<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
Amendment No. 2
(Amending Part I- Items 1 and 2)
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter Ended September 30, 1996
Commission File No. 1-14114
RETIREMENT CARE ASSOCIATES, INC.
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(Exact Name of Registrant as Specified in its Charter)
Colorado 43-1441789
- ------------------------------ ----------------------------------
(State or Other Jurisdiction of (IRS Employer Identification Number)
Incorporation or Organization)
6000 Lake Forrest Drive, Suite 200, Atlanta, Georgia 30328
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(Address of Principal Executive Offices)
(404) 255-7500
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(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such report(s), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [ X ] No [ ]
There were 13,474,995 shares of the Registrant's $.0001 par value Common Stock
outstanding as of September 30, 1996.
<PAGE> 2
RETIREMENT CARE ASSOCIATES AND SUBSIDIARIES
FORM 10-Q/A FOR THE QUARTER ENDED SEPTEMBER 30, 1996
INDEX
<TABLE>
<CAPTION>
Page(s)
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Introduction. . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations
(Unaudited) - Three Months Ended
September 30, 1996 and September 30, 1995 . . . . . 4
Consolidated Balance Sheets - (Unaudited)
September 30, 1996 and (Audited) June 30, 1995. . . 5 - 6
Consolidated Statements of Cash Flows
(Unaudited) - Three Months Ended September 30,
1996 and September 30, 1995. . . .. . . . . . . . . 7
Notes to Consolidated Financial
Statements (Unaudited). . . . . . . . . . . . . . . 8 - 10
Item 2. Managements' Discussion and Analysis of
Results of Operations and Financial
Condition . . . . . . . . . . . . . . . . . . . . . 11 - 14
Signatures. . . . . . . . . . . . . . . . . . . . . 15
</TABLE>
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<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
INTRODUCTION - CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements included herein have been prepared
pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures have been condensed or
omitted pursuant to such rules and regulations. In the opinion of Management,
all adjustments, which were of a normal recurring nature, necessary to present
fairly the consolidated financial position and results of operations and cash
flows for the periods presented have been included. These consolidated
financial statements should be read in conjunction with the financial
statements and the notes thereto included in the Annual Report on Form 10-K,
Retirement Care Associates, Inc. (the "Company") for the fiscal year ended June
30, 1996, File No. 1-14114.
The Company has restated its financial information for periods commencing
June 30, 1996 through the nine months ended March 31, 1997, as reflected in the
Company's Quarterly Reports on Forms 10-Q for the quarters ended September 30,
1996, December 31, 1996 and March 31, 1997. Adjustments and reclassifications
were necessary to correct entries relating to (i) receivables due from
third-party payors, (ii) the Company's inventory for such periods,
(iii)provisions for doubtful accounts, (iv) provisions for contractual
allowances for third-party payors, (v) provisions for accrued liabilities, and
(vi) pre-recorded operating leases (collectively, the "Restated Entries").
To show the impact of the Restated Entries with respect to previously reported
amounts for each period restated, the Company has provided a description of the
Restated Entries and a reconciliation of historical results for each period
as previously reported in the filed quarterly report to restated results.
Certain statement in this Form 10-Q are "forward-looking statements" made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Forward-looking statements involve a number of risks and
uncertainties. Factors which may cause the Company's actual results in future
periods to differ materially from forecast results include, but are not limited
to: general economic and business conditions, both nationally and in the regions
in which the Company operates; industry capacity; demographic changes;
existing government regulations and changes in, or the failure to comply
with, government regulations; legislative proposals for reform; the ability to
enter into lease and management contracts and arrangements on acceptable terms;
changes in Medicare and Medicaid reimbursement levels; liability and other
claims asserted against the Company; competition; changes in business strategy
or development plans; the ability to attract and retain qualified personnel;
the significant indebtedness of the Company; and the availability and terms of
capital to fund the expansion of the Company's business, including the
acquisition of additional facilities.
The financial information included in this report has been prepared by the
Company, without audit, and should not be relied upon to the same extent as
audited financial statements.
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RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
<TABLE>
<CAPTION>
September 30, September 30,
1996 1995
<S> <C> <C>
REVENUES
Patient service revenue $ 41,974,970 $ 25,835,329
Medical supply revenue 11,224,782 1,589,073
Management fee revenue:
From affiliates 796,500 797,502
From others 137,546 110,377
Other operating revenue 996,236 307,896
55,130,034 28,640,177
EXPENSES
Cost of patient services 37,561,421 16,044,110
Cost of medical supplies sold 7,467,17 1,589,072
Lease expense 3,026,791 1,751,415
General and administrative 9,810,099 4,455,581
Depreciation and amortization 1,118,462 489,614
Interest 2,397,636 928,852
Provision for bad debt 1,600,000 --
62,981,582 25,258,644
INCOME (LOSS) BEFORE MINORITY INTEREST
AND INCOME TAXES (7,851,548) 3,381,533
Minority interest (210,000) (37,548)
Income (loss) before income taxes (7,641,548) 3,343,985
Income tax provision (benefit) (2,900,000) 1,285,265
NET INCOME (LOSS) ($ 4,741,548) $ 2,058,720
NET INCOME (LOSS) PER COMMON AND COMMON
EQUIVALENT SHARE (.33) .16
WEIGHTED AVERAGE SHARES OUTSTANDING 14,173,305 12,612,040
</TABLE>
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<PAGE> 5
RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS AS OF
SEPTEMBER 30, 1996 AND AUDITED AT JUNE 30, 1995
<TABLE>
<CAPTION>
Unaudited Audited
September 30, June 30,
1996 1996
<S> <C> <C>
ASSETS
CURRENT
Cash and cash equivalents $ 3,071,179 $ 45,365
Accounts receivable 28,894,478 20,556,920
Inventory 6,385,449 4,849,819
Deferred income taxes 480,000 461,214
Note and accrued interest receivable 775,000 713,750
Restricted Bond Fund 2,167,000 2,342,565
Prepaid expenses and other 1,882,290 1,791,442
Total current assets 43,655,396 30,761,075
PROPERTY AND EQUIPMENT 143,274,304 114,682,082
OTHER ASSETS
Marketable equity securities 33,645 33,645
Investments in unconsolidated affiliates 545,294 496,800
Deferred lease and loan costs 9,567,370 7,665,891
Goodwill 10,812,468 3,976,675
Notes and advances due from non-affiliates 895,076 1,422,247
Notes and advances due from affiliates -- 14,316,661
Restricted bond funds 2,758,455 3,514,969
Other assets 4,051,975 2,687,602
Total other assets 28,664,283 34,144,490
$215,593,983 $179,557,647
</TABLE>
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<PAGE> 6
RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1996 AND AUDITED AT JUNE 30, 1996
<TABLE>
<CAPTION>
Unaudited Audited
September 30, June 30,
1996 1996
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Lines of credit $ -- $ 1,456,535
Current maturities of long-term debt 15,867,557 2,055,880
Accounts payable 17,181,327 11,201,976
Accrued expenses 11,969,535 7,543,131
Income taxes payable -- 3,889,809
Deferred gain 40,000 40,000
Total current liabilities 45,058,419 26,187,331
Deferred gain 211,370 371,370
Deferred income taxes 1,476,776 1,465,877
Long-term debt and capitalized leases,
less current maturities 128,304,966 110,375,799
Minority interest 5,033,952 4,068,147
Redeemable convertible preferred stock 2,400,000 2,400,000
Shareholders' equity
Common stock, $.0001 par value;
300,000,000 shares authorized; 13,474,995
and 12,145,875 shares outstanding 1,047 1,215
Preferred stock 6,674,500 8,765,250
Additional paid-in capital 35,661,752 26,972,655
Retained earnings (9,184,204) (929,877)
Treasury stock (44,595) (120,120)
Total shareholders' equity 33,108,500 34,689,123
Total liabilities and shareholders' equity $215,593,983 $179,557,647
</TABLE>
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<PAGE> 7
RETIREMENT CARE ASSOCIATES, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR
THE THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
<TABLE>
<CAPTION>
September 30, September 30,
1996 1995
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (4,741,548) $ 2,058,720
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization 1,118,462 489,614
Provision for bad debts 1,600,000 --
Amortization of deferred gain (160,000) (10,000)
Minority interest 210,000 37,728
Deferred income taxes (7,887) 15,500
Changes in current assets and liabilities
net of effects of acquisitions:
Accounts receivable (9,937,558) (4,190,550)
Inventory (1,535,630) (204,789)
Prepaid expense and other assets (1,455,221) 633,412
Accounts payable and accrued expenses 6,515,946 3,036,882
Increase in deferred lease and loan costs -- (615,750)
Cash provided by (used in) operating activities (8,393,436) 1,250,797
INVESTING ACTIVITIES
Purchase of property and equipment (29,442,222) (8,622,131)
Issuance of notes receivable and
advances to affiliates 14,843,832 (1,645,903)
Investment in and advances to Atrium Ltd. -- (972,873)
Restricted bond funds 932,079 --
Changes in marketable equity securities -- (111,878)
Change in receivable (61,250) 854,795
Deferred lease cost (2,169,941) --
Investment in unconsolidated subsidiaries (48,494) --
Cash (used in) investing activities (15,945,996) (10,497,990)
FINANCING ACTIVITIES
Dividends on preferred stock (60,000) (75,000)
Net proceeds from issuance of:
Line of credit (1,456,535) --
Common stock -- 257,989
Long-term debt 25,877,565 8,436,000
Preferred Stock 6,598,179 --
Payments on long-term debt (444,250) (1,729,693)
Purchase and retirement of common stock (3,149,713) --
Cash provided by financing activities 27,365,246 6,889,296
Net increase (decrease) in cash and
cash equivalents 3,025,814 (2,357,897)
Cash and cash equivalents, beginning of year 45,365 5,207,185
Cash and cash equivalents, end of year $ 3,071,179 $ 2,849,288
</TABLE>
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<PAGE> 8
RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1: BASIS OF PRESENTATION
The consolidated financial statements included herein have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are adequate to
make the information presented not misleading. These consolidated financial
statements and the notes thereto should be read in conjunction with the
consolidated financial statements included in the Company's Annual Report on
Form 10-K for the fiscal year ended June 30, 1996, File No 1-14114.
In the opinion of management of the Company, the accompanying unaudited
consolidated financial statements contain all necessary adjustments to present
fairly the financial position, the results of operations and cash flows for the
periods reported. All adjustments are of a normal recurring nature.
The Financial Accounting Standard Board has adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" (SFAS No. 115). The Company has adopted this standard in
fiscal 1995. In management's opinion, adopting SFAS No. 115 did not materially
affect the Company's financial statements for the three months ended December
31, 1995.
NOTE 2. RESTATEMENT
The consolidated financial statements for the three months ended September 30,
1996, as originally reported, reflect certain accounting policies and estimates
which were subsequently determined to be incorrect and, accordingly, the
consolidated financial statements have been restated as follows (in thousands):
<TABLE>
<CAPTION>
AS PREVIOUSLY REPORTED AS RESTATED
---------------------- -----------
<S> <C> <C>
Revenues $ 55,140 $ 55,130
Operating Expenses $ 53,652 $ 62,982*
Net Earnings (Loss) $ 801 $ (4,742)
Shareholders' Equity $ 38,879 $ 33,109
</TABLE>
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* Restated Operating Expenses include (in thousands) (i) an additional
accrual for employee benefits of $3,400, (ii) restated
inventory of $3,770, (iii) restated operating lease expense of $375,
(iv) a provision for doubtful accounts of $1,600, and (v) restated
miscellaneous expenses of $185.
NOTE 3. ACCOUNTS RECEIVABLE AND COST REIMBURSEMENTS
Accounts receivable and operating revenue include net amounts reimbursed by
Medicaid under the provisions of cost reimbursement formulas in effect. The
Company operates under a prospective payment system with Medicare, under which
annual rates are assigned based on estimated reimbursements. Differences
between estimated provisions and final settlement are reflected as adjustments
to future rates.
NOTE 4. INVENTORIES
<TABLE>
Inventories consist of the following at September 30, 1996:
<S> <C>
Raw material $ 284,463
Work in process 70,604
Finished goods 6,030,382
-----------
$ 6,385,449
</TABLE>
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<PAGE> 9
RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 5: NOTES RECEIVABLE AND ADVANCES TO AFFILIATES
At September 30, 1996 and June 30, 1996, the Company had notes and advances to
affiliates totaling approximately $0.00 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 stock held by
the affiliates. (See Note 8)
NOTE 6. LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
September 30, June 30,
1996 1995
<S> <C> <C>
Amounts outstanding under Revenue Bonds
secured by retirement facilities $ 68,050,000 $ 59,986,000
Other debt secured by retirement and
nursing facilities 42,671,148 39,848,938
Other debt 17,852,813 12,596,741
Capitalized leases 15,598,582 --
Totals 144,172,543 112,431,679
Current maturities 15,867,577 2,055,880
Total long-term debt $128,304,966 $110,375,799
</TABLE>
NOTE 7: COMMITMENTS AND CONTINGENCIES
The Company is involved in legal proceedings arising in the ordinary course of
business. In addition, the Company is in dispute with the Internal Revenue
Service ("IRS") concerning the application of certain income and payroll tax
liabilities and payments. The IRS contends that the Company is delinquent in
the payment of certain taxes and has charged penalties and interest in
connection with the alleged underpayments. The Company contends that the IRS
has misapplied payments between income and payroll taxes and between the
Company and its affiliates. The Company has estimated in the accompanying
financial statements amounts for ultimate settlement of this dispute, and has
recorded an accrual of $600,000, which is based upon the best available
information after consulting with the Company's advisors concerning this
matter. Further, the Company has filed lawsuits against the IRS related to this
matter. In the opinion of management, the ultimate resolution of pending legal
proceedings and the IRS dispute will not have a material effect on the
Company's financial positions or results of operations.
NOTE 8: FACILITY ACQUISITIONS
During the quarter ended September 30, 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
stockholders' equity of the Company by $3,000,000.
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<PAGE> 10
RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 8: FACILITY ACQUISITIONS (Continued)
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 are due in full on January 10, 1997. In the event
of a default in the payment of the promissory notes, they are convertible into
shares of common stock of the Company.
During the period from September 27 through October 2, 1996, the Company sold
1,000,000 shares of Series F Convertible Preferred Stock in an offering to
foreign investors at $10.00 per share. Holders of the Series F Preferred Stock
have no voting rights except as required by law, and have liquidation
preference of $10.00 per share plus 4% per amount 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 lesser of (a) $7.665625, or (b) 85% of the
average closing bid price for the five trading days prior to the date of
conversion. The maximum number of shares of common stock which can be issued
upon conversion of the Series F Preferred Stock is 2,588,000. At the time of
conversion, the holder is also entitled to additional shares equal to $10.00
per share of Series F Preferred Stock converted multiplied by 8% per annum from
the date of issuance divided by the applicable conversion price. Each holder of
the Series F Preferred Stock has the option to convert up to one-third of such
holder's shares at any time from and after the 60th day following the date of
issuance, up to an additional one-third of the shares from and after the 90th
day following the date of issuance, and all remaining shares may be converted
from and after the 120th day following the date of issuance.
For purposes of computing earnings per share, the Series F Preferred Stock has
been determined to be a common stock equivalent. Accordingly, weighted average
shares outstanding includes the common shares issuable upon conversion of these
shares after consideration of accumulated dividends.
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<PAGE> 11
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1995.
The Company's total revenues for the three months ended September 30, 1996,
were $55,130,034 compared to $28,640,177 for the three months ended September
30, 1995. Due to the increased number of facilities owned or leased by the
Company, patient service revenue increased from $25,835,329 for the quarter
ended September 30, 1995, to $41,974,970 for the quarter ended September 30,
1996. The Company was operating 75 facilities for the quarter ended September
30, 1996, compared to 42 for the quarter ended September 30, 1995. The cost of
patient services in the amount of $37,561,421 for the quarter ended September
30, 1996, represented 89% of patient service revenue, as compared to
$16,044,110, or 62%, of patient service revenue during the quarter ended
September 30, 1995. This increase is attributed to the Company's acquisition of
skilled nursing facilities (which have higher personnel costs), delays in
Medicaid rate increases discussed below, increased reserves for employees
benefits and decreases in inventory supplies.
Medical supply revenue increased from $1,589,073 during the quarter ended
September 30, 1995, to $11,224,782 during the quarter ended September 30, 1996.
These revenues, which are revenues of Contour Medical, Inc. ("Contour"), a
majority-owned subsidiary, increased primarily as a result of two acquisitions
made by Contour. Contour acquired AmeriDyne Corporation ("AmeriDyne") effective
March 1, 1996, and Atlantic Medical Supply Company, Inc. ("Atlantic") effective
July 1, 1996. Cost of medical supplies sold as a percentage of medical supply
revenue decreased to approximately 66.5% during the quarter ended September 30,
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 increased from $907,879 in the quarter ended September 30, 1995
to $934,046 in the quarter ended September 30, 1996. As of September 30, 1995,
the Company was managing 26 facilities, and as of September 30, 1996, the
Company was only managing 20 facilities. Although the number of managed
facilities declined, revenues increased slightly as a result of increased
management fees charged by the Company. The reduced number of facilities
managed by the Company is due to the fact that the Company has acquired, by
lease or purchase, a number of facilities which it previously only managed.
Management anticipates that the number of facilities only managed by the
Company will continue to decline as a result of the 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.
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<PAGE> 12
Most of the revenue from the management services division of the Company's
business is received pursuant to management agreements with entities controlled
by Messrs. Brogdon and Lane, two of the Company's officers and directors. These
management agreements have five year terms; however, they are subject to
termination on 60 days notice, after the end of the third year of the Agreement
with or without cause by either the Company or the owners. Therefore, Messrs.
Brogdon and Lane have full control over whether or not these management
agreements, and thus the management service revenue, continue in the future.
Other operating revenue increased from $307,896 during the quarter ended
September 30, 1995, to $996,236 during the quarter ended September 30, 1996.
The increase was primarily a result of one-time referral fees of $300,000
received from a building contractor, and approximately $180,000 in interest
income.
General and administrative expenses for the three months ended September 30,
1996 were $9,810,099 representing 18% of total revenues, as compared to
$4,455,581 representing 16% of total revenues, for the three months ended
September 30, 1995. The increase in the dollar amount is primarily due to the
general and administrative expenses related to operating the additional
facilities owned or leased by the Company. The increased percentage is
attributed to higher payroll costs of general and administrative personnel
which took effect at the beginning of the fiscal year.
Interest expense rose from $928,852 during the quarter ended September 30,
1995, to $2,397,636 during the quarter ended September 30, 1996, as a result of
the increased amount of debt carried by the Company as a result of acquisitions
made over the last twelve months. At September 30, 1995, the Company had
approximately $47 million in long-term debt, as compared to approximately $144
million in long-term debt at September 30, 1996.
For the quarter ended September 30, 1996, the Company received an income tax
benefit of $2,900,000 which represents an effective tax benefit of 38%, as
compared to expenses for income taxes of $1,285,265 which represents an
effective tax rate of 39% for the quarter ended September 30, 1995.
The net loss of $4,741,548 for the quarter ended September 30, 1996, compares
to net income of $2,058,720 for the quarter ended September 30, 1995. The loss
for the quarter ended September 30, 1996, is primarily a result of increases 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 mid-August, 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.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1996, the Company had a deficit of ($1,403,023) in working
capital compared to $2,925,302 in working capital at June 30, 1996.
During the quarter ended September 30, 1996, cash used by operating activities
was $(8,393,436) as compared to $1,250,797 provided by operating activities
during the quarter ended September 30, 1995. The cash used during the current
period was primarily a result of an increase in accounts receivable of
$9,937,558, and an increase in inventory of $1,535,630. These increases are
partially a result of Contour's acquisition of Atlantic effective July 1, 1996.
The increases in non-cash assets were partially offset by increases in accounts
payable and accrued expense of $6,515,946.
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<PAGE> 13
Cash flows used in investing activities during the quarter ended September 30,
1996, totaled $(15,945,996) as compared to $(10,497,990) during the quarter
ended September 30, 1995. During the current period, the Company expended
$29,442,222 on the purchase of property and equipment, primarily through
acquisitions, and incurred $2,169,941 in deferred lease costs. These
expenditures were partially offset by repayments of advances from affiliates of
$14,843,832.
Cash provided by financing activities during the quarter ended September 30,
1996, totaled $27,365,246 as compared to $6,889,296 during the same period last
year. During the current period the Company received $6,598,179 from the sale
of preferred stock and the placement of $25,877,565 in long-term debt. These
were partially offset by the purchase and retirement of common stock in the
amount of $3,149,713, payments on long-term debt of $444,250, a reduction of
line of credit borrowings of $1,456,535 and payment of $60,000 in dividends on
preferred stock.
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
preferred stock. The Company is obligated to redeem the preferred stock issued
in the transaction over five years for $3,000,000 in cash. $600,000 was paid on
October 11, 1996 pursuant to this obligation. Management intends to fund future
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 maintains various lines of credit with interest rates ranging from
prime plus .25% to prime plus 1.25%. At September 30, 1996, the Company had
approximately $3,500,000 in unused credit available under such lines.
On August 6, 1996, Contour acquired all of the outstanding stock of Atlantic, a
distributor of disposable medical supplies and provider of third-party billing
services to the nursing home and home health care markets. The acquisition was
made effective retroactively to July 1, 1996. Contour paid $1,400,000 in cash
and promissory notes totaling $10,500,000 for the stock of Atlantic, and
subsequently paid an additional $50,000 in cash and issued a promissory note
for $350,000 to acquire a minority interest in a subsidiary of Atlantic Medical
Supply, Inc. The promissory notes bear interest at 7% per annum and are due in
full on January 10, 1997. In the event of a default in the payment of the
promissory notes, they are convertible into shares of common stock of the
Company (Retirement Care Associates, Inc.) The cash for this transaction came
from a $5 million debenture placement by Contour that was completed on July 12,
1996. Contour intends to pay the promissory notes from the proceeds of an
offering of securities to be conducted by Contour. However, if Contour is
unable to pay these promissory notes, a default could occur and the holders
could exercise their conversion rights. In such event the Company could be
required to issue shares of its Common Stock equal to $10,850,000 based on a
conversion price of 85% of the average daily closing price on the New York
Stock Exchange for the five consecutive trading days prior to the conversion
date. In such event, the Company has agreed to register such shares for resale
under the Securities Act of 1933, as amended.
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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 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 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 healthcare facilities.
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<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
RETIREMENT CARE ASSOCIATES, INC.
DATED: August 25, 1997 By: /s/ Darrell C. Tucker
--------------------------------
Darrell C. Tucker, Treasurer
