<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
Amendment No. 3
(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 December 31, 1997
Commission File No. 1-14114
RETIREMENT CARE ASSOCIATES, INC.
------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Colorado 43-1441789
- ------------------------------ -----------------------------------
(State or 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 December 31, 1997.
<PAGE> 2
RETIREMENT CARE ASSOCIATES AND SUBSIDIARIES
FORM 10-Q/A FOR THE QUARTER ENDED DECEMBER 31, 1997
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
December 31, 1997 and December 31, 1996 .......... 4
Consolidated Statements of Operations
(Unaudited) - Six Months Ended
December 31, 1997 and December 31, 1996 .......... 5
Consolidated Balance Sheets - (Unaudited)
December 31, 1997 and (Audited) June 30, 1997 .... 6 - 7
Consolidated Statements of Cash Flows
(Unaudited) - Three Months Ended December 31,
1997 and December 31, 1996 ....................... 8
Notes to Consolidated Financial
Statements (Unaudited) ........................... 9 - 12
Item 2. Managements' Discussion and Analysis of
Results of Operations and Financial
Condition ........................................ 13 - 17
Signatures ....................................... 18
</TABLE>
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<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
INTRODUCTION - CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements included herein have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures have been condensed or omitted
pursuant to such rules and regulations. In the opinion of Management, all
adjustments, which were of a normal recurring nature, necessary to present
fairly the consolidated financial position and results of operations and cash
flows for the periods presented have been included. These consolidated financial
statements should be read in conjunction with the financial statements and the
notes thereto included in the Annual Report on 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 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 DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
<S> <C> <C>
REVENUES
Patient service revenue $ 68,873,798 $ 47,950,464
Medical supply revenue 10,320,899 11,471,114
Management fee revenue:
From affiliates 391,500 446,334
From others 138,406 112,241
Other operating revenue 410,684 1,228,305
80,135,287 61,208,458
EXPENSES
Cost of patient services 49,206,128 33,415,634
Cost of medical supplies sold 6,914,317 7,666,277
Lease expense 5,645,121 2,988,406
General and administrative 14,273,113 12,393,814
Depreciation and amortization 1,780,825 1,394,664
Interest 4,169,927 2,753,971
Provision for bad debt 380,891 989,000
82,370,322 61,601,766
(LOSS) BEFORE MINORITY INTEREST
AND INCOME TAXES (2,235,035) (393,308)
Minority interest (33,500) (93,500)
(Loss) before income taxes
and extraordinary item (2,268,535) (486,808)
Income tax (benefit) -- (115,000)
(Loss) before extraordinary item (2,268,535) (371,808)
Extraordinary item, less applicable
income taxes -- (490,000)
NET (LOSS) (2,268,535) (861,808)
Preferred stock dividends 30,000 1,401,971
(Loss) applicable to
common stock (2,298,535) (2,263,779)
Basic and diluted (loss) per common
share before extraordinary item (.15) (.13)
BASIC AND DILUTED NET (LOSS) PER
COMMON SHARE (.15) (.17)
WEIGHTED AVERAGE SHARES OUTSTANDING 14,770,938 13,301,109
</TABLE>
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<PAGE> 5
RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
<S> <C> <C>
REVENUES
Patient service revenue $ 135,329,589 $ 89,925,434
Medical supply revenue 22,357,734 22,777,309
Management fee revenue:
From affiliates 783,000 1,252,501
From others 186,443 240,120
Other operating revenue 901,273 2,185,709
159,558,039 116,381,073
EXPENSES
Cost of patient services 98,575,825 65,321,257
Cost of medical supplies sold 15,534,842 15,333,477
Lease expense 10,877,624 6,015,197
General and administrative 28,235,625 21,895,541
Depreciation and amortization 3,372,831 2,513,126
Interest 8,151,216 5,151,607
Provision for bad debt 380,891 2,009,000
165,128,854 118,239,205
(LOSS) BEFORE MINORITY INTEREST
AND INCOME TAXES (5,570,815) (1,858,132)
Minority interest (125,000) (13,500)
(Loss) before income taxes
and extraordinary item (5,695,815) (1,871,632)
Income tax (benefit) (1,340,000) (460,000)
(Loss) before extraordinary item (4,355,815) (1,411,632)
Extraordinary item, less applicable
income taxes -- (490,000)
NET (LOSS) (4,355,815) (1,901,632)
Preferred stock dividends 75,000 2,146,777
(Loss) applicable to
common stock (4,430,815) (4,048,409)
Basic and diluted (loss) per common
share before extraordinary item (.30) (.27)
BASIC AND DILUTED NET (LOSS) PER
COMMON SHARE (.30) (.31)
WEIGHTED AVERAGE SHARES OUTSTANDING 14,720,998 13,188,523
</TABLE>
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<PAGE> 6
RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS AS OF
December 31, 1997 AND AUDITED AT JUNE 30, 1997
<TABLE>
<CAPTION>
Unaudited Audited
December 31, June 30,
1997 1997
<S> <C> <C>
ASSETS
CURRENT
Cash and cash equivalents $ 11,663,691 $ 3,637,878
Accounts receivable 51,646,999 40,391,377
Inventory 10,650,558 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 6,232,411 3,068,276
Prepaid expenses and other 712,699 2,009,467
Total current assets 90,600,357 64,911,451
PROPERTY AND EQUIPMENT 160,015,560 150,492,221
OTHER ASSETS
Investments in unconsolidated affiliates 793,433 734,514
Deferred lease and loan costs 13,101,975 13,065,759
Goodwill 16,106,995 16,357,532
Advances due from non-affiliates 1,181,251 1,421,405
Advances due from affiliates 5,429,584 1,411,379
Restricted bond funds 3,940,000 3,689,969
Other assets 3,243,053 3,286,736
Total other assets 43,796,291 39,967,294
$294,412,208 $255,370,966
</TABLE>
-6-
<PAGE> 7
RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND AUDITED AT JUNE 30, 1997
<TABLE>
<CAPTION>
Unaudited Audited
December 31, June 30,
1997 1997
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Lines of credit $ 27,331,732 $ 9,935,036
Current maturities of long-term debt 17,063,115 11,454,059
Loans payable to affiliates -- 1,478,368
Accounts payable 47,584,501 34,076,015
Accrued expenses 18,965,412 18,417,258
Deferred gain 40,000 40,000
Total current liabilities 110,984,760 75,400,736
Deferred gain 161,370 181,370
Deferred income taxes 1,098,929 1,098,929
Long-term debt and capitalized leases,
less current maturities 148,532,538 141,674,131
Minority interest 4,552,509 4,520,953
Redeemable convertible preferred stock 1,200,000 1,800,000
Shareholders' equity
Common stock, $.0001 par value;
300,000,000 shares authorized; 14,749,441
and 14,489,888 shares outstanding 1,479 1,450
Preferred stock 2,786,000 3,250,000
Additional paid-in capital 45,881,658 43,799,617
Retained earnings (20,787,035) (16,356,220)
Total shareholders' equity 27,882,102 30,694,847
Total liabilities and shareholders' equity 294,412,208 $ 255,370,966
</TABLE>
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<PAGE> 8
RETIREMENT CARE ASSOCIATES, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR
THE SIX MONTHS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (4,355,815) $ (1,901,632)
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization 3,372,831 2,513,126
Provision for bad debts 380,891 2,009,000
Amortization of deferred gain (20,000) (170,000)
Minority interest 125,000 13,500
Deferred income taxes (144,835) (729,641)
Changes in current assets and liabilities
net of effects of acquisitions:
Accounts receivable (11,636,513) (16,300,244)
Inventory (3,395,269) (3,674,172)
Prepaid expense and other assets 1,340,451 (1,793,658)
Accounts payable and accrued expenses 13,056,640 8,893,973
Increase in deferred lease and loan costs (2,947,195)
Cash (used in) operating activities (1,276,619) (14,086,943)
INVESTING ACTIVITIES
Purchase of property and equipment (11,788,087) (39,437,345)
Issuance of advances to affiliates (5,256,419) 14,316,661
Investment in unconsolidated subsidiaries (58,919)
Restricted bond funds (3,414,166) (4,056,194)
Changes in marketable equity securities (1,067,748)
Change in receivable (957,935)
Deferred loan and lease cost (893,762)
Investment in unconsolidated subsidiaries (148,449)
Cash (used in) investing activities (21,411,353) (31,351,010)
FINANCING ACTIVITIES
Dividends on preferred stock (75,000) (105,000)
Redemption of preferred stock (600,000) (600,000)
Net proceeds from issuance of:
Line of credit 17,396,696 3,759,182
Common stock 1,988,626 70,676
Long-term debt 13,927,633 38,324,959
Preferred Stock (464,000) 9,340,000
Payments on long-term debt (1,460,170) (1,267,894)
Purchase and retirement of common stock
Cash provided by financing activities 30,713,785 45,721,512
Net increase in cash and
cash equivalents 8,025,813 283,559
Cash and cash equivalents, beginning of year 3,637,878 45,365
Cash and cash equivalents, end of year $ 11,663,691 $ 328,924
</TABLE>
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<PAGE> 9
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.
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS
128"), which is required to be adopted for the fiscal years ending after
December 15, 1997. SFAS No. 128 supersedes APB Opinion No. 15, "Earnings Per
Share" and specifies the computation, presentation and disclosure requirements
for earnings per share ("EPS") for entities with publicly held common stock or
potential common stock. SFAS 128 essentially replaces the primary EPS and fully
diluted EPS presentations under APB Opinion No. 15 with a basic EPS and a
diluted EPS calculation. The Company will comply with the disclosure
requirements of SFAS No. 128 commencing with its December 31, 1997 Form 10-Q.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income", which establishes standards for the
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements. There currently are no additional
disclosures in the financial statements of the Company that are expected to be
required by the provisions of this statement.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"), which changes the way public companies report information about
segments of their business in annual financial statements and requires segment
information in quarterly reports to shareholders. SFAS 131 also requires that
public companies report certain information about their products and services,
the geographic areas in which they operate and their major customers. SFAS 131
is effective for fiscal years beginning after December 15, 1997. The Company has
not determined what additional disclosures may be required by the provisions of
SFAS 131.
NOTE 2: RESTATEMENT
The consolidated financial statements for the six months ended December 31,
1996, as originally reported, reflected certain balances which were subsequently
determined to be incorrect and, accordingly, the consolidated financial
statements for the six months ended December 31, 1996 were restated as follows
(in thousands):
<TABLE>
<CAPTION>
As Previously Reported As Restated
---------------------- -----------
<S> <C> <C>
Revenues $116,517 $116,381
Operating Expenses $124,548 $118,239*
Net Earnings (Loss)
applicable to common stock $ (5,528) $ (1,902)
Shareholders' Equity $ 34,666 $ 34,462
</TABLE>
- -------------------
* Restated Operating Expenses included (in thousands) (i) a reduction in the
accrual for employee benefits of $3,700, (ii) restated inventory of $1,955,(iii)
a reduction in the provision for doubtful accounts of $580, and (iv) restated
general and administrative expenses of $74.
NOTE 3. ACCOUNTS RECEIVABLE AND COST REIMBURSEMENTS
Accounts receivable and operating revenue include net amounts reimbursed by
Medicaid under the provisions of cost reimbursement formulas in effect. The
Company operates under a prospective payment system with Medicare, under which
annual rates are assigned based on estimated reimbursements. Differences between
estimated provisions and final settlement are reflected as adjustments to future
rates.
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<PAGE> 10
RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 4. INVENTORIES
Inventories consisting mainly of medical supplies, are valued at the lower of
cost (first in, first out) or market.
NOTE 5: ADVANCES TO AFFILIATES
At December 31, 1997 and June 30, 1997, the Company had advances to
(from) affiliates totaling approximately ($5,429,584) and $66,991,
respectively, and are due on demand.
NOTE 6. LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
December 31, June 30,
1997 1997
------------ ------------
<S> <C> <C>
Amounts outstanding under Revenue Bonds
secured by retirement facilities $ 81,400,000 $ 74,675,000
Other debt secured by retirement and
nursing facilities 40,420,000 40,700,380
Other debt 21,802,851 15,780,008
Capitalized leases 21,972,802 21,972,802
Totals 165,595,653 153,128,190
Current maturities 17,063,115 11,454,059
Total long-term debt $148,532,538 $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 December 31, 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 June 30, 1997. The following table
includes the bonds that were in default as of June 30, 1997:
<TABLE>
<CAPTION>
AMOUNT
BOND TRUSTEE OUTSTANDING
---- -------------- -----------
<S> <C> <C>
Jacksonville Series 1996....................... Sentinel Trust $ 8,370,000
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.
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<PAGE> 11
On December 15, 1997, HCFP Funding, Inc. ("HCFP"), the Company and certain
subsidiaries of the Company entered into a loan and security agreement, pursuant
to which HCFP granted to the Company a $14 million revolving line of credit (the
"HCFP Loan"). The HCFP Loan is secured by a priority lien on all of the
Company's accounts receivable and bears interest at a rate of prime plus 2%. The
outstanding principal and interest under the HCFP Loan are due on December 15,
2001, and the HCFP Loan may be renewed for one-year periods thereafter upon the
mutual written agreement of the parties.
NOTE 7: ANCILLARY SERVICE AGREEMENTS
The Company has entered into various agreements with Sun Healthcare Group, Inc.
("Sun") to provide ancillary services such as therapy services and
pharmaceutical services to the Company's long-term care facilities. The
agreements provided for the Company to cause all of its facilities to promptly
take all reasonable action, including, without limitation, terminating existing
contracts with other providers of ancillary services in accordance with the
terms thereof, and to cause all facilities to begin receiving all of their
required ancillary services from Sun or Sun's affiliates as soon as practicable
after November 25, 1997. The Company is notifying all existing ancillary service
providers of the termination of services and expects to receive all such
services from Sun by February 1998. The agreements may not be terminated until
14 days after the termination of the merger agreement with Sun, at which time
either party may freely terminate.
NOTE 8: EARNINGS PER SHARE
The Company and its subsidiaries have adopted the provisions of SFAS 128 for
reporting purposes. Earnings available to common shares has been computed as
net income less all preferred stock dividends earned during the period, whether
or not declared. No additional securities have been included in the
computation of diluted earnings per share as they would be antidilutive. See the
Company's Annual Report for the fiscal year ended June 30, 1997 for a
description of securities which may potentially be dilutive in the future.
NOTE 9: YEAR 2000 DISCLOSURE
The Company has reviewed all of its current computer applications with respect
to the date change from 1999 to the year 2000, as discussed in the Securities
and Exchange Commission Staff Legal Bulletin No. 5 (the "Year 2000 Issue"). The
Company believes that certain of its applications are substantially in
compliance with the Year 2000 Issue and that any additional costs with respect
to compliance with the Year 2000 Issue will not be material to the Company. The
Company is currently unable to determine the effect of compliance with the Year
2000 Issue by its customers and suppliers.
-11-
<PAGE> 12
NOTE 10: AMENDMENT NO. 3 TO SUN MERGER AGREEMENT.
On November 25, 1997, the Company entered into the third amendment ("Amendment
No. 3") to the Agreement and Plan of Merger and Reorganization (the "Merger
Agreement") between the Company and Sun. Amendment No. 3 changes the exchange
ratio in the Merger Agreement from 0.520 shares of the common stock of Sun for
each share the Company's common stock to that number of shares of the common
stock of Sun having a market value, based on the average closing price for the
common stock of Sun equal to $10.00 per share, subject to adjustment up or down
in event of the significant appreciation or depreciation in the price of the
common stock of Sun. Amendment No. 3 also (i) waives certain responsibilities
and warranties which had become materially incorrect since the date of the
original Merger Agreement; (ii) modifies the definition of "Company Material
Adverse Effect" to related only to changes in the assets and liabilities of the
Company; (iii) contains provisions relating to Sun and its affiliates providing
ancillary services to the Company and its affiliates; (iv) contains provisions
allowing the Company to obtain up to $15 million in working capital financing
under certain conditions; (v) contains provisions relating to certain related
company leases; (vi) modifies the conditions to Sun's obligations to consummate
the merger with the Company related to the Company's representations and
warranties and makes corresponding modifications to Sun's termination rights;
(vii) provides a termination fee payable to the Company in the event Sun's board
of directors changes its recommendation of the merger in a manner adverse to the
Company; (viii) contains certain other technical provisions; and (ix) extends
the date after which either party may freely terminate the Merger Agreement from
November 30, 1997 (or under certain circumstances, December 31, 1997) to March
31, 1998.
NOTE 11: 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 position or
results of operations.
On November 25, 1997, the Company, Sun and representatives of the plaintiffs
entered into a Memorandum of Understanding ("MOU"). Pursuant to the MOU, Sun has
agreed to pay $9 million into an interest bearing escrow account maintained by
Sun to settle ten putative class action lawsuits ("Actions") filed in the United
States District Court for the Northern District of Georgia against the Company
and certain of its officers and directors. The Company has also agreed to assign
coverage under its directors' and officers' liability insurance policy for these
specific claims to the plaintiffs in the Actions. The payment and assignment
(the "Settlement") is contingent upon the closing of the merger with Sun and
confirmatory discovery and is subject to the execution of definitive
documentation and court approval. Upon satisfaction of the conditions precedent
to the Settlement, all claims by the plaintiffs that were or could have been
asserted by the plaintiffs against the Company or any of the other defendants in
the Actions will be settled and released and the Actions will be dismissed in
their entirety with prejudice in exchange for the release of all funds from the
Escrow Account to the plaintiffs.
The Company has not recorded an accrual of the Settlement in its financial
statements because it is not apparent to the Company's management that a
liability has been incurred or that the Company's assets are impaired as of the
date hereof. The Company cannot establish the amount of potential liability, if
any, to be incurred by the Company because the Actions are still in their
preliminary stages and the Settlement is still contingent on the closing of the
merger with Sun. Although the MOU has been executed with respect to the
Settlement, the Settlement is only effective if the proposed merger with Sun is
consummated. If the proposed merger with Sun is not consummated and the
Settlement becomes null and void, the Company will vigorously defend against the
Actions.
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<PAGE> 13
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
THREE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
1996.
The Company's total revenues for the three months ended December 31, 1997, were
$80,135,287 compared to $61,208,458 for the three months ended December 31,
1996. Due to the increased number of facilities owned or leased by the Company,
patient service revenue increased from $47,950,464 for the quarter ended
December 31, 1996, to $68,873,798 for the quarter ended December 31, 1997. The
Company was operating 101 facilities for the quarter ended December 31, 1997,
compared to 75 for the quarter ended December 31, 1996. The cost of patient
services in the amount of $49,206,128 for the quarter ended December 31, 1997,
represented 71% of patient service revenue, as compared to $33,415,634, or 70%,
of patient service revenue during the quarter ended December 31, 1996.
Medical supply revenue decreased from $11,471,114 during the quarter ended
December 31, 1996, to $10,320,899 during the quarter ended December 31, 1997.
These revenues, which are revenues of Contour Medical, Inc. ("Contour"), a
majority-owned subsidiary, decreased primarily due to volume. Cost of medical
supplies sold as a percentage of medical supply revenue remained constant at
approximately 67% during the quarter ended December 31, 1997, as compared to
approximately 67% of such revenue during the same period last year.
Management fees decreased from $558,575 in the quarter ended December 31, 1996
to $529,906 in the quarter ended December 31, 1997. As of December 31, 1996, the
Company was managing 20 facilities, and as of December 30, 1997, the Company was
only managing 8 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 one long-term care
facility and two assisted living/independent living facilities from Messrs.
Brogdon and Lane. In addition, 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.
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<PAGE> 14
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.
Other operating revenue decreased from $1,228,305 during the quarter ended
December 31, 1996, to $410,684 during the quarter ended December 31, 1997. The
decrease was primarily a result of one-time referral fees of $350,000 received
from a building contractor, and approximately $400,000 in interest income
included in the December 31, 1996 amounts.
Lease expense increased from $2,988,406 for the quarter ended December 31, 1996,
to $5,645,121 for the quarter ended December 31, 1997. This increase is
primarily attibutable to the increased numbers of facilities that the Company
has leased.
General and administrative expenses for the three months ended December 31, 1997
were $14,273,113, representing 18% of total revenues, as compared to
$12,393,814, representing 20% of total revenues, for the three months ended
December 31, 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 $400,000 was due to
legal and accounting expenses related to the pending merger with Sun Healthcare
Group, Inc.
Interest expense rose from $2,753,971 during the quarter ended December 31,
1996, to $4,169,927 during the quarter ended December 31, 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 December 31, 1996, the Company had
approximately $153 million in long-term debt, as compared to approximately $165
million in long-term debt at December 31, 1997.
For the quarter ended December 31, 1997, the Company received no income tax
benefit, as compared to a tax benefit of $115,000 which represents an effective
tax benefit of 25% for the quarter ended December 31, 1996.
The net loss of $2,268,535 for the quarter ended December 31, 1997, compares to
a net loss of $861,808 for the quarter ended December 31, 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 relatory compliance problems).
SIX MONTHS ENDED DECEMBER 31, 1997 COMPARED TO THE SIX MONTHS ENDED DECEMBER 31,
1996.
The Company's total revenues for the six months ended December 31, 1997, were
$159,558,039 compared to $116,381,073 for the six months ended December 31,
1996.
Due to the increased number of facilities owned or leased by the Company,
patient service revenue increased from $89,925,434 for the six months ended
December 31, 1996, to $135,329,589 for the six months ended December 31, 1997.
The Company was operating 101 facilities for the six months ended December 31,
1997, compared to 75 for the six months ended December 31, 1996. The cost of
patient services in the amount of $98,575,825 for the six months ended December
31, 1997, represented 73% of patient service revenue, as compared to
$65,321,257, or 73%, of patient service revenue during the six months ended
December 31, 1996.
Medical supply revenue decreased from $22,777,309 during the six months ended
December 31, 1996, to $22,357,734 during the six months ended December 31, 1997.
The increased percentage if primarily a result of increases in the cost of
products sold and increased competition in the medical supply industry, which
has decreased the sales price of most products. These revenues, which are
revenues of Contour Medical, Inc. ("Contour"), a majority-owned subsidiary,
decreased primarily due to volume. Cost of medical supplies sold as a percentage
of medical supply revenue increased to approximately 69% during the six months
ended December 31, 1997, as compared to approximately 67% of such revenue during
the same period last year. This increased percentage is primarily attributable
to increases in the cost of products sold and increased competition in the
medical supply industry, which has decreased the sales price of most of
Contour's products.
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<PAGE> 15
Management fees decreased from $1,492,621 in the six months ended December 31,
1996 to $969,443 in the six months ended December 31, 1997. As of December 31,
1996, the Company was managing 20 facilities, and as of December 30, 1997, the
Company was only managing 8 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 living facilities and purchased
one long-term care facility and two assisted living/independent living
facilities from Messrs. Brogdon and Lane. In addition, 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.
Other operating revenue decreased from $2,185,709 for the six months ended
December 31, 1996, compared to $901,273 for the six months ended December 31,
1997. The decrease is primarily a result of one-time referral fees of $650,000
received from a building contractor, and approximately $580,000 in interest
income from affiliated companies included in the December 31, 1996 amount.
General and administrative expenses for the six months ended December 31, 1997
were $28,235,625, representing 18% of total revenues, as compared to
$21,895,541, representing 18% of total revenues, for the six months ended
December 31, 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 $800,000 was due to
legal and accounting expenses related to the pending merger with Sun.
Interest expense rose from $5,151,607 during the six months ended December 31,
1996, to $8,151,216 during the six months ended December 31, 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 December 31, 1996, the Company
had approximately $153 million in long-term debt, as compared to approximately
$165 million in long-term debt at December 31, 1997.
For the six months ended December 31, 1997, the Company received an income tax
benefit of $1,340,000, as compared to a tax benefit of $460,000 for the six
months ended December 31, 1996.
The net loss of $4,355,815 for the six months ended December 31, 1997, compares
to a net loss of $1,901,632 for the six months ended December 31, 1996. The
increased loss in attributable due to the fact that the Company's operations
have deteriorated due as 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).
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<PAGE> 16
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, the Company had a deficit of $20,384,403 in working
capital compared to a deficit of $10,489,285 at June 30, 1997.
The funds needed to reduce the increasing deficit in working capital could be
provided by increased efforts to collect accounts receivable, possible
refinancing of selected facilities, extended payment terms to major vendors for
food and supplies, and increased control over expenses.
During the six months ended December 31, 1997, cash used by operating activities
was $1,276,619, as compared to $14,086,943 during the six months ended December
31, 1996. The cash used during the six months ended December 31, 1997 was
primarily due to the net loss of $4,355,815, for the six months ended December
31, 1997; increases in accounts receivable of $11,636,513 from medicare
settlements, increases in receivables on the 11 facilities added in the fourth
quarter of the year ended June 30, 1997 and increases in Contour accounts
receivable; increases in Contour inventory of $3,395,269 for primarily two new
distribution centers. Cash provided by operating activities was primarily
depreciation and amortization of $3,372,831 on facilities, increases in accounts
payable and accrued expenses of $13,056,640 from 11 facilities added in the
fourth quarter of the year ended June 30, 1997.
Cash flows used in investing activities during the six months ended December 31,
1997, totaled $21,411,535 as compared to $31,351,010 during the six months ended
December 31, 1996. The Company expended $11,788,087 on the purchase of property
and equipment including the purchase of a long-term facility for $5,400,000 on
October 1, 1997 from individuals who are officers and directors of the Company.
The facility was subject to bond debt of $4,285,000. The Company applied the
remaining purchase price of $1,115,000 against the advance to the facility of
$919,148 from the Company, thereby resulting in an advance from the facility of
$195,852 due to the Company. The Company paid $3,414,166 for restricted bond
funds on facilities and advanced $5,256,419 to affiliated companies. 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.
Cash provided by financing activities during the six months ended December 31,
1997, totaled $30,713, 785 as compared to $45,721,512 during the six months
ended December 31, 1996. Sources of cash included additional lines of credit of
$17,396,696 which included $14,000,000 from Health Care Financial Partners, an
unrelated third party. The interest rate on the line of credit is prime plus 2%
and is due on December 15, 2001, collateralized by a first lien on accounts
receivable of the Company. The Company incurred long-term debt of $13,927,633
including $5,000,000 from Sun and $4,285,000 of bond debt on the acquisition of
a long-term care facility from two individuals who are officers and directors of
the Company. The bond debt is due 2015, with an interest rate of 9.5%. Sources
of cash also included proceeds from issuance of stock options of $1,988,626.
Cash used in financing activities primarily consisted of $464,000 in payments on
long-term debt, $600,000 in redemption of Series AA Preferred Stock, $75,000 in
dividends on preferred stock.
On September 30, 1994, the Company purchased a majority of the stock of Contour
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. The Company paid $600,000 on
September 30, 1997 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 2.0%. At December 31, 1997, the Company had
approximately $3,500,000 in unused credit available under such lines.
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<PAGE> 17
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.
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<PAGE> 18
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: May 21, 1998 By:/s/ Darrell C. Tucker
---------------------------------------
Darrell C. Tucker, Treasurer
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