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MAINE LIFE CARE RETIREMENT COMMUNITY, INC. REPORT OF EXAMINATION TABLE OF CONTENTS SCOPE OF EXAMINATION CERTIFICATE OF AUTHORITY I hereby certify that the attached report of examination dated December 12, 2002 shows the condition and affairs of Maine Life Care Retirement Community, Inc. (DBA Piper Shores), Portland, Maine as of March 31, 2002 and has been filed in the Bureau of Insurance as a public document. This report has been reviewed. _____________________________ Dated this day of , 2003 December 12, 2002 Honorable Alessandro A. Iuppa Dear Honorable Iuppa: In accordance with your instructions and pursuant to the provisions of M.R.S.A. Title 24-A Chapter 24, a limited scope examination has been made on the conditions and financial affairs of Maine Life Care Retirement Community, Inc. (DBA Piper Shores) at its office in Scarborough, Maine, hereinafter referred to as the "Company". The following report is respectively submitted. The examination covered the period from January 1995 to the close of business on March 31, 2002. The examination was performed on a limited scope basis with a primary focus on accounting controls and procedures. The examination also included a review of the Company's Business Policies, Articles of Incorporation, Bylaws, Minutes of the Board of Directors meetings, compliance with the terms and conditions of the Company's Certificate of Authority, compliance with the laws, rules and regulations prescribed or permitted by the Maine Bureau of Insurance, and verification of the assets and liabilities as reported to the Maine Bureau of Insurance as of March 31, 2002. For purposes of this report, comments on various items may be limited to matters involving departure from laws, rules or regulations, a significant change in the amount of the item, or where an explanation, comment and/or recommendation is warranted. The Company was incorporated in January 1995 as a nonprofit corporation. The purpose of the Company is to establish, own, maintain and operate a continuing care retirement community ("CCRC") known as Piper Shores. Piper Shores provides housing, food services, health services and other services to elderly residents for their lifetime in return for an upfront entrance fee, paid prior to assuming residency at Piper Shores, plus a monthly fee subject to annual increases. On July 13, 1996, the Company, acknowledging their inexperience in managing a project of this type and magnitude, contracted with Retirement Living Services, LLC ("RLS") to develop a life care community in the Portland, Maine area. RLS, subject to approval by the Company, assumed responsibility for: (1) project and program planning and development services; (2) obtaining regulatory approvals for the site and the project; (3) financial planning; (4) marketing; (5) construction and architect procurement and supervision; and (6) overall direction, coordination and supervision of all phases of the project. The agreement mandates participation by the Company throughout the contract period. The role of RLS for Phase I of the project is almost complete. RLS remains actively involved in marketing units for Phase I; however, their involvement should end in the second half of 2002. In consideration for the services provided, RLS is to be paid a development fee equal to 5% of the project cost and a marketing fee equal to 3% of the project cost. RLS is similarly involved in Phase II of the project. On July 1, 1999, the Company entered into an agreement with Life Care Services LLC, an Iowa limited liability company ("LCS") to oversee the management of the day to day affairs of the Company. LCS assumed responsibility to implement policies, budgets and goals; supervise the day to day management; and provide the Company with relevant information as to past operations and to make recommendations as to future operations. The agreement provides for a monthly management fee of $13,000 during the first six months prior to opening operations, $17,000 from opening until 90% occupancy is achieved and $19,500 thereafter. The fee is adjusted annually on January 1 based on the change in the "all items" CPI index. The fee for the month of March 2002 was $17,859. The agreement also provides that the Executive Director of the Company be an LCS employee and that LCS be reimbursed for the Executive Director's total compensation, fringe benefits, professional memberships, licensing expenses and cost of attending educational seminars in addition to the monthly management fee described above. On December 16, 1999, the Company obtained financing for the construction of Phase I of the community through the sale of two series of bonds. Series A bonds, par value $24,900,000, bear interest at fixed rates ranging from 7.5% to 7.55%; Series B bonds, par value $21,500,000, are variable interest rate bonds guaranteed by a letter of credit. The variable rate is reset weekly. The Series B bonds were repaid in full in January 2002. The Series A bonds require interest only payments through 2029 at which time the entire principle would become due. At a board meeting held October 18, 2000, the board voted to select Deborah Riddell, an LCS employee, as Executive Director for the community. Ms. Riddell assumed this position on February 1, 2001. By June 2001, Ms. Riddell had hired all department heads and plans were underway for occupancy to commence in August 2001. The facility became operational September 1, 2001. The initial project completed in August 2001, Phase I, consists of 160 independent living units, 16 assisted living units and 32 skilled nursing beds as well as common areas. Construction for Phase II of the project commenced in October 2001 and will, upon completion, consist of 40 independent living cottages, 4 assisted living units and 8 skilled nursing beds. As of March 31, 2002, 134 independent living units, 13 assisted living units and 8 skilled nursing units for Phase I were occupied. Residency deposits for 34 of the 40 independent living cottages in Phase II had been received as of March 31, 2002. Management of the Company is vested in a twelve member board of directors. The following are the duly elected members of the board of directors and officers as of March 31, 2002. Board of Directors: John J. Evans, Chairman
Judith M. Coburn Officers: John J. Evans, President The board of directors has established the following committees:
Title 24-A M.R.S.A. § 6203 requires that each director and officer of the Company complete a conflict of interest statement annually to disclose any material interest or affiliation which is likely to be in conflict with his/her official duties and responsibilities with the Company. The Company was unable to provide any conflict of interest statements for 1999 and 2000. (See Comment and Recommendation #4) The Company was granted a Final Certificate of Authority to operate as a life care community within the meaning of 24-A M.R.S.A. § 6202 on December 14, 1999 subject to certain terms and conditions. The examiners conducted a review of the process used in recording assets and liabilities of the Company and the controls in place to verify the value reported. Some weaknesses were observed with the most significant listed here: Overall The examiners did not encounter any difficulties experienced by the Company's Certified Public Accountants as referenced in the Board of Directors' Minutes of February 27, 2002; however, regular and timely reconciliation of accounts was not evidenced for the period being examined. It is essential that monthly reconciliations be performed on a timely basis for all significant accounts in order to ensure the monthly financial statements are accurate. (See Comments and Recommendations #1) Transactions as they relate to work performed by RLS are recorded in the month following the month in which they occur. This reporting lag is a significant item in the account reconciliation process and results in inaccurate reporting of cash and construction in progress balances in the monthly financial statements provided to the board of directors. (See Comments and Recommendations #2) Cash The examiners were provided with a list of bank accounts and bank confirmations were requested from all institutions. Bank reconciliations were reviewed. A test sample was selected to verify procedures for cash receipts and disbursements were being followed. It was noted during the review that bank reconciliations were not completed in a timely manner and voucher approval for an invoice payable to LCS was authorized by an LCS employee. (See Comments and Recommendations #3) It was also noted that the amount refunded due to the death of a resident exceeded the contractual amount due. (See Comments and Recommendations #1) Fixed Assets The Company provided the examiners with a detailed fixed asset schedule as of December 31, 2001. The examiners reviewed the purchasing procedures including the approval process. A review of the fixed asset schedule indicated that certain assets were being depreciated using a life other than the life indicated in the schedule, and that the correct acquisition date was not being applied in the calculation of accumulated depreciation as of the balance sheet date. (See Comments and Recommendations #1) Construction in Process The Company contracted with RLS to manage the construction of the project. In accordance with the agreement, RLS maintains the accounting records for construction in process and reports the activity to the Company on a monthly basis. At March 31, 2002, the construction in process account did not include RLS construction activity for the month of March 2002. The examiners were advised that RLS construction activity is booked on a one month lag for all months except December. (See Comments and Recommendations #2) Bond Issue Cost A schedule of the bond issue costs was provided to the examiners which did not agree to the value carried in the balance sheet. In addition, a portion of the carried asset pertained to fees associated with construction loans. Construction loan expenses should either be capitalized as part of the construction in process or expensed. (See Comments and Recommendations #1) Residency Deposits and Deferred Revenue Accounts Schedules for the residency deposits and deferred revenue accounts were reviewed and tested for compliance with the terms and conditions of the residency agreements. The review consisted of verifying the entrance fee deposits of 10% and 15% and the final settlement amount including accumulated interest in accordance with the agreement. Two exceptions were noted wherein the amount charged/refunded did not agree with the terms and conditions of the agreement. (See Comments and Recommendations #1) The following financial statements show the Company's financial position
at March 31, 2002 as determined by this examination: BALANCE SHEET March 31, 2002
STATEMENT OF OPERATIONS AND CHANGES IN NET ASSETS (DEFICIT) Three Months Ended March 31, 2002
Note 1 - Cash and cash equivalents $391,064 The Company maintains separate operating accounts for general operations, payroll and petty cash. Cash and cash equivalents at March 31, 2002 are as follows:
Note 2 - Trustee Held Funds $9,072,331 Trustee held funds as of March 31, 2002 are as follows:
The operating reserve fund represents amounts required under Title 24-A Chapter 73§ 6215-A (2). The debt service reserve was established to secure the Series A bonds and represents amounts required under the terms of the debt agreement which is greater than the amount required under Title 24-A Chapter 73 § 6215-A (1). The Phase II deposits and construction fund will be used to fund construction costs. The interest fund represents amounts segregated on a monthly basis for purposes of funding the semiannual interest payable on each January 1 and July 1 until maturity or redemption. Other funds include a performance guarantee deposit with the Town of Scarborough and a renewal/replacement reserve fund. Note 3 - Property, plant and equipment $45,198,228 Property, plant and equipment are recorded at cost. Depreciation is provided over the estimated useful life of each class of depreciable asset and is computed using the straight line method. Construction in progress is recorded at cost and is reclassified when the asset is placed into service. Note 4 - Other assets $2,039,902 Deferred financing costs consist primarily of issuance and other costs incurred in connection with securing the long term financing of the project. Such costs are being amortized on a straight line basis over the life of the debt. Deferred marketing costs consist primarily of the marketing portion of an agreement with an outside vendor to assume responsibility to develop a life care community in the Portland, Maine area. Such marketing costs are being amortized over the estimated life expectancy of the residents of the community. Note 5 - Resident entrance fee liabilities $32,912,739 Resident entrance fee deposits represent amounts received from future residents under signed residency agreements. Such amount is refundable if, prior to occupancy, a resident should decide to terminate the contract due to illness or other specified circumstances. Deferred revenue arises from entrance fees from residents occupying units and consists of the following components at March 31, 2002: Residential component $30,562,300 Life care component 2,989,400 Less amortization (638,961) Resident entrance fee liabilities, net $32,912,739 Note 6 - Long term debt obligations and notes payable to directors $24,647,352 Long term debt obligations consist of tax exempt mortgage revenue bonds, Piper Shores Issue, Series A, issued by the Maine Health and Higher Educational Facilities Authority in the amount of $24,647,352 (net of discount of $252,648) and bear interest at fixed rates ranging from 7.5% to 7.55%. Annual interest expense will approximate $1,875,000 for the full year 2002. In accordance with the indenture agreement, subsequent to the repayment of the Series B bonds in January 2002, the Company is required to begin funding a renewal and replacement fund (the "Fund") with the Bond Trustee in the amount of $10,000 per month until the Retirement Living Services, Inc. fees ($350,000) and the subordinated directors loans ($175,500) are paid and $15,000 thereafter until the balance of the Fund totals $1,200,000. At March 31, 2002 the balance in the Fund was $20,000. At March 31, 2002 the Company had $175,500 in loans payable to certain current and former board members. The loans bear interest at various rates. The principle and interest were subordinated to repayment of the Series B bonds, repaid in January 2002. Management has classified this debt as current and intends that the amounts will be repaid in 2002. Note 7 -Commitments and contingencies The Company has obtained from a bank a letter of credit in favor of the Town of Scarborough for $575,000 in connection with the Phase II construction. A bank has provided a credit facility for the construction of Phase II which provides available financing of $9,223,450. This facility bears interest at 2% above the one month London Inter Bank Offer Rate ("LIBOR"). Interest only payments are required during the duration of the loan with principal repayment from the proceeds from units sold. No amounts were outstanding at March 31, 2002.
STATE OF MAINE Joel S. Thomsen, CPA, CFE, being duly sworn according to law, deposes and says that in accordance with the authority vested in him by Alessandro A. Iuppa, Superintendent of Insurance, pursuant to the Insurance Laws of the State of Maine, he has made an examination of the conditions and affairs of: MAINE LIFE CARE RETIREMENT COMMUNITY, INC. (DBA PIPER SHORES) of Portland, Maine as of March 31, 2002 and that the foregoing report of examination, subscribed to by him, is true to the best of his knowledge and belief. The following examiners from the Bureau of Insurance assisted: Graham S. Payne _________________________________ Subscribed and sworn to before me Notary Public My Commission Expires
Last Updated: August 22, 2012 |
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