ITEM 1. BUSINESS.
BUSINESS OF THE REMIC
Rosewood Care Centers Capital Funding Corporation, a Missouri corporation, was formed June 23, 1993 as a single purpose corporation, to function as a real estate mortgage investment conduit ("REMIC"). The REMIC was organized to issue the 7 1/4% First Mortgage Redeemable Bonds due November 1, 2013 and to make first mortgage loans to six affiliated companies (the "Borrowing Companies"). Each of the six Borrowing Companies owns a skilled nursing facility which is state-licensed. The six skilled nursing facilities are operated by six affiliated companies, which are guarantors of the first mortgage loans (the "Guarantors") (collectively the Borrowing Companies and the Guarantors are the "Companies"). The principal assets of the REMIC are the notes from the six first mortgage loans. The REMIC does not engage in any business or investment activities other than in connection with administering the repayment of the bonds and the first mortgage loans.
BUSINESS OF THE COMPANIES
The Companies own and operate six Rosewood Care Centersm skilled nursing facilities located in Illinois, each with a 120 bed capacity. The facilities provide convalescent care, long-term care, and rehabilitative services primarily for elderly patients. Each facility offers a complete therapy program, including physical, occupational and speech therapy under the direction of a registered therapist.
The Companies principally market to private paying patients and attempt to provide a high-quality alternative to competing facilities, both in the physical surroundings and services offered. The Companies' marketing strategy focuses on obtaining the highest average daily rate as well as high occupancy levels in order to maximize revenues from the facilities. Although the facilities provide long-term care for those patients who require it, emphasis is on rehabilitative services to allow a patient to convalesce and either return to independent living outside the facility or enjoy a maximum level of independence and mobility within the facility. The Companies believe this emphasis has an appeal to a much larger private payor market than exists for a strictly long-term care oriented nursing home.
Approximately 62% of the patients in the facilities are private paying, though all the facilities participate in both the Medicare and Medicaid programs. The majority of the patients have sufficient funds and desire at the outset to try restorative therapy, which is covered by Medicare and private insurance. The Medicare program and various forms of private payment are the principal payors for short-term nursing home care and rehabilitative services. Because of the high percentage of patients in the facilities that are private paying, the average daily rate of the facilities is higher than it would be if the facilities had a greater participation in the Medicaid program. All of the facilities currently participate in one or more managed care programs. The Companies are negotiating with additional third parties and expect to enter into additional managed care contracts in the future.
OPERATIONS
Each skilled nursing facility is managed by an affiliated company, HSM Management Services, Inc., an Illinois corporation ("HSM Management"), pursuant to management agreements with each Guarantor. HSM Management provides a state-licensed nursing home administrator for each skilled nursing facility. HSM Management employs a director of operations and three directors of nursing who supervise operations at the six facilities owned by the Companies, as well as others. In addition, nursing staff at each skilled nursing facility is under the supervision of a state-licensed director of nursing who is an employee of the facility. The nursing staffs consist of registered nurses and licensed practical nurses, as well as nurses aides. The facilities also contract with others to provide therapy services, medical and dietary consulting services, personal grooming services and recreational activities.
The management agreements entered into with Hovan Enterprises, Inc. ("Hovan"), the precedessor of HSM Management, Inc. by each Guarantor on October 21, 1993, the bond issue date, continue in full force and effect after the merger of Hovan into HSM Management. All of the provisions of the management agreements apply to HSM Management in the same way they previously applied to Hovan.
REVENUE BY PAYOR
The following table indicates the percentage of patient service revenue of the Companies by type of payor for the periods indicated.
OCCUPANCY BY LOCATION AS A PERCENTAGE OF AVAILABLE BEDS
Each facility has the capacity of 120 beds. Most of the rooms are designed to be semi-private, with two beds per room. Some semi-private rooms are made available as private at a higher daily rate, thereby resulting in a lower number of available beds at a facility. The Companies focus on obtaining the highest average daily rate which may produce higher revenues even at lower occupancies, whereas if the facilities were principally Medicaid providers, maximum revenues could only be achieved with maximum occupancies. The following table indicates occupancy at each facility as a percentage of available beds for the periods indicated.
MARKETING
The Companies attempt to increase admissions through marketing programs. The Companies' marketing programs are executed under the direction of HSM Management. Marketing is done through direct mail, community programs and television. Although the Companies provide long-term nursing home care, their marketing strategy emphasizes short-term nursing home care for rehabilitative purposes. The Companies believe this emphasis has an appeal to a much larger private payor market than exists for strictly long-term care oriented nursing homes.
GOVERNMENTAL REGULATION AND REIMBURSEMENT
The Companies' nursing facilities are required to comply with various federal and state health care regulations and statutes. Compliance with the state licensing regulations is a prerequisite for the operation of the facilities and for participation in government sponsored health care programs such as Medicaid and Medicare.
All six facilities participate in the federally administered Medicare program. Medicare is a health insurance program for the aged and certain other disabled individuals, operated by the federal government and administered by an insurance intermediary. As a result of the Companies' emphasis on short-term rehabilitative nursing care, which is covered by Medicare, the percentage of patient service revenue attributable to Medicare continues to be a significant sector of the Companies' total revenue.
The Companies have experienced significant growth in ancillary revenues, primarily for services reimbursed by Medicare, over the past several years. Ancillary revenues are derived from providing services to residents over and above room and board and include services such as occupational, physical, speech, and IV therapy, as well as prescription drugs and medical supplies. Such services are being provided primarily to Medicare and private pay residents which is consistent with the current trend of providing services in the lower cost setting of nursing facilities rather than in hospitals.
Medicaid is a medical assistance program for the indigent, operated by the State of Illinois with financial aid provided by the federal government. Prior to January 1991, four of the six facilities participated in the state administered Medicaid program. In 1991, the Companies began to voluntarily
withdraw the facilities from the Medicaid program. However, in May 1993, as a result of a change in state policy, all six Guarantors requested and received certification in the Medicaid program for a distinct part of each facility for a limited number of beds. This certification permits the Companies to participate in the Medicaid program while limiting the Medicaid census at their respective facilities. The Galesburg and East Peoria facilities are certified for twenty beds each and the four remaining facilities for ten beds each.
Under current reimbursement regulations, funds received under Medicare programs are subject to audit by the third party payor responsible for administering the facility account. This results either in amounts due to or from the facilities based on the actual costs of participating in the Medicare program during the year. Past audits of the Companies' reimbursements through the fiscal year ending June 30, 1994, have not resulted in any material adjustments for any of the Companies that were not otherwise indemnified for by private vendors to the Companies. Audits of the Medicare program for all the facilities have recently been completed through the fiscal year ended June 30, 1995. The Companies experienced a material negative adjustment to their Medicare cost reports for that year with regard to costs for therapy services furnished by a private vendor. The Companies were indemnified by the private vendor for most of the negative adjustment and continue to be indemnified for 1996 and the years thereafter.
Medicare reimbursement of routine operating costs is subject to a cap that is related to costs of similar providers. In cases where this cap is exceeded, the facility may obtain an exception if it can show that the excess costs are caused by "atypical services." All six of the facilities exceeded the cap by the aggregate amount of $346,000 in 1996. The Company is in the process of compiling the information necessary to apply for the exception for two of the facilities which qualify for the exception for 1995 and one of the facilities which qualifies for 1996. Management cannot predict whether or not the Company will be successful in its application to the regulatory agency to grant the exception. Legislation was enacted by the United States Congress which froze the routine cost limits at pre October 1, 1993 levels for cost report periods beginning prior to October 1, 1995. The legislation limits any exceptions to such limits to the amount that would have been granted if no restriction on charges to the cost limits had been enacted. In addition, such legislation eliminated the return on equity payment available to certain nursing facilities. This legislation has not materially adversely affected the Companies' results of operations nor do the Companies expect any significant future impact on revenues.
In addition to the requirements for participation in the Medicare and Medicaid programs, the Companies' health care facilities are subject to annual licensing and other regulatory requirements of state authorities. In order to maintain the operators' licenses, the nursing facilities must meet certain statutory and administrative requirements. The requirements relate to the physical condition of the building and equipment used in the patient care, the quality and adequacy of personnel and the quality of medical care. The Health Care Financing Administration of the Department of Health and Human Services ("HCFA") has adopted new survey, certification and enforcement procedures by regulations effective July 1, 1995, to implement various Medicare and Medicaid provisions of the Omnibus Budget Reconciliation Act of 1987 ("OBRA"). The
Companies' believe that the facilities are in full compliance with the requirements of the applicable Medicaid and Medicare regulatory requirements currently in effect. In the ordinary course of business, the Company receives notices of deficiencies for failure to comply with various regulatory requirements. The notices are reviewed and the Companies take the appropriate action to correct the deficiencies noted. There can be no assurance that the Company will not be required to expend significant sums in order to maintain its licenses in the future.
While federal regulations do not provide states with the grounds to curtail funding of their Medicaid cost reimbursement programs due to state budget deficiencies, the states have reduced funding in the past. No assurance can be given that the state will not do so in the future or that the future funding of Medicaid programs will remain comparable to the present level. The United States Supreme Court ruled in 1990 that health care providers may bring suit in federal court to enforce the Medicaid Act requirement that states reimburse nursing facilities at rates which are reasonable and adequate.
Governmental funding for health care programs continues to be under pressure. Recent actions have included lowering the Medicaid reimbursement rate, thus limiting payments to hospitals and nursing homes under the Medicaid program. Another reimbursement change currently being discussed is a change in the Medicare system of reimbursement for certain therapy services.
Health care funding was again a prominent issue in the United States Congress during the past year. Numerous proposals are pending which seek to reduce the costs of the Medicare and Medicaid programs by lowering the utilization of the programs and by controlling costs within the programs.
As a result of the national pressure on health care costs, the Medicare program is facing significant cutbacks and intense scrutiny. Due to this atmosphere, the Companies have experienced closer scrutiny and delays with regard to payment of claims under the Medicare program. The Companies do not expect this environment to improve in the near future and believe they will experience future problems relating to reimbursement, some of which could have a significant effect on operations.
The Companies are carefully monitoring these developments and attempting to structure contractual arrangements which they believe will minimize the impact of reductions in government reimbursement. However, no assurance can be made that the funding of Medicare and Medicaid will remain at their current levels. Changes in the reimbursement policies of Medicare and Medicaid as a result of budget cuts by federal and state governments or other legislative actions could adversely affect the revenues of the Companies.
COMPETITION
The long-term care industry is highly competitive. The Companies compete with other providers on the basis of the breadth and quality of services they offer, the quality of their facilities and price. The Companies also compete in the recruitment of qualified health care personnel and the acquisition and development of additional facilities. The Companies' current and potential competitors include national, regional and local long-term care providers as
well as hospital-based extended care providers and rehabilitation hospitals, many of which have significantly greater financial and other resources than the Companies. In addition, certain competitors are operated by not-for-profit organizations and similar businesses which can finance capital expenditures on a tax-exempt basis or receive charitable contributions unavailable to the Companies. Managed care contracts will also have an impact on competition, as services formerly provided at hospitals are shifted to nursing homes and as the managed care model becomes more common in the nursing home industry.
The degree of success with which the Companies compete varies from location to location and depends on a number of factors, including the number of competing facilities in the local market, types of services, quality of care, reputation, age and appearance of each facility and the cost of care in each location. In light of these factors, the Companies seek to meet competition in each location by establishing a reputation in the local community for high quality nursing services and attractive facilities, and by responding to the specialized health needs of their patients and referral sources.
The need for skilled nursing facilities is expected to increase in the future as the demand for rehabilitative and long-term care increases. Construction of new skilled nursing facilities near the Companies' facilities could adversely affect the Companies' business. However, state regulations generally require a CON before a new skilled nursing facility can be constructed or additional beds can be added to existing facilities. The Companies believe that these regulations reduce the possibility of overbuilding and promote higher utilization of existing facilities.
At the time the CON was granted for each of the Companies' skilled nursing facilities, the addition of such facilities resulted in an excess number of beds for purposes of future CON analysis. Under current CON regulations, existing facilities are given a preference in the opportunity to meet any additional need by expansion before a CON is issued for construction of a new facility. Recently, there have been Legislative initiatives to repeal existing CON laws and there can be no assurance that the CON procedure will not be eliminated or changed in the future. Although the terms of the loan documents prohibit the Borrowing Companies from undertaking new construction, the Guarantors are not prohibited from operating additional facilities, including expansion facilities. All of the facilities are adjacent to excess acreage owned by affiliated companies and related companies are allowed to construct expansions to current facilities under certain conditions. At Galesburg and Alton affiliated companies contemplate commencing construction of expansions during the 1997 fiscal year.
LEASES
Each of the facilities is leased by a Guarantor from the Borrowing Company which owns the facility. Lease payments consist of a base rent which is adjustable based on the amount needed by the Borrowing Company to service mortgage indebtedness on the facility and additional rent based on the economic performance of the facilities. Each lease has an initial term of four years and may be extended for up to five additional four-year periods. Under each lease, the Borrowing Company is required to furnish the building and all equipment and furnishings and any replacements necessary for the operation of the facility.
The Guarantor is responsible for paying all other expenses associated with operating the facility. The lease payments represent substantially all of the income earned by the Borrowing Companies.
INSURANCE
The Companies carry property insurance, general liability insurance and other insurance which they believe adequate to cover the facilities and their businesses.
EMPLOYEES
The REMIC and the Borrowing Companies have no employees. The Guarantors employed 497 persons at June 30, 1996. None of the employees of the Companies are covered by collective bargaining agreements. The Companies believe that their relations with their employees are good and they have never experienced a major labor dispute.
The Company has experienced increases in its labor costs due to higher wages and greater benefits required to attract and retain qualified personnel. The Company expects labor costs to increase in the future, but any increase in costs would probably be offset by increases in patient rates. The Company has not experienced any shortages in qualified personnel to staff the facilities, but it competes with other health care providers and service industries which could adversely affect the availability of qualified personnel in the future.
ITEM 2.
ITEM 2. PROPERTIES.
THE FACILITIES
Each of the facilities is a one story, 120 bed skilled nursing care facility consisting of approximately 38,000 to 40,000 square feet and situated on 4 to 7 acres. Each facility is new construction, with poured concrete foundation and brick veneer exterior walls. The facilities were built by the Companies for use as skilled nursing facilities with modern design and high quality systems. Accordingly, the Companies believe the properties are well suited to present and future needs. The six facilities are encumbered by the first mortgages given to the REMIC.
ROSEWOOD CARE CENTER OF SWANSEA
Rosewood Care Center of Swansea is owned by Swansea Real Estate, Inc. and is operated by Rosewood Care Center, Inc. of Swansea. The Swansea Facility opened October 8, 1987 and is located at 100 Rosewood Village Drive, Swansea, Illinois 62221 on the west side of Highway 159, just north of Fullerton Road in Swansea, Illinois.
ROSEWOOD CARE CENTER OF GALESBURG
Rosewood Care Center of Galesburg is owned by Galesburg Real Estate, Inc. and is operated by Rosewood Care Center, Inc. of Galesburg. The Galesburg Facility opened December 9, 1987 and is located at 1250 West Carl Sandburg Dr., Galesburg, Illinois 61401 on the southeast corner of Sandburg Mall Access Road
and West Carl Sandburg Drive.
ROSEWOOD CARE CENTER OF ALTON
Rosewood Care Center of Alton is owned by Alton Real Estate, Inc. and is operated by Rosewood Care Center, Inc. of Alton. The Alton facility opened May 15, 1989 and is located at 3490 Humbert Road, Alton, Illinois 62002 on the north side of Pebble Creek Lane at Humbert Road, Alton, Illinois.
ROSEWOOD CARE CENTER OF PEORIA
Rosewood Care Center of Peoria is owned by Peoria Real Estate, Inc. and is operated by Rosewood Care Center, Inc. of Peoria. The Peoria facility opened June 12, 1989 and is located at 1500 West Northmoor Road, Peoria, Illinois 61614 at the junction of Northmoor Road and University Avenue in Northwest Peoria.
ROSEWOOD CARE CENTER OF EAST PEORIA
Rosewood Care Center of East Peoria is owned by East Peoria Real Estate, Inc. and is operated by Rosewood Care Center, Inc. of East Peoria. The East Peoria facility opened April 18, 1989 and is located at 900 Centennial Drive, East Peoria, Illinois 61611 on the south side of Centennial Drive and Oakwood, East Peoria, Illinois. The East Peoria facility is approximately five miles from the Peoria facility.
ROSEWOOD CARE CENTER OF MOLINE
Rosewood Care Center of Moline is owned by Moline Real Estate, Inc. and is operated by Rosewood Care Center, Inc. of Moline. The Moline facility opened May 6, 1990 and is located at 7300 - 34th Avenue, Moline, Illinois 61265 on 34th Avenue two blocks east of Black Hawk College in Moline, Illinois.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
There are various lawsuits and regulatory actions pending against the Companies arising in the normal course of business, some of which seek punitive damages. The Companies do not believe that the ultimate resolution of these matters will have a material adverse effect on the Companies' combined financial position or results of operations.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.
Not applicable.
PART II ITEM 5.
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Not applicable.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
The following table of selected combined financial data should be read in conjunction with the Combined Financial Statements and related Notes thereto included elsewhere in this annual report on Form 10-K.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
OVERVIEW
The Companies' operating strategy focuses on the average daily rate as well as on occupancy levels in order to maximize revenues from the facilities. The Companies principally market their services to private paying patients. Revenues from this market continued to grow in 1996.
The Companies have continued their marketing emphasis on short-term convalescent care while continuing to provide long-term care. The number of short-term care patients and demand for ancillary rehabilitative and therapy services continues to increase. Revenues and expenses associated with rehabilitative and therapy have continued to increase through June 30, 1996.
The Medicare program and various forms of private payment are principal payors for short-term nursing home care and rehabilitative services. All six of the facilities participate in the federally administered Medicare program. In May 1993, as a result of a change in state policy allowing limited participation in Medicaid, the Companies requested and received certification in the Medicaid program for a distinct number of beds in each facility. The Companies believe this is the most economically desirable participation in the Medicaid program for them. Medicare revenues are expected to remain at substantially the level experienced in fiscal year 1996. Private patient revenues continue to represent the major share of all patient service revenues. All of the Companies currently participate in one or more managed care programs. The Companies are negotiating with third parties and expect to enter into additional managed care contracts in the future.
OPERATING RESULTS
YEAR ENDED JUNE 30, 1996 COMPARED TO YEAR ENDED JUNE 30, 1995
Net Revenues. Net revenues increased to $27,753,000 for the year ended June 30, 1996, from $25,839,000 for the same period in 1995, an increase of $1,914,000 or 7.4%. Private revenue increased $252,000 or 1.5%, which is the result of an increase in the room revenue of $208,000 and a $44,000 increase in ancillary revenue during the 1996 fiscal year. Private census decreased to 162,387 patient days compared to a private census of 170,342 patient days for the fiscal year ended June 30, 1995. The average room rate for the year ended June 30, 1996 has increased to $102 per day compared to $96 per day for 1995.
Medicare revenue increased $1,850,000 or 24.9%, due to an increase in the Medicare reimbursement rate for the current fiscal year, which is a direct result of the increase in the ancillary services provided to Medicare eligible residents. The Medicare census for the fiscal year ended June 30, 1996, aggregated 39,509 patient days compared to 40,049 for the fiscal year ended June 30, 1995.
Medicaid revenue has decreased $176,000 or 11.8% when compared to the same period last year.
The total patient census aggregated 87.7% of available beds for the fiscal year ended June 30, 1996, compared to 92.2% for the prior fiscal year.
Facility Operating Expense. Facility operating expenses increased to $18,009,000 for the period ended June 30, 1996, (or $80.88 per patient day) from $16,050,000 (or $68.74 per patient day) for the fiscal year ended June 30, 1995, an increase of $1,959,000 (or $12.14 per patient day).
Nursing expenses have decreased $38,000 from $6,556,000 for 1995 to $6,518,000 for the year ended June 30, 1996. Nursing payroll expenses increased $303,000 from $5,500,000 for 1995 to $5,803,000 for 1996, while other nursing expenses decreased $341,000 when compared to the same period last year.
Ancillary services (which is comprised of physical therapy, occupational therapy, speech therapy, drugs and medical supplies), increased $1,826,000 when compared to the same period last year. The increase in cost is the direct result of the increase in ancillary services billed to Medicare and private pay residents.
Dietary expenses increased $51,000 or 2.9% compared to the same period last year, which is primarily due to inflation.
Plant utilities and maintenance expenses have increased $97,000 when compared to the same period last year.
Housekeeping and laundry expenses increased $37,000 or 4.5% when compared to the same period last year. The majority of the increase is the result of an increase in the cost of supplies for those departments.
Employee fringe benefit expenses decreased $32,000 compared to the same period last year. The majority of the decrease is attributable to the decrease in the cost of workmen's compensation insurance.
Administrative expenses decreased $73,000 when compared to the same period last year, primarily as a result of a decrease in payroll expense for the current year.
Social service and activities expenses increased $91,000 or 19.8% when compared to the same period last year. The increase is attributable to an increase in staffing for these departments.
Nonfacility Expense. Real estate taxes and insurance increased $36,000, which is the result of an increase in the cost of liability and property insurance of $10,000 and a $26,000 increase in real estate taxes.
Depreciation and amortization expense increased $21,000 when compared to the same period last year. The increase is a result of leasehold improvements aggregating $159,000 and $171,000 for the fiscal years ended June 30, 1996 and 1995 respectively.
Incentive Fees. Incentive management fees decreased $62,000 compared to the same period last year as a result of the decrease in the income from operations of the nursing facilities. Incentive management fees are based on the combined performance of the six facilities. Officers' bonuses of $188,000 paid during 1996, compared to $180,000 for 1995, were awarded at the discretion of the Companies' sole director.
Other Income and Expense. Interest income decreased $36,000 or 4.2% compared to the same period last year. The decrease is the result of a decrease in notes receivable from $9,332,000 from Rosewood Care Center Holding Co. for 1995 to $8,056,000 for the fiscal year ended June 30, 1996.
Interest expense decreased $116,000 compared to the same period last year which is the result of the decrease in the outstanding long-term debt.
Income Taxes. Income taxes decreased $30,000 while income before income taxes increased $32,000 because the real estate companies' income is taxed at the individual shareholder level and not the corporate level. A larger portion of the combined revenue of the companies was sheltered in the real estate companies for the current fiscal year compared to the prior fiscal year.
YEAR ENDED JUNE 30, 1995 COMPARED TO YEAR ENDED JUNE 30, 1994
Net Revenues. Net revenues increased to $25,839,000 for the year ended June 30, 1995, from $24,504,000 for the same period in 1994, an increase of $1,335,000 or 5.4%. Private revenue increased $520,000 or 3.2%, which is the result of an increase in the room rates during the 1995 fiscal year. Private census decreased to 170,342 patient days compared to a private census of 172,788 patient days for the fiscal year ended June 30, 1994.
Medicare revenue increased $811,000 or 12.2%, due to an increase in the Medicare reimbursement rate for the current fiscal year, which reimbursement increase is a direct result of the increase in the cost of ancillary services provided to Medicare eligible residents. The Medicare census for the fiscal year ended June 30, 1995, aggregated 40,049 patient days compared to 40,332 for the fiscal year ended June 30, 1994.
Medicaid revenue is virtually unchanged from the prior fiscal year.
The total patient census aggregated 92.2% of available beds for the fiscal year ended June 30, 1995, compared to 93.8% for the prior fiscal year.
Facility Operating Expense. Facility operating expenses increased to $16,050,000 for the period ended June 30, 1995, (or $68.74 per patient day) from
$14,278,000 (or $60.49 per patient day) for the fiscal year ended June 30, 1994, an increase of $1,772,000 (or $8.25 per patient day).
Nursing services increased $567,000 or 9.5% when compared to the same period last year. The increase is the result of an increase in labor costs during the 1995 fiscal year.
Ancillary services expense increased $830,000 as the result of an increase in the cost of ancillary services for occupational therapy, physical therapy, speech therapy, drugs and medical supplies provided for Medicare and private residents.
Dietary expenses increased $67,000 or 4.0% compared to the same period last year. The increase is due primarily to inflation.
Plant utilities and maintenance expenses are virtually unchanged from a year ago.
Housekeeping and laundry expenses increased $42,000 or 5.4% when compared to the same period last year. The majority of the increase is the result of an increase in wages for those departments.
Social services and activities expenses increased $80,000 or 21.1% compared to the same period last year. The increase is due to increased staffing in these departments.
Employee fringe benefit expenses increased $139,000 compared to the same period last year. The cost per patient day increased from $7.06 for 1994 to $7.74 for 1995. The majority of the increase can be accounted for by the increase in payroll taxes and holiday pay. Payroll taxes increased as a result of the increase in wages and an increase in state unemployment tax rates. Full time employee equivalents aggregated 500 and 493 employees for 1995 and 1994 respectively. Holiday pay increased due to a change in company policy as to employee eligibility for holiday pay premiums.
Administrative expenses increased $32,000 compared to the same period last year. The increase of 3.6% is the result of inflation for the current fiscal year. The cost per patient day increased to $3.96 per patient day compared to $3.76 per patient day for the fiscal year ended June 30, 1994.
Nonfacility Expense. Real estate taxes and insurance decreased $42,000 compared to the same period last year. The $26,000 real estate tax reduction is the result of a decrease in the assessment of three of the six facilities after the appeals of prior increases were decided. Insurance costs also decreased $16,000.
Depreciation and amortization decreased $53,000 when compared to the same period last year. The amortization expense for the fiscal year ended June 30, 1994, contained a write off of loan costs in the amount of $105,892 on refinanced debt.
Incentive Fees. Incentive management fees decreased $357,000 compared to the same period last year as a result of the decrease in the income from operations of the nursing facilities. Incentive management fees are based on the combined performance of the six facilities. Officers' bonuses of $180,000 paid during 1995, compared to $175,000 for 1994, were awarded at the discretion of the Companies' sole director.
Other Income and Expense. Interest income increased $225,000 or 35.8% compared to the same period last year. The increase is the result of notes receivable aggregating $9,332,000 from Rosewood Care Center Holding Co. which were outstanding for the full twelve months of the current fiscal year, compared to only eight months for the prior fiscal year.
Interest expense increased $96,000 compared to the same period last year. The refinancing of the corporate debt occurred during October 1993, four months into the 1994 fiscal year. Interest expense for the current year reflects a twelve month period under the refinancing arrangement compared to only eight months for the 1994 fiscal year.
Income Taxes. Income taxes decreased $10,000 while income before income taxes increased $139,000 because the real estate companies' income is taxed at the individual shareholder level and not the corporate level. A larger portion of the combined revenue of the companies was sheltered in the real estate companies for the current fiscal year compared to the prior fiscal year.
INFLATIONARY FACTORS
The health care industry is labor intensive. General operating expenses related to personnel, such as salaries and employee benefits, as well as expenses of dietary, medical and other supplies, are subject to normal inflationary factors. The Companies' response to such pressures has been to concurrently increase rates charged private paying patients. Any cost increases billed under Medicare are paid for at year-end as a part of the annual cost reimbursement settlement. Reimbursement of increased expenses from Medicaid may lag for up to 18 months. Although the Companies have successfully implemented rate increases to compensate for increases in operating expenses in the past, there can be no assurance that the Companies will always be able to do so in the future.
LIQUIDITY AND CAPITAL RESOURCES
Overview. As of June 30, 1996 the Companies had approximately $2,237,000 in cash and cash equivalents and net working capital of approximately $1,824,000. The decrease in cash of $285,000 is the result of cash from operations aggregating $3,174,000, down from $3,827,000 in 1995, cash from investing activities of $1,117,000 (the majority of which was from payments on notes with Rosewood Care Center Holding Co.) and cash used in financing activities of $4,576,000 (which is comprised of debt retirement aggregating $1,667,000 and payment of dividends aggregating $2,909,000).
On October 21, 1993 the Companies refinanced their long term debt with the REMIC which issued $33,000,000 of its 7-1/4% First Mortgage Redeemable Bonds due November 1, 2013. Proceeds from the sale of the bonds were used to pay off the Companies' existing debt with a number of banks and to pay the loan costs, including issuance costs of the bonds. Per the terms of the loan documents, a reserve fund in the form of an irrevocable letter of credit in the amount of approximately $3,130,000 from a commercial bank rated "AA" has been established. The letter of credit is secured by cash and investments of Rosewood Care Center Holding Co. Remaining loan proceeds, net of loan costs, were loaned to an affiliate, Rosewood Care Center Holding Co., under unsecured promissory notes bearing interest at 7-1/4% per annum and having maturities from October to December 1996. The Companies are not contemplating nor aware of any significant replacement of equipment and property beyond comparable amounts expended in 1995 and 1996 because the facilities are all newly constructed with an average age of seven years.
The Companies believe they have adequate capital for operations and replacements for the coming year and the foreseeable future.
Accounts Receivable. Private paying patients are billed monthly at the beginning of the month for that month's routine nursing care charges. Charges for ancillary services are billed monthly in arrears. Accounts receivable from private paying patients increased to $1,257,000 as of June 30, 1996, compared to $705,000 as of June 30, 1995. The amounts allowed for doubtful accounts aggregated $206,000 and $120,000 for 1996 and 1995 respectively, which is 14.8% and 14.5% of the outstanding balances. Accounts receivable from third parties increased to $3,001,000 as of June 30, 1996, compared with $2,195,000 as of June 30, 1995. $1,799,000 of this is due from Medicare for unsettled Medicare Cost Reports filed for the fiscal year ended June 30, 1996, which are subject to audit by the third party payor. $671,500 of this amount was received subsequent to the end of the 1996 fiscal year. With the Medicare program facing intense scrutiny and significant cutbacks, the Companies have experienced closer scrutiny of their Medicare cost reports and delays with regard to payment of claims. An additional effect of Medicare's delay has been delay of co-payment amounts received from private payors. Management does not presently anticipate any cash flow shortages during the next fiscal year, despite the increase in the amounts due from Medicare, unless Medicare administration and payment terms significantly further deteriorate.
The Companies had no open lines of credit with any financial institution as of June 30, 1996.
Governmental funding for health care programs continues to be under pressure. Health care funding was again a prominent issue in the United States Congress during the past year. Numerous proposals are pending which seek to reduce the costs of the Medicare and Medicaid programs by lowering the utilization of the programs and by controlling costs within the programs. Implementation of a change in reimbursement for therapy services provided by private vendors resulted in a material negative adjustment on the Companies' Medicare cost reports for the year ended June 30, 1996. Due to an indemnification arrangement between the Companies and the private vendor, the effect on the Companies was minimal. However, due to the current national environment surrounding health care, the Companies believe they will experience future problems relating to reimbursement, some of which could have a significant effect on operations.
The Companies continue to monitor legislative and other health care developments and will attempt to structure contractual arrangements to minimize the impact of reductions in government reimbursement. However, changes in the reimbursement policies of Medicare and Medicaid as a result of budget cuts by federal and state governments or other legislative actions could have a significant adverse effect on the revenues of the Companies.
THE REMIC
The REMIC is purely a pass-through entity and has no resources and no operations other than those arising out of the first mortgage loans and the bonds. All of the payments on the first mortgage loans are used to pay the obligations on the 7 1/4% First Mortgage Redeemable Bonds due November 1, 2013. All expenses of the offering and the administration of the Trust Indenture executed as of October 1, 1993 pursuant to which the bonds were issued are the responsibility of the Companies.
ITEM 8.
ITEM 8. COMBINED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Rosewood Care Centers Capital Funding Corporation
We have audited the accompanying balance sheet of Rosewood Care Centers Capital Funding Corporation as of June 30, 1995 and 1996 and the statement of operations for the years ended June 30, 1994, 1995 and 1996 and cash flows for the years ended June 30, 1994, 1995 and 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Rosewood Care Centers Capital Funding Corporation as of June 30, 1995 and 1996 and the results of operations for the years ended June 30, 1994, 1995 and 1996 and cash flows for the years ended June 30, 1994, 1995 and 1996, in conformity with generally accepted accounting principles.
/s/ Rubin, Brown, Gornstein & Co. LLP
August 30, 1996
ROSEWOOD CARE CENTERS CAPITAL FUNDING CORPORATION - -------------------------------------------------------------------------------
ROSEWOOD CARE CENTERS CAPITAL FUNDING CORPORATION - -------------------------------------------------------------------------------
ROSEWOOD CARE CENTERS CAPITAL FUNDING CORPORATION - -------------------------------------------------------------------------------
ROSEWOOD CARE CENTERS CAPITAL FUNDING CORPORATION - ------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS JUNE 30, 1995 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
HISTORY AND NATURE OF ACTIVITY
Rosewood Care Centers Capital Funding Corporation was formed as a "single purpose entity" to function as a Real Estate Mortgage Investment Conduit (REMIC). Accordingly, the articles of incorporation restrict the activities to issuance of bonds, making of mortgage loans and related activities.
Rosewood Care Centers Capital Funding Corporation (the "REMIC") is the issuer of the First Mortgage Redeemable Bonds. The Bond proceeds were lent to certain Rosewood Care Center real estate companies. The real estate companies are referred to as the "Borrowing Companies."
Each of the real estate companies is 100% owned by the two stockholders who own Rosewood Care Centers Capital Funding Corporation in like ratios.
ESTIMATES AND ASSUMPTIONS
Management uses estimates and assumptions in preparing financial statements. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses.
CASH EQUIVALENTS
The Company considers all investments purchased with maturities of three months or less to be cash equivalents.
INCOME TAXES
Although a REMIC is a separate entity for federal income tax purposes, a REMIC is not generally subject to entity-level income taxes. The net income or net loss of a REMIC is reported on the tax returns of the holders of its residual interest who are also the two stockholders of the real estate companies. The Bonds are designated "regular interests" and are generally taxable as debt of the REMIC.
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ROSEWOOD CARE CENTERS CAPITAL FUNDING CORPORATION - -------------------------------------------------------------------------------- Notes To Financial Statements (Continued)
2. MORTGAGE NOTES RECEIVABLE
The mortgage notes evidence the loans in the original amount of $33,000,000 from the REMIC to the real estate companies and are cross collateralized by a security agreement and assignment of management agreement from each facility company and a first mortgage which includes a security interest in fixtures, improvements, and other personal property, assignment of rents and leases, collateral pledge and security agreement and subordination and attornment agreements from each real estate company. In addition, compensation of officers or directors of the real estate companies is subordinated to payments under the loan agreement. The mortgage notes bear interest at 7.25%. The facility companies and the real estate companies are referred to together as the "Companies."
The mortgage notes from the real estate companies require monthly principal and interest collections of $260,824 plus an additional annual principal collection of $720,000 for the first seven years, subject to certain conditions in the loan agreement. If all additional annual collections are made, the principal of the mortgage notes will be collected as follows:
The Borrowing Companies are required to make the additional annual principal payments up to $720,000 per year to the extent the amount of cash available exceeds net income available for debt service (income from operations plus depreciation and amortization, incentive management fees, interest income, and officer bonuses) for the prior fiscal year less (a) the regular principal and interest payments for that year, (b) the amount necessary to pay income taxes of the obligated companies and their shareholders, (c) any increase in accounts receivable from third party payors, (d) interest income from related parties and (e) the $1,000,000 cash or cash equivalents required to be maintained by the loan agreement. - --------------------------------------------------------------------------------
ROSEWOOD CARE CENTERS CAPITAL FUNDING CORPORATION - -------------------------------------------------------------------------------- Notes To Financial Statements (Continued)
The failure of any real estate company to meet the required additional annual principal payments is not an event of default, but the deficit is cumulative to the extent any annual payment is less than $720,000. The difference is carried forward, at which time such real estate company is subject to certain covenants which restrict its ability to pay out officer bonuses, dividends and incentive management fees until the additional annual payment, on a cumulative basis, is paid in full.
The Loan Agreement also contains certain covenants relating to the consolidation of companies, restrictions on indebtedness, transfers of property, expansion of facilities, and the commingling of funds.
Bond issuance costs of $609,000 and underwriter's discount of $841,500 (aggregating $1,450,500) were paid by the REMIC on behalf of the real estate companies from the proceeds of the First Mortgage Redeemable Bonds.
The Companies have established with the trustee and the trustee is the custodian of a 12 month debt service reserve fund consisting of a bank letter of credit for $3,129,889.
3. FIRST MORTGAGE REDEEMABLE BONDS
The bonds are dated October 21, 1993 and bear interest at 7.25%. The Bonds are secured by first mortgage liens, assignments of rents and leases, collateral pledge and security agreements, subordination and attornment agreements from each real estate company, a security agreement, and assignment of management agreement from each facility company and are scheduled to mature November 1, 2013. However, if all the additional annual payments are made as required, the bonds will be paid in full in July 2009. The application of bond proceeds, tender and purchase of bonds, redemption of bonds and other covenants are defined in the trust indenture.
All bond holders receive scheduled monthly principal and interest payments and may receive additional annual principal payments during the first seven years of the bond amortization, if additional annual payments are received on the mortgage notes (See Note 2).
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ROSEWOOD CARE CENTERS CAPITAL FUNDING CORPORATION - -------------------------------------------------------------------------------- Notes To Financial Statements (Continued)
Principal payments in the years subsequent to June 30, 1996 are approximately as follows:
4. STOCKHOLDERS' EQUITY
Stockholders' equity consists of the following investments:
Larry Vander Maten Revocable Trust $ 750 Darrell Hoefling Revocable Trust 250 ----------- $ 1,000 ===========
Each share of common stock has been designated as a "Certificate of Residual Interest".
5. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of each class of financial instruments:
CASH AND CASH EQUIVALENTS
The carrying amount approximates fair value because of the short maturity of those instruments.
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ROSEWOOD CARE CENTERS CAPITAL FUNDING CORPORATION - -------------------------------------------------------------------------------- Notes To Financial Statements (Continued)
MORTGAGE NOTES RECEIVABLE
The fair value of the note receivable is estimated based on discounted future cash flows using current rates at which similar loans would be made to related borrowers for the same remaining maturities.
FIRST MORTGAGE REDEEMABLE BONDS
The fair value of the Company's first mortgage redeemable bonds is estimated based on discounted future cash flows at the current rates at which the Company could borrow funds with similar terms, degree of risk and remaining maturities.
Estimated fair values of the Company's financial instruments, all of which are held for nontrading purposes, are as follows:
The estimated fair value amounts presented herein have been determined using available market information and appropriate valuation methodologies and are not necessarily indicative of the amounts the Company could realize in a current market exchange.
INDEPENDENT AUDITORS' REPORT
To the Boards of Directors and Stockholders of Rosewood Care Center Facility Companies Rosewood Real Estate Companies St. Louis, Missouri
We have audited the accompanying combined balance sheet of Rosewood Care Center Facility Companies and Real Estate Companies (see Note 1 of Notes to Combined Financial Statements) as of June 30, 1995 and 1996 and the combined statements of operations, stockholders' equity and cash flows for the years ended June 30, 1994, 1995 and 1996. These combined financial statements are the responsibility of the management of the Companies. Our responsibility is to express an opinion on these combined 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 combined financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the combined 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 combined financial statements referred to in the first paragraph present fairly, in all material respects, the combined financial position of Rosewood Care Center Facility Companies and Real Estate Companies as of June 30, 1995 and 1996 and the combined results of operations and the combined cash flows for the years ended June 30, 1994, 1995 and 1996 in conformity with generally accepted accounting principles.
/s/ Rubin, Brown, Gornstein & Co. LLP
August 30, 1996
ROSEWOOD CARE CENTER FACILITY COMPANIES AND REAL ESTATE COMPANIES - --------------------------------------------------------------------------------
ROSEWOOD CARE CENTER FACILITY COMPANIES AND REAL ESTATE COMPANIES - --------------------------------------------------------------------------------
ROSEWOOD CARE CENTER FACILITY COMPANIES AND REAL ESTATE COMPANIES - --------------------------------------------------------------------------------
ROSEWOOD CARE CENTER FACILITY COMPANIES AND REAL ESTATE COMPANIES - --------------------------------------------------------------------------------
ROSEWOOD CARE CENTER FACILITY COMPANIES AND REAL ESTATE COMPANIES - --------------------------------------------------------------------------------
ROSEWOOD CARE CENTER FACILITY COMPANIES AND REAL ESTATE COMPANIES - --------------------------------------------------------------------------------
NOTES TO COMBINED FINANCIAL STATEMENTS JUNE 30, 1994, 1995 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REPORTING ENTITY AND OPERATIONS
The combined financial statements include the accounts of six facility companies (C Corporations) and their six related real estate companies (S Corporations).
The facility companies are wholly-owned subsidiaries of Rosewood Care Center Holding Co. ("Rosewood Holding Company"). Rosewood Holding Company and the real estate companies are under common control. The facility companies and the real estate companies are referred to together as the "Companies."
The real estate companies own the real estate and equipment and lease the facilities to the affiliated facility companies.
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ROSEWOOD CARE CENTER FACILITY COMPANIES AND REAL ESTATE COMPANIES - -------------------------------------------------------------------------------- Notes To Combined Financial Statements (Continued)
The facility companies provide convalescent care, long-term care, and rehabilitative services primarily to elderly patients in their facilities in Illinois. Revenues are collected from the patients, their families, their insurance companies or from third party payors. Collections from the state third-party payor are in arrears as a result of budgetary limitations.
All material intercompany balances and transactions between the Companies have been eliminated in combining the financial statements.
Other similarly owned facility companies and real estate companies have been excluded from these combined statements because they are not borrowers or guarantor companies in connection with mortgage loans from Rosewood Care Centers Capital Funding Corporation.
HISTORY OF OPERATIONS AND BUSINESS ACTIVITY
Each facility company is licensed as a skilled nursing facility by the state of Illinois.
ESTIMATES AND ASSUMPTIONS
Management uses estimates and assumptions in preparing financial statements. Those estimates and assumptions +affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses.
ACCOUNTING BASIS
The Companies present their financial statements on the accrual basis in accordance with generally accepted accounting principles and in accordance with the Audit and Accounting Guide, Audits of Providers of Health Care Services, issued by the American Institute of Certified Public Accountants.
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ROSEWOOD CARE CENTER FACILITY COMPANIES AND REAL ESTATE COMPANIES - -------------------------------------------------------------------------------- Notes To Combined Financial Statements (Continued)
ACCOUNTING RECLASSIFICATION
Certain 1994 and 1995 figures have been reclassified where appropriate to conform to the financial statement presentation used in 1996.
PATIENT SERVICE REVENUE
Patient service revenue is reported at the estimated net realizable amounts from residents, third-party payors and others for services rendered, including estimated retroactive adjustments.
Revenue under federal and state third-party payor agreements is subject to audit and retroactive adjustment. Provisions for estimated federal and state third-party payor settlements are provided in the period the related services are rendered. Differences between the estimated amounts accrued and interim and final settlements are reported in operations in the year of settlement.
Accounts receivable - third party payor is comprised of amounts due from the state Medicaid and Federal Medicare Program for services provided to residents eligible for participation in those programs. Also included is an estimate for the settlement of the cost report to be submitted for the year ended June 30, 1996.
ILLINOIS MEDICAID ASSESSMENT PLAN PAYMENTS
Effective July 1, 1993, a nursing home licensing fee of $1.50 per licensed bed day was imposed by the State of Illinois. The nursing home license fee for the years ended June 30, 1996 and 1995 was $394,200 for each year.
PROPERTY, EQUIPMENT AND DEPRECIATION
Property and equipment are carried at cost. Depreciation is computed on the straight-line method for financial reporting purposes as follows:
INCOME TAXES
The six facility companies file a consolidated return with Rosewood Holding Company and its other facility companies. Income taxes are allocated to each facility based on its proportionate share of net income. The six real estate companies file separate S Corporation returns.
Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes (for the facility companies) related primarily to plant and equipment for financial and income tax reporting. The deferred tax assets represent the future tax return consequences of those differences, which will be deductible when the liabilities are settled.
CASH EQUIVALENTS
The Companies consider all investments purchased with maturities of three months or less to be cash equivalents.
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ROSEWOOD CARE CENTER FACILITY COMPANIES AND REAL ESTATE COMPANIES - -------------------------------------------------------------------------------- Notes To Combined Financial Statements (Continued)
2 . RELATED PARTY TRANSACTIONS
Related party interest is as follows:
The facility companies pay a management fee to HSM Management Services, Inc., (the management company, formerly known as Hovan Enterprises, Inc.) which is 100% owned by Rosewood Holding Company for certain management functions as specified in the management agreements. An annual base fee of $1,100 per licensed bed is payable monthly plus additional incentive fees.
Incentive management fees are based on income from the nursing home operations before income taxes and incentive management fees (base income) of the combined group. The combined base income from the nursing home operations is multiplied by, on a graduated basis, various percentages with the maximum percentage of 75% applied to combined base income over $100,000. The base plus incentive management fee is limited to 15% of patient service revenue, by location.
Rosewood Holding Company, as licensee, grants the subsidiary facility companies a nonexclusive right to the use of the service mark "Rosewood Care Center."
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ROSEWOOD CARE CENTER FACILITY COMPANIES AND REAL ESTATE COMPANIES - -------------------------------------------------------------------------------- Notes To Combined Financial Statements (Continued)
3. NOTES RECEIVABLE FROM HOLDING COMPANY
At the closing on the issuance of Rosewood Care Centers Capital Funding Corporation's (the REMIC) 7-1/4% First Mortgage Redeemable Bonds due November 1, 2013, $4,369,000 in excess proceeds were loaned to Rosewood Holding Company pursuant to notes to each Borrowing Company bearing interest at 7-1/4% per annum and having maturities of October 1996. In addition, Rosewood Holding Company delivered notes for outstanding indebtedness to the Borrowing Companies in the aggregate principal amount of $2,686,000. These notes bore interest at 7% and matured December 31, 1997. In December 1993, Rosewood Holding Company obtained a letter of credit which was deposited with the Trustee of the Trust Indenture into the debt service reserve fund for the benefit of holders of the REMIC's 7-1/4% First Mortgage Redeemable Bonds due November 1, 2013. Cash of approximately $3,130,000 which was being held in the debt service reserve fund was then loaned to Rosewood Holding Company pursuant to 3-year notes bearing interest at 7-1/4% per annum. Thereafter, loans of excess cash to Rosewood Holding Company were made pursuant to a series of 3-year notes bearing interest at 7-1/4% per annum. As of June 30, 1994, all of the notes except for the notes signed at the bond closing (totalling $4,369,000) were cancelled and replaced with six (6) new revolving credit notes. As of June 30, 1996, those notes were cancelled and replaced with new revolving credit notes which allow Rosewood Holding Company to borrow, pursuant to the revolving credit notes an aggregate of up to $9,100,000 from the Borrowing Companies. The new revolving credit notes also bear interest at a rate of 7-1/4% per annum and mature December 31, 1999. The outstanding balance of the notes signed at the bond closing was $3,485,000 at June 30, 1995 and 1996. The outstanding balance of the revolving credit notes was $5,847,000 at June 30, 1995 and $4,570,448 at June 30, 1996. All of the notes from Rosewood Holding Company to the Borrowing Companies are pledged to the Trustee under the Trust Indenture as additional collateral security for repayment of the REMIC's 7-1/4% First Mortgage Redeemable Bonds due November 1, 2013.
4. LONG-TERM DEBT
Long-term debt consists of:
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ROSEWOOD CARE CENTER FACILITY COMPANIES AND REAL ESTATE COMPANIES - -------------------------------------------------------------------------------- Notes To Combined Financial Statements (Continued)
The notes payable to Rosewood Care Centers Capital Funding Corporation evidence the loans from the REMIC to the real estate companies and are cross collateralized by a security agreement and assignment of management agreement from each facility company and a first mortgage which includes a security interest in fixtures, improvements, and other personal property, assignment of rents and leases, collateral pledge and security agreement and subordination and attornment agreements from each real estate company. In addition, compensation of officers or directors of the real estate companies is subordinated to payments under the loan agreement.
The Borrowing Companies will be required to make the additional annual payments up to $720,000 per year to the extent the amount of cash available exceeds net income available for debt service (income from operations plus depreciation and amortization, incentive management fees, interest income, and officer bonuses) for the prior fiscal year less (a) the regular principal and interest payments for that year, (b) the amount necessary to pay income taxes of the Companies as if they were all taxed as C Corporations for income tax purposes, (c) any increase in accounts receivable from third party payors and (d) interest income from related parties. In addition, the Companies are required to maintain a minimum cash balance of $1,000,000.
The failure of any real estate company to meet the required additional annual principal payments is not an event of default, but the deficit is cumulative to the extent any annual payment is less than $720,000. The difference is carried forward, at which time such real estate company is subject to certain covenants which restrict its ability to pay out officer bonuses, dividends and incentive management fees until the additional annual payment, on a cumulative basis, is paid in full.
The Loan Agreement also contains certain covenants relating to the consolidation of companies, restrictions on indebtedness, transfers of property, expansion of facilities, and the commingling of funds.
The Companies have established with the trustee and the trustee is the custodian of a 12 month debt service reserve fund consisting of a bank letter of credit for $3,129,889.
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ROSEWOOD CARE CENTER FACILITY COMPANIES AND REAL ESTATE COMPANIES - -------------------------------------------------------------------------------- Notes To Combined Financial Statements (Continued)
The scheduled maturities of long-term debt at June 30, 1996 are as follows:
5. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of each class of financial instruments:
NOTES RECEIVABLE FROM ROSEWOOD CARE CENTER HOLDING CO.
It was not practicable to estimate the fair value of the notes receivable from Rosewood Care Center Holding Co. because of the uncertainty of future cash flows to be paid for interest and principal. Information pertinent to estimating the fair values is disclosed in Note 3.
FIRST MORTGAGE REDEEMABLE BONDS
The fair value of the Company's first mortgage redeemable bonds is estimated based on discounted future cash flows at the current rates at which the Company could borrow funds with similar terms, degree of risk and remaining maturities.
Estimated fair values of the Company's financial instruments, all of which are held for nontrading purposes, are as follows:
The estimated fair value amounts presented herein have been determined using available market information and appropriate valuation methodologies and are not necessarily indicative of the amounts the Company could realize in a current market exchange.
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ROSEWOOD CARE CENTER FACILITY COMPANIES AND REAL ESTATE COMPANIES - -------------------------------------------------------------------------------- Notes To Combined Financial Statements (Continued)
6. INCOME TAXES
Income tax expense (benefit) consists of:
FACILITY COMPANIES
The facility companies provide for deferred taxes on temporary differences between amounts reported for financial statement and income tax purposes of the facility companies, which are taxed under Subchapter C of the Internal Revenue Code of 1986. The estimated tax effect of each temporary difference is as follows:
REAL ESTATE COMPANIES
The real estate companies do not provide for deferred taxes on temporary differences between financial statement and income tax depreciation expense on the real estate companies which are taxed under Subchapter S of the Internal Revenue Code of 1986. The shorter recovery periods, as prescribed by tax law, which result in lower taxable income, pass through to the individual shareholder level.
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ROSEWOOD CARE CENTER FACILITY COMPANIES AND REAL ESTATE COMPANIES - -------------------------------------------------------------------------------- Notes To Combined Financial Statements (Continued)
Income of the real estate companies is taxed at the individual shareholder level and not at the corporate level.
7. DIVIDENDS
Dividends declared were as follows:
8. LITIGATION
The Companies, from time to time, are involved in litigation in the ordinary course of business including disputes involving management contracts, patient services, employment claims and construction matters. The Companies are also involved in routine administrative and judicial proceedings regarding permits and expenses. The Companies are not a party to any lawsuit or proceeding which, in the opinion of management, is not adequately covered by insurance or which is, individually or in the aggregate, likely to have a material adverse effect on the combined financial position or results of operations of the Companies.
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ROSEWOOD CARE CENTER FACILITY COMPANIES AND REAL ESTATE COMPANIES - -------------------------------------------------------------------------------- Notes To Combined Financial Statements (Continued)
9. SUMMARIZED COMBINING FINANCIAL INFORMATION
Summarized condensed combining financial information for the facility companies and the real estate companies is as follows:
Balance sheet information (Dollars in thousands):
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ROSEWOOD CARE CENTER FACILITY COMPANIES AND REAL ESTATE COMPANIES - -------------------------------------------------------------------------------- Notes To Combined Financial Statements (Continued)
Statement of Operations information (Dollars in thousands):
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ROSEWOOD CARE CENTER FACILITY COMPANIES AND REAL ESTATE COMPANIES - -------------------------------------------------------------------------------- Notes To Combined Financial Statements (Continued)
Statement of Cash Flows Information (Dollars in thousands):
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ROSEWOOD CARE CENTER FACILITY COMPANIES AND REAL ESTATE COMPANIES - -------------------------------------------------------------------------------- Notes To Combined Financial Statements (Continued)
INDEPENDENT AUDITORS' REPORT
Board of Directors Rosewood Care Center Facility and Real Estate Companies St. Louis, Missouri
We have audited, in accordance with generally accepted auditing standards, the combined financial statements of Rosewood Care Center Facility Companies and Real Estate Companies as of June 30, 1995 and 1996 and for each of three years in the period ended June 30, 1994, 1995 and 1996, and have issued our report thereon dated August 30, 1996. The combined financial statement schedules are the responsibility of the Company's management and are presented for the purpose of complying with Securities and Exchange Commission's rules and are not part of the combined financial statements. These schedules have been subjected to the auditing procedures applied in the audit of the combined financial statements and, in our opinion, presents fairly in all material respects the financial data required to be set forth herein in relation to the combined financial statements taken as a whole.
/s/ Rubin, Brown, Gornstein & Co. LLP RUBIN, BROWN, GORNSTEIN & CO., LLP
St. Louis, Missouri August 30, 1996
ROSEWOOD CARE CENTER FACILITIES COMPANIES AND REAL ESTATE COMPANIES - --------------------------------------------------------------------------------
Schedule VIII Reg S-X210.12-09
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
There were no changes in or disagreements with accountants on accounting and financial disclosures during the fiscal year ended June 30, 1996.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND OFFICERS OF THE COMPANY.
The following table lists the directors and executive officers of the REMIC and each of the Companies, their ages and their positions. The director serves for a term of one year. Each executive officer serves at the pleasure of the director.
MR. VANDER MATEN is a founder and principal shareholder (through his trust) of the REMIC and the Companies. Mr. Vander Maten is actively involved in related companies in which Mr. Vander Maten, his trust or his family limited partnership is the principal shareholder. Such businesses have the same management as and operate substantially similar businesses or businesses closely related to that of the Companies. Mr. Vander Maten also serves on the Board of Directors of Charlestown, a life care retirement community in Baltimore, Maryland and Henry Ford Village, a life care retirement community in Dearborn, Michigan.
MR. HOEFLING is Vice President of the REMIC and has been Vice President of Operations of the Companies and the affiliated Rosewood companies since 1985. He is a shareholder (through his trust or his family limited partnership) of the Companies and all affiliated Rosewood companies.
MR. NETEMEYER has been Controller, Secretary and Treasurer of the REMIC since its formation and of the Companies since 1985.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
The REMIC has no employees and pays no salaries to its officers. The Companies also do not regularly pay salaries to any officers. However, a bonus was paid to officers during 1996. The regular compensation of the executive officers for services rendered to the Companies is paid by HSM Management, pursuant to the Management Agreements or the Administrative Services Agreements. Currently, HSM Management pays all such compensation in the form of cash. Except for any incentive compensation which may be paid to Messrs. Vander Maten and Hoefling, all such compensation is paid from the base management fee payable to HSM Management pursuant to the Management Agreements.
THE FOLLOWING TABLE SETS FORTH CERTAIN INFORMATION WITH RESPECT TO THE ANNUAL COMPENSATION PAID OR ACCRUED FOR FISCAL YEAR ENDED JUNE 30, 1996 TO THE CHIEF EXECUTIVE OFFICER OF THE REMIC AND THE COMPANIES AND TO THE ONLY OTHER EXECUTIVE OFFICER WHOSE TOTAL SALARY EXCEEDED $100,000 DURING SUCH FISCAL YEAR.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth the shares of the REMIC and the Companies beneficially owned by each person who is the beneficial owner of more than 5% of the outstanding shares. All of the shares set forth in the following table are subject to an agreement between the shareholders restricting transfer of the shares. Each person named in the table has sole voting and investment power with respect to all shares shown in the table as being owned by such person. There are no arrangements known to the REMIC or the Companies which may, at a subsequent date, result in change in control of the REMIC or the Companies.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
During 1996 and 1995 the Companies loaned excess cash to an affiliate, Rosewood Care Center Holding Co., pursuant to certain promissory notes. Rosewood Care Center Holding Co. is owned 75% by Mr. Vander Maten's family limited partnership and 25% by Mr. Hoefling's family limited partnership. Mr. Vander Maten and Mr. Hoefling through their respective controlled corporations act as general partner of their respective limited partnerships. Mr. Vander Maten is the president and sole director and Mr. Hoefling is the vice president of Rosewood Care Center Holding Co. The highest amount of such indebtedness by Rosewood Care Center Holding Co. to the Companies during 1996 and 1995 was $10,953,000 and $10,384,000 respectively. At June 30, 1996 and 1995, the amount of such indebtedness of Rosewood Care Center Holding Co. to the Companies was $8,056,448 and $9,332,000 respectively.
At the closing on the issuance of the REMIC's 7 1/4% First Mortgage Redeemable Bonds due November 1, 2013, $4,369,000 in excess proceeds were loaned to Rosewood Care Center Holding Co. pursuant to notes to each Borrowing Company bearing interest at 7 1/4% per annum and having maturities of October 1996. As of June 30, 1996, when the remaining balance of the notes aggregated $3,554,847, the original notes were cancelled and replaced with notes bearing interest at 7 1/4% per annum and due December 31, 1999.
In December 1993, Rosewood Care Center Holding Co. obtained a letter of credit which was deposited with the Trustee of the Trust Indenture into the debt service reserve fund for the benefit of holders of the REMIC's 7 1/4% First Mortgage Redeemable Bonds due November 1, 2013. Cash of approximately $3,130,000 which was being held in the debt service reserve fund was then loaned to Rosewood Care Center Holding Co. pursuant to 3 year notes bearing interest at 7 1/4% per annum. Subsequently, the notes aggregating approximately $3,130,000 were cancelled and replaced with revolving credit notes to allow additional amounts of excess cash to be loaned to Rosewood Care Center Holding Co. without the necessity of continuously revising or executing new promissory notes. As of June 30, 1996 outstanding notes were cancelled and replaced with six (6) new revolving credit notes which allow Rosewood Care Center Holding Co. to borrow, pursuant to the revolving credit notes, an aggregate up to $9,100,000 from the borrowing companies. The notes bear interest at 7 1/4% per annum and are due December 31, 1999. The balance outstanding for the revolving credit notes aggregated $4,501,601 as of June 30, 1996. All of the notes from Rosewood Care Center Holding Co. to the Borrowing Companies are pledged to the Trustee under the Trust Indenture as additional collateral security for repayment of the REMIC's 7 1/4% First Mortgage Redeemable Bonds due November 1, 2013.
The Guarantors incurred expenses for management fees to HSM Management during the year ended June 30, 1996 and 1995 of approximately $2,771,222 and $2,833,174 for services rendered during the 1996 and 1995 fiscal year respectively. HSM Management is a wholly owned subsidiary of Rosewood Care Center Holding Co. Mr. Vander Maten and Mr. Hoefling are the President and Vice President respectively of HSM Management and Mr. Vander Maten is HSM Management's sole director. At June 30, 1996 and 1995, $464,000 and 537,000 respectively of such fees were unpaid. All such accrued fees were paid subsequent to the end of the 1996 and 1995 fiscal years. Pursuant to the management agreements entered into as of October 21, 1993, the bond issue date, it was anticipated that the Guarantors would, from time to time, accrue a portion of the incentive management fees and thus be indebted to the management company until such amounts were paid. Under the loan documents, payment of the management fees is subordinated and any note given to the management company for incentive management fees must be subordinated to payment of the bonds and preclude remedial action against the Companies until the bonds are paid in full. The management agreements entered into continue in full force and effect.
HSM Management pays the compensation of persons who render management services to the Guarantors. Such compensation is paid from the base management fee payable pursuant to the Management Agreements. In the last fiscal year, HSM Management allocated $273,000 and $147,000 as the compensation paid to Messrs. Vander Maten and Hoefling, respectively, relating to services rendered to the Guarantors. This compensation arrangement is anticipated to continue.
Each Guarantor pays an annual license fee of $3,000 to Rosewood Care Center Holding Co. under the terms of a license agreement dated June 30, 1996 under which the Companies are authorized to use the name "Rosewood Care Center".
During the last quarter of 1994, one of the Companies, Galesburg Real Estate, Inc., granted a long term ground lease and easements for nominal consideration to related companies, Galesburg Real Estate II, L.L.C. and HSM Investment, L.L.C., as permitted under the loan documents, for the purpose of facilitating construction of a planned 60 bed expansion at Rosewood Care Center of Galesburg. If expansion proceeds as originally planned, the easement rights will be assigned to Galesburg Real Estate, L.L.C. when it acquires the property adjoining the Galesburg facility from HSM Investment, L.L.C. Galesburg Real Estate II, L.L.C. and HSM Investment, L.L.C. are owned 75% by Mr. Vander Maten's family limited partnership and 25% by Mr. Hoefling's family limited partnership. Mr. Vander Maten is the Manager of both Galesburg Real Estate II, L.L.C. and HSM Investment, L.L.C. The expansion building will be connected to the existing Galesburg facility by a corridor. The expansion building will be constructed and owned by the affiliate Galesburg Real Estate II, L.L.C. but operated by Rosewood Care Center, Inc. of Galesburg and managed by HSM Management. The expansion building may share some special use areas and equipment with the Galesburg facility. However, the Galesburg facility will continue to be able to function as a separate facility. Therefore, if it should become necessary or desirable to sever the expansion building from the Galesburg facility or cease operation of the expansion building, there should be no material adverse effect on the existing Galesburg facility's ability to operate as a complete, separate physical structure. Although any rents or proceeds from the ground lease and easements are encumbered, the ground leases and easements are not encumbered by the mortgage held by the REMIC on the Galesburg facility. The bifurcated ownership structure is required by the loan documents and is intended to shelter bondholders from risks associated with construction. The Galesburg facility expansion is currently under review by the Illinois Health Facilities Planning Board and, if the expansion does proceed, it may not occur in the manner described above.
Plans for the expansion of the Alton facility on terms substantially similar to those described above for the Galesburg facility are nearing completion. As of June 30, 1996 construction of the Alton expansion was contemplated to begin in the next fiscal quarter. Similar expansion is a possibility at any or all of the remaining facilities.
The Guarantors are all subsidiaries of and file a consolidated tax return with Rosewood Care Center Holding Co. As of June 30, 1996 and 1995, the Companies owed $88,263 and $170,120 respectively as their share of the current year income taxes to the Rosewood Care Center Holding Co. All such accrued amounts were paid subsequent to the end of the 1996 and 1995 fiscal years.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES & REPORTS ON FORM 8-K
(a) 1 AND 2 FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
The financial statements and the financial statement schedule listed in Item 8 in the index to Combined Financial Statements and Supplementary Data are filed as part of this annual report on Form 10-K.
(a) 3 EXHIBITS
The Exhibits listed in the accompanying index to exhibits are incorporated by reference herein and filed as part of this annual report on Form 10-K.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the fourth quarter.
(c) EXHIBITS
See the accompanying index to exhibits referenced in Item 14(a)(3) above for a list of exhibits incorporated herein by reference or filed as part of this annual report on Form 10-K.
(d) FINANCIAL STATEMENT SCHEDULE
See the accompanying index to Combined Financial Statements and Supplementary Data referenced in Item 14(a)1 and 2 above.
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT
The Registrant has only debt registered under the Securities Act of 1933. No annual report has been or will be sent to security (bond) holders. If any security holder requests information, a copy of this annual report on Form 10-K will be sent to such security holder.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ROSEWOOD CARE CENTERS CAPITAL FUNDING CORPORATION, Registrant
Dated: September 26, 1996 /s/ Larry D. Vander Maten ------------------------- Larry D. Vander Maten President and Director (Principal Executive Officer and Principal Financial and Accounting Officer)
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ROSEWOOD CARE CENTER, INC. OF SWANSEA, Registrant
Dated: September 26, 1996 /s/ Larry D. Vander Maten ------------------------- Larry D. Vander Maten President and Director (Principal Executive Officer and Principal Financial and Accounting Officer)
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ROSEWOOD CARE CENTER, INC. OF GALESBURG, Registrant
Dated: September 26, 1996 /s/ Larry D. Vander Maten ------------------------- Larry D. Vander Maten President and Director (Principal Executive Officer and Principal Financial and Accounting Officer
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ROSEWOOD CARE CENTER, INC. OF PEORIA, Registrant
Dated: September 26, 1996 /s/ Larry D. Vander Maten ------------------------- Larry D. Vander Maten President and Director (Principal Executive Officer and Principal Financial and Accounting Officer)
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ROSEWOOD CARE CENTER, INC. OF EAST PEORIA, Registrant
Dated: September 26, 1996 /s/ Larry D. Vander Maten ------------------------- Larry D. Vander Maten President and Director (Principal Executive Officer and Principal Financial and Accounting Officer)
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ROSEWOOD CARE CENTER, INC. OF ALTON, Registrant
Dated: September 26, 1996 /s/ Larry D. Vander Maten ------------------------- Larry D. Vander Maten President and Director (Principal Executive Officer and Principal Financial and Accounting Officer)
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ROSEWOOD CARE CENTER, INC. OF MOLINE, Registrant
Dated: September 26, 1996 /s/ Larry D. Vander Maten ------------------------- Larry D. Vander Maten President and Director (Principal Executive Officer and Principal Financial and Accounting Officer)
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SWANSEA REAL ESTATE, INC., Registrant
Dated: September 26, 1996 /s/ Larry D. Vander Maten ------------------------- Larry D. Vander Maten President and Director (Principal and Executive Officer and Principal Financial and Accounting Officer
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
GALESBURG REAL ESTATE, INC., Registrant
Dated: September 26, 1996 /s/ Larry D. Vander Maten ------------------------- Larry D. Vander Maten President and Director (Principal Executive Officer and Principal Financial and Accounting Officer)
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
PEORIA REAL ESTATE, INC., Registrant
Dated: September 26, 1996 /s/ Larry D. Vander Maten ------------------------- Larry D. Vander Maten President and Director (Principal Executive Officer and Principal Financial and Accounting Officer)
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
EAST PEORIA REAL ESTATE, INC., Registrant
Dated: September 26, 1996 /s/ Larry D. Vander Maten ------------------------- Larry D. Vander Maten President and Director (Principal Executive Officer and Principal Financial and Accounting Officer)
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ALTON REAL ESTATE, INC., Registrant
Dated: September 26, 1996 /s/ Larry D. Vander Maten ------------------------- Larry D. Vander Maten President and Director (Principal Executive Officer and Principal Financial and Accounting Officer)
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
MOLINE REAL ESTATE, INC., Registrant
Dated: September 26, 1996 /s/ Larry D. Vander Maten ------------------------- Larry D. Vander Maten President and Director (Principal Executive Officer and Principal Financial and Accounting Officer)
ROSEWOOD CARE CENTERS CAPITAL FUNDING CORPORATION EXHIBIT INDEX
These Exhibits are numbered in accordance with the Exhibit Table of Item 601 of Regulation S-K