<PAGE> 1
U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Amendment No. 3
(Amending
Part II - Item 7)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the Fiscal Year ended: June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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, 1997, 14,749,441 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 $84,064,500.
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: None.
<PAGE> 2
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
YEAR ENDED JUNE 30, 1997 COMPARED TO YEAR ENDED JUNE 30, 1996
The Company's total revenues for the year ended June 30, 1997 were
$253,227,861 compared to $134,011,369 for the year ended June 30, 1996.
Management fee revenue decreased from $3,781,433 in the year ended June
30, 1996, to $2,629,329 in the year ended June 30, 1997. The Company leased
three long-term care facilities and four assisted living/independent living
facilities and purchased two assisted living/independent living facilities
during the fiscal year ended June 30, 1997, each of which the Company managed
during the fiscal year ended June 30, 1996. All of these facilities were owned
and controlled by Messrs. Brogdon and Lane. The Company purchased and leased
these facilities to reduce the affiliated receivable due the Company and to
increase the number of facilities owned or leased, rather than just managed, by
the Company. Included in the Company's management fee revenue is $2,212,500 and
$3,472,900 from affiliates during the year ended June 30, 1997 and 1996,
respectively.
Due to the increased number of facilities owned or leased by the
Company, patient service revenue increased from $119,499,849 for the year ended
June 30, 1996 to $202,603,841 for the year ended June 30, 1997. The cost of
patient services in the amount of $148,520,849 for the year ended June 30, 1997,
represent 73% of patient service revenue, as compared to $81,082,972 or 68%, of
patient service revenue during the year ended June 30, 1996. The increase in the
percentage is attributed to the Company's operation of twenty-one long-term care
facilities compared to fourteen assisted living/independent living facilities in
the year end June 30, 1997. The long-term care facilities require more everyday
skilled patient services than assisted living/independent living facilities.
Additionally, staffing a long-term care facility requires more nursing
specialists, therapy services and higher staffing levels as compared to assisted
living/independent living facilities.
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 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
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<PAGE> 3
Company does not have to support the ongoing operating cash flow of the
facility.
The Company owned or leased 35 additional facilities during fiscal
year ended June 30, 1997 compared to fiscal year ended June 30, 1996, which
resulted in a corresponding increase in net revenues of $36 million during the
fiscal year ended June 30, 1997. The number of leased or owned properties at
year end are presented in the following table (which does not include managed
facilities):
<TABLE>
<CAPTION>
Type Fiscal 1995 Fiscal 1996 Fiscal 1997
<S> <C> <C> <C>
Long-Term Care 30 48 69
Assisted Living/Independent
Living 8 18 32
Total 38 66 101
</TABLE>
CCMC maintains a cash management account where all operating cash funds
of the Company's managed facilities are pooled into one bank account and
invested daily. Notes and advances due from (to) affiliates consist of advances
to facilities, net of advances from facilities, owned by affiliated entities of
($66,989) and $14,316,661 for the fiscal years 1997 and 1996, respectively.
For facilities that were in place for the entire year ended June 30,
1996 and June 30, 1997, revenue increased approximately $1 million, or 2%,
during the year ended June 30, 1997. For these same facilities, average rates
increased approximately 4% while patient-days decreased approximately 2%.
Medical supply revenue increased from $9,825,252 during the fiscal
year ended June 30, 1996 to $45,500,712 during the fiscal year ended June 30,
1997. These revenues, which are the revenues of Contour, increased primarily due
to the acquisition of Ameridyne Corporation on April 1, 1996 and Atlantic
Medical Supply Company, Inc. on July 1, 1996. The cost of medical supplies sold
during the fiscal year ended June 30, 1996, $5,350,817, represented 54% of the
Company's total medical supply revenue for such period, compared to the cost of
medical supplies sold during the year ended June 30, 1997, $31,045,671, which
represents 68% of the Company's total medical supply revenue for such period.
This increase is primarily due to increases in the cost of the goods sold and
increased competition in the medical supply industry, which has decreased the
sale prices of most products.
Other revenues increased from $904,835 for the fiscal year ended June
30, 1996, to $2,463,979 for the fiscal year ended June 30, 1997. Financing fees
increased from $150,000 for the fiscal year ended June 30, 1996 to approximately
$700,000 for the fiscal year ended June 30, 1997. Financing fees represent fees
received by the Company for assisting other companies to obtain financing for
facilities. The Company recorded income under the equity method of $240,000 for
investments in unconsolidated subsidiaries. The Company also experienced
increases in other revenue not related to resident care, such as guest meals and
beauty and barber services, due to the increased number of facilities the
Company operated.
Lease expense increased from $8,442,671 in the year ended June 30,
1996, to $14,117,392 in the year ended June 30, 1997. 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, 1996.
General and administrative expenses for the year ended June 30, 1997
were $46,346,051, representing 18% of total revenues, as compared to
$23,192,250 representing 17% of total revenues, for the year ended June 30,
1996.
During the year ended June 30, 1997, the Company recorded a $2,982,063
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, 1997, the aging of
receivables increased compared with the aging of receivables at June 30, 1996.
The increase in the allowance for doubtful accounts of Contour reflects an
adjustment to the purchase price allocation for Contour's acquisition of
Atlantic Medical and its subsidiaries. The adjustment was required to reduce
acquired trade receivables, principally due from Medicare and Medicaid, to their
net realizable value.
During the year ended June 30, 1997, the Company had $673,655 in
interest income and financing fees as compared to $1,847,868 in interest income
and financing fees for the year ended June 30, 1996. The decrease in interest
income is a result of the decreased amount of advances to related parties
during the current year.
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<PAGE> 4
Interest expense increased from $7,948,091 in the year ended June 30,
1996 to $14,111,843 in the year ended June 30, 1997. 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, 1996.
For the year ended June 30, 1997, the Company incurred benefits for
income taxes of $2,343,256 which represents an effective tax benefit rate of
25% as compared to expenses for income taxes of $1,307,091, which represents an
effective tax rate of 48% for the year ended June 30, 1996.
The net loss of $7,535,810 for the year ended June 30, 1997 is lower
than the net income of $1,746,808 for the year ended June 30, 1996, due to the
fact that the Company's operations have deteriorated
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<PAGE> 5
as a result of the pendency of and delays associated with the merger with Sun,
including higher-than-normal turnover, costs associated with the integration and
operation of the Company's recently-acquired Virginia and North Carolina
facilities (including certain regulatory compliance problems), declines in
Medicaid rates and occupancy rates during fiscal year 1997 without a
corresponding reduction in operating costs, and accounting adjustments related
to the restatement of the Company's financial statements. Although difficult to
quantify, the Company believes that such staffing concerns led to increases in
costs of patient care and selling, general and administrative expenses during
fiscal year 1997.
Occupancy rates have also impacted the Company's profitability this
fiscal year versus fiscal year 1996. Occupancy rates have declined because of
the turnover of administrators, social workers, and nurses. With both the
expansion of the number of facilities the Company operated during fiscal year
1997 and the higher than normal staff turnover, the Company's existing
management staff was spread very thin.
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 three to 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 .87% and 2.82%
of the total revenues of the Company for the years ended June 30, 1997 and 1996,
respectively.
YEAR ENDED JUNE 30, 1996 COMPARED TO YEAR ENDED JUNE 30, 1995
The Company's management has evaluated the potential effect on
periods prior to 1996 of certain errors that the Company has corrected in a
restatement and reissuance of its 1996 financial statements. Based on such
evaluation, the Company's management determined that a restatement of periods
prior to 1996 was unnecessary. The following summarizes the principal
considerations made by the Company's management in that regard:
Allowance for uncollected accounts during 1996. The Company's accounts
receivable nearly doubled during 1996, and the mix of such receivables also
changed significantly. In 1995, amounts due from Medicare and Medicaid
represented approximately 87% of the Company's total accounts receivable,
versus 67% in 1996. Further, amounts due from patients increased from
approximately $11,000 in 1995 to approximately $3,113,000 in 1996, and the
Company's other trade receivables increased from approximately $761,000 in 1995
to approximately $2,595,000 in 1996. The Company reviewed its 1995 allowance on
a payor category basis and concluded that the balance was appropriate for
1995. Nothing was noted that would indicate a misapplication of facts and
circumstances during 1995, and nothing would indicate a potential error
relating to the allowance for uncollectible accounts during 1995. Since 87% of
the Company's accounts receivable in 1995 consisted of Medicare and Medicaid
receivables, and since these amounts were billed and paid on a regular and
timely basis from state and federal agencies, no allowance for uncollectible
accounts for 1995 was deemed necessary. However, with the large increase during
1996 in accounts receivable from sources other than Medicare and Medicaid, such
as private pay residents and insurance companies, the Company refined its
method of evaluation of the collectibility of its accounts receivable and
recorded the allowance for uncollectible accounts for fiscal year 1996.
Additional accrual for claims incurred but not reported for
self-insured worker's compensation and health care. Until April 1995, the
Company had been acquiring commercial insurance, which transferred
substantially all risk to a third party insurer. In conjunction with the
Company's switch to self-insurance, the Company experienced significant growth
during 1996 compared to 1995. During 1996, the Company acquired or leased an
additional 28 facilities, a 74% increase in total facilities owned or leased.
A similar increase in covered employees can be implied. As a result of
the increase in facilities and the rapid increase in covered employees, the
reasonable conclusion is that the expenses associated with these increases are
properly accounted for in 1996. The Company evaluated what portion of the
expenses, if any, would have been properly accrued in 1995 and determined that
amount to be $174,000 net of the related tax effect.
Accrual for compensated absences. The Company evaluated what portion
of the expenses, if any, would have been properly accrued in 1995 and
determined that amount to be $24,000 net of the related tax effect.
Adjustment of previously recorded inventory. This adjustment applies
only to the 1996 financial statements. Initially, the Company had erroneously
included certain items, such as beds and other insignificant equipment ($200 or
less per item), in its physical inventory b facility. The adjustment to
inventory represents a correction to the inventory balance to only reflect
those items appropriately included as inventory.
Adjustment to lease expense. This adjustment represents the amount
necessary to increase lease expense to reflect straight line expense for those
leases which contained escalation clauses. This adjustment is principally
related to 1996 when the Company acquired an additional 28 facilities. The
Company evaluated what portion of the expenses, if any, would have been
properly included in prior periods and determined that $143,000 and $52,000 net
of the related tax effect should have been reflected in the 1995
and 1994 financial statements, respectively.
If the amounts noted above had been reflected in the 1995 financial
statements, they would have had the following effect:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Net income before cumulative effect of $1,374,808 $5,058,503
change in accounting principle - as reported
Proforma effect of adjustments 393,000 (393,000)
---------- ----------
Proforma net income before cumulative effect $1,767,808 $4,719,503
of change in accounting principle ---------- ----------
Net income (loss) per common share $ (0.08) $ 0.40
Proforma effect of adjustments 0.03 (0.01)
---------- ----------
Proforma net income (loss) per common share $ (0.05) $ 0.39
----------- ----------
</TABLE>
The Company believes that the effect of such items does not warrant any
adjustments to the 1995 financial statements.
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<PAGE> 6
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 leased one
long-term care facility, purchased three long-term care facilities and purchased
two assisted living/independent living facilities during the fiscal year ended
June 30, 1996, each of which it managed during the fiscal year ended June 30,
1995. All of these facilities were owned and controlled by Messrs. Brogdon and
Lane. The Company purchased and leased these facilities to reduce the
affiliated receivable due the Company and to increase the number of facilities
owned or leased, rather than just managed, by the Company. 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. The decrease in
the percentage is attributed to an increase in the ratio of assisted
living/independent living facilities to long-term care facilities operated
during the current year. Assisted living/independent living facilities require
less patient services than long-term care facilities. The ratio of long-term
care facilities to assisted living/independent living facilities decreased to
2.7 from 3.8 during the year ended June 30, 1996.
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> 7
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>
Long-term Care 20 30 48
Assisted Living/Independent
Living 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, 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.
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<PAGE> 8
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, represents 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 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 three to 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.
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<PAGE> 9
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1997, the Company had a deficit of $10,489,285 in working
capital compared to a $1,496,160 deficit at June 30, 1996. The funds needed to
reduce such working capital deficit could be provided by a new line of credit
secured by accounts receivable, increased collection efforts on the existing
accounts receivable balances, extended payment terms to major vendors and
possible refinancing of selected facilities.
During the year ended June 30, 1997, cash provided by or (used in)
operating activities was ($3,838,000) as compared to $5,549,626 for the year
ended June 30, 1996. The $9,387,626 decrease was primarily due to the net loss
of $7,535,810 for the year ended June 30, 1997, increases in deferred income
taxes of $11,111,558 arising from the carryback of the loss and refunds of
estimated tax payments, and increases in accounts receivable of $20,987,667 due
to the addition of thirty five facilities for the year ended June 30, 1997. Cash
provided by operating activities was primarily attributed to depreciation and
amortization of $6,514,713 on the facilities and an increase in accounts payable
and accrued expenses of $29,187,587 due to the addition of thirty five
facilities for the year ended June 30, 1997.
Cash used in investing activities during the year ended June 30, 1997,
was $23,581,023. The expenditures primarily related to purchases of property and
equipment of 12,734,389 and acquisitions of facilities and a medical supply
company of $18,807,777. On August 6, 1996, Contour Medical, Inc., a
majority-owned subsidiary of the Company, purchased all of the outstanding stock
of 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 accounted for as a purchase and 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 bore interest at 7% per annum and were paid in full on January
10, 1997. On October 14, 1996, Winter Haven sold two retirement facilities to
the Company at their fair market value, based on an independent appraisal, for a
total purchase price of $19,200,000. The facilities were the Jackson Oaks
retirement facility in Jackson, Tennessee, which the Company previously leased,
and the Cumberland Green retirement facility which the Company previously
managed. The purchase prices for these facilities were $12,400,000 and
$6,800,000, respectively. These facilities were acquired subject to total bond
debt of $7,670,000, resulting $11,530,000 due to Winter Haven, which was applied
to eliminate the $11,214,320 owed to the Company by Winter Haven. On September
27, 1996, Gordon Jensen transferred 399,426 shares of the Company's common stock
to the Company with a fair market value equal to $3,000,000 in exchange for the
cancellation of its debt totalling $2,982,000. The Company subsequently retired
these shares. These shares were loaned to Gordon Jensen by Edward E. Lane, Chris
Brogdon and Connie Brogdon. Gordon Jensen must repay the debt to Mr. Lane, Mr.
Brogdon and Ms. Brogdon with either stock or cash within five years. The
advances were due on demand.
Cash provided by financing activities during the year ended June 30,
1997, totaled $31,012,336. Sources of cash included proceeds of $9,340,000 from
the issuance of 1,000,000 shares of $10.00 Series F Convertible Preferred Stock
which were sold in an offering to foreign investors in September, 1996. 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 $7.425 or 85% of the average
closing bid price for the five trading days prior to the date of conversion,
whichever is lower. At the time of conversion, the holder is also entitled to
additional shares equal to $10.00 per share of Series F Preferred Stock
multiplied by 8% per annum from the date of issuance divided by the applicable
conversion price. Sources of cash also included proceeds from stock options and
warrants exercised of $1,900,306, and proceeds from long-term debt and lines of
credit of $33,919,190. The Company's net borrowing from lines of credit was
$9,935,036, with interest rates ranging from prime plus .25% to prime plus
1.25%. Available borrowings at June 30, 1997 was $14,050,000. The Company
incurred long-term debt of approximately $24 million, due through 2026, with
interest rates ranging from 7.0% to 12.5%. Included in the long-term debt is a
$9,750,000 loan with Sun, used to repay the notes payable associated with the
Contour acquisition of Atlantic Medical, with interest accruing at rates of 11%
and would increase to 15% during any period of default. Principal is due 120
days following the termination of the agreement or merger with Sun. In
connection with 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, 1997, the Company was in violation of several of these
covenants creating a technical default on approximately $51 million of bond
indentures. These violations included the failure to make monthly payments to
the bond sinking funds for certain of these facilities and inadequate debt
service reserves for certain of these facilities. The Company is also delinquent
with regard to approximately $1.2 million 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.
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All semi-annual interest and principal payments have been made in a timely
fashion. Cash used in financing activities primarily consisted of $13,329,520 in
payments of long-term debt, $600,000 in redemption of Series AA Preferred Stock,
$841,318 in purchases of treasury stock, and $240,000 for dividends on preferred
stock. Subsequent to June 30, 1997, the Company obtained an additional note
payable from Sun of $5,000,000 for working capital purposes on July 10, 1997.
Interest accrues at the rate of 12% and would increase to 16% during any period
of default. Principal is due 120 days following the termination of the agreement
or merger with Sun.
All of the Company's notes receivable and advances to affiliated
entities issued during fiscal year 1996 were paid in full during 1997, including
interest on the notes receivable at a rate of 12% per annum. Affiliated entities
that received notes receivable and advances during 1996 were Gordon Jensen
Health Care Association, Inc. ("Gordon Jensen"), Winter Haven Homes, Inc.
("Winter Haven"), Southeastern Cottages, Inc. ("SCI"), National Assistance
Bureau, Inc. ("NAB"), Chamber Health Care Society, Inc. ("Chamber") and Senior
Care, Inc. ("Senior Care"), all of which are owned or controlled by officers and
directors of the Company or family members of such officers and directors, and
Sea Breeze Health Care Center ("Sea Breeze"), a wholly-owned subsidiary of the
Company. Further, the affiliated entities overpaid such notes receivable and
advances during the fiscal year ended June 30, 1997 by $66,989, which includes
the payment of interest on the notes receivable at a rate of 12% per annum. The
Company used such overpayment to fund additional advances to such entities. For
the fiscal year ended June 30, 1997, the Company advanced a total $143,876 to
affiliated entities while recognizing management fee revenue of $2,212,500 for
the same period. Management fee revenue recognized by the Company from
affiliated entities is decreasing as the Company purchases or leases facilities
from affiliated entities, thereby decreasing the number of affiliated facilities
managed by the Company.
At June 30, 1996, the Company had a deficit of $1,496,160 in working
capital compared to a surplus of $2,925,302 at June 30, 1995.
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During the year ended June 30, 1996, cash provided by operating
activities was $5,549,626 as compared to $4,208,048 for the year ended June 30,
1995. The $1,341,578 increase was primarily due to net income of $1,746,808 for
the year ended June 30, 1996, depreciation and amortization of $3,406,986 on the
facilities, provisions for bad debts of $3,423,117 on accounts receivable and
increases in accounts payable and accrued expenses of $9,964,620 due to the
addition of twenty eight facilities for the year ended June 30, 1996. Cash used
in operating activities was primarily due to the increase in accounts receivable
of $10,672,485 due to the addition of twenty eight facilities for the year ended
June 30, 1996 and increases in inventories of $2,245,194 on the nursing
facilities and Contour Medical Supply, Inc.
Cash used in investing activities during the year ended June 30, 1996,
was $44,981,326. The expenditures primarily related to purchases of property and
equipment of $12,490,298 and acquisitions of facilities of $21,938,513. On
December 15, 1995, the Company obtained both a sole general and a limited
partnership interest, totaling 74.25% interest, in Encore Partners, L.P. in
exchange for a capital contribution to Encore of $3.5 million. Encore owns three
assisted living/independent living and two long-term care facilities. 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. On February 27, 1996, the Company purchased a
thirty six unit assisted living/independent living facility from individuals who
are officers and directors of the Company. The purchase price was $2,000,000
and was financed with a $1,600,000 mortgage loan from an unrelated third-party
real estate investment trust and $400,000 from the Company, which offset an
advance to the facility of $278,119 from the Company and created an advance
from the facility of $121,881 to the Company. The advance was repaid by the
Company during fiscal year 1997.
During the fiscal year ended June 30, 1996, the Company issued notes
receivable and advances in the aggregate amount of $8,935,677 to Gordon Jensen,
Winter Haven, SCI, NAB, Chamber, Senior Care and Sea Breeze, while recognizing
management fee revenue of $3,472,900 during the same period. These affiliated
entities overpaid such notes receivable and advances during the 1997 fiscal year
by $66,989, which includes the payment of interest on the notes receivable at a
rate of 12% per annum. The Company has used such overpayment to fund additional
advances to such entities. The Company's management fee revenue from affiliated
entities is decreasing as the Company purchases or leases facilities from the
affiliated entities, thereby decreasing the number of affiliated facilities
managed by the Company.
Gordon Jensen owned one facility, Magnolia Manor, which was constructed
and opened in fiscal year 1995 and required construction funding and start-up
working capital during fiscal year 1996. This facility's financial condition has
improved as resident census has increased. The facility might, however, require
additional advances until a stable occupancy level is achieved.
Winter Haven owned two facilities which required significant advances
to fund working capital and capital improvements during fiscal year 1996. In
addition, Renaissance of Titusville, a partnership of which Winter Haven is the
sole general partner, required advances during 1996 to fund construction of
forty additional units. Renaissance of Titusville has performed poorly
historically because of the need for additional units to offset overhead
expenses.
SCI and NAB each required advances during fiscal year 1996 to fund
working capital and capital improvements at Summer's Landing -- Vidalia, SCI's
only facility, and Summer's Landing -- Lynn Haven, NAB's only facility. Both of
the facilities have historically operated poorly financially due to poor
residence census at such facilities.
Chamber constructed Parkway Health Care Center, a 120-bed long-term
care facility, in 1996, and the Company advanced funds to Chamber for
construction, preliminary staffing and planning at the Parkway facility. After
Parkway's opening in September 1996, the facility also required additional
advances to fund start-up operations.
The Company made advances of approximately $80,000 to Senior Care
during fiscal year 1996 after the Company's acquisition of the Deerfield Nursing
Facility. Senior Care used such advances to satisfy its accounts payable. The
Company's Board of Directors believed that such advances were necessary to avoid
the possibility of any claims against the Company or its assets by Senior Care's
former vendors and suppliers solely by virtue of the Company's succession to the
Deerfield Nursing Facility. Any actions involving the Company or its assets
could be distracting to management and cause the Company to expend resources in
frivolous litigation.
The Company purchased Sea Breeze with a low census caused by state
imposed sanctions created by quality-of-care issues that arose under its former
operators. Sea Breeze, therefore, required significant working capital and
capital improvements during fiscal year 1996 to cure such sanctions and allow
the admission of new residents. Sea Breeze's financial condition has improved
gradually and admissions have increased, but Sea Breeze may require additional
working capital until a stable occupancy level is reached.
The Company's management fee revenue from its affiliated entities
totalled $2,212,500 and $3,472,900 for fiscal years 1997 and 1996, respectively.
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The Company funded an additional $4,720,047 in restricted bond funds
used for debt service reserve requirements, semi-annual principal and interest
payments and project funds for facilities under construction or renovation. Cash
provided by investment activities was primarily the repayment of a $2,200,000
note receivable from an unrelated third-party. The Company issues advances and
notes receivable to affiliated companies controlled by Messrs. Brogdon and Lane
to finance working capital deficits and capital expenditures of facilities which
are managed by the Company. In the opinion of the Company's Board of Directors,
these advances represent a good use of the Company's funds because they enable
such affiliated companies to develop their properties, increase census revenue
and increase the fair market value of the facilities, which gives the Company
greater assurances that the facilities will continue to pay management fees to
the Company. Further, as census revenues increase, management fees payable to
the Company will likewise increase. In addition, as properties mature and
develop, they may be acquired by the Company with a portion of the purchase
price payable through the cancellation of advances and notes receivable due the
Company.
Cash provided by financing activities during the year ended June 30,
1996, totaled $34,269,880. Sources of cash included proceeds of $9,300,000 from
the issuance of 1,000,000 shares of $10.00 Series E Convertible Preferred Stock
which were sold in an offering to foreign investors in April, 1996. 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 $11.55 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). At the time of conversion, the
holder is also entitled to additional shares equal to $10.00 per share of Series
E Preferred Stock multiplied by 8% annum from the date of issuance divided by
the applicable conversion price. Sources of cash also included proceeds from
stock options and warrants exercised of $559,593, and proceeds from long-term
debt and lines of credit of $35,329,244. The Company's net borrowing from lines
of credit was $3,556,535, with interest rates ranging from prime plus .25% to
prime plus 1.25%. Available borrowings at June 30, 1996 was $5,075,000. The
Company incurred long-term debt of approximately $31 million, due through 2025,
with interest rates ranging from 6.75% to 11.28%. In connection with 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,
the Company was in violation of several of these covenants creating a technical
default on approximately $14 million of bond indentures. These violations
included the failure to make monthly payments to the bond sinking funds for
certain of these facilities and inadequate debt service reserves for certain of
these facilities. The Company is also delinquent with regard to approximately
$800,000 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. Cash used in financing activities primarily
consisted of $9,443,626 in payments of long-term debt, $600,000 in redemption of
Series AA 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
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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 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, 1997, the
Company had approximately $4,115,000 in unused credit available under such
lines.
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 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.
In the event the merger with Sun does not take place, management's
plans include a complete reorganization of operations of the Company and
Contour. With respect to the Company, this reorganization plan would include new
personnel to implement increased census and develop and implement ancillary
businesses (e.g., pharmacy and therapy). A comprehensive plan is being developed
to implement these changes, if necessary. The personnel for this plan have been
identified and could be immediately available. The funds needed to implement
this plan would be provided from a new line of credit, sale and lease-back
transactions for certain identified properties of the Company, as well as
refinancing of other of the Company's targeted facilities.
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 assisted living/independent living and long-term care
facilities on terms which can be paid out of the cash flow generated by the
property.
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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 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.
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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: May 21, 1998
By: /s/ Darrell C. Tucker
---------------------------------
Darrell C. Tucker, Treasurer
