ITEM 1. BUSINESS
General - -------
As of February 28, 1994, Care Enterprises, Inc. ("Care" or "the Company") operated and managed 52 nursing and rehabilitation, developmentally disabled and retirement centers in California, Ohio, West Virginia and New Mexico, and home health agencies at 14 locations in California and Ohio. The nursing and rehabilitation centers provide skilled nursing, subacute, custodial care and rehabilitative services to patients that do not require acute care hospitalization and the home health operations provide skilled nursing care, rehabilitative and homemaker services to patients outside the institutional setting. Care also has a 26% interest in a pharmacy partnership which provides products and services to California nursing and other institutional facilities, including nursing facilities operated by Care.
Recent Development - ------------------
In December, 1993, Care entered into an Agreement and Plan of Merger with Regency Health Services, Inc. ("Regency"), a Delaware corporation, substantially all of whose business operations are conducted in California, pursuant to which Care would merge with a newly-formed, wholly-owned subsidiary of Regency, and shareholders of Care would receive 0.71 shares of Regency common stock for each share of Care. A Special Shareholders Meeting to vote on the merger is scheduled for April 4, 1994 at 11:00 A.M. at the Sheraton Hotel, Newport Beach, California. Definitive proxy information concerning the meeting was mailed to all shareholders of record as of the close of business on March 3, 1994, the record date fixed by Care's Board of Directors. In connection with the execution of the Agreement and Plan of Merger, holders of a majority of Care's outstanding shares agreed with Regency to vote in favor of the proposed merger. Under Delaware law, the affirmative vote of a majority of the outstanding shares is required to approve the merger. No dissenters' rights are available to shareholders of Care in connection with the merger. Care's Board of Directors has recommended that shareholders vote to approve the merger.
Recent History - --------------
In 1992 Care initiated a long range strategic business plan under which Care undertakes to provide a continuum of quality care through delivery of specialized medical services from inpatient to in home settings. Care believes there is an inherent synergy that exists between its home health agencies and nursing and rehabilitation centers. By taking advantage of that unique continuum within one company, Care offers an attractive product to the market, particularly in the managed care arena. It currently has ten specialized clinical units in various stages of development at its nursing and rehabilitation centers. These units include ventilator and other complex medical care such as IV therapies, complex infections, pulmonary care, diabetic management, chemotherapy, treatment of AIDS patients and wound care. Care has increased its focus on physical, speech and occupational rehabilitative therapies, which continue to be a strong source of revenue, growing approximately from $26,600,000 in 1991 to $30,900,000 in 1992 and $34,800,000 in 1993. Care now has 16 outpatient therapy units licensed. Revenue from Care's high acuity specialized clinical programs was approximately 27% of total revenue in 1992 and approximately 32% for 1993.
Care's home health operations have been extensively involved in program development. New services such as neonatal care, prenatal care and gero- psychiatric care and expanded infusion therapy services, ventilator care and care to AIDS patients were highlights in 1993.
Continued development of a wide base of high acuity services and an integrated approach to the market with its nursing and rehabilitation and home care services make clear Care's direction for the future.
Long-term Care Operations - -------------------------
Care's nursing and rehabilitation centers provide nursing care and rehabilitative services to persons who do not require the services of an acute care hospital. Each facility is operated by a licensed administrator and a director of nursing services, who are assisted on a part-time contract basis by a physician who acts as a medical director. The services provided at Care's nursing and rehabilitation centers include 24-hour nursing care by registered nurses and licensed practical nurses, room, board, housekeeping and laundry services, dietary planning, the provision of medical supplies and prescription drugs, and the provision for rehabilitative and other ancillary services including speech, occupational, physical and respiratory therapies and contract laboratory and x-ray services.
In support of the health care operations, Care maintains executive and regional administrative centers which provide supervisory, administrative and consulting services. Each regional office is staffed by a regional administrator and support personnel specializing in nursing care, rehabilitation and dietary programs, medical bookkeeping and maintenance. Care's executive offices provide centralized management and support services including operations support, marketing, planning and development, human resources, accounting, reimbursement and financial services, cash management, data processing, legal support, risk management, quality control, centralized purchasing, education, training and consulting support services in the area of rehabilitative care.
Care's profitability and cash flows are affected by many factors, including (i) the licensed bed capacity of its nursing facilities; (ii) the extent to which that bed capacity is occupied; (iii) the extent of rehabilitative and other ancillary services provided by Care at its skilled nursing facilities; (iv) the mix of private, Medicare and Medicaid patients; (v) the mix and volume of services provided by Care's home health agencies; (vi) the cost reimbursement rates paid by Medicare and Medicaid (see "Health Care Reimbursement Programs"); and (vii) labor and employee benefits and facility maintenance expense.
Care, as well as many of its competitors, is affected by many factors that are indigenous to the long-term care industry, including (i) medical reimbursement levels, (ii) increased regulatory control and scrutiny as a result of the implementation of the Omnibus Budget Reconciliation Act of 1987 ("OBRA"); and (iii) alternatives to the institutional long-term care setting, (i.e., home health agencies, residential care facilities and acute hospital based nursing facility distinct parts). These alternatives have increased competition for employees resulting in an escalation in wages, and have also impacted competition for patient census. Facilities are now accepting patients with greater medical needs in order to maximize census and revenue. Care's specialized clinical units are designed to meet the needs of these high acuity patients and further enhance ancillary and routine revenues.
The table below shows the number of Care's nursing and rehabilitation centers and licensed beds at year end, average occupancy rates and annual revenues by source during each of the last five years.
(1) Data excludes a 248 bed facility which is being managed by Care under a management agreement.
Home Health Operations - ----------------------
Care Home Health Services, Inc., a wholly-owned subsidiary of Care, has provided home care services throughout California and Southern Ohio since 1983 and has grown steadily in revenue and visits in every year since its founding. Through two divisions, Care Home Health and Care At Home, patients at home receive technical medical support such as infusion and ventilator care and respite services such as assistance with personal hygiene, cooking and cleaning.
Home Health management resides in free-standing offices from where clinical staff is dispatched. One additional office was opened in 1993 for a total of 14 locations as of December 31, 1993. The 1993 revenue mix was approximately 70% Medicare, 17% private, 11% Medicaid and 2% managed care. Home health revenues increased approximately 39% from $14,700,000 in 1992 to $20,500,000 in 1993.
The home care industry has experienced growth in the last decade due to the benefits to patients, physicians, hospitals and payors. Patients enjoy the increased comfort of home and the control of the schedule of nursing visits and therapies. They welcome earlier discharge from hospitals and significantly lower costs than hospitalization. Physicians use home care because it helps minimize distress calls to the doctor and provides ongoing communication regarding the patients' progress. Hospitals refer patients to home care to decrease lengths of stay, thereby reducing costs for services that are reimbursed to them by diagnosis versus time in the hospital. Payors support home care for cost savings and for the reduction in re- hospitalizations achieved by home care nurses recognizing clinical problems earlier and preventing misunderstandings on therapies.
Internal factors supporting continued growth of Care Home Health Services, Inc. include the steady referral base from Care facilities and the market appeal of a company that provides a continuum of care from inpatient to outpatient rehabilitation to home care. Care Home Health Services, Inc. is well positioned due to its established longevity in this relatively adolescent industry.
Care Home Health Services, Inc. is state licensed in California (not required in Ohio), Medicare and Medicaid certified in California and Ohio and accredited in California and Ohio by the independent Joint Commission on the Accreditation of Healthcare Organizations ("JCAHO").
Care Combined Operations - ------------------------
The table below sets forth the approximate percentage of Care's revenues from each of the following sources:
Health Care Reimbursement Programs - ---------------------------------
All but one of the nursing facilities and all of the home health agencies operated by Care are certified for participation in Medicare and all of the facilities and home health agencies operated by Care are Medicaid certified.
Payments under the Medicare program received by Care are currently sufficient to cover all of the operating and fixed costs allocable to Medicare patients. Payments received by Care under Medicaid programs currently cover a substantial portion, but not all, of the operating and fixed costs of furnishing services to Medicaid patients. There is no assurance that payments under these programs will remain at levels comparable to present levels or will, in the future, be sufficient to cover the operating and fixed costs allocable to patients participating in such programs.
Care has made a strategic commitment and has pledged resources to provide managed care organization members with services ranging from subacute care to home health care. The scope of care which Care offers along with the talents of new staff sets Care apart from its competitors in the market. Contracts have been negotiated with managed care organizations, such as health maintenance organizations ("HMO's"), preferred provider organizations ("PPO's") and independent provider associations ("IPA's"), including major medical groups, for care to their members. Numerous contracts have also been entered into with hospice providers and with the Veterans Administration for care to eligible veterans.
The last audit of Care with respect to Medicare and Medicaid payments was for the year ended December 31, 1991. Care believes that its reserves for potential adjustments related to fiscal years 1992 and 1993 are adequate and that any future adjustments proposed by these agencies will not have a material effect on the consolidated financial position or liquidity of Care.
Managed care is playing a larger role in the industry, with HMO's, PPO's, IPA's and insurance companies creating relationships with long-term care companies and home health agencies. Managed care reimbursement is predicated on different levels of services. Care has made a strategic commitment to develop new payor sources in this growing area.
Regulations - -----------
Care's nursing and rehabilitation and home health operations are subject to extensive federal and state regulatory, licensing and inspection requirements. These requirements relate to, among other things, the adequacy of physical buildings and equipment, the qualifications of administrative personnel and nursing staff, the quality of nursing care provided and continuing compliance with the laws and regulations applicable to the operations of the facilities. OBRA contains provisions related to nursing care which are more stringent than those effective prior to its enactment. Care has implemented the provisions of OBRA applicable to its business through the support of its Corporate Professional Services Department, which includes quality improvement programs. In addition, before the acquisition of any existing nursing facility can be consummated, approval of the local state health care licensing authority must be obtained, together with certification for participation in its respective Medicaid and Medicare programs. The nursing and rehabilitation facilities and home health agencies operated by Care are licensed and certified by various governmental agencies.
Care's Corporate Professional Services Department sets standards for patient care, provides training and education, assists in development of specialized clinical units, investigates patient complaints, reviews citations or deficiency notices issued by regulatory agencies, consults with facility management and conducts periodic site inspections to ensure that quality care is provided and deficiencies are corrected. Peer reviews are also conducted by teams, whose members are employees of Care's nursing and rehabilitation facilities, to ensure that Care's standards of quality are upheld.
In the ordinary course of business, Care, like others in the long-term care industry, receives statements of deficiency for failure to comply with various federal and state regulatory requirements. Fines may be assessed and regulatory authorities have the ability to delicense or decertify facilities operated by any nursing care operator at which there has been failure to comply with the various regulatory requirements. Care believes that its present reserves for potential fines and decertification actions are adequate and that any future actions will not have a material effect on the consolidated financial position of Care.
Competition - -----------
Care's approach to revenue enhancement is based on the philosophy that its facilities must strategically identify the needs of the local market and develop programs to meet those needs through a diversification of medical services in order to meet the challenge of a more competitive market. Care is developing specialized clinical units in its facilities to enhance its reputation as a high-end provider. Care has historically emphasized
rehabilitation programs (physical, speech and occupational therapies) and has recently expanded its inpatient programs and is developing new outpatient therapy units. Currently, 31% of Care's facilities have outpatient therapy units. Care's specialized clinical units address hospice care, AIDS, wound care, pulmonary and respiratory, ventilator units, Alzheimers units and others currently in development. Care's infusion therapy programs have shown substantial growth in 1993. Increased revenue from these programs comes primarily through the Medicare program and managed care providers.
Competition from home health agencies has been partially offset by the continued development of Care's home health operations and the recognition that Care's facilities can operate in conjunction with the home health agencies in their local communities.
Employees - ---------
At February 28, 1994, Care had approximately 5,900 full-time and part-time employees, of whom approximately 4,850 were employed at Care's nursing and rehabilitation facilities, approximately 900 at its home health agencies, and approximately 150 at its administrative, regional and corporate offices. Approximately 1,100 of the employees were covered by eight collective bargaining agreements. Care believes that its relations with its employees in general and the eight collective bargaining units remain very good.
Tax Audits - ----------
An Internal Revenue Service audit of the Care federal income tax returns for the years 1987 through 1990 and the Care federal payroll tax returns for the year 1990 is presently pending, which raises issues concerning the amount of the net operating loss claimed by Care and certain other issues. Although it is not possible to predict with certainty the outcome of the audit, in the opinion of Care management, adequate provision for the audit has been made and the audit is not expected to have a material adverse effect on Care's financial position.
Insurance - ---------
Care maintains general and professional liability insurance for its operations, subject to a self-insurance retention, in amounts which it believes to be adequate. Property insurance is maintained to protect against all perils, including earthquake and flood, subject to deductibles. For workers' compensation, Care is self-insured in California and Ohio and purchases insurance for this risk in West Virginia and New Mexico. The cost of insurance is based on market conditions, claims history and number and type of company operations. As these factors vary, the cost of insurance can vary. To secure its obligations to pay benefits under its self-insured workers' compensation programs, Care has caused various surety bonds and letters of credit to be issued.
Health Care Reform - ------------------
On October 27, 1993, President Clinton submitted to the United States Congress his proposed Health Security Act. As proposed by the Clinton Administration, the Health Security Act would guarantee comprehensive health care coverage for all Americans regardless of health or employment status. The Health Security Act would reduce certain Medicare and Medicaid programs, and permit greater
flexibility in the administration of Medicaid. Changes in reimbursement levels under Medicare or Medicaid and changes in applicable government regulations could significantly affect the Company's results of operations. Several U.S. Senators and Representatives have submitted bills that could approach the reform of the United States healthcare system in different ways. In addition to federal initiatives, California, where the Company conducts a substantial portion of its business, has already enacted various healthcare reform measures that are expected to have an effect on the business of the Company. The Company is not able to predict whether the Health Security Act or any of such other healthcare legislation will be enacted and implemented or the precise effects of any such legislation. Management of the Company believes that health services organizations with specialized and diverse services, such as Care, are likely to be well positioned under any of the proposed legislative reforms.
Recent Financing - ----------------
On December 30, 1993, Care entered into a note agreement with a number of institutional purchasers pursuant to which it issued $30,000,000 of its 8.10% Senior Secured Notes due December 15, 2000 (the "Notes"). The Notes have an average maturity of five years and provide for semi-annual interest payments commencing January 15, 1994. Principal payments of $6,000,000 are due annually commencing January 15, 1997. The Notes are secured by mortgages on 11 of Care's facilities. Proceeds from the financing were used to retire $18,851,000 of existing indebtedness, to pay the $495,000 remaining balance of a capitalized lease obligation and purchase the related facility, and to pay $1,848,000 of certain other costs and expenses. Net proceeds from the financing totalled $8,806,000, which, combined with the resulting reduction in current maturities of long-term debt, has created a working capital surplus of $5,769,000 at December 31, 1993.
On March 3, 1994, Care entered into an $8,000,000 letter of credit facility with the Bank of America secured by Care's accounts and notes receivable and the shares of Care's subsidiary, Healthcare Network, which is a partner in the pharmacy partnership. These letters of credit are used by Care in connection with its self-insured workers' compensation programs in California and Ohio.
ITEM 2.
ITEM 2. PROPERTIES
As of February 28, 1994, Care operated and managed 52 nursing and rehabilitation, developmentally disabled and retirement centers in California, Ohio, West Virginia and New Mexico, and home health agencies in 14 locations in California and Ohio through its subsidiary, Care Home Health Services, Inc.
Long-Term Care - --------------
The following table sets forth information regarding the nursing and rehabilitation centers owned or leased by Care as of February 28, 1994:
In addition, a 248-bed facility is being managed by the Company under a management agreement and, effective January 1, 1994, Care assumed the operation of a 64-bed residential facility in Pasadena, California.
During 1993 Care exercised options to purchase three previously leased nursing facilities with a total of 278 beds.
Home Health - -----------
Care's subsidiary, Care Home Health Services, Inc., leases facilities occupying approximately 33,000 square feet for its 14 home health locations.
General Lease Information - -------------------------
Care leases a 52,000 square foot facility for its corporate offices in Tustin, California and 7,400 square feet at two regional offices in Suisun, California and Worthington, Ohio. Substantially all of the leases for its operating units require Care to pay all taxes, insurance and maintenance costs. The leases expire at various dates (inclusive of renewal periods) to October 2010. Care has options to purchase five of the leased facilities. See Note 7 to the Consolidated Financial Statements for additional information regarding facility leases.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material pending legal proceedings other than ordinary routine litigation incidental to its business. See Note 7 to the Consolidated Financial Statements for additional information regarding legal proceedings.
ITEM 4.
ITEM 4. RESULTS OF VOTES OF SECURITY HOLDERS
None.
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED MATTERS
Care's capital structure consists of one class of common stock ("Common Stock") issued effective December 31, 1990, in accordance with the Joint Plan of Reorganization (the "Plan"). The previous two classes of common stock, Class A Common Stock and Class B Common Stock (collectively known as "Old Common Stock"), were retired in accordance with the Plan. Holders of Common Stock do not have pre-emptive rights or other rights to subscribe for additional shares. The Common Stock is not subject to conversion or redemption and is fully paid and non-assessable.
Price of Common Stock - ---------------------
The Common Stock commenced trading over-the-counter on January 7, 1991 and is being quoted on the National Market System of the National Association of Securities Dealers Automated Quotation System ("NASDAQ NMS") under the symbol CREI. The last reported sales price per share for the Common Stock as of March 22, 1994 was $13.00. As of March 22, 1994 Care had approximately 1,100 holders of record.
Dividends and Dividends Policy - ------------------------------
Dividends were not paid on the Old Common Stock shares during 1989 and 1990. Covenants in the Company's loan agreement with its secured lenders prohibit the payment of cash dividends on the Common Stock.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The summary consolidated financial information set forth below should be read in conjunction with the Consolidated Financial Statements of the Company and Notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Annual Report on Form 10-K.
(a) The pre-reorganization periods are not comparable with 1991, 1992 and 1993 due to the effects of the implementation of "Fresh-Start Reporting" resulting from the Company's emergence from Chapter 11 reorganization.
(b) Represents an extraordinary gain from discharge of debt in connection with the reorganization proceedings.
(c) Per share amounts are not meaningful due to Chapter 11 reorganization.
(d) Includes charges related to Care's Share Appreciation Rights Plan of $2,157,000, $323,000, and $293,000 for 1993, 1992 and 1991, respectively.
(e) The December 31, 1990 balance sheet was restated to record the Plan of Reorganization and reflect "Fresh-Start Reporting." Accordingly, the Company's financial position at December 31, 1990 and subsequent thereto is not comparable to prior periods.
(f) Average occupancy is calculated based on all facilities operated during the respective years and is not necessarily representative of occupancy for facilities operated at year end.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financial Condition, Capital Resources and Liquidity - ----------------------------------------------------
During most of 1993 Care relied on operations to meet its liquidity needs. Cash provided by operations totalling $10,570,000 for the year was used to make principal payments of $9,338,000 on long-term debt, including payments of $7,180,000 on the Term Notes. Cash used in investing activities totalled $5,074,000, including routine capital expenditures of $3,884,000 and payments of an additional $1,542,000 to exercise options to purchase two previously leased facilities, offset slightly by collections on notes receivable.
On December 30, 1993 Care sold $30,000,000 of its 8.1% Senior Secured Notes to a number of institutional investors in a private transaction. The notes have an average maturity of five years and provide for semiannual interest payments, with annual principal payments of $6,000,000 commencing in January, 1997. The proceeds of the notes were used to pay $18,851,000 of existing debt, including the remaining balance of $11,569,000 on the Term Notes. An additional $495,000 was used to pay the outstanding balance of a capitalized lease obligation and purchase the related facility. Proceeds of the borrowing were also used to pay costs and expenses of the issuance of the notes totalling $1,139,000, and $709,000 was used to establish cash escrows with a title company pending the resolution of certain title and debt payoff related issues and to pay certain other costs.
The $8,806,000 net cash proceeds from the sale of the Senior Secured Notes, combined with the reduction in current maturities of long-term debt, has created a working capital surplus of $5,769,000 at December 31, 1993, including cash of $12,985,000. Management believes the Company's liquidity, including cash provided by operating activities, is adequate to finance planned 1994 capital expenditures of approximately $5,000,000 and other known operating needs.
In March 1994 Care entered into an $8,000,000 letter of credit facility with the Bank of America to replace $6,238,000 letters of credit previously issued by another bank to be used in connection with its self-insured workers' compensation programs in California and Ohio. The new letter of credit facility will allow Care to further improve liquidity by substituting an additional $1,762,000 in letters of credit for cash collateral currently held by certain regulatory agencies. Accordingly, these deposits have been included in receivables in the Company's balance sheet as of December 31, 1993.
Comparison of operating results 1993 to 1992 - --------------------------------------------
Revenues for the year ended December 31, 1993 increased by $8,306,000 compared to 1992. The change consisted of increases of $16,180,000 for nursing and rehabilitation centers and $5,832,000 for home health, offset by a decrease of $13,706,000 for operations discontinued in 1992. The increase in nursing and rehabilitation center revenues is attributable to several factors. Medicare revenues increased by $11,849,000 due to the continued growth of therapy, subacute, and other specialized clinical services and a 13% increase in Medicare utilization. Medicaid revenues increased by $3,642,000 primarily due to rate increases, offset slightly by lower Medicaid utilization. Home health revenues increased due to the development of new clinical services and increased visits resulting from marketing efforts.
The increase in salaries and employee benefits is the result of wage rate increases, increased labor hours and the resulting increase in payroll-related costs for nursing and rehabilitation centers and home health, partially offset by a decrease of $7,153,000 related to operations discontinued in 1992. The increase in labor hours is primarily the result of growth of the home health business.
Share appreciation rights ("SARs") expense increased $1,834,000 due to the increase in the market price of shares of Care's Common Stock from $2.75 per share at December 31, 1992 to $9.625 per share at December 31, 1993. Depending on the future performance of Care's Common Stock, Care may incur substantial additional charges related to the SARs in future periods, through December 1995, which will aggregate approximately $333,000 for each one dollar increase in the market price of Care's Common Stock.
Supplies and other expenses consist of food, routine supplies, costs related to therapy services, utilities, maintenance and other general and administrative expenses. The increase in supplies and other expenses is primarily the result of higher therapy-related costs in the nursing and rehabilitation centers and home health due to Care's increased provision of those services, offset by a decrease of $2,588,000 related to operations discontinued in 1992. The increased emphasis on the provision of therapy services also resulted in an increase in the cost for contract therapists, which accounts for most of the increase in purchased services and professional fees. Other costs and expenses increased due to the imposition of a health care provider tax in West Virginia.
The decrease in interest expense is primarily due to the lower outstanding debt balances. The outstanding debt balances were increased on December 30, 1993 and interest expense for 1994 is expected to be substantially higher than for 1993. Lease and rent expense and depreciation decreased due to the discontinuance of certain operations in 1992.
Comparison of operating results 1992 to 1991 - --------------------------------------------
During 1992 revenues increased by $6,372,000, consisting of increases of $11,976,000 for nursing and rehabilitation centers and $3,010,000 for home health partially offset by a $8,614,000 decrease for pharmacies. The decrease in pharmacy revenues resulted from the contribution of the pharmacies to an unconsolidated partnership on April 1, 1992. The increase in nursing and rehabilitation center revenues is attributable to several factors. The fastest growing revenue source was occupational, speech, and physical therapies which increased by approximately $4,300,000. Medicare and Medicaid revenues increased by $2,553,000 and $6,212,000, respectively, due primarily to rate increases. Medicaid revenues for 1992 include approximately $865,000 of favorable rate increases related to 1990 and favorable cost report settlements of $381,000. Medicare revenues for 1992 and 1991 include favorable settlements on prior years' cost reports of $670,000 and $743,000, respectively.
The increase in salaries and employee benefits of $2,990,000 is primarily the result of wage rate increases, increased labor hours, and increases in the cost of vacation and other employee benefits provided by the Company totalling $6,724,000. This was offset by a reduction of $3,069,000 for pharmacies and a $665,000 decrease in the provision for workers' compensation insurance resulting from favorable loss experience on prior years' claims. The increase in wage rates was primarily due to nursing salaries which, unlike other staff salaries, are being driven upwards by increased market competition. The increase in labor hours is the result of enforcement of OBRA regulations,
increased acuity levels of patients in the nursing and rehabilitation centers and increases in home health due to growth in that business.
Supplies and other costs and expenses consist of food, routine supplies, costs relating to therapy services, utilities, maintenance and other general and administrative expenses. The decrease in supplies and other expenses was the result of decreased pharmacy cost of sales, offset by higher therapy-related costs in the nursing and rehabilitation centers due to Care's increased provision of therapy services and inflation.
Care's increased emphasis on the provision of therapy services, as discussed above, resulted in an increase in the cost for contract therapists, which accounts for most of the increase in purchased services. The professional fee reduction was the result of the discontinuance of the services of certain management consultants.
The decrease in the provision for doubtful accounts and losses is the result of an increased provision in 1991 for losses on mortgage notes receivable offset by a reduced provision in 1992 resulting from substantial recoveries of accounts previously written off as uncollectible. Lease and rent expense decreased due to the contribution of the pharmacies to a partnership, offset by an increase in rent under a short-term lease of a formerly owned facility. Depreciation expense decreased due to the disposal of two nursing and rehabilitation centers in 1991, combined with the elimination of the expense related to assets contributed to the pharmacy partnership. Interest expense declined due to lower interest rates on variable rate debt and a decrease in outstanding debt balances of approximately $7,700,000 during 1992.
Additional financial data for fiscal 1992 - -----------------------------------------
In 1992, Care recognized a gain of $1,007,000 on a nursing facility disposal which occurred in 1991. The gain represents the difference between the book value of the nursing facility assets which were acquired in 1991 by a bank in a non-judicial foreclosure and management's estimate of the value of the assets surrendered.
Care reduced its reserve for losses on discontinuance of certain operations by $461,000 and reduced its reserve for fees and expenses in connection with Chapter 11 proceedings by $75,000.
Impact of Inflation - -------------------
Care's principal costs are salaries and wages (and related employee benefit costs) and payments to third parties for services rendered, all of which are generally sensitive to inflation. A principal source of Care's revenues is derived from the Medi-Cal program which is not a cost reimbursement type program. Adjustments to Medi-Cal reimbursement rates are typically made only on an annual basis and such adjustments may not be sufficient to fully cover all inflationary cost increases.
ITEM 8.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE
Report of Independent Auditors 18
Consolidated Balance Sheets as of December 31, 1993 and 1992 19
Consolidated Statements of Operations, Years Ended December 31, 1993, 1992 and 1991 20
Consolidated Statements of Shareholders' Equity, Years Ended December 31, 1993, 1992 and 1991 21
Consolidated Statements of Cash Flows, Years Ended December 31, 1993, 1992 and 1991 22
Notes to Consolidated Financial Statements 24
Report of Independent Auditors
Shareholders and Board of Directors Care Enterprises, Inc.
We have audited the accompanying consolidated balance sheets of Care Enterprises, Inc. and subsidiaries as of December 31, 1993 and 1992, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1993. Our audits also included the financial statement schedules listed in the index at Item 14(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules 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 consolidated financial position of Care Enterprises, Inc. and subsidiaries at December 31, 1993 and 1992, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
As discussed in notes to the consolidated financial statements, in 1992 the Company changed its method of accounting for income taxes.
ERNST & YOUNG
Orange County, California March 10, 1994
CARE ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except number of shares and par values)
See Independent Auditors' Report and Notes to Consolidated Financial Statements
CARE ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts)
See Independent Auditors' Report and Notes to Consolidated Financial Statements
CARE ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (in thousands)
See Independent Auditors' Report and Notes to Consolidated Financial Statements.
CARE ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
See Independent Auditors' Report and Notes to Consolidated Financial Statements
CARE ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands, except facility data) (Continued)
In 1992 Care contributed the net assets of five pharmacies and four distribution centers having a net book value of $1,400,000 to a partnership formed with another long-term provider. During 1991 Care disposed of two facilities, one of which the Company continued to operate under a short term lease agreement through November 1992.
See Independent Auditors' Report and Notes to Consolidated Financial Statements
NOTE 1 - MERGER AGREEMENT - -------------------------
On December 20, 1993, Care Enterprises, Inc. ("Care" or "the Company") and Regency Health Services, Inc., a Delaware corporation ("Regency"), entered into an Agreement and Plan of Merger (the "Merger Agreement"). Regency currently operates 43 long-term care facilities with 4,215 beds and one pharmacy, all located in California. Pursuant to the Merger Agreement, Care will be merged with and into Regency with Regency as the surviving corporation (the "Merger") and each share of Care's Common Stock will be converted into 0.71 shares of Regency's Common Stock, par value $0.01 per share in a tax-free transaction. The Company anticipates that the Merger will be accounted for as a pooling of interests.
The Merger has been approved by the Board of Directors of both companies and its completion is subject to, among other things, the approval of regulatory agencies and the shareholders of each of Care and Regency. In connection with the Merger Agreement, shareholders holding a majority of Care's Common Stock and shareholders holding approximately 22% of Regency's Common Stock have agreed to vote in favor of the Merger under certain circumstances. Care anticipates that the Merger will be consummated in the second calendar quarter of 1994.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - ---------------------------------------------------
Nature of Business - ------------------
Care provides skilled and intermediate nursing, rehabilitative services, subacute and other specialized medical services. Services are provided in the Company's owned, leased or managed nursing and rehabilitation facilities located in California, Ohio, West Virginia and New Mexico. Care, through its wholly-owned subsidiary Care Home Health Services, Inc., provides patients at home with technical medical support such as infusion therapy and ventilator care, and respite services such as assistance with personal hygiene, cooking and cleaning.
Principles of Consolidation - ---------------------------
The consolidated financial statements include the accounts of Care and its wholly-owned subsidiaries. All material intercompany balances have been eliminated.
Reclassifications - -----------------
The Company has reclassified the presentation of certain prior year information to conform with the current year presentation.
Cash - ----
Cash consists of cash balances held in banks and petty cash funds. The cash balance at December 31, 1993 includes $6,238,000 temporarily placed with Wells Fargo Bank to collateralize letters of credit issued in conjunction with Care's self-insured workers' compensation programs. An agreement in principle
was reached in December 1993, and a definitive agreement was signed in March 1994 with the Bank of America to provide an $8,000,000 letter of credit facility (Note 7) and new letters of credit were obtained to secure the workers' compensation obligations.
At December 31, 1993 and 1992 the Company held personal funds in trust for patients approximating $425,000 and $400,000, respectively, which are not reflected on the accompanying balance sheets.
Supplies Inventory - ------------------
Supplies inventory is stated at the lower of cost or market using the first- in, first-out method.
Property and Equipment - ----------------------
Property and equipment owned by the Company at the time of its emergence from bankruptcy on December 31, 1990 was adjusted to its then current fair market value. All other property and equipment is stated at cost. Depreciation and amortization is provided on the straight-line method over the following estimated useful lives or, if applicable, over the terms of the leases.
Buildings 20 to 40 years Leasehold interests and improvements 7 to 30 years Equipment 5 to 10 years Assets under capitalized leases 10 to 25 years
Betterments, renewals and extraordinary repairs that extend the life of the asset are capitalized; other repairs and maintenance are expensed. The cost and accumulated depreciation applicable to assets retired are removed from the accounts and any gain or loss on disposition is recognized in income.
Health Care Revenues and Reimbursement Programs - -----------------------------------------------
Long-term care facilities receive payments for services to certain patients under Medicare and state Medicaid programs and from the Veterans Administration. Revenues are recorded at the estimated net realizable amounts from patients and third party payors in the period in which the service is provided. Approximately 83% (1993), 82% (1992), and 83% (1991) of total revenue was derived from federal and state medical assistance programs. Revenues under these programs are based in part on cost reimbursement principles which govern reimbursement of current year costs. These revenues and costs are subject to audit and, in the opinion of management, adequate provision has been made for any adjustments that may result from such audits. Differences between estimated provisions and final settlements are reflected in operations in the year finalized. Approximately 75% (1993) and 78% (1992) of the Company's accounts receivable were related to federal and state medical assistance programs including approximately 26% (1993) and 33% (1992) related to the California Medicaid program.
Interest Expense - ----------------
Interest expense is reflected net of $712,000, $752,000 and $1,280,000 of interest income for the years ending December 31, 1993, 1992 and 1991,
respectively.
Income Taxes - ------------
During 1991, the Company accounted for income taxes under the provisions of Statement of Financial Accounting Standards No. 96 ("SFAS 96"). Effective December 31, 1992, the Company adopted (on a cumulative basis from January 1, 1992) the provisions of Statement of Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes" (Note 3).
In accordance with AICPA Statement of Position 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7"), SFAS 96 and SFAS 109 tax benefits recognized in periods subsequent to bankruptcy reorganization, resulting from utilization of pre-reorganization financial reporting Net Operating Losses ("financial reporting NOL"), are recorded by the Company as direct additions to additional capital with a corresponding charge in lieu of taxes included in the provision for income taxes in the Statement of Operations.
Income Per Share - ----------------
Income per share for 1993, 1992 and 1991 has been computed on the basis of the weighted average shares of Common Stock outstanding plus, for 1993, common equivalent shares arising from dilutive stock options, using the treasury stock method. For 1992, common equivalent shares arising from dilutive stock options have been excluded from the determination of income per share due to immateriality. No such options were outstanding during 1991. For the computation of fully diluted income per share for 1991, shares issued in November 1991 for the conversion of the $3,000,000 secured convertible exchangeable notes are included in the weighted average shares outstanding from the beginning of 1991 and, accordingly, net income for 1991 has not been reduced by interest expense on the notes. The weighted average number of common and common equivalent shares outstanding for the calculation of primary income per share was 13,312,000 in 1993, 11,667,000 in 1992, and 9,294,000 in 1991. The weighted average number of shares used to compute income per share, assuming full dilution, was 13,388,000 in 1993, 11,667,000 in 1992, and 11,635,000 in 1991. All common shares issued pursuant to the Plan of Reorganization have been treated as outstanding as of December 31, 1990.
The income per share calculation does not include the shares reserved for issuance in connection with the Company's Share Appreciation Rights Plan (Note 8), which provides for settlement of the rights in cash or stock. The Company's Board of Directors does not presently plan to issue any shares in settlement of the rights.
Workers' Compensation Self-Insurance - ------------------------------------
The Company maintains self-insurance programs for workers' compensation in California and Ohio. The self-insurance liability under these programs is based on claims filed and estimates of claims incurred but not reported. The self-insurance liability is discounted at a rate of 10%, which management believes to be its appropriate market rate of interest based on its current financial circumstances.
Professional Liability Insurance - --------------------------------
The Company maintains approximately $30,000,000 of professional liability insurance covering substantially all of its operations on a claims-made basis, with a $10,000 deductible for operations in the states of New Mexico and West Virginia and a $250,000 self-insurance retention for all other locations. The estimated amount payable for claims, including unasserted claims, under the Company's self-insurance retention is recorded as a liability, without discounting.
NOTE 3 - INCOME TAXES - ---------------------
During 1991, the Company accounted for income taxes under the provisions of SFAS 96. Effective December 31, 1992, the Company adopted (on a cumulative basis from January 1, 1992) the provisions of SFAS 109, which mandates the liability method of accounting for deferred income taxes and permits the recognition of net deferred tax assets subject to an ongoing assessment of realizability. The change in accounting for income taxes did not have a material effect on the Company's financial statements.
For federal tax return purposes, Care Enterprises, Inc. files a consolidated tax return with its subsidiaries. As of December 31, 1993, the Company had claimed a federal net operating loss carryforward for tax purposes ("Tax NOL") of approximately $93,200,000 and credit carryforwards of approximately $4,021,000. However, when the Company's Plan of Reorganization was confirmed, an ownership change as defined in Internal Revenue Code ("IRC") Section 382 occurred. As a result, use of Tax NOL and credit carryforwards accumulated on or before April 20, 1990 ("pre-confirmation") may be subject to an annual limitation of approximately $300,000. Tax losses and credits generated after April 20, 1990 ("post-confirmation") are not subject to the above limitation.
Because a portion of the Company's Tax NOL was generated as early as 1985, it will begin to expire in the year 2000. Considering the annual limitation, it is currently estimated that as of December 31, 1993, a maximum of $3,300,000 of Tax NOL in the aggregate will be available for use prior to expiration.
Management is pursuing the possibility that the Company may qualify for the special provisions of IRC Section 382(l)(5), which could reduce the aggregate Tax NOL and credit carryforwards available but would not limit their annual use. Should circumstances permit the Company to qualify for this section of the IRC, a significant portion of the pre-confirmation Tax NOL and credit carryforwards could become available for use. However, the Merger (discussed in Note 1) may also result in a limitation on the use of the Company's post- confirmation Tax NOL and credit carryforwards and, if Section 382(l)(5) applies, pre-confirmation Tax NOL and carryforwards.
The Internal Revenue Service ("IRS") is examining the Company's income tax returns for the years 1987 through 1990. Management believes that the outcome of this examination will not have a material impact on the financial position or liquidity of the Company, although it may reduce the Tax NOL.
In March 1994 the IRS issued final regulations relating to net operating losses, and specifically relating to the determination of eligibility for the use of Section 382(l)(5). Based on the new regulations, management believes the Company will qualify for use of this section. After applying its
provisions, the amount of Tax NOL would be approximately $53,000,000, usable without annual limitation, before the effect of any audit adjustments.
Deferred income tax assets and liabilities originate from differences between accounting principles and procedures used for book and tax purposes, principally related to depreciation, contingencies and legal settlements, workers' compensation, share appreciation rights, bankruptcy costs and fees, doubtful accounts and reserves for losses on discontinuance of certain operations.
The provision for income taxes consists of the following:
A reconciliation of the federal statutory income tax rate with the Company's effective tax rate follows:
The tax effect of the temporary differences giving rise to the Company's deferred tax assets and liabilities are shown on the following table:
NOTE 4 - PROPERTY AND EQUIPMENT - ------------------------------- A summary of property and equipment follows:
NOTE 5 - DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS - --------------------------------------------------
Other assets consist of deposits (primarily related to the Company's self- insured workers' compensation plans and facility leases), debt service reserves related to the Industrial Development Bonds, a 26% interest in a pharmacy partnership, deferred charges and other.
Accrued liabilities consist of the following (in thousands):
NOTE 6 - LONG-TERM DEBT AND CREDIT FACILITIES - ---------------------------------------------
Long-term debt consists of the following:
The repayment of the remaining balances of the Term Notes and the working capital loan and the reduction of the outstanding balances of IDB's, mortgage notes payable, and capitalized lease obligations was primarily accomplished with the proceeds of the Senior Secured Notes, as discussed below.
The aggregate maturities of long-term debt and capitalized lease obligations for the ensuing five years and thereafter are as follows (in thousands):
On December 30, 1993, Care entered into a Note Agreement with a number of institutional purchasers pursuant to which it issued $30,000,000 of its 8.10% Senior Secured Notes due December 15, 2000 ("Notes"). The Notes have an average maturity of five years and provide for interest payments on each of January 15 and July 15, commencing January 15, 1994. Principal payments of $6,000,000 are due annually commencing on January 15, 1997, with the final payment due on maturity. The Notes are secured by mortgages on eleven nursing facilities having an aggregate carrying value of $30,374,000. The Notes contain covenants which require the maintenance of certain financial ratios and levels of tangible net worth, restrict the incurrence of new debt, and limit the payment of dividends on Care's Common Stock.
The proceeds of the Notes were used to pay $18,851,000 of existing debt, including the remaining balance of $11,569,000 on the Term Notes, the $1,000,000 working capital loan from a shareholder, and $6,282,000 in other debt. An additional $495,000 was used to pay the outstanding balance of a capitalized lease obligation and purchase the related facility. Proceeds of the borrowing were also used to pay costs and expenses of the issuance of the notes totalling $1,139,000, and $709,000 was used to establish cash escrows with a title company pending the resolution of certain title and debt payoff related issues and to pay certain other costs.
Each of the mortgage notes and IDBs is secured by a first deed of trust on the related facility. One of the IDBs requires the maintenance of debt service reserve funds and all of the IDBs contain affirmative and negative covenants and reporting requirements.
NOTE 7 - COMMITMENTS AND CONTINGENCIES - --------------------------------------
Letters of Credit - -----------------
The Company is contingently liable under letters of credit principally related to deposit requirements on its self-insured workers' compensation plans. State regulations require the maintenance of deposits at specified percentages of estimated future claim payments which can be satisfied through a combination of cash deposits, surety bonds and letters of credit. The total amount of letters of credit outstanding at December 31, 1993 and 1992 were $6,238,000 and $6,250,000, respectively.
An agreement in principle was reached in December 1993, and a definitive agreement was signed in March 1994 with the Bank of America to provide an $8,000,000 letter of credit facility secured by Care's accounts and notes receivable and the shares of Care's subsidiary, Healthcare Network, which is a partner in the pharmacy partnership.
Leases - ------
The Company leases certain facilities and offices under cancelable and noncancelable agreements expiring at various dates through October 2010. The leases are generally triple-net leases and provide for the Company's payment of property taxes, insurance and repairs. Certain leases contain renewal options and rent escalation clauses. Rent escalation clauses require either fixed increases or increases tied to the Consumer Price Index. Five leases include purchase options at fixed or market prices at various dates. Three leases include put options in the year 2000 at 100% of fair market value.
Rent and lease expenses aggregated $6,897,000 for 1993, $7,682,000 for 1992, and $7,785,000 for 1991.
Future minimum lease payments (in thousands) for operating leases at December 31, 1993 are as follows:
Guarantees of Leases - --------------------
The Company is contingently liable for certain operating leases assumed by the purchasers of the Company's leasehold interests in facilities. The Company is not aware of any failure on the part of these purchasers to meet the terms of their obligations, and does not anticipate any expenditures to be incurred in connection with its guarantees. If a default were to occur, the Company generally would be able to assume operations of the facility and use the net revenues thereof to defray the Company's expenditures on these guarantees.
The following is a schedule of future minimum lease payments (in thousands) for the operating leases for which the Company is contingently liable:
Litigation - ----------
The Company is also subject to various claims and lawsuits which arise in the normal course of business. In the opinion of management, adequate provision has been made and such claims or actions are not expected to have a material adverse effect on the Company's financial position.
NOTE 8 - CAPITAL STRUCTURE - --------------------------
The Company has authorized capital stock of 26,000,000 shares consisting of 1,000,000 shares of Series A Preferred Stock, $1.00 par value per share, and 25,000,000 shares of Common Stock, $.01 par value per share.
Preferred Stock - ---------------
The Preferred Stock, none of which has been issued, has certain preferences upon liquidation or redemption and has voting rights similar to the Common Stock.
Common Stock - ------------
On December 21, 1992, the Company sold 1,633,000 shares of Common Stock to affiliates of Smith Management Company and Foothill Group, Inc., its two largest shareholders for $4,000,000 (Note 9). In 1992, Care retired 46,000 shares of Common Stock which had been acquired by the Company through settlement of certain claims.
Stock Option Plan - -----------------
In 1992, the Board of Directors and the shareholders of the Company approved a stock option plan providing for the grant of options to employees and certain consultants to purchase an aggregate of 550,000 shares of the Company's Common Stock. Under this plan, full-time employees are eligible to receive grants of either incentive stock options structured to qualify under Section 422 of the IRC of 1986, or nonqualified stock options which are not intended to meet the requirements of the IRC. Consultants and certain eligible directors may be granted only nonqualified stock options. The options vest over a four year
period and have an exercise price equal to the market price of the Company's common stock on the date of grant. Outstanding options expire on various dates through December 15, 1998.
Stock option activity (in shares):
Share Appreciation Rights Plan - ------------------------------
In January 1991, Care's Board of Directors adopted a Share Appreciation Rights Plan (the "SAR Plan") which provided for the award of 1,000,000 units to certain key executives. The SAR Plan was amended by the Board of Directors and shareholders in May 1992.
The SAR Plan provides that upon award, 25% of the units vest on each of the first four anniversaries of the award date and vested units must be exercised before the fifth anniversary of the award. Upon exercise, the awardee is entitled to receive in cash or stock, at the Company's option, the difference between the base value awarded and the market value on the date units are exercised.
As indicated below, of the 900,000 units which were awarded in 1991 at the base price of $1 per unit, 36,000 were exercised, 531,000 were forfeited and 333,000 remain outstanding, of which 166,500 are vested as of December 31, 1993. The Board of Directors has decided not to award additional rights under the SAR Plan. During 1993, 1992 and 1991, the Company accrued $2,157,000, $323,000 and $293,000, respectively, in benefits associated with this plan and 450,000 shares of Common Stock have been reserved for possible issuance in settlement of the appreciation due awardees.
Share appreciation rights activity (in units):
NOTE 9 - RELATED PARTY TRANSACTIONS - ------------------------------------
Smith Management Company and its affiliated companies ("Smith") and Foothill Capital Corporation, Foothill Group, Inc. and affiliates ("Foothill") are significant shareholders of the Company.
In January 1992, Foothill acquired from Wells Fargo Bank, N.A. a 50% interest in the Company's Term Note obligation. Their portion of the Term Notes amounted to $9,375,000 at December 31, 1992. As part of the transaction, Foothill also acquired a contingent letter of credit obligation with a principal amount of $4,316,000. The remaining balance of the Term Notes was paid on December 30, 1993.
In December, 1992, the Company sold 1,633,000 shares of Common Stock to Smith and Foothill for $4,000,000. In connection with this transaction, Smith and Foothill have registration rights whereby they can join the Company in a registration if the Company chooses to register other shares of its Common Stock with the Securities and Exchange Commission.
In 1990 and 1991 the Company sold $3,000,000 in secured convertible exchangeable notes to Smith and Foothill. The notes, which had a maturity date of December 31, 1993, bore interest at a rate approximating the Citibank, N.A. prime rate plus 1% payable quarterly, were secured by two of the Company's nursing facilities. The notes were convertible at any time, at the option of the holder, into shares of Preferred Stock or Common Stock and would automatically convert into shares of Common Stock upon the occurrence of certain events. On November 14, 1991, the requirements for automatic conversion were met and the notes were converted into 2,679,000 shares of Common Stock. The holders of these shares have registration rights whereby they can request, at the Company's expense, that the Common Stock issued be registered with the Securities and Exchange Commission. Foothill also provided the Company with a $1,000,000 revolving credit working capital facility which was terminated, and the outstanding balance paid, in December 1993.
In April 1991, the Company engaged Smith to assist in the development and implementation of a program which would improve the Company's liquidity. Under this agreement, the Company paid Smith an aggregate of $218,000 for 1992 and $100,000 for 1991. This agreement expired on December 31, 1992.
The Company has a 26% interest in the pharmacy partnership formed in April 1992. The partnership continues to provide products and services to the
nursing and rehabilitation centers operated by the Company. For 1993 and 1992 these purchases totalled approximately $5,900,000 and $4,200,000, respectively.
NOTE 10 - DISPOSAL OF FACILITY - ------------------------------
In 1992, Care recognized a gain of $1,007,000 on a nursing facility disposal which occurred in 1991. The gain represents the difference between the book value of the nursing facility assets which were acquired in 1991 by a bank in a non-judicial foreclosure and management's estimate of the value of the assets surrendered.
NOTE 11 - RETIREMENT SAVINGS PLAN - ---------------------------------
Effective January 1, 1992, the Company began accepting the entry of new participants and began accepting participant contributions to the Care Enterprises, Inc. Retirement Savings Plan, which is a qualified cash or deferred arrangement under Section 401(k) of the Internal Revenue Code. All employees with at least one year of employment who have attained the age of 21 are eligible to participate. Participants may contribute, on a pretax basis, up to 15% of their earnings to the plan (subject to certain limitations), for which the Company matches 15% of the first 3% of contributions for persons with less than three years of service and 25% of the first 5% for all others. The Company's contributions are subject to a four-year vesting period. Matching contributions made by the Company for 1993 and 1992 were $186,000 and $155,000, respectively.
NOTE 12 - QUARTERLY FINANCIAL DATA - ----------------------------------
During the fourth quarter of 1993 the Company recorded a charge of $1,694,000 for compensation payable under the Share Appreciation Rights Plan. This charge is the result of an increase in the market price of Care's Common Stock from $4.00 per share at September 30, 1993 to $9.625 at December 31, 1993.
During the fourth quarter of 1992 the Company recognized gains resulting from the reversal of reserves for losses on the discontinuance of certain operations of $461,000, the reversal of reserves for expenses and fees resulting from Chapter 11 proceedings of $75,000 and recognized a gain on the sale of a facility disposed of in 1991 of $1,007,000.
During the second quarter of 1991 Care disposed of one facility and recognized a loss of $653,000 that was charged against reserves for losses on discontinuance of certain operations.
During the third quarter of 1991 the Company recognized gains resulting from the reversal of reserves for losses on the discontinuance of certain operations of $882,000.
During the fourth quarter of 1991 the Company recognized gains resulting from the reversal of reserves for losses on the discontinuance of certain operations of $374,000 and reversal of reserves for expenses and fees resulting from Chapter 11 proceedings of $464,000.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
John W. Adams, 50, has been Chairman of the Board of Directors since May 1990 and was Chief Executive Officer of the Company from September 1991 through December 1993. He has been President of Smith Management Company, a New York- based investment firm since January 1984. Mr. Adams served as Co-Chairman of the Official Creditors' Committee during the Company's reorganization proceedings from March 1988 to December 1990. From 1975 to 1983, Mr. Adams was a partner with the law firm of Dillon, Bitar and Luther in New Jersey.
Corley R. Barnes, 42, has been a director of the Company since May 1990. He is a private investor and a financial consultant to various publicly and privately held companies, including certain companies in the health care industry. Mr. Barnes served on the Official Creditors' Committee during the Company's reorganization proceedings from March 1988 through December 1990.
Laraine K. Beck, 43, has been a director of the Company since May 1990. Since December 1992, Ms. Beck has been the Senior Credit Manager at Rykoff/Sexton, a food service distribution company based in Los Angeles, California. Prior to joining Rykoff, Ms. Beck was the Regional Credit Manager of Kraft Food Service, a food production and distribution company from 1978 to 1992 and served as Co-Chairman of the Official Creditors' Committee during the Company's reorganization proceedings from March 1988 through December 1990. From 1975 to 1978, Ms. Beck was employed as Credit Manager of White Motor Credit, a truck manufacturing company, located in Dallas, Texas.
Robert G. Coo, 52, has been a director of the Company since January 1991. Also since January 1991, Mr. Coo has been Vice President, Chief Financial Officer and Secretary of Pengo Industries, Inc., the parent company of two manufacturing companies - Pengo Corporation and Goex, Inc. From 1987 to 1990, Mr. Coo was Vice President, Finance and Secretary of Renewable Resource Systems, Inc., a privately owned, diversified venture capital company. Mr. Coo has been a director of First National Bank, whose headquarters are located in San Diego, California, since October 1993. Mr. Coo is the brother-in-law of Mr. Adams.
John F. Nickoll, 59, has been a director of the Company since November 1991. Since 1970, he has been Vice Chairman, Co-Chief Executive Officer, Chief Operating Officer and President of The Foothill Group, Inc. and Chairman and Chief Executive Officer of Foothill Capital Corporation, a subsidiary of The Foothill Group. Mr. Nickoll is also a director of Carson Pirie Scott & Co., Inc.; a director of CIM-High Yield Securities, Inc., a closed-end investment company; and a director of American Healthcare Management, Inc., an owner and manager of acute care hospitals.
Arthur J. Pasmas, 59, has been a director of Care since December 1993, when he was elected to fill the vacancy created by the death of a board member. Since 1987, Mr. Pasmas has served as a Vice President of Smith Management Company. Prior thereto, he was founder, President, and Chief Executive Officer of Energy Management Corporation (acquired by Smith Management Company in 1987). He presently serves as Chairman of the Board of Pengo Industries, Inc. and of Goex International, Inc., and is a director of Liberty National Bank, Austin, Texas.
Richard K. Matros, 40, has been a director of the Company since November 1991, President and Chief Operating Officer of the Company since September 1991 and Chief Executive Officer of the Company since January 1994. Prior to September 1991, Mr. Matros was Executive Vice President, Operations of the Company from March 1988. Before joining the Company, Mr. Matros served as Vice President of Operations, from 1985 to 1987, and Regional Administrator, from 1983 to 1985, for Beverly Enterprises, the nation's largest long-term care company. He has over 17 years of experience in the long-term care industry and is President-elect of the California Association of Health Facilities.
Gary L. Massimino, 57, was appointed Chief Financial Officer of the Company in March 1990 and Executive Vice President in September 1991. For the previous eight years, Mr. Massimino was a financial consultant to companies in the health care, real estate and entertainment industries in various specialized financial projects. He has also served as Chief Financial Officer, Treasurer and a Director of Flagg Industries, Inc., a major California-based operator of nursing homes and real estate ventures.
Barbara A. Garner, 39, was appointed Vice President of Professional Services in January 1988. Ms. Garner has been an Administrator and Southern Division Quality Assurance Coordinator since joining Care in 1983. From 1978 to 1983, she held nursing and administrator responsibilities with National Health Enterprises and Hillhaven; both companies are providers of skilled nursing care.
Janet M. Turner, 62, was appointed Vice President of Nursing and Rehabilitation Centers in July 1992. Prior to her appointment, Ms. Turner was the Company's Director of Operations from September 1991 to June 1992 and a Regional Administrator from 1983 to 1988 and again from 1989 to 1991. From 1988 through 1989, Ms. Turner served as a Regional Administrator for ARA Living Centers, a nationwide long-term care company based in Houston, Texas. Ms. Turner joined Care Enterprises in 1983 in conjunction with the Company's acquisition of Casa Blanca Convalescent Homes, Inc., a long-term care company for which she was then Vice President of Operations for Northern California. She has over 25 years experience in the long-term care industry including serving as a statewide Officer for the California Association of Health Facilities from 1976 through 1980.
Steven C. Ronilo, 44, was appointed Vice President of Human Resources in March 1990. Prior to his appointment, from 1984 to 1990, Mr. Ronilo was the Corporate Director of Industrial Relations for Beverly Enterprises, Inc., the nation's largest long-term care company. Prior to joining Beverly Enterprises, Mr. Ronilo held a variety of positions in upper management specializing in labor relations, employee relations and industrial relations for various manufacturing companies. Mr. Ronilo has over 21 years experience in the field of human resources, including personnel development and administration and union negotiation.
One report to the Securities and Exchange Commission on Form 5, due February 14, 1994, was filed on March 21, 1994 by Janet M. Turner. The report covered one transaction in December, 1993.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
(1) The Company has no restricted stock awards outstanding. (2) The Company has no long term incentive payout plans. (3) All compensation is reported in columns c, d, & e. (4) SARs granted January 1, 1991. (5) Options granted April 9, 1992. (6) Options granted February 26, 1993. (7) Includes $26,000, $23,000, and $14,000 in Director's fees for 1993, 1992, and 1991, respectively. (8) Includes $9,688 of compensation resulting from December 20, 1993 exercise of nonqualified stock options.
Options/Stock Appreciation Rights (SAR) Grants in Last Fiscal Year ------------------------------------------------------------------
Aggregated Option/SAR Exercises in Fiscal Year ended December 31, 1993 and - -------------------------------------------------------------------------- December 31, 1993 Option/SAR Value ----------------------------------
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information, as of March 22, 1994, with respect to all those known by the Company to be the beneficial owners of more than 5% of its outstanding Common Stock, each director who owns shares of Common Stock, and all directors and executive officers of the Company as a group. Except as otherwise indicated, the address of each individual director is in care of the Company at 2742 Dow Avenue, Tustin, California, 92680.
(1) Common Stock consists of 13,243,168 shares issued and outstanding as of March 22, 1994.
(2) According to reports filed with the Securities and Exchange Commission and Company records, the aggregate number of shares reported for the
Smith Group is beneficially owned by a group comprised of SOLVation Inc., d/b/a/ Smith Management Company, Randall D. Smith, Gary M. Smith, Energy Management Corporation, Woodstead Associates, L.P., The Durian Trust and SEGA Associates, L.P.
(3) According to the most recent reports filed with the Commission and Care records, the aggregate number of shares reported for The Foothill Group was 3,161,729 and includes shares beneficially owned by The Foothill Group, Inc., a Delaware corporation, The Foothill Fund, a California limited partnership, Foothill Capital Corporation, a California corporation, Foothill Partners L.P., a Delaware Limited Partnership, as well as 35,803 shares owned directly by John F. Nickoll. On March 3, 1994, The Foothill Fund distributed 1,663,857 shares of Care Common Stock in connection with the liquidation of the partnership following the expiration of the partnership term. Of such amount, 1,928 shares were distributed to John F. Nickoll and 108,161 shares were distributed to The Foothill Group.
(4) Mr. Adams is the sole general partner of SEGA Associates, L.P. and accordingly has voting control and beneficial ownership of 64,175 shares of Care Common Stock held by SEGA Associates, L.P. Mr. Adams is also the President of Smith Management Company and indirectly owns 4.2% of Smith Management Company.
(5) Mr. Coo is the brother-in-law of John W. Adams.
(6) John F. Nickoll is the President, Co-Chief Executive Officer and a Director of The Foothill Group, Inc.
(7) Richard K. Matros is President and Chief Executive Officer of the Company. Beneficial ownership includes 31,250 shares that could be purchased within 60 days of March 22, 1994 upon exercise of stock options, but does not include SARs.
(8) Arthur J. Pasmas is Vice President of Smith Management Company.
(9) Includes 64,500 shares that could be purchased within 60 days of March 22, 1994 upon exercise of stock options, including 31,250 shares that could be purchased by Mr. Matros, and 22,000 shares that could be purchased by Mr. Massimino. Does not include SARs.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Smith Management Company and its affiliated companies ("Smith") and Foothill Capital Corporation ("Foothill Capital"), Foothill Group, Inc. and its affiliates ("Foothill") are significant shareholders of Care. John W. Adams, Chairman of the Board of Directors of Care (and, until January 1994, Care's Chief Executive Officer), is President of Smith Management Company. Arthur J. Pasmas, a director of Care, is also employed by Smith. Mr. Adams received a fee for services as chief executive officer of Care at the rate of $50,000 per annum until December 31, 1992 and at the rate of $100,000 per annum for fiscal year 1993. John F. Nickoll, a director of Care, is President and Co-Chief Executive Officer and a director of The Foothill Group, Inc.
In December 1990 and January 1991, Care issued to Smith and Foothill an aggregate of $3,000,000 of Convertible Exchangeable Notes. These notes were converted by their terms into 2,679,000 shares of Common Stock in November 1991.
In April 1991, Care engaged Smith to assist in the development and implementation of a program that would improve Care's liquidity. Under this agreement, Care paid Smith an aggregate of $218,000 for 1992 and $100,000 for 1991. This agreement expired on December 31, 1992.
In December 1992, Care sold 1,633,000 shares of Common Stock to Smith and Foothill Capital for $4,000,000. In connection with this transaction, Smith and Foothill Capital have registration rights whereby they can join Care in a registration if Care chooses to register other shares of Common Stock with the Commission.
In January 1992, Foothill Capital purchased from Wells Fargo Bank, N.A. a Term Note obligation of Care, which had a principal amount of $13,212,722 and which was scheduled to mature on April 20, 1995, and accrued interest at the rate of Prime plus 2%. As part of the Term Note purchase, Foothill Capital also acquired a standby letter of credit obligation of Care with a principal amount of $4,316,000. The Term Note obligation was repaid in full by Care on December 30, 1993.
In March 1993, Care obtained a commitment for a $3,500,000 increase in its working capital facility provided by Foothill Capital. This facility was secured by certain of Care's nursing and rehabilitation centers and certain accounts receivable, and was to bear interest at a rate of Prime plus 3%. The facility was terminated and the collateral released on December 30, 1993.
Until December 30, 1993, Care had a $1,000,000 working capital facility made available by Foothill Capital. This facility bore interest at a rate approximating Citibank N.A.'s prime rate plus 3%, payable quarterly, and was secured by one of Care's properties. This facility was terminated, all outstanding indebtedness was retired and the collateral was released on December 30, 1993.
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8K
(a) Set forth below is a list of Financial Statements and Financial Statement Schedules filed as part of this Report:
AND FINANCIAL STATEMENT SCHEDULES
1. Financial Statements: Page ---- Report of Independent Auditors 18
Consolidated Balance Sheets at December 31, 1993 and 1992 19
Consolidated Statements of Operations, Years Ended December 31, 1993, 1992 and 1991 20
Consolidated Statements of Shareholders' Equity, Years Ended December 31, 1993, 1992 and 1991 21
Consolidated Statements of Cash Flows, Years Ended December 31, 1993, 1992 and 1991 22
Notes to Consolidated Financial Statements 24
2. Financial Statement Schedules: Schedule IV - Indebtedness of and to related parties - not current 55 Schedule V - Property and equipment 56 Schedule VI - Accumulated depreciation and amortization 57 Schedule VIII - Valuation and qualifying accounts 58
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted.
3. Exhibits:
Reference is made to the Exhibit Index which is filed as part of this annual report.
(b) Reports on Form 8-K:
The Company filed the following reports on Form 8-K during the quarter ended December 31, 1993:
Date Item Reported - ------------------------ -------------------------- December 20, 1993 Merger Agreement with Regency Health Services, Inc.
December 30, 1993 Sale of Senior Secured Notes
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.
CARE ENTERPRISES, INC. (Registrant)
March 24, 1994 /S/ John W. Adams - ---------------------- ------------------------------ Date John W. Adams Chairman of the Board
March 24, 1994 /S/ Gary L. Massimino - ---------------------- ------------------------------ Date Gary L. Massimino Executive Vice President Chief Financial Officer
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on the date or dates indicated below, by the following persons on behalf of the registrant in the capacities indicated.
CARE ENTERPRISES, INC. (Registrant)
March 24, 1994 /S/ John W. Adams - ---------------------- ------------------------------ Date John W. Adams, Chairman
March 24, 1994 /S/ Corley R. Barnes - ---------------------- ------------------------------ Date Corley R. Barnes, Director
March 24, 1994 /S/ Laraine K. Beck - ---------------------- ------------------------------ Date Laraine K. Beck, Director
March 24, 1994 /S/ Robert G. Coo - ---------------------- ------------------------------ Date Robert G. Coo, Director
March 24, 1994 /S/ Richard K. Matros - ---------------------- ------------------------------ Date Richard K. Matros, Director
March 24, 1994 /S/ John F. Nickoll - ---------------------- ------------------------------ Date John F. Nickoll, Director
March 24, 1994 /S/ Arthur J. Pasmas - ---------------------- ------------------------------ Date Arthur J. Pasmas, Director
INDEX TO EXHIBITS (ITEM 14(a) (3)) Sequential Exhibit Numbered Number Description Page - ---------- ------------------------------------------------ ------
2.1 Debtors' and Official Creditors Committee's (A) Joint Plan of Reorganization.
2.2 Order confirming Debtors' and Creditors' (B) Committee's Joint Consolidated Plan of Reorganization.
2.5 Agreement and Plan of Merger, dated as of (M) December 20, 1993, between Regency Health Services, Inc. and Care Enterprises, Inc.
2.6 Amendment to Agreement and Plan of Merger, (O) dated as of January 7, 1994, between Regency Health Services, Inc. and Care Enterprises, Inc.
3.1 Restated Certificate of Incorporation of (C) Care Enterprises, Inc., a Delaware corporation.
3.2 Restated By-Laws of Care Enterprises, Inc. (C)
3.3 Certificate of Amendment of Restated (D) Certificate of Incorporation of Care Enterprises, Inc.
4.1 Form of Transfer Restriction Agreement (D)
4.2 Certificate of Designations, Preferences (D) and Relative, Participating, Optional or Other Special Rights of Series A Convertible Preferred Stock of CARE ENTERPRISES, INC.
4.3 1992 Stock Option Plan of the Registrant. (F)
4.4 Form of Incentive Stock Option Agreement for (G) Employees of the Registrant.
4.5 Form of Nonqualified Stock Option Agreement for (H) Employees and Consultants of the Registrant.
4.6 Registrant's Share Appreciation Rights Plan, (I) as amended.
4.7 Form of Agreement Regarding Allocation of Units (J) Under Registrant's Share Appreciation Rights Plan.
10.14 Stock Purchase Agreement dated as of (K) December 15, 1992 between Care Enterprises, Inc., Foothill Group Inc., Foothill Partners and Energy Management Corporation
10.15 Partnership agreement dated April 1, 1992 between (L) Medisave Pharmacies, Inc. and HealthCare Network, Incorporated.
10.16 Voting Agreement, dated December 27, 1993 between (M) Care Enterprises, Inc. and certain shareholders of Regency Health Services, Inc. named therein.
10.17 Voting Agreement, dated December 27, 1993 between (M) Regency Health Services, Inc. and certain shareholders of Care Enterprises, Inc. named therein.
10.18 Note Agreement dated as of December 15, 1993 between (N) Care Enterprises, Inc. and the Purchasers named on Schedule I to the Note Agreement.
10.19 Indenture of Trust dated as of December 15, 1993 (N) between Care Enterprises, Inc. and State Street Bank and Trust Company of Connecticut, National Association, as Indenture Trustee.
10.20 Guaranty Agreement dated as of December 15, 1993 in (N) favor of Note Holders by certain subsidiaries of Care Enterprises, Inc.
10.21 Letter Agreement dated December 29, 1993 (N) between Wells Fargo Bank, National Association and Care Enterprises, Inc.
10.22 Form of Deeds of Trust relating to the 8.1% (O) Senior Secured Notes with a corresponding schedule pursuant to Regulation S-K Item 601 instruction 2.
10.23 Form of Open-End Mortgage and Security Agreement (O) relating to the 8.1% Senior Secured Notes with a corresponding schedule pursuant to Regulation S-K Item 601 instruction 2.
10.24 Agreement dated as of December 30, 1993 (O) between Care Enterprises, Inc. and the Purchasers of the 8.1% Senior Secured Notes.
10.25 Agreement dated July 1, 1993 between (O) Mabon Securities Corp. and Care Enterprises, Inc. to provide investment banking services.
10.26 Agreement dated November 15, 1993 between (O) Merrill Lynch & Co. and Care Enterprises, Inc. to provide advisory services.
10.27 Business loan agreement dated as of (O) March 1, 1994, between Care Enterprises, Inc. and Bank of America National Trust and Savings Association.
10.28 Third Amendment to Lease, dated as of (O) October 22, 1992, by and among certain lessors and Care Enterprises, West.
10.29 Amendment to Agreement of Lease re: (O) Calistoga Convalescent Hospital dated August 21, 1992 between certain lessors and Care Enterprises, West.
10.30 Employment Agreement dated January 1, 1993 (O) between Care Enterprises, Inc. and Richard K. Matros.
10.31 Employment Agreement dated January 1, 1993 (O) between Care Enterprises, Inc. and Gary L. Massimino.
10.32 Form of Deeds of Trust relating to the 8.1% (O) Senior Secured Notes with a corresponding schedule pursuant to Regulation S-K Item 601 instruction 2.
21 Subsidiaries of Registrant. (O)
23 Consent of Ernst & Young (O)
99.2 8.10% Senior Secured Note from (N) Care Enterprises, Inc. to John Hancock Life Insurance Company of America in the original principal amount of $1,000,000, dated December 30, 1993.
99.3 8.10% Senior Secured Note from (N) Care Enterprises, Inc. to Mellon Bank, N.A., Trustee under Master Trust Agreement of NYNEX Corporation dated January 1, 1984 for Employee Pension Plans - NYNEX - John Hancock - Private Placement in the original principal amount of $2,000,000, dated December 30, 1993.
99.4 8.10% Senior Secured Note from (N) Care Enterprises, Inc. to Anchor National Life Insurance Company in the original principal amount of $15,000,000, dated December 30, 1993.
99.5 8.10% Senior Secured Note from (O) Care Enterprises, Inc. to John Hancock Mutual Life Insurance Company in the original principal amount of $7,000,000, dated December 30, 1993.
99.6 8.10% Senior Secured Note from (O) Care Enterprises, Inc. to John Hancock Mutual Life Insurance Company in the original principal amount of $5,000,000, dated December 30, 1993.
99.7 Annual Report on Form 11-K for (E) Employee Retirement Savings Plan for the year ended December 31, 1992.
(A) Incorporated by reference from Exhibit 28.1 to Care's Current Report on Form 8-K dated December 29, 1989.
(B) Incorporated by reference from the same numbered exhibit to Care's Annual Report on Form 10-K for the fiscal year ended December 31, 1989.
(C) Incorporated by reference from the same numbered exhibit to Care's Current Report on Form 8-K dated April 20, 1990.
(D) Incorporated by reference from the same numbered exhibit to Care's 8-A filed on December 28, 1990.
(E) Incorporated by reference.
(F) Incorporated by reference from Exhibit 4.1 to Care's Registration Statement on Form S-8 dated March 16, 1992.
(G) Incorporated by reference from Exhibit 4.2 to Care's Registration Statement on Form S-8 dated March 16, 1992.
(H) Incorporated by reference from Exhibit 4.3 to Care's Registration Statement on Form S-8 dated March 16, 1992.
(I) Incorporated by reference from Exhibit 4.4 to Care's Registration Statement on Form S-8 dated March 16, 1992.
(J) Incorporated by reference from Exhibit 4.5 to Care's Registration Statement on Form S-8 dated March 16, 1992.
(K) Incorporated by reference from Exhibit 10.1 to Care's Current Report on Form 8-K filed on December 22, 1992.
(L) Incorporated by reference from the same numbered exhibit to Care's Annual Report on Form 10-K for the fiscal year ended December 31, 1992.
(M) Incorporated by reference from the same numbered exhibit to Care's Current Report on Form 8-K filed on December 20, 1993.
(N) Incorporated by reference from the same numbered exhibit to Care's Current Report on Form 8-K filed on December 30, 1993.
(O) Filed with this report.
CARE ENTERPRISES, INC. AND SUBSIDIARIES SCHEDULE IV - INDEBTEDNESS OF AND TO RELATED PARTIES
CARE ENTERPRISES, INC. AND SUBSIDIARIES SCHEDULE V - PROPERTY AND EQUIPMENT (in thousands)
(a) Reclassification of previously leased assets to owned assets.
(b) Restoration of assets previously classified as held for sale.
CARE ENTERPRISES, INC. AND SUBSIDIARIES SCHEDULE VI - ACCUMULATED DEPRECIATION AND AMORTIZATION (in thousands)
(a) Reclassification of previously leased assets to owned assets.
CARE ENTERPRISES, INC. AND SUBSIDIARIES SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS (in thousands)