<PAGE> 1
U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Amendment No. 2
(Amending Part II - Items 6, 7, 8 and 9, Part IV - Item 14 and Financial
Statements)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year ended: June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from:
Commission File No. 1-14114
RETIREMENT CARE ASSOCIATES, INC.
(Exact Name of Registrant as Specified in its Charter)
COLORADO 43-1441789
(State or Other Jurisdiction of (I.R.S. Employer Identi-
Incorporation or Organization) fication Number)
6000 Lake Forrest Drive, Suite 200, Atlanta, Georgia 30328
(Address of Principal Executive Offices, Including Zip Code)
Registrant's telephone number, including area code: (404) 255-7500
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
Common Stock, $.0001 Par Value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$.0001 Par Value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of September 18, 1996, 13,180,918 shares of common stock were outstanding.
The aggregate market value of the common stock of the Registrant held by
nonaffiliates on that date was approximately $67,925,000.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
Documents incorporated by reference: Part III is incorporated by reference to
the Registrant's Proxy Statement relating to the Annual Meeting of Shareholders
to be held in December 1996.
<PAGE> 2
PART II
AMENDMENT TO FORM 10-K
The accompanying financial statements of the Company for the twelve
months ended June 30, 1996 have been reaudited and restated. Items set
forth in this amended Form 10-K have been amended to reflect the effect of the
aforementioned restatement, but Items not set forth herein have not been
amended from the Company's previously issued Form 10-K for the fiscal year
ended June 30, 1996 filed by the Company with the Securities and Exchange
Commission (the "Original Form 10-K"). Further, this amended Form 10-K has not
been amended to reflect changes in market conditions, revisions to stated
estimates or events that have occurred since the filing of the Original Form
10-K in October 1996. Therefore, this amended Form 10-K should be read in
conjunction with the Original Form 10-K.
PART II
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial information for the fiscal year ended
June 30, 1996, is derived from financial statements of the Company audited by
Cherry, Bekaert & Holland, L.L.P., independent certified public accountants.
The selected financial information for the fiscal years ended June 30, 1995,
1994 and 1993, is derived from financial statements of the Company audited by
BDO Seidman, LLP, independent certified public accountants. The selected
information for the fiscal year ended June 30, 1992, is derived from financial
statements of the Company audited by Laney, Boteler & Killinger, independent
certified public accountants. As described more fully in the Company's
financial statements, financial information prior to the date of the Company's
merger with Capitol Care Management Company, Inc. reflects the financial
information of Capitol Care Management Company, Inc.
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
AT JUNE 30,
1996(1)(2) 1995(1)(2) 1994(1)(2) 1993(1)(2) 1992(1)
<S> <C> <C> <C> <C> <C>
Current Assets $ 29,478,560 $25,782,546 $12,449,522 $1,404,228 $240,088
Total Assets 177,492,287 80,257,546 31,230,025 2,453,241 359,397
Current Liabili-
ties 30,974,720 22,857,244 9,328,989 1,677,250 215,255
Working Capital
(Deficit) (1,496,160) 2,925,302 3,120,533 (273,022) 24,833
Long-Term Debt 108,481,040 32,426,023 8,199,915 -0- 11,164
Redeemable Pre-
ferred Stock 2,400,000 3,000,000 -0- -0- -0-
Shareholders'
Equity 30,886,118 19,733,254 13,399,751 775,991 132,978
</TABLE>
(1) Effective November 30, 1992, the Company acquired the stock of CCMC in a
reverse acquisition in which CCMC's stockholders acquired voting control of the
Company. The transaction was accounted for as a purchase with CCMC as the
acquiring company because CCMC's stockholders acquired a majority of the voting
rights in the combined company. Accordingly, the results of operations prior
to November 30, 1992, are those of CCMC.
(2) On May 1, 1993, the Company entered into operating lease agreements for
seven licensed nursing homes and one personal care facility. Prior to May 1,
1993, the Company and its predecessor, Capitol Care Management Company, Inc.,
were engaged exclusively in the management of retirement facilities and nursing
homes. Subsequent to May 1, 1993, the Company, through the operating leases on
the eight facilities, began to operate facilities resulting in the recognition
of $2,399,906 of patient service revenues and $222,610 of other revenues for the
year ended June 30, 1993. During the year ended June 30, 1993, the eight
facilities incurred $2,037,694 of operating expenses resulting in an operating
margin of $584,822. During the year ended June 30, 1994, the Company continued
its expansion into the operation of facilities, with the acquisition of two
retirement facilities and two nursing home facilities accounted for using the
purchase method of accounting and new operating lease commitments for eleven
nursing homes and one retirement facility. The addition of these sixteen
facilities either through direct acquisition or operating leases increased
patient service revenues by $16,520,401, total revenues by $136,124 and
operating expenses by $12,774,764. During the year ended June 30, 1995, the
Company purchased three nursing homes and two retirement facilities and leased
seven more
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nursing homes. During the fiscal year ended June 30, 1996, the Company
purchased seven nursing homes and four retirement facilities and leased eight
nursing homes and three retirement facilities.
STATEMENT OF INCOME DATA:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE 30,
1996 1995 1994 1993 1992
------------ ----------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C>
Revenues $134,011,369 $79,616,053 $37,971,052 $4,553,666 $610,981
Operating
Expenses 124,631,352 70,598,837 32,993,562 3,615,109 585,535
Net Income 1,746,808 5,058,503 2,917,642 573,557 18,951
Net Income (loss)
applicable to
common stock (519,969) 4,833,503 2,917,642 573,557 18,951
Net Income
(Loss) Per
Common and
Common Equi-
valent
Share(1) $ (.05) $ .38 $ .30 $ .11 $ .02
Weighted
Average
Shares(1) 11,324,755 12,616,835 9,839,993 5,010,354 964,688
Cash Dividends
Per Common
Share $ -0- $ -0- $ -0- $ -0- $ -0-
</TABLE>
The Company has retroactively restated net income per share and weighted
average shares outstanding for the effect of stock dividends, stock splits and
reverse stock splits. See "Notes to Financial Statements."
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
YEAR ENDED JUNE 30, 1996 COMPARED TO YEAR ENDED JUNE 30, 1995
The Company's total revenues for the year ended June 30, 1996, were
$134,011,369 compared to $79,616,053 for the year ended June 30, 1995.
Management fee revenue decreased from $4,169,694 in the year ended
June 30, 1995, to $3,781,433 in the year ended June 30, 1996. The Company
purchased or leased six facilities in the year ended June 30, 1996, that it
managed in the year ended June 30, 1995. Included in the Company's management
fee revenue is $3,472,900 and $3,517,500 from affiliates during the years ended
June 30, 1996 and 1995, respectively.
Due to the increased number of facilities owned or leased by the
Company, patient service revenue increased from $69,949,822 for the year ended
June 30, 1995 to $119,499,849 for the year ended June 30, 1996. The cost of
patient services in the amount of $81,082,972 for the year ended June 30, 1996,
represents 68% of patient service revenue, as compared to $47,778,410, or 68%,
of patient service revenue during the year ended June 30, 1995.
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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.
The Company converted four managed properties to leased properties
during the fiscal year ended June 30, 1996, which resulted in an increase in
net revenues of $1 million during the fiscal year ended June 30, 1996 compared
to the fiscal year ended June 30, 1995. The number of leased or owned
properties at year-end are presented in the table below (the table does not
included managed facilities):
<TABLE>
<CAPTION>
TYPE FISCAL 1994 FISCAL 1995 FISCAL 1996
---- ----------- ----------- -----------
<S> <C> <C> <C>
Nursing 20 30 48
Retirement 6 8 18
----- ----- ------
Total 26 38 66
</TABLE>
For facilities that were in place for the entire year ended June 30,
1995 and June 30, 1996, revenue increased approximately $3 million, or 5%,
during the year ended June 30, 1996. For these same facilities, average rates
increased approximately 3% while patient-days increased approximately 2%.
During the year ended June 30, 1996, the Company had revenue from
medical supply sales of $14,542,421, an approximately $6.2 million increase
compared to fiscal year ended June 30, 1995, of which $4,717,169 was
intercompany sales which were eliminated in consolidation. These sales reflect
the operations of Contour Medical, Inc., of which the Company acquired a
majority interest on September 30, 1994. Because the Company acquired Contour
on September 30, 1994, only nine months of activity were recorded for fiscal
year ended June 30, 1995. Sales for those nine months of $3,617,439 have been
annualized and recorded for the year ended June 30, 1995 and comprise $1.2
million of the $6.2 million increase in medical supplies revenue for the fiscal
year ended June 30, 1995. Sales for the nine month period following the
Contour acquisition have been annualized so as not to distort the net increase
in revenues from the fiscal year ended June 30, 1995 to the fiscal year ended
June 30, 1996. Moreover, Contour acquired AmeriDyne on March 1, 1996, which
contributed $3.6 million of revenue for the fiscal year ended June 30, 1996
(see Contour 6/30/96 10-K, page 16). While AmeriDyne contributed $3.6 million
of revenue for the fiscal year ended June 30, 1996 (as set forth correctly in
Contour's 6/30/96 10-K), Contour's $4.7 million in sales should not have been
labeled intercompany because this amount was not attributable to sales to RCA.
The remaining $1.4 million increase in sales increase is attributable to the
internal growth of the business. The change in costs of goods sold as a
percentage of sales during fiscal year ended June 30,
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1996 versus fiscal year ended June 30, 1995 is not meaningful because the
method of recording intercompany elimination changed during the fiscal year
ended June 30, 1996. During the fiscal year ended June 30, 1995, intercompany
sales of $4,995,346 were recorded as an elimination of medical supply revenue
and an elimination of routine and ancillary costs. During the fiscal year
ended June 30, 1996, intercompany sales of $4,717,169 was recorded as an
elimination of medical supply revenue and an elimination of medical supply
costs of goods sold. If fiscal year ended June 30, 1996 is treated identically
to fiscal year ended June 30, 1995, the costs of goods sold margin would be
107% of sales as compared to 87% of sales during fiscal year ended June 30,
1995. The increase in costs of goods sold margin is primarily attributable to
the fact that sales to RCA comprised 32% of Contour's sales during fiscal year
ended June 30, 1996 (representing costs without associated revenues), while
sales to RCA comprised only 22% of Contour's sales during fiscal year ended
June 30, 1995. The Cost of Goods Sold for the year ended June 30, 1996, was
$5,773,934.
Lease expense increased from $5,769,232 in the year ended June 30,
1995, to $8,442,671 in the year ended June 30, 1996. This increase is
primarily attributable to the increased numbers of facilities leased during the
year, as well as the full year effect of leased facilities that started during
the year ended June 30, 1995. There were ten new facilities leased during the
fiscal year ended June 30, 1996.
General and administrative expenses for the year ended June 30, 1996,
were $23,192,250, representing 17% of total revenues, as compared to
$12,769,582 representing 16% of total revenues, for the year ended June 30,
1995.
During the year ended June 30, 1996, the Company recorded a $3,423,117
provision for bad debts. The amount of the provision for bad debts was based
upon the aging and estimated collectibility of receivables from Medicare,
Medicaid and private payors. During the year ended June 30, 1996, the aging of
receivables increased compared with the aging of receivables at June 30, 1995.
In addition, at June 30, 1996, a larger amount of the receivables was deemed to
be uncollectible than at June 30, 1995. As of June 30, 1995, the estimated
allowance for bad debts was immaterial to the financial statements and was,
therefore, not recorded. The Company's consideration of several factors
related to the current accounts receivable balance for fiscal year 1996
resulted in the Company recording a $2.7 million bad debt reserve. The Company
considered the overall increase in patient account balances (approximately 80%)
resulting from the Company's acquisitions during fiscal year 1996, the
deterioration in the aging categories due to untimely collection practices by
individual facilities which in several cases resulted in the expiration of
allowable time periods to bill accounts, the significant rise in accounts
receivable net days, the growth in self-pay balances and the lack of timely
write-off of uncollectible accounts throughout the fiscal year.
During the year ended June 30, 1996, the Company had $1,847,868 in
interest income and financing fees as compared to $658,215 in interest income
and financing fees for the year ended June 30, 1995. Financing fees, which
totaled $150,000 for the year ended June 30, 1996, represent fees received by
the Company for assisting other companies to obtain financing for nursing homes
and retirement facilities. The increase in interest income is a result of the
increased amount of advances to related parties during the current year.
Interest expense increased from $1,179,052 in the year ended June 30,
1995, to $7,948,091 in the year ended June 30, 1996. This increase is
primarily attributable to the increased numbers of facilities acquired by the
Company during the year, as well as the full year effect of facilities that
were acquired by the Company during the year ended June 30, 1995.
For the year ended June 30, 1996, the Company incurred expenses for
income taxes of $1,307,091, which represents an effective tax rate of 48%, as
compared
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<PAGE> 6
to expenses for income taxes of $3,419,092, which represents an effective tax
rate of 40%, for the year ended June 30, 1995. The increase in the effective
tax rate is mainly the result of a non-deductible tax penalty of approximately
$400,000 which was assessed during the year ended June 30, 1996.
The net income of $1,746,808 for the year ended June 30, 1996, is less
than the net income of $5,058,503 for the year ended June 30, 1995, due to the
provision of an additional allowance for bad debts and increased interest
expense because of the larger number of facilities acquired during the most
recent fiscal year.
Most of the revenue from the management services division of the
Company's business is received pursuant to management agreements with entities
controlled by Messrs. Brogdon and Lane, two of the Company's officers and
directors. These management agreements have five year terms; however, they are
all subject to termination on 60 days notice, with or without cause, by either
the Company or the owners. Therefore, Messrs. Brogdon and Lane have full
control over whether or not these management agreements, and thus the
management services revenue, continue in the future. These fees represent
2.82% and 5.24% of total revenues of the Company for the years ended June 30,
1996 and 1995, respectively.
YEAR ENDED JUNE 30, 1995 COMPARED TO YEAR ENDED JUNE 30, 1994
The Company's total revenues for the year ended June 30, 1995, were
$79,616,053 compared to $37,971,052 for the year ended June 30, 1994.
Management fees increased from $3,292,949 in the year ended June 30,
1994, to $4,169,694 in the year ended June 30, 1995, due to the increased
number of facilities which the Company manages as well as the renegotiation of
management agreements resulting in higher management fees. Included in the
Company's management fee revenue is $3,517,500 and $3,034,445 from affiliates
during the years ended June 30, 1995 and 1994, respectively.
Due to the increased number of facilities owned or leased by the
Company, patient service revenue increased from $34,340,394 for the year ended
June 30, 1994, to $69,949,822 for the year ended June 30, 1995. The cost of
patient services in the amount of $47,778,410 for the year ended June 30, 1995,
represented 68% of patient service revenue, as compared to $23,088,387, or 67%
of patient service revenue during the year ended June 30, 1994.
During the year ended June 30, 1995, the Company had revenue from
medical supply sales of $3,617,439. These sales reflect the operations of
Contour Medical, Inc., of which the Company acquired a 63% interest on
September 30, 1994. As a result, these sales only reflect nine months of
operations. The cost of goods sold for the year ended June 30, 1995, was
$3,153,430, or 87% of medical supply sales.
Lease expense increased from $3,714,105 in the year ended June 30,
1994, to $5,769,232 in the year ended June 30, 1995. This increase is
primarily attributed to the increased number of facilities leased during the
year, as well as the full year effect of leased facilities that started during
the year ended June 30, 1994. There were six new facilities leased during the
fiscal year ended June 30, 1995.
General and administrative expenses for the year ended June 30, 1995,
were $12,769,582 representing 16% of total revenues, as compared to $5,953,793
representing 16% of total revenues, for the year ended June 30, 1994.
During the year ended June 30, 1995, the Company had $658,215 in
interest income and financing fees. The Company had no similar revenue during
the year ended June 30, 1994.
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<PAGE> 7
Interest expense increased from $232,365 in the year ended June 30,
1994, to $1,179,052 in the year ended June 30, 1995. This increase is
primarily attributed to the increased numbers of facilities acquired by the
Company during the year, as well as the full year effect of facilities that
were acquired by the Company during the year ended June 30, 1994.
For the year ended June 30, 1995, the Company incurred expenses for
income taxes of $3,419,092 which represents an effective tax rate of 40% as
compared to expenses for income taxes of $1,827,483 which represents an
effective tax rate of 39% for the year ended June 30, 1994.
The net income of $5,058,503 for the year ended June 30, 1995, is
higher than the net income of $2,917,642 for the year ended June 30, 1994, due
to the increased number of facilities operated and managed during 1995.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1996, the Company had $(1,496,160) in working capital
compared to $2,925,302 at June 30, 1995.
During the year ended June 30, 1996, cash provided by operating
activities was $5,279,626 as compared to $4,208,048 for the year ended June 30,
1995. The $1,071,578 increase was primarily due to the increased accounts
payable associated with acquiring facilities in the year ended June 30, 1996
and an increase in depreciation and amortization from 1,128,183 for the year
ended June 30, 1995 to $3,406,986 for the year ended June 30, 1996.
Cash used in investing activities during the year ended June 30, 1996,
was $44,711,326. The expenditures primarily related to acquisitions to
purchases of property and equipment of $12,490,298, and advances to affiliates
and non-affiliates of $8,935,686 due to capital expenditures and working
capital deficits of the affiliates.
At June 30, 1996, advances to affiliates had increased to $14,316,661
from $7,328,222 at June 30, 1995, due to additional capital expenditures and
working capital deficits of the affiliates. These advances were repaid
subsequent to year end. The repayment transactions included the transfer of
two facilities to the Company at fair market value, as established by an
independent appraisal. The proceeds of this transfer reduced the balance to
approximately $2.8 million. The balance was eliminated by the contribution of
shares of the Company's common stock by affiliated shareholders. The stock
will be retired.
Cash provided by financing activities during the year ended June 30,
1996, totaled $34,769,880. Sources of cash included capital investment by
minority shareholders of a subsidiary of $2,088,492, proceeds from issuance of
preferred stock of $9,300,000, proceeds from stock options and warrants
exercised of $559,595, and proceeds from long-term debt and lines of credit of
$35,329,244. Cash used in financing activities primarily consisted of
$9,443,626 in payments of long-term debt, $2,419,783 in payments of debt
issuance costs, and $600,000 in redemption of preferred stock, $274,040 in
purchases of treasury stock, and $270,000 for dividends on preferred stock.
During the year ended June 30, 1995, cash provided by operating
activities was $4,208,048 as compared to $1,523,311 for the year ended June
30, 1994. The $2,684,737 increase was primarily due to the increased net
income for the year ended June 30, 1995.
Cash used in investing activities during the year ended June 30, 1995,
was $(10,644,726). The expenditures primarily related to purchases of
property and equipment of $6,079,610, purchases of bonds receivable of
$4,487,936, increases in investments and advances to The Atrium Ltd. of
$2,985,833 and advances to affiliates of $1,742,147 due to capital expenditures
and working capital deficits
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<PAGE> 8
of the affiliates. These were partially offset by the proceeds from a
sale-leaseback transaction of $4,500,000.
At June 30, 1995, advances to affiliates had increased to $7,328,222
from $5,605,250 at June 30, 1994, due to additional capital expenditures and
working capital deficits of the affiliates.
Cash provided by financing activities during the year ended June 30,
1995, totalled $10,683,801. Sources of cash included capital investment by
minority shareholders of a subsidiary of $1,729,469, net borrowings under lines
of credit of $1,745,316 and proceeds from long-term debt of $9,564,670. Cash
used in financing activities primarily consisted of $2,130,654 in payments of
long-term debt and $225,000 for dividends on preferred stock.
Management's objective is to acquire only those facilities it believes
will be able to generate sufficient revenue to pay all operating costs,
management fees, lease payments or debt service, and still return a 3% to 4%
cash flow. Management believes that the Company's cash flow from operations,
together with lines of credit and the sale of securities described below, will
be sufficient to meet the Company's liquidity needs for the current year.
The Company maintains various lines of credit with interest rates
ranging from prime plus .25% to prime plus 1.25%. At June 30, 1996, the
Company had approximately $1,500,000 in unused credit available under such
lines.
Subsequent to year end, the Company raised approximately $9,340,000
in net proceeds from the sale of the Series F convertible preferred stock
in a private offering to foreign investors. The proceeds of this offering are
being used for working capital purposes.
On September 30, 1994, the Company purchased a majority of the stock of
Contour Medical, Inc. in exchange for shares of the Company's common stock and
Series A redeemable convertible preferred stock. The Company is obligated to
redeem the preferred stock issued in the transaction over the five years for
$3,000,000 in cash. $600,000 was paid on September 30, 1996 pursuant to this
obligation. Management intends to fund these redemptions from cash flow
generated from operations.
The Company believes that its long-term liquidity needs will generally
be met by income from operations. If necessary, the Company believes that it
can obtain an extension of its current line of credit and/or other lines of
credit from commercial sources. Except as described above, the Company is not
aware of any trends, demands, commitments or understandings that would impact
its liquidity.
The Company intends to use long-term debt financing in connection with
the purchase of additional retirement care facilities and nursing homes on
terms which can be paid out of the cash flow generated by the property.
The Company intends to continue to lease or purchase additional
retirement care and/or nursing home facilities in the future.
IMPACT OF INFLATION AND PENDING FEDERAL HEALTH CARE LEGISLATION
Management does not expect inflation to have a material impact on the
Company's revenues or income in the foreseeable future so long as inflation
remains below the 9% level. The Company's business is labor intensive and
wages and other labor costs are sensitive to inflation. Management believes
that any increases in labor costs in its management services segment can be
offset over the long term by increasing the management fees. With respect to
the operations segment, approximately 52% of the Company's net patient service
revenue is received from state Medicaid programs. The two states which make
Medicaid payments to the Company have inflation factors built into the rates
which they
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<PAGE> 9
will pay. Georgia's inflation factor is nine percent and Tennessee's inflation
is eleven percent. Therefore, increases in operating costs due to inflation
should be covered by increased Medicaid reimbursements.
Management is uncertain what the final impact will be of pending
federal health care reform packages since the legislation has not been
finalized. However, based on information which has been released to the public
thus far, Management doesn't believe that there will be cuts in reimbursements
paid to nursing homes.
Legislative and regulatory action, at the state and federal level, has
resulted in continuing changes in the Medicare and Medicaid reimbursement
programs. The changes have limited payment increases under these programs.
Also, the timing of payments made under the Medicare and Medicaid programs are
subject to regulatory action and governmental budgetary constraints. Within
the statutory framework of the Medicare and Medicaid programs, there are
substantial areas subject to administrative rulings and interpretations which
may further affect payments made under these programs. Further, the federal
and state governments may reduce the funds available under those programs in
the future or require more stringent utilization and quality review of health
care facilities.
ACCOUNTING PRONOUNCEMENT
The Financial Accounting Standard Board has adopted Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" (SFAS No. 115). The Company has adopted this
standard in fiscal 1995. In management's opinion, adopting SFAS No. 115 did
not materially affect the Company's financial statements for the year ended
June 30, 1995.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Independent Auditors' Reports appear at pages F-1 and F-2, and the
Financial Statements and Notes to Financial Statements appear at pages F-3
through F-27 hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
In August 1997, the accounting firm of Coopers & Lybrand, L.L.P. resigned
as the Company's independent accountants and notified the Company that its
report on its audit of the Company's financial statements for the fiscal year
ended June 30, 1996 should no longer be relied upon.
The Company engaged the accounting firm of Cherry, Bekaert & Holland,
L.L.P. to reaudit the Company's financial statements for the fiscal year ended
June 30, 1996.
These changes in the Company's independent accountants were previously
reported in the Company's Current Report on Form 8-K dated August 14, 1997 (as
amended by an amendment to such Current Report on Form 8-K/A filed with the
Commission on September 9, 1997).
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<PAGE> 10
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. FINANCIAL STATEMENTS. The following financial statements are
filed as part of this report:
<TABLE>
<CAPTION>
Page(s)
<S> <C>
Independent Auditors' Report .................................. F-1
Report of Independent Certified Public Accountants ............ F-2
Consolidated Balance Sheets as of June 30, 1996 and 1995....... F-3 - F-4
Consolidated Statements of Income for the years ended
June 30, 1996, 1995 and 1994................................. F-5
Consolidated Statements of Shareholders' Equity for the
years ended June 30, 1996, 1995 and 1994..................... F-6 - F-7
Consolidated Statements of Cash Flows for the years ended
June 30, 1996, 1995 and 1994................................. F-8 - F-9
Notes to Financial Statements.................................. F-10 - F-27
</TABLE>
(a) 2. FINANCIAL STATEMENT SCHEDULES. All schedules have been omitted,
as the required information is inapplicable or the information is presented in
the financial statements or the notes thereto.
(a) 3. Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION LOCATION
<S> <C> <C>
3.1 Articles of Incor- Incorporated by reference
poration, as amended to Exhibit No. 3.1 to the
Company's Form S-18 Regis-
tration Statement No. 33-7666-D
3.2 Bylaws, as amended Incorporation by reference
to Exhibit No. 3.2 to the
Company's Form S-18 Regis-
tration Statement No. 33-7666-D
3.3 Articles of Amendment Incorporated by reference
to Articles of Incor- to Exhibit 3.3 to the
poration Company's Annual Report on
Form 10-K for the fiscal year
ended June 30, 1993
3.4 Statements Establish- Incorporated by reference
ing Series A and Series to Exhibit 3.4 to the
D Convertible Preferred Company's Annual Report on
Stock Form 10-K for the fiscal year
ended June 30, 1994
3.5 Articles of Amendment to Incorporated by reference
Articles of Incorporation to Exhibit 3.5 to the
(Series AA Convertible Company's Annual Report on
Preferred Stock) Form 10-K for the fiscal year
ended June 30, 1994
3.6* Articles of Amendment to
</TABLE>
-10-
<PAGE> 11
<TABLE>
<CAPTION>
<S> <C> <C>
Incorporation (Series E
Convertible Preferred
Stock)
3.7* Articles of Amendment to
Articles of Incorporation
(Series F Convertible Pre-
ferred Stock) and Certif-
icate of Correction to
same
10.1* Employment Agreement
with Darrell C. Tucker
10.2* Management and Marketing
Agreement with Affiliates
10.3* Nursing Home Management
Agreements with Affiliates
10.4* Lease Agreements with
Affiliates
10.5 Loan Agreement between Incorporated by reference
Residential Care Facilities to Exhibit 10.1 to the
for the Elderly Authority of Company's Current Report
the City of Dublin and the on Form 8-K dated February 3,
Company 1994
10.6 Deed to Secured Debt and Incorporated by reference
Security between Residen- to Exhibit 10.2 to the
tial Care Facilities for Company's Current Report
the Elderly Authority of on Form 8-K dated February 3,
the City of Dublin and 1994
the Company
10.7 Trust Indenture between Incorporated by reference
Residential Care Facili- to Exhibit 10.3 to the
ties for the Elderly Company's Current Report
Authority of the City of on Form 8-K dated February 3,
Dublin and the Sentinel 1994
Trust Company
10.8 Loan Agreement between Incorporated by reference
Highlands County (Florida) to Exhibit 10.2 to the
Industrial Development Company's Current Report
Authority and the Company on Form 8-K dated March 3,
1994
10.9 Trust Indenture between Incorporated by reference
Highlands County (Florida) to Exhibit 10.3 to the
Industrial Development Company's Current Report
Authority and the Company on Form 8-K dated March 3,
1994
10.10 Asset Purchase Agreement Incorporated by reference
between the Company and to Exhibit 10.1 to the
Springdale Convalescent Company's Current Report
Center of Atlanta, Ltd., et on Form 8-K dated April 29,
al., and Springdale Conva- 1994
lescent Center Purchase
Agreement between the
</TABLE>
-11-
<PAGE> 12
<TABLE>
<CAPTION>
<S> <C> <C>
Company and Bartow
River L.L.C.
10.11 Promissory Note from the Incorporated by reference
Company to Winter Haven to Exhibit 10.46 to the
Homes Company's Annual Report
on Form 10-K for the fiscal
year ended June 30, 1994
10.12 Promissory Note from the Incorporated by reference
Company to Tiffany Indus- to Exhibit 10.3 to the
tries, Inc. Company's Current Report
on Form 8-K dated April 29,
1994
10.13 Loan Agreement with Cave Incorporated by reference
Spring Housing Develop- to Exhibit 10.57 to the
ment Corporation Company's Annual Report
on Form 10-K for the fiscal
year ended June 30, 1994
10.14 Trust Indenture between Incorporated by reference
Cave Spring Housing to Exhibit 10.58 to the
Development Corporation Company's Annual Report
and Sentinel Trust Company on Form 10-K for the fiscal
year ended June 30, 1994
10.15 Transfer and Assignment of Incorporated by reference to
Loan Asset and Forbearance to Exhibit 10.67 to the
Agreement with R. Wayne Company's Annual Report
Lowe, et al. on Form 10-K for the fiscal
year ended June 30, 1994
10.16 Promissory Note from South- Incorporated by reference
eastern Cottages, Inc. and to Exhibit 10.67 to the
related Mortgage and Company's Registration
Security Agreement Statement on Form S-1
File No. 33-85886
10.17 Promissory Note from Gordon Incorporated by reference
Jensen Health Care, Inc. to Exhibit 10.68 to the
and related Deed to Secure Company's Registration
Debt Statement on Form S-1
File No. 33-85886
10.18 Promissory Note from Incorporated by reference
Renaissance Retirement, to Exhibit 10.69 to the
Ltd. and related Mortgage Company's Registration
and Security Agreement Statement on Form S-1
File No. 33-85886
10.19 Promissory Note from Incorporated by reference
Retirement Village of to Exhibit 10.70 to the
Jackson, Ltd. and related Company's Registration
Deed of Trust Statement on Form S-1
File No. 33-85886
10.20 Promissory Note from Incorporated by reference
Hendersonville Retirement to Exhibit 10.71 to the
Village, Ltd. and related Company's Registration
Deed of Trust Statement on Form S-1
File No. 33-85886
</TABLE>
-12-
<PAGE> 13
<TABLE>
<CAPTION>
<S> <C> <C>
10.21 Agreement and Amendment Incorporated by reference
to Agreement with The to Exhibit 10.77 to the
Atrium of Jacksonville, Company's Annual Report
Ltd. and Assignment to on Form 10-K for the fiscal
the Company year ended June 30, 1994
10.22 Guaranties and Stock Pledge Incorporated by reference
and Maintenance Agreements to Exhibit 10.80 to the
with Edward E. Lane and Company's Registration
Connie B. Brogdon Statement on Form S-1
File No. 33-85886
10.23 Dearfield Nursing Home Incorporated by reference
Purchase Agreement to Exhibit 10.1 to the Com-
pany's Report on Form 8-K
dated April 28, 1995
10.24 Loan Agreement Incorporated by reference
to Exhibit 10.2 to the Com-
pany's Report on Form 8-K
dated April 28, 1995
10.25 Promissory Note Secured by Incorporated by reference
Security Deed to Exhibit 10.3 to the Com-
pany's Report on Form 8-K
dated April 28, 1995
10.26 Security Agreement Incorporated by reference
to Exhibit 10.4 to the Com-
pany's Report on Form 8-K
dated April 28, 1995
10.27 Deed to Secure Debt, Incorporated by reference
Security Agreement, to Exhibit 10.5 to the Com-
Assignment of Rents and pany's Report on Form 8-K
Filing for Dearfield dated April 28, 1995
Nursing Home
10.28 Edwinola Retirement Incorporated by reference
Community Purhase Agree- to Exhibit 10.93 to the
ment Company's Annual Report on
Form 10-K for the fiscal
year ended June 30, 1995
10.29 Loan Agreement between Incorporated by reference
Dade City, Florida and to Exhibit 10.94 to the
the Company Company's Annual Report on
Form 10-K for the fiscal
year ended June 30, 1995
10.30 Promissory Note from The Incorporated by reference
Atrium Nursing Home, Inc. to Exhibit 10.95 to the
Company's Annual Report on
Form 10-K for the fiscal
year ended June 30, 1995
10.31 Promissory Note from Incorporated by reference
Hendersonville Retirement to Exhibit 10.96 to the
Village, Ltd. Company's Annual Report on
Form 10-K for the fiscal
year ended June 30, 1995
</TABLE>
-13-
<PAGE> 14
<TABLE>
<CAPTION>
<S> <C> <C>
10.32 Second Amendment to Incorporated by reference
Agreement with The Atrium to Exhibit 10.97 to the
of Jacksonville, Ltd. Company's Annual Report on
Form 10-K for the fiscal
year ended June 30, 1995
10.33 Promissory Note from Incorporated by reference
National Assistance to Exhibit 10.98 to the
Bureau Company's Annual Report on
Form 10-K for the fiscal
year ended June 30, 1995
10.34 Letter Agreement with Incorporated by reference
R. Wayne Lowe, et al., to Exhibit 10.99 to the
Amending Forebearance Company's Annual Report on
Agreement Form 10-K for the fiscal
year ended June 30, 1995
10.35 Hillview Nursing Home Incorporated by reference
Purchase Agreement to Exhibit 10.100 to the
Company's Annual Report on
Form 10-K for the fiscal
year ended June 30, 1995
10.36 Crestwood Nursing Home Incorporated by reference
Purchase Agreement and to Exhibit 10.101 to the
Lease Assignment Agree- Company's Annual Report on
ment Form 10-K for the fiscal
year ended June 30, 1995
10.37 Florida Retirement Villa Incorporated by reference
Purchase Agreement to Exhibit 10.102 to the
Company's Annual Report on
Form 10-K for the fiscal
year ended June 30, 1995
10.38 Loan Agreement dated Incorporated by reference
September 29, 1995, with to Exhibit 10.103 to the
LTC Properties, Inc. Company's Annual Report on
Form 10-K for the fiscal
year ended June 30, 1995
18 Letter re changes in Filed herewith electronically
accounting principles
21* Subsidiaries of the
Registrant
23.1 Consent of Cherry, Bekaert Filed herewith electronically (see
& Holland, L.L.P. Item 14(a)1. hereof)
23.2 Consent of BDO Seidman, LLP Filed herewith electronically (see
Item 14(a)1. hereof)
27 Financial Data Schedule Filed herewith electronically
(for SEC use only)
</TABLE>
- ---------------
*Previously filed.
(b) No Reports on Form 8-K were filed during the last quarter of the
period covered by this Report.
-14-
<PAGE> 15
Independent Auditor's Report
Board of Directors and Shareholders of
Retirement Care Associates, Inc.
We have audited the accompanying consolidated balance sheet of Retirement Care
Associates, Inc. and subsidiaries as of June 30, 1996 and the related
consolidated statements of income, shareholders' equity and cash flows for the
year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as, evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Retirement Care
Associates, Inc. and subsidiaries as of June 30, 1996 and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
As described in Note 6 to the consolidated financial statements, the Company
changed its method of accounting for certain costs in inventory.
/s/ Cherry, Bekaert & Holland, L.L.P.
CHERRY, BEKAERT & HOLLAND, L.L.P.
Greensboro, North Carolina
October 7, 1997
F-1
<PAGE> 16
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders of
Retirement Care Associates, Inc.
We have audited the accompanying consolidated statements of income,
shareholders' equity and cash flows of Retirement Care Associates, Inc. and
Subsidiaries for the year ended June 30, 1995. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Retirement Care Associates, Inc. and Subsidiaries for the year ended June 30,
1995, in conformity with generally accepted accounting principles.
/s/ BDO Seidman, LLP
BDO SEIDMAN, LLP
Atlanta, Georgia
October 9, 1995,
Except for Note 1
which is as of
May 1, 1996
F-2
<PAGE> 17
Retirement Care Associates, Inc. & Subsidiaries
Consolidated Balance Sheets
June 30, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 45,365 $ 5,207,185
Accounts receivable, net 18,845,780 11,282,467
Notes and advances due from affiliates - 2,314,250
Inventories 3,998,991 1,364,569
Note and accrued interest receivable 613,750 2,396,667
Deferred tax asset 2,008,430 -
Restricted bond funds 2,342,565 719,175
Prepaid expenses and other assets 1,623,679 2,498,233
Total current assets 29,478,560 25,782,546
Property and equipment, net of
accumulated depreciation 111,420,486 37,233,506
Marketable equity securities 33,645 99,510
Investment in unconsolidated affiliates 496,800 4,431,235
Deferred loan and loan costs 7,665,891 3,732,197
Goodwill, net of accumulated amortization 6,636,675 1,798,881
Notes and advances due from non-affiliates 1,372,247 -
Notes and advances due from affiliates 14,316,661 5,013,972
Restricted bond funds 3,514,969 418,312
Other assets 2,556,353 1,747,387
Total assets $177,492,287 $80,257,546
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE> 18
Retirement Care Associates, Inc. & Subsidiaries
Consolidated Balance Sheets
June 30, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Lines of credit $3,556,535 $1,745,316
Current maturities of long-term debt 2,220,491 8,640,871
Accounts payable 10,115,347 7,699,640
Accrued expenses 11,316,030 3,184,233
Income taxes payable 3,726,317 3,158,000
Deferred income taxes - 134,500
Deferred gain 40,000 40,000
Total current liabilities 30,974,720 24,602,560
Deferred gain 371,370 261,370
Deferred income taxes 277,000 -
Long-term debt, less current 108,481,040 30,680,707
Minority interest 4,122,039 1,979,655
Commitments and contingencies
Redeemable convertible preferred stock 2,400,000 3,000,000
Shareholders' equity
Common stock, $.0001; 300,000,000 shares
authorized; 12,145,875 and 10,317,083
shares issued, respectively 1,214 1,031
Preferred stock 7,408,279 -
Additional paid-in capital 28,329,625 18,555,677
Retained earnings (deficit) (4,752,880) 1,176,546
Treasury stock, at cost (120,120) -
30,866,118 19,733,254
$177,492,287 $80,257,546
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE> 19
Retirement Care Associates, Inc. & Subsidiaries
Consolidated Statements of Income
For the Years Ended June 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Revenues:
Net patient service revenue $119,499,849 $ 69,949,822 $ 34,340,394
Medical supply revenue 9,825,252 3,617,439 -
Management fee revenue:
From affiliates 3,472,900 3,517,500 3,034,445
From others 308,533 652,194 258,504
Other revenue 904,835 1,879,098 337,709
Total revenues 134,011,369 79,616,053 37,971,052
Expenses:
Cost of patient services 80,815,511 47,778,410 23,088,387
Cost of medical supplies sold 5,350,817 3,153,430 -
Lease expense 8,442,671 5,769,232 3,714,105
General and administrative 23,192,250 12,769,582 5,953,793
Depreciation and amortization 3,406,986 1,128,183 237,277
Provision for bad debts 3,423,117 - -
Total expenses 124,631,352 70,598,837 32,993,562
Operating income 9,380,017 9,017,216 4,977,490
Other income (expense):
Interest income 1,847,868 658,215 -
Interest expense (7,948,091) (1,179,052) (232,365)
Income before minority interest,
income taxes and cumulative effect
of change in accounting principle 3,279,794 8,496,379 4,745,125
Minority interest (597,895) (18,784) -
Income before income taxes and cumulative
effect of change in accounting principle 2,681,899 8,477,595 4,745,125
Income taxes 1,307,091 3,419,092 1,827,483
Income before cumulative effect of
change in accounting principle 1,374,808 5,058,503 2,917,642
Cumulative effect of change in accounting
principle, net of income taxes of $228,000 372,000 - -
Net income $1,746,808 $5,058,503 $2,917,642
Preferred stock dividends 2,266,777 225,000 -
Net income (loss) applicable to common stock $(519,969) $4,833,503 $2,917,642
Income (loss) per common and common equivalent share:
Income (loss) before cumulative effect of
change in accounting principle $ (0.08) $ 0.38 $ .30
Cumulative effect of change in
accounting principle 0.03 - -
Net income (loss) (0.05) 0.38 .30
Weighted average shares outstanding
11,324,755 12,616,835 9,839,993
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE> 20
Retirement Care Associates, Inc. & Subsidiaries
Consolidated Statements of Shareholders' Equity
For the Years Ended June 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Preferred Stock
Common Stock
Series A Series C Series E Shares Amount
<S> <C> <C> <C> <C> <C>
Balance June 30, 1993 $ 670,642 $ 833,000 $ - 5,391,896 $ 539
Issuance of common stock upon conversion
of Series A preferred stock (670,563) - - 558,802 56
Issuance of common stock upon conversion
of Series C preferred stock - (833,000 ) - 833,333 83
Private placement Reg D - - - 1,494,165 149
Expenses on private placement Reg D - - - - -
Acquisition of Retirement Management
Corporation - - - 80,000 8
Stock dividend, 5% - - - 417,970 42
Private placement Reg S - - - 750,000 75
Expenses of private placement Reg S - - - - -
Recognition of convertibility of Series A
preferred stock 364,004 - - - -
Net Income - - - - -
Balance June 30, 1994 $ 364,083 $ - $ - 9,526,166 $ 952
Issuance of common stock upon conversion
of Series A preferred stock (364,083) 69,508 7
Issuance of common stock upon conversion
of Series D preferred stock - - - 125,000 12
Issuance of common stock upon
Contour Medical, Inc. acquisition - - - 105,000 11
Preferred stock, 10% dividend - - - - -
Stock dividend, 5% - - - 491,409 49
Net Income - - - - -
Balance June 30, 1995 $ - $ - $ - 10,317,083 $1,031
Issuance of Series E preferred stock - - 9,300,000 - -
Issuance of common stock upon conversion
of Series E preferred stock - - (534,750) 54,516 5
Unmamortized balance on imputed
Series E preferred stock
dividend - - (1,356,971) - -
Treasury stock purchased - - - - -
Retirement of treasury stock - - - (15,500) (2)
Stock issued in exchange for cancellation
of warrants and stock warrants exercised - - - 1,198,894 120
Stock options exercised - - - 22,076 2
Preferred stock, 10% dividend - - - - -
Stock dividend, 5% - - - 568,806 58
Net Income - - - - -
Balance June 30, 1996 $ - $ - $ 7,408,279 12,145,875 $1,214
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE> 21
Retirement Care Associates, Inc. & Subsidiaries
Consolidated Statements of Shareholders' Equity
For the Years Ended June 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Retained
Paid-In Earnings Treasury
Capital (Deficit) Stock
<S> <C> <C> <C>
Balance June 30, 1993 $(1,433,725) $ 705,535 $ -
Issuance of common stock upon conversion
of Series A preferred stock 670,507 - -
Issuance of common stock upon conversion
of Series C preferred stock 832,917 - -
Private placement Reg D 5,047,349 - -
Expenses on private placement Reg D (520,580) - -
Acquisition of Retirement Management
Corporation 399,992 - -
Stock dividend, 5% 2,980,092 (2,980,134) -
Private placement Reg S 5,249,925 - -
Expenses on private placement Reg S (470,800) - -
Recognition of convertibility of Series A
preferred stock (364,004) - -
Net income - 2,917,642 -
Balance June 30, 1994
$12,391,673 $ 643,043 $ -
Issuance of common stock upon conversion
of Series A preferred stock 364,076 - -
Issuance of common stock upon conversion
of Series D preferred stock 499,989 - -
Issuance of common stock upon
Contour Medical, Inc. acquisition 999,988 - -
Preferred stock, 10% dividend - (225,000) -
Stock dividend, 5% 4,299,951 (4,300,000) -
Net income - 5,058,503 -
Balance June 30, 1995 $18,555,677 $ 1,176,546 $ -
Issuance of Series E preferred stock - - -
Issuance of common stock upon conversion
of Series E preferred stock 534,743 - -
Unamortized balance on imputed
Series E preferred stock
dividend 1,356,971 - -
Treasury stock purchased - - (274,040)
Retirement of treasury stock - (153,918) 153,920
Stock issued in exchange for cancellation
of warrants and stock warrants exercised 473,673 -
Stock options exercised 156,303 - -
Preferred stock, 10% dividend - (270,000) -
Stock dividend, 5% 7,252,258 (7,252,316) -
Net income - 1,746,808 -
Balance June 30, 1996 $28,329,625 $(4,752,880) $(120,120)
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
<PAGE> 22
Retirement Care Associates, Inc. & Subsidiaries
Consolidated Statements of Cash Flows
For the Years Ended June 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 1,746,808 $ 5,058,503 $ 2,917,642
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 3,406,986 1,128,183 237,277
Loss on sale of marketable securities 29,085 - -
Cumulative effect of change in accounting
principles (372,000) - -
Amortization of deferred gain (40,000) (40,000) (40,000)
Provision for bad debt 3,423,117 - -
Equity in income from investees 146,800 - -
Minority interest 597,895 18,784 -
Deferred Income
(1,297,613) 261,092 (91,237)
Changes in assets and liabilities net of
effects of acquisitions
Accounts receivable (10,672,485) (6,012,900) (4,071,251)
Inventories (2,245,194) (996,139) -
Prepaid expenses and other assets 703,690 (642,013) (1,373,827)
Accrued interest receivable 157,917 (196,667) -
Accounts payable and accrued expenses 9,964,620 6,608,148 5,509,837
Deferred lease and loan costs - (978,943) (1,565,130)
Net cash provided by
operating activities 5,549,626 4,208,048 1,523,311
Cash flows from investing activities:
Purchases of property and equipment (12,490,298) (6,079,610) (5,093,344)
Proceeds from sale leaseback transaction - 4,500,000 -
Proceed from repayment of notes receivable 2,200,000 - -
Issuance of note receivable and advances
to affiliates and non-affiliates (8,935,677) (1,742,147) (5,142,182)
Purchase of bonds receivable - (4,487,936) -
Purchase of notes receivable - - (2,200,000)
Investments in unconsolidated affiliates 3,787,635 (3,335,833) (783,904)
Restricted bond funds
(4,720,047) (17,317) 913,857
Proceed from sale of fixed assets - - 2,481,370
Cash acquired in acquisition of Contour Medical, Inc. - 73,254 -
Decrease (increase) in marketable equity securities - 444,863 (544,373)
Proceed from sale of marketable equity securities 36,780 - -
Goodwill paid in acquisitions (2,327,736) - (93,422)
Acquisitions, net of cash required
(21,938,513) - -
Payment of deferred lease costs (593,470) - -
Net cash used in investing activities $(44,981,326) $(10,644,726) $(10,461,998)
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-8
<PAGE> 23
Retirement Care Associates, Inc. & Subsidiaries
Consolidated Statements of Cash Flows (continued)
For the Years Ended June 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Cash flows from financing activities
Capital investment by minority shareholders
of subsidiary $ 2,088,492 $ 1,729,469 $ -
Redemption of preferred stock (600,000) - -
Purchase of treasury stock (274,040) - -
Dividends on preferred stock (270,000) (225,000) -
Proceeds from issuance of preferred stock 9,300,000 - 9,306,118
Proceeds from stock options and warrants exercised 559,593 - -
Proceeds from long-term debt and net borrowings
under line of credit 35,329,244 11,309,986 112,754
Payments on long-term debt (9,443,626) (2,130,654) -
Payments on deferred loan costs (2,419,783) - -
Net cash provided by financing
activities 34,269,880 10,683,801 9,418,872
Net increase (decrease) in cash and cash equivalents (5,161,820) 4,247,123 480,185
Cash and cash equivalents, beginning of year 5,207,185 960,062 479,877
Cash and cash equivalents, end of year $ 45,365 $ 5,207,185 $ 960,062
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-9
<PAGE> 24
RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996 and 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF BUSINESS AND BASIS OF PRESENTATION
Retirement Care Associates, Inc. ("RCA" or the "Company") operates 64 leased
and owned nursing and retirement facilities in the Southeast United States and
manages, for both related and unaffiliated third parties, an additional 28
nursing and retirement facilities. The Company also owns a majority interest
in Contour Medical, Inc. ("Contour") whose principal operations consist of
distributing medical supplies to healthcare facilities.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, as well as its majority-owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation.
CASH AND CASH EQUIVALENTS
For purposes of financial statement presentation, the Company considers all
highly liquid investments with maturity of three months or less at issuance to
be cash equivalents.
INVENTORIES
Inventories, consisting mainly of medical supplies, are valued at the lower of
cost (first-in, first-out) or market.
ALLOWANCE FOR POSSIBLE LOAN LOSSES
The Company periodically reviews the adequacy of the allowance for possible
loan losses on affiliate notes receivable by considering various factors, among
others, such as the fair value of the underlying facility collateral in excess
of prior and senior liens, the periodic results of operations of the
underlying collateral, the fair value of other collateral or guarantees
pledged as security for the notes receivable, and the Company's ability to
foreclose, if necessary, against prior and senior liens to protect the
collateral value.
During 1996, the Company adopted Statement of Financial Accounting Standards
No. 114, "Accounting by Creditors for Impairment of a Loan" (SFAS No. 114).
All affiliated notes receivable were liquidated subsequent to June 30, 1996
(see Note 19).
PROPERTY, EQUIPMENT AND DEPRECIATION
Property and equipment are recorded at cost less accumulated depreciation.
Depreciation, which includes amortization of assets under capital leases, is
computed using the straight-line method over the estimated useful lives of the
related assets (five to thirty years). Maintenance and repairs are charged to
expense as incurred. Upon sale, retirement or other disposition of these assets
the cost and the related accumulated depreciation are removed from the
respective accounts and any gain or loss on the disposition is included in
income.
INVESTMENT IN UNCONSOLIDATED AFFILIATES
F-10
<PAGE> 25
During the year ended June 30, 1995, the Company acquired a 35% interest in
In-House Rehab, Inc. ("In-House"), a therapy service company, for $350,000. The
Company accounts for its investment in In-House on the equity method. The
Company's share of In-House's net income was $146,800 and $0 for the years
ended June 30, 1996 and 1995, respectively.
Investment in affiliates as of June 30, 1995 included the investment in
In-House and The Atrium of Jacksonville, Ltd. ("Atrium"). The accounts of
Atrium are consolidated with those of the Company as of June 30, 1996.
DEFERRED LEASE AND LOAN COSTS
Deferred lease and loan costs, consisting of lease acquisition fees paid to
lessors and loan commitment fees and related expenditures, are amortized over
the respective terms of the lease or loan using the interest method. The
related amortization of the lease and loan cost is recorded as lease and
interest expense, respectively.
RESTRICTED BOND FUNDS
Restricted bond funds relate to the debt service requirements of RCA's
outstanding bond obligations. RCA has several industrial revenue bonds, housing
development mortgage revenue bonds and municipal revenue bonds, which relate to
the restricted bond funds. Current restricted bond funds include principal and
interest funds which are used for payment of principal and interest on or
before the dates required by the trust indenture. Non-current restricted bond
funds include debt service reserve funds (used for payment of principal and
interest when principal and interest funds are insufficient) and project funds
(used for payment of construction, improvement and equipment costs at
facilities under construction).
GOODWILL
Goodwill arises in connection with business combinations accounted for as
purchases where the purchase price exceeds the fair value of the net assets of
the acquired businesses. Goodwill is amortized on a straight-line basis over 15
years. The carrying value of goodwill is reviewed if the facts and
circumstances suggest that it may be impaired. Any permanent impairment would
be recognized by a charge against earnings. Accumulated amortization of
goodwill approximated $233,000 and $111,000 as of June 30, 1996 and 1995,
respectively.
DEFERRED GAIN
Deferred gain on a sale-leaseback transaction is recorded at cost and is
amortized into income on a straight-line basis over 10 years, the life of the
lease. The related amortization is recorded as a reduction of lease expense.
STOCK DIVIDENDS
During February 1994, January 1995 and April 1996, the Company declared 5%
stock dividends which were payable on March 1, 1994, February 15, 1995 and May
15, 1996, respectively, to shareholders of record on February 15, 1994 and 1995
and May 1, 1996, respectively. All common stock information presented has been
retroactively restated to reflect these stock dividends.
NET PATIENT SERVICE REVENUE
Net patient service revenue is derived primarily from services to retirement
center residents and nursing home patients. Retirement center residents
typically pay rent in advance of the month for which it is due. Nursing home
patients are predominately beneficiaries of the Medicare and Medicaid programs.
F-11
<PAGE> 26
The Medicare program reimburses nursing homes on the basis of allowable costs,
subject to certain limits. Payments are received throughout the year at
amounts estimated to approximate costs. Following year end, cost reports are
filed with the Medicare program and final settlements are made. Provisions for
Medicare settlements are provided in the financial statements in the period the
related services are rendered. Differences between amounts accrued and final
settlements are reported in the year of settlement.
State Medicaid programs pay nursing homes primarily on a per diem basis with no
retroactive settlement. Revenues from services to Medicaid patients are
recorded at payment rates established by the various state programs in the
period services are rendered.
There has been, and the Company expects that there will continue to be, a
number of proposals to limit Medicare and Medicaid payments for long-term and
rehabilitative services. The Company cannot predict at this time whether any
of these proposals will be accepted or, if adopted and implemented, what effect
such proposals would have on the Company.
TAXES ON INCOME
Deferred income taxes are recognized for the tax consequences of temporary
differences between the financial reporting bases and the tax bases of the
Company's assets and liabilities. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized.
Income tax expense is the tax payable for the period and the change during the
period in deferred tax assets and liabilities.
NET INCOME PER SHARE
Net income per share is computed on the basis of net income applicable to
common stock and the weighted average number of common and common equivalent
shares outstanding during each year, retroactively adjusted to give effect to
the stock dividends. Shares used in the calculation consist of the weighted
average number of shares actually outstanding as well as the weighted average
number of common share equivalents which include dilutive convertible preferred
stock, stock options and warrants.
Common stock equivalents for the year ended June 30, 1996 have not been
included since the effect would be antidilutive. Shares used in the
calculation for the year ended June 30, 1995 consisted of the weighted average
number of shares actually outstanding (10,798,292), as well as, the weighted
average number of common share equivalents (1,818,543) which include dilutive
stock options and warrants as described below. Shares used in the calculation
for the year ended June 30, 1994 consisted of the weighted average number of
shares actually outstanding (8,292,882) together with the weighted average
numbers outstanding of common shares expected to be issued upon the conversion
of all of the Series A convertible preferred stock (672,497 shares) issued in
the merger since the income levels required to permit conversion were currently
being attained. Shares used in the calculation also included the weighted
average number of common share equivalents (874,614) which include dilutive
stock options and warrants as described below.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
F-12
<PAGE> 27
NEW PRONOUNCEMENTS
The Financial Accounting Standards Board has released Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121
requires that long-lived assets and certain identifiable intangibles to be held
and used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. This standard would be effective for the company's fiscal year
ended June 30, 1997.
The Financial Accounting Standards Board also released SFAS No. 123,
"Accounting for Stock Based Compensation." SFAS No. 123 encourages, but does
not require, companies to recognize compensation expense based on the fair
value of grants of stock, stock options, and other equity investments to
employees. Although expense recognition for employee stock-based compensation
is not mandatory, SFAS No. 123 requires that companies not adopting must
disclose pro forma net income and earnings per share. The Company will
continue to apply the prior accounting rules and make pro forma disclosures.
This standard would be effective for the Company's fiscal year ending June 30,
1997.
RECLASSIFICATIONS
Certain 1995 and 1994 amounts have been reclassified to conform with the 1996
presentations.
2. BUSINESS ACQUISITIONS:
CONTOUR
On September 30, 1994, the Company acquired a 63% interest in Contour through
the acquisition of preferred and common stock from the existing shareholders.
Contour is a publicly held company based in St. Petersburg, Florida, which
manufactures a full line of orthopedic care and rehabilitation products. In
connection with the acquisition of the 63% interest in Contour, the Company
paid $4,000,000, consisting of 137,813 shares of its common stock and 300,000
shares of a new series of redeemable convertible preferred stock (see Note 9).
The acquisition of Contour was accounted for under the purchase method of
accounting. The excess of the purchase price over the fair value of
identifiable tangible and intangible assets of $899,792 was allocated to
goodwill and is being amortized over 15 years.
ENCORE
On December 15, 1995, the Company obtained both a sole general and a limited
partnership interest, totaling a 74.25% interest, in Encore Partners, L.P.
("Encore") in exchange for a capital contribution to Encore of $3.5 million.
Encore owns three retirement facilities, totaling 527 beds, and two nursing
homes, totaling 157 beds. The acquisition was accounted under the purchase
method of accounting.
Profits and losses of Encore are allocated 74.25% to the Company and 25.75% to
other partners. Available cash, if any, is distributed 74.25% to the Company
and 25.75% to the other partners.
ATRIUM
During the year ended June 30, 1995, Winter Haven Homes, Inc. ("Winter
Haven"), an affiliated entity, assigned to the Company its rights under an
agreement between Atrium and Winter Haven. The agreement granted Winter Haven
the right to acquire up to a 75% ownership interest in Atrium in exchange for
and upon meeting certain performance requirements.
F-13
<PAGE> 28
In addition to the assignment, Winter Haven and the Company entered into a
separate Compensation Agreement requiring the Company to pay Winter Haven an
amount equal to 25% of the appraised values of Atrium upon each transfer of a
25% interest in Atrium to the Company. The payment of each 25% interest in
Atrium was reflected as an increase in Investment in Unconsolidated Affiliates
and a decrease in Notes and Advances Due From Affiliates in the accompanying
financial statements.
At June 30, 1995, a 50% interest in Atrium had been transferred to the Company
at a carrying value of $1,913,000 plus advances made by the Company to Atrium
of $2,149,060. This investment was accounted for under the equity method. In
May 1996, the Company obtained an additional 25% interest for $1,230,000,
bringing the total investment to $3,143,000 plus advances made by the Company
to Atrium of $2,602,942, and the total ownership interest to 75%. Effective May
1996, the accounts of Atrium have been consolidated with those of the Company.
The minority partners of Atrium are allocated 25% of the profits and losses and
25% of available cash flow, if any, is distributed to the minority partners.
OTHER
During the year ended June 30, 1996, the Company purchased a number of other
facilities. Such purchases included both nursing and retirement facilities. The
data related to these purchases is as follows:
<TABLE>
<CAPTION>
1996
<S> <C>
Number of Facilities Purchased:
Nursing 7
Retirement 3
Total 10
Cost of acquired facilities:
Cash paid $ 223,000
Debt incurred 19,811,000
Total $20,034,000
</TABLE>
During the year ended June 30, 1995, the Company purchased three nursing
facilities and two retirement facilities.
The Company typically obtains financing in excess of the purchase price paid
for acquired facilities. The excess funds are used to cover certain closing
costs associated with the transactions with any residual amounts retained by
the Company.
The acquisitions referred to above have been accounted for using the purchase
method of accounting. The operating results of those acquired facilities have
been included in the consolidated statement of operations from the date of
acquisition.
The following table presents unaudited pro forma results of operations data as
if the acquisitions described above had occurred on July 1, 1994.
<TABLE>
<CAPTION>
For the year ended June 30,
(Unaudited)
1996 1995
<S> <C> <C>
Revenue $148,466,000 $127,671,000
Net income (loss) (1,828,997) 5,568,000
Net income per share (.04) .42
</TABLE>
The pro forma information includes adjustments for interest expense that would
have been incurred to finance the acquisitions, additional depreciation based
on
F-14
<PAGE> 29
the fair market value of the facilities and other adjustments, together with
related income tax effects. The pro forma financial information is not
necessarily indicative of the results of operations as they would have been had
the transactions been effected on the assumed dates.
3. RELATED PARTY TRANSACTIONS
The Company provides management and administrative services for 19 facilities
owned by affiliates and also leases one facility from an affiliate. The
affiliates are owned and controlled by two individuals who are officers and
directors of the Company. These services are provided pursuant to agreements
which have five-year terms and are cancelable with sixty days written notice by
either party. The agreements provide for monthly fees ranging from $6,000 to
$30,000 per facility and expire through 1999. Revenue from these management
services totaled $3,472,900, $3,517,500 and $3,034,445 for the years ended June
30, 1996, 1995 and 1994.
CCMC maintains a cash management account where all operating cash funds of the
managed facilities are pooled into one bank account and invested daily. Notes
and advances due from affiliates consist of advances to facilities, net of
advances from facilities, owned by the following affiliated entities:
<TABLE>
<CAPTION>
June 30,
1996 1995
<S> <C> <C>
Gordon Jensen Health Care Association, Inc. $2,982,975 $2,117,562
Winter Haven Homes, Inc. 8,887,833 4,966,589
Southeastern Cottages, Inc. 679,144 105,533
National Assistance Bureau, Inc. 1,326,391 748,801
Chamber Health Care Society, Inc. 336,857 (610,263)
Senior Care, Inc. 84,095 -
Other Affiliates 19,366 -
$14,316,661 $7,328,222
Less current portion - 2,314,250
$14,316,661 $5,013,972
</TABLE>
During 1995 and 1994, the Company received notes as consideration for advances
totaling $5,360,000. These notes require quarterly interest payments at 8% per
annum with all principal and accrued interest due on or before June 30, 1998.
The notes were collateralized by second mortgages on facilities owned by
affiliates and certain notes receivables are guaranteed by the principals of
Winter Haven, who are shareholders of the Company. All notes and advances due
from affiliates which existed at June 30, 1996, were liquidated subsequent to
year end.
FACILITY ACQUISITIONS AND LEASES
On April 28, 1995, the Company purchased a 210-unit nursing home of an
affiliate. The purchase price was $5,650,000 and was financed with $500,000
from the Company and a $5,150,000 mortgage loan from an unrelated third-party
real estate investment trust.
On February 27, 1996, the Company purchased a 36-unit retirement facility from
an affiliate. The purchase price was $2,000,000 and was financed with $400,000
from the Company and a $1,600,000 mortgage loan from an unrelated third-party
real estate investment trust.
On May 5, 1996, the Company entered into a lease agreement with an affiliate
to rent a 60-unit nursing home. Terms of the agreement are ten years at
$300,000 per year beginning on June 1, 1996. The total lease payments in 1996
were $25,000.
F-15
<PAGE> 30
The Company's exposure to credit loss in the event of nonperformance by its
related parties totaled $14,316,661 and $7,938,485 as of June 30, 1996 and
1995, respectively.
ADDITIONAL TRANSACTIONS
The Company paid amounts to affiliates for obtaining financing of $190,000 for
the year ended June 30, 1995. During 1994, the Company paid amounts to
affiliates for lease acquisition and buy out costs, financing fees and
financial advisory fees of $350,000, $300,000, and $70,000, respectively.
These amounts are deferred and included in deferred lease and loan costs in the
accompanying balance sheets.
The Company was paid fees of $150,000 and $400,000 by affiliates in connection
with locating financing for three facilities in 1996 and two facilities in
1995, respectively. These fees were included in interest income on the
accompanying statements of income.
The Company has service and consulting agreements whereby In-House provides
therapy and case management to facilities for a fixed monthly fee plus a charge
per treatment unit provided. For 1996 and 1995, substantially all of the sales
and accounts receivable of In-House were to the Company.
4. ACCOUNTS RECEIVABLE
Patient accounts receivable and net patient service revenue include amounts
estimated by management to be payable by Medicaid and Medicare under the
provisions of payment formulas in effect. Medicaid and Medicare programs
accounted for approximately 68% and 72% of net patient service revenue during
1996 and 1995, respectively.
The Company grants credit without collateral to its patients most of whom are
local residents of the respective nursing home and retirement facilities and
are insured under third-party payor agreements. The mix of receivables from
patients and third party payors is as follows:
<TABLE>
<CAPTION>
June 30,
1996 1995
<S> <C> <C>
Medicaid $10,644,368 $5,485,610
Medicare 4,304,368 4,327,868
Other third-party payors 1,598,816 697,402
Patients 3,113,145 10,884
Trade receivables 2,595,083 760,703
22,255,780 11,282,467
Allowance for doubtful accounts 3,410,000 -
$18,845,780 $11,282,467
</TABLE>
In the opinion of management, any differences between the net revenue recorded
and final determination will not materially affect the consolidated financial
statements.
The activity in the allowance for doubtful accounts is as follows:
<TABLE>
<CAPTION>
June 30,
1996 1995 1994
<S> <C> <C> <C>
Beginning of Period $ - - -
Provisions for Bad Debts 3,423,117 - -
Deductions (13,117) - -
End of Period 3,410,000 - -
</TABLE>
5. NOTE RECEIVABLE:
On February 7, 1996, the Company loaned $500,000 to an unaffiliated company.
The note, plus interest at 9% per annum, is due on February 7, 1997 and is
collateralized by a first lien on a 38-bed nursing home in Atlanta, Georgia
6. CHANGE IN ACCOUNTING FOR SUPPLIES INVENTORY:
During the year ended June 30, 1996, the Company changed its method of
accounting for facility supplies inventory from expensing when purchased to
capitalizing and expensing as used. The Company believes that this change is
preferable in the
F-16
<PAGE> 31
circumstances because it more closely matches inventory costs with net patient
service revenue. In connection with the capitalization of facility supplies
inventory at June 30, 1996, the Company recorded additional inventory and
reduced supplies expense by approximately $1.0 million, of which approximately
$600,000 related to inventory on hand as of June 30, 1995. Accordingly, the
cumulative effect of this change in accounting principle on beginning retained
earnings has been shown, net of tax, as a separate component of the statement
of operations for the year ended June 30, 1996. Although the cumulative effect
on retained earnings at June 30, 1995 resulting from the change can be
determined, the pro forma effects of retroactive application cannot be computed
for individual prior periods. Accordingly, net income and income per common
share computed on a pro forma basis have not been presented for the years ended
June 30, 1995 and 1994.
7. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
Estimated
Useful
Lives 1996 1995
<S> <C> <C> <C>
Land - $ 7,184,001 $ 2,237,133
Buildings 30 83,281,050 28,917,590
Equipment 5-10 12,179,912 5,702,897
Leasehold improvements 5-10 2,193,228 1,110,666
Buildings and equipment under
capital leases 5-30 8,111,801 -
112,949,992 37,968,286
Less accumulated depreciation 8,518,084 990,968
Construction in progress 104,431,908 36,977,318
Net property and equipment 6,988,578 256,188
$111,420,486 37,233,506
</TABLE>
Construction in progress, consisting of the development of four facilities,
includes approximately $605,000 and $4,600 of capitalized interest costs as of
June 30, 1996 and 1995, respectively. The total contract price of construction
in progress was approximately $8,500,000.
Substantially all property and equipment is pledged as collateral for long-term
debt.
8. DEFERRED LEASE AND LOAN COST:
In connection with the execution of certain lease transactions and financing of
acquisitions, the Company incurred lease and loan commitment fees, which are
included in deferred lease and loan costs in the accompanying balance sheets,
as follows:
<TABLE>
<CAPTION>
June 30,
1996 1995
<S> <C> <C>
Lease cost:
Affiliated $ 500,000 $ 500,000
Non-affiliated 1,801,619 1,283,149
Loan cost:
Affiliated 410,000 410,000
Non-affiliated 5,800,288 1,897,403
Less accumulated amortization 8,511,907 4,090,552
Net deferred lease and loan cost 846,016 358,355
$ 7,665,891 $3,732,197
</TABLE>
F-17
<PAGE> 32
9. SHAREHOLDERS' EQUITY:
STOCK PURCHASE WARRANTS
In prior years, the Company issued warrants to an investment banker and
consultants to purchase 1,126,500 shares of its common stock at prices ranging
from $1.632 to $6.875 per share. All exercise prices approximated the market
price at the date of grant. The warrants were exercisable at varying dates
through June 1998. During the year ended June 30, 1996, the Company issued
763,386 shares of its common stock in exchange for the cancellation of all of
these warrants.
The Company has issued Class A warrants in connection with a private offering
and Class B and Class C warrants in connection with an offer to Class A
warrant holders to convert their warrants. The Class A warrants are exercisable
at $.907 per share of common stock, the Class B warrants are exercisable at
$5.714 per share of common stock and the Class C warrants are exercisable at
$2.721 per share of common stock. At any time during the period the warrants
are exercisable, the Company may redeem the warrants at $.05 per warrant upon
45 days written notice in the event certain listing and registration
requirements are achieved, and the closing bid price of the common stock
exceeds $7.00 per share for the Class A and Class C Warrants, and $10.00 per
share for the Class B Warrants, for 20 of 30 consecutive trading days. During
the year ended June 30, 1996, Class A Warrants were exercised to purchase
approximately 156,783 shares of common stock, Class B Warrants were exercised
to purchase approximately 56,616 shares of common stock and Class C Warrants
were exercised to purchase approximately 222,109 shares of common stock. As of
June 30, 1996, there were Class A warrants outstanding which entitles the
holders to purchase 136,212 shares of common stock, Class B warrants
outstanding which entitles the holders to purchase 302,312 shares of common
stock and Class C Warrants outstanding which entitles the holders to purchase
141,312 shares of common stock.
STOCK OPTIONS
In December 1993, the Company adopted the 1993 Stock Option Plan (the "Plan").
A total of 1,682,625 shares of the Company's common stock have been reserved
for issuance under the Plan. Under the Plan, options are granted at an exercise
price of not less than 100% of the fair market value of the shares on the date
of grant. Certain options are exercisable immediately, while others are subject
to vesting provisions as specified by the Board of Directors on the date of
grant. Each option grant under the Plan automatically expires ten years after
the date of grant or at such earlier time as may be determined by the Board of
Directors.
Stock option transactions are summarized as follows:
<TABLE>
<CAPTION>
Exercise Price
Shares Per Share
<S> <C> <C>
Balance at June 30, 1993 -
Granted 882,110 $4.65 -$ 6.75
Balance at June 30. 1994 882,110 4.65 - 6.75
Granted 184,708 6.46 - 8.57
Balance at June 30, 1995 1,066,818 4.65 - 8.57
Granted 489,300 9.76 - 10.24
Exercised (22,076) 4.65 - 9.76
Canceled (35,674) 4.65 - 9.76
Balance at June 30, 1996 1,498,368 $4.65 -$10.24
</TABLE>
PREFERRED STOCK
F-18
<PAGE> 33
As of June 30, 1996, the Company has authorized 40,000,000 shares of preferred
stock and has designated the following series of preferred stock:
- SERIES AA REDEEMABLE CONVERTIBLE PREFERRED STOCK
300,000 shares of Series AA Redeemable Convertible Preferred Stock are
authorized. These shares were issued in connection with the acquisition of a
majority interest in Contour. Holders of the Series AA Redeemable Convertible
Preferred Stock are entitled to receive cumulative dividends of $1.00 per share
(10%) annually, and are convertible into common stock at any time at the rate
of 5.5125 shares of common stock for each six shares of Series AA Redeemable
Convertible Preferred Stock. Each share is entitled to one vote and has a
preferred rate of $10.00 per share upon voluntary or involuntary liquidation,
dissolution, or winding up of affairs of the Company.
The Company may redeem shares of Series AA Redeemable Convertible Preferred
Stock, in whole or in part, at any time at its option at a price of $10.00 per
share plus any unpaid dividends (the "Redemption Price"). In addition, to the
extent that such funds are legally available, the Company is required to
redeem, at the Redemption Price, at least 20% of each holder's initial number
of shares of Series AA Redeemable Convertible Preferred Stock by September 30,
1995; 40% by September 30, 1996; 60% by September 30, 1997; 80% by September
30, 1998; and 100% by September 30, 1999. In the event that a holder of Series
AA Redeemable Convertible Preferred Stock shall have converted a portion of his
shares into common stock, such converted shares shall be counted toward the
redemption requirement and shall be deemed redeemed for the purposes of the
mandatory redemption requirement. In addition, in the event that the Company
fails to pay any dividend on the Series AA Redeemable Convertible Preferred
Stock within 30 days of the due date, the Company is required to redeem all of
the outstanding Series AA Redeemable Convertible Preferred Stock. During the
year ended June 30, 1996, the Company redeemed 60,000 shares of Series A
Redeemable Preferred Stock.
- - SERIES A CONVERTIBLE PREFERRED STOCK
2,000,000 shares of Series A Convertible Preferred Stock, par value $.10 per
share, are authorized. Each share is entitled to 10 votes and has a preference
rate of $.01 per share with no dividend rights. 750,000 shares of Series A
Preferred Stock were issued in connection with the Company and Capitol Care
Management Company, Inc. The preferred shares were converted into common stock
in 1994 and 1995.
- - SERIES C CONVERTIBLE PREFERRED STOCK
1,000,000 shares of Series C Convertible Preferred Stock are authorized. Each
share is entitled to one vote per share and had a preference rate of $1.00 per
share with no dividend rights.
The shares of Series C Convertible Preferred Stock were converted in 1994 into
common stock.
- - SERIES E CONVERTIBLE PREFERRED STOCK
1,000,000 shares of Series E Convertible Preferred Stock are authorized. These
shares were sold in an offering to foreign investors in April 1996 at $10.00
per share. Holders of the Series E Preferred Stock have no voting rights except
as required by law, and have a liquidation preference of $10.00 per share plus
4% per annum from the date of issuance. The shares of Series E Preferred Stock
are convertible into shares of common stock at a conversion price of $12.4025
or 85% of the average closing bid price for the five trading days prior to the
date of conversion, whichever is lower (but no lower than $5.00).
F-19
<PAGE> 34
At the time of conversion, the holder is also entitled to additional shares
equal to $10.00 per share of Series E Preferred Stock converted multiplied by
8% per annum from the date of issuance divided by the applicable conversion
price. As of June 30, 1996, 57,500 shares of Series E Convertible Preferred
Stock had been converted into 54,516 shares of common stock. The imputed
dividend on this preferred stock was $1,996,777 at June 30, 1996.
TREASURY STOCK
In November 1995, the Company purchased and retired 15,000 shares of its common
stock at an aggregate cost of $153,920. In December 1995, the Company
purchased 10,000 shares of its common stock at an aggregate cost of $120,120.
In March 1996, the Company purchased and retired 500 shares of its common stock
at an aggregate cost of $5,070.
10. LONG-TERM DEBT:
Long-term debt at June 30, 1996 and 1995 is summarized as follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Non-affiliates:
Notes payable to a real estate
investment trust ("REIT") $ 39,623,938 $12,930,347
Industrial development revenue bonds 20,060,000 9,345,000
Municipal revenue bonds 18,170,000 13,350,000
Housing development mortgage revenue bonds 21,750,000 1,660,000
Notes payable to banks (8.5% or prime plus
1% to 10% due through 2003) 3,049,012 1,220,749
Capitalized lease obligations 8,048,581 -
Affiliates:
Note payable to an affiliate (12%
due on July 31, 1996) - 1,000,000
Less discount on bonds payable - 184,518
110,701,531 39,321,578
Less current maturities 2,220,491 8,640,871
$108,481,040 $30,680,707
</TABLE>
Future maturities of debt and capital lease obligations are as follows:
<TABLE>
<CAPTION>
Capital
Year Lease Debt Total
<S> <C> <C> <C>
1997 $ 973,304 $ 2,161,380 $ 3,134,684
1998 980,120 2,368,392 3,348,512
1999 987,068 2,464,109 3,451,177
2000 994,202 2,948,158 3,942,360
2001 1,001,438 2,979,065 3,980,503
Thereafter 15,090,218 89,731,845 104,822,063
Total 20,026,350 102,652,949 122,679,299
Less amount representing imputed
interest at 11% to 12% 11,977,768 - 11,977,768
Total obligations $ 8,048,582 $102,652,949 $110,701,531
</TABLE>
The notes payable to the REIT consist of mortgage notes on eight facilities.
Principal amounts are amortized over a 25-year period with monthly installments
payable through 2008. Interest rates on these notes range from 9.75% to 11.18%
and increase annually at rates ranging from 0.1% to 0.25%. The notes are
collateralized by property and equipment of the eight facilities.
The industrial development revenue bonds consist of bonds on two facilities: a
retirement community located in San Destin, Florida and the Atrium, a nursing
and retirement community located in Jacksonville, Florida. The San Destin
facility serves as collateral for $9,225,000 of bonds payable to the Walton
County Industrial Development Authority. Principal payments range from
$135,000 to $1,000,000 annually through 2017 and interest accrues at 10.5%. The
Atrium
F-20
<PAGE> 35
facility serves as collateral for three City of Jacksonville Industrial
Development Revenue Refunding bonds totaling $10,835,000. Principal payments
range from $150,000 to $370,000 annually through 2024 and interest accrues at
rates ranging from 6.38% to 11.5%.
The housing development mortgage revenue bonds include approximately
$18,525,000 of bond debt assumed by the Company in connection with the
acquisition of Encore. The bond debt, which is collateralized by property and
equipment of four facilities, includes Okaloosa County, Florida Retirement
Rental Housing Revenue Series A bonds totaling $8,425,000 with semi-annual
interest payments at 10.75% due in 2003 and Ohio Rental Housing Revenue Series
A bonds totaling $10,100,000 with semi-annual interest at 10.38% due in 2009.
The remainder of the housing development mortgage revenue bonds consist of
bonds totaling $3,225,000 collateralized by two facilities with interest
ranging from 8% to 11.0%. The housing development mortgage revenue bonds
require annual principal payments ranging from $10,000 to $2,000,000.
The municipal revenue bonds, which are collateralized by property and equipment
of five facilities and require annual principal payments ranging from $15,000
to $540,000, consist of the following:
Dade City, Florida Series A and B bonds totaling $6,455,000, with principal
payments due through 2025 and interest ranging from 6.75% to 8%.
Highland County Series A and B bonds totaling $4,275,000, with principal
payments due through 2024 and interest ranging from 6.5% to 9.5%.
City of Dublin Series A and B bonds totaling $2,780,000, with principal
payments due through 2024 and interest ranging from 8.5% to 10.5%
Rome-Floyd County Development Authority Revenue Series A and B bonds totaling
$2,760,000, with principal payments due through 2011 and interest rates ranging
from 7.5% to 10%.
Americus-Sumter Series A and B bonds totaling $1,900,000, with principal
payments due through 2026 and interest rates ranging from 8.0% to 10.25%.
In connection with the bond indentures, the Company is required to meet
certain covenants, including monthly sinking fund deposits, adequate balances in
debt service reserve funds, timely payment of tax obligations and adequate
insurance coverage. At June 30, 1996 and 1995, the Company was in violation of
several of these covenants including the failure to make monthly payments to the
bond sinking funds for certain of these facilities and inadequate debt service
reserves for certain of the facilities. The Company is also delinquent with
regard to the payment of property taxes at several facilities. The trustees
have not called the bonds in the past for these violations and management does
not foresee the bonds being called at this time. All semi-annual interest and
principal payments have been made in a timely fashion.
11. LINES OF CREDIT:
The Company maintains various lines of credit with interest rates ranging from
prime plus .25% to prime plus 1.25%. Available borrowings under the lines of
credit totaled $5,075,000 and $1,750,000 for the years ended June 30, 1996 and
1995, respectively. Total borrowings against the lines of credit were
$3,556,535 and $1,745,316 at June 30, 1996 and 1995, respectively.
12. COMMITMENTS AND CONTINGENCIES:
OPERATING LEASES
The Company leases nursing homes and retirement care facilities from
unaffiliated entities (in addition to leasing one nursing home from an
affiliated entity). The lease agreements commenced on various dates with terms
extending through February 2016. The Company has options to extend most of the
leases for an additional five to ten years. The Company also leases certain
facilities under agreements classified as capital leases. These agreements
include purchase options exercisable at the Company's discretion during, or at
the end of, each of the lease terms. The capital lease agreements commenced on
various dates with terms extending through January 2006.
Included in the above agreements are three leases whereby a sale to the lessor
preceded the lease agreement ("sale/leaseback transaction"). The Company has
F-21
<PAGE> 36
accounted for two of these sale/leaseback transactions as sales with no gains
or losses recognized on the transactions. The remaining sale/leaseback
transaction was capitalized and included a deferred gain of $381,370 to be
amortized over the term of the lease. Future minimum payments, by year and in
the aggregate, under noncancelable operating leases with initial or remaining
terms of one year or more consist of the following at June 30, 1996:
<TABLE>
<CAPTION>
Year Amount
<S> <C>
1997 $ 8,712,474
1998 9,101,249
1999 8,686,407
2000 8,357,981
2001 8,177,038
Future years 35,641,998
Total $78,677,147
</TABLE>
The Company's rental expense under operating leases for nursing homes and
retirement care facilities amounted to approximately $6,040,000, $5,750,000 and
$3,000,000 for the years ended June 30, 1996, 1995 and 1994, respectively.
The Company leases office space under a noncancelable operating lease which
expires in October 2000. At June 30, 1996, minimum future rental payments under
the noncancelable lease were as follows:
<TABLE>
<CAPTION>
Year Amount
<S> <C>
1997 $303,644
1998 325,455
1999 341,683
2000 358,673
2001 120,509
</TABLE>
Total amounts paid for rental of office facilities totaled approximately
$317,000, $60,000 and $35,000 for the years ended June 30, 1996, 1995 and 1994,
respectively.
OTHER
The Company has guaranteed the debt of three facilities owned by affiliates
totaling approximately $13,000,000. Additionally, the Company has guaranteed
20% to 25%, or approximately $1,900,000, of the debt on five facilities owned
by unaffiliated entities that are currently operated by the Company under
operating leases.
The Company is involved in legal proceedings arising in the ordinary course of
business. In addition, the Company is in dispute with the Internal Revenue
Service ("IRS") concerning the application of certain income and payroll tax
liabilities and payments. The IRS contends that the Company is delinquent in
the payment of certain taxes and has charged penalties and interest in
connection with the alleged underpayment. The Company contends that the IRS has
misapplied payments between income and payroll taxes and between the Company
and its affiliates. The Company has estimated in the accompanying financial
statements amounts for ultimate settlement of this dispute. The Company has
filed lawsuits against the IRS related to this matter. In the opinion of
management, the ultimate resolution of pending legal proceedings and the IRS
dispute will not have a material effect on the Company's financial positions or
results of operations.
13. INCOME TAXES:
The components of the provision for income taxes were as follows:
F-22
<PAGE> 37
<TABLE>
<CAPTION>
Year ended June 30,
1996 1995 1994
<S> <C> <C> <C>
Current:
Federal $2,671,891 $2,659,000 $1,630,900
State 501,600 499,000 287,820
3,173,491 3,158,000 1,918,720
Deferred (benefit):
Federal (1,571,500) 221,928 (77,600)
State (294,900) 39,164 (13,637)
261,092 (91,237) (1,866,400)
Total income tax provision $1,307,091 $3,419,092 $1,827,483
</TABLE>
The income tax provisions included in the consolidated statements of income are
as follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Income before cumulative
effect of change in
accounting principle $1,307,091 $3,419,092 $1,827,483
Cumulative effect of change
in accounting principle 228,000 - -
$1,535,091 $3,419,092 $1,827,483
</TABLE>
Deferred income taxes are provided to reflect temporary differences between
financial and income tax bases of assets and liabilities. The sources of the
temporary differences and their effect on the net deferred taxes at June 30,
1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Current deferred taxes:
Deferred tax assets:
Workers' compensation accrual $1,062,900 $ -
Provision for losses on accounts
receivable 811,300 -
Health insurance accrual 227,800 -
Net operating loss 355,100 -
Total 2,457,100 -
Less: Valuation allowance (355,100) -
Deferred tax liabilities
Net current deferred tax asset $2,008,430 $ -
Noncurrent deferred taxes:
Deferred tax asset - deferred gain $ 276,700 $120,590
Deferred tax liabilities:
Property and equipment 352,600 255,090
Deferred lease cost 201,100 -
553,700 255,090
Net noncurrent deferred tax
liability $ 277,000 $134,500
</TABLE>
The provision for income taxes for the year ended June 30, 1996 varies from the
amount determined by applying the Federal statutory rate to pretax income as a
result of the following:
<TABLE>
<S> <C>
Income tax expense at federal statutory rate $1,115,130
Nondeductible tax penalties 417,700
State income taxes, net of federal tax benefit 331,100
Other, net (556,839)
$1,307,091
</TABLE>
The primary difference between the actual income tax rate of approximately 40%
and 39% for the years ended June 30, 1995 and 1994, respectively, and the
Federal income tax rate of 34% is the amount paid for state income taxes.
14. FAIR VALUES OF FINANCIAL INSTRUMENTS AND INVESTMENTS
F-23
<PAGE> 38
The following methods and assumptions were used by the Company in estimating
the fair value of its financial instruments.
CASH AND CASH EQUIVALENTS
The carrying amount reported in the balance sheet for cash and cash equivalents
approximates fair value because of the short maturity of these instruments.
MARKETABLE EQUITY SECURITIES
The carrying amount reported in the balance sheet for marketable equity
securities approximates fair value. All marketable equity securities are
classified as "available for sale" for accounting purposes and, therefore, are
carried at fair value with unrealized gains and losses recorded directly in
equity. There were no significant unrealized gains or losses at June 30, 1996.
NOTES RECEIVABLE
The carrying amount approximates fair value for the notes receivable based on
the fair value being estimated as the net present value of cash flows that
would be received on the notes over the remaining notes' terms using the
current market interest rates rather than stated interest rates.
SHORT- AND LONG-TERM DEBT
The fair value of all debt has been estimated based on the present value of
expected cash flows related to existing borrowings discounted at rates
currently available to the Company for debt with similar terms and remaining
maturities.
The cost basis and estimated fair values of the Company's financial instruments
at June 30 are as follows:
<TABLE>
<CAPTION>
June 30, 1996
Carrying Fair
Amount Value
<S> <C> <C>
Financial assets:
Cash and cash equivalents $ 45,365 $ 45,365
Marketable equity securities 33,645 33,645
Financial liabilities:
Short-term debt 5,777,026 5,777,026
Long-term debt 108,491,040 112,349,000
</TABLE>
As of June 30, 1995, the carrying amount of all financial instruments
approximated fair value.
15. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
In connection with the purchase of Contour in September 1994, the Company
issued $1,000,000 of common stock, and $3,000,000 of redeemable convertible
preferred stock. Total assets and liabilities acquired were $5,146,493 and
$1,146,493, respectively.
In June 1995, the Company acquired for $4,488,000 through foreclosure a
116-unit property which secured bonds that the Company held.
Total debt of $20,830,000 was incurred during the year ended June 30, 1995, to
purchase property and equipment totaling $17,825,642, pay loan costs of
$1,004,358, and pay off an existing note for $2,000,000.
As described in Note 2, the Company acquired certain businesses during 1996.
The fair value of assets acquired was $69,826,951 and the fair value of
liabilities assumed was $47,888,438 which resulted in net cash payments of
$21,938,513.
F-24
<PAGE> 39
Through the acquisition of a company in December 1993, the Company recorded
$500,000 as goodwill and additional paid-in capital in 1995 based on the fair
value of 105,000 shares of common stock issued in connection with the
conversion of Series D preferred stock.
Cash paid for interest during the years ended June 30, 1996, 1995 and 1994 was
$6,561,954, $1,172,883 and $11,172, respectively.
Cash paid for income taxes during the years ended June 30, 1996, 1995 and 1994
was $3,561,089, $829,292 and $1,360,720, respectively.
Cash dividends on preferred stock of $15,000 and imputed dividends of
$1,996,777 on Series E preferred stock were accrued but not paid at June 30,
1996.
During 1996, approximately $8,112,000 of lease assets and obligations were
capitalized.
16. ACCRUED EXPENSES:
Accrued expenses consisted of the following as of June 30:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Payroll and payroll taxes $ 3,587,217 $1,936,927
Interest 1,868,805 452,173
Workers Compensation 2,975,000 -
Other 2,885,008 795,133
Total $11,316,030 $3,184,233
</TABLE>
17. EMPLOYEE RETIREMENT PLAN:
During the year ended June 30, 1996, the company established a defined
contribution retirement plan. Employees qualify for the plan upon the
completion of three months of service with the Company and reaching the age of
twenty-one. Company contributions to the plan represent a matching percentage
of certain employee contributions. The matching percentage is subject to
management's discretion based upon consolidated financial performance. For the
year ended June 30, 1996, the Company has not made any contributions to the
plan.
18. BUSINESS SEGMENT INFORMATION:
Retirement Care Associates; Inc. and Subsidiaries is a long-term health care
provider which engages in two distinct business segments. The Retirement Care
Associates entity operates and manages nursing homes and retirement facilities
throughout the Southeast. As of June 30, 1996, approximately 10,400 beds were
owned or operated by this entity.
The Contour entity manufacturers a full line of orthopedic care and
rehabilitation products and distributes them to nursing facilities throughout
the Southeast. The Contour entity was acquired in 1995. The following
represents business segment information for the years ended June 30, 1996 and
1995.
<TABLE>
<CAPTION>
1996
1995
<S> <C> <C>
Operating revenues:
Retirement Care Associates $124,951,954 $75,998,614
Contour Medical 9,059,415 3,617,439
$134,011,369 $79,616,053
Depreciation and amortization expense:
Retirement Care Associates $ 2,806,637 $ 1,051,842
Contour Medical 600,349 76,341
$ 3,406,986 $ 1,128,183
Identifiable assets:
</TABLE>
F-25
<PAGE> 40
<TABLE>
<S> <C> <C>
Retirement Care Associates $165,094,536 $72,644,179
Contour Medical 12,397,751 7,613,367
$177,492,287 $80,257,546
Capital expenditures:
Retirement Care Associates $ 11,741,135 $ 5,763,553
Contour Medical 749,163 316,057
$ 12,490,298 $ 6,079,610
Operating Income
Retirement Care Associates $ 8,540,815 $ 8,865,388
Contour Medical 839,202 151,828
$ 9,380,017 $ 9,017,216
</TABLE>
19. SUBSEQUENT EVENTS
On October 14, 1996, the Company acquired two retirement facilities from
related parties, individuals who control the Company and its affiliates, for
their fair value, based on independent appraisals, totaling $19,200,000. The
facilities were subject to bond debt of $7,670,000. The remaining balance due
from the Company was $11,530,000. For the purpose of this transaction, Winter
Haven had assumed the amounts due to the Company in the amount of $2,426,487,
from Southeastern Cottages, Inc., National Assistance Bureau, Inc., Chamber
Health Care Society, Inc. and Senior Care, Inc. which, in combination with the
amount of $8,887,833 previously due from Winter Haven to the Company, totaled
$11,314,320. As part of the exchange agreement, the Company and Winter Haven
agreed to offset the Company's debt incurred of $11,530,000 with the Company's
receivable of $11,314,320.
On September 27, 1996, Gordon Jensen Health Care Association, Inc. returned
approximately 400,000 shares of stock in the Company which had a fair market
value of $3,000,000 in payment of Gordon Jensen s debt of $2,982,000 due to the
Company. The retirement of these shares reduced shareholders' equity of the
Company by $3,000,000.
On August 6, 1996, Contour acquired all of the outstanding stock of Atlantic
Medical Supply Company, Inc. ("Atlantic Medical"), a distributor of disposable
medical supplies and a provider of third-party billing services to the nursing
home and home health care markets. The acquisition was made retroactively to
July 1, 1996. Contour paid 1.4 million in cash and $10.5 million in promissory
notes for all of the outstanding stock of Atlantic Medical. The promissory
notes bear interred 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 RCA. On January 10, 1997, Contour
retired all outstanding notes due to sellers of Atlantic Medical 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.
During the period from September 26 through October 2, 1996, the Company sold
1,000,000 shares of Series F Convertible Preferred Stock in an offering to
foreign investors at $10.00 per share. Holders of the Series F Preferred Stock
have no voting rights except as required by law, and have a liquidation
preference of $10.00 per share plus 4% per annum from the date of issuance. The
shares of Series F Preferred Stock are convertible into shares of common stock
at a conversion price of the lessor of (a) $9.6525 or 110% of the average
closing bid price for the twenty consecutive trading days commencing September
30, 1996,
F-26
<PAGE> 41
whichever is lower, or (b) 85% of the average closing bid price for the five
trading days prior to the date of conversion. The maximum number of shares of
common stock which can be issued upon conversion of the Series F Preferred
Stock is 2,588,000. At the time of conversion, the holder is also entitled to
additional shares equal to $10.00 per share of Series F Preferred Stock
converted multiplied by 8% per annum from the date of issuance divided by the
applicable conversion price.
The board of directors of RCA has unanimously approved and adopted the Agreement
and Plan of Merger and reorganization, dated as of February 17, 1997, as amended
by Amendment No. 1 thereto dated as of May 27, 1997 and Amendment No. 2 thereto
dated as of August 21, 1997, with Sun Healthcare Group, Inc. ("Sun"). The
proposed RCA merger is contingent upon, among other things, the approval of the
holders of the requisite number of shares of Sun Common Stock and RCA Capital
Stock, which is described in a Joint Proxy Statement/Prospectus/Information
Statement. The proposed RCA Merger will be consummated as soon as practicable
after such approvals are obtained and the other conditions to the RCA Merger
are satisfied.
20. ADJUSTMENTS TO 1996 FINANCIAL STATEMENTS
As discussed in Note 19, on February 17, 1997, following a series of meetings
and negotiations, the Company agreed to be acquired by Sun through an exchange
of shares of Sun for shares of the Company. During due diligence procedures
associated with the transaction, certain adjustments to previously issued
financial statements were discovered to be required. Those adjustments,
together with additional amounts have been applied to the financial statements
for the year ended June 30, 1996 as restatements and corrections as follows:
<TABLE>
<S> <C>
Additional provisions or uncollectible account $ 1,705,000
Additional accrual for claims incurred, but not
reported for self-insured worker's
compensation and health care 3,400,000
Accrual for compensated absences 300,000
Adjustment of previously recorded inventory 809,219
Adjustment to lease expenses 530,000
-----------
Less: 6,744,219
Adjustment to income taxes (2,921,219)
Decrease in net income before extraordinary
item $ 3,832,000
Decrease in net income per share $ .34
</TABLE>
F-27
<PAGE> 42
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned thereunto duly authorized.
RETIREMENT CARE ASSOCIATES, INC.
Dated: October 14, 1997 By: \s\ Darrell C. Tucker
------------------------------
Darrell C. Tucker, Treasurer
<PAGE> 1
EXHIBIT 18
October 7, 1997
Retirement Care Associates, Inc.
6000 Lake Forrest Drive, Suite 200
Atlanta, Georgia 30328
Gentlemen:
We are providing this letter to you for inclusion as an exhibit to your
Form 10-K/A filing for the year ended June 30, 1996, pursuant to Item 601 of
Regulation S-K.
We have read management's justification for the change of method of
accounting for facility supplies inventories from expensing when purchased to
capitalizing (using the cost basis) and expensing as used, contained in the
Company's Form 10-K/A for the year ended June 30, 1996. Based on our reading of
the data and discussions with Company officials about the business judgment and
business planning factors relating to the change, we believe management's
justification to be reasonable. Accordingly, in reliance on management's
determination as regards elements of business judgment and business planning, we
concur that the newly adopted accounting principle described above is preferable
in the Company's circumstances to the method previously applied.
/s/ Cherry, Bekaert & Holland, L.L.P.
-------------------------
Cherry, Bekaert &
Holland, L.L.P.
Greensboro, North Carolina
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF INCOME FOUND ON
PAGES F-3 THROUGH F-6 OF THE COMPANY'S FORM 10-K FOR THE FISCAL YEAR ENDED JUNE
30, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> JUN-30-1996
<CASH> 45,385
<SECURITIES> 33,645
<RECEIVABLES> 18,845,780
<ALLOWANCES> 0
<INVENTORY> 3,998,991
<CURRENT-ASSETS> 29,478,560
<PP&E> 111,420,486
<DEPRECIATION> 0
<TOTAL-ASSETS> 177,492,287
<CURRENT-LIABILITIES> 30,974,720
<BONDS> 108,481,040
2,400,000
7,408,279
<COMMON> 1,214
<OTHER-SE> 23,456,625
<TOTAL-LIABILITY-AND-EQUITY> 177,492,287
<SALES> 8,826,252
<TOTAL-REVENUES> 134,011,389
<CGS> 5,773,934
<TOTAL-COSTS> 118,857,418
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (7,948,091)
<INCOME-PRETAX> 2,681,899
<INCOME-TAX> 1,307,091
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 372,000
<NET-INCOME> 1,746,808
<EPS-PRIMARY> (.05)
<EPS-DILUTED> 0
</TABLE>
