuring compliance with applicable federal, state and local regulations, reviewing and monitoring compliance with corporate policies and procedures and monitoring adherence to budgets. Each of the Company's assisted/independent living centers is managed by an executive director who is responsible for monitoring the day-to-day operations of the center and the resident assistants who provide the personal care to the center's residents. Each center also has a social activities coordinator, a community service representative, a kitchen manager and dietary staff. The regional and center personnel are supported by a corporate staff based at the Company's headquarters. Corporate personnel work with regional directors of operations and the executive director of each center with respect to the establishment of goals and strategies; quality assurance oversight; budgeting, accounting, cash management and treasury functions; development of monitoring systems and operational procedures; human resources management; and development and implementation of new marketing programs. In connection with the Company's delivery of services to its assisted living residents, a resident assistant is responsible for the personal care, medication supervision (when state law so permits), meal service, housekeeping, laundry and linen service and social activities of a small number of residents. In addition, management believes that its method of service delivery permits the care-giver to establish a better relationship with the resident and in some cases become an extension of the resident's family. The Company's Extended Care Program reassesses each of its assisted living residents on a regular basis to develop a daily care plan that provides each of the residents with the appropriate level of care and assistance. The Company has adopted an objective assessment system whereby each resident receives points based upon his or her acuity level. The Company is then able to determine the appropriate level of care based on this point acuity assessment. -9- MARKETING. The Company develops a comprehensive marketing plan for each of its assisted/independent living centers. The marketing plan identifies the strengths and weaknesses of the center, the demographic and competitive profile of the geographic area in which the center is located and provides a strategy for marketing the center in light of these factors. The plan consists of a combination of advertising, primarily directed to the adult children of potential residents, special events, direct mail and community networking, all of which are designed to generate a sufficient number of inquiries to fill the center. The Company's marketing effort sets goals for the number of inquiries, facility tours, deposits and new residents resulting from such efforts on a monthly basis. With this targeted marketing approach, management believes that it has been successful in marketing its assisted/independent living centers. QUALITY ASSURANCE. The Company's quality assurance program with respect to its assisted independent living centers involves personnel at all levels. The Company has established a quality assurance team that periodically visits and inspects each of the Company's assisted/independent living centers and evaluates all aspects of the center's operations, including resident care, physical environment, staff appearance, residents' rights, resident activities and dietary regimen. The management receives the reports from the quality assurance team, reviews them against prior reports, and works with the relevant regional director of operations and the facility's administrators to address any deficiencies and work toward continual improvement. GENERAL FACILITY OPERATION MANAGEMENT AND FINANCIAL CONTROLS. The Company has developed integrated management and financial information systems and controls intended to maximize operating efficiency. These systems enable management to monitor key operations and financial data on a timely basis. Key operating data, such as payables and billing data, cash collections and admissions/discharge data, are entered into the system daily. This information forms the basis for a variety of management and financial reports, including monthly financial statements, for each facility. PURCHASING. The Company's focus in purchasing is to develop national pricing contracts for nursing supplies and dietary, housekeeping and laundry products. Each facility, however, is responsible for purchasing the required supplies and products pursuant to those contracts. MANAGEMENT AND MARKETING SERVICES The Company provides management services to all its owned or leased facilities, as well as to 17 assisted/independent living centers and long-term care facilities owned by its affiliates and 7 assisted/independent living centers owned by unaffiliated third parties. See "ITEM 2. PROPERTIES." Pursuant to its management agreements with the owners of each facility, the Company supervises the management of the facility as to staffing, accounting, billing, collections, rate setting and general administration, and provides marketing services, which include identifying target markets, developing appropriate marketing strategies and procedures, hiring, training and supervising qualified leasing counselors as employees of the manager and budgeting and controlling costs. The Company is responsible for hiring, on behalf of the owner, all staff, including a facility administrator or -10- executive director. The management agreements provide for management fees of a flat rate per month, a percentage of net operating revenues (total revenues less deductions and allowances for contractual adjustments to third party payors and charitable allowances) or a combination of a flat rate and a percentage of net operating revenues. For long-term care facilities, which require the greatest amount of management services, the Company charges management fees of $6,000 to $24,000 per month, depending primarily on the number of beds, or, in some cases, 6% of net operating revenues. For assisted/independent living centers, which involve fewer management services, the Company charges $1,000 to $15,000 per month, depending primarily on the amount of revenues of the center. The management agreements also provide a separate fee for the marketing services provided by the Company to assisted/independent living centers. The obligations to pay management fees to the Company are general obligations of the owners of the facilities. In many cases the facilities have incurred substantial debt in the form of municipal bonds, debentures or similar debt instruments. The payment of management fees to the Company is generally subordinated to the payment of these obligations. SOURCES OF REVENUES The Company derives its patient service revenue primarily from a combination of state Medicaid programs, the federal Medicare program and private payment sources. The Company's revenues are determined by a number of factors, including the licensed bed capacity of its facilities, occupancy rates at the facilities and the payer mix. While management believes that it has been successful in obtaining reimbursement, there can be no assurance that reimbursement rates will remain at present levels or increase at rates necessary to offset the effects of inflation. In particular, cost containment proposals at both the state and federal levels may impact the Company's ability to recover its costs of providing services to Medicaid and Medicare patients. See "-- Governmental Regulation.". MEDICAID. Medicaid refers to the various state-administered reimbursement programs that are eligible for matching federal funds. Each of the Company's long-term care facilities participates in the Medicaid program of the state in which it is located. Under the federal Medicaid statute and regulations, state Medicaid programs must provide reimbursement rates that are reasonable and adequate to cover the costs that would be incurred by efficiently and economically-operated facilities in providing services in conformity with state and federal laws, regulations and quality and safety standards. Furthermore, payments must be sufficient to enlist enough providers so that services under the state's Medicaid plan are available to recipients at least to the extent that those services are available to the general population. The Medicaid programs in which the Company's facilities participate pay a per diem rate based on each facility's reasonable allowable costs incurred in providing services, subject to cost ceilings applicable to both operating and fixed costs, plus a return on equity. Reimbursement rates are typically determined by the state, on a prospective or retrospective basis, from cost reports filed by each facility. Under a prospective system, per diem rates are established (generally on an annual basis) based on certain historical costs of providing services during the prior year, adjusted to reflect factors such as inflation and any additional services required to be performed; no subsequent adjustment is made to reflect variations in actual costs from the -11- rates established. All of the Company's long-term care facilities are reimbursed on a prospective rate system. Providers must accept reimbursement from Medicaid as payment in full for the services rendered. The Georgia and Tennessee Medicaid programs currently include incentive allowances for providers whose costs are less than certain ceilings and who meet other requirements. See "-- Governmental Regulation." All Medicaid programs conduct periodic financial audits of participating facilities. To date, adjustments from Medicaid audits have not had a material adverse effect on the Company. While there can be no assurance that future adjustments will not have such an effect, the Company believes that the actual reimbursable amounts determined after audit will approximate the estimated reimbursable amounts at which Medicaid revenue has been recorded. MEDICARE. Medicare is a federally-funded and administered health insurance program primarily designed for individuals who are age 65 or over and are entitled to receive Social Security benefits. The Medicare program consists of two parts: Part A covers in-patient hospital services and services furnished by other institutional health care providers, such as long-term care facilities; Part B covers the services of doctors, suppliers of medical items and services, and various types of outpatient services. Part B services include physical, speech and occupational therapy, pharmaceuticals and medical supplies, certain intensive rehabilitation and psychiatric services and ancillary diagnostic and other services of the type provided by long-term care or acute care facilities. Part A coverage is limited to a specified term (generally 100 days in a long-term care facility) and requires beneficiaries to share some of the cost of covered services through the payment of a deductible and a co-insurance payment. There are no limits on duration of coverage for Part B services, but there is a co-insurance requirement for most services covered by Part B. All of the Company's long-term care beds are certified for Medicare services. Generally, the Company's Medicare participating facilities receive monthly reimbursement payments during the year at interim rates based on historical costs. These rates are later adjusted to reflect actual allowable direct and indirect costs of services based on the submission of a cost report at the end of each year. Actual costs incurred and reported by each facility are subject to retrospective audits which can result in upward or downward adjustments of payments received. To date, adjustments from Medicare audits have not had a material adverse effect on the Company. While there can be no assurance that future adjustments will not have such an effect, the Company believes that the actual reimbursable amounts determined after audit will approximate the estimated reimbursable amounts at which Medicare revenue has been recorded. PRIVATE PAY. Private pay revenues include payments from individuals who pay directly for services without governmental assistance and include payments from commercial insurers, Blue Cross organizations, health maintenance organizations, preferred provider organizations, workers' compensation programs and other similar payment sources. The Company's rates for private pay residents are typically higher than rates for patients eligible for assistance under governmental reimbursement programs. The amount the Company charges to private pay residents is not subject to regulatory control in any state in which the Company operates. However, the private pay rates charged by the Company are influenced primarily by the rates charged by other providers in the local market and by Medicaid and Medicare reimbursement rates. -12- All of the Company's patient service revenue attributable to its assisted/independent living centers is derived exclusively from private pay sources. Monthly resident fees for the Company's independent living centers typically range from approximately $1,250 to $1,800 and monthly resident fees for the Company's assisted living centers typically range from $1,500 to $3,000 based upon the resident's level of required care. Government payments for assisted living services have been limited and are not material to the Company's assisted/independent living operations. ANCILLARY BUSINESSES On September 30, 1994, the Company acquired approximately 63% of the outstanding capital stock of Contour Medical, Inc. ("Contour") from certain shareholders of Contour. In exchange for such shares, the Company issued 125,000 shares of the Company Common Stock and 300,000 shares of the Company's Series AA Convertible Preferred Stock. The Company currently owns approximately 60% of Contour's outstanding capital stock. Contour is a publicly-held company based in St. Petersburg, Florida which manufactures and sells a full line of orthopedic care and rehabilitation products. These products range from braces designed for reconstructive rehabilitation of patients after surgery to finger and leg spreaders, leg positioning devices (designed to prevent muscle atrophy and speed recovery after surgery) and a full line of proprietary orthopedic devices used in rehabilitative therapy procedures. Some of these products are utilized for the care of wheelchair or bed-bound patients in the hospital, long-term care facility and the home. Contour also manufactures and sells disposable surgical procedure products for outpatient surgery, X-ray, radiology, and other imaging technology within the hospital, emergency room, integrated care facilities and clinic markets. These products, such as pads, bags, equipment covers and drapes, are used to protect equipment, patients and attending personnel in the surgery or emergency room environment, and are designed to meet the requirements of infection control for medical, industrial and institutional applications. In addition, Contour markets its REDINURSE SYSTEMS product line, which provides custom-packaged procedural trays for use in clinics and long-term care centers as well as by home health care nurses, and distributes medical supplies and equipment produced by other manufacturers. In March 1996, Contour acquired AmeriDyne Corporation, a bulk medical supply company based in Jackson, Tennessee, which has annual sales of approximately $10 million. In August 1996, Contour acquired all of the outstanding stock of Atlantic Medical Supply Company, Inc. ("Atlantic Medical"), a distributor of disposable medical supplies and a provider of third-party billing services to the nursing home and home health care markets. Contour paid $1,400,000 in cash and promissory notes totaling $10,500,000 for the stock of Atlantic Medical. The promissory notes bear interest at 7% per annum and are due in full on January 10, 1997. In the event of a default in the payment of the promissory notes, they are convertible into shares of common stock of the Company (Retirement Care Associates, Inc.). Retirement Care holds approximately 27% of the outstanding capital stock of Perennial Development Corporation, a publicly held company based in Louisville, Kentucky, whose wholly owned subsidiary, In-House Rehab, Inc., provides rehabilitation services to approximately 26 of Retirement Care's long-term care facilities. -13- COMPETITION The senior residential care industry is highly competitive. The Company competes with other providers of senior residential care on the basis of the breadth and quality of its services, the quality of its facilities and, with respect to private pay patients or residents, price. The Company also competes in the acquisition and development of additional facilities. The Company's current and potential competitors include national, regional and local operators of long-term care facilities, acute care hospitals and rehabilitation hospitals, extended care centers, assisted/independent living centers, retirement communities, home health agencies and similar institutions, many of which have significantly greater financial and other resources than the Company. In addition, the Company competes with a number of tax-exempt nonprofit organizations which can finance capital expenditures on a tax-exempt basis or receive charitable contributions unavailable to the Company and which are generally exempt from paying income tax. There can be no assurance that the Company will not encounter increased competition which could adversely affect the Company's operating results. While the Company's competitive standing varies from market to market, management believes that the Company competes favorably in substantially all of the markets it serves based on key competitive factors such as the breadth and quality of services it offers, the quality of its facilities, its recruitment and retention of qualified health care personnel and its reputation among local referral sources. Competition for the acquisition of long-term care facilities has remained steady in recent years, but is expected to increase as the demand for long-term care increases. Construction of new long-term care facilities near the Company's facilities could adversely affect its business. However, state laws generally require a CON, which is only issued if the applicant proves that the need for additional long-term care beds exists under the state devised formula, before a new long-term care facility can be built or beds can be added to existing facilities. The Company believes that these laws reduce the possibility of overbuilding and promote higher utilization of existing facilities. CON laws are in place in all states where the Company operates. While such measures may limit the Company's expansion of current facilities and possible future acquisitions, they may also reduce competition in the affected service area. The Company competes with other health care providers for both professional and nonprofessional employees and with non-health care providers for non-professional employees. In recent years the health care industry has experienced a shortage of qualified health care personnel. While the Company has been able to retain the services of an adequate number of qualified personnel to staff its facilities appropriately and maintain its standards of quality care, there can be no assurance that continued shortages will not affect the ability of the Company to maintain the desired staffing levels. A lack of qualified personnel at any facility could result in significant increases in labor costs or otherwise adversely affect the operations at that facility. Any of these developments could adversely affect the Company's operating results or expansion plans. GOVERNMENT REGULATION The federal government and all states in which the Company operates regulate various aspects of the Company's business. In addition to the -14- regulation of rates by governmental payer sources, the development and operation of long-term care and assisted living facilities and the provision of long-term care services are subject to federal, state and local licensure and certification laws which regulate with respect to a facility, among other matters, the number of beds, the services provided, the distribution of pharmaceuticals, the condition and use of medical equipment, staffing requirements, operating policies and procedures, fire prevention measures and compliance with building and safety codes and environmental laws. There can be no assurance that federal, state or local governments will not impose additional restrictions which might impact the Company's business. LICENSURE AND CERTIFICATION. All of the facilities operated by the Company are licensed under applicable state laws and have all required CONs from responsible state authorities. All of the Company's long-term care facilities are certified or approved as providers under the Medicaid program, and all of its long-term care facilities are certified or approved as providers under the Medicare program. Both initial and continuing qualification of a long-term care facility to participate in the Medicaid and Medicare programs depend on many factors, including accommodations, equipment, services, non-discrimination policies against indigent patients, patient care, quality of life, residents' rights, safety, personnel, physical environment and adequacy of policies, procedures and controls. Licensing, certification and other applicable standards vary from jurisdiction to jurisdiction and are revised periodically. State agencies survey or inspect all long-term care facilities on a regular basis to determine whether such facilities are in compliance with the requirements for participation in government-sponsored third party payer programs. In some cases or upon repeat violations, the reviewing agency has the authority to take various adverse actions against a facility, including the imposition of fines, temporary suspension of admission of new patients to the facility, suspension or decertification from participation in the state Medicaid or the Medicare program, denial of payment under Medicaid for new admissions, reduction of payments, and, in extreme circumstances, revocation of a facility's license or closure of a facility. The compliance history of a prior operator may be used by state or federal regulators in determining possible action against a successor operator. REGULATORY COMPLIANCE AND ENFORCEMENT. The Company believes that its facilities comply in all material respects with all applicable statutes, regulations, standards and requirements, including applicable Medicaid and Medicare regulatory requirements. However, in the ordinary course of its business, the Company's long-term care facilities are surveyed from time to time for regulatory compliance and receive notices of deficiencies for failure to comply with various regulatory requirements. In most cases, the Company and the reviewing agency will agree upon corrective measures to be taken to bring the facility into compliance. To date, statements of deficiency received by the Company have not had any material adverse effect on its operations, and there is no pending or threatened decertification of or moratorium on admissions at any of its facilities. While there can be no assurance that future surveys will not have a material adverse effect on the Company, based on its operating policies and compliance procedures, quality assurance programs and past experience, the Company does not expect to receive any statements of deficiency which would, either individually or in the aggregate, have a material adverse effect on its operations. FRAUD AND ABUSE LAWS. Various federal and state laws regulate the relationship between providers of health care services and physicians, including employment or service contracts and investment relationships. These -15- laws include the broadly-worded fraud and abuse provisions of the Medicaid and Medicare statutes, which prohibit payments for the referral of Medicaid or Medicare patients. Violations of these provisions may result in civil or criminal penalties for individuals or entities or exclusion from participation in the Medicaid and Medicare programs. Management believes that in the past the Company has been, and in the future it will be, able to arrange its business relationships so as to comply with these provisions. OBRA - 87. Effective October 1, 1990, the Omnibus Budget Reconciliation Act of 1987 ("OBRA") eliminated the different certification standards for "skilled" and "intermediate care" nursing facilities under the Medicaid program in favor of a single "nursing facility standard. This standard requires, among other things, that the Company have at least one registered nurse on each day shift and one licensed nurse on each other shift and increases training requirements for nurse's aides by requiring a minimum number of training hours and a certification test before a nurse's aide can commence work. States must continue to certify that nursing facilities provide "skilled care" in order to obtain Medicare reimbursement. Management is unable to predict how individual state licensure laws win conform to this change but believes that the Company will not be materially adversely affected. RESTRICTIONS ON ACQUISITIONS, CONSTRUCTION AND ADDITIONS. All states in which the Company operates have adopted CON or similar laws which generally require that, with respect to long-term care facilities, a state agency determine that a need exists prior to the addition or reduction of beds or services, the implementation of other changes, the incurrence of certain capital expenditures or, in certain states, the closure of a facility. State approvals are generally issued for a specified maximum expenditure and require implementation of the proposal within a specified period of time. Failure to obtain the necessary state approval can result in the inability of the facility to provide the service, operate the facility or complete the acquisition, addition or other change in a facility and in the imposition of sanctions or other adverse action on the facility's license and reimbursement eligibility. GOVERNMENTAL BUDGETARY RESTRAINTS. Both the federal government and venous states are considering imposing limitations on the amount of funding available for various health care services. Among the proposals being considered by the United States Congress is a "block grant" funding mechanism for the disbursement of the federal share of Medicaid payments to the individual states. If enacted, this could cause a reduction in the availability of Medicaid funds in future years to the states which, in turn, provide reimbursement to Medicaid-certified long-term care facilities. In addition, various states are themselves considering reduced levels of spending in various areas which also could affect the amount of available Medicaid funding. In November 1995, the United States Senate and House of Representatives passed a budget reconciliation bill which would establish a framework for balancing the federal budget in seven years. While the President vetoed the bill, the Administration has agreed to achieve a balanced budget in this time frame. The bill passed by the Senate and House would have resulted in a major restructuring of the current Medicaid program. Rather than operating as an entitlement program, the new "MediGrant" program would provide federal block grants to the states for medical assonance prodded to low income individuals and families. While the states would be subject to certain federal requirements, states would also have broad flexibility to establish their coverage, eligibility and payment standards. Given the fixed -16- federal funds that would be available to support state MediGrant programs, there would be no assurance that, if enacted, these provisions would not have a material adverse effect on the results of operations of the Company. While Medicare and Medicaid reimbursements may not continue at the current levels or rates of increase, it is not possible to predict with certainty the effect of any legislation upon the Company's operations. EMPLOYEES. As of August 31, 1996, the Company employed in the aggregate approximately 6,900 employees, including 95 employees at the Company's executive offices. The Company believes that its relationship with its employees is satisfactory. The Company has collective bargaining agreements with unions representing two of the facilities that the Company operates. The Company is currently negotiating an agreement with the union representing employees at one other facilities operated by the Company. The employees at the remaining facilities operated by the Company have not elected to be covered by collective bargaining agreements. The Company believes that the attraction and retention of dedicated, skilled and experienced nursing and other professional staff has been and will continue to be a critical factor in the successful development of its business. In response to this challenge, a compensation program which provides for regular merit and cost-of-living reviews and a variety of financial and other incentives have been implemented to promote facility staff motivation and productivity and to reduce turnover rates. The Company believes that its wage rates for nursing and other professional staff are commensurate with market rates. INSURANCE Providing health care services entails an inherent risk of liability. The Company maintains liability insurance providing coverage which it believes to be adequate. In addition, the Company maintains property, business interruption and workers' compensation insurance covering all facilities in amounts deemed adequate by the Company. The Company carries malpractice insurance coverage for each of the facilities that it owns, operates or manages in the amount of $1 million per incident per facility and $3 million annual aggregate per facility. The Company also carries an umbrella excess liability insurance policy which has a $20 million per incident limit with an aggregate limit of $20 million. There can be no assurance that any future claims will not exceed applicable insurance coverage or that the Company will be able to continue its present insurance coverage on satisfactory terms, if at all. ITEM 2. PROPERTIES. The Company currently leases approximately 20,000 square feet of office space for its corporate offices at 6000 Lake Forrest Drive, Suite 200, Atlanta, Georgia, from an unaffiliated party. This lease expires in October 2000, and currently requires base monthly lease payments of approximately $25,304. The Company believes that these facilities are suitable and adequate to meet its present and anticipated needs. The following table summarizes certain information regarding facilities leased, owned and managed by the Company as of August 20, 1996. With regard to facilities managed for affiliated companies, the name of the affiliate is indicated using the following abbreviations: Winter Haven Homes, Inc. - WHH; Gordon Jensen Health Care Associates, Inc. - GJ; National Assistance Bureau, Inc. - NAB; Southeastern Cottages, Inc. - SCI; and Chamber Health Care Society - - CHCS. -17- Leased/ Owned/ Occupancy Number Managed As of Type of of Beds (Name of August 20, Name Location of Facility or Units Affiliate) 1996 - ------------------ ---------- ----------- -------- --------- ---------- GEORGIA Twin View Health Twin City Long-Term 110 Managed 98% Care Center Care (GJ) Griffin Health Griffin Long-Term 148 Owned 99% Care Center Care Midway Health Midway Long-Term 169 Managed 93% Care Center Care (GJ) Dearfield Nursing Columbus Long-Term 210 Owned 96% Facility Care Summer's Landing- Vidalia Assisted/ 24 Managed 100% Vidalia Independent (SCI) Living Summer's Landing- Cordele Assisted/ 36 Owned 97% Cordele Independent Living Summer's Landing- Douglas Assisted/ 58 Managed 97% Douglas Independent (GJ) Living Summer's Landing- Dublin Assisted/ 56 Owned 86% Dublin Independent Living Summer's Landing- Dahlonega Assisted/ 24 Leased 88% Dahlonega Independent Living Summer's Landing- Griffin Assisted/ 30 Owned Under Griffin Independent Con- Living struc- tion Summer's Landing- Plains Assisted/ 40 Owned Under Plains Independent Con- Living struc- tion Twelve Oaks Health Riverdale Long-term 152 Leased 97% Care Care Cedartown Health Cedartown Long-term 116 Leased 98% Care Center Care Floyd Health Care Rome Long-term 100 Leased 97% Center Care -18- Friendship Health Cleveland Long-term 89 Leased 99% Care Center Care Gateway Health Cleveland Long-term 60 Leased 98% Care Center Care Gold City Health Dahlonega Long-term 102 Leased 100% Care Center Care Mountain View Clayton Long-term 117 Leased 97% Health Care Center Care Sandmont Health Trenton Long-term 71 Leased 97% Care Center Care Rome Health Care Rome Long-term 100 Leased 95% Center Care Sun Mountain Rome Long-term 100 Leased 99% Health Care Center Care Arrowhead Nursing Jonesboro Long-term 115 Owned 96% Center Care Roberta Nursing Roberta Long-term 100 Leased 96% Home Care West View Health Port Long-term 99 Leased 99% Care Center Wentworth Care Peachbelt Health Warner Long-term 106 Leased 96% Care Center Robins Care Dogwood Retirement Warner Assisted/ 18 Leased 79% Village Robins Independent Living Riverside Health Covington Long-term 157 Managed 99% Care Center Care (CHCS) Springdale Conva- Atlanta Long-term 109 Owned 96% lescent Center of Care Atlanta Springdale Conva- Carters- Long-term 118 Leased 98% lescent Center ville Care of Bartow County Summer's Landing- Carters- Long-term 50 Owned 70% Cartersville ville Care Brunswick Nursing Brunswick Long-term 204 Leased 100% Center Care Tattnall Nurse Reidsville Long-term 92 Leased 87% Care Center Care Altamaha Conva- Jesup Long-term 62 Leased 95% lescent Center Care -19- Summer's Landing- Rome Assisted/ 30 Owned 77% Rome Independent Living Manor on the Roswell Assisted/ 24 Managed 93% Square Independent Living Riverview Nursing Rome Long-term 100 Owned 99% Home Care Summer's Landing- Rome Assisted/ 15 Owned 80% Riverview Independent Living Marietta Health Marietta Long-term 119 Leased 98% Care Care Brown's Nursing Statesboro Long-term 63 Leased 100% Home Care Clinch Healthcare Homerville Long-term 92 Leased 92% Center Care Total for Georgia 3,564 (38 facilities)* - --------------- * Excludes facilities under construction. FLORIDA Renaissance of Sebring Assisted/ 170 Owned 79% Sebring Independent Living The Garden at Green Cove Assisted/ 28 Managed 61% Magnolia Manor Springs Independent (GJ) Living Magnolia Manor Green Cove Long-term 60 Managed 97% Nursing Center Springs Care (GJ) Lake Forrest Jackson- Long-term 60 Leased 95% Health Care ville Care Center Summer's Landing- Lynn Haven Assisted/ 51 Managed 80% Lynn Haven Independent (NAB) Living The Renaissance Titusville Assisted/ 93 Managed 89% Independent (WHH) Living Renaissance of Sanford Assisted/ 94 Managed 94% Sanford Independent (WHH) Living -20- The Atrium Jackson- Assisted/ 178 Managed 95% ville Independent and 75% Care Owned The Atrium Jackson- Long-term 84 Managed Under Nursing Home ville Care and 75% Con- Owned struc- tion The Preserve Pompano Assisted/ 297 Managed 99% Beach Independent Living The Renaissance Destin Assisted/ 116 Owned 82% of Sandestin Independent Living The Edwinola Dade City Assisted/ 214 Owned 85% Independent Living Oak Bluff Clearwater Assisted/ 251 Managed 80% Independent Living Westwood Retire- Fort Walton Assisted/ 208 Owned 95% ment Independent Living Southside Nursing Jackson- Long-term 116 Leased 60% Center ville Care The Renaissance Lakeland Assisted/ 104 Owned 56% of Lakeland Independent Living The Renaissance Pensacola Assisted/ 106 Leased 50% of Pensacola Independent Living Oak Bluff Clearwater Long-term 60 Managed 95% Care Westwood Nursing Fort Walton Long-term 60 Owned 95% Center Care Oak Cove Clearwater Long-term 56 Managed 95% Care Summer's Landing- Jackson- Assisted/ 39 Managed 97% Atrium ville Independent and 75% Living Owned Summer's Landing- Titusville Assisted/ 28 Managed Under of Titusville Independent (WHH) Con- Living struc- tion Total for Florida 2,361 (20 facilities)* -21- - --------------- *Excludes facilities under construction. TENNESSEE Marshall C. Voss Harriman Long-term 139 Managed 99% Health Care Care (NAB) Trenton Health Trenton Long-term 58 Managed 98% Care Center Care (GJ) Summer's Landing- Trenton Assisted/ 22 Managed 100% Trenton Independent (GJ) Living Jackson Oaks Jackson Assisted/ 178 Leased 97% Retirement Independent Living Cumberland Green Henderson- Assisted/ 140 Managed 93% Retirement ville Independent (WHH) Living Winchester Health Winchester Long-term 80 Leased 96% Care Care Health Care Ardmore Long-term 79 Leased 98% Center of Care Ardmore Fayetteville Fayetteville Long-term 79 Leased 100% Health Care Care Center River Park Health Nashville Long-term 78 Leased 88% Care Center Care Palmyra Inter- Palmyra Long-term 75 Leased 88% mediate Care Care Center Milan Health Milan Long-term 66 Leased 96% Care Center County Care Pleasant View Bolivar Long-term 67 Leased 99% Health Care Care Center Lauderdale Ripley Long-term 71 Owned 89% Healthcare Care Oak Manor Health McKenzie Long-term 66 Leased 99% Care Center Care Parkway Health Memphis Long-term 120 Managed 0%* and Rehab Care (CHCS) -22- Hillview Nursing Dresden Long-term 70 Owned 96% Home Care Crestwood Nursing Manchester Long-term 59 Owned 93% Home Care Reelfoot Manor Tiptonville Long-term 120 Leased 85% Care Woodbury Nursing Woodbury Long-term 101 Leased 100% Home Care Total for Tennessee 1,668 (19 facilities) - --------------- * This facility became licensed on August 12, 1996. ALABAMA Gardendale Gardendale Long-term 148 Leased 98% Health Care Care Center Summer's Landing- Gardendale Assisted/ 26 Leased 100% Gardendale Independent Living Summer's Landing- Hanceville Assisted/ 46 Leased 50% Hanceville Independent Living Sea Breeze Mobile Long-term 120 Managed 96% Health Care Care (WHH) Center Summer's Landing- Mobile Assisted/ 20 Managed 10% Sea Breeze Independent (WHH) Living Total for Alabama 360 (5 facilities) SOUTH CAROLINA The Calhoun Anderson Assisted/ 90 Managed 64% Independent Living Total for South 90 (1 facility) Carolina NORTH CAROLINA Pine Manor Fayette- Long-term 100 Managed 65% ville Care Wilkinson Health Gastonia Long-term 50 Leased 98% Care Center Care -23- Total for North 150 (2 facilities) Carolina VIRGINIA Libbie Convales- Richmond Long-term 195 Owned 95% cent Center Care Highland Manor Dublin Long-term 132 Leased 92% Nursing Center Care Tappahannock Tappahannock Long-term 60 Owned 100% Manor Care Summer's Landing- Tappahannock Assisted/ 58 Owned 91% Tappahannock Independent Living Brentlox Hall Chesapeake Long-term 120 Owned 98% Care Total for Virginia 565 (5 facilities) OHIO Hamlet Chagrin Assisted/ 222 Owned 90% Retirement Falls Independent Care Hamlet Nursing Chagrin Long-term 88 Owned 81% Manor Falls Care Total for Ohio 310 (2 facilities) ARIZONA The Carillons Sun City Assisted/ 75 Owned 96% Independent Care Total for Arizona 75 (1 facility) ITEM 3. LEGAL PROCEEDINGS. The Company is a party to litigation arising in the ordinary course of business. The Company and its subsidiaries are not currently parties to any litigation that management believes would have a material adverse effect on the financial condition or results of operations of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. -24- PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. (a) MARKET INFORMATION. Since December 18, 1995, the Company's Common Stock has been listed on the New York Stock Exchange under the symbol "RCA". The Company's Common Stock was previously traded in the over-the-counter market, and from April 7, 1994 through December 15, 1995, it was quoted on the NASDAQ National Market System. Prior to April 7, 1994, quotations were carried on the NASD's OTC Bulletin Board. The following table sets forth the high and low sale prices for the Company's Common Stock as reported on the NASDAQ National Market System through December 15, 1995, and on the New York Stock Exchange after that date, for the periods indicated: QUARTER ENDED HIGH* LOW* September 30, 1994 $ 8.05 $ 5.44 December 31, 1994 $ 8.11 $ 6.12 March 31, 1995 $ 9.29 $ 6.79 June 30, 1995 $12.86 $ 6.43 September 30, 1995 $16.65 $10.12 December 31, 1995 $12.74 $ 8.15 March 31, 1996 $11.31 $ 9.46 June 30, 1996 $13.25 $10.00 ______________________ * As adjusted to give retroactive effect to a 5% stock dividend that was effected on February 15, 1995, and a 5% stock dividend that was effected on May 1, 1996. (b) APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK. The number of record holders of the Company's $.0001 par value common stock at September 18, 1996, was 417, and the number of beneficial holders is estimated to be approximately 2,500. (c) DIVIDENDS. The Company has paid no cash dividends on its Common Stock and has no present intention of paying cash dividends in the foreseeable future. In February 1994, the Company declared a 5% stock dividend on its outstanding Common Stock, in January 1995, the Company declared an additional 5% stock dividend on its outstanding Common Stock, and in April 1996, the Company declared an additional 5% stock dividend on its outstanding Common Stock. It is the present policy of the Board of Directors to retain all earnings to provide for the growth of the Company. Payment of cash dividends in the future will depend, among other things, upon the Company's future earnings, requirements for capital improvements and financial condition. The Company does, however, intend to consider additional stock dividends in the future. The Company's ability to pay any cash dividends on the Company's Common Stock in the future will be limited by the dividend and redemption requirements of the Company's Series AA Convertible Preferred Stock. -25- ITEM 6. SELECTED FINANCIAL DATA. The following selected financial information for the fiscal year ended June 30, 1996, is derived from financial statements of the Company audited by Coopers & Lybrand, LLP, independent certified public accountants. The selected financial information for the fiscal years ended June 30, 1995, 1994 and 1993, is derived from financial statements of the Company audited by BDO Seidman, independent certified public accountants. The selected information for the fiscal year ended June 30, 1992, is derived from financial statements of the Company audited by Laney, Boteler & Killinger, independent certified public accountants. As described more fully in the Company's financial statements, financial information prior to the date of the Company's merger with Capitol Care Management Company, Inc. reflects the financial information of Capitol Care Management Company, Inc. BALANCE SHEET DATA:
AT JUNE 30, 1996 1995 1994 1993 1992 Current Assets $ 30,761,075 $25,782,546 $12,449,522 $1,404,228 $240,088 Total Assets 179,557,647 80,257,546 31,230,025 2,453,241 359,397 Current Liabili- ties 26,187,331 22,857,244 9,328,989 1,677,250 215,255 Working Capital (Deficit) 4,573,744 2,925,302 3,120,533 (273,022) 24,833 Long-Term Debt 110,375,799 32,426,023 8,199,915 -0- 11,164 Redeemable Pre- ferred Stock 2,400,000 3,000,000 -0- -0- -0- Shareholders' Equity 34,689,123 19,733,254 13,399,751 775,991 132,978 Effective November 30, 1992, the Company acquired the stock of CCMC in a reverse acquisition in which CCMC's stockholders acquired voting control of the Company. The transaction was accounted for as a purchase with CCMC as the acquiring company because CCMC's stockholders acquired a majority of the voting rights in the combined company. Accordingly, the results of operations prior to November 30, 1992, are those of CCMC. See Note 2 to the Company's financial statements. On May 1, 1993, the Company entered into operating lease agreements for seven licensed nursing homes and one personal care facility. Prior to May 1, 1993, the Company and its predecessor, Capitol Care Management Company, Inc., were engaged exclusively in the management of retirement facilities and nursing homes. Subsequent to May 1, 1993, the Company, through the operating leases on the eight facilities, began to operate facilities resulting in the recognition of $2,399,906 of patient service revenues and $222,610 of other revenues for the year ended June 30, 1993. During the year ended June 30, 1993, the eight facilities incurred $2,037,694 of operating expenses resulting in an operating margin of $584,822. During the year ended June 30, 1994, the Company continued its expansion into the operation of facilities, with the acquisition of two retirement facilities and two nursing home facilities accounted for using the purchase method of accounting and new operating lease commitments for eleven nursing homes and one retirement facility. The -26- addition of these sixteen facilities either through direct acquisition or operating leases increased patient service revenues by $16,520,401, total revenues by $136,124 and operating expenses by $12,774,764. During the year ended June 30, 1995, the Company purchased three nursing homes and two retirement facilities and leased seven more nursing homes. During the fiscal year ended June 30, 1996, the Company purchased seven nursing homes and four retirement facilities and leased eight nursing homes and three retirement facilities.
STATEMENT OF INCOME DATA:
FOR THE YEARS ENDED JUNE 30, 1996 1995 1994 1993 1992 ------------ ----------- ----------- ---------- -------- Revenues $134,011,369 $79,616,053 $37,971,052 $4,553,666 $610,981 Operating Expenses 117,887,133 70,598,837 32,993,562 3,615,109 585,535 Net Income 5,569,811 5,058,503 2,917,642 573,557 18,951 Net Income Per Common and Common Equi- valent Share $ .39 $ .38 $ .30 $ .11 $ .02 Weighted Average Shares 13,586,003 12,616,835 9,839,993 5,010,354 964,688 Cash Dividends Per Common Share $ -0- $ -0- $ -0- $ -0- $ -0- The Company has retroactively restated net income per share and weighted average shares outstanding for the effect of stock dividends, stock splits and reverse stock splits. See "Notes to Financial Statements."
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. YEAR ENDED JUNE 30, 1996 COMPARED TO YEAR ENDED JUNE 30, 1995 The Company's total revenues for the year ended June 30, 1996, were $134,011,369 compared to $79,616,053 for the year ended June 30, 1995. Management fee revenue decreased from $4,169,694 in the year ended June 30, 1995, to $3,781,433 in the year ended June 30, 1996. The Company purchased or leased six facilities in the year ended June 30, 1996, that it managed in the year ended June 30, 1995. Included in the Company's management fee revenue is $3,472,900 and $3,517,500 from affiliates during the years ended June 30, 1996 and 1995, respectively. -27- Due to the increased number of facilities owned or leased by the Company, patient service revenue increased from $69,949,822 for the year ended June 30, 1995 to $119,499,849 for the year ended June 30, 1996. The cost of patient services in the amount of $77,776,292 for the year ended June 30, 1996, represent 65% of patient service revenue, as compared to $47,778,410, or 68% of patient service revenue during the year ended June 30, 1995. The decrease in the percentage is attributed to an increase in the ratio of retirement facilities to nursing facilities operated during the current year. Retirement facilities require less patient services than nursing homes. During the year ended June 30, 1996, the Company had revenue from medical supply sales of $14,542,421 of which $4,717,169 was intercompany sales which were eliminated in consolidation. These sales reflect the operations of Contour Medical, Inc., of which the Company acquired a majority interest on September 30, 1994. The Cost of goods sold for the year ended June 30, 1996, was $5,773,934. General and administrative expenses for the year ended June 30, 1996, were $23,886,877, representing 18% of total revenues, as compared to $12,769,582 representing 16% of total revenues, for the year ended June 30, 1995. During the year ended June 30, 1996, the Company recorded a $1,027,593 provision for bad debts. The Company recorded no similar provision during the prior year. During the year ended June 30, 1996, the Company had $1,847,868 in interest income and financing fees as compared to $658,215 in interest income and financing fees for the year ended June 30, 1995. Financing fees, which totaled $150,000 for the year ended June 30, 1996, represents fees received by the Company for assisting other companies to obtain financing for nursing homes and retirement facilities. The increase in interest income is a result of the increased amount of advances to related parties during the current year. For the year ended June 30, 1996, the Company incurred expenses for income taxes of $4,228,307 which represents an effective tax rate of 45% as compared to expenses for income taxes of $3,419,092 which represents an effective tax rate of 40% for the year ended June 30, 1995. The increase in the effective tax rate is mainly the result of a non-deductable tax penalty of approximately $400,000 which was assessed during the year ended June 30, 1996. The net income of $5,569,811 for the year ended June 30, 1996, is higher than the net income of $5,058,503 for the year ended June 30, 1995, due to the increased number of facilities operated during the most recent fiscal year. Most of the revenue from the management services division of the Company's business is received pursuant to management agreements with entities controlled by Messrs. Brogdon and Lane, two of the Company's officers and directors. These management agreements have five year terms; however, they are all subject to termination on 60 days notice, with or without cause, by either the Company or the owners. Therefore, Messrs. Brogdon and Lane have full control over whether or not these management agreements, and thus the management services revenue, continue in the future. These fees represent 2.82% and 5.24% of total revenues of the Company for the years ended June 30, 1996 and 1995, respectively. YEAR ENDED JUNE 30, 1995 COMPARED TO YEAR ENDED JUNE 30, 1994 -28- The Company's total revenues for the year ended June 30, 1995, were $79,616,053 compared to $37,971,052 for the year ended June 30, 1994. Management fees increased from $3,292,949 in the year ended June 30, 1994, to $4,169,694 in the year ended June 30, 1995, due to the increased number of facilities which the Company manages as well as the renegotiation of management agreements resulting in higher management fees. Included in the Company's management fee revenue is $3,517,500 and $3,034,445 from affiliates during the years ended June 30, 1995 and 1994, respectively. Due to the increased number of facilities owned or leased by the Company, patient service revenue increased from $34,340,394 for the year ended June 30, 1994, to $69,949,822 for the year ended June 30, 1995. The cost of patient services in the amount of $47,778,410 for the year ended June 30, 1995, represented 68% of patient service revenue, as compared to $23,088,387, or 67% of patient service revenue during the year ended June 30, 1994. During the year ended June 30, 1995, the Company had revenue from medical supply sales of $3,617,439. These sales reflect the operations of Contour Medical, Inc., of which the Company acquired a 63% interest on September 30, 1994. As a result, these sales only reflect nine months of operations. The cost of goods sold for the year ended June 30, 1995, was $3,153,430, or 87% of medical supply sales. General and administrative expenses for the year ended June 30, 1995, were $12,769,582 representing 16% of total revenues, as compared to $5,953,793 representing 16% of total revenues, for the year ended June 30, 1994. During the year ended June 30, 1995, the Company had $658,215 in interest income and financing fees. The Company had no similar revenue during the year ended June 30, 1994. For the year ended June 30, 1995, the Company incurred expenses for income taxes of $3,419,092 which represents an effective tax rate of 40% as compared to expenses for income taxes of $1,827,483 which represents an effective tax rate of 39% for the year ended June 30, 1994. The net income of $5,058,503 for the year ended June 30, 1995, is higher than the net income of $2,917,642 for the year ended June 30, 1994, due to the increased number of facilities operated and managed during 1995. LIQUIDITY AND CAPITAL RESOURCES At June 30, 1996, the Company had $4,573,744 in working capital compared to $2,925,302 at June 30, 1995. The increase was primarily due to the net income recorded for the year ended June 30, 1996. During the year ended June 30, 1996, cash provided by operating activities was $5,708,460 as compared to $4,208,048 for the year ended June 30, 1995. The $1,500,412 increase was primarily due to the increased accounts payable associated with acquiring facilities in the year ended June 30, 1996 and an increase in depreciation from 1,128,183 for the year ended June 30, 1995 to $3,223,543 for the year ended June 30, 1996. Cash used in investing activities during the year ended June 30, 1996, was $45,195,665. The expenditures primarily related to acquisitions to purchases of property and equipment of $8,826,151, and advances to affiliates of $8,855 686 due to capital expenditures and working capital deficits of the affiliates. -29- At June 30, 1996, advances to affiliates had increased to $14,316,661 from $7,328,222 at June 30, 1995, due to additional capital expenditures and working capital deficits of the affiliates. These advances were repaid subsequent to year end. The repayment transactions included the transfer of two facilities to the Company at fair market value, as established by an independent appraisal. The proceeds of this transfer reduced the balance to approximately $2.8 million. The balance was eliminated by the contribution of shares of the Company's common stock by affiliated shareholders. The stock will be retired. Cash provided by financing activities during the year ended June 30, 1996, totaled $34,325,385. Sources of cash included capital investment by minority shareholders of a subsidiary of $2,088,492, proceeds from issuance of preferred stock of $9,300,000, proceeds from stock options and warrants exercised of $630,098, and proceeds from long-term debt and lines of credit of $35,329,244. Cash used in financing activities primarily consisted of $9,443,626 in payments of long-term debt, $2,419,783 in payments of debt issuance costs, and $600,000 in redemption of preferred stock, $274,040 in purchaser of treasury stock, and $285,000 for dividends on preferred stock. During the year ended June 30, 1995, cash provided by operating activities was $4,208,048 as compared to $1,523,311 for the year ended June 30, 1994. The $2,684,737 increase was primarily due to the increased net income for the year ended June 30, 1995. Cash used in investing activities during the year ended June 30, 1995, was $(10,644,726). The expenditures primarily related to purchases of property and equipment of $6,079,610, purchases of bonds receivable of $4,487,936, increases in investments and advances to The Atrium Ltd. of $2,985,833 and advances to affiliates of $1,742,147 due to capital expenditures and working capital deficits of the affiliates. These were partially offset by the proceeds from a sale-leaseback transaction of $4,500,000. At June 30, 1995, advances to affiliates had increased to $7,328,222 from $5,605,250 at June 30, 1994, due to additional capital expenditures and working capital deficits of the affiliates. Cash provided by financing activities during the year ended June 30, 1995, totalled $10,683,801. Sources of cash included capital investment by minority shareholders of a subsidiary of $1,729,469, net borrowings under lines of credit of $1,745,316 and proceeds from long-term debt of $9,564,670. Cash used in financing activities primarily consisted of $2,130,654 in payments of long-term debt and $225,000 for dividends on preferred stock. Management's objective is to acquire only those facilities it believes will be able to generate sufficient revenue to pay all operating costs, management fees, lease payments or debt service, and still return a 3% to 4% cash flow. Management believes that the Company's cash flow from operations, together with lines of credit and the sale of securities described below, will be sufficient to meet the Company's liquidity needs for the current year. The Company maintains various lines of credit with interest rates ranging from prime plus .25% to prime plus 1.25%. At June 30, 1996, the Company had approximately $1,500,000 in unused credit available under such lines. -30- Subsequent to year end, the Company raised approximately $9,340,000 in net proceeds from the sale of convertible preferred stock in a private offering to foreign investors. The proceeds of this offering are being used for working capital purposes. On September 30, 1994, the Company purchased a majority of the stock of Contour Medical, Inc. in exchange for shares of the Company's common stock and preferred stock. The Company is obligated to redeem the preferred stock issued in the transaction over the five years for $3,000,000 in cash. $600,000 was paid on September 30, 1996 pursuant to this obligation. Management intends to fund these redemptions from cash flow generated from operations. The Company believes that its long-term liquidity needs will generally be met by income from operations. If necessary, the Company believes that it can obtain an extension of its current line of credit and/or other lines of credit from commercial sources. Except as described above, the Company is not aware of any trends, demands, commitments or understandings that would impact its liquidity. The Company intends to use long-term debt financing in connection with the purchase of additional retirement care facilities and nursing homes on terms which can be paid out of the cash flow generated by the property. The Company intends to continue to lease or purchase additional retirement care and/or nursing home facilities in the future. IMPACT OF INFLATION AND PENDING FEDERAL HEALTH CARE LEGISLATION Management does not expect inflation to have a material impact on the Company's revenues or income in the foreseeable future so long as inflation remains below the 9% level. The Company's business is labor intensive and wages and other labor costs are sensitive to inflation. Management believes that any increases in labor costs in its management services segment can be offset over the long term by increasing the management fees. With respect to the operations segment, approximately 52% of the Company's net patient service revenue is received from state Medicaid programs. The two states which make Medicaid payments to the Company have inflation factors built into the rates which they will pay. Georgia's inflation factor is nine percent and Tennessee's inflation is eleven percent. Therefore, increases in operating costs due to inflation should be covered by increased Medicaid reimbursements. Management is uncertain what the final impact will be of pending federal health care reform packages since the legislation has not been finalized. However, based on information which has been released to the public thus far, Management doesn't believe that there will be cuts in reimbursements paid to nursing homes. Legislative and regulatory action, at the state and federal level, has resulted in continuing changes in the Medicare and Medicaid reimbursement programs. The changes have limited payment increases under these programs. Also, the timing of payments made under the Medicare and Medicaid programs are subject to regulatory action and governmental budgetary constraints. Within the statutory framework of the Medicare and Medicaid programs, there are substantial areas subject to administrative rulings and interpretations which may further affect payments made under these programs. Further, the federal and state governments may reduce the funds available under those programs in the future or require more stringent utilization and quality review of health care facilities. -31- ACCOUNTING PRONOUNCEMENT The Financial Accounting Standard Board has adopted Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (SFAS No. 115). The Company has adopted this standard in fiscal 1995. In management's opinion, adopting SFAS No. 115 did not materially affect the Company's financial statements for the year ended June 30, 1995. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The Independent Auditors' Report appears at page F-1, and the Financial Statements and Notes to Financial Statements appear at pages F-3 through F-32 hereof. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. No response required. -32- PART III ITEMS 10, 11, 12 AND 13. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT; EXECUTIVE COMPENSATION; SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT; AND CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required by these Items is incorporated herein by reference to the Company's definitive Proxy Statement relating to the Annual Meeting of Shareholders to be held in December 1996. -33- PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) 1. FINANCIAL STATEMENTS. The following financial statements are filed as part of this report: Page(s) Reports of Independent Certified Public Accountants............ F-1 - F-2 Consolidated Balance Sheets as of June 30, 1996 and 1995....... F-3 - F-4 Consolidated Statements of Income for the years ended June 30, 1996, 1995 and 1994................................. F-5 - F-6 Consolidated Statements of Shareholders' Equity for the years ended June 30, 1996, 1995 and 1994..................... F-7 - F-8 Consolidated Statements of Cash Flows for the years ended June 30, 1996, 1995 and 1994................................. F-9 - F-10 Notes to Financial Statements.................................. F-11 - F-32 (a) 2. FINANCIAL STATEMENT SCHEDULES. All schedules have been omitted, as the required information is inapplicable or the information is presented in the financial statements or the notes thereto. (a) 3. EXHIBITS: EXHIBIT NO. DESCRIPTION LOCATION 3.1 Articles of Incor- Incorporated by reference poration, as amended to Exhibit No. 3.1 to the Company's Form S-18 Regis- tration Statement No. 33-7666-D 3.2 Bylaws, as amended Incorporation by reference to Exhibit No. 3.2 to the Company's Form S-18 Regis- tration Statement No. 33-7666-D 3.3 Articles of Amendment Incorporated by reference to Articles of Incor- to Exhibit 3.3 to the poration Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1993 3.4 Statements Establish- Incorporated by reference ing Series A and Series to Exhibit 3.4 to the D Convertible Preferred Company's Annual Report on Stock Form 10-K for the fiscal year ended June 30, 1994 3.5 Articles of Amendment to Incorporated by reference Articles of Incorporation to Exhibit 3.5 to the (Series AA Convertible Company's Annual Report on Preferred Stock) Form 10-K for the fiscal year ended June 30, 1994 -34- 3.6 Articles of Amendment to Filed herewith electronically Incorporation (Series E Convertible Preferred Stock) 3.7 Articles of Amendment to Filed herewith electronically Articles of Incorporation (Series F Convertible Pre- ferred Stock) and Certif- icate of Correction to same 10.1 Employment Agreement Filed herewith electronically with Darrell C. Tucker 10.2 Management and Marketing Filed herewith electronically Agreement with Affiliates 10.3 Nursing Home Management Filed herewith electronically Agreements with Affiliates 10.4 Lease Agreements with Filed herewith electronically Affiliates 10.5 Loan Agreement between Incorporated by reference Residential Care Facilities to Exhibit 10.1 to the for the Elderly Authority of Company's Current Report the City of Dublin and the on Form 8-K dated February 3, Company 1994 10.6 Deed to Secured Debt and Incorporated by reference Security between Residen- to Exhibit 10.2 to the tial Care Facilities for Company's Current Report the Elderly Authority of on Form 8-K dated February 3, the City of Dublin and 1994 the Company 10.7 Trust Indenture between Incorporated by reference Residential Care Facili- to Exhibit 10.3 to the ties for the Elderly Company's Current Report Authority of the City of on Form 8-K dated February 3, Dublin and the Sentinel 1994 Trust Company 10.8 Loan Agreement between Incorporated by reference Highlands County (Florida) to Exhibit 10.2 to the Industrial Development Company's Current Report Authority and the Company on Form 8-K dated March 3, 1994 10.9 Trust Indenture between Incorporated by reference Highlands County (Florida) to Exhibit 10.3 to the Industrial Development Company's Current Report Authority and the Company on Form 8-K dated March 3, 1994 -35- 10.10 Asset Purchase Agreement Incorporated by reference between the Company and to Exhibit 10.1 to the Springdale Convalescent Company's Current Report Center of Atlanta, Ltd., et on Form 8-K dated April 29, al., and Springdale Conva- 1994 lescent Center Purchase Agreement between the Company and Bartow River L.L.C. 10.11 Promissory Note from the Incorporated by reference Company to Winter Haven to Exhibit 10.46 to the Homes Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1994 10.12 Promissory Note from the Incorporated by reference Company to Tiffany Indus- to Exhibit 10.3 to the tries, Inc. Company's Current Report on Form 8-K dated April 29, 1994 10.13 Loan Agreement with Cave Incorporated by reference Spring Housing Develop- to Exhibit 10.57 to the ment Corporation Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1994 10.14 Trust Indenture between Incorporated by reference Cave Spring Housing to Exhibit 10.58 to the Development Corporation Company's Annual Report and Sentinel Trust Company on Form 10-K for the fiscal year ended June 30, 1994 10.15 Transfer and Assignment of Incorporated by reference to Loan Asset and Forbearance to Exhibit 10.67 to the Agreement with R. Wayne Company's Annual Report Lowe, et al. on Form 10-K for the fiscal year ended June 30, 1994 10.16 Promissory Note from South- Incorporated by reference eastern Cottages, Inc. and to Exhibit 10.67 to the related Mortgage and Company's Registration Security Agreement Statement on Form S-1 File No. 33-85886 10.17 Promissory Note from Gordon Incorporated by reference Jensen Health Care, Inc. to Exhibit 10.68 to the and related Deed to Secure Company's Registration Debt Statement on Form S-1 File No. 33-85886 10.18 Promissory Note from Incorporated by reference Renaissance Retirement, to Exhibit 10.69 to the Ltd. and related Mortgage Company's Registration and Security Agreement Statement on Form S-1 File No. 33-85886 -36- 10.19 Promissory Note from Incorporated by reference Retirement Village of to Exhibit 10.70 to the Jackson, Ltd. and related Company's Registration Deed of Trust Statement on Form S-1 File No. 33-85886 10.20 Promissory Note from Incorporated by reference Hendersonville Retirement to Exhibit 10.71 to the Village, Ltd. and related Company's Registration Deed of Trust Statement on Form S-1 File No. 33-85886 10.21 Agreement and Amendment Incorporated by reference to Agreement with The to Exhibit 10.77 to the Atrium of Jacksonville, Company's Annual Report Ltd. and Assignment to on Form 10-K for the fiscal the Company year ended June 30, 1994 10.22 Guaranties and Stock Pledge Incorporated by reference and Maintenance Agreements to Exhibit 10.80 to the with Edward E. Lane and Company's Registration Connie B. Brogdon Statement on Form S-1 File No. 33-85886 10.23 Dearfield Nursing Home Incorporated by reference Purchase Agreement to Exhibit 10.1 to the Com- pany's Report on Form 8-K dated April 28, 1995 10.24 Loan Agreement Incorporated by reference to Exhibit 10.2 to the Com- pany's Report on Form 8-K dated April 28, 1995 10.25 Promissory Note Secured by Incorporated by reference Security Deed to Exhibit 10.3 to the Com- pany's Report on Form 8-K dated April 28, 1995 10.26 Security Agreement Incorporated by reference to Exhibit 10.4 to the Com- pany's Report on Form 8-K dated April 28, 1995 10.27 Deed to Secure Debt, Incorporated by reference Security Agreement, to Exhibit 10.5 to the Com- Assignment of Rents and pany's Report on Form 8-K Filing for Dearfield dated April 28, 1995 Nursing Home 10.28 Edwinola Retirement Incorporated by reference Community Purhase Agree- to Exhibit 10.93 to the ment Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1995 -37- 10.29 Loan Agreement between Incorporated by reference Dade City, Florida and to Exhibit 10.94 to the the Company Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1995 10.30 Promissory Note from The Incorporated by reference Atrium Nursing Home, Inc. to Exhibit 10.95 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1995 10.31 Promissory Note from Incorporated by reference Hendersonville Retirement to Exhibit 10.96 to the Village, Ltd. Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1995 10.32 Second Amendment to Incorporated by reference Agreement with The Atrium to Exhibit 10.97 to the of Jacksonville, Ltd. Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1995 10.33 Promissory Note from Incorporated by reference National Assistance to Exhibit 10.98 to the Bureau Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1995 10.34 Letter Agreement with Incorporated by reference R. Wayne Lowe, et al., to Exhibit 10.99 to the Amending Forebearance Company's Annual Report on Agreement Form 10-K for the fiscal year ended June 30, 1995 10.35 Hillview Nursing Home Incorporated by reference Purchase Agreement to Exhibit 10.100 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1995 10.36 Crestwood Nursing Home Incorporated by reference Purchase Agreement and to Exhibit 10.101 to the Lease Assignment Agree- Company's Annual Report on ment Form 10-K for the fiscal year ended June 30, 1995 10.37 Florida Retirement Villa Incorporated by reference Purchase Agreement to Exhibit 10.102 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1995 10.38 Loan Agreement dated Incorporated by reference September 29, 1995, with to Exhibit 10.103 to the LTC Properties, Inc. Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1995 -38- 18 Letter re changes in Filed herewith electronically accounting principles 21 Subsidiaries of the Filed herewith electronically Registrant 27 Financial Data Schedule Filed herewith electronically (b) No Reports on Form 8-K were filed during the last quarter of the period covered by this Report. -39- REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors and Shareholders of Retirement Care Associates, Inc. We have audited the accompanying consolidated balance sheet of Retirement Care Associates, Inc. and subsidiaries as of June 30, 1996 and the related consolidated statements of income, shareholders' equity and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Retirement Care Associates, Inc. and subsidiaries as of June 30, 1996 and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. As described in Note 6 to the consolidated financial statements, the Company changed its method of accounting for certain costs in inventory. /s/ Coopers & Lybrand L.L.P. Atlanta, Georgia September 27, 1996 except for Note 19, as to which the date is October 14, 1996 F-1 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors and Shareholders of Retirement Care Associates, Inc. We have audited the accompanying consolidated balance sheet of Retirement Care Associates, Inc. and Subsidiaries as of June 30, 1995 and the related consolidated statements of income, shareholders' equity and cash flows for each of the two years in the period ended June 30, 1995. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our 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 Retirement Care Associates, Inc. and Subsidiaries as of June 30, 1995, and the results of their operations and their cash flows for each of the two years in the period ended June 30, 1995 in conformity with generally accepted accounting principles. /s/ BDO Seidman, LLP BDO SEIDMAN, LLP Atlanta, Georgia October 9, 1995, except for Note 1 which is as of May 1, 1996 F-2 RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS June 30, 1996 and 1995 1996 1995 ------------ ----------- ASSETS Current assets: Cash and cash equivalents $ 45,365 $ 5,207,185 Patient accounts receivable, net 20,556,920 11,282,467 Notes and advances due from affiliates - 2,314,250 Inventories 4,849,819 1,364,569 Note and accrued interest receivable 713,750 2,396,667 Deferred income taxes 461,214 - Restricted bond funds 2,342,565 719,175 Prepaid expenses and other assets 1,791,442 2,498,233 Total current assets 30,761,075 25,782,546 Property and equipment, net of accumulated depreciation 114,682,082 37,233,506 Marketable equity securities 33,645 99,510 Investments in unconsolidated affiliates 496,800 4,431,235 Deferred lease and loan costs 7,665,891 3,732,197 Goodwill, net of accumulated amortization 3,976,675 1,798,881 Notes and advances due from non-affiliates 1,422,247 - Notes and advances due from affiliates 14,316,661 5,013,972 Restricted bond funds 3,514,969 418,312 Other assets 2,687,602 1,747,387 Total assets $179,557,647 80,257,546 (Continued) F-3 RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Continued) June 30, 1996 and 1995 1996 1995 ------------- ----------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Lines of credit $ 1,456,535 $ - Current maturities of long-term debt 2,055,880 8,640,871 Accounts payable 11,201,976 7,699,640 Accrued expenses 7,543,131 3,184,233 Income taxes payable 3,889,809 3,158,000 Deferred income taxes - 134,500 Deferred gain 40,000 40,000 Total current liabilities 26,187,331 22,857,244 Deferred gain 371,370 261,370 Deferred income taxes 1,465,877 - Long-term debt, less current maturities 110,375,799 32,426,023 Minority interest 4,068,147 1,979,655 Commitments and contingencies Redeemable convertible preferred stock 2,400,000 3,000,000 Shareholders' equity Common stock, $.0001 par value; 300,000,000 shares authorized; 12,145,875 and 10,317,083 shares issued, respectively 1,215 1,031 Preferred stock 8,765,250 - Additional paid-in capital 26,972,655 18,555,677 Retained earnings (deficit) (929,877) 1,176,546 Treasury stock, at cost (120,120) - Total liabilities and shareholders' equity 34,689,123 19,733,254 $179,557,647 $80,257,546 The accompanying notes are an integral part of these consolidated financial statements. F-4 RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME for the years ended June 30, 1996, 1995 and 1994 1996 1995 1994 Revenues: ------------ ----------- ----------- Net patient service revenue $119,499,849 $69,949,822 $34,340,394 Medical supply revenue 9,825,252 3,617,439 - Management fee revenue: From affiliates 3,472,900 3,517,500 3,034,445 From others 308,533 652,194 258,504 Other revenue 904,835 1,879,098 337,709 Total revenues 134,011,369 79,616,053 37,971,052 Expenses: Cost of patient services 77,776,292 47,778,410 23,088,387 Cost of medical supplies sold 5,773,934 3,153,430 - Lease expense 6,198,948 5,769,232 3,714,105 General and administrative 23,886,877 12,769,582 5,953,793 Depreciation and amortization 3,223,543 1,128,183 237,277 Provision for bad debts 1,027,539 - - Total expenses 117,887,133 70,598,837 32,993,562 Operating income 16,124,236 9,017,216 4,977,490 Other income (expense): Interest income 1,847,868 658,215 - Interest expense (7,948,091) (1,179,052) (232,365) Income before minority interest, income taxes and cumulative effect of change in accounting principle 10,024,013 8,496,379 4,745,125 Minority interest (597,895) (18,784) - Income before income taxes and cumulative effect of change in accounting principle 9,426,118 8,477,595 4,745,125 Income taxes 4,228,307 3,419,092 1,827,483 Income before cumulative effect of change in accounting principle 5,197,811 5,058,503 2,917,642 Cumulative effect of change in accounting principle, net of income tax provision of $228,000 372,000 - - Net income 5,569,811 5,058,503 2,917,642 Preferred stock dividend 270,000 225,000 - Net income applicable to common stock $ 5,299,811 $ 4,833,503 $ 2,917,642 (Continued) F-5 RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Continued) for the years ended June 30, 1996, 1995 and 1994 1996 1995 1994 ------------ ----------- ----------- Income per common and common equivalent share: Income before cumulative effect of change in account- ing principle $ .36 $ .38 $ .30 Cumulative effect of change in accounting principle .03 - - Net income $ .39 $ .38 $ .30 Weighted average shares outstanding 13,586,003 12,616,835 9,839,993 The accompanying notes are an integral part of these consolidated financial statements. F-6 RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY for the years ended June 30, 1996, 1995 and 1994 PREFERRED STOCK COMMON STOCK -------------------------- --------------- SERIES A SERIES C SERIES E SHARES AMOUNT -------- -------- -------- --------- ------ Balance, June 30, 1993 $670,642 $833,000 $ - 5,391,896 $ 539 Issuance of common stock upon conversion of Series Series A preferred stock (670,563) - - 558,802 56 Issuance of common stock upon conversion of Series Series C preferred stock - (833,000) - 833,333 83 Private placement Reg D - - - 1,494,165 149 Expenses on private placement - - - - - Reg D Acquisition of Retirement Management Corporation - - - 80,000 8 Stock dividend, 5% - - - 417,970 42 Private placement Reg S - - - 750,000 75 Expenses on private placement Reg S - - - - - Recognition of convertibility of Series A preferred stock 364,004 - - - - Net income - - - - - Balance, June 30, 1994 364,083 - - 9,526,166 952 Issuance of common stock upon conversion of Series A preferred stock (364,083) - - 69,508 7 Issuance of common stock upon conversion of Series D preferred stock - - - 105,000 11 Issuance of common stock upon Contour Medical, Inc. acquisition - - - 125,000 12 Preferred stock, 10% dividend - - - - - Stock dividend, 5% - - - 491,409 49 Net income - - - - - Balance, June 30, 1995 $ - $ - $ - 10,317,083 $1,031 Issuance of Series E pre- ferred stock - - 9,300,000 - - Issuance of common stock upon conversion of Series E preferred stock - - (534,750) 54,516 6 Treasury stock purchased - - - - - Retirement of treasury stock - - - (15,000) (2) Stock issued in exchange for cancellation of warrants and stock warrants exercised - - - 1,198,391 120 Stock options exercised - - - 22,076 2 Preferred stock, 10% dividend - - - - - Stock dividend, 5% - - - 568,809 58 Net income - - - - - Balance, June 30, 1996 $ - $ - $8,765,250 12,145,875 $1,215 (Continued) F-7 RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Continued) For the years ended June 30, 1996, 1995 and 1994 ADDITIONAL RETAINED PAID-IN EARNINGS TREASURY CAPITAL (DEFICIT) STOCK Balance, June 30, 1993 $(1,433,725) $ 705,535 $ - Issuance of common stock upon con- version of Series A preferred stock 670,507 - - Issuance of common stock upon con- version of Series C preferred stock 832,917 - - Private placement Reg D 5,047,349 - - Expenses on private placement Reg D (520,580) - - Acquisition of Retirement Management Corporation 399,992 - - Stock dividend, 5% 2,980,092 (2,980,134) - Private placement Reg S 5,249,925 - - Expenses on private placement Reg S (470,800) - - Recognition of convertibility of Series A preferred stock (364,004) - - Net income - 2,917,642 - Balance, June 30, 1994 12,391,673 643,043 - Issuance of common stock upon con- version of Series A preferred stock 364,076 - - Issuance of common stock upon con- version of Series D preferred stock 499,989 - - Issuance of common stock upon Contour Medical, Inc. acquisition 999,988 - - Preferred stock, 10% dividend - (225,000) - Stock dividend, 5% 4,299,951 (4,300,000) - Net income - 5,058,503 - Balance, June 30, 1995 $18,555,677 $1,176,546 $ - Issuance of Series E preferred stock - - - Issuance of common stock upon con- version of Series E preferred stock 534,744 - - Treasury stock purchased - - (274,040) Retirement of treasury stock - (153,918) 153,920 Stock issued in exchange for cancel- lation of warrants and stock warrants exercised 473,673 - - Stock options exercised 156,303 - - Preferred stock, 10% dividend - (270,000) - Stock dividend, 5% 7,252,258 (7,252,316) - Net income - 5,569,811 - Balance, June 30, 1996 $26,972,655 $ (929,877) $(120,120) The accompanying notes are an integral part of these consolidated financial statements. F-8 RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS for the years ended June 30, 1996, 1995 and 1994 1996 1995 1994 ----------- ----------- ----------- Cash flows from operating activities: Net income $ 5,569,811 $ 5,058,503 $ 2,917,642 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 3,223,543 1,128,183 237,277 Loss on sale of marketable equity securities 29,085 - - Cumulative effect of change in accounting principle (372,000) - - Amortization of deferred gain (40,000) (40,000) (40,000) Provision for bad debts 1,027,539 - - Equity in income from investees 146,800 - - Amortization of deferred lease and loan costs 698,785 - - Minority interest 597,895 18,784 - Deferred income taxes (148,886) 261,092 (91,237) Changes in assets and liabilities net of effects of acquisitions: Accounts receivable (9,988,047 ) (6,012,900) (4,071,251) Inventories (3,096,022) (996,139) - Prepaid expenses and other assets 703,690 (642,013) (1,373,827) Accrued interest receivable 77,917 (196,667) - Accounts payable and accrued expenses 7,278,350 6,608,148 5,509,837 Deferred lease and loan costs - (978,943) (1,565,130) Net cash provided by operating activities 5,708,460 4,208,048 1,523,311 Cash flows from investing activities: Purchases of property and equipment (8,826,151) (6,079,610) (5,093,344) Proceeds from sale leaseback trans- action - 4,500,000 - Proceeds from repayment of notes receivable 2,200,000 - - Issuance of notes receivable and advances to affiliates and non- affiliates (8,855,686) (1,742,147) (5,142,182) Purchase of bonds receivable - (4,487,936) - Purchase of note receivable - - (2,200,000) Investments in unconsolidated affiliates 3,787,635 (3,335,833) (783,904) Restricted bond funds (4,419,184) (17,317) 913,857 Proceeds from sale of fixed assets - - 2,481,370 Cash acquired in acquisition of Contour Medical, Inc. - 73,254 - Decrease (increase) in marketable equity securities - 444,863 (544,373) Proceeds from sale of marketable equity securities 36,780 - - (Continued) F-9 RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) for the years ended June 30, 1996, 1995 and 1994 1996 1995 1994 ------------ ------------ --------- Goodwill paid in acquisitions (2,327,736) - (93,422) Acquisitions, net of cash acquired (26,197,853) - - Payment of deferred lease costs (593,470) - - Net cash used in investing activities (45,195,665) (10,644,726) (10,461,998) Cash flows from financing activities: Capital investment by minority shareholders of subsidiary 2,088,492 1,729,469 - Redemption of preferred stock (600,000) - - Purchase of treasury stock (274,040) - - Dividends on preferred stock (285,000) (225,000) - Proceeds from issuance of preferred stock 9,300,000 - - Proceeds from stock options and warrants exercised 630,098 - 9,306,118 Proceeds from long-term debt and net borrowings under line of credit 35,329,244 11,309,986 112,754 Payments on long-term debt (9,443,626) (2,130,654) - Payments of deferred loan (2,419,783) - - Net cash provided by financing activities 34,325,385 10,683,801 9,418,872 Net increase (decrease) in cash and cash equivalents (5,161,820) 4,247,123 480,185 Cash and cash equivalents, beginning of year 5,207,185 960,062 479,877 Cash and cash equivalents, end of year $ 45,365 $ 5,207,185 $ 960,062 The accompanying notes are an integral part of these consolidated financial statements. F-10 RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: NATURE OF BUSINESS AND BASIS OF PRESENTATION Retirement Care Associates, Inc. ("RCA" or the "Company") operates 64 leased and owned nursing and retirement facilities and manages, for both related and unaffiliated third parties, an additional 28 nursing and retirement facilities. The Company also owns a majority interest in Contour Medical, Inc. ("Contour") whose principal operations consist of distributing medical supplies to healthcare facilities. PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, as well as its majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. CASH AND CASH EQUIVALENTS For purposes of financial statement presentation, the Company considers all highly liquid investments with maturity of three months or less at issuance to be cash equivalents. INVENTORIES Inventories, consisting mainly of medical supplies, are valued at the lower of cost (first-in, first-out) or market. ALLOWANCE FOR POSSIBLE LOAN LOSSES The Company periodically reviews the adequacy of the allowance for possible loan losses on affiliate notes receivable by considering various factors, among others, such as the fair value of the underlying facility collateral in excess of prior and senior liens, the periodic results of operations of the underlying collateral, the fair value of other collateral or guarantees pledged as security for the notes receivable, and the Company's ability to foreclose, if necessary, against prior and senior liens to protect the collateral value. During 1996, the Company adopted Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" (SFAS No. 114). All affiliated notes receivable were liquidated subsequent to June 30, 1996 (see Note 19). PROPERTY, EQUIPMENT AND DEPRECIATION Property and equipment are recorded at cost less accumulated depreciation. Depreciation, which includes amortization of assets under capital leases, is computed using the straight-line method over the estimated useful lives of the related assets (five to thirty years). Maintenance and repairs are charged to F-11 RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued 1. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES, continued: expense as incurred. Upon sale, retirement or other disposition of these assets, the cost and the related accumulated depreciation are removed from the respective accounts and any gain or loss on the disposition is included in income. INVESTMENT IN UNCONSOLIDATED AFFILIATES During the year ended June 30, 1995, the Company acquired a 35% interest in In-House Rehab, Inc. ("In-House"), a therapy service company, for $350,000. The Company accounts for their investment in In-House on the equity method. The Company's share of In-House's net income was $146,800 and $0 for the years ended June 30, 1996 and 1995, respectively. Investment in affiliates included the investment in In-House and The Atrium of Jacksonville, Ltd. ("Atrium") as of June 30, 1995. The accounts of Atrium are consolidated with those of the Company as of June 30, 1996. DEFERRED LEASE AND LOAN COSTS Deferred lease and loan costs, consisting of lease acquisition fees paid to lessors and loan commitment fees and related expenditures, are amortized over the respective terms of the lease or loan using the effective rate method. The related amortization of the lease and loan cost is recorded as lease and interest expense, respectively. RESTRICTED BOND FUNDS Current restricted bond funds include principal and interest funds which are used for payment of principal and interest on or before the dates required by the trust indenture. Non-current restricted bond funds include debt service reserve funds (used for payment of principal and interest when principal and interest funds are insufficient) and project funds (used for payment of construction, improvement and equipment costs at facilities under construction). GOODWILL Goodwill arises in connection with business combinations accounted for as purchases where the purchase price exceeds the fair value of the net assets of the acquired businesses. Goodwill is amortized on a straight-line basis over 15 years. The carrying value of goodwill is reviewed if the facts and circumstances suggest that it may be impaired. If this review indicates that goodwill will not be recoverable, as determined based on undiscounted cash flows of the acquired entity over the remaining amortization period, the Company's carrying value of the goodwill is reduced by the estimated shortfall of cash flows. Accumulated amortization of goodwill totaled $233,014 and $110,911 as of June 30, 1996 and 1995, respectively. DEFERRED GAIN Deferred gain on a sale-leaseback transaction is recorded at cost and is amortized into income on a straight-line basis over 10 years, the life of the lease. The related amortization is recorded as a reduction of lease expense. F-12 RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued 1. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES, continued: STOCK DIVIDENDS During February 1994, January 1995 and April 1996, the Company declared 5% stock dividends which were payable on March 1, 1994, February 15, 1995 and May 15, 1996, respectively, to shareholders of record on February 15, 1994 and 1995 and May 1, 1996, respectively. All common stock information presented has been retroactively restated to reflect these stock dividends. NET PATIENT SERVICE REVENUE Net patient service revenue is derived primarily from services to retirement center residents and nursing home patients. Retirement center residents typically pay rent in advance of the month for which it is due. Nursing home patients are predominately beneficiaries of the Medicare and Medicaid programs. The Medicare program reimburses nursing homes on the basis of allowable costs, subject to certain limits. Payments are received throughout the year at amounts estimated to approximate costs. Following year end, cost reports are filed with the Medicare program and final settlements are made. Provisions for Medicare settlements are provided in the financial statements in the period the related services are rendered. Differences between amounts accrued and final settlements are reported in the year of settlement. State Medicaid programs pay nursing homes primarily on a per diem basis with no retroactive settlement. Revenues from services to Medicaid patients are recorded at payment rates established by the various state programs in the period services are rendered. There have been, and the Company expects that there will continue to be, a number of proposals to limit Medicare and Medicaid payments for long-term and rehabilitative services. The Company cannot predict at this time whether any of these proposals will be accepted or, if adopted and implemented, what effect such proposals would have on the Company. TAXES ON INCOME Deferred income taxes are recognized for the tax consequences of temporary differences between the financial reporting bases and the tax bases of the Company's assets and liabilities. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable for the period and the change during the period in deferred tax assets and liabilities. NET INCOME PER SHARE Net income per share is computed on the basis of net income applicable to common stock and the weighted average number of common and common equivalent shares outstanding during each year, retroactively adjusted to give effect to the stock dividends. Shares used in the calculation consists of the weighted average number of shares actually outstanding as well as the weighted average number of common share equivalents which include dilutive convertible F-13 RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued 1. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES, continued: preferred stock, stock options and warrants. Primary weighted average number of common and common equivalent shares outstanding approximated the fully diluted weighted average number of common and common equivalent shares outstanding for the year ended June 30, 1996. Shares used in the calculation for the year ended June 30, 1995 consisted of the weighted average number of shares actually outstanding (10,798,292) as well as the weighted average number of common share equivalents (1,818,543) which include dilutive stock options and warrants as described below. Shares used in the calculation for the year ended June 30, 1994 consisted of the weighted average number of shares actually outstanding (8,292,882) together with the weighted average numbers outstanding of common shares expected to be issued upon the conversion of all of the Series A convertible preferred stock (672,497 shares) issued in the merger since the income levels required to permit conversion were currently being attained. Shares used in the calculation also included the weighted average number of common share equivalents (874,614) which include dilutive stock options and warrants as described below. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. RECLASSIFICATIONS Certain 1995 and 1994 amounts have been reclassified to conform with the 1996 presentations. 2. BUSINESS ACQUISITIONS: Effective November 30, 1992, the Company acquired the stock of Capitol Care Management Company, Inc. ("CCMC") in a reverse acquisition in which CCMC's stockholders acquired voting control of the Company. For financial reporting purposes, CCMC was deemed to be the acquiring entity. The acquisition was recorded using the purchase method of accounting. Since RCA had no significant operations or assets at the acquisition date, as required by the Securities and Exchange Commission, the accounts of RCA have been recorded at the predecessor's cost basis. CONTOUR On September 30, 1994, the Company acquired a 63% interest in Contour through the acquisition of preferred and common stock from the existing shareholders of Contour. Contour is a publicly held company based in St. Petersburg, Florida, which manufactures a full line of orthopedic care and rehabilitation F-14 RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued 2. BUSINESS ACQUISITIONS, continued: products. In connection with the acquisition of the 63% interest in Contour, the Company paid $4,000,000, consisting of 137,813 shares of its common stock and 300,000 shares of a new series of redeemable convertible preferred stock (see Note 9). The acquisition of Contour was accounted for under the purchase method of accounting. The excess of the purchase price over the fair value of identifiable tangible and intangible assets of $899,792 was allocated to goodwill and is being amortized over 15 years. ENCORE On December 15, 1995, the Company obtained both a sole general and a limited partnership interest, totaling a 74.25% interest, in Encore Partners, L.P. ("Encore") in exchange for a capital contribution to Encore of $3.5 million. Encore owns three retirement facilities, totaling 527 beds, and two nursing homes, totaling 157 beds. The acquisition was accounted under the purchase method of accounting. Profits and losses of Encore are allocated 74.25% to the Company and 25.75% to other partners. Available cash, if any, is distributed 74.25% to the Company and 25.75% to the other partners. ATRIUM During the year ended June 30, 1995, Winter Haven Homes, Inc. ("Winter Haven"), an affiliated entity, assigned to the Company its rights under an agreement between Atrium and Winter Haven. The agreement granted Winter Haven the right to acquire up to a 75% ownership interest in Atrium in exchange for and upon meeting certain performance requirements. In addition to the assignment, Winter Haven and the Company entered into a separate Compensation Agreement requiring the Company to pay Winter Haven an amount equal to 25% of the appraised values of Atrium upon each transfer of a 25% interest in Atrium to the Company. At June 30, 1995, a 50% interest in Atrium had been transferred to the Company at a carrying value of $1,913,000 plus advances made by the Company to Atrium of $2,149,060. This investment was accounted for under the equity method. In May 1996, the Company obtained an additional 25% interest for $1,230,000, bringing the total investment to $3,143,000 plus advances made by the Company to Atrium of $2,602,942, and the total ownership interest to 75%. Effective May 1996, the accounts of Atrium have been consolidated with those of the Company. The minority partners of Atrium are allocated 25% of the profits and losses and 25% of available cash flow, if any, is distributed to the minority partners. F-15 RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued 2. BUSINESS ACQUISITIONS, continued: OTHER During the year ended June 30, 1996, the Company purchased a number of other facilities. Such purchases included both nursing and retirement facilities. The data related to these purchases is as follows: 1996 ----------- Number of Facilities Purchased: Nursing 7 Retirement 4 ----------- Total 11 ----------- ----------- Cost of acquired facilities: Cash paid $ 775,000 Debt incurred 22,736,000 ----------- Total $23,511,000 ----------- ----------- During the year ended June 30, 1995, the Company purchased three nursing facilities and two retirement facilities. The Company typically obtains financing in excess of the purchase price paid for acquired facilities. The excess funds are used to cover certain closing costs associated with the transactions with any residual amounts retained by the Company. The acquisitions referred to above have been accounted for using the purchase method of accounting. The operating results of those acquired facilities have been included in the consolidated statement of operations from the date of acquisition. The following table presents unaudited pro forma results of operations data as if the acquisitions described above had occurred on July 1, 1994. For the year ended June 30, ---------------------------- 1996 1995 (Unaudited) ---------------------------- Revenue $148,466,000 $127,671,000 Net income 5,652,000 5,568,000 Net income per share .40 .42 The pro forma information includes adjustments for interest expense that would have been incurred to finance the acquisitions, additional depreciation based on the fair market value of the facilities and other adjustments, together with related income tax effects. The pro forma financial information is not necessarily indicative of the results of operations as they would have been had the transactions been effected on the assumed dates. F-16 RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued 3. RELATED PARTY TRANSACTIONS: The Company provides management and administrative services for 19 facilities owned by affiliates and also leases one facility from an affiliate. The facilities are owned and controlled by two individuals who are officers and directors of the Company. These services are provided pursuant to agreements which have five-year terms and are cancelable with sixty days written notice by either party. The agreements provide for monthly fees ranging from $6,000 to $40,000 per facility and expire through 1999. Revenue from these management services totaled $3,472,900, $3,517,500 and $3,034,445 for the years ended June 30, 1996, 1995 and 1994. CCMC maintains a cash management account where all operating cash funds of the managed facilities are pooled into one bank account and invested daily. Notes and advances due from affiliates consist of advances to facilities, net of advances from facilities, owned by the following affiliated entities: June 30, -------------------------- 1996 1995 ----------- ---------- Gordon Jensen Health Care Association, Inc. $ 2,982,975 $2,117,562 Winter Haven Homes, Inc. 8,887,833 4,966,589 Southeastern Cottages, Inc. 679,144 105,533 National Assistance Bureau, Inc. 1,326,391 748,801 Chamber Health Care Society, Inc. 336,857 (610,263) Senior Care, Inc. 84,095 - Other Affiliates 19,366 - ----------- ---------- 14,316,661 7,328,222 Less current portion - 2,314,250 ----------- ---------- $14,316,661 $5,013,972 ----------- ---------- ----------- ---------- During 1995 and 1994, the Company received notes as consideration for advances totaling $5,360,000. These notes require quarterly interest payments at 8% per annum with all principal and accrued interest due on or before June 30, 1998. The notes are collateralized by second mortgages on facilities owned by affiliates and certain notes receivables are guaranteed by the principals of Winter Haven, who are shareholders of the Company. All notes and advances due from affiliates were liquidated subsequent to year end (see Note 19). FACILITY ACQUISITIONS AND LEASES On April 28, 1995, the Company purchased a 210-unit nursing home from an affiliate. The purchase price was $5,650,000 and was financed with $500,000 from the Company and a $5,150,000 mortgage loan from an unrelated third-party real estate investment trust. On February 27, 1996, the Company purchased a 36-unit retirement facility from an affiliate. The purchase price was $2,000,000 and was financed with $400,000 F-17 RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued 3. RELATED PARTY TRANSACTIONS, continued: from the Company and a $1,600,000 mortgage loan from an unrelated third-party real estate investment trust. On May 5, 1996, the Company entered into a lease agreement with an affiliate to rent a 60-unit nursing home. Terms of the agreement are ten years at $300,000 per year beginning on June 1, 1996. ADDITIONAL TRANSACTIONS The Company paid amounts to affiliates for obtaining financing of $190,000 for the year ended June 30, 1995. During 1994, the Company paid amounts to affiliates for lease acquisition and buyout costs, financing fees and financial advisory fees of $350,000, $300,000, and $70,000, respectively. These amounts are deferred and included in deferred lease and loan costs in the accompanying balance sheets. The Company was paid fees of $150,000 and $400,000 by affiliates in connection with locating financing for three facilities in 1996 and two facilities in 1995, respectively. These fees were included in interest income on the accompanying statements of income. 4. PATIENT ACCOUNTS RECEIVABLE: Patient accounts receivable and net patient service revenue include amounts estimated by management to be payable by Medicaid and Medicare under the provisions of payment formulas in effect. Medicaid and Medicare programs accounted for approximately 71% and 72% of net patient service revenue during 1996 and 1995, respectively. The Company grants credit without collateral to its patients most of whom are local residents of the respective nursing home and retirement facilities and are insured under third-party payor agreements. The mix of receivables from patients and third party payors is as follows: June 30, --------------------------- 1996 1995 ----------- ----------- Medicaid $ 8,248,590 $ 5,485,610 Medicare 7,943,371 5,088,571 Other third-party payors 3,139,919 697,402 Patients 1,225,040 10,884 ----------- ----------- $20,556,920 $11,282,467 ----------- ----------- ----------- ----------- The allowance for doubtful accounts was approximately $1,000,000 and $0 as of June 30, 1996 and 1995, respectively. F-18 RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued 5. NOTE RECEIVABLE: On February 7, 1996, the Company loaned $500,000 to an unaffiliated company. The note, plus interest at 9% per annum, is due on February 7, 1997 and is collateralized by a first lien on a 38-bed nursing home in Atlanta, Georgia. 6. CHANGE IN ACCOUNTING FOR SUPPLIES INVENTORY: During the year ended June 30, 1996, the Company changed methods of accounting for facility supplies inventory from expensing when purchased to capitalizing and expensing as used. The Company believes that this change is preferable in the circumstances because it more closely matches inventory costs with net patient service revenue. In connection with the capitalization of facility supplies inventory at June 30, 1996, the Company recorded additional inventory and reduced supplies expense by approximately $1.8 million, of which approximately $600,000 related to inventory on hand as of June 30, 1995. Accordingly, the cumulative effect of this change in accounting principle on beginning retained earnings has been shown, net of tax, as a separate component of the statement of operations for the year ended June 30, 1996. Although the cumulative effect on retained earnings at June 30, 1995 resulting from the change can be determined, the pro forma effects of retroactive application cannot be computed for individual prior periods. Accordingly, net income and income per common share computed on a pro forma basis have not been presented for the years ended June 30, 1995 and 1994. 7. PROPERTY AND EQUIPMENT: Property and equipment consisted of the following: Estimated Useful Lives 1996 1995 --------- ------------ ----------- Land -- $ 7,432,502 $ 2,237,133 Buildings 30 85,615,764 28,917,590 Equipment 5-10 12,216,740 5,702,897 Leasehold improvements 5-10 2,193,227 1,110,666 Buildings and equipment under capital leases 5-30 8,111,801 - ---- ------------ ----------- 115,570,034 37,968,286 Less accumulated depreciation 8,517,213 990,968 ------------ ----------- 107,052,821 36,977,318 Construction in progress 7,629,261 256,188 ------------ ----------- Net property and equipment $114,682,082 $37,233,506 ------------ ----------- ------------ ----------- F-19 RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued 7. PROPERTY AND EQUIPMENT, continued: Construction in progress, consisting of the development of four facilities, includes approximately $605,000 and $4,600 of capitalized interest costs as of June 30, 1996 and 1995, respectively. Substantially all property and equipment is pledged as collateral for long-term debt. 8. DEFERRED LEASE AND LOAN COST: In connection with the execution of certain lease transactions and financing of acquisitions, the Company incurred lease and loan commitment fees, which are included in deferred lease and loan costs in the accompanying balance sheets, as follows: June 30, ------------------------- 1996 1995 ---------- ----------- Lease cost: Affiliated $ 500,000 $ 500,000 Non-affiliated 1,801,619 1,283,149 Loan cost: Affiliated 410,000 410,000 Non-affiliated 5,800,288 1,897,403 ---------- ---------- 8,511,907 4,090,552 Less accumulated amortization 846,016 358,355 ---------- ---------- Net deferred lease and loan cost $7,665,891 $3,732,197 ---------- ---------- ---------- ---------- 9. SHAREHOLDERS' EQUITY: STOCK PURCHASE WARRANTS In prior years, the Company issued warrants to an investment banker and consultants to purchase 1,137,899 shares of its common stock at prices ranging from $1.554 to $6.543 per share. All exercise prices approximated the market price at the date of grant. The warrants were exercisable at varying dates through June 1998. During the year ended June 30, 1996, the Company issued 799,090 shares of its common stock in exchange for the cancellation of all of these warrants. The Company has issued Class A warrants in connection with a private offering and Class B and Class C warrants in connection with an offer to Class A warrant holders to convert their warrants. The Class A and C warrants are exercisable at $.864 per share of common stock and the Class B warrants are exercisable at $5.442 per share of common stock. At any time during the period the warrants are exercisable, the Company may redeem the warrants at $.05 per warrant upon 45 days written notice in the event certain listing and registration requirements are achieved, and the closing bid price of the common stock exceeds $7.00 per share for the Class A and Class C Warrants, and $10.00 per share for the Class B F-20 RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued 9. SHAREHOLDERS' EQUITY, continued: Warrants, for 20 of 30 consecutive trading days. During the year ended June 30, 1996, Class A and Class C Warrants were exercised to purchase approximately 402,541 shares of common stock and Class B Warrants were exercised to purchase approximately 50,853 shares of common stock. As of June 30, 1996, there were Class A and Class C warrants outstanding which entitles the holders to purchase 377,964 shares of common stock and Class B warrants outstanding which entitles the holders to purchase 392,116 shares of common stock. STOCK OPTIONS In December 1993, the Company adopted the 1993 Stock Option Plan (the "Plan"). A total of 1,682,625 shares of the Company's common stock have been reserved for issuance under the Plan. Under the Plan, options are granted at an exercise price of not less than 100% of the fair market value of the shares on the date of grant. Certain options are exercisable immediately, while others are subject to vesting provisions as specified by the Board of Directors on the date of grant. Each option grant under the Plan automatically expires ten years after the date of grant or at such earlier time as may be determined by the Board of Directors. Stock option transactions are summarized as follows: Exercise Price Shares Per Share --------- -------------- Balance at June 30, 1993 - - Granted 882,110 $4.65 - $ 6.75 --------- -------------- Balance at June 30, 1994 882,110 4.65 - 6.75 Granted 228,113 6.46 - 8.57 --------- -------------- Balance at June 30, 1995 1,110,223 4.65 - 8.57 Granted 478,800 9.76 - 10.24 Exercised (22,076) 4.65 - 9.76 Canceled (68,579) 4.65 - 9.76 --------- -------------- Balance at June 30, 1996 1,498,368 $4.65 - $10.24 --------- -------------- --------- -------------- PREFERRED STOCK As of June 30, 1996, the Company has authorized 40,000,000 shares of preferred stock and has designated the following series of preferred stock: - SERIES AA REDEEMABLE CONVERTIBLE PREFERRED STOCK 300,000 shares of Series AA Redeemable Convertible Preferred Stock are authorized. These shares were issued in connection with the acquisition of a majority interest in Contour. Holders of the Series AA Redeemable Convertible Preferred Stock are entitled to receive cumulative dividends of $1.00 per share (10%) annually, and are convertible into common stock at any time at the F-21 RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued 9. SHAREHOLDERS' EQUITY, continued: rate of 5.5125 shares of common stock for each six shares of Series AA Redeemable Convertible Preferred Stock. Each share is entitled to one vote and has a preferred rate of $10.00 per share upon voluntary or involuntary liquidation, dissolution, or winding up of affairs of the Company. The Company may redeem shares of Series AA Redeemable Convertible Preferred Stock, in whole or in part, at any time at its option at a price of $10.00 per share plus any unpaid dividends (the "Redemption Price"). In addition, to the extent that such funds are legally available, the Company is required to redeem, at the Redemption Price, at least 20% of each holder's initial number of shares of Series AA Redeemable Convertible Preferred Stock by September 30, 1995; 40% by September 30, 1996; 60% by September 30, 1997; 80% by September 30, 1998; and 100% by September 30, 1999. In the event that a holder of Series AA Redeemable Convertible Preferred Stock shall have converted a portion of his shares into common stock, such converted shares shall be counted toward the redemption requirement and shall be deemed redeemed for the purposes of the mandatory redemption requirement. In addition, in the event that the Company fails to pay any dividend on the Series AA Redeemable Convertible Preferred Stock within 30 days of the due date, the Company is required to redeem all of the outstanding Series AA Redeemable Convertible Preferred Stock. During the year ended June 30, 1996, the Company redeemed 60,000 shares of Series A Redeemable Preferred Stock. - SERIES A CONVERTIBLE PREFERRED STOCK 2,000,000 shares of Series A Convertible Preferred Stock, par value $.10 per share, are authorized. Each share is entitled to 10 votes and has a preference rate of $.01 per share with no dividend rights. 750,000 shares of Series A Preferred Stock were issued in connection with the RCA merger and converted into common stock in 1994 and 1995. - SERIES C CONVERTIBLE PREFERRED STOCK 1,000,000 shares of Series C Convertible Preferred Stock are authorized. Each share is entitled to one vote per share and had a preference rate of $1.00 per share with no dividend rights. The shares of Series C Convertible Preferred Stock were converted in 1994 into common stock. - SERIES E CONVERTIBLE PREFERRED STOCK 1,000,000 shares of Series E Convertible Preferred Stock are authorized. These shares were sold in an offering to foreign investors in April 1996 at $10.00 per share. Holders of the Series E Preferred Stock have no voting rights except as required by law, and have a liquidation preference of $10.00 per share plus 4% per annum from the date of issuance. The shares of Series E Preferred Stock are convertible into shares of common stock at a conversion price of $12.4025 or 85% of the average closing bid price for the five trading days prior to the date of conversion, whichever is lower (but no lower than $5.00). F-22 RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued 9. SHAREHOLDERS' EQUITY, continued: At the time of conversion, the holder is also entitled to additional shares equal to $10.00 per share of Series E Preferred Stock converted multiplied by 8% per annum from the date of issuance divided by the applicable conversion price. As of June 30, 1996, 57,500 shares of Series E Convertible Preferred Stock had been converted into 54,516 shares of common stock. TREASURY STOCK In November 1995, the Company purchased and retired 15,000 shares of its common stock at an aggregate cost of $153,920. In December 1995, the Company purchased 10,000 shares of its common stock at an aggregate cost of $120,120. 10. LONG-TERM DEBT: Long-term debt at June 30, 1996 and 1995 is summarized as follows: 1996 1995 ------------ ----------- Non-affiliates: Notes payable to a real estate investment trust ("REIT") $ 39,848,938 $12,930,347 Industrial development revenue bonds 20,066,000 9,345,000 Municipal revenue bonds 18,170,000 13,350,000 Housing development mortgage revenue bonds 21,750,000 1,660,000 Notes payable to banks (8.5% or prime plus 1% to 10% due through 2003) 4,548,160 2,966,065 Capitalized lease obligations 8,048,581 - Affiliates: Note payable to an affiliate (12% due on July 31, 1996) - 1,000,000 Less discount on bonds payable - 184,518 ------------ ----------- 112,431,679 41,066,894 Less current maturities 2,055,880 8,640,871 ------------ ----------- $110,375,799 $32,426,023 ------------ ----------- ------------ ----------- Future maturities of debt and capital lease obligations are as follows: F-23 RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued 10. LONG-TERM DEBT, Continued: Capital Year Lease Debt Total - ---------- ----------- ------------ ------------ 1997 $ 989,657 $ 1,986,380 $ 2,976,037 1998 3,859,557 4,377,081 8,236,638 1999 656,240 2,364,807 3,021,047 2000 662,136 2,840,171 3,502,307 2001 667,960 2,866,566 3,534,526 Thereafter 7,317,105 89,948,093 97,265,198 ----------- ------------ ------------ Total 14,152,655 104,383,098 118,535,753 Less amount representing imputed interest at ll% to 12% 6,104,074 - 6,104,074 ----------- ------------ ------------ Total obligations $ 8,048,581 $104,383,098 $112,431,679 ----------- ------------ ------------ ----------- ------------ ------------ The notes payable to the REIT consist of mortgage notes on eight facilities. Principal amounts are amortized over a 25-year period with monthly installments payable through 2008. Interest ranges on these notes from 9.75% to 11.25% and increases annually at rates ranging from 0.1% to 0.25%. The notes are collateralized by property and equipment of the eight facilities. The industrial development revenue bonds consist of bonds on two facilities: a retirement community located in San Destin, Florida and Atrium, a nursing and retirement community located in Jacksonville, Florida. The San Destin facility serves as collateral for $9,225,000 of bonds payable to the Walton County Industrial Development Authority. Principal payments range from $120,000 to $1,000,000 annually through 2017 and interest accrues at 10.5%. The Atrium facility serves as collateral for three City of Jacksonville Industrial Development Revenue Refunding bonds totaling $10,841,000. Principal payments range from $150,000 to $370,000 annually through 2024 and interest accrues at rates ranging from 6.38% to 11.5%. The housing development mortgage revenue bonds include approximately $18,525,000 of bond debt assumed by the Company in connection with the acquisition of Encore. The bond debt, which is collateralized by property and equipment of four facilities, includes Okaloosa County, Florida Retirement Rental Housing Revenue Series A bonds totaling $8,425,000 with semi-annual interest payments at 10.75% due in 2003 and Ohio Rental Housing Revenue Series A bonds totaling $10,000,000 with semi-annual interest at 10.38% due in 2009. The remainder of the housing development mortgage revenue bonds consist of bonds totaling $3,225,000 collateralized by two facilities with interest ranging from 8% to 11.0%. The housing development mortgage revenue bonds require annual principal payments ranging from $10,000 to $2,000,000. The municipal revenue bonds, which are collateralized by property and equipment of five facilities and require annual principal payments ranging from $15,000 to $540,000, consist of the following: F-24 RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued 10. LONG-TERM DEBT, Continued: - Dade City, Florida Series A and B bonds totaling $6,455,000, with principal payments due through 2025 and interest ranging from 6.75% to 8%. - Highland County Series A and B bonds totaling $4,275,000, with principal payments due through 2024 and interest ranging from 8.5% to 9.5%. - City of Dublin Series A and B bonds totaling $2,780,000, with principal payments due through 2024 and interest ranging from 8.5% to 10.5%. - Rome-Floyd County Development Authority Revenue Series A and B bonds totaling $2,760,000, with principal payments due through 2011 and interest rates ranging from 7.5% to 9.5%. - Americus-Sumter Series A and B bonds totaling $1,900,000, with principal payments due through 2026 and interest rates ranging from 8.0% to 10.25%. 11. LINES OF CREDIT: The Company maintains various lines of credit with interest rates ranging from prime plus .25% to prime plus 1.25%. Available borrowings under the lines of credit totaled $5,075,000 and $1,750,000 for the years ended June 30, 1996 and 1995, respectively. Total borrowings against the lines of credit were $3,556,535 and $1,745,316 at June 30, 1996 and 1995, respectively, which have been included in long-term debt. Included in these amounts were borrowings of $2,100,000 and $1,745,316 at June 30, 1996 and 1995, respectively, which have been included in long-term debt. 12. COMMITMENTS AND CONTINGENCIES: OPERATING LEASES The Company leases nursing homes and retirement care facilities from unaffiliated entities (in addition to leasing one nursing home from an affiliated entity). The lease agreements commenced on various dates with terms extending through February 2016. The Company has options to extend most of the leases for an additional five to ten years. The Company also leases certain facilities under agreements classified as capital leases. These agreements include purchase options exercisable at the Company's discretion during, or at the end of, each of the lease terms. The capital lease agreements commenced on various dates with terms extending through January 2006. Included in the above agreements are three leases whereby a sale to the lessor preceded the lease agreement ("sale/leaseback transaction"). The Company has accounted for two of these sale/leaseback transactions as sales with no gains or losses recognized on the transactions. The remaining sale/leaseback transaction was capitalized and included a deferred gain of $381,370 to be amortized over the term of the lease. Future minimum payments, by year and in the aggregate, under noncancelable operating leases with initial or remaining terms of one year or more consist of the following at June 30, 1996: F-25 RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued 12. COMMITMENTS AND CONTINGENCIES, Continued: Year Amount ----------- ----------- 1997 $ 7,958,940 1998 7,733,171 1999 6,332,600 2000 6,181,636 2001 6,247,504 Future years 26,890,709 ----------- Total $61,344,560 ----------- ----------- The Company's rental expense under operating leases for nursing homes and retirement care facilities amounted to approximately $5,890,000, $5,750,000 and $3,000,000 for the years ended June 30, 1996, 1995 and 1994, respectively. The Company leases office space under a noncancelable operating lease which expires in October 2000. At June 30, 1996, minimum future rental payments under the noncancelable lease were as follows: Year Amount ----------- -------- 1997 $303,647 1998 325,450 1999 341,680 2000 358,670 2001 120,508 Total amounts paid for rental of office facilities totaled approximately $305,000, $60,000 and $35,000 for the years ended June 30, 1996, 1995 and 1994, respectively. OTHER The Company has guaranteed the debt of two facilities owned by affiliates totaling approximately $6,000,000. Additionally, the Company has guaranteed 20% of the debt on five facilities owned by unaffiliated entities totaling $9,370,000 that are currently operated by the Company under operating leases. The Company is involved in legal proceedings arising in the ordinary course of business. In addition, the Company is in dispute with the Internal Revenue Service ("IRS") concerning the application of certain income and payroll tax liabilities and payments. The IRS contends that the Company is delinquent in the payment of certain taxes and has charged penalties and interest in connection with the alleged underpayments. The Company contends that the IRS has misapplied payments between income and payroll taxes and between the Company and its affiliates. The Company has estimated in the accompanying financial statements amounts for ultimate settlement of this dispute. The Company has filed lawsuits against the IRS related to this matter. In the opinion of management, the ultimate resolution of pending legal proceedings and the IRS dispute will not have a material effect on the Company's financial positions or results of operations. F-26 RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued 13. INCOME TAXES: The components of the provision for income taxes were as follows: Year ended June 30, ---------------------------------- 1996 1995 1994 ---------- ---------- ---------- Current: Federal $3,918,693 $2,659,000 $1,630,900 State 686,500 499,000 287,820 ---------- ---------- ---------- 4,605,193 3,158,000 1,918,720 ---------- ---------- ---------- Deferred: Federal (80,660) 221,928 (77,600) State (68,226) 39,164 (13,637) ---------- ---------- ---------- (148,886) 261,092 (91,237) ---------- ---------- ---------- Total income tax provision $4,456,307 $3,419,092 $1,827,483 ---------- ---------- ---------- ---------- ---------- ---------- The income tax provision is included in the statements of operations as follows: 1996 1995 1994 ---------- ---------- ---------- Income before cumulative effect of change in accounting principle $4,228,307 $3,419,092 $1,827,483 Cumulative effect of change in accounting principle 228,000 - - ---------- ---------- ---------- $4,456,307 $3,419,092 $1,827,483 ---------- ---------- ---------- ---------- ---------- ---------- Deferred income taxes are provided to reflect temporary differences between financial and income tax reporting. The sources of the temporary differences and their effect on the net deferred tax liability at June 30, 1996 and 1995 are as follows: F-27 RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued 13. INCOME TAXES, Continued: 1996 1995 ---------- ---------- Deferred tax assets: Provision for losses on accounts receivable $ 379,600 $ - Worker's compensation accrual 66,430 Deferred gain 99,216 120,590 ---------- ---------- Total deferred tax assets 545,246 120,590 Deferred tax liabilities: Property and equipment 1,434,719 255,090 Equity in undistributed earnings of subsidiaries 115,190 - ---------- --------- Total deferred tax liabilities 1,549,909 255,090 ---------- --------- Net deferred tax liabilities $1,004,663 $ 134,500 ---------- --------- ---------- --------- The provision for income taxes for the year ended June 30, 1996 varies from the amount determined by applying the Federal statutory rate to pretax income as a result of the following: Income tax expense at federal statutory rate $3,409,045 Nondeductible tax penalties 417,658 State income taxes, net of federal tax benefit 384,864 Dividend exclusion of subsidiary earnings 59,464 Other 185,276 ---------- $4,456,307 ---------- ---------- The primary difference between the actual income tax rate of approximately 40% and 39% for the years ended June 30, 1995 and 1994, respectively, and the Federal income tax rate of 34% is the amount paid for state income taxes. 14. FAIR VALUES OF FINANCIAL INSTRUMENTS AND INVESTMENTS: The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments. CASH AND CASH EQUIVALENTS The carrying amount reported in the balance sheet for cash and cash equivalents approximates fair value because of the short maturity of these instruments. MARKETABLE EQUITY SECURITIES The carrying amount reported in the balance sheet for marketable equity securities approximates fair value. All marketable equity securities are F-28 RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued 14. FAIR VALUES OF FINANCIAL INSTRUMENTS AND INVESTMENTS, Continued: classified as "available for sale" for accounting purposes and, therefore, are carried at fair value with unrealized gains and losses recorded directly in equity. There were no significant unrealized gains or losses at June 30, 1996. SHORT- AND LONG-TERM DEBT The fair value of all debt has been estimated based on the present value of expected cash flows related to existing borrowings discounted at rates currently available to the Company for debt with similar terms and remaining maturities. The cost basis and estimated fair values of the Company's financial instruments at June 30 are as follows: June 30, 1996 ----------------------------- Carrying Fair Amount Value Financial assets: Cash and cash equivalents $ 45,365 $ 45,365 Marketable equity securities 33,645 33,645 Financial liabilities: Short-term debt 3,512,415 3,512,415 Long-term debt 110,375,799 111,117,000 As of June 30, 1995, the carrying amount of all financial instruments approximated fair value. 15. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: In connection with the purchase of Contour in September 1994, the Company issued $1,000,000 of common stock, and $3,000,000 of redeemable convertible preferred stock. Total assets and liabilities acquired were $5,146,493 and $1,146,493, respectively. In June 1995, the Company acquired for $4,488,000 through foreclosure a 116-unit property which secured bonds that the Company held. Total debt of $20,830,000 was incurred during the year ended June 30, 1995, to purchase property and equipment totaling $17,825,642, pay loan costs of $1,004,358, and pay off an existing note for $2,000,000. As described in Note 2, the Company acquired certain businesses during 1996. The fair value of assets acquired was $67,155,500 and the fair value of liabilities assumed was $40,957,647 which resulted in net cash payments of $26,197,853. Total debt of $10,200,000 was incurred during the year ended June 30, 1994 to purchase property and equipment totaling $7,736,490, pay loan costs of $429,483 and fund bond reserves of $2,034,027. F-29 RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued 15. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION, Continued: Through the acquisition of a company in December 1993, the Company recorded $500,000 as goodwill and additional paid-in capital in 1995 based on the fair value of 105,000 shares of common stock issued in connection with the conversion of Series D preferred stock. In conjunction with the Series C preferred stock conversion in September 1993, $833,000 of preferred stock was capitalized as $87 in common stock and $832,913 in additional paid-in capital. Cash paid for interest during the years ended June 30, 1996, 1995 and 1994 was $6,561,954, $1,172,883 and $11,172, respectively. Cash paid for income taxes during the years ended June 30, 1996, 1995 and 1994 was $3,561,089, $829,292 and $1,360,720, respectively. Dividends on preferred stock of $15,000 were accrued but not paid at June 30, 1996. During 1996, approximately $8,112,000 of lease assets and obligations were capitalized. 16. ACCRUED EXPENSES: Accrued expenses consisted of the following as of June 30: 1996 1995 ---------- ---------- Payroll and payroll taxes $3,152,795 $1,936,927 Interest 1,872,658 452,173 Other 2,517,678 795,133 ---------- ---------- Total $7,543,131 $3,184,233 ---------- ---------- ---------- ---------- 17. EMPLOYEE RETIREMENT PLAN: During the year ended June 30, 1996, the Company company established a defined contribution retirement plan. Employees qualify for the plan upon the completion of three months of service with the Company and reaching the age of twenty-one. Company contributions to the plan represent a matching percentage of certain employee contributions. The matching percentage is subject to management's discretion based upon consolidated financial performance. For the year ended June 30, 1996, the Company has not made any contributions to the plan. F-30 RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued 18. BUSINESS SEGMENT INFORMATION: Retirement Care Associates, Inc. and Subsidiaries is a long-term health care provider which engages in two distinct business segments. The Retirement Care Associates entity operates and manages nursing homes and retirement facilities throughout the Southeast. As of June 30, 1996, approximately 10,400 beds were owned or operated by this entity. The Contour entity manufacturers a full line of orthopedic care and rehabilitation products and distributes them to nursing facilities throughout the Southeast. The Contour entity was acquired in 1995. The following represents business segment information for the years ended June 30, 1996 and 1995. 1996 1995 ------------ ----------- Operating revenues: Retirement Care Associates $124,951,954 $76,656,829 Contour Medical 9,059,415 3,617,439 ------------ ----------- $134,011,369 $80,274,268 ------------ ----------- ------------ ----------- Depreciation and amortization expense: Retirement Care Associates $ 2,623,194 $ 1,051,842 Contour Medical 600,349 76,341 ------------ ----------- $ 3,223,543 $ 1,128,183 ------------ ----------- ------------ ----------- Identifiable assets: Retirement Care Associates $167,159,896 $72,644,179 Contour Medical 12,397,751 7,613,367 ------------ ----------- $179,557,647 $80,257,546 ------------ ----------- ------------ ----------- Capital expenditures: Retirement Care Associates $ 8,076,988 $ 5,763,553 Contour Medical 749,163 316,057 ------------ ----------- $ 8,826,151 $ 6,079,610 ------------ ----------- ------------ ----------- 19. SUBSEQUENT EVENT: Subsequent to year end, the Company entered into a series of transactions with Winter Haven, Gordon Jensen Health Care Association, Inc. ("Gordon Jensen"), National Assistance Bureau, Inc. ("NAB"), Southeastern Cottages, Inc. ("Southeastern"), Chamber Health Care Society, Inc. ("Chamber"), and Senior Care, Inc. ("Senior"); all are entities which principal shareholders of the Company either own or control. The result of the transactions was to eliminate all notes receivable and advances due to the Company from affiliates. F-31 RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued 19. SUBSEQUENT EVENT, Continued: The following is a summary of the transactions: - Winter Haven assumed the liability for all amounts, totaling $2,426,487, due to the Company from NAB, Southeastern, Chamber and Senior. - On October 14, 1996, Winter Haven sold to the Company two retirement facilities for their fair value, based on independent appraisal, totaling $19,200,000. The facilities were acquired by the Company subject to bond debt of $7,670,000, resulting in debt due to Winter Haven from the Company of $11,530,000. As part of the sales agreement, the Company and Winter Haven agreed that the debt of $11,530,000 would be applied to eliminate the receivable, totaling $11,214,320, due to the Company by Winter Haven. - On September 27, 1996, Gordon Jensen contributed to the treasury of the Company 400,000 shares of stock in the Company which had a fair market value of $3,000,000. This transaction results in the elimination of the debt, totaling $2,982,000, due to the Company by Gordon Jensen and a reduction of stockholders' equity of the Company by $3,000,000. On August 6, 1996, Contour acquired all of the outstanding stock of Atlantic Medical Supply Company, Inc. ("Atlantic Medical"), a distributor of disposable medical supplies and a provider of third-party billing services to the nursing home and home health care markets. The acquisition was made retroactively to July 1, 1996. Contour paid $1.4 million in cash and $10.5 million in promissory notes for all of the outstanding stock of Atlantic Medical. The promissory notes bear interest at 7% per annum and are due in full on January 10, 1997. In the event of a default in the payment of the promissory notes, they are convertible into shares of common stock of RCA. During the period from September 26 through October 2, 1996, the Company sold 1,000,000 shares of Series F Convertible Preferred Stock in an offering to foreign investors at $10.00 per share. Holders of the Series F Preferred Stock have no voting rights except as required by law, and have a liquidation preference of $10.00 per share plus 4% per annum from the date of issuance. The shares of Series F Preferred Stock are convertible into shares of common stock at a conversion price of the lessor of (a) $9.6525 or 110% of the average closing bid price for the twenty consecutive trading days commencing September 30, 1996, whichever is lower, or (b) 85% of the average closing bid price for the five trading days prior to the date of conversion. The maximum number of shares of common stock which can be issued upon conversion of the Series F Preferred Stock is 2,588,000. At the time of conversion, the holder is also entitled to additional shares equal to $10.00 per share of Series F Preferred Stock converted multiplied by 8% per annum from the date of issuance divided by the applicable conversion price. F-32 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. RETIREMENT CARE ASSOCIATES, INC. Dated: October 15, 1996 By /s/ Chris Brogdon Chris Brogdon, President Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date /s/ Chris Brogdon President and Director October 15, 1996 Chris Brogdon /s/ Edward E. Lane Secretary and Director October 15, 1996 Edward E. Lane /s/ Darrell C. Tucker Treasurer (Chief Finan- October 15, 1996 Darrell C. Tucker cial Officer and Prin- cipal Accounting Officer) and Director /s/ Julian S. Daley Director October 15, 1996 Julian S. Daley - ------------------------- Director October __, 1996 Harlan Mathews EX-3.6 2 ARTICLES OF AMENDMENT TO ARTICLES OF INCORPORATION OF RETIREMENT CARE ASSOCIATES, INC. (SERIES E CONVERTIBLE PREFERRED STOCK) Pursuant to the requirements of Section 7-106-102 of the Colorado Business Corporation Act, the undersigned Corporation submits the following Articles of Amendment to Articles of Incorporation. FIRST: The name of the Corporation is Retirement Care Associates, Inc. SECOND: The Articles of Incorporation of the Corporation are hereby amended as follows: "There is hereby established a series of Preferred Stock of the Corporation designated "Series E Convertible Preferred Stock." The number of shares of this series of Convertible Preferred Stock shall be 1,000,000 shares. The powers, designations, preferences and relative, participating, optional or other special rights of the shares of this series of Convertible Preferred Stock and the qualifications, limitations and restrictions of such preferences and rights shall be as follows: Section 1. CONVERSION RIGHTS. a. RIGHT TO CONVERT. Each share of Series E Convertible Preferred Stock may be converted at the option of the holder thereof at the times set forth herein, and without the payment of any additional consideration thereof, into the number of fully paid, nonassessable shares of common stock $.0001 par value, of the Corporation (the "Common Stock") determined by taking the price paid per share of Series E Convertible Preferred Stock and dividing it by the Conversion Price as determined as follows: the Conversion Price shall be the lesser of (a) 110% of the average closing price as reported by the New York Stock Exchange of the Company's Common Stock (the "Closing Price") for the five (5) trading days immediately prior to the Original Issuance Date or (b) 85% of the average of the Closing Price for the five (5) trading days immediately preceding the Date of Conversion, as defined below in Section 1(c) herein; but in no event will the Conversion Price be less than $5.00. b. CONVERSION PERIODS. Each holder of Series E Convertible Preferred Stock shall have the option to convert one-half (1/2) of his shares at any time from and after the forty-fifth (45th) day following the date of issuance and one-half (1/2) of his shares at any time from and after the seventy-fifth (75th) day following the date of issuance. c. AUTOMATIC CONVERSION. Each share of Series E Convertible Preferred Stock not previously converted at the election of the holder thereof shall automatically be converted into shares of Common Stock at the then effective Conversion Price on the date which is two (2) years after the date such shares of Series E Convertible Preferred Stock were issued by the Corporation. d. ADDITIONAL SHARES OR CASH. Upon the conversion of shares of Series E Convertible Preferred Stock under the terms of Section 1a. through c. above, the holder of the shares of Series E Convertible Preferred Stock converted shall also receive additional shares of Common Stock as determined by the following calculation for each share of Series E Convertible Preferred Stock that is converted: (.08)(N/365)(P) ----------------- Conversion Price where, N = The number of days between the original date of issuance of the Series E Convertible Preferred Stock (the "Original Issuance Date") and the applicable date of conversion, and P = Price paid per share of Series E Convertible Preferred Stock. PROVIDED, HOWEVER, that in lieu of issuing all or a portion of the additional shares of Common Stock to which a holder of Series E Convertible Preferred Stock is entitled, the Corporation may, in the sole discretion of the Board of Directors, pay to such holder an amount in cash equal to the Conversion Price of such additional shares; and PROVIDED FURTHER that the Corporation shall be required to pay such amount in cash in lieu of additional shares of Common Stock if it is necessary to do so in order to prevent the total number of shares of Common Stock to be issued upon the conversion of all of the shares of the Series E Convertible Preferred Stock from exceeding 2,200,000 (which number shall be adjusted in accordance with Section 2b. hereof). e. MECHANICS OF CONVERSION. No fractional shares of Common Stock shall be issued upon conversion of Series E Convertible Preferred Stock. In lieu of any fractional share to which the holder would otherwise be entitled, the Corporation shall round up to the nearest whole share. In the case of a dispute as to the calculation of the Conversion Rate, the Corporations calculations shall be deemed conclusive absent manifest error. In order to convert Series E Convertible Preferred Stock into full shares of Common Stock, the holder shall surrender the certificate or certificates thereof, duly endorsed, either by overnight courier or 2-day courier, to the office of the Corporation or of any transfer agent for the Series E Convertible Preferred Stock, and shall give written notice to the Corporation at such office that the holder elects to convert the same, the number of shares of Series E Convertible Preferred Stock so converted and a calculation of the Conversion Rate (with an advance copy of the certificate(s) and the notice by facsimile); provided, however, that the Corporation shall not be obligated to issue certificates evidencing shares of Common Stock issuable upon such conversion unless certificates evidencing such shares of Series E Convertible Preferred Stock are delivered to the Corporation or its transfer agent as provided above, or the holder notifies the Corporation or its transfer agent that such certificates have been lost, stolen or destroyed and executes an agreement satisfactory to the Corporation to indemnify the Corporation from any loss incurred by it in connection with such certificates. The Corporation shall use its best efforts to issue and deliver within three (3) business days after delivery to the Corporation of such Series E Convertible Preferred Stock certificates, or after such agreement and indemnification, to such holder of Series E Convertible Preferred Stock at the address of the holder on the stock books of the Corporation, a certificate or certificates for the number of shares of Common Stock to which the holder shall be entitled as aforesaid. The date on which notice of conversion is given (the "Date of Conversion") shall be deemed to be the date set forth in such notice of conversion provided the original shares of Series E Convertible Preferred Stock to be converted are received by the Corporation of the transfer agent, as the case may be, within three (3) business days thereafter and the person or person entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock on such date. If the original shares of Series E Convertible Preferred Stock to be converted are not received by the transfer agent within three (3) business days after the Date of Conversion, the notice of conversion shall become null and void. Section 2. CORPORATE EVENTS. a. NOTICES OF RECORD DATE. In the event of (i) any declaration by the Corporation of a record date of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend or other distribution or (ii) any capital reorganization of the Corporation, any reclassification or recapitalization of the capital stock of the Corporation, any merger or consolidation of the Corporation and any other entity or person, or any voluntary or involuntary dissolution, liquidation or winding up of the Corporation, the Corporation shall mail to each holder of Series E Convertible Preferred Stock at least 20 days prior to the record date specified herein, a notice specifying (A) the date on which any such record date is to be declared for the purpose of such dividend or distribution and a description of such dividend or distribution, (B) the date on which any such reorganization, reclassification, transfer, consolidation, merger, dissolution, liquidation or winding up is expected to become effective, and (C) the time, if any, that is to be fixed, as to when the holders of record of Common Stock (or other securities) become eligible to receive securities or other property deliverable upon such reorganization, reclassification, transfer, consolidation, merger, dissolution or winding up. b. CORPORATE CHANGES. The Closing Price used to determine the Conversion Price shall be appropriately adjusted to reflect, as deemed equitable and appropriate by the Corporation, any stock dividend, stock split or share combination of the Common Stock. In the event of a merger, reorganization, recapitalization or similar event of or with respect to the Corporation (a "Corporate Change") (other than a Corporation Change in which all or substantially all of the consideration received by the holders of the Company's equity securities upon such Corporate Change consists of cash or assets other than securities issued by the acquiring entity or any affiliate thereof), the Series E Convertible Preferred Stock shall be assumed by the acquiring entity and thereafter the Series E Convertible Preferred Stock shall be convertible into such class and type of securities as the holder would have received had the holder converted the Series E Convertible Preferred Stock immediately prior to such Corporate Change, as appropriately adjusted to equitably reflect the Conversion Price and any stock dividend, stock split or share combination of the Common Stock after such corporate event. Section 3. RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock solely for the purpose of effecting the conversion of the shares of Series E Convertible Preferred Stock, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all then outstanding shares of Series E Convertible Preferred Stock; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to affect the conversion of all then outstanding shares of the Series E Convertible Preferred Stock, the Corporation will take such corporate action as may be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose. Section 4. LIQUIDATION PREFERENCE. a. In the event of any liquidation, dissolution or winding up of the Corporation, either voluntary or involuntary, the holders of shares of Series E Convertible Preferred Stock shall be entitled to receive, immediately after distributions of senior securities required by the Corporation's Articles of Incorporation, and prior and in preference to any distribution to junior securities but in parity with any distribution to parity securities, an amount per share equal to the sum of (i) $10.00 (the "Original Convertible Issue Price") and (ii) an amount equal to 4% of the Original Convertible Issue Price per annum for the period that has passed since the date of issuance of any Series E Convertible Preferred Stock (such amount being referred to herein as the "Premium"). If upon the occurrence of such event the assets and funds thus distributed among the holders of the Series E Convertible Preferred Stock and parity securities shall be insufficient to permit the payment to such holders of the full preferential amounts due to the holders of the Series E Convertible Preferred Stock and the parity securities, respectively, then the entire assets and funds of the Corporation legally available for distribution shall be distributed among the holders of the Series E Convertible Preferred Stock and the parity securities, pro rata, based on the respective liquidation amounts to which such series of stock is entitled by the Corporation's Articles of Incorporation. b. Upon the completion of the distribution required by subsection 5(a), if assets remain in this Corporation, they shall be distributed to holders of parity securities (unless holders of parity securities have received distributions pursuant to subsection 5(a) above) and junior securities in accordance with the Corporation's Articles of Incorporation. c. A consolidation or merger of the Corporation with or into any other corporation or corporations, or a sale, conveyance or distribution of all or substantially all of the assets of the Corporation or the effectuation by the Corporation of a transaction or series of related transactions in which more than 50% of the voting power of the Corporation is disposed of, shall not be deemed to be a liquidation, dissolution or winding up within the meaning of this Section 5, but shall instead be treated pursuant to Section 3 hereof. Section 5. VOTING RIGHTS. The holders of Series E Convertible Preferred Stock will not have any voting rights except as set forth below or as otherwise from time to time required by law. The affirmative vote or consent of the holders of at least a majority of the outstanding shares of Series E Convertible Preferred Stock, voting separately as a class, will be required for an amendment, alteration or repeal of the Corporation's Articles of Incorporation if, and only if, the amendment, alteration or repeal adversely affects the powers, preferences or special rights of the Series E Convertible Preferred Stock. To the extent that under Colorado law the vote of the holders of the Series E Convertible Preferred Stock, voting separately as a class, is required to authorize a given action of the Corporation, the affirmative vote or consent of the holders of at least a majority of the outstanding shares of the Series E Convertible Preferred Stock shall constitute the approval of such action by the class. To the extent that under Colorado law the holders of the Series E Convertible Preferred Stock are entitled to vote on a matter with holders of Common Stock, voting together as one class, each share of Series E Convertible Preferred Stock shall be entitled to a number of votes equal to the number of shares of Common Stock into which it is then convertible using the record date for the taking of such vote of stockholders as the date as of which the Conversion Price is calculated. Holders of the Series E Convertible Preferred Stock shall be entitled to notice of all shareholders meetings or written consents with respect to which they would be entitled to vote, which notice would be provided pursuant to the Corporation's by-laws and applicable statutes. Section 6. PROTECTIVE PROVISIONS. So long as shares of Series E Convertible Preferred Stock are outstanding, the Corporation shall not take any action that would impair the rights of the holders of the Series E Convertible Preferred Stock set forth herein and shall not without first obtaining the approval (by vote or written consent, as provided by law) of the holders of at least a majority of the then outstanding shares of Series E Convertible Preferred Stock: a. alter or change the rights, preferences or privileges of the shares of the Series E Convertible Preferred Stock or any other securities so as to affect adversely the Series E Convertible Preferred Stock; b. create any new class or series of stock having a preference over, or being on a parity with, the Series E Convertible Preferred Stock with respect to distributions pursuant to Section 5 above; or c. do any act or thing which would result in taxation of the holders of shares of the Series E Convertible Preferred Stock under Section 305 of the Internal Revenue Code of 1986, as amended (or any comparable provision of the Internal Revenue Code as hereinafter from time to time amended) Section 7. STATUS OF CONVERTED OR REACQUIRED STOCK. In case any shares of Series E Convertible Preferred Stock shall be converted pursuant to Section 1 hereof, the shares so converted shall cease to be a part of the authorized capital stock of the Corporation. Section 8. REDEMPTION PROVISIONS. Shares of the Series E Convertible Preferred Stock are not redeemable. Section 9. DIVIDEND PROVISIONS. The holders of shares of the Series E Convertible Preferred Stock are not entitled to receive any dividends. Section 9. NOTICES. Any notice required to be given to holders of shares of Series E Convertible Preferred Stock shall be deemed given upon deposit in the United States mail, postage prepaid, addressed to such holder of record at his address appearing on the books of the Corporation, or upon personal delivery of the aforementioned address." THIRD: Such Amendment was duly adopted by the Board of Directors of the Corporation on the 8th day of April 1996. IN TESTIMONY WHEREOF, the undersigned Corporation has caused these Articles of Amendment to the Articles of Incorporation to be signed by a duly authorized officer and duly attested by another such officer, to be hereunto affixed this 16th day of April 1996. RETIREMENT CARE ASSOCIATES, INC. By /s/ Chris Brogdon Chris Brogdon, President ATTEST: /s/ Edward E. Lane Edward E. Lane, Secretary EX-3.7 3 ARTICLES OF AMENDMENT TO ARTICLES OF INCORPORATION OF RETIREMENT CARE ASSOCIATES, INC. (SERIES F CONVERTIBLE PREFERRED STOCK) Pursuant to the requirements of Section 7-106-102 of the Colorado Business Corporation Act, the undersigned Corporation submits the following Articles of Amendment to Articles of Incorporation. FIRST: The name of the Corporation is Retirement Care Associates, Inc. SECOND: The Articles of Incorporation of the Corporation are hereby amended as follows: "There is hereby established a series of Preferred Stock of the Corporation designated "Series F Convertible Preferred Stock." The number of shares of this series of Convertible Preferred Stock shall be 1,000,000 shares. The powers, designations, preferences and relative, participating, optional or other special rights of the shares of this series of Convertible Preferred Stock and the qualifications, limitations and restrictions of such preferences and rights shall be as follows: Section 1. CONVERSION RIGHTS. a. RIGHT TO CONVERT. Each share of Series F Convertible Preferred Stock may be converted at the option of the holder thereof at the times set forth herein, and without the payment of any additional consideration thereof, into the number of fully paid, nonassessable shares of common stock $.0001 par value, of the Corporation (the "Common Stock") determined by dividing $10.00 (as adjusted for stock splits, stock dividends, combinations and similar recapitalizations affecting the Series F Convertible Preferred Stock, the "Original Issue Price") by the Conversion Price, determined as follows: the Conversion Price shall be the lesser of (a) 110% of the average closing bid price of the Corporation's Common Stock as reported by the New York Stock Exchange for the five (5) consecutive trading days immediately prior to the date (the "Original Issuance Date") on which shares of Series F Convertible Preferred Stock were first issued (the "Fixed Conversion Price") or (b) 85% of the average closing bid price, as so reported, for the five (5) consecutive trading days immediately prior to the Date of Conversion, as defined below in Section 1(c) (the "Formula Conversion Price"). b. CONVERSION PERIODS. Each holder of Series F Convertible Preferred Stock shall have the option to convert up to one-third (1/3) of the shares originally issued to such holder at any time from and after the sixtieth (60th) day following the Original Issuance Date, up to an additional one-third (1/3) of the shares originally issued to such holder at any time from and after the ninetieth (90th) day following the Original Issuance Date, and all remaining shares of Series F Convertible Preferred Stock held by such holder at any time from and after the one hundred twentieth (120th) day following the Original Issuance Date. c. AUTOMATIC CONVERSION. Each share of Series F Convertible Preferred Stock not previously converted at the election of the holder thereof shall automatically be converted into shares of Common Stock at the then effective Conversion Price on the date which is two (2) years after the Original Issuance Date. d. ADDITIONAL SHARES OR CASH. Upon the conversion of shares of Series F Convertible Preferred Stock under the terms of Section 1a. through c. above, the holder of the shares of Series F Convertible Preferred Stock converted shall also receive additional shares of Common Stock as determined by the following calculation for each share of Series F Convertible Preferred Stock that is so converted: (.08)(N/365)(Original Issue Price) ---------------------------------- Conversion Price where, N = The number of days that elapse from the Original Issuance Date to the Date of Conversion. PROVIDED, HOWEVER, that in lieu of issuing all or a portion of the additional shares of Common Stock to which a holder of Series F Convertible Preferred Stock is entitled, the Corporation may, in the sole discretion of the Board of Directors, pay to such holder an amount in cash equal to the Conversion Price of such additional shares. e. MECHANICS OF CONVERSION. (i) No fractional shares of Common Stock shall be issued upon conversion of Series F Convertible Preferred Stock. In lieu of any fractional shares to which the holder would otherwise be entitled, the Corporation shall round up to the nearest whole share. In the case of a dispute as to the calculation of the Conversion Price, the Corporation's calculations shall be deemed conclusive absent manifest error. In order to convert Series F Convertible Preferred Stock into full shares of Common Stock, the holder shall surrender the certificate or certificates therefor, duly endorsed, either by overnight courier or 2-day courier, to the Corporation or its designated representative, and shall give written notice to the Corporation, with a copy to such representative that the holder elects to convert the same, the number of shares of Series F Convertible Preferred Stock so converted and a calculation of the Conversion Price (with an advance copy of the certificate(s) and the notice by facsimile to the Corporation, with a copy to such representative); provided, however, that the Corporation shall not be obligated to issue certificates evidencing shares of Common Stock issuable upon such conversion unless certificates evidencing such shares of Series F Convertible Preferred Stock are delivered to the Corporation or its designated representative as provided above, or the holder notifies the Corporation that such certificates have been lost, stolen or destroyed and executes an agreement satisfactory to the Corporation to indemnify the Corporation from any loss incurred by it in connection with such certificates. (ii) The Corporation shall use its best efforts to issue and deliver within three (3) business days after delivery to the Corporation or its designated representative of such Series F Convertible Preferred Stock certificates, or after such agreement and indemnification, to such holder of Series F Convertible Preferred Stock at the address of the holder on the stock books of the Corporation, a certificate or certificates for the number of shares of Common Stock to which the holder shall be entitled as aforesaid, free of any restrictive legend. The Corporation shall not be deemed to have used its best efforts if its failure so to deliver such certificates is caused by (x) a lack of sufficient authorized but unissued shares of Common Stock available to effect conversion or (y) non-compliance with the New York Stock Exchange's requirements as to the listing of additional shares or shareholder approval of additional issuances of stock. The date on which conversion occurs (the "Date of Conversion") shall be deemed to be the date on which such notice of conversion is telecopied to the Corporation or its designated representative, provided the original certificates representing the shares of Series F Convertible Preferred Stock to be converted are received by the Corporation or its designated representative within three (3) business days thereafter, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock on the Date of Conversion. If the original certificates representing the shares of Series F Convertible Preferred Stock to be converted are not so received by the Corporation or its designated representative within such three (3) business day period, the notice of conversion shall become null and void. (iii) Notwithstanding the foregoing, the Corporation shall not issue more than an aggregate of 2,588,000 shares of the Corporation's Common Stock upon conversion of the Series F Convertible Preferred Stock. At the time of the original issuance of the Series F Convertible Preferred Stock, each holder of the Series F Convertible Preferred Stock shall be allocated a maximum number of shares of Common Stock which such holder may receive upon conversion of Series F Convertible Preferred Stock. Such maximum number of shares of Common Stock will be equal to the number of shares of Series F Convertible Preferred Stock issued to such holder multiplied by 2.588. In the event that a holder (and any assigns) becomes entitled to receive more than the maximum number of shares of Common Stock upon the conversion of the shares of Series F Convertible Preferred Stock of the holder (and any assigns), the Corporation shall immediately notify such holder (and any assigns) and shall redeem out of funds legally available therefor the number of shares of Series F Convertible Preferred Stock that, if converted, would result in the issuance of more than the maximum number of shares of Common Stock allocated to such holder by this Section 2e.(iii). Such redemption shall be effected in the manner and at the price set forth in Section 9. Section 2. CORPORATE EVENTS. a. NOTICES OF RECORD DATE. In the event of (i) any declaration by the Corporation of a record date of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend or other distribution or (ii) any capital reorganization of the Corporation, any reclassification or recapitalization of the capital stock of the Corporation, any merger or consolidation of the Corporation and any other entity or person, or any voluntary or involuntary dissolution, liquidation or winding up of the Corporation, the Corporation shall mail to each holder of Series F Convertible Preferred Stock at least twenty (20) days prior to the record date specified herein, a notice specifying (A) the date on which any such record date is to be declared for the purpose of such dividend or distribution and a description of such dividend or distribution, (B) the date on which any such reorganization, reclassification, transfer, consolidation, merger, dissolution, liquidation or winding up is expected to become effective, and (C) the time, if any, that is to be fixed, as to when the holders of record of Common Stock (or other securities) become eligible to receive securities or other property deliverable upon such reorganization, reclassification, transfer, consolidation, merger, dissolution or winding up. b. CORPORATE CHANGES. The Fixed Conversion Price shall be appropriately adjusted to reflect, as deemed equitable and appropriate by the Corporation, any stock dividend, stock split or share combination of the Common Stock. If the Corporation shall, during the five consecutive trading-day period applicable in determining the Formula Conversion Price for any shares of Series F Convertible Preferred Stock, effect any stock dividend, stock split or share combination, then for purposes of calculating the Formula Conversion Price applicable to such conversion, the closing bid price for the Corporation's Common Stock for any trading day prior to such action which falls in such five-trading-day period shall be adjusted to a price per share giving effect to such action. In the event of a merger, reorganization, recapitalization or similar event of or with respect to the Corporation (a "Corporate Change") (other than a Corporate Change in which all or substantially all of the consideration received by the holders of the Corporation's equity securities upon such Corporate Change consists of cash or assets other than securities issued by the acquiring entity or any affiliate thereof), the Series F Convertible Preferred Stock shall be assumed by the acquiring entity and thereafter the Series F Convertible Preferred Stock shall be convertible into such class and type of securities as the holder would have received had the holder converted the Series F Convertible Preferred Stock immediately prior to such Corporate Change, as appropriately adjusted to equitably reflect the Conversion Price and any stock dividend, stock split or share combination of the Common Stock after such corporate event, and in any such case appropriate provisions shall be made with respect to the rights and interests of the holders of the Series F Convertible Preferred Stock to the end that the provisions hereof (including, without limitation, provisions for the adjustment of the Conversion Price and of the number of shares issuable upon conversion of the Series F Convertible Preferred Stock) shall thereafter be applicable, as nearly as may be practicable in relation to any securities thereafter deliverable upon the exercise hereof. Section 3. SPIN OFFS, LIQUIDATING DISTRIBUTIONS. In the event that the Corporation shall make any distribution of its assets upon or with respect to its Common Stock, as a liquidating or partial liquidating dividend, or other than as a dividend payable out of earnings or any surplus legally available for dividends under the laws of the state of incorporation of the Corporation, each holder of any Series F Convertible Preferred Stock then outstanding shall receive the amount of such assets which would be distributed to such holder if he had exercised his right to convert immediately prior to the record date for such distribution or, in the absence of a record date, immediately prior to the date of such distribution. Section 4. RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock solely for the purpose of effecting the conversion of the shares of Series F Convertible Preferred Stock, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all then outstanding shares of Series F Convertible Preferred Stock; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to affect the conversion of all then outstanding shares of the Series F Convertible Preferred Stock, the Corporation will take such corporate action as may be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose. Section 5. LIQUIDATION PREFERENCE. a. In the event of any liquidation, dissolution or winding up of the Corporation (other than a partial liquidation described in Section 2(b)), either voluntary or involuntary, the holders of shares of Series F Convertible Preferred Stock shall be entitled to receive, immediately after distributions of senior securities required by the Corporation's Articles of Incorporation, and prior and in preference to any distribution to junior securities but in parity with any distribution to parity securities, an amount per share equal to the sum of (i) Original Issue Price and (ii) an amount equal to 4% of the Original Issue Price per annum for the period from the Original Issue Date to the date of such liquidation, dissolution or winding up. If upon the occurrence of such event the assets and funds thus distributed among the holders of the Series F Convertible Preferred Stock and parity securities shall be insufficient to permit the payment to such holders of the full preferential amounts due to the holders of the Series F Convertible Preferred Stock and the parity securities, respectively, then the entire assets and funds of the Corporation legally available for distribution shall be distributed among the holders of the Series F Convertible Preferred Stock and the parity securities, pro rata, based on the respective liquidation amounts to which such series of stock is entitled by the Corporation's Articles of Incorporation. b. Upon the completion of the distribution required by subsection 4(a), if assets remain in this Corporation, they shall be distributed to holders of parity securities (unless holders of parity securities have received distributions pursuant to subsection 4(a) above) and junior securities in accordance with the Corporation's Articles of Incorporation. c. A consolidation or merger of the Corporation with or into any other corporation or corporations, or a sale, conveyance or distribution of all or substantially all of the assets of the Corporation or the effectuation by the Corporation of a transaction or series of related transactions in which more than 50% of the voting power of the Corporation is disposed of, shall not be deemed to be a liquidation, dissolution or winding up within the meaning of this Section 4, but shall instead be treated pursuant to Section 2 hereof. Section 6. VOTING RIGHTS. The holders of Series F Convertible Preferred Stock will not have any voting rights except as set forth below or as otherwise from time to time required by law. The affirmative vote or consent of the holders of at least a majority of the outstanding shares of Series F Convertible Preferred Stock, voting separately as a class, will be required for an amendment, alteration or repeal of the Corporation's Articles of Incorporation if, and only if, the amendment, alteration or repeal adversely affects the powers, preferences or special rights of the Series F Convertible Preferred Stock. To the extent that under Colorado law the vote of the holders of the Series F Convertible Preferred Stock, voting separately as a class, is required to authorize a given action of the Corporation, the affirmative vote or consent of the holders of at least a majority of the outstanding shares of the Series F Convertible Preferred Stock shall constitute the approval of such action by the class. To the extent that under Colorado law the holders of the Series F Convertible Preferred Stock are entitled to vote on a matter with holders of Common Stock, voting together as one class, each share of Series F Convertible Preferred Stock shall be entitled to a number of votes equal to the number of shares of Common Stock into which it is then convertible using the record date for the taking of such vote of stockholders as the date as of which the Conversion Price is calculated. Holders of the Series F Convertible Preferred Stock shall be entitled to notice of all shareholders meetings or written consents with respect to which they would be entitled to vote, which notice would be provided pursuant to the Corporation's by-laws and applicable statutes. Section 7. PROTECTIVE PROVISIONS. So long as shares of Series F Convertible Preferred Stock are outstanding, the Corporation shall not take any action that would impair the rights of the holders of the Series F Convertible Preferred Stock set forth herein and shall not without first obtaining the approval (by vote or written consent, as provided by law) of all of the holders of the then outstanding shares of Series F Convertible Preferred Stock; a. alter or change the rights, preferences or privileges of the shares of the Series F Convertible Preferred Stock or any other securities so as to affect adversely the Series F Convertible Preferred Stock; b. create any new class of stock having a preference over, or being on a parity with, the Series F Convertible Preferred Stock with respect to distributions pursuant to Section 4 above; or c. do any act or thing which would result in taxation of the holders of shares of the Series F Convertible Preferred Stock under Section 305 of the Internal Revenue Code of 1986, as amended (or any comparable provision of the Internal Revenue Code as hereinafter from time to time amended). Section 8. STATUS OF CONVERTED OR REACQUIRED STOCK. In case any shares of Series F Convertible Preferred Stock shall be converted pursuant to Section 1 hereof, the shares so converted shall cease to be a part of the authorized capital stock of the Corporation. Section 9. REDEMPTION BY CORPORATION. a. At the time of receipt of a notice of conversion pursuant to Section 1, if the applicable Conversion Price would be less than the Fixed Conversion Price, the Corporation shall have the right, in its sole discretion, to redeem in whole or in part any Series F Convertible Preferred Stock submitted for conversion, immediately prior to and in lieu of conversion. (i) The redemption price per share of Series F Preferred Stock under this Section 6.a. shall be calculated in accordance with the following formula ("Redemption Rate"): [(.08)(N/365)(Original Issue Price)]+[Original Issue Price x 5 Day Average Price] - ------------------------------------------------------------------------------ Conversion Price where, "N," "Date of Conversion," and "Conversion Price" shall have the same meanings as defined in Section 1, and "5 Day Average Price" means the average closing bid price of the Corporation's Common Stock, as reported by the New York Stock Exchange, for the five (5) consecutive trading days preceding the Date of Conversion. (ii) The Corporation shall effect each such redemption by giving notice of its election to redeem, by facsimile, by 5:00 p.m. New York City time, within one (1) business day following the receipt of a notice of conversion from a holder by telecopier, and the Corporation shall provide a copy of such redemption notice by overnight or two (2) day courier and facsimile, to (A) the holder of the Series F Preferred Stock submitted for conversion at the address and facsimile number of such holder appearing in the Corporation's register for the Series F Convertible Preferred Stock and (B) the Corporation's transfer agent. Such redemption notice shall indicate whether the Corporation will redeem all or part of the Series F Preferred Stock submitted for conversion and the applicable redemption price. The Corporation shall pay the applicable redemption price in full within five (5) business days of the Corporation's notice of its election to redeem. b. The Corporation shall not be entitled to send any redemption notice and begin the redemption procedure under Section 8 unless it has: (i) the full amount of the redemption price in cash, available in a demand or other immediately available account in a bank or similar financial institution; or (ii) immediately available credit facilities, in the full amount of the redemption price with a bank or similar financial institution; or (iii) an agreement with a standby underwriter willing to purchase from the Corporation a sufficient number of shares of stock to provide proceeds necessary to redeem any stock that is not converted prior to redemption; or (iv) a combination of the sources of funds set forth in (i), (ii) and (iii) above, aggregating the full amount of the redemption price. c. Each holder of Series F Convertible Preferred Stock shall have the right to demand, by written notice to the Corporation, that the Corporation provide advance notice as to whether it intends to redeem such holder's Series F Convertible Preferred Stock following receipt of a notice of conversion and, if so, how many shares of Series F Convertible Preferred Stock it intends to redeem. The Corporation shall respond in writing to any such demand within one (1) business day of receipt. Section 10. DIVIDEND PROVISIONS. The holders of shares of the Series F Convertible Preferred Stock are not entitled to receive any dividends. Section 11. NOTICES. Any notice required to be given to holders of shares of Series F Convertible Preferred Stock shall be deemed given upon deposit in the United States mail, postage prepaid, addressed to such holder of record at his address appearing on the books of the Corporation, or upon personal delivery at the aforementioned address." THIRD: Such Amendment was duly adopted by the Board of Directors of the Corporation on the 13th day of September, 1996. IN TESTIMONY WHEREOF, the undersigned Corporation has caused these Articles of Amendment to the Articles of Incorporation to be signed by a duly authorized officer and duly attested by another such officer, to be hereunto affixed this 24th day of September, 1996. RETIREMENT CARE ASSOCIATES, INC. By: /s/ Chris Brogdon Chris Brogdon, President ATTEST: /s/ Edward E. Lane Edward E. Lane, Secretary CERTIFICATE OF CORRECTION OF RETIREMENT CARE ASSOCIATES, INC. Pursuant to the Colorado Business Corporation Act, the undersigned hereby executes the following Certificate of Correction: FIRST: The exact name of the Corporation is RETIREMENT CARE ASSOCIATES, INC. organized under the laws of the State of Colorado. SECOND: The Articles of Amendment to the Articles of Incorporation (Series F Convertible Preferred Stock) are being corrected. A copy of such Articles of Amendment are attached to this document. THIRD: The referenced Articles of Amendment to the Articles of Incorporation were filed on September 25, 1996. FOURTH: Statement of incorrect information: Section 1. CONVERSION RIGHTS. a. RIGHT TO CONVERT. Each share of Series F Convertible Preferred Stock may be converted at the option of the holder thereof at the times set forth herein, and without the payment of any additional consideration thereof, into the number of fully paid, nonassessable shares of common stock $.0001 par value, of the Corporation (the "Common Stock") determined by dividing $10.00 (as adjusted for stock splits, stock dividends, combinations and similar recapitalizations affecting the Series F Convertible Preferred Stock, the "Original Issue Price") by the Conversion Price, determined as follows: the Conversion Price shall be the lesser of (a) 110% of the average closing bid price of the Corporation's Common Stock as reported by the New York Stock Exchange for the five (5) consecutive trading days immediately prior to the date (the "Original Issuance Date") on which shares of Series F Convertible Preferred Stock were first issued (the "Fixed Conversion Price") or (b) 85% of the average closing bid price, as so reported, for the five (5) consecutive trading days immediately prior to the Date of Conversion, as defined below in Section 1(c) (the "Formula Conversion Price"). FIFTH: Statement of corrected information: Section 1. CONVERSION RIGHTS. a. RIGHT TO CONVERT. Each share of Series F Convertible Preferred Stock may be converted at the option of the holder thereof at the times set forth herein, and without the payment of any additional consideration thereof, into the number of fully paid, nonassessable shares of common stock $.0001 par value, of the Corporation (the "Common Stock") determined by dividing $10.00 (as adjusted for stock splits, stock dividends, combinations and similar recapitalizations affecting the Series F Convertible Preferred Stock, the "Original Issue Price") by the Conversion Price, determined as follows: the Conversion Price shall be the lesser of (a) 110% of the average closing bid price of the Corporation's Common Stock as reported by the New York Stock Exchange for the five (5) consecutive trading days immediately prior to the date (the "Original Issuance Date") on which shares of Series F Convertible Preferred Stock were first issued or 110% of the average closing bid price of the Corporation's Common Stock as reported by the New York Stock Exchange for the twenty (20) consecutive trading days commencing on September 30, 1996, whichever is lower (the "Fixed Conversion Price") or (b) 85% of the average closing bid price, as so reported, for the five (5) consecutive trading days immediately prior to the Date of Conversion, as defined below in Section 1(c) (the "Formula Conversion Price"). RETIREMENT CARE ASSOCIATES, INC. By: /s/ Chris Brogdon Chris Brogdon, President ATTEST: /s/ Edward E. Lane Edward E. Lane, Secretary -2- CERTIFICATE OF CORRECTION OF RETIREMENT CARE ASSOCIATES, INC. Pursuant to the Colorado Business Corporation Act, the undersigned hereby executes the following Certificate of Correction: FIRST: The exact name of the corporation is RETIREMENT CARE ASSOCIATES, INC. organized under the laws of the State of Colorado. SECOND: The Articles of Amendment to the Articles of Incorporation (Series F Convertible Preferred Stock) are being corrected. A copy of such Articles of Amendment are attached to this document. THIRD: The referenced Articles of Amendment to the Articles of Incorporation were filed on September 25, 1996. FOURTH: Statement of incorrect information: Section 7. PROTECTIVE PROVISIONS. So long as shares of Series F Convertible Preferred Stock are outstanding, the Corporation shall not take any action that would impair the rights of the holders of the Series F Convertible Preferred Stock set forth herein and shall not without first obtaining the approval (by vote or written consent, as provided by law) of the holders of at least a majority of the then outstanding shares of Series F Convertible Preferred Stock; FIFTH: Statement of corrected information: Section 7. PROTECTIVE PROVISIONS. So long as shares of Series F Convertible Preferred Stock are outstanding, the Corporation shall not take any action that would impair the rights of the holders of the Series F Convertible Preferred Stock set forth herein and shall not without first obtaining the approval (by vote or written consent, as provided by law) of all of the holders of the then outstanding shares of Series F Convertible Preferred Stock; RETIREMENT CARE ASSOCIATES, INC. ATTEST: By: /s/ Chris Brogdon Chris Brogdon, President /s/ Edward E. Lane Edward E. Lane, Secretary EX-10.1 4 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT is made and entered as of the 1st day of July, 1995, by and between CAPITOL CARE MANAGEMENT COMPANY, INC., a Georgia corporation, hereinafter sometimes referred to as "EMPLOYER" or "Corporation" and DARRELL C. TUCKER, hereinafter sometimes referred to as "EMPLOYEE". WHEREAS, the EMPLOYER has offered and the EMPLOYEE has accepted employment upon certain terms and conditions; and WHEREAS, the parties desire to reduce the employment agreement in writing; NOW, THEREFORE, IT IS MUTUALLY AGREED AS FOLLOWS: W I T N E S S E T H : ARTICLE I. DUTIES AND TERM FOR AND IN CONSIDERATION of Ten ($10.00) Dollars, and other good and valuable considerations exchanged between the parties, receipt of which is hereby acknowledged. The EMPLOYER does hereby employ the EMPLOYEE for a term of two (2) years to commence on the 1st day of July, 1995 and continue to June 30, 1997, and to continue thereafter unless terminated prior to any such annual renewal. THE EMPLOYEE shall serve in a capacity with the EMPLOYER as President, and such other offices as may be designated from time to time by the Corporation's Board of Directors, and at the discretion of the Board, serve upon the Corporation's Board of Directors as from time to time may be determined by resolution of the Board. The EMPLOYEE shall devote his full time, undivided attention and full business efforts to his duties as an employee of the Corporation which shall include but are not limited to the following: (a) Hire, train and employ all employees under him as may be required on behalf of the Corporation to enable the Corporation to conduct its business in an orderly fashion; (b) Supervise the business affairs of the Corporation in conducting its business in an orderly fashion; (c) Assume administrative responsibility for fulfillment of contractual duties of the Corporation in performing its management contracts with health care facilities; (d) Supervise the day-to-day running and operation of the health care facilities under management contracts with the Corporation; (e) Maintain physical responsibility be keeping or causing to be kept all necessary books and records of the Corporation in the customary and orderly fashion; (f) To report to the Corporation's other executives or Board as from time to time shall be directed to the EMPLOYEE; (g) To be a faithful and loyal employee and act in a fiduciary manner with the EMPLOYER in performing his duties in a professional and satisfactory manner which will be in the best interest of the EMPLOYER. (h) To refrain from engaging in other business enterprises either directly or indirectly during this Agreement without the express prior written approval of EMPLOYER. ARTICLE II. COMPENSATION AND BENEFITS The EMPLOYER shall pay to the EMPLOYEE (in accordance with normal payroll procedures) an annual salary of Two Hundred Twenty Thousand Dollars ($220,000) beginning July 1, 1995, an annual salary of Two Hundred Forty-Five Thousand Dollars ($245,000) beginning July 1, 1996, and increases of ten percent (10%) per annum thereafter in subsequent years. The EMPLOYER shall provide employee with a car allowance of One Thousand Two Hundred Dollars ($l,200.00) per month for the duration of this Employment Contract. EMPLOYEE will be eligible to participate in the annual year end Bonus Pool. EMPLOYER will grant to EMPLOYEE each year under its stock option plan an option to purchase 50,000 shares of common stock at the closing price on the date granted, exercisable for a period of five years; provided, however, such options shall only be automatically granted in years in which the Corporation (including its parent corporation) increases its profit over the previous year's profit. The EMPLOYER shall provide paid health insurance (family coverage) to the EMPLOYEE under the standard group policy of the EMPLOYER. The EMPLOYER shall provide paid term life insurance on the EMPLOYEE in the amount of $1,000,000. The EMPLOYEE shall take such annual and sick leave with pay as may be determined by resolution of the EMPLOYER'S Board of Directors. ARTICLE III. RESTRICTIVE COVENANTS The EMPLOYEE further covenants and agrees that he will not, during the term of this employment nor for a period of two (2) years immediately following the termination of this employment (regardless of whether said termination is voluntary or involuntary) engage in the business of, or be employed by a business entity in competition with the primary business of the EMPLOYER. For purposes of this Agreements the primary business of the EMPLOYER is the management of health care facilities. This restrictive covenant shall apply in a geographic area within twenty-five (25) miles of each city or cities in which the EMPLOYER does business or has done business during the term of this Agreement. This restrictive covenant is applicable to employment or service directly or indirectly by the EMPLOYEE through consultation, advice or other indirect methods of competition. The EMPLOYEE is further restricted upon termination of this employment from the employment of, or offer of, employment to any other employees of the Corporation or from engaging in business, in partnership or joint ownership, of another business entity with any other employee of the Corporation for a period of six (6) months after the termination either voluntarily or involuntarily of this Employment Agreement. The EMPLOYEE agrees that during the course of his employment, he will acquire information and knowledge respecting the confidential affairs of the EMPLOYER in various phases of its business. Accordingly, the EMPLOYEE agrees that he shall not, at any time, use for himself or disclose to any other person not employed by the Corporation, any such knowledge or information heretofore acquired or acquired during the term of this Agreement. He further agrees that all memorandums, notes, records, papers and other documents and all copies thereof relating to the Corporation's operation or business, some of which may be prepared by him, and all other objects associated therewith and in any way obtained by him, shall be the Corporation's property. This shall include, but is not limited to, documents and objects, concerning any process, system, approach, technique, consultation or advice to clients, business techniques and other trade secrets. At the conclusion of this Agreement, whether voluntarily or involuntarily, the EMPLOYEE shall deliver all such documents and objects that may be in his possession to the Corporation, at the Corporation's request, together with his written certification of compliance. The parties further agree that should the EMPLOYEE violate the terms of this restrictive covenant, that the EMPLOYER shall be entitled to not only monetary damages as may be assessed by a Court of competent jurisdiction, but in addition, extraordinary injunctive relief to prohibit perpetually violation of these restrictive covenants. ARTICLE IV. TERMINATION FOR CAUSE EMPLOYER reserves the right to terminate this Agreement at any time after its Board of Directors, by a majority vote, approves and directs such termination for any of the following reasons: (1) EMPLOYEE shall fail to perform or comply with any term or condition of this Agreement and such failure continues for a period of (10) days after written notice from the Board of Directors of EMPLOYER;. (2) EMPLOYEE commits any offense involving moral turpitude which would offend public decency or morality, or cause EMPLOYEE or EMPLOYER public ridicule or scorn or has the potential for public scandal; (3) EMPLOYEE violates any federal, state or local laws or ordinances for which EMPLOYER might become liable. Termination for cause for any of the above described reasons shall be immediately effective upon written notice, posted by certified mail to the EMPLOYEE'S current address on file with the EMPLOYER. In the event of termination for cause by EMPLOYER, compensation and any and all benefits to which EMPLOYEE is entitled, unless otherwise provided by law, shall cease at midnight on the Both day following the date of notice of termination. ARTICLE V. MISCELLANEOUS This Agreement shall be governed by and construed in accordance with the laws of the State of Georgia. Should any particular provision or paragraph or article of this Agreement be determined by a Court of competent jurisdiction to be illegal, then the remaining provisions shall be severable and legally binding. This Agreement constitutes the full and complete understanding and agreement of the parties, supersedes all prior understandings and arrangements as to the employment of EMPLOYEE with EMPLOYER and cannot be amended, changed or modified without the consent in writing of the parties hereto. This Agreement shall inure to and be binding upon the Executors, Administrators, and personal representatives of the EMPLOYEE and the EMPLOYER'S assigns or successors in interest. Should it become necessary to enforce any of the terms, provisions or obligations in this Agreement, the guilty party shall pay the other parties' reasonable attorney fees incurred as a result of any action for the enforcement of all rights, duties and obligations contained herein. IN WITNESS WHEREOF, the parties have executed this Agreement as of the 1st day of July, 1995. EMPLOYER: CAPITOL CARE MANAGEMENT COMPANY, INC . By:/s/ Chris Brogdon Its: Secretary CHRIS BROGDON EMPLOYEE: /s/ Darrell C. Tucker DARRELL C. TUCKER EX-10.2 5 MANAGEMENT AND MARKETING AGREEMENT This agreement (the "Agreement") is made and entered into as of the 1st day of January 1996, by and between Winter Haven Homes, Inc. ("Owner"), which owns a retirement community known as Cumberland Green, located at 202 Walton Ferry Road, Hendersonville, Tennessee (the "Facility"), and Capitol Care Management Company, Inc., a Georgia corporation ("CCMC"). This Agreement shall take effect on January 1, 1996, or on such other date as the parties agree in writing (the "Effective Date"). In consideration of the mutual covenants, promises and conditions contained herein, the parties hereby agree as follows: I. APPOINTMENT Owner hereby appoints CCMC as its exclusive agent and manager for the marketing and management of the Facility during the term of this Agreement and any extensions or renewals thereof. II. TERM; TERMINATION 1. The term of this Agreement shall commence as of the Effective Date and shall continue for a period of five (5) years. In addition, the Owner shall have the option to renew this Agreement for additional terms of One (1) year each. Such renewals shall be automatic unless Owner gives Manager written notice of cancellation at least sixty (60) days prior to the expiration of the then current contract term. 2. Owner may terminate this Agreement upon giving CCMC sixty (60) days written notice after the end of the third year of this Agreement. CCMC may terminate this Agreement at any time by giving the Owner, sixty (60) days written notice. III. COMPENSATION 1. As compensation for the services to be performed by CCMC under this Agreement CCMC shall receive a monthly management fee (the "Management Fee") of: $15,000.00, and receive a monthly accounting fee (the "Accounting Fee") of: $1,000.00. 2. In addition to the Marketing and Management Fee, the Manager shall be entitled to reimbursement of all reasonable out-of-pocket expenses incurred in connection with management of the Facility and documented in a reasonable manner; provided, however, that any such expenses in excess of $250 shall require the Owner's prior approval. Expense reimbursements shall be due and payable within 30 days of Management's submission of an invoice therefore. 3. If any time during the term of this agreement Owner terminates as Owner of facility this agreement shall terminate upon receipt of notice of Owner's termination. IV. RESPONSIBILITIES OF CCMC As Exclusive Agent and Manager of the Facility, CCMC shall have the authority to and shall operate, market and manage the Facility on behalf of and as agent for the Owner, including, but not limited to the following: 1. General Authority and Policies a. Subject to Owner's prior approval, CCMC shall have the authority to establish and change all resident rents, fees and other charges with respect to the Facility. b. CCMC is authorized to and shall establish and enforce operating policies and procedures for the Facility with a view of promoting a safe and comfortable residential environment consistent with maximizing the net cash flow to Owner from the Facility. Such policies shall cover all aspects of management including leasing, tenant relations, food service, public relations, advertising, maintenance, social activities, accounting and regulatory compliance. c. CCMC is authorized to and shall, on the Owner's behalf, take all action necessary in order to assure that such policies and procedures are correctly followed. d. CCMC is hereby granted exclusive authority by Owner to advertise the availability of units in the Facility or any room, space, or apartment thereon for rental and to display same; to execute, renew, mollify and/or cancel leases for the Owner for any part of the Facility on such terms and conditions as CCMC reasonably deems best and to collect on Owner's behalf, rents and other income clue or to become due and given written acknowledgment of payment. Subject to prior written approval of Owner, given at the direction of the Owner, the Manager shall have the authority to terminate tenancies as Owner's agent and to sign and serve in the name of Owner such direction and shall have authority to institute and prosecute legal actions, evict tenants, and settle, compromise and release such actions or suits or reinstate such tenancies. e. CCMC shall establish procedures for collection of rentals and other income from the Facility and shall deposit all such amounts in the operating account maintained by Manager for the benefit of Owner. 2. Marketing Manager's marketing responsibilities shall include: identifying target markets; developing appropriate marketing strategies and procedures; hiring, training and supervising qualified leasing counselors as employees of Owner, and budgeting and cost control Subject to Owner's prior approval, Manager shall have the authority as agent for Owner to retain the services of marketing professionals to assist in the marketing of the Facility. The costs incurred in retaining such professionals shall be included in the proposed operational budget to be approved by Owner. 3. Accounting CCMC, on the effective date of this Agreement, shall have implemented a system of accounting controls and procedures for timely monthly reporting of all accounts, including an analysis versus budget. CCMC shall make its accounting system available for review by Trustee. All costs associated with the accounting for the Facility shall be at Owner's sole cost and expense. Manager shall make all accounting records available to Owner's auditors upon reasonable notice. 4. Standard of Care In performing its obligations under this Agreement, CCMC shall act in good faith and with the prudence and care required of health professionals situated in similar circumstances in this industry. Notwithstanding any other provision contained herein, whether express or implied, neither the Owner nor the Bondholders shall be responsible for any claims, liabilities, or expenses arising from CCMC's negligence or willful misconduct. 5. Employees Manager shall hire as employees of Owner and discharge, maintain and supervise, to the extent the same are available in the community, an adequate staff of employees at competitive wage and salary rates for the various job classifications approved from time to time by Owner. Release of employees shall be at the discretion of Manager. Manager shall recommend and institute, subject to approval of Owner, appropriate employee benefits. Employee benefits may include pension plans (where applicable), insurance benefits, incentive plans for key employees and vacation policies. V. RESPONSIBILITIES OF OWNER Owner shall make itself or its designated representative available to meet with Manager on a monthly basis to review the progress of the Facility and approve or otherwise direct Manager's plans and strategies. Owner agrees that it will review and evaluate all proposals within a reasonable time to assure the uninterrupted operation of the property. Owner also agrees as follows: 1. Employment Owner agrees and acknowledges that all Facility employees shall be employees of Owner. Owner accepts hill responsibility for all costs and expenses associated with employment of such employees. Owner agrees to pay, and to indemnity and hold Manager harmless with respect to, all salary, benefits, taxes and regulatory costs with respect to such employees, including, but not limited to, payroll taxes, wages, worker's compensation insurance, unemployment insurance, health and benefit plan costs, salaries, any extended benefits, and other charges or insurance provided to such employees or levied or required by federal, state or local statutes related to the employment of the Facility's employees. 2. Indemnification Owner agrees to indemnify and hold Manager harmless from and against any and all liabilities, claims, laws, damages or actions arising out of or relating to the Facility or the operation thereof, including without limitation any liabilities arising out of violations of any antipollution or environmental protection or remediation laws, the Occupational Safety and Health Act of 1970, the Fair Labor Standards Act, as amended, Title VI of the Civil Rights Act of 1964, as amended, the Age Discrimination in Employment Act of 1967, as amended, and any rules and regulations thereunder, except for any liabilities, claims, laws, damages or actions arising directly out of (a) any actions taken by Manager contrary to the express written instructions or specific written policy of Owner relating to the operation of the Facility, or 3. Designated Representatives of Owner The name of the officer, agent or employee of Owner designated by the Owner as Owner's representative for purposes of this Agreement are as follows: Edward E. Lane, President Winter Haven Homes, Inc. 6000 Lake Forrest Drive, Suite 200 Atlanta, Georgia 30328 (404) 255-7500 fax (404) 843-9677 Owner may change its designated representative(s) from time to time by giving written notice to Manager. In any situation in which Owner is required or permitted under the terms of this Agreement to take any action, or to give any consent or approval, Manager shall be entitled to rely conclusively upon the statement of any of such designated representative(s). In the event Owner, through its designated representative(s) does not respond to a request by Manager for approval or consent under this Agreement within 15 business days after receipt of such request, the request shall be deemed approved. If any action is required in a shorter period of time in order to comply with legal requirements or other emergency circumstances, Owner shall be so notified and shall be required to respond within such shorter period of time. Owner agrees that it will not unreasonably withhold or delay any approvals or consents requested by Manager hereunder. VI. PROPRIETARY MATERIALS The Owner acknowledges that in managing the Facility under this Agreement, the Manager will use certain proprietary materials which are the exclusive property of the Manager, including computer software used for accounting, marketing and food service functions, as well as marketing, accounting and food services operations manuals. The Owner understands that these materials will remain the sole and exclusive property of the Manager and that the Owner will not acquire any rights or license in such materials. Upon expiration or termination of this Agreement for any reason, all such materials in tangible form, including all copies, shall be returned to Manager, and all such materials or copies stored by electronic means shall be purged or erased. VII. MISCELLANEOUS PROVISIONS The following provisions are an integral part of this Agreement. 1. The Agreement shall be binding upon and shall inure to the benefit of the successors and assigns of the respective parties hereto. Either party may assign this contract after obtaining the prior written consent of the other party, which consent shall not be unreasonably withheld or delayed. 2. The headings used in the Agreement are inserted for reference purposes only and shall not be deemed to limit or affect the meaning or interpretation of any of the terms or provisions of this Agreement. 3. This Agreement constitutes the entire understanding and agreement between the patties with respect to the subject matter hereof and supersedes all prior agreements, representations or understandings between the parties relating to such subject matter. 4. The provisions of this Agreement are severable and should any provision hereof be void, unenforceable, or invalid, such void, unenforceable or invalid provision shall not affect any other portion or provision of this Agreement. 5. Any waiver by either party hereto or any breach of this Agreement of any kind or character whatsoever by the other party, whether such waiver be direct or implied, shall not be construed as a continuing waiver or as a consent to any subsequent breach or waiver of this Agreement on the part of the other party. 6. The several tights and remedies herein expressly reserved to each of the parties shall be construed as cumulative; none of them shall be exclusive or in lieu or Dictation of any other right, remedy, or priority allowed by law. 7. This Agreement shall be interpreted, construed and enforced according to the laws of the State of Georgia. 8. This Agreement may not be modified except by an instrument in writing signed by the party against whom enforcement is sought. 9. In the event arty action or proceeding is brought by either party against the other under this Agreement, the prevailing party shall be entitled to recover reasonable attorney's fees such amounts as the courts may deem just. 10. Unless otherwise specified, all notices, demands and requests required or permitted to be given hereunder shall be deemed duly given at the time of delivery if delivered in person on the date of delivery if sent and receipted for by Federal Express or other nationally recognized overnight service, or three (3) business day's following mailing if mailed by registered or certified mail, return receipt requested, addressed to the following: If to Owner, to: Edward E. Lane, President Winter Haven Homes, Inc. 6000 Lake Forrest Drive, Suite 200 Atlanta, Georgia 30328 If to Manager, to: Darrell C. Tucker, President Capitol Care Management Company, Inc. 6000 Lake Forrest Drive, Suite 225 Atlanta, Georgia 30328 Either party shall have the right to specify in writing, in the manner above provided other address to which subsequent notices to such parties be given. Any notice given hereunder shall be deemed to have been given as of the date delivered or mailed 11. Nothing contained in this Agreement shall constitute or be construed to be or to create a joint venture, partnership or lease between Owner and Manager with respect to the Facility or any equity interest in the Facility on the part of Manager. The relationship of Manager to Owner under this Agreement is that of an independent contractor. 12. Manager shall not, by entering into and performing this Agreement or by managing the Facility, assume or become liable for any of the existing or future obligations, liabilities or debts of the Facility or Owner. Manager's sole liability to Owner hereunder will be for actual damages incurred by Owner due to Manager's breach of the standard of care described in paragraph V.9. Under no circumstances shall Manager be liable for any incidental, consequential or special damages suffered by Owner for any reason whatsoever, whether arising out of breach of contract, negligence, tort or otherwise. 13. Neither party shall be deemed to be in violation of this Agreement if it is prevented from performing any of its obligations hereunder for any reason beyond its reasonable control, including without limitation, acts of God or of the public enemy, flood or stone, fire or explosion, labor trouble or statutes, regulations or rules of any federal, state or local government, or any agency thereof. IN WITNESS WHEREOF, the parties hereto have signed this agreement as of the date first stated above. CAPITOL CARE MANAGEMENT WINTER HAVEN HOMES, INC. COMPANY, INC. By: /s/ Darrell Tucker By: /s/ Edward E. Lane Its: President Its: President ADDITIONAL MANAGEMENT & MARKETING AGREEMENTS OMITTED The Registrant has additional Management and Marketing Agreements with affiliates substantially identical to the foregoing. The material details of such agreements which differ are as follows: Monthly Fees ---------------------------- Name of Date of Manage- Facility Location Owner* Agreement ment Marketing Accounting - --------------- ----------- ------ --------- ------- --------- ---------- The Garden Green Cove GJ 1/ 1/96 $ 8,500 -0- $1,000 Springs, FL The Renaissance Titusville, WHH 12/10/93 $ 5,000 $3,500 $1,000 FL The Renaissance Sanford, FL WHH 1/ 1/96 $14,000 -0- $1,000 of Sanford Summer's Landing Douglas, GA GJ 1/ 1/96 $ 6,500 -0- $1,000 - - Douglas Summer's Landing Lynn Haven, NAB 12/10/96 $ 1,000 -0- $1,000 - - Lynn Haven FL Summer's Landing Trenton, TN GJ 1/ 1/96 $12,500 -0- $1,000 - - Trenton Summer's Landing Vidalia, GA SC1 12/10/93 $ 1,000 -0- $1,000 - - Vidalia - --------------- * The names of the owners are abbreviated as follows: Gordon Jensen Health Care Associates, Inc. - GJ; Winter haven Homes, Inc. - WHH; National Assistance Bureau, Inc. - NAB; Southeastern Collages, Inc. - SCI EX-10.3 6 NURSING HOME MANAGEMENT AGREEMENT THIS MANAGEMENT AGREEMENT (the "Agreement") is made and entered into this 1st day of July 1995, by and between Gordon Jensen Health Care Association, Inc., (hereinafter called "Owner"), and Capitol Care Management Company, Inc. (hereinafter called "CCMC"). Owner and CCMC agree that CCMC shall manage Twin View Health Care, Twin City, Georgia (the "Facility"), owned by Owner, containing 110 licensed nursing home beds, on the following tens and conditions: SECTION ONE: MANAGEMENT DUTIES AND OBLIGATIONS 1.01 Management of Facility. During the term of this Agreement, CCMC shall supervise the management of the Facility including but not limited to staffing, accounting, billing, collections, setting of rates and charges and general administration. In connection therewith CCMC (either directly or through supervision of employees of the Facility) shall: (a) Hire on behalf of Owner and maintain (to the extent such personnel are reasonably available in the community in which the Facility is located) an adequate staff of nurses, technicians, office and other employees, including an administrator, at wage and salary rates for various job classifications approved Dom time to time by Owner; and release employees at CCMC's discretion. (b) Recommend and institute, subject to approval of Owner, appropriate employee benefits. Employee benefits may include pension and profit-sharing plans, insurance benefits, incentive plans for key employees and vacation policies. (c) Design and maintain accounting, billing, patient and collection records; prepare and file insurance, Medicaid and any and all other necessary or desirable reports and claims related to revenue production. (d) Order, supervise and conduct a program of regular maintenance and repair of the Facility except that physical improvements costing more than $500.00 shall be subject to prior approval of Owner which shall not be unreasonably withheld. (e) Purchase supplies, drugs, solutions, equipment, Furniture and furnishings on behalf of Owner' except that purchases of items of equipment which cost more than $500.00 shall be subject to prior approval of Owner which shall not be unreasonably withheld. (f) Administer and schedule all services of the Facility. (g) Supervise and provide the operation of food service facilities. (h) Provide for the orderly payment (to the extent funds of Owner are available therefore) of accounts payable, employee payroll, taxes and insurance premiums. (i) Institute standards and procedures for admitting patients, for charging patients for services, and for collecting the charges from the patients or third parties. (j) Advise and assist Owner in obtaining and maintaining adequate insurance coverage with Owner, Manager and such other persons as requested by Owner named as insured for the Facility. CCMC shall advise Owner with regard to the availability, nature and desirable policy limits of insurance coverage for the Facility, and shall request and receive bids for such coverage. (k) Negotiate on behalf of Owner (and in conjunction with Owner's counsel) with any labor union lawfully entitled to represent employees of the Owner who work at the Facility, but any collective bargaining agreement of labor contact must be submitted to Owner for approval and execution. (1) Make periodic evaluation of the performance of all departments of the facility paying particular attention to those departments where there is an inconsistency between expenditures and budget. (m) Establish and maintain books of account using accounts and classifications consistent with those used by CCMC at other facilities owned or leased by it or its affiliates. (n) Advise and assist Owner in designing an adequate and appropriate public and personnel relations program. 1.02 Reports to Owner. CCMC shall prepare and deliver to Owner monthly financial statements (unaudited) containing a balance sheet and statement of income in reasonable detail, and such monthly financial statements will be delivered to Owner within 30 days after the close of each calendar month. CCMC shall submit to Owner each 12 months a proposed budget for the operation of the Facility during the succeeding 12-month period, and shall use its best efforts to operate the Facility in accordance with the provisions of the budget submitted to and approved by Owner. CCMC shall submit to Owner each week a vacancy report for the Facility. 1.03 Bank Accounts and Working Capital. CCMC shall deposit all funds received from the operation of the Facility in an Operating Account in a bank or banks presently being used by the Facility or such other banks as are designated from time to time by CCMC. Owner shall provide sufficient working capital for the operation of the Facility and shall make deposits in the Operating Accounts of such working capital from time to time upon the request of CCMC. All costs and expenses incurred in the operation of the Facility shall be paid out of the Operating Accounts. All checks or other documents withdrawal must be signed by the Comptroller of CCMC or his designate. Deposits may be made by the Comptroller of CCMC or his designate. 1.04 Access to Records and Facility. The books and records kept by CCMC for the Facility shall be maintained at the Facility, although CCMC shall have the right to maintain copies of such records at its home office for the purpose of providing services under this Agreement. CCMC shall make available to Owner, its agents, accountants and attorneys, during normal business hours, all books and records pertaining to the Facility and CCMC shall promptly respond to any questions of Owner with respect to such books and records and shall confer with Owner at all reasonable times, upon request, concerning operation of the Facility. In addition, Owner shall have access to the Facility at all reasonable hours for the purpose of examining or inspecting the Facility. 1.05 Licenses. (a) CCMC shall use its best efforts to manage the Facility in a manner necessary to maintain all necessary licenses, permits, consents, and approvals from all governmental agencies which have jurisdiction over the operation of the Facility. CCMC shall not assume the liability for any employee action, failure to act or negligence prohibiting the intent of this provision to be met. (b) Neither Owner nor CCMC shall knowingly take any action which may (1) cause any governmental authority having jurisdiction over the operation of the Facility to institute any proceeding for the rescission or revocation of any necessary license, permit, consent or approval, or (2) adversely affect Owner's right to accept and obtain payments under Medicare, Medicaid, or any other public or private medical payment program; however, this Agreement in no way guarantees or warrants that any or all of the above will not or could not occur. (c) CCMC shall, with the written approval of Owner, have the right to contest by appropriate legal proceedings, diligently conducted in good faith, in the name of the Owner, the validity or application of any law, ordinance, rule, ruling, regulation, order or requirement of any governmental agency having jurisdiction over the operation of similar facilities. Owner, after having given its written approval, shall cooperate with CCMC with regard to the contest, and Owner shall pay the reasonable attorney's fees incurred win regard to the contest. Counsel for any such contest shall be mutually selected by CCMC and Owner. CCMC shall have the right, without the written consent of the Owner, to process all third-party payment claims for the services of the Facility, including the full right to contest adjustments and denials by governmental agencies (or their fiscal intermediaries) as third-party payer. 1.06 Taxes. Any taxes or other governmental obligations properly imposed on the Facility are the obligations of the Owner, not of CCMC, and shall be paid out of the operating Accounts of the Facility. With the Owner's written consent, CCMC may contest the validity or amount of any such tax or imposition on the Facility in the same manner as described in Section 1.05(c). 1.07 Use of CCMC's Personnel. CCMC shall actively utilize CCMC staff specialists in such areas as accounting, auditing, budgeting, computer services, dietary services, housekeeping, industrial engineering, interior design, legal, nursing, personnel, pharmaceutical, purchasing, systems and procedures, and third-party payments for services of facilities in the management of the Facility when considered desirable by CCMC or upon the reasonable request of Owner. SECTION TWO: TERM AND TERMINATION 2.01 Term. The term of this Agreement shall commence on July 1, 1995 and shall terminate at Midnight on December 31, 2000, unless an earlier date is mutually agreed upon during the provision of section 2.02. This Agreement shall automatically renew for an additional three year term unless either party shall terminate this Agreement in accordance with Section 2.02. 2.02 Termination. Owner may terminate this Agreement upon giving CCMC sixty (60) days written notice after the end of the third year of this Agreement. CCMC may terminate this Agreement at any time by giving the Owner sixty (60) days written notice. SECTION THREE: MANAGEMENT FEE 3.01 Fee to CCMC. During each term of this Agreement the Facility shall pay CCMC a fee equal to Twelve Thousand dollars ($12,000.00) per month for the term of this Agreement. During the term of this Agreement, the management fee shall comply with Revenue Procedure 93-19. 3.02 Timing of Payments to CCMC. Within twenty (20) days after the end of each month of the term, CCMC shall be paid the fee computed in accordance with the provisions of Section 3.01. The amount of such fee shall be calculated on the basis of monthly financial statements regularly prepared by CCMC in accordance with Section 1.02 hereof. SECTION FOUR: COVENANTS OF OWNER 4.1 Insurance. Owner shall provide and maintain throughout the Term, the following insurance with responsible companies naming Owner and CCMC (as its interest may appear) as insured thereunder in amounts approved by CCMC and Owner. (a) public liability insurance and insurance against theft of or damage to patient's property in the Facility or its Premises; (d) workman's compensation, employers' liability or similar insurance as may be required by law; (c) insurance against loss or damage to the Facility Down fire and such other risks and casualties now or hereafter embraced by "Extended Coverage," as well as such other risks and casualties with respect to which insurance is customarily carried for similar facilities; (d) business interruption insurance against loss of income due to the risks insured against under this Section 4.01; (e) personal injury liability insurance against claims of bodily injury or death or otherwise arising out of the operations of the Facility such insurance to afford minimum protection of not less than $1,000,000 in respect to bodily injury or death to any one person; (f) such other insurance or additional insurance as CCMC and Owner together shall reasonably deem necessary for protection against claims, liabilities and losses arising from the operation or ownership of the Facility. If Owner fails to effect or maintain any such insurance, Owner will indemnify CCMC against damage, loss or liability resulting from all risks for which such insurance should have been maintained, and CCMC may, but shall not be liable for its failure so to do, effect the same as the agent of Owner by taking our policies in such insurance companies as may be selected by CCMC, running for a period not to exceed one year. 4.02 Convalescent Services. Owner covenants and agrees that Facility is and will continue to be a fully licensed nursing home containing the number of licensed beds set forth on the first page of this Agreement. CCMC and Owner agree that the services rendered by the Facility will not, during the term thereof, be changed in any material respect, unless there shall first have been mutual agreement between CCMC and Owner to such change. SECTION FIVE: MISCELLANEOUS 5.01 Assignment by CCMC. CCMC shall not assign its rights or obligations under this Agreement without the consent of Owner. 5.02 Assignment by Owner. Owner shall not assign its rights or obligations under this Agreement without the notice to CCMC. 5.03 Binding on Successors and Assigns. The terms, covenants, conditions, provisions and agreements herein contained shall be binding upon and inure to the benefit of the parties hereto, their heirs, administrators, executors, successors and assigns, subject to provisions of Section 5.01 and 5.02 above. 5.04 Negation of Partnership. Joint Venture and Agency. Nothing in this Agreement contained shall constitute or be construed to be or to create a partnership, joint venture or lease between Owner and CCMC with respect to the Facility. The parties intent for the relationship of CCMC to Owner under this Agreement to be that of an independent contractor, nor that of an agent. Owner shall not have the power to control the time method or manner of CCMC's performance hereunder, Owner shall look solely to the results to be achieved by CCMC, and nothing contained herein shall be construed to create a relationship of agency between CCMC and Owner. 5.05 Notices. All notices hereunder by either party to the other shall be in writing. All notices, demands and request shall be deemed given when mailed, postage prepaid, registered, or certified mail, return receipt requested, (a) to Owner: Edward E. Lane Gordon Jensen Health Care Association, Inc. 6000 Lake Forrest Drive, Suite 200 Atlanta, GA 30328 (b) to CCMC: Capitol Care Management Company, Inc. 6000 Lake Forrest Drive, Suite 225 Atlanta, GA 30398 or to such other address or to such other person as may be designated by notice given from time to time during the term by one party to the other. 5.06 Entire Agreement. This Agreement contains the entire agreement between the parties hereto, and no representations or agreements, oral or otherwise, between the parties not embodied herein or attached hereto shall be of any force and effect. Any additions or amendments to this Agreement subsequent hereto shall be of no force and effect unless in writing and signed by the party to be bound. 5.07 Governing Law. This Agreement has been executed and delivered in the State of Georgia, all the teas and provisions hereof and the rights and obligations of the parties hereto shall be construed and enforced in accordance with the laws hereof. 5.08 Captions and Headings. The captions and headings throughout this Agreement are for convenience and reference only, and the words contained therein shall in no way be held or deemed to define, limit, describe, explain, modify, amplify or add to the interpretation, construction or meaning of any provision of or the scope or intent of this Agreement nor in any way affect this Agreement. 5.09 Disclaimer of Employment of Facility Employees. No person employed by Owner in operation of the Facility will be an employee of CCMC, and CCMC will have no liability for payment of wages, payroll taxes and other expenses of employment, except that CCMC shall have the obligation to exercise reasonable care in its management of the Facility to properly apply available Facility funds to the payment of such wages and payroll taxes. 5.10 Impossibility of Performance. Neither party to this Agreement shall be deemed to be in violation of this Agreement if it is prevented from performing any of its obligations hereunder for any reason beyond its control, including without limitation, acts of God or of the public enemy, flood or storm, strikes or statutory regulation or rule of any federal, state, or local government, or any agency thereof. 5.11 Non-assumption of Liabilities. CCMC shall not, by entering into and performing this Agreement, become liable for any of the existing or future obligations, liabilities or debts of Owner, and CCMC shall not be managing the Facility assume or become liable for any of the obligations, debts and liabilities of Owner, and CCMC will in its role as manager of the Facility have only the obligation to exercise reasonable care in its management and handling of the funds generated from the operation of the Facility. 5.19 Responsibility for Misconduct of Employees and Other Personnel. CCMC will have no liability whatever for damages suffered on account of the dishonesty, willful misconduct or negligence of any employee of the Owner regarding the Facility in connection with damage or loss directly sustained by it by reason of the dishonesty, willful misconduct and gross negligence of CCMC employees in the operation of the Facility during the teen of this Agreement. 5.13 Rights Cumulative, No Waiver. No right or remedy herein conferred upon or reserved to either of the parties hereto is intended to be exclusive of any other right or remedy, and each and every right and remedy shall be cumulative and in addition to any other right or remedy given hereunder, or now or hereafter legally existing upon the occurrence of any event of default hereunder. The failure of either party hereto to insist at any time upon the strict observance or performance of any of the provisions of this Agreement or to exercise any right or remedy as provided in this Agreement shall not impair any such right or remedy to be construed as a waiver or relinquishment thereof. Every right and remedy given by this Agreement to the parties hereto may be exercised from time to time and as often as may be deemed expedient by the parties hereto, as the case may be. 5.14 Time of Essence. Time is of the essence of this Agreement. 5.15 Invalid or Unenforceable Provisions. If any terms, covenants or conditions of this Agreement or the application thereof to any person or circumstances other than those to which it is held invalid or unenforceable, shall not be affected thereby and each term, covenant or condition of this Agreement shall be valid and shall be enforced to the fullest extent permitted by law. 5.16 Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed an original and all such counterparts together shall constitute one and the same instrument. 5.17 Authorization of Agreement. CCMC and Owner represent and warrant, each to the other, that this Agreement has been duly authorized by its respective Board of Directors and, if required by law, shareholders; and that this Agreement consulates a valid and enforceable obligation of CCMC and Owner in accordance with its terms. 5.18 Designation. Owner agrees that, during the term of this Agreement, CCMC shall have the right to designate and make public reference to the Facility as a Capitol Care Management Company, Inc., managed facility. IN WITNESS WHEREOF, the parties hereto have executed this Agreement, the day and year first above written. CAPITOL CARE MANAGEMENT COMPANY, INC. By:/s/ Darrell C. Tucker GORDON JENSEN HEALTH CARE ASSOCIATION, INC. By: /s/ Edward E. Lane ADDITIONAL NURSING HOME MANAGEMENT AGREEMENTS The Registrant has additional Nursing Home Management Agreements with affiliates substantially identical to the foregoing. The material details of such agreements which differ are as follows:
Owner Date of Termination Monthly Name of Facility Location Agreement Date Fee - ---------------- ------------- ----- --------- ----------- ------- Magnolia Manor Green Cove GJ 7/1/95 12/31/01 $14,000 Springs, FL Marshall C. Harriman, TN NAB 1/1/95 6/30/96 $14,000 Voss H.C.C. Midway H.C.C. Midway, GA GJ 7/1/95 12/31/00 $24,000 Riverside H.C.C. Covington, GA CHCS 7/1/95 12/31/00 $28,000 Sea Breeze H.C.C. Mobile, AL WHH 7/1/94 7/31/00 $12,000 Trenton H.C.C. Trenton, TN GJ 7/1/95 12/31/00 $10,000 - --------------- The names of the owners are abbreviated a follows: Gordon Jensen Health Care Associates, Inc. - GJ; National Assistance Bureau, Inc. - NAB; Chamber Health care Society, Inc. - CHCS; Winter Haven Homes, Inc. - WHH. Owned by Sea Breeze Health Care Center, Inc., a subsidiary of Winter Haven Homes, Inc.
EX-10.4 7 LEASE AGREEMENT This lease agreement made and entered into this 5 day of May, 1996, by and between PHEO MED LIMITED PARTNERSHIP a partnership organized under the laws of the State of Georgia, hereinafter referred to as LESSOR and LAKE FOREST HEALTH CARE CENTER, INC., a corporation organized under the laws of the State of Georgia, hereinafter referred to as LESSEE; WITNESSETH That for and in consideration of the mutual promises and benefits hereinafter stipulated and agreed to, the parties mutually agree and bind themselves as follows: SECTION 1. Lease of Property. The Lessor hereby leases unto the Lessee and the Lessee hereby leases from the Lessor the premises described as follows: that 60-bed licensed nursing home facility, located in Jacksonville, Florida commonly known as "Lake Forest Health Care Center" located at 1771 Edgewood Avenue, Jacksonville, Florida 32208, including all furnishings, equipment and attachments thereto. It is understood that the leased premises include such inventories, supplies and other items as are incident to the operation of the facility in accordance with the requirements of the Department of Human Resources, and that comparable inventories, supplies and other items will be returned to the Lessor upon the expiration of this lease. SECTION 2. Term of Lease. The term of this lease shall commence on June 1, 1996, and the same shall continue for a period of ten(10) years thereafter, terminating at midnight on May 31, 2006,or until the same is sooner terminated according to the provisions hereinafter contained. At the expiration of the original term of this lease, Lessee shall have the option to renew upon a thirty (30) day written notice to Lessor prior to the expiration of the original term of this lease for an additional ten year period through May 31, 2012 at a rate to be mutually agreeable. SECTION 3. Lease Payments. The Lessee shall pay to the Lessor as rental the sum of $25,000.00 on June 1, 1996 and at the 1st of every month thereafter up to and including May 1, 2006. The monthly Lease payments are due on the first day of each month beginning June 1, 1996, with the last payment due on May 1, 2006, or 2016, as the case may be. SECTION 4. Supplies and Inventory. Lessee shall be permitted to utilize the inventory of consumable items located on the Property at the commencement of the term, including but not limited to food, beverages, medicines, drugs, linens and cleaning supplies and other items incident to the operation of the nursing home (collectively the "Supplies and Inventory") and Lessee shall replenish the Supplies and Inventory as they are consumed, and a comparable inventory of supplies shall be returned to the Lessor upon the expiration of this Lease. SECTION 5. Payables and Receivables. (a) All accounts payables chargeable to the nursing home prior to the month of June, 1996 shall remain the liability of Lessor. Lessee shall accumulate such payables as received and forward to Lessor for payment within 10 days of receipt of same. (b) Uncollected receivables prior to the month of June, 1996 will be received by Lessee and immediately forwarded to Lessor. SECTION 6. Use and Operation. (a) The Lessee agrees to use and operate said property during the entire term of this lease as a nursing home and shall operate the same in a business like and professional manner as is generally acceptable and normal in the operation of a nursing home for the elderly. The same shall be open for business and in operation continuously each and every day for the entire term hereof unless otherwise mutually agreed upon in writing by the parties hereto. Provided, however, that the business office may be closed on Saturday and Sunday of each week, but such closure shall not prevent admission or dismissal of residents. (b) The Lessee agrees that said premises shall at all times be kept and used in accordance with laws of the State of Florida, and the rules and regulations of the Florida Agency for Health Care Administration or any successor agency and in accordance with the ordinances, resolutions, rules, and regulations of all local, state, and federal governments. The Lessee will permit no waste, damage or injuries to the premises and at Lessee's own cost and expense will keep all drainage pipes free and open. (c) The Lessee shall not make any alterations, additions, or improvements in and to the leased premises, including the improvements placed thereon by the Lessor, without the consent of the Lessor in writing first being had and obtained. The Lessor shall not withhold approval of any alterations, additions, or improvements required by the Florida Agency for Health Care Administration or any successor agency thereof for the continued use of the premises as a nursing home. Lessee will make appropriate alterations, additions, or improvements as may be required by the Florida Agency for Health Care Administration or any successor agency. All alterations, additions, or improvements made to the nursing home, and/or grounds, shall become a part of the leased premises and shall be and remain the sole property of the Lessor, subject to the terms of this lease. (d) All personal property brought upon the leased premises during the term of this lease shall be at the risk of the Lessee. The Lessor shall not be liable for any damage, either to persons or to property, sustained by Lessee or others, caused by any defect in the leased premises or the sidewalks adjoining the same, now existing or hereafter arising therein, including any improvements placed thereon by Lessor or any part or appurtenance thereof, nor by reason of the same becoming out of repair, nor by reason of any bursting or leaking water, gas, steam or other pipes or from any act of neglect of employees, co-tenants or other occupants of said building or buildings, if any, or any other persons whomsoever, in and upon or about the leased premises or sidewalks adjoining the same, or the occurrence of any accident or event from whatever cause in and about the leased premises and the improvements thereon and sidewalks or areas adjoining the same. The Lessee agrees to defend and hold Lessor harmless from any and all lawful claims, demands, liabilities, or judgements for damages suffered or alleged to be suffered in or about the leased premises by any person, firm, or corporation, including reasonable costs incurred by Lessor in investigating and/or defending against the same in the event the Lessee does not do so. (e) The Lessee shall keep the leased premises including all improvements therein free from any liens arising out of any work performed, material furnished or obligations incurred by Lessee. In the event Lessee becomes insolvent, voluntarily or involuntarily bankrupt, or if a receiver, assignee, or other liquidating officer is appointed for the business of Lessee, then Lessor may cancel this lease at Lessor's option. (f) All signs or symbols placed in the windows or doors of the premises or upon any exterior part of the buildings on the leased premises by Lessee, shall be subject to the approval of Lessor. In the event Lessee shall place signs or symbols on the exterior of said building or in the windows or doors where they are visible from the street that are not satisfactory to the Lessor, the Lessor may immediately demand removal of said signs or symbols, and refusal of Lessee to comply with such demand within a period of ten (10) days shall constitute a breach of this lease and entitle Lessor to immediately recover possession of said premises in the manner provided by law. (g) The Lessee agrees to immediately forward a copy of all licensure surveys, cost reports, any disciplinary action, fines or penalties, or default of any ary action, fines or penalties, or default of any EX-10.4 8 LEASE AGREEMENT This lease agreement made and entered into this 5 day of May, 1996, by and between PHEO MED LIMITED PARTNERSHIP a partnership organized under the laws of the State of Georgia, hereinafter referred to as LESSOR and LAKE FOREST HEALTH CARE CENTER, INC., a corporation organized under the laws of the State of Georgia, hereinafter referred to as LESSEE; perty damages and personal injury limits of at least one million ($1,000,000) dollars, and Lessor may require of the Lessee that said limits be adjusted upward in such amounts as may be required by law, ordinance, state or federal rules and regulations. In the event the Lessee fails to obtain the insurance hereinabove mentioned, then, the Lessor may obtain the same at the expense of and to the charge of the Lessee or the Lessor may at its option treat such failure as a breach of this lease and terminate the same and take possession of the premises and fixtures and hold the Lessee liable for such damages as the Lessor may show itself entitled to as a result of such breach. The Lessee agrees to and shall hold the Lessor harmless on account of any or all liability which may result as a result of the use, occupancy, and operation of the nursing home on the premises. The Lessee agrees to carry workers compensation insurance on all employees of the Facility. (b) The Lessee shall furnish and carry at its expense, fire and extended coverage insurance with Lessor as named insured in the amount of $1,950,000 on the building, equipment and furnishings in an amount sufficient to replace the entire building, equipment and furnishings in the same condition as before they were destroyed or damaged with not more than Five Thousand ($5,000) Dollars deductible and shall insure the Lessor's interest therein and furnish a copy of the policy to the Lessor. The Lessee shall be liable to the Lessor for any losses occasioned by the Lessor resulting from the Lessee's failure to provide and maintain such insurance. Upon the failure of the Lessee to provide such insurance, the Lessor may at its option terminate the original lease and the lease as herein amended or may purchase such insurance at the charge and expense of the Lessee. (c) Lessee shall furnish, at its expense, use and occupancy insurance in an amount sufficient to pay Lessor its monthly rental fee for up to not less than twelve months should Lessee experience the loss of use of any part or all of the facility caused by the perils covered by fire and extended coverage insurance. A copy of said policy shall be furnished to Lessor. SECTION 8. Maintenance. The Lessee assumes responsibility to maintain and repair the building, including the roof and outside structure, equipment, fixtures and furnishings in a good state of repair during the entire period of this lease and shall bear the expense of all the same except those expenses that may be compensated for by insurance carried by either party hereto. At the expiration or termination of this lease, the Lessee will return the premises to the Lessor in as good a condition as that which existed at the commencement of this lease, except for ordinary and usual wear and tear. SECTION 9. Property Taxes. The Lessee shall be responsible for any real estate, personal property, or intangible taxes during the term of this lease. Taxes for the year 1993 shall be prorated between Lessor and Lessee with each paying for their respective share. SECTION 10. Fees and Charges. All fees and charges due and owing to any agency, firm, city, county, state, or federal government on account of any required inspection made of the facility or the leased premises by any officer or employee of such inspection shall be paid by the Lessee. SECTION 11. Utilities. The Lessee hereby covenants and agrees to pay all charges for heat, lights, water, telephone and all other utilities which shall be used in or charged against the leased premises during the entire term of this lease. SECTION 12. Access to Property. Lessee will allow Lessor or Lessor's agent free access at all reasonable times to said premises for the purpose of inspecting the buildings and premises or any allegations made by a governing agency. This right shall not be construed as an agreement on the part of the Lessor to make any repairs, all of such repairs to be made by Lessee as aforesaid. SECTION 13. Damage by Casualty. In the event the nursing home is damaged by fire, windstorm, or other casualty to the extent of not more than fifty (50%) percent of the value of the facility, the Lessee shall rebuild, remodel, repair, and restore said facilities to the condition existing immediately preceding said fire or casualty within a reasonable time. In the event the premises are destroyed by fire, windstorm, or other casualty in excess of fifty (50) percent of its value, it shall be optional with the Lessor as to whether it rebuilds, repairs, or restores the facilities. If the facility is so repaired, rebuilt, or repaired, then it is agreed that during any period of time within which the premises may be untenable and after such restoration the term of this lease herein provided for shall be extended over and above the original term or any extension thereof by the amount of time necessary to restore the premises. If the Lessor does not elect to rebuild, repair, or restore the same, then, in such event this lease shall terminate and be of no force and effect except for the rights and obligations which shall have accrued prior to the date of such termination. SECTION 14. Assignment and Subletting. Lessee shall not let, sublease, or sublet the whole leased premises, or any part thereof, or assign this lease without the written consent of Lessor which shall not be unreasonably withheld. SECTION 15. Waivers. (a) Failure of Lessor to insist upon strict performance of any of the covenants and agreements of this lease, or to exercise any option herein conferred in any one or more instances, shall not be construed to be a waiver or relinquishment of any such or any other covenants or agreements, but the same shall be and remain in full force and effect. (b) In the event of any suit or action instituted on account of any default or to enforce any provisions of this agreement, both Lessor and Lessee agree that the court may award to the prevailing party such amount as the court may consider necessary and reasonable as the attorney fees, together with court costs, and this provision shall also apply in connection with any appeal thereof. SECTION 16. Defaults. If the Lessee shall default in payment of any rent, additional rent, or other sum required by this lease, and Lessee fails to cure such default for a period of ten (10) days after receipt by Lessee of written demand by Lessor for payment, Lessee shall immediately return the leased property back to Lessor. In the event Lessee defaults in the performance of any other provision of this lease, for a period of thirty (30) days after Lessee's receipt of written demand by Lessor for performance of such other provision of this lease (provided, however, that if such non-monetary default may not be reasonable cured within thirty (30) days after Lessee receives Lessors written demand therefor, Lessee shall immediately cure said default with due diligence, unless by mutual written agreement said time is extended), Lessor may cancel this lease by giving a fifteen (15) day written notice to Lessee, whereupon the expiration of the said fifteen (15) day notice period, Lessee shall return the leased property to Lessor. Lessor may immediately reenter property at the end of fifteen (15) day period without legal process if Lessor has not remitted proper payment. No further notice to Lessee shall be necessary before reentry by Lessor or commencement of legal actions. SECTION 17. Binding Effect. Subject to the provisions hereof pertaining to assignment and subletting, the covenants and agreements of this lease shall be binding upon the heirs, legal representatives, successors, and assigns of any or all of the parties hereto. SECTION 18. Notices. Any notice required to be served in accordance with the terms of this lease shall be sent by registered mail, to the last known address of either the Lessor or the Lessee, or their agents or representatives, and such notice shall be deemed and treated as notice to all of them, their heirs, legal representatives or assigns. Lessee will forward within fifteen (15) days of receipt of any State Licensure Inspection a copy of such Licensure inspection as well as plans of corrections to Lessor. SECTION 19. Regulatory Approval. This lease is subject to approval and continued approval of all applicable state and federal regulatory agencies. SECTION 20. Right of First Refusal to Purchase. Lessee has the first right of refusal to purchase this facility from Lessor at any time during the period of this lease provided Lessor receives a bona fide offer for the Facility. Lessee has thirty days to respond in writing to Lessor of its intentions of exercising its Right of Refusal to purchase the Facility. In any event if Lessor chooses to sell this Facility the new purchaser is bound by this Lease. SECTION 21. Acceptance of the Premises. Lessee has inspected the facility and the operations thereof, and herewith agree to accept the facility in its current condition, as is, and subject only to the terms of this Lease Agreement. Lessee agrees to hold Lessor, its Agents, Officers, and Directors harmless for any acts or omissions of actions arising out of or in connection with this Lease Agreement so long as it shall remain in full force and effect. IN TESTIMONY WHEREOF, the parties hereunto have executed this contract in duplicate originals as of the day and date first above mentioned. PHEO MED LIMITED PARTNERSHIP By: Winter Haven Homes, Inc. Its General Partner By: /s/ Edward E. Lane Its President (Lessor) [Corporate Seal] LAKE FOREST HEALTH CARE CENTER, INC. By: /s/ Chris Brogdon Its President (Lessee) [Corporate Seal] ADDITIONAL LEASE AGREEMENTS WITH AFFILIATES The Registrant has additional Lease Agreements with affiliates substantially identical to the foregoing. The material details of such agreements which differ are as follows:
Owner Date of Name of Facility Location Agreement Lease Lease Payment - ---------------- -------- ----- --------- ----- ------------------------ Summer's Landing Douglas, GJ 9/1/96 5 years $300,000 on execution of - - Douglas GA the lease plus debt pay- ment on existing mort- gage each month Jackson Oaks Jackson, WHH 6/30/96 15 years $1,500,000 on execution TN of the lease plus $50,000 per month Lake Forest Health Jackson- WHH 5/5/96 10 years $25,000 per month Care Center ville, FL - -------------- The names of the owners are abbreviated as follows: Gordon Jensen Health Care Associates, Inc. - GJ and Winter Haven Homes, Inc. - WHH. The Registrant may extend up to two additional terms of five years each. Beginning in year two there will be an additional payment of $500 per month; in year three $750 per month; in year four $1,000 per month and in year five $1,250 per month. During any extensions the additional amount will be $1,250 per month. Winter Haven Homes, Inc. is general partner of Retirement Village of Jackson, Ltd., the owner of Jackson Oaks. Winter Haven Homes, Inc. is general partner of Pheo Med Limited Partnership, the owner of Lake Forest Health Care Center. The Registrant may extend the lease an additional ten years at a rate to be mutually agreed upon.
EX-18 9 September 27, 1996 Retirement Care Associates, Inc. 6000 Lake Forrest Drive, Suite 200 Atlanta, Georgia 30308 We are providing this letter to you for inclusion as an exhibit to your Form 10-K filing pursuant to Item 601 of Regulation S-K. We have read management's justification for the change in accounting for supplies inventory (from expensing inventory when purchased to capitalizing inventory using the cost basis) contained in the Company's Form 10-K for the year ended June 30, 1996. Based on our reading of the data and discussions with Company officials of the business judgment and business planning factors relating to the change, we believe management's justification to be reasonable. Accordingly, in reliance on management's determination as regards elements of business judgment and business planning, we concur that the newly adopted accounting principle described above is preferable in the Company's circumstances to the method previously applied. /s/ Coopers & Lybrand L.L.P. Atlanta, Georgia EX-21 10 SUBSIDIARIES OF THE REGISTRANT Atrium Nursing Home, Inc. Florida Brent-Lox Hall Nursing Home, Inc. Virginia Capitol Care Management Company, Inc. Georgia Crescent Medical Services, Inc. Georgia Encore Retirement Partners, Ltd. New York F & L Associates, Inc. Virginia Gardendale Health Care Center, Inc. Georgia Lake Forest Healthcare Center, Inc. Georgia Lake Health Care Center, Inc. Georgia Libbie Rehabilitation Center, Inc. Virginia Mid-Florida, Inc. Georgia Phoenix Associates, Inc. Virginia Pro-Scription, Inc. Georgia Quality N.H.F. Leasing, Inc. Georgia Retirecare, Inc. Colorado Retirement Management Corp. Georgia Riviera Retirement, Inc. Georgia Roberta Health Care Center, Inc. Georgia Sea Side Retirement, Inc. Georgia Southside Health Care Center, Inc. Georgia Statesboro Health Care Center, Inc. Georgia Summers Landing, Inc. Georgia Sun Coast Retirement, Inc. Georgia The Atrium of Jacksonville, Ltd. Florida West Tennessee, Inc. Georgia Willow Way, Inc. Georgia Woodbury Health Care Center, Inc. Georgia Contour Medical, Inc. Nevada Contour Fabricators, Inc. Michigan Contour Fabricators of Florida, Inc. Florida AmeriDyne Corporation Tennessee Atlantic Medical Supply Company, Inc. Georgia Americare Health Services Corp. Delaware Facility Supply, Inc. Florida Gerimed, Inc. Florida Florida ACLF, Inc. Florida EX-27 11
5 This schedule contains summary financial information extracted from the consolidated balance sheets and consolidated statements of operations found on pages F-3 through F-6 of the Company's Form 10-K for the fiscal year ended June 30, 1996, and is qualified in its entirety by reference to such financial statements. YEAR JUN-30-1996 JUN-30-1996 45,365 33,645 20,556,920 0 4,849,819 30,761,075 114,682,082 0 179,557,647 26,187,331 0 0 8,765,250 1,215 25,922,658 179,557,647 9,825,252 134,011,369 5,773,934 117,887,133 0 0 (7,948,091) 9,426,118 4,228,307 0 0 0 372,000 5,569,811 .39 0
-----END PRIVACY-ENHANCED MESSAGE-----