<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
Amendment No. 3
(Amending Part I- Items 1, 2 and 6)
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter Ended December 31, 1996
Commission File No. 1-14114
RETIREMENT CARE ASSOCIATES, INC.
------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Colorado 43-1441789
- ------------------------------ ----------------------------------
(State or Other Jurisdiction of (IRS Employer Identification Number)
Incorporation or Organization)
6000 Lake Forrest Drive, Suite 200, Atlanta, Georgia 30328
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(Address of Principal Executive Offices)
(404) 255-7500
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(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such report(s), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ X ] No [ ]
As of December 31, 1996, 13,474,995 shares of Common Stock were outstanding.
<PAGE> 2
RETIREMENT CARE ASSOCIATES AND SUBSIDIARIES
Form 10-Q/A For the Quarter Ended December 31, 1996
<TABLE>
<CAPTION>
INDEX Page(s)
<S> <C> <C>
PART I. Financial Information
Item 1. Consolidated Financial Statements
Introduction 3
Consolidated Statements of Operations
(Unaudited) - Three Months Ended
December 31, 1996 and December 31, 1995 4
Consolidated Statements of Operations
(Unaudited) - Six Months Ended
December 31, 1996 and December 31, 1995 5
Consolidated Balance Sheets - (Unaudited)
December 31, 1996 and (Audited) June 30, 1996 6-7
Consolidated Statements of Cash Flows
(Unaudited) - Six Months Ended December 31,
1996 and December 31, 1995 8-9
Notes to Consolidated Financial Statements
(Unaudited) 10-13
Item 2. Managements' Discussion and Analysis of
Results of Operations and Financial
Condition 13-17
Item 6. Exhibits and Reports on Form 8-K 18
Signature 18
</TABLE>
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<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
INTRODUCTION - CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements included herein have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures have been condensed or omitted
pursuant to such rules and regulations. In the opinion of management, all
adjustments, which were of a normal recurring nature, necessary to present
fairly the consolidated financial position and results of operations and cash
flows for the periods presented have been included. These consolidated financial
statements should be read in conjunction with the financial statements and the
notes thereto included in the Annual Report on Form 10-K for Retirement Care
Associates, Inc. (the "Company") for the fiscal year ended June 30, 1996, File
No. 1-14114.
The Company has restated its financial information for periods commencing June
30, 1996 through the nine months ended March 31, 1997, as reflected in
amendments to the Company's Quarterly Reports on Forms 10-Q for the quarters
ended September 30, 1996, December 31, 1996 and March 31, 1997. Adjustments and
reclassifications were necessary to correct entries relating to (i) receivables
due from third-party payors, (ii) the Company's inventory for such periods,
(iii) provisions for doubtful accounts, (iv) provisions for contractual
allowances for third-party payors, (v) provisions for accrued liabilities, and
(vi) pre-recorded operating leases (collectively, the "Restated Entries").
To show the impact of the Restated Entries with respect to previously reported
amounts for each period restated, the Company has provided a description of the
Restated Entries and a reconciliation of historical results for each period as
previously reported in the filed quarterly report to restated results.
Certain statements in this Form 10-Q are "forward-looking statements" made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Forward-looking statements involve a number of risks and
uncertainties. Factors which may cause the Company's actual results in future
periods to differ materially from forecast results include, but are not limited
to: general economic and business conditions, both nationally and in the regions
in which the Company operates; industry capacity; demographic changes; existing
government regulations and changes in, or the failure to comply with, government
regulations; legislative proposals for reform; the ability to enter into lease
and management contracts and arrangements on acceptable terms; changes in
Medicare and Medicaid reimbursement levels; liability and other claims asserted
against the Company; competition; changes in business strategy or development
plans; the ability to attract and retain qualified personnel; the significant
indebtedness of the Company; and the availability and terms of capital to fund
the expansion of the Company's business, including the acquisition of additional
facilities.
The Financial information included in this report has been prepared by the
Company, without audit, and should not be relied upon to the same extent as
audited financial statements.
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<PAGE> 4
Retirement Care Associates, Inc. and Subsidiaries
Unaudited Consolidated Statements of Operations
for the Three Months Ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
<S> <C> <C>
Revenues
Patient service revenue: $ 47,950,464 $ 28,342,120
Medical supply revenue 11,471,114 1,605,242
Management fee revenue:
From affiliates 446,334 783,669
From others 112,241 112,247
Other operating revenue 1,228,305 386,899
61,208,458 31,230,177
Expenses
Cost of patient services 33,415,634 17,608,280
Cost of medical supplies sold 7,666,277 1,831,267
Lease expense 2,988,406 1,729,516
General and administrative 12,393,814 4,314,937
Depreciation and amortization 1,394,664 588,175
Interest 2,753,971 1,343,981
Provision for bad debts 989,000 --
61,601,766 27,416,156
Income (loss) before minority
interest and income taxes (393,308) 3,814,021
Minority interest (93,500) (31,412)
Income (loss) before income taxes and
extraordinary item (486,808) 3,782,609
Income tax provision (benefit) (115,000) 1,462,598
Income (loss) before extraordinary item (371,808) 2,320,011
Extraordinary item, less applicable
income taxes (490,000) --
Net income (loss) $ (861,808) $ 2,320,011
Preferred stock dividends 1,401,971 --
Income (loss) applicable to common stock (2,263,779) --
Income (loss) per common and common
equivalent share before extraordinary item (.13) .19
Net income (loss) per common and common
equivalent share (.17) .19
Weighted average shares outstanding 13,301,109 12,386,290
</TABLE>
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<PAGE> 5
Retirement Care Associates, Inc. and Subsidiaries
Unaudited Consolidated Statements of Operations for
the Six Months Ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
<S> <C> <C>
Revenues
Patient service revenue: $ 89,925,434 $ 54,177,449
Medical supply revenue 22,777,309 3,194,315
Management fee revenue:
From affiliates 1,252,501 1,581,171
From others 240,120 222,624
Other operating revenue 2,185,709 694,795
116,381,073 59,870,354
Expenses
Cost of patient services 65,321,257 33,652,390
Cost of medical supplies sold 15,333,477 3,420,339
Lease expense 6,015,197 3,480,931
General and administrative 21,895,541 8,770,518
Depreciation and amortization 2,513,126 1,077,789
Interest 5,151,607 2,272,833
Provision for bad debts 2,009,000 --
118,239,205 52,674,800
Income (loss) before minority interest
and income taxes (1,858,132) 7,195,554
Minority interest (13,500) (68,960)
Income (loss) before income taxes
and extraordinary item (1,871,632) 7,126,594
Income taxes (460,000) 2,747,863
Income (loss) before extraordinary item (1,411,632) 4,378,731
Extraordinary item, less applicable
income taxes (490,000) --
Net income (loss) $ (1,901,632) $ 4,378,731
Preferred stock dividends 2,146,777 --
Income (loss) applicable to common stock (4,048,409) 4,378,731
Income (loss) per common and common
equivalent share before extraordinary item (.27) .35
Net income (loss) per common and common
equivalent share (.31) .35
Weighted average shares outstanding 13,188,523 12,386,290
</TABLE>
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<PAGE> 6
Retirement Care Associates, Inc. and Subsidiaries
Unaudited Consolidated Balance Sheets as of
December 31, 1996 and Audited at June 30, 1996
<TABLE>
<CAPTION>
Unaudited Audited
December 31, June 30,
1996 1996
<S> <C> <C>
Assets
Current
Cash and cash equivalents $ 328,924 $ 45,365
Accounts receivable, net 33,137,024 18,845,780
Inventory 7,673,163 3,998,991
Deferred tax asset 3 560,000 2,008,430
Note and accrued interest receivable 636,250 613,750
Restricted Bond Fund 5,513,728 2,342,565
Prepaid expenses and other 3,222,582 1,623,679
Total current assets 54,071,671 29,478,560
Property and equipment 148,924,771 111,420,486
Other assets
Marketable equity securities 1,101,393 33,645
Investments in unconsolidated affiliates 645,249 496,800
Deferred lease and loan costs 10,033,020 7,665,891
Goodwill, net of accumulated amortiza-
tion 12,707,416 6,636,675
Notes and advances due from non-
affiliates 2,307,682 1,372,247
Notes and advances due from affiliates -- 14,316,661
Restricted bond funds 4,400,000 3,514,969
Other assets 2,751,108 2,556,353
Total other assets 33,945,868 36,593,241
$236,942,310 $177,492,287
</TABLE>
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<PAGE> 7
Retirement Care Associates, Inc. and Subsidiaries
Unaudited Consolidated Balance Sheets as of
December 31, 1996 and Audited at June 30, 1996
<TABLE>
<CAPTION>
Unaudited Audited
December 31, June 30,
1996 1996
<S> <C> <C>
Liabilities and Shareholders' Equity
Current liabilities
Lines of credit $ 7,315,722 $ 3,556,535
Current maturities of long-term debt 12,675,509 2,220,491
Accounts payable 19,981,410 10,115,347
Accrued expenses 14,070,257 11,316,030
Income taxes payable -- 3,726,317
Deferred gain 40,000 40,000
Total current liabilities 54,082,898 30,974,720
Deferred gain 201,370 371,370
Deferred income taxes 1,098,929 277,000
Long-term debt, less current maturities 140,783,611 108,481,040
Minority interest 4,514,039 4,122,039
Redeemable convertible preferred stock 1,800,000 2,400,000
Shareholders' equity
Common stock, $.0001 par value;
300,000,000 shares authorized;
13,786,278 and 12,145,875 shares
outstanding 1,379 1,214
Preferred stock 6,230,000 7,408,279
Additional paid-in capital 38,918,417 28,329,625
Retained earnings (10,146,903) (4,752,880)
Treasury stock (541,430) (120,120)
Total shareholders' equity 34,461,463 30,866,118
Total Liabilities and shareholders'
equity $236,942,310 $177,492,287
</TABLE>
-7-
<PAGE> 8
Retirement Care Associates, Inc.
Unaudited Consolidated Statements of Cash Flows for
the Six Months Ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
<S> <C> <C>
Operating activities
Net income (loss) $ (1,901,632) $ 4,378,731
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization 2,513,126 1,077,789
Provision for bad debts 2,009,000
Amortization of deferred gain (170,000) --
Minority interest 13,500 181,716
Deferred income taxes (729,641) --
Changes in current assets and liabili-
ties net of effects of acquisitions:
Accounts receivable (16,300,244) (12,491,771)
Inventory (3,674,172) (338,280)
Prepaid expense and other assets (1,793,658) (2,477,168)
Accounts payable and accrued expenses 8,893,973 8,427,971
Increase in deferred lease and loan
costs (2,947,195) (1,017,781)
Cash (used in) operating activities (14,086,943) (2,258,793)
Investing activities
Purchase of property and equipment (39,437,345) (39,301,488)
Issuance of notes receivable and
advances to affiliates and non-affiliates 14,316,661 (2,018,200)
Investment in and advances to Atrium
Ltd. -- (655,253)
Restricted bond funds (4,056,194) --
Changes in marketable equity securities (1,067,748) (459,239)
Change in receivable (957,935) 1,141,900
Investment in unconsolidated subsidiaries (148,449) --
Cash (used in) investing activities (31,351,010) (41,292,280)
</TABLE>
-8-
<PAGE> 9
Retirement Care Associates, Inc.
Unaudited Consolidated Statements of Cash Flows for
the Six Months Ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
<S> <C> <C>
Financing activities
Dividends on preferred stock (105,000) (150,000)
Redemption of preferred stock (600,000) --
Net proceeds from issuance of:
Line of credit 3,759,182 --
Common stock 70,676 295,198
Long-term debt 38,324,959 40,427,251
Preferred stock 9,340,000 --
Payments on long-term debt (1,267,894) (1,210,667)
Purchase and retirement of common stock (3,800,411) --
Cash provided by financing activities 45,721,507 39,361,782
Net (decrease) in cash and cash equiva-
lents 283,559 (4,189,291)
Cash and cash equivalents, beginning of
year 45,365 5,207,185
Cash and cash equivalents, end of year $ 328,924 $ 1,017,894
</TABLE>
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<PAGE> 10
RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1: BASIS OF PRESENTATION
The consolidated financial statements included herein have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are adequate to
make the information presented not misleading. These consolidated financial
statements and the notes thereto should be read in conjunction with the
consolidated financial statements included in the Company's Annual Report on
Form 10-K for the fiscal year ended June 30, 1996, File No. 1-14114.
In the opinion of management of the Company, the accompanying unaudited
consolidated financial statements contain all necessary adjustments to present
fairly the financial position, the results of operations and cash flows for the
periods reported. All adjustments are of a normal recurring nature.
The Financial Accounting Standard Board has adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" (SFAS No. 115). The Company adopted this standard in fiscal
1995. In management's opinion, adopting SFAS No. 115 did not materially effect
the Company's financial statements for the three months ended December 31, 1995.
NOTE 2: RESTATEMENT
The consolidated financial statements for the six months ended December 31,
1996, as reported in Amendment No. 2 to the Company's Quarterly Report on Form
10-Q, reflect certain accounting policies and estimates which were subsequently
determined to be incorrect and, accordingly, the consolidated financial
statements for the six months ended December 31, 1996 have been restated as
follows (in thousands):
<TABLE>
<CAPTION>
As Previously Reported As Restated
<S> <C> <C>
Revenues $116,517 $116,381
Operating Expenses $124,548 $118,239*
Net Earnings (Loss) $ (5,528) $ (1,902)
Shareholders' Equity $ 34,666 $ 34,462
</TABLE>
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* Restated Operating Expenses include (in thousands) (i) a
reduction in the accrual for employee benefits of $3,700, (ii)
restated inventory of $1,955, (iii) a reduction in the
provision for doubtful accounts of $580, and (iv) restated
general and administrative expenses of $74
NOTE 3. ACCOUNTS RECEIVABLE AND COST REIMBURSEMENTS
Accounts receivable and operating revenue include net amounts reimbursed by
Medicaid under the provisions of cost reimbursement formulas in effect. The
Company operates under a prospective payment system with Medicare, under which
annual rates are assigned based on estimated reimbursements. Differences between
estimated provisions and final settlement are reflected as adjustments to future
rates.
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<PAGE> 11
RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 4. INVENTORIES
Inventories consist of the following at December 31, 1996:
<TABLE>
<S> <C>
Raw material $ 330,823
Work in process 62,985
Finished goods 7,279,355
----------
$7,673,163
</TABLE>
NOTE 5: NOTES RECEIVABLE AND ADVANCES TO AFFILIATES
At December 31, 1996 and June 30, 1996, the Company had notes and advances to
affiliates totaling approximately $0 and $14,316,661, respectively. The notes
were repaid by the sale of two retirement homes to the Company at fair market
value and the retirement of 399,992 shares of the Company's common stock held by
the affiliates. (See Note 8)
NOTE 6: LONG-TERM DEBT
Long-term debt payable consisted of the following:
<TABLE>
<CAPTION>
December 31, June 30,
1996 1996
<S> <C> <C>
Amounts outstanding under
Revenue Bonds secured by
retirement facilities $ 65,110,000 $ 59,986,000
Other debt secured by
retirement and nursing
facilities 54,123,531 39,848,938
Other debt 15,377,007 10,866,593
Capital leases 18,848,582 --
Totals 153,459,120 110,701,531
Current maturities 12,675,509 2,220,491
Total long-term debt $140,783,611 $108,481,040
</TABLE>
NOTE 7: COMMITMENTS AND CONTINGENCIES
The Company is involved in legal proceedings arising in the ordinary course of
business. In addition, the Company is in dispute with the Internal Revenue
Service ("IRS") concerning the application of certain income and payroll tax
liabilities and payments. The IRS contends that the Company is delinquent in the
payment of certain taxes and has charged penalties and interest in connection
with the alleged underpayments. The Company contends that the IRS has misapplied
payments between income and payroll taxes and between the Company and its
affiliates. The Company has estimated in the accompanying financial statements
amounts for ultimate settlement of this dispute, and has recorded an accrual of
$600,000, which is based upon the best available information after consulting
with the Company's advisors concerning this matter. Further, the Company has
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<PAGE> 12
RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 7: COMMITMENTS AND CONTINGENCIES (Continued)
filed lawsuits against the IRS related to this matter. In the opinion of
management, the ultimate resolution of pending legal proceedings and the IRS
dispute will not have a material effect on the Company's financial positions or
results of operations.
NOTE 8: FACILITY ACQUISITIONS
During the quarter ended December 31, 1996, the Company entered into a series of
transactions with Winter Haven, Gordon Jensen Health Care Association, Inc.
("Gordon Jensen"), National Assistance Bureau, Inc. ("NAB"), Southeastern
Cottages, Inc. ("Southeastern"), Chamber Health Care Society, Inc. ("Chamber"),
and Senior Care, Inc. ("Senior"); all are entities which principal shareholders
of the Company either own or control. The result of the transactions was to
eliminate all notes receivable and advances due to the Company from affiliates.
The following is a summary of the transactions:
On September 30, 1996, Winter Haven sold to the Company two retirement
facilities for their fair value, based on independent appraisal, totaling
$19,200,000. The facilities were acquired by the Company subject to bond debt of
$7,670,000, resulting in debt due to Winter Haven from the Company of
$11,530,000. As part of the sales agreement, the Company and Winter Haven agreed
that the debt of $11,530,000 would be applied to eliminate the receivable,
totaling $11,214,320, due to the Company by Winter Haven.
On September 27, 1996, Gordon Jensen contributed to the treasury of the Company
400,000 shares of stock in the Company which had a fair market value of
$3,000,000. This transaction results in the elimination of the debt, totaling
$2,982,000, due to the Company by Gordon Jensen and a reduction of shareholders'
equity of the Company by $3,000,000.
NOTE 9: OTHER TRANSACTIONS
On August 6, 1996, Contour acquired all of the outstanding stock of Atlantic
Medical Supply Company, Inc. ("Atlantic"), a distributor of disposable medical
supplies and a provider of third-party billing services to the nursing home and
home health care markets. The acquisition was made retroactively to July 1,
1996. Contour paid $1.4 million in cash and $10.5 million in promissory notes
for all of the outstanding stock of Atlantic. The promissory notes bear interest
at 7% per annum and were due in full on January 10, 1997. In the event of a
default in the payment of the promissory notes, they were convertible into
shares of common stock of the Company. On January 10, 1997, Contour retired all
outstanding notes due to sellers of Atlantic in the aggregate principal amount
of $10,850,000, along with accrued interest. The retirement of these notes was
funded by a loan of $9,750,000 from the Company, with the balance funded from
Contour's existing line of credit with Barnett Bank. The loan from the Company
was evidenced by a convertible promissory note bearing interest at 9% per annum
and payable upon demand. This note was convertible into 1,950,000 shares of
Contour's common stock, and on January 10, 1997, the Company exercised this
conversion right.
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<PAGE> 13
RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 9: OTHER TRANSACTIONS (Continued)
During the period from September 27 through October 2, 1996, the Company sold
1,000,000 shares of Series F Convertible Preferred Stock in an offering to
foreign investors at $10.00 per share. Holders of the Series F Convertible
Preferred Stock have no voting rights except as required by law, and have
liquidation preference of $10.00 per share plus 4% per annum from the date of
issuance. The shares of Series F Convertible Preferred Stock are convertible
into shares of common stock at a conversion price of the lessor of (a)
$7.665625, or (b) 85% of the average closing bid price for the five trading days
prior to the date of conversion. The maximum number of shares of common stock
which can be issued upon conversion of the Series F Convertible 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 Convertible Preferred
Stock converted multiplied by 8% per annum from the date of issuance divided by
the applicable conversion price. Each holder of the Series F Convertible
Preferred Stock has the option to convert up to one-third of such holder's
shares at any time from and after the 60th day following the date of issuance,
up to an additional one-third of the shares from and after the 90th day
following the date of issuance, and all remaining shares may be converted from
and after the 120th day following the date of issuance.
NOTE 10: EXTRAORDINARY ITEMS
During the quarter ended December 31, 1996, the Company recorded an
extraordinary charge of $490,000, net of taxes of $300,000. The gross
extraordinary charge consists of $790,000 of charges associated with the early
extinguishment of approximately $9.2 million of long term debt associated with
the Company's retirement facility located in Destin, Florida.
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
THREE MONTHS ENDED DECEMBER 31, 1996 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
1995
The Company's total revenues for the three months ended December 31, 1996, were
$61,208,458 compared to $31,230,177 for the three months ended December 31,
1995.
Due to the increased number of facilities owned or leased by the Company,
patient service revenue increased from $28,342,120 for the quarter ended
December 31, 1995, to $47,950,464 for the quarter ended December 31, 1996. The
Company was operating 81 facilities for the quarter ended December 31, 1996
compared to 42 for the quarter ended December 31, 1995. The cost of patient
services in the amount of $33,415,643 for the quarter ended December 31, 1996
represented 69% of patient service revenue as compared to $17,608,280, or 63%,
of patient service revenue during the quarter ended December 31, 1995. This
increase is attributed to the Company acquiring skilled nursing facilities which
require more skilled care and to delays in Medicaid rate increases discussed
below.
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<PAGE> 14
Medical supply revenue increased from $1,605,242 during the quarter ended
December 31, 1995, to $11,471,114 nuring the quarter ended December 31, 1996.
These revenues, which are revenues of Contour, increased primarily as a result
of two acquisitions made by Contour. Contour acquired AmeriDyne Corporation
("AmeriDyne") effective March 1, 1996, and Atlantic effective July 1, 1996. Cost
of medical supplies sold as a percentage of medical supply revenue decreased to
approximately 66% during the quarter ended December 31, 1996, as compared to
approximately 100% of such revenue during the same period last year. The reduced
percentage is primarily a result of higher gross profit margins on the products
sold by AmeriDyne and Atlantic.
Management fees decreased from $895,916 in the quarter ended December 31, 1995
to $558,575 in the quarter ended December 31, 1996, due to the number of
facilities which the Company manages. As of December 31, 1995, the Company was
managing 25 facilities, and as of December 31, 1996, the Company was managing 18
facilities. The Company has leased or purchased 8 facilities it managed at
December 31, 1995. Management anticipates that the number of facilities only
managed by the Company will continue to decline as a result of acquisition of
such facilities by the Company.
Owning or leasing a facility is distinctly different from managing a facility
with respect to operating results and cash flows. For an owned or leased
facility, the entire revenue/expense stream of the facility is recorded on the
Company's income statement. In the case of a management agreement, only the
management fee is recorded. The expenses associated with management revenue are
somewhat indirect as the infrastructure is already in place to manage the
facility. Therefore, the profitability of managing a facility appears more
lucrative on a margin basis than that of an owned/leased facility. However, the
risk of managing a facility is that the contract generally can be canceled on a
relatively short notice, which results in loss of all revenue attributable to
the contract. Furthermore, with an owned or leased property the Company benefits
from the increase in value of the facility as its performance increases. With a
management contract, the owner of the facility maintains the equity value. From
a cash flow standpoint, a management contract is more lucrative because the
Company does not have to support the ongoing operating cash flow of the
facility.
General and administrative expenses for the three months ended December 31, 1996
were $12,393,814, representing 20% of total revenues, as compared to $4,314,937,
representing 14% of total revenues, for the three months ended December 31,
1995. This increase is due to the general and administrative expenses related to
operating the additional facilities owned or leased by the Company, and the
acquisition by Contour of Atlantic.
For the quarter ended December 31, 1996, the Company received a tax benefit of
$115,000, which represents an effective tax rate benefit of 24%, as compared to
expenses for income taxes of $1,462,598, which represents an effective tax rate
of 39%, for the quarter ended December 31, 1995. The tax benefit for the quarter
ended December 31, 1996 is a result of a before tax loss for that quarter.
The net loss of $861,808 for the quarter ended December 31, 1996, compares with
net income of $2,320,011 for the quarter ended December 31, 1995. The net loss
for the quarter ended December 31, 1996, is a result of (1) an extraordinary
charge relating to a restructure of debt, and (2) an increase in the cost of
patient services as described above and delays in annual Medicaid rate
increases, which are usually in effect on July 1 of each year. This year, the
rate increases in Georgia were delayed until August 16, 1996, and the rate
increase in Tennessee were delayed until November 1, 1996. Most of the long-term
care facilities operated by the Company are located in these two states. The
delays in Medicaid rate increases are not related to the extraordinary charge.
-14-
<PAGE> 15
During the quarter ended December 31, 1996, the Company recorded an
extraordinary charge of $490,000, net of taxes of $300,000. The gross
extraordinary charge consists of $790,000 of charges associated with the early
extinguishment of approximately $9.2 million of long term debt.
Most of the revenue from the management services division of the Company's
business is received pursuant to management agreements with entities controlled
by Messrs. Brogdon and Lane, two of the Company's officers and directors. These
management agreements have five year terms. However, each such agreement is
subject to termination on 60 days notice, after the end of the third year of
each such Agreement with or without cause by either the Company or the owners.
Therefore, Messrs. Brogdon and Lane have full control over whether or not these
management agreements, and thus the management service revenue, continue in the
future.
SIX MONTHS ENDED DECEMBER 31, 1996 COMPARED TO THE SIX MONTHS ENDED DECEMBER 31,
1995
The Company's total revenues for the six months ended December 31, 1996, were
$116,381,073 compared to $59,870,354 for the six months ended December 31, 1995.
Due to the increased number of facilities owned or leased by the Company,
patient service revenue increased from $54,177,449 for the six months ended
December 31, 1995, to $89,925,434 for the six months ended December 31, 1996.
The Company was operating 81 facilities in the six months ended December 31,
1996 compared to 42 for the six months ended December 31, 1995. The cost of
patient services in the amount of $65,321,257 for the six months ended December
31, 1996, represented 72% of patient service revenue, as compared to $33,652,390
or 62% of patient service revenue during the six months ended December 31, 1995.
This increase is attributed to the Company acquiring skilled nursing facilities
which require more skilled care and to delays in Medicaid rate increases
discussed below.
Medical supply revenues increased from $3,194,315 during the quarter ended
December 31, 1995, to $22,777,309 during the quarter ended December 31, 1996.
These revenues, which are revenues of Contour, a majority-owned subsidiary,
increased primarily as a result of two acquisitions made by Contour. Contour
acquired AmeriDyne Corporation ("AmeriDyne") effective March 1, 1996, and
Atlantic effective July 1, 1996. Cost of medical supplies sold as a percentage
of medical supply revenue decreased to approximately 67% during the quarter
ended December 31, 1996, as compared to approximately 100% of such revenue
during the same period last year. The reduced percentage is primarily a result
of higher gross profit margins on the products sold by AmeriDyne and Atlantic.
Management fees decreased from $1,803,795 in the six months ended December 31,
1995 to $1,492,621 in the six months ended December 31, 1996 because the Company
purchased or leased 8 facilities it managed at December 31, 1995. As of December
31, 1995, the Company was managing 25 facilities, and as of December 31, 1996
the Company was managing 18 facilities.
General and administrative expenses for the six months ended December 31, 1996
were $21,895,541, representing 19% of total revenues, as compared to $8,770,518,
representing 15% of total revenues, for the six months ended December 31, 1995.
This increase is due to the general and administrative expenses related to
operating the additional facilities owned or leased by the Company, and the
acquisition by Contour of Atlantic Medical.
-15-
<PAGE> 16
For the six months ended December 31, 1996, the Company incurred a tax benefit
of $460,000, which represents an effective tax rate of 25%, as compared to
expenses for income taxes of $2,747,863, which represents an effective rate of
39%, for the six months ended December 31, 1995. The tax benefit is a result of
a before tax loss for the six months ended December 31, 1996.
The net loss of $1,901,632 for the six months ended December 31, 1996 compares
to net income of $4,378,731 for the six months ended December 31, 1995. The net
loss for the six months ended December 31, 1996 is a result of an extraordinary
charge relating to a restructuring of debt, the increase in the cost of patient
services as described above and delays in annual Medicaid rate increases, which
are usually in effect on July 1 of each year. This year, the rate increases in
Georgia were delayed until August 16, 1996, and the rate increases in Tennessee
were delayed until November 1, 1996. Most of the long-term care facilities
operated by the Company are located in these two states. The delays in Medicaid
rate increases are not related to the extraordinary charge.
During the quarter ended December 31, 1996, the Company recorded an
extraordinary charge of $490,000, net of taxes of $300,000. The gross
extraordinary charge consists of $790,000 of charges associated with the early
extinguishment of approximately $9.2 million of long term debt.
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, each such agreement is
subject to termination on 60 days notice, with or without cause by either the
Company or the owners. Therefore, Messrs. Brogdon and Lane have full control
over whether or not these management agreements, and thus the management
services revenue, continue in the future.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, the Company had a deficit of $11,227 in working capital
compared to $1,496,160 at June 30, 1996.
During the six months ended December 31, 1996, cash used by operating activities
was $14,086,943 as compared to $2,258,793 for the quarter ended December 31,
1995. The $11,828,150 decrease was primarily due to the increase in accounts
receivable for the six months ended December 31, 1996 of $16,300,244. These
increases in non-cash assets were partially offset by increases in accounts
payable and accrued expense of $8,893,973.
Cash used in investing activities during the six months ended December 31, 1996
was $31,351,010. The expenditures related to purchases of equipment, securities,
investments in subsidiaries and advances to affiliates.
Cash provided by financing activities during the six months ended December 31,
1996 consisted of $38,324,959 in long term loans and $9,340,000 in issuance of
preferred stock. Cash used in financing activities consisted of $1,267,894 in
payments of long term debt and the purchase and retirement of common stock of
3,800,411.
IMPACT OF PENDING FEDERAL HEALTH CARE LEGISLATION
Management is uncertain what the financial impact will be of the pending federal
health care reform package since the legislation has not been finalized.
However, based on information which has been released to the public thus far,
management does not believe that there will be cuts in reimbursements paid to
nursing homes.
-16-
<PAGE> 17
Legislative and regulatory action at the state and federal level has resulted in
continuing changes in the Medicare and Medicaid reimbursement programs. The
changes have limited payment increases under those programs. Also, the timing of
payments made under Medicare and Medicaid programs are subject to regulatory
action and governmental budgetary constraints. Within the statutory framework of
the Medicare and Medicaid programs, there are substantial areas subject to
administrative rulings and interpretations which may further affect payments
made under these programs. Further, the federal and state governments may reduce
the funds available under those programs in the future or require more stringent
utilization and quality review of health care facilities.
-17-
<PAGE> 18
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27 Restated Financial Data Schedule
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
RETIREMENT CARE ASSOCIATES, INC.
DATED: October 20, 1997 By: /s/ Darrell C. Tucker
-----------------------------------
Darrell C. Tucker, Treasurer
-18-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEETS AND STATEMENTS OF OPERATIONS FOUND ON PAGES 4-7 OF THE COMPANY'S FORM
10-Q FOR THE YEAR TO DATE, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> DEC-31-1996
<CASH> 328,924
<SECURITIES> 0
<RECEIVABLES> 33,137,024
<ALLOWANCES> 0
<INVENTORY> 7,673,163
<CURRENT-ASSETS> 54,071,671
<PP&E> 148,924,771
<DEPRECIATION> 0
<TOTAL-ASSETS> 236,942,310
<CURRENT-LIABILITIES> 54,082,898
<BONDS> 0
1,379
0
<COMMON> 6,230,000
<OTHER-SE> 28,230,084
<TOTAL-LIABILITY-AND-EQUITY> 236,942,310
<SALES> 59,980,153
<TOTAL-REVENUES> 61,208,458
<CGS> 41,081,911
<TOTAL-COSTS> 41,081,911
<OTHER-EXPENSES> 17,765,884
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,753,971
<INCOME-PRETAX> (486,808)
<INCOME-TAX> (115,000)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> (490,000)
<CHANGES> 0
<NET-INCOME> (861,808)
<EPS-PRIMARY> (0.17)
<EPS-DILUTED> (0.17)
</TABLE>
