<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 and Part II - Item 1)
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter Ended September 30, 1997
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
(Address of Principal Executive Offices)
(404) 255-7500
(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 14,749,441 shares of the Registrant's $.0001 par value Common Stock
outstanding as of September 30, 1997.
<PAGE> 2
RETIREMENT CARE ASSOCIATES AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1997
INDEX
<TABLE>
<CAPTION>
Page(s)
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Introduction. . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations
(Unaudited) - Three Months Ended
September 30, 1997 and September 30, 1996 . . . . . 4
Consolidated Balance Sheets - (Unaudited)
September 30, 1997 and (Audited) June 30, 1997. . . 5 - 6
Consolidated Statements of Cash Flows
(Unaudited) - Three Months Ended September 30,
1997 and September 30, 1996. . . .. . . . . . . . . 7
Notes to Consolidated Financial
Statements (Unaudited). . . . . . . . . . . . . . . 8 - 10
Item 2. Managements' Discussion and Analysis of
Results of Operations and Financial
Condition . . . . . . . . . . . . . . . . . . . . . 11 - 14
PART II. OTHER INFORMATION.
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . .. 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
Amended Form 10-K/A, Retirement Care Associates, Inc. (the "Company") for the
fiscal year ended June 30, 1997, 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/A 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").
Certain statements in this Form 10-Q/A 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 SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
September 30, September 30,
1997 1996
<S> <C> <C>
REVENUES
Patient service revenue $ 66,455,791 $ 41,974,970
Medical supply revenue 12,036,835 11,306,195
Management fee revenue:
From affiliates 391,501 796,500
From others 48,036 137,546
Other operating revenue 490,589 957,404
79,422,752 55,172,615
EXPENSES
Cost of patient services 49,369,697 31,905,623
Cost of medical supplies sold 8,620,525 7,667,200
Lease expense 5,232,503 3,026,791
General and administrative 13,962,512 9,501,727
Depreciation and amortization 1,592,006 1,118,462
Interest 3,981,289 2,397,636
Provision for bad debt -- 1,020,000
82,758,532 56,637,439
(LOSS) BEFORE MINORITY INTEREST
AND INCOME TAXES (3,335,780) (1,464,824)
Minority interest (91,500) 80,000
(Loss) before income taxes (3,427,280) (1,384,824)
Income tax (benefit) (1,340,000) (345,000)
NET (LOSS) ($2,087,280) ($1,039,824)
Preferred stock dividends 45,000 744,806
(Loss) applicable to common stock (2,132,280) (1,784,630)
NET (LOSS) PER COMMON AND COMMON
EQUIVALENT SHARE (.15) (.14)
WEIGHTED AVERAGE SHARES OUTSTANDING 14,671,059 13,075,978
</TABLE>
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<PAGE> 5
RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS AS OF
SEPTEMBER 30, 1997 AND AUDITED AT JUNE 30, 1997
<TABLE>
<CAPTION>
Unaudited Audited
September 30, June 30,
1997 1997
ASSETS
<S> <C> <C>
CURRENT
Cash and cash equivalents $ 2,881,066 $ 3,637,878
Accounts receivable 49,644,721 40,391,377
Inventory 7,410,521 7,255,289
Deferred tax asset 4,553,568 4,408,733
Income tax receivables 5,065,431 4,065,431
Note and accrued interest receivable 75,000 75,000
Restricted Bond Fund 4,720,000 3,068,276
Prepaid expenses and other 1,281,152 2,009,467
Total current assets 75,631,459 64,911,451
PROPERTY AND EQUIPMENT 152,676,366 150,492,221
OTHER ASSETS
Marketable equity securities ---
Investments in unconsolidated affiliates 793,433 734,514
Deferred lease and loan costs 12,841,634 13,065,759
Goodwill 16,231,979 16,357,532
Advances due from non-affiliates 1,276,158 1,421,405
Advances due from affiliates 2,904,098 1,411,379
Restricted bond funds 4,515,609 3,689,969
Other assets 3,002,224 3,286,736
Total other assets 41,565,135 39,967,294
$269,872,960 $255,370,966
</TABLE>
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<PAGE> 6
RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1997 AND AUDITED AT JUNE 30, 1997
<TABLE>
<CAPTION>
Unaudited Audited
September 30, June 30,
1997 1997
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Lines of credit $ 13,354,000 $ 9,935,036
Current maturities of long-term debt 16,725,842 11,454,059
Loans payable to affiliates 964,831 1,478,368
Accounts payable 37,262,692 34,076,015
Accrued expenses 22,208,889 18,417,258
Deferred gain 40,000 40,000
Total current liabilities 90,556,254 75,400,736
Deferred gain 171,370 181,370
Deferred income taxes 1,098,929 1,098,929
Long-term debt and capitalized leases,
less current maturities 141,647,606 141,674,131
Minority interest 4,533,153 4,520,953
Redeemable convertible preferred stock 1,800,000 1,800,000
Shareholders' equity
Common stock, $.0001 par value;
300,000,000 shares authorized; 14,749,441
and 14,489,888 shares outstanding 1,475 1,450
Preferred stock 3,000,000 3,250,000
Additional paid-in capital 45,552,673 43,799,617
Retained earnings (18,488,500) (16,356,220)
Total shareholders' equity 30,065,648 30,694,847
Total liabilities and shareholders' equity $269,872,960 $255,370,966
</TABLE>
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<PAGE> 7
RETIREMENT CARE ASSOCIATES, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR
THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
September 30, September 30,
1997 1996
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (2,087,280) $ (1,039,824)
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization 1,592,006 1,118,462
Provision for bad debts -- 1,020,000
Amortization of deferred gain (10,000) (160,000)
Minority interest 91,500 (80,000)
Deferred income taxes (144,835) 230,359
Changes in current assets and liabilities
net of effects of acquisitions:
Accounts receivable (9,253,344) (9,287,819)
Inventory (155,232) (3,533,039)
Prepaid expense and other assets 1,012,827 (2,022,759)
Accounts payable and accrued expenses 5,978,308 8,922,127
Increase in deferred lease and loan costs --
Cash (used in) operating activities (2,976,050) (4,832,493)
INVESTING ACTIVITIES
Purchase of property and equipment (3,426,473) (32,703,818)
Issuance of advances to affiliates (1,861,009) 14,793,832
Investment in and advances to Atrium Ltd. --
Restricted bond funds (2,477,364) 932,079
Changes in marketable equity securities --
Change in receivable (161,250)
Deferred lease cost (2,169,941)
Investment in unconsolidated subsidiaries (58,919) (48,494)
Cash (used in) investing activities (7,823,765) (19,357,592)
FINANCING ACTIVITIES
Dividends on preferred stock (45,000) (60,000)
Net proceeds from issuance of:
Line of credit 3,418,964 (3,556,535)
Common stock 1,503,081 --
Long-term debt 5,662,742 27,776,507
Preferred Stock -- 6,598,181
Payments on long-term debt (496,784) (444,250)
Purchase and retirement of common stock -- (3,098,004)
Cash provided by financing activities 10,043,003 27,215,899
Net increase (decrease) in cash and
cash equivalents (756,812) 3,025,814
Cash and cash equivalents, beginning of year 3,637,878 45,365
Cash and cash equivalents, end of year $ 2,881,066 $ 3,071,179
</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
Amended Form 10-K/A for the fiscal year ended June 30, 1997, 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.
NOTE 2: RESTATEMENT
The consolidated financial statements for the three months ended September 30,
1996, as originally reported, reflect certain balances which were subsequently
determined to be incorrect and, accordingly, the consolidated financial
statements for the three months ended September 30, 1996 have been restated as
follows (in thousands):
<TABLE>
<CAPTION>
As Previously Reported As Restated
---------------------- -----------
<S> <C>
Revenues $ 55,140 $ 55,173
Operating Expenses $ 53,652 $ 56,637*
Net Earnings (Loss)
applicable to common stock $ 801 $ (1,785)
Shareholders' Equity $ 38,879 $ 33,266
-------------------
</TABLE>
* Restated Operating Expenses include (in thousands) (i) an additional accrual
for employee benefits of $1,400, (ii) restated operating lease expense of
$375, (iii) a provision for doubtful accounts of $1,020, and (iv) restated
miscellaneous expenses of $190.
NOTE 3. ACCOUNTS RECEIVABLE AND COST REIMBURSEMENTS
Accounts receivable and operating revenue include net amounts reimbursed by
Medicaid under the provisions of cost reimbursement formulas in effect. The
Company operates under a prospective payment system with Medicare, under which
annual rates are assigned based on estimated reimbursements. Differences
between estimated provisions and final settlement are reflected as adjustments
to future rates.
NOTE 4. INVENTORIES
Inventories consisting mainly of medical supplies, are valued at the lower of
cost (first in, first out) or market.
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<PAGE> 9
RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 5: ADVANCES TO AFFILIATES
At September 30, 1997 and June 30, 1997, the Company had notes and advances to
(from) affiliates totaling approximately ($1,939,267) and $66,991,
respectively, due on demand.
NOTE 6. LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
September 30, June 30,
1997 1997
------------ ------------
<S> <C> <C>
Amounts outstanding under Revenue Bonds
secured by retirement facilities $ 74,670,000 $ 74,675,000
Other debt secured by retirement and
nursing facilities 40,647,020 40,700,380
Other debt 21,083,626 15,780,008
Capitalized leases 21,972,802 21,972,802
Totals 158,373,448 153,128,190
Current maturities 16,725,842 11,454,059
Total long-term debt $141,647,606 $141,674,131
</TABLE>
In connection with the bond indentures underlying the revenue bonds, 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 September 30, 1997, the Company
was in default under several of these covenants, including the failure to make
monthly payments to the bond sinking funds for certain of the facilities and
inadequate debt service reserves for certain of the facilities. The Company is
also delinquent with regard to the payment of property taxes at several
facilities. The bond indentures underlie industrial development revenue bonds,
municipal revenue bonds and housing development mortgage bonds that, together,
totalled approximately $50,785,000 at September 30, 1997. The following table
includes the bonds that were in default as of September 30, 1997:
<TABLE>
<CAPTION>
AMOUNT
BOND TRUSTEE OUTSTANDING
---- -------------- -----------
<S> <C> <C>
Jacksonville Series 1996....................... Sentinel Trust $ 8,375,000
Jacksonville Series 1994....................... Sentinel Trust 1,955,000
Dublin, Georgia IDA Series A and B............. Sentinel Trust 2,740,000
Highland County IDA Series A and B............. Sentinel Trust 4,230,000
Cove Springs 1994.............................. Sentinel Trust 1,650,000
Dade City, Florida............................. Sentinel Trust 6,230,000
Rome-Floyd 1996 Series A and B................. Sentinel Trust 2,665,000
Walton County.................................. Sentinel Trust 11,925,000
Americus-Sumpter PDA Series A and B............ Sentinel Trust 1,900,000
Cave Springs 1996.............................. Sentinel Trust 1,555,000
Jackson, Tennessee 1993........................ Sentinel Trust 1,600,000
Jackson, Tennessee 1989........................ Sentinel Trust 3,265,000
Sumner, Tennessee 1989 Series A and B.......... Sentinel Trust 2,695,000
-------------- -----------
TOTAL: $50,785,000
</TABLE>
The Company generally has a grace period of 30 days to cure defaults after
receipt of written notification from the bond trustee, and no such written
notification has been received. The Company believes that it is probable that,
upon receipt of such written notification, the Company could cure such defaults
within the 30 day grace period.
The terms of the note payable to Sun Healthcare Group, Inc. ("Sun") of
$9,750,000, due July 10, 1997, were amended to: (i) increase the applicable
interest rate from 9.0% to 11.0% per annum; (ii) extend the maturity date to
the close of business on the 120th day after the termination or consummation of
the Company's agreement to merge with Sun; and (iii) replace the collateral
securing the loan with a second lien on all of the Company's accounts
receivable. The note payable is unconditionally and irrevocably guaranteed by
two officers and directors of the Company.
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<PAGE> 10
On July 15, 1997, Sun loaned the Company an additional $5,000,000, for working
capital purposes. The loan is secured by a second lien on all of the Company's
accounts receivable, bears interest at the rate of 12.0% per annum, and matures
on the close of business on the 120th day after the termination or consummation
of the Company's agreement to merge with Sun. The note payable is
unconditionally and irrevocably guaranteed by two officers and directors of
the Company.
NOTE 7: MANAGEMENT AGREEMENT
On July 15, 1997, the Company and Sun entered into a management agreement
pursuant to which Sun agreed to provide management, consulting, and advisory
services to sixteen long-term care facilities the Company operates in Virginia
and North Carolina. As payment for providing such services, Sun will receive a
monthly management fee equal to seven percent of the gross revenues of the
facilities. The agreement also authorizes Sun to cause its therapy services and
pharmaceutical subsidiaries to provide such ancillary services to the facilities
at costs not in excess of those that would be charged to the Company by an
unrelated third party in an arms'-length transaction. The Company has agreed to
indemnify Sun with respect to any investigations, actions or proceedings on the
part of regulatory authorities regarding the facilities. The management
agreement will terminate on the earlier of the consummation of the merger with
Sun, the repayment of a $5,000,000 loan from Sun, or 120 days after the
termination of the merger agreement with Sun.
NOTE 8: 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 assessed taxes, penalties and interest in
connection with the alleged underpayment of approximately $1.2 million. The
Company contends that the IRS has misapplied payments between income and payroll
taxes and between the Company and its affiliates. Based on the opinion of
counsel handling the matter that it is unlikely that a settlement of the dispute
would require a payment materially greater than $400,000 plus interest, the
Company has estimated and accrued in the accompanying financial statements
$400,000 for ultimate settlement of 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.
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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, 1997 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1996.
The Company's total revenues for the three months ended September 30, 1997,
were $79,422,752 compared to $55,172,615 for the three months ended September
30, 1996. Due to the increased number of facilities owned or leased by the
Company, patient service revenue increased from $41,974,970 for the quarter
ended September 30, 1996, to $66,455,791 for the quarter ended September 30,
1997. The Company was operating 100 facilities for the quarter ended September
30, 1997, compared to 75 for the quarter ended September 30, 1996. The cost of
patient services in the amount of $49,369,697 for the quarter ended September
30, 1997, represented 74% of patient service revenue, as compared to
$31,905,623, or 76%, of patient service revenue during the quarter ended
September 30, 1996. The decrease in the percentage of patient service revenue
compared to cost of patient services of 2% is attributed to increased control
over facility payroll costs, controllable costs such as supplies and reductions
in corporate staff due to attrition from the proposed merger to Sun Healthcare
Group, Inc.
Medical supply revenue increased from $11,306,195 during the quarter ended
September 30, 1996, to $12,036,835 during the quarter ended September 30, 1997.
These revenues, which are revenues of Contour Medical, Inc. ("Contour"), a
majority-owned subsidiary, increased primarily due to volume. Cost of medical
supplies sold as a percentage of medical supply revenue increased to
approximately 72% during the quarter ended September 30, 1997, as compared to
approximately 68% of such revenue during the same period last year. The
increased percentage is primarily a result of increases in the cost of products
sold and increased competition in the medical supply industry, which has
decreased the sales prices of most products.
Management fees decreased from $934,046 in the quarter ended September 30, 1996
to $439,537 in the quarter ended September 30, 1997. As of September 30, 1996,
the Company was managing 20 facilities, and as of September 30, 1997, the
Company was only managing 9 facilities. The reduced number of facilities
managed by the Company is due to the fact that the Company leased three long-
term facilities and four assisted living/independent facilities and purchased
two assisted living/independent living facilities from Messrs. Brogdon and
Lane. Two third-party assisted living/independent living facilities cancelled
their management contracts with the Company. 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. 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.
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 and are terminable 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 service revenue, continue in the
future.
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<PAGE> 12
Other operating revenue decreased from $957,404 during the quarter ended
September 30, 1996, to $490,589 during the quarter ended September 30, 1997.
The decrease was primarily a result of one-time referral fees of $300,000
received from a building contractor, and approximately $180,000 in interest
income included in the September 30, 1996 amounts.
Lease expense increased from $3,026,791 for the quarter ended September 30,
1996, to $5,232,503 for the quarter ended September 30, 1997. This increase
is primarily attributable to the increased number of facilities that the Company
has leased.
General and administrative expenses for the three months ended September 30,
1997 were $13,962,512 representing 18% of total revenues, as compared to
$9,501,727 representing 17% of total revenues, for the three months ended
September 30, 1996. 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, and approximately $600,000 was due
to legal and accounting expenses related to the pending merger with Sun
Healthcare Group, Inc.
Interest expense rose from $2,397,636 during the quarter ended September 30,
1996, to $3,981,289 during the quarter ended September 30, 1997, 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, 1996, the Company had
approximately $144 million in long-term debt, as compared to approximately $158
million in long-term debt at September 30, 1997.
For the quarter ended September 30, 1997, the Company received an income tax
benefit of $1,340,000 which represents an effective tax benefit of 39%, as
compared to a tax benefit of $345,000 which represents an effective tax benefit
of 25% for the quarter ended September 30, 1996.
The net loss of $2,087,280 for the quarter ended September 30, 1997, compares
to a net loss of $1,039,824 for the quarter ended September 30, 1996. The
increased loss is attributable to a deterioration in the Company's operations
as a result of the pendency of and delays associated with the merger with Sun,
including higher-than-normal turnover, and costs associated with the integration
and operation of the Company's recently-acquired Virginia and North Carolina
facilities (including certain regulatory compliance problems).
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997, the Company had a deficit of $14,924,795 in working
capital compared to a deficit of $10,489,285 at June 30, 1997. The Company is
increasing it efforts to reduce the increasing working capital deficit by
concentrating it resources on collecting current and delinquent accounts
receivable, improving the operations of the facilities through better budget
management and analysis, and possible refinancing of selected facilities.
During the quarter ended September 30, 1997, cash used by operating activities
was $2,976,050 as compared to $4,832,493 during the quarter ended September 30,
1996. The cash used during the current period was primarily due to the net
loss of $2,087,280 for the quarter ended September 30, 1997, increases in
accounts receivable of $9,253,344 due to the increase in facilities operated by
the Company. Cash provided by operating activities was primarily attributed to
depreciation and amortization of $1,592,006 on the facilities, decreases in
prepaid expenses and other of $1,012,827, and increases in accounts payable and
accrued expenses of $5,978,308 due to the increase in facilities operated by
the Company.
Cash flows used in investing activities during the quarter ended September 30,
1997, totaled $7,823,765 as compared to $19,357,592 during the quarter ended
September 30, 1996. During the current period, the Company expended $3,426,473
on the purchase of property and equipment paid $1,861,009 and $2,477,364 on
advances to affiliated companies controlled by Messrs. Brogdon and Lane and
restricted bond funds on facilities, respectively. The advances are due on
demand. 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.
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Cash provided by financing activities during the quarter ended September 30,
1997, totaled $10,043,003 as compared to $27,215,899 during the same period
last year. During the current period the Company received $1,503,081 from the
exercise of common stock options and the placement of $5,662,742 in long-term
debt, including the $5 million loan from Sun Healthcare Group, Inc. and
$3,418,964 from a line of credit.
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, 1997 pursuant to this obligation. Management intends to fund
future redemptions from cash flow generated from operations.
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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, 1997, the Company had
approximately $3,500,000 in unused credit available under such lines.
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 health care facilities.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 1997, includes information in Item 3 - Legal Proceedings, with regard
to litigation commenced during the quarter ended September 30, 1997. Such
information is incorporated herein by this reference.
Since the Form 10-K was filed one additional class action was filed
against the Company similar to the nine class actions disclosed in the Form
10-K. This suit was titled TP HOLDING ON BEHALF OF ITSELF AND ALL OTHERS
SIMILARLY SITUATED, PLAINTIFF V. RETIREMENT CARE ASSOCIATES, INC., CHRIS
BROGDON, DARRELL C. TUCKER, JULIAN S. DALEY AND HARLAN MATTHEWS, DEFENDANTS.
This class action complaint was filed on October 24, 1997 in the United States
District Court, Northern District of Georgia, Atlanta Division , Civil Action
No. 1: 97-CV-3228. The complaint alleges that the Company and certain of its
officers and directors misrepresented the results of the Company's operations
and concealed adverse material information concerning the operations, finances,
financial condition, products, inventories, results of operations and future
business prospects of the Company in its quarterly reports, filings with the
Securities and Exchange Commission, press releases and presentations to
securities analysts. The compliant does not specify the amount of damages
sought.
The class action filed by Panhai Shah against the Company in the
Central District of California was dismissed and refiled in the Northern
District of Georgia as Civil Action No. 1:97-CV-3192.
In the lawsuit filed by Theratx Inc. against the Company, the Company
filed a motion for a summary judgment and lost on October 14, 1997. A notice
of appeal has been filed in the Georgia Court of Appeals. The appeal has not
been docketed, no formal pleadings have been filed and the issues regarding the
appeal have not been framed.
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
RETIREMENT CARE ASSOCIATES, INC.
DATED: April 8, 1998 By: /s/ Darrell C. Tucker
----------------------------
Darrell C. Tucker, Treasurer
