<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
Amendment No. 2
(Amending Part I- Items 1 and 2)
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter Ended December 31, 1996
Commission File No. 1-14114
RETIREMENT CARE ASSOCIATES, INC.
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(Exact Name of Registrant as Specified in its Charter)
Colorado 43-1441789
- ------------------------------ ----------------------------------
(State or Other Jurisdiction of (IRS Employer Identification Number)
Incorporation or Organization)
6000 Lake Forrest Drive, Suite 200, Atlanta, Georgia 30328
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(Address of Principal Executive Offices)
(404) 255-7500
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(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such report(s), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [ X ] No [ ]
As of December 31, 1996, 13,474,995 shares of Common Stock were outstanding.
<PAGE> 2
RETIREMENT CARE ASSOCIATES AND SUBSIDIARIES
Form 10-Q/A For the Quarter Ended December 31, 1996
<TABLE>
<CAPTION>
INDEX Page(s)
<S> <C> <C>
PART I. Financial Information
Item 1. Consolidated Financial Statements
Introduction 3
Consolidated Statements of Operations
(Unaudited) - Three Months Ended
December 31, 1996 and December 31, 1995 4
Consolidated Statements of Operations
(Unaudited) - Six Months Ended
December 31, 1996 and December 31, 1995 5
Consolidated Balance Sheets - (Unaudited)
December 31, 1996 and (Audited) June 30, 1995 6-7
Consolidated Statements of Cash Flows
(Unaudited) - Six Months Ended December 31,
1996 and December 31, 1995 8-9
Notes to Consolidated Financial Statements
(Unaudited) 10-13
Item 2. Managements' Discussion and Analysis of
Results of Operations and Financial
Condition 13-16
Signatures 17
</TABLE>
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<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
INTRODUCTION - CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements included herein have been prepared
pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures have been condensed
or omitted pursuant to such rules and regulations. In the opinion of
Management, all adjustments, which were of a normal recurring nature, necessary
to present fairly the consolidated financial position and results of operations
and cash flows for the periods presented have been included. These
consolidated financial statements should be read in conjunction with the
financial statements and the notes thereto included in the Annual Report on
Form 10-K, Retirement Care Associates, Inc. (the "Company") for the fiscal year
ended June 30, 1996, File No. 1-14114.
The Company has restated its financial information for periods commencing June
30, 1996 through the nine months ended March 31, 1997, as reflected in the
Company's Quarterly Reports on Forms 10-Q for the quarters ended September 30,
1996, December 31, 1996 and March 31, 1997. Adjustments and reclassifications
were necessary to correct entries relating to (i) receivables due from
third-party payors, (ii) the Company's inventory for such periods,
(iii)provisions for doubtful accounts, (iv) provisions for contractual
allowances for third-party payors, (v) provisions for accrued liabilities, and
(vi) pre-recorded operating leases (collectively, the "Restated Entries").
To show the impact of the Restated Entries with respect to previously reported
amounts for each period restated, the Company has provided a description of the
Restated Entries and a reconciliation of historical results for each period as
previously reported in the filed quarterly report to restated results.
Certain statement in this Form 10-Q are "forward-looking statements" made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Forward-looking statements involve a number of risks and
uncertainties. Factors which may cause the Company's actual results in future
periods to differ materially from forecast results include, but are not limited
to: general economic and business conditions, both nationally and in the regions
in which the Company operates; industry capacity; demographic changes;
existing government regulations and changes in, or the failure to comply
with, government regulations; legislative proposals for reform; the ability to
enter into lease and management contracts and arrangements on acceptable terms;
changes in Medicare and Medicaid reimbursement levels; liability and other
claims asserted against the Company; competition; changes in business strategy
or development plans; the ability to attract and retain qualified personnel;
the significant indebtedness of the Company; and the availability and terms of
capital to fund the expansion of the Company's business, including the
acquisition of additional facilities.
The financial information included in this report has been prepared by the
Company, without audit, and should not be relied upon to the same extent as
audited financial statements.
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Retirement Care Associates, Inc. and Subsidiaries
Unaudited Consolidated Statements of Operations
for the Three Months Ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
<S> <C> <C>
Revenues
Patient service revenue: $ 47,950,464 $ 28,342,120
Medical supply revenue 11,631,336 1,605,242
Management fee revenue:
From affiliates 446,334 783,669
From others 112,241 112,247
Other operating revenue 1,246,894 386,899
61,387,269 31,230,177
Expenses
Cost of patient services 33,415,649 17,608,280
Cost of medical supplies sold 7,745,113 1,831,267
Lease expense 2,988,406 1,729,516
General and administrative 12,006,626 4,314,937
Depreciation and amortization 1,394,664 588,175
Interest 3,116,215 1,343,981
Provision for bad debts 900,000 --
61,566,673 27,416,156
Income (loss) before minority
interest and income taxes (179,404) 3,814,021
Minority interest (217,500) (31,412)
Income (loss) before income taxes and
extraordinary item (396,904) 3,782,609
Income tax provision (benefit) (100,000) 1,462,598
Income (loss) before extraordinary item (296,904) 2,320,011
Extraordinary item, less applicable
income taxes (490,000) --
Net (loss) income $ (786,904) $ 2,320,011
Income (loss) per common and common
equivalent share before extraordinary item (.02) .19
Net income (loss) per common and common
equivalent share (.05) .19
Weighted average shares outstanding 15,420,468 12,386,290
</TABLE>
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<PAGE> 5
Retirement Care Associates, Inc. and Subsidiaries
Unaudited Consolidated Statements of Operations for
the Six Months Ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
<S> <C> <C>
Revenues
Patient service revenue: $ 89,925,434 $ 54,177,449
Medical supply revenue 22,856,118 3,194,315
Management fee revenue:
From affiliates 1,252,501 1,581,171
From others 240,120 222,624
Other operating revenue 2,243,130 694,795
116,517,303 59,870,354
Expenses
Cost of patient services 70,977,070 33,652,390
Cost of medical supplies sold 15,212,286 3,420,339
Lease expense 6,015,197 3,480,931
General and administrative 21,816,725 8,770,518
Depreciation and amortization 2,513,126 1,077,789
Interest 5,513,851 2,272,833
Provision for bad debts 2,500,000 --
124,548,255 52,674,800
Income (loss) before minority interest
and income taxes (8,030,952) 7,195,554
Minority interest (7,500) (68,960)
Income (loss) before income taxes
and extraordinary item (8,038,452) 7,126,594
Income taxes (3,000,000) 2,747,863
Income (loss) before extraordinary item (5,038,452) 4,378,731
Extraordinary item, less applicable
income taxes (490,000) --
Net Income (loss) $(5,528,452) $ 4,378,731
Income (loss) per common and common
equivalent share before extraordinary item (.34) .35
Net income (loss) per common and common
equivalent share (.37) .35
Weighted average shares outstanding 14,996,887 12,386,290
</TABLE>
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Retirement Care Associates, Inc. and Subsidiaries
Unaudited Consolidated Balance Sheets as of
December 31, 1996 and Audited at June 30, 1996
<TABLE>
<CAPTION>
Unaudited Audited
December 31, June 30,
1996 1996
<S> <C> <C>
Assets
Current
Cash and cash equivalents $ 328,924 $ 45,365
Accounts receivable 34,896,497 20,556,920
Inventory 6,526,582 4,849,819
Deferred income taxes 470,193 461,214
Note and accrued interest receivable 636,250 713,750
Restricted Bond Fund 5,513,728 2,342,565
Prepaid expenses and other 2,975,460 1,791,442
Total current assets 51,347,634 30,761,075
Property and equipment 148,924,771 114,682,082
Other assets
Marketable equity securities 1,101,393 33,645
Investments in unconsolidated affiliates 645,249 496,800
Deferred lease and loan costs 10,033,020 7,665,891
Goodwill, net of accumulated amortiza-
tion 10,857,603 3,976,675
Notes and advances due from non-
affiliates 2,307,682 1,422,247
Notes and advances due from affiliates -- 14,316,661
Restricted bond funds 4,400,000 3,514,969
Other assets 2,751,108 2,687,602
Total other assets 32,096,055 34,114,490
$232,368,460 $179,557,647
</TABLE>
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<PAGE> 7
Retirement Care Associates, Inc. and Subsidiaries
Unaudited Consolidated Balance Sheets as of
December 31, 1996 and Audited at June 30, 1996
<TABLE>
<CAPTION>
Unaudited Audited
December 31, June 30,
1996 1996
<S> <C> <C>
Liabilities and Shareholders' Equity
Current liabilities
Lines of credit $ 3,500,000 $ 1,456,535
Current maturities of long-term debt 16,491,228 2,055,880
Accounts payable 19,981,410 11,201,976
Accrued expenses 9,069,849 7,543,131
Income taxes payable -- 3,889,809
Deferred gain 40,000 40,000
Total current liabilities 49,082,487 26,187,331
Deferred gain 201,370 371,370
Deferred income taxes 1,387,000 1,465,877
Long-term debt, less current maturities 140,783,611 110,375,799
Minority interest 4,448,056 4,068,147
Redeemable convertible preferred stock 1,800,000 2,400,000
Shareholders' equity
Common stock, $.0001 par value;
300,000,000 shares authorized;
13,786,278 and 12,145,875 shares
outstanding 1,379 1,215
Preferred stock 6,230,000 8,765,250
Additional paid-in capital 38,918,417 26,972,655
Retained earnings (9,942,430) (929,877)
Treasury stock (541,430) (120,120)
Total shareholders' equity 34,665,936 34,689,123
Total Liabilities and shareholders'
equity $232,368,460 $179,557,647
</TABLE>
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<PAGE> 8
Retirement Care Associates, Inc.
Unaudited Consolidated Statements of Cash Flows for
the Six Months Ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
<S> <C> <C>
Operating activities
Net income (loss) $ (5,528,452) $ 4,378,731
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization 2,513,126 1,077,789
Provision for bad debts 2,500,000
Amortization of deferred gain (170,000) --
Minority interest 57,734 181,716
Deferred income taxes (87,856) --
Changes in current assets and liabili-
ties net of effects of acquisitions:
Accounts receivable (16,839,577) (12,491,771)
Inventory (1,676,763) (338,280)
Prepaid expense and other assets (1,247,524) (2,477,168)
Accounts payable and accrued expenses 6,416,343 8,427,971
Increase in deferred lease and loan
costs (2,947,195) (1,017,781)
Cash (used in) operating activities (17,010,164) (2,258,793)
Investing activities
Purchase of property and equipment (36,175,749) (39,301,488)
Issuance of notes receivable and
advances to affiliates 14,316,661 (2,018,200)
Investment in and advances to Atrium
Ltd. -- (655,253)
Restricted bond funds (4,056,194) --
Changes in marketable equity securities (1,067,748) (459,239)
Change in receivable (807,935) 1,141,900
Investment in unconsolidated subsidiaries (148,449) --
Cash (used in) investing activities (27,939,414) (41,292,280)
</TABLE>
-8-
<PAGE> 9
Retirement Care Associates, Inc.
Unaudited Consolidated Statements of Cash Flows for
the Six Months Ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
<S> <C> <C>
Financing activities
Dividends on preferred stock (105,000) (150,000)
Redemption of preferred stock (600,000) --
Net proceeds from issuance of:
Line of credit 2,043,465 --
Common stock 70,676 295,198
Long-term debt 39,552,301 40,427,251
Preferred stock 9,340,000 --
Payments on long-term debt (1,267,894) (1,210,667)
Purchase and retirement of common stock (3,800,411) --
Cash provided by financing activities 45,233,137 39,361,782
Net (decrease) in cash and cash equiva-
lents 283,559 (4,189,291)
Cash and cash equivalents, beginning of
year 45,365 5,207,185
Cash and cash equivalents, end of year $ 328,924 $ 1,017,894
</TABLE>
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<PAGE> 10
RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1: BASIS OF PRESENTATION
The consolidated financial statements included herein have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are adequate to
make the information presented not misleading. These consolidated financial
statements and the notes thereto should be read in conjunction with the
consolidated financial statements included in the Company's Annual Report on
Form 10-K for the fiscal year ended June 30, 1996, File No 1-14114.
In the opinion of management of the Company, the accompanying unaudited
consolidated financial statements contain all necessary adjustments to present
fairly the financial position, the results of operations and cash flows for the
periods reported. All adjustments are of a normal recurring nature.
The Financial Accounting Standard Board has adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" (SFAS No. 115). The Company has adopted this standard in
fiscal 1995. In management's opinion, adopting SFAS No. 115 did not materially
effect the Company's financial statements for the three months ended December
31, 1995.
NOTE 2. RESTATEMENT
The consolidated financial statements for the six months ended December 31,
1996, as originally reported, reflect certain accounting policies and estimates
which were subsequently determined to be incorrect and, accordingly, the
consolidated financial statements have been restated as follows (in thousands):
<TABLE>
<CAPTION>
AS PREVIOUSLY REPORTED AS RESTATED
---------------------- -----------
<S> <C> <C>
Revenues $116,527 $116,517
Operating Expenses $111,937 $124,548*
Net Earnings (Loss) $ 1,785 $ (5,528)
Shareholders' Equity $ 41,979 $ 34,666
</TABLE>
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* Restated Operating Expenses include (in thousands) (i) an additional
accrual for employee benefits of $5,200, (ii) restated inventory of
$3,770, (iii) restated operating lease expense of $560, (iv) a
provision for doubtful accounts of $2,500, and (v) restated miscellaneous
expenses of $581.
NOTE 3. ACCOUNTS RECEIVABLE AND COST REIMBURSEMENTS
Accounts receivable and operating revenue include net amounts reimbursed by
Medicaid under the provisions of cost reimbursement formulas in effect. The
Company operates under a prospective payment system with Medicare, under which
annual rates are assigned based on estimated reimbursements. Differences
between estimated provisions and final settlement are reflected as adjustments
to future rates.
NOTE 4. INVENTORIES
Inventories consist of the following at December 31, 1996:
<TABLE>
<S> <C>
Raw material $ 330,823
Work in process 62,985
Finished goods 6,132,774
-----------
$ 6,526,582
</TABLE>
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<PAGE> 11
RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 5: NOTES RECEIVABLE AND ADVANCES TO AFFILIATES
At December 31, 1996 and June 30, 1996, the Company had notes and advances to
affiliates totaling approximately $0 and $14,316,661, respectively. The notes
were repaid by the sale of two retirement homes to the Company at fair market
value and the retirement of 399,992 shares of the Companies stock held by the
affiliates. (See Note 8)
NOTE 6: LONG-TERM DEBT
Long-term debt payable consisted of the following:
<TABLE>
<CAPTION>
December 31, June 30,
1996 1996
<S> <C> <C>
Amounts outstanding under
Revenue Bonds secured by
retirement facilities $ 65,110,000 $ 59,986,000
Other debt secured by
retirement and nursing
facilities 54,123,531 39,848,938
Other debt 19,192,726 12,596,741
Capital leases 18,848,582 --
Totals 157,274,839 112,431,679
Current maturities 16,491,228 2,055,880
Total long-term debt $140,783,611 $110,375,799
</TABLE>
NOTE 7: COMMITMENTS AND CONTINGENCIES
The Company is involved in legal proceedings arising in the ordinary course of
business. In addition, the Company is in dispute with the Internal Revenue
Service ("IRS") concerning the application of certain income and payroll tax
liabilities and payments. The IRS contends that the Company is delinquent in
the payment of certain taxes and has charged penalties and interest in
connection with the alleged underpayments. The Company contends that the IRS
has misapplied payments between income and payroll taxes and between the
Company and its affiliates. The Company has estimated in the accompanying
financial statements amounts for ultimate settlement of this dispute, and has
recorded an accrual of $600,000, which is based upon the best available
information after consulting with the Company's advisors concerning this
matter. Further, the Company has filed lawsuits against the IRS related to
this matter. In the opinion of management, the ultimate resolution of pending
legal proceedings and the IRS dispute will not have a material effect on the
Company's financial positions or results of operations.
NOTE 8: FACILITY ACQUISITIONS
During the quarter ended December 31, 1996, the Company entered into a series
of transactions with Winter Haven, Gordon Jensen Health Care Association, Inc.
("Gordon Jensen"), National Assistance Bureau, Inc. ("NAB"), Southeastern
Cottages, Inc. ("Southeastern"), Chamber Health Care Society, Inc. ("Chamber"),
and Senior Care, Inc. ("Senior"); all are entities which principal shareholders
of the Company either own or control. The result of the transactions was to
eliminate all notes receivable and advances due to the Company from affiliates.
The following is a summary of the transactions:
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<PAGE> 12
RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 8: FACILITY ACQUISITIONS (Continued)
On September 30, 1996, Winter Haven sold to the Company two retirement
facilities for their fair value, based on independent appraisal, totaling
$19,200,000. The facilities were acquired by the Company subject to bond debt
of $7,670,000, resulting in debt due to Winter Haven from the Company of
$11,530,000. As part of the sales agreement, the Company and Winter Haven
agreed that the debt of $11,530,000 would be applied to eliminate the
receivable, totaling $11,214,320, due to the Company by Winter Haven.
On September 27, 1996, Gordon Jensen contributed to the treasury of the Company
400,000 shares of stock in the Company which had a fair market value of
$3,000,000. This transaction results in the elimination of the debt, totaling
$2,982,000, due to the Company by Gordon Jensen and a reduction of
stockholders' equity of the Company by $3,000,000.
NOTE 9: OTHER TRANSACTIONS
On August 6, 1996, Contour acquired all of the outstanding stock of Atlantic
Medical Supply Company, Inc. ("Atlantic"), a distributor of disposable medical
supplies and a provider of third-party billing services to the nursing home and
home health care markets. The acquisition was made retroactively to July 1,
1996. Contour paid $1.4 million in cash and $10.5 million in promissory notes
for all of the outstanding stock of Atlantic. The promissory notes bear
interest at 7% per annum and were due in full on January 10, 1997. In the
event of a default in the payment of the promissory notes, they were
convertible into shares of common stock of the Company. On January 10, 1997,
Contour retired all outstanding notes due to sellers of Atlantic in the
aggregate principal amount of $10,850,000, along with accrued interest. The
retirement of these notes was funded by a loan of $9,750,000 from the Company,
with the balance funded from Contour's existing line of credit with Barnett
Bank. The loan from the Company was evidenced by a convertible promissory note
bearing interest at 9% per annum and payable upon demand. This note was
convertible into 1,950,000 shares of Contour's Common Stock, and on January 10,
1997, the Company exercised this conversion right.
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<PAGE> 13
RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 9: OTHER TRANSACTIONS (Continued)
During the period from September 27 through October 2, 1996, the Company sold
1,000,000 shares of Series F Convertible Preferred Stock in an offering to
foreign investors at $10.00 per share. Holders of the Series F Preferred Stock
have no voting rights except as required by law, and have liquidation
preference of $10.00 per share plus 4% per annum from the date of issuance.
The shares of Series F Preferred Stock are convertible into shares of common
stock at a conversion price of the lessor of (a) $7.665625, or (b) 85% of the
average closing bid price for the five trading days prior to the date of
conversion. The maximum number of shares of common stock which can be issued
upon conversion of the Series F Preferred Stock is 2,588,000. At the time of
conversion, the holder is also entitled to additional shares equal to $10.00
per share of Series F Preferred Stock converted multiplied by 8% per annum from
the date of issuance divided by the applicable conversion price. Each holder
of the Series F Preferred Stock has the option to convert up to one-third of
such holder's shares at any time from and after the 60th day following the date
of issuance, up to an additional one-third of the shares from and after the
90th day following the date of issuance, and all remaining shares may be
converted from and after the 120th day following the date of issuance.
For purposes of computing earnings per share, the Series F Preferred Stock has
been determined to be a common stock equivalent. Accordingly, weighted average
shares outstanding includes the common shares issuable upon conversion of these
shares after consideration of accumulated dividends.
NOTE 10: EXTRAORDINARY ITEMS
During the quarter ended December 31, 1996, the Company recorded an
extraordinary charge of $490,000, net of taxes of $300,000. The gross
extraordinary charge consists of $790,000 of charges associated with the early
extinguishment of approximately $9.2 million of long term debt associated with
the Company's retirement facilities located in Destin, Florida.
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
THREE MONTHS ENDED DECEMBER 31, 1996 COMPARED TO THREE MONTHS
ENDED DECEMBER 31, 1995
The Company's total revenues for the three months ended December 31, 1996, were
$61,387,269 compared to $31,230,177 for the three months ended December 31,
1995.
Due to the increased number of facilities owned or leased by the Company,
patient service revenue increased from $28,342,120 for the quarter ended
December 31, 1995, to $47,950,464 for the quarter ended December 31, 1996. The
Company was operating 81 facilities for the quarter ended December 31, 1996
compared to 42 for the quarter ended December 31, 1995. The cost of patient
services in the amount of $33,415,649 for the quarter ended December 31, 1996,
represented 69% of patient service revenue, as compared to $17,608,280, or 63%,
of patient service revenue during the quarter ended December 31, 1995. This
increase is attributed to the Company acquiring skilled nursing facilities
which require more skilled care and to delays in Medicaid rate increases
discussed below.
Medical supply revenue increased from $1,605,242 during the quarter ended
December 31, 1995, to $11,631,336 during the quarter ended December 31, 1996.
These revenues, which are revenues of Contour Medical, Inc. ("Contour"), a
majority-owned subsidiary, increased primarily as a result of two acquisitions
made by Contour. Contour acquired AmeriDyne Corporation ("AmeriDyne")
effective March 1, 1996, and Atlantic Medical Supply Company, Inc. ("Atlantic")
effective July 1, 1996. Cost of medical supplies sold as a percentage of
medical supply revenue decreased to approximately 66.5% during the quarter
ended December 31, 1996, as compared to approximately 100% of such revenue
during the same period last year. The reduced percentage is primarily a result
of higher gross profit margins on the products sold by AmeriDyne and Atlantic.
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<PAGE> 14
Management fees decreased from $895,916 in the quarter ended December 31, 1995
to $558,575 in the quarter ended December 31, 1996, due to the number of
facilities which the Company manages. As of December 31, 1995, the Company was
managing 25 facilities, and as of December 31, 1996, the Company was managing
18 facilities. The Company has leased or purchased 8 facilities it managed at
December 31, 1995. Management anticipates that the number of facilities only
managed by the Company will continue to decline as a result of acquisition of
such facilities by the Company.
Owning or leasing a facility is distinctly different from managing a facility
with respect to operating results and cash flows. For an owned or leased
facility, the entire revenue/expense stream of the facility is recorded on the
Company's income statement. In the case of a management agreement, only the
management fee is recorded. The expenses associated with management revenue
are somewhat indirect as the infrastructure is already in place to manage the
facility. Therefore, the profitability of managing a facility appears more
lucrative on a margin basis than that of an owned/leased facility. However,
the risk of managing a facility is that the contract generally can be canceled
on a relatively short notice, which results in loss of all revenue attributable
to the contract. Furthermore, with an owned or leased property the Company
benefits from the increase in value of the facility as its performance
increases. With a management contract, the owner of the facility maintains the
equity value. From a cash flow standpoint, a management contract is more
lucrative because the Company does not have to support the ongoing operating
cash flow of the facility.
General and administrative expenses for the three months ended December 31,
1996 were $12,006,626, representing 19% of total revenues, as compared to
$4,314,937, representing 14% of total revenues, for the three months ended
December 31, 1995. This increase is due to the general and administrative
expenses related to operating the additional facilities owned or leased by the
Company, and the acquisition by Contour of Atlantic.
For the quarter ended December 31, 1996, the Company received a tax benefit of
$100,000, which represents an effective tax rate benefit of 25%, as compared to
expenses for income taxes of $1,462,598 which represents an effective tax rate
of 39%, for the quarter ended December 31, 1995. The tax benefit for the
quarter ended December 31, 1996 is a result of a before tax loss for that
quarter.
The net loss of $786,904 for the quarter ended December 31, 1996, compares with
net income of $2,320,011 for the quarter ended December 31, 1995. The net loss
for the quarter ended December 31, 1996, is a result of (1) an extraordinary
charge relating to a restructure of debt, and (2) an increase in the cost of
patient services as described above and delays in annual Medicaid rate
increases, which are usually in effect on July 1 of each year. This year the
rate increases in Georgia were delayed until August 16, 1996, and the rate
increase in Tennessee were delayed until November 1, 1996. Most of the
long-term care facilities operated by the Company are located in these two
states. The delays in Medicaid rate increases are not related to the
extraordinary charge.
During the quarter ended December 31, 1996, the Company recorded an
extraordinary charge of $490,000, net of taxes of $300,000. The gross
extraordinary charge consists of $790,000 of charges associated with the early
extinguishment of approximately $9.2 million of long term debt.
Most of the revenue from the management services division of the Company's
business is received pursuant to management agreements with entities controlled
by Messrs. Brogdon and Lane, two of the Company's officers and directors.
These management agreements have five year terms, however, they are subject to
termination on 60 days notice, after the end of the third year of the Agreement
with or without cause by either the Company or the owners. Therefore, Messrs.
Brogdon and Lane have full control over whether or not these management
agreements, and thus the management service revenue, continue in the future.
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SIX MONTHS ENDED DECEMBER 31, 1996 COMPARED TO THE SIX MONTHS ENDED
DECEMBER 31, 1995
The Company's total revenues for the six months ended December 31, 1996, were
$116,517,303 compared to $59,870,354 for the six months ended December 31,
1995.
Due to the increased number of facilities owned or leased by the Company,
patient service revenue increased from $54,177,449 for the six months ended
December 31, 1995, to $89,925,434 for the six months ended December 31, 1996.
The Company was operating 81 facilities in the six months ended December 31,
1996 compared to 42 for the six months ended December 31, 1995. The cost of
patient services in the amount of $70,977,070 for the six months ended December
31, 1996, represented 79% of patient service revenue, as compared to
$33,652,390 or 67% of patient service revenue during the six months ended
December 31, 1995. This increase is attributed to the Company acquiring
skilled nursing facilities which require more skilled care and to delays in
Medicaid rate increases discussed below.
Medical supply revenues increased from $3,194,315 during the quarter ended
December 31, 1995, to $22,856,118 during the quarter ended December 31, 1996.
These revenues, which are revenues of Contour, a majority-owned subsidiary,
increased primarily as a result of two acquisitions made by Contour. Contour
acquired AmeriDyne Corporation ("AmeriDyne") effective March 1, 1996, and
Atlantic effective July 1, 1996. Cost of medical supplies sold as a percentage
of medical supply revenue decreased to approximately 66.5% during the quarter
ended December 31, 1996, as compared to approximately 100% of such revenue
during the same period last year. The reduced percentage is primarily a result
of higher gross profit margins on the products sold by AmeriDyne and Atlantic.
Management fees decreased from $1,803,795 in the six months ended December 31,
1995 to $1,492,621 in the six months ended December 31, 1996 because the
Company purchased or leased 8 facilities it managed at December 31, 1995. As
of December 31, 1995, the Company was managing 25 facilities, and as of
December 31, 1996 the Company was managing 18 facilities.
General and administrative expenses for the six months ended December 31, 1996
were $21,816,725 representing 19% of total revenues, as compared to $8,770,518
representing 15% of total revenues, for the six months ended December 31, 1995.
This increase is due to the general and administrative expenses related to
operating the additional facilities owned or leased by the Company, and the
acquisition by Contour of Atlantic Medical.
For the six months ended December 31, 1996, the Company incurred a tax benefit
of $3,000,000 which represents an effective tax rate of 37%, as compared to
expenses for income taxes of $2,747,863 which represents an effective rate of
39% for the six months ended December 31, 1995. The tax benefit is a result of
a before tax loss for the six months ended December 31, 1996.
The net loss of $5,528,452 for the six months ended December 31, 1996 compares
to net income of $4,378,731 for the six months ended December 31, 1995. The
net loss for the six months ended December 31, 1996 is a result of (1) an
extraordinary charge relating to a restructuring of debt, as described below,
and (2) the increase in the cost of patient services, as described above, and
delays in annual Medicaid rate increases, which are usually in effect on July 1
of each year. This year the rate increases in Georgia were delayed until August
16, 1996, and the rate increases in Tennessee were delayed until November 1,
1996. Most of the long-term care facilities operated by the Company are
located in these two states. The delays in Medicaid rate increases are not
related to the extraordinary charge.
During the quarter ended December 31, 1996, the Company recorded an
extraordinary charge of $490,000, net of taxes of $300,000. The gross
extraordinary charge consists of $790,000 of charges associated with the early
extinguishment of approximately $9.2 million of long term debt.
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<PAGE> 16
Most of the revenue from the management services division of the Company's
business is received pursuant to management agreements with entities controlled
by Messrs. Brogdon and Lane, two of the Company's officers and directors.
These management agreements have five year terms, however, they are all subject
to termination on 60 days notice, with or without cause by either the Company
or the owners. Therefore, Messrs. Brogdon and Lane have full control over
whether or not these management agreements, and thus the management services
revenue, continue in the future.
LIQUIDITY AND CAPITAL RESOURCES
At December 31. 1996, the Company had $4,105,398 in working capital compared to
$4,573,744 at June 30, 1996.
During the six months ended December 31, 1996, cash used by operating
activities was (16,098,656) as compared to (2,258,793) for the quarter ended
December 31, 1995. The (13,839,863) decrease was primarily due to the increase
in accounts receivable for the six months ended December 31, 1996 of
$11,739,577. These increases in non-cash assets were partially offset by
increases in accounts payable and accrued expense of $4,643,095.
Cash used in investing activities during the six months ended December 31, 1996
was 17,408,656. The expenditures related to purchases of equipment,
securities, investments in subsidiaries and advances to affiliates.
Cash provided by financing activities during the six months ended December 31,
1996 consisted of $28,110,035 in long term loans and $9,340,000 in issuance of
preferred stock. Cash used in financing activities consisted of ($1,267,894)
in payments of long term debt and the purchase and retirement of common stock
of (3,800,411).
IMPACT OF PENDING FEDERAL HEALTH CARE LEGISLATION
Management is uncertain what the financial impact will be of the pending
federal health care reform package since the legislation has not been
finalized. However, based on information which has been released to the public
thus far, management does not believe that there will be cuts in reimbursements
paid to nursing homes.
Legislative and regulatory action at the state and federal level, has resulted
in continuing changes in the Medicare and Medicaid reimbursement programs. The
changes have limited payment increases under those programs. Also, the timing
of payments made under Medicare and Medicaid programs are subject to regulatory
action and governmental budgetary constraints. Within the statutory framework
of the Medicare and Medicaid programs, there are substantial areas subject to
administrative rulings and interpretations which may further affect payments
made under these programs. Further, the federal and state governments may
reduce the funds available under those programs in the future or require more
stringent utilization and quality review of health care facilities.
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
RETIREMENT CARE ASSOCIATES, INC.
DATED: August 25, 1997 By: /s/ Darrell C. Tucker
---------------------------
Darrell C. Tucker, Treasurer
