FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ___________
Commission file number: 1-11144
Regency Health Services, Inc.
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
Delaware 33-0210226
Regency Health Services
2742 Dow Avenue
Tustin, California 92780
714-544-4443
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 ____
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Title Outstanding
Common Stock 16,737,170
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
REGENCY HEALTH SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS
September 30, December 31,
1996 1995
------------------ ------------------
(Unaudited)
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ $
21,717 104,238
Restricted cash 5,100
-
Accounts receivable, net of allowances of $3,812 at
September 30, 1996 and $3,757 at December 31, 1995 74,177 51,203
Estimated third party settlements 9,738 800
Notes and other receivables 1,726 2,182
Deferred income taxes 5,447 5,447
Assets held for sale 7,558 8,970
Other current assets 8,056 6,396
------------------ ------------------
Total current assets 133,519 179,236
------------------ ------------------
PROPERTY AND EQUIPMENT:
Land 21,281 21,249
Buildings and improvements 102,497 96,396
Leasehold interest - other 19,629 19,631
Equipment 33,577 24,610
------------------ ------------------
176,984 161,886
Less - accumulated depreciation and amortization (41,467) (34,679)
------------------ ------------------
Total property and equipment 135,517 127,207
------------------ ------------------
OTHER ASSETS:
Mortgage notes receivable, net of allowances of $949 at
September 30, 1996 and $951 at December 31, 1995 4,515 5,163
Goodwill, net of accumulated amortization of $2,860 at
September 30, 1996 and $563 at December 31, 1995 57,224 13,621
Other assets, net of accumulated amortization of $3,151 at
September 30, 1996 and $2,206 at December 31, 1995 22,980 13,715
------------------ ------------------
Total other assets 84,719 32,499
------------------ ------------------
$ $
353,755 338,942
================== ==================
The accompanying notes are an integral part of these
consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
REGENCY HEALTH SERVICES, INC.
CONSOLIDATED BALANCE SHEETS (Continued)
(In thousands, except par value)
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, December 31,
1996 1995
------------------ ------------------
(Unaudited)
CURRENT LIABILITIES:
<S> <C> <C>
Current portion of long-term debt $ $
2,297 4,371
Accounts payable 24,705 22,285
Accrued expenses 5,344 5,946
Accrued compensation 22,855 18,051
Accrued workers' compensation 4,901 5,377
Deferred revenue 2,065 1,743
Accrued interest 6,719 4,231
------------------ ------------------
Total current liabilities 68,886 62,004
LONG-TERM DEBT, NET OF CURRENT PORTION 182,558 179,615
OTHER LIABILITIES AND NONCURRENT RESERVES 9,029 8,988
DEFERRED INCOME TAXES 9,353 7,946
------------------ ------------------
Total liabilities 269,826 258,553
------------------ ------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; authorized - 35,000 shares; 16,732 and
16,670 shares issued and outstanding at September 30, 1996
and December 31, 1995, respectively 167 167
Additional paid-in capital 51,968 56,679
Retained earnings 31,794 23,543
------------------ ------------------
Total stockholders' equity 83,929 80,389
------------------ ------------------
$ $
353,755 338,942
================== ==================
The accompanying notes are an integral part of these
consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
REGENCY HEALTH SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Three months ended Nine months ended
September 30, September 30,
-------------------------- ----------------------------
1996 1995 1996 1995
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
NET OPERATING REVENUE $ $ $ $
144,100 107,491 411,695 304,806
------------ ------------ ------------- -------------
COSTS AND EXPENSES:
Operating expenses
116,959 87,208 335,653 247,062
Corporate general and administrative
5,423 4,648 17,103 14,346
Rent expense
6,599 4,266 18,289 12,624
Depreciation and amortization
4,011 2,631 11,197 7,253
Interest expense
5,023 2,009 13,368 5,843
Class action suit settlement
- - - 3,098
------------ ------------ ------------- -------------
Total costs and expenses
138,015 100,762 395,610 290,226
------------ ------------ ------------- -------------
INCOME BEFORE PROVISION FOR INCOME TAXES
6,085 6,729 16,085 14,580
PROVISION FOR INCOME TAXES
2,444 2,687 6,641 5,670
------------ ------------ ------------- -------------
INCOME BEFORE EXTRAORDINARY ITEM
3,641 4,042 9,444 8,910
EXTRAORDINARY ITEM - Loss on extinguishment of debt, net
of applicable income taxes of $812
(1,193) - (1,193) -
------------ ------------ ------------- -------------
NET INCOME $ $ $ $
2,448 4,042 8,251 8,910
============ ============ ============= =============
INCOME (LOSS) PER COMMON SHARE - PRIMARY
Income before extraordinary item $ $ $ $
0.22 0.24 0.57 0.54
Extraordinary item
(0.07) - (0.07) -
------------ ------------ ------------- -------------
Net income per share $ $ $ $
0.15 0.24 0.50 0.54
============ ============ ============= =============
Weighted average shares of common stock and
equivalents
16,279 16,683 16,505 16,624
============ ============ ============= =============
INCOME (LOSS) PER COMMON SHARE - FULLY DILUTED
Income before extraordinary item $ $ $ $
0.22 0.22 0.54 0.51
Extraordinary item
(0.07) - (0.06) -
------------ ------------ ------------- -------------
Net income per share $ $ $ $
0.15 0.22 0.48 0.51
============ ============ ============= =============
Weighted average shares of common stock and equivalents
17,492 20,670 19,546 20,577
============ ============ ============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
REGENCY HEALTH SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Nine months ended
September 30,
-----------------------------------
1996 1995
---- ----
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ $
8,251 8,910
Adjustments to reconcile net income to net cash provided by operating
activities:
Extraordinary loss on discharge of debt 2,005
-
Depreciation and amortization 11,197 7,317
Deferred income taxes and charge in lieu of taxes, net of payments 1,407 3,660
Other, net 418 20
Change in cash from changes in assets and liabilities, excluding effects
of acquisitions and dispositions:
Accounts receivable (21,445) (4,404)
Estimated third party settlements (8,938) 336
Other current assets (1,456) 9,189
Current and other liabilities 9,172 1,135
----------------- ---------------
Net cash provided by operating activities 611 26,163
----------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions (48,513)
(13,225)
Purchases of property and equipment (10,969) (10,937)
Collection on mortgage notes receivable 109 169
Changes in other assets, net (1,767) (610)
----------------- ---------------
Net cash used in investing activities (61,140) (24,603)
----------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt (62,650) (3,388)
Proceeds from issuance of long-term debt 56,143 1,843
Workers' compensation trust funding (10,637)
-
Purchase of treasury stock
(5,082) -
Proceeds from exercise of warrants and options 234 1,147
Proceeds from exercise of stock appreciation rights
- 615
----------------- ---------------
Net cash provided by (used in) financing activities (21,992) 217
----------------- ---------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (82,521) 1,777
CASH AND CASH EQUIVALENTS, beginning of period 104,238 25,677
----------------- ---------------
CASH AND CASH EQUIVALENTS, end of period $ $
21,717 27,454
================= ===============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
REGENCY HEALTH SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
The unaudited consolidated financial statements and related notes have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Accordingly, certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have not been presented. The accompanying
unaudited financial statements and related notes should be read in conjunction
with the consolidated financial statements and related notes included in Regency
Health Services, Inc.'s ("Regency" or the "Company") 1995 Annual Report on Form
10-K.
In the opinion of the management of Regency, all material adjustments
necessary to present fairly the Company's financial condition, results of
operations, and changes in financial position have been made. All material
intercompany balances, profits, and transactions have been eliminated. The
consolidated results of operations presented are not necessarily indicative of
the consolidated results for a full year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period.
Actual results could differ from those estimates.
Estimated third party settlements classified in accounts receivable,
other assets and other liabilities and non-current reserves in the 1995
financial statements have been reclassified to estimated third party settlements
in current assets to conform to the 1996 presentation. Certain other amounts
have been reclassified in the 1995 financial statements to conform to the 1996
presentation.
2. Acquisitions
Effective January 2, 1996, the Company completed the acquisition of the
assets of Assist-A-Care, a pharmacy located in San Diego, California. The
purchase price was $5.8 million, composed of $3.2 million cash and a $2.6
million note payable.
Effective February 1, 1996, the Company acquired leasehold interests in
18 health care facilities in Tennessee and North Carolina with 2,375 beds from
Liberty Healthcare Limited Partnership ("Liberty") through an asset purchase for
$39.3 million cash and a note payable for $2.2 million. The Company also
acquired Executive Pharmacy (consisting of one pharmacy in North Carolina and
one in Tennessee) with a $763,000 note payable and an enteral feeding business
for $1.5 million cash from businesses affiliated with Liberty. In addition, the
Company paid $400,000 cash for the inventory of Liberty. A portion of the
purchase was funded with notes payable, which may be reduced as a result of
certain seller liabilities and audit adjustments. Escrow accounts established at
the time of purchase were funded with $2.96 million for payment on the notes
payable and are included in other assets on the accompanying consolidated
balance sheet as of September 30, 1996.
On April 1, 1996, the Company completed the acquisition of the assets
of Buena Vista Nursing Center ("Buena Vista"), a health care facility with 64
skilled nursing beds and 22 assisted living beds, located in Lexington, North
Carolina. The purchase price was $2.875 million, consisting of $2.675 million in
cash and a $200,000 note payable. Payment of the note is dependent upon Buena
Vista attaining certain financial performance targets.
<PAGE>
These transactions were accounted for using the purchase method of
accounting under generally accepted accounting principles. Revenues and expenses
are included in the accompanying financial statements subsequent to the purchase
date. The purchase price allocation related to these transaction has not yet
been finalized.
The following unaudited pro forma condensed consolidated statements of
earnings present the summarized consolidated results of operations of the
Company after giving effect to the acquisitions of Liberty and
Liberty-affiliated businesses for the nine months ended September 30, 1996 and
1995, as if such acquisitions had been consummated on January 1, 1995 (in
thousands, except per share data):
<TABLE>
Nine months ended
September 30,
--------------------------------
1996 1995
-------------- ---------------
(Unaudited)
<S> <C> <C>
Net operating revenue $418,501 $ 364,504
Total costs and expenses 401,835 349,249
-------------- ---------------
Income before provision for income taxes 16,666 15,255
Provision for income taxes 6,885 5,940
-------------- ---------------
Net income before extraordinary item $ 9,781 $ 9,315
============== ===============
Income before extraordinary item per common share-
Primary $ 0.59 $ 0.56
============== ===============
Fully diluted $ 0.56 $ 0.53
============== ===============
</TABLE>
The pro forma results are presented for informational purposes only and
are not necessarily indicative of what results of operations actually would have
been had such acquisitions been consummated at the beginning of such period or
of future operations or results. The effect of the other acquisitions is
immaterial.
3. Dispositions
On March 1, 1996, the Company disposed of a 98-bed facility in Lynwood,
California resulting in a $182,000 charge against the reserve established in the
fourth quarter 1995.
4. Workers' Compensation Claims Trust
In 1995, the Company established a revocable workers' compensation
claims trust ("Trust") to pre-fund its workers' compensation obligations. The
Trust was funded for fiscal 1995 in March 1996 with approximately $10.6 million
from available cash. Of the remaining $7.8 million in the Trust at September 30,
1996, $5.1 million was classified as current restricted cash and $2.7 million
was classified as other long-term assets.
<PAGE>
5. Issuance of Subordinated Notes and Redemption of Convertible
Subordinated Debentures
On June 28, 1996, the Company issued 12 1/4% Subordinated Notes (the
"Subordinated Notes") in an aggregate amount of $50 million. Interest on the
Subordinated Notes will be payable semi-annually on January 15 and July 15 of
each year, commencing January 15, 1997. The Subordinated Notes will mature on
July 15, 2003, unless previously redeemed. Net proceeds received by the Company
totaled approximately $48.4 million and funded the redemption of the Company's
outstanding 6 1/2% Convertible Subordinated Debentures due 2003 (the
"Convertible Subordinated Debentures") on July 29, 1996. The Subordinated Notes
contain certain covenants similar to the 9-7/8% Senior Subordinated Notes,
including limitations on the ability of the Company to, among other things, (a)
incur additional indebtedness and issue redeemable preferred stock, (b) sell
equity interests in subsidiaries, (c) make certain restricted payments (as
defined), (d) create liens, and (e) engage in mergers, consolidations or
transfers of substantially all of the assets of the Company to another party.
On July 29, 1996, the Company completed the redemption of all $48.9
million of its outstanding Convertible Subordinated Debentures for cash at such
amount from the proceeds of the Subordinated Notes and available cash. The
redemption reduces fully diluted shares by 3.9 million shares and produces an
extraordinary loss on extinguishment of debt of $868,000, net of tax, resulting
from the write-off of unamortized underwriting costs.
6. Refinancing of Industrial Revenue Bonds
Effective September 30, 1996, the Company refinanced three of its
Industrial Revenue Bond Issues (IRBs) with an aggregate outstanding principal
balance of $7,560,000 with three new issues of tax exempt IRBs maturing through
September 2012. One of the new issues has a principal balance of $2,830,000 and
bears interest at rates ranging from 4.2% to 6.0% based on the maturity dates of
the individual bonds. The other two IRBs bear interest at a variable rate
initially set at 4.0% which is capped at 12.0%. The refinancing resulted in an
extraordinary loss on extinguishment of debt of $325,000, net of tax, resulting
from the write-off of unamortized underwriting costs and a call premium paid.
7. Net Income Per Share
For the three and nine months ended September 30, 1996 and 1995,
primary income per share was calculated based on the weighted average number of
common and common equivalent shares outstanding during the periods. For the
three and nine months ended September 30, 1996 and 1995, fully diluted income
per share was computed as described above and includes the issuance of common
shares upon the assumed conversion of the Convertible Subordinated Debentures
for the period prior to redemption. Additionally, interest and amortization of
underwriting costs related to such debentures were added, net of tax, to income
for the purpose of calculating fully diluted income per share for the period
prior to redemption. Such amounts aggregated $158,000 and $509,000 for the three
months ended September 30, 1996 and 1995, respectively, and $1,129,000 and
$1,527,000 for the nine months ended September 30, 1996 and 1995, respectively.
8. Subsequent Event
On November 1, 1996, the Company closed the sale of three of the remaining 12
previously identified facilities held for sale in California with 148 licensed
beds for an aggregate sales price of $2.0 million.
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
The following table sets forth certain operating data for the Company
on the dates indicated:
<TABLE>
September 30,
1996 1995
----- ----
(Unaudited)
In-patient operations
<S> <C> <C>
Facilities............................................. 112 93
Licensed beds.......................................... 11,537 9,134
Subacute beds.......................................... 1,108 972
Subacute units......................................... 46 40
Contract rehabilitation therapy operations
Non-affiliated facilities served....................... 103 73
Regency operated facilities served..................... 52 15
------ -----
Total........................................ 155 88
====== =====
Pharmacy operations
Non-affiliated facilities served....................... 81 5
Regency operated facilities served..................... 63 34
------ ----
Total........................................ 144 39
====== ===
Home health agencies........................................ 29 29
</TABLE>
- - ------------------
In-Patient Operations
The Company's in-patient operations derive its net operating revenue
from the performance of routine and ancillary services at the Company's
facilities. Revenue from routine services is comprised of charges for room and
board and basic nursing services for the care of patients, including those in
the Company's subacute specialty units. Revenue from ancillary services is
comprised of charges for rehabilitative services, subacute specialty services,
and pharmaceutical products and services provided to patients at the Company's
facilities. In-patient operations derive most of its ancillary services revenue
from Medicare- and HMO-eligible patients. The Company has classified revenue
from in-patient operations as either basic nursing care revenue or subacute
revenue. Basic nursing care revenue includes charges for room and board for
non-Medicare and non-HMO patients. Subacute revenue includes room and board and
basic nursing services for Medicare and HMO patients and revenues from all
ancillary services provided to patients at the Company's facilities.
The Company's growth strategy includes the selective acquisition of
both new facilities as well as other service providers. The Company incurs
certain costs and experiences operating inefficiencies in connection with the
acquisition of a new facility following such acquisition, relating to the
integration of such facility's financial and administrative systems, physical
plant and other aspects of its operations into those of the Company. In
addition, the introduction of a substantial portion of the Company's contract
rehabilitation therapy, pharmacy and other ancillary services to a new facility
may take as long as 12 months to fully implement. There can be no assurance that
each of the service providers the Company may acquire will be profitable, or
that the acquisition of new facilities that result in significant integration
costs and inefficiencies will not adversely affect the Company's profitability.
<PAGE>
During the fourth quarter of 1995 the Company exchanged leasehold
interests in three healthcare facilities with 360 beds in New Mexico for
leasehold interests in four healthcare facilities with 461 beds in Ohio
previously operated by another company. In October 1995, the Company also opened
a newly constructed facility and disposed of one additional facility.
In December 1995, the Company determined to dispose of 13 facilities
located in California as part of its strategic plan of diversifying from the
California Medicaid system ("Medi-Cal"). The results of operations of these
facilities will continue to be reflected in the Company's financial statements
until such dispositions are completed. In March 1996, the Company disposed of
one of the thirteen facilities and on November 1, 1996, the Company disposed of
three additional facilities (see Note 8 to the Consolidated Financial
Statements).
Effective February 1, 1996, the Company acquired 18 healthcare
facilities with 2,375 beds in Tennessee and North Carolina (see Note 2 to the
Consolidated Financial Statements). Effective April 1, 1996, the Company
acquired 1 healthcare facility in North Carolina with 86 beds.
Ancillary Businesses Operations
In July 1995, the Company acquired SCRS which provides rehabilitation
services to Company-operated and non-affiliated healthcare facilities in 14
states in the West, Midwest, and Southeast. In the third quarter 1996 and 1995,
69.9% and 85.8%, respectively, of SCRS revenues were derived from providing
services to non-affiliated healthcare providers. On August 9, 1996, SCRS
purchased the assets of Managed Respiratory Care Services, Inc., a respiratory
therapy company located in Arizona. The purchase price consisted of $300,000
cash and an "Earn-Out" clause in an amount not to exceed $500,000.
The Company's pharmacy operations provide prescription services and
basic pharmaceutical dispensing programs to Company and third party healthcare
facilities. During the first nine months of 1996 and 1995, 65% and 56%,
respectively, of revenues from pharmacy operations were derived from providing
services to non-affiliated healthcare providers and patients at Regency
facilities billed directly to third-party payors. In January and February of
1996, the Company acquired three additional pharmacy operations (see Note 2 to
the Consolidated Financial Statements).
The Company's 29 home healthcare locations provide skilled nursing,
rehabilitation and other services in selected areas in California and Ohio.
The acquisitions occurring in the first, second and third quarters 1996
are collectively referred to as the "1996 Acquisitions."
<PAGE>
Results of Operations
The following table sets forth the amounts of certain elements of net
operating revenue and the percentage of total net operating revenue for the
periods presented: (dollars in thousands) <TABLE>
Three months ended September 30,
1996 1995
---- ----
(Unaudited)
<S> <C> <C> <C> <C>
Basic nursing care......................................... $74,355 52% $57,378 53%
Subacute................................................... 42,384 29 33,666 31
--------- ----- --------- ----
Total in-patient operations........................... 116,739 81 91,044 84
Home healthcare operations................................. 9,146 6 8,011 8
Contract rehabilitation therapy operations to
non-affiliates (1).................................... 11,767 8 6,040 6
Pharmacy operations to non-affiliates (2).................. 5,710 4 1,931 2
Interest................................................... 738 1 465 --
--------- ----- --------- -----
Total................................................. $144,100 100% $107,491 100%
======== === ======== ===
(1) Net of intercompany billings of $5,056,000 and $999,000 for the three months ended September 30, 1996, and 1995,
respectively.
(2) Net of intercompany billings of $3,013,000 and $1,499,000 for the three months ended September 30, 1996
and 1995, respectively.
</TABLE>
<TABLE>
Nine months ended September 30,
1996 1995
---- ----
(Unaudited)
<S> <C> <C> <C> <C>
Basic nursing care......................................... $211,368 51% $173,097 57%
Subacute................................................... 127,047 31 96,417 31
---------- ----- --------- ----
Total in-patient operations........................... 338,415 82 269,514 88
Home healthcare operations................................. 26,695 6 22,454 7
Contract rehabilitation therapy operations to
non-affiliates (1).................................... 28,522 7 6,040 2
Pharmacy operations to non-affiliates (2).................. 15,815 4 5,219 2
Interest................................................... 2,248 1 1,579 1
----------- ---- ----------- ----
Total................................................. $411,695 100% $304,806 100%
======== === ======== ===
(1) Net of intercompany billings of $12,946,000 and $999,000 for the nine months
ended September 30, 1996 and 1995, respectively. (2) Net of intercompany
billings of $8,365,000 and $4,176,000 for the nine months ended September 30,
1996 and 1995, respectively.
</TABLE>
<PAGE>
<TABLE>
The following table sets forth certain operating data for the Company
for the periods presented:
Three months ended Nine months ended
September 30, September 30,
-------------------------------- ---------------------------------
1996 1995 1996 1995
---- ---- ---- ----
(Unaudited) (Unaudited)
Patient Days by Payor:
<S> <C> <C> <C> <C>
Medicare 76,245 58,575 232,305 183,626
Private/Other 194,112 169,297 568,035 512,223
Managed Care 27,166 23,476 86,809 71,133
Medicaid 640,819 484,080 1,843,341 1,424,769
------------- -------------- ------------ -------------
Total 938,342 735,428 2,730,490 2,191,751
============= ============== ============ =============
Home Health Visits 68,477 68,138 213,761 196,170
Home Health Hours 117,760 113,835 332,809 282,577
Revenue Mix:
Medicare 28.9 % 30.8 % 29.8 % 32.2 %
Private/Other 25.2 % 24.5 % 24.4 % 21.8 %
Managed Care 4.6 % 5.2 % 5.2 % 5.5 %
Medicaid 41.3 % 39.5 % 40.6 % 40.5 %
The following table presents the percentage of net operating revenue
represented by certain items reflected in the Company's Consolidated Statements
of Operations for the periods presented:
</TABLE>
<TABLE>
Three months ended Nine months ended
September 30, September 30,
---------------------------- -----------------------------
1996 1995 1996 1995
---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
NET OPERATING REVENUE 100.0 % 100.0 % 100.0 % 100.0 %
------------ ------------- ------------- -------------
COSTS AND EXPENSES:
Operating expenses 81.1 81.1 81.5 81.1
Corporate general and administrative 3.8 4.3 4.2 4.7
Rent expense 4.6 4.0 4.4 4.1
Depreciation and amortization 2.8 2.4 2.7 2.4
Interest expense 3.5 1.9 3.3 1.9
Class action lawsuit settlement -- -- -- 1.0
------------ ------------- ------------- -------------
Total costs and expenses 95.8 93.7 96.1 95.2
------------ ------------- ------------- -------------
INCOME BEFORE PROVISION FOR
INCOME TAXES AND EXTRAORDINARY ITEM 4.2 % 6.3 % 3.9 % 4.8 %
============ ============= ============= =============
</TABLE>
<PAGE>
Quarter Comparison 1996 to 1995
Net Operating Revenue
The Company's net operating revenue for the three months ended September
30, 1996 ("Third Quarter 1996") was $144.1 million compared to $107.5 million
for the three months ended September 30, 1995 ("Third Quarter 1995"), an
increase of $36.6 million or 34.1%.
Net operating revenue from in-patient operations increased $25.7 million,
or 28.2%, to $116.7 million from $91.0 million primarily due to the 1996
acquisition of 18 in-patient facilities and, on a same store basis, an increase
in average rates per patient day of 3.9%. The 18 in-patient facilities acquired
by the Company in February 1996 contributed $21.6 million of net operating
revenue during Third Quarter 1996. On a same store basis, the increase in rates
per patient day of 3.9% from Third Quarter 1995 was primarily due to providing
services to higher acuity patients, an increase in the Medi-Cal reimbursement
rates and the Company recognizing revenue associated with the elimination of the
Medicare Routine Cost Limit (RCL) inflationary freeze. The increase in higher
acuity patients on a same store basis is demonstrated by the shift in the payor
mix from Medicaid (43.8% to 43.0%) and private (14.5% to 13.4%) to Medicare
(28.9% to 29.2%) and managed care (6.2% to 6.6%), partially offset by a .5%
decrease in total patient days. The Medi-Cal rate increases in August 1996
resulted in approximately $.4 million in revenues. The revenue associated with
the elimination of the RCL inflationary freeze totaled $.9 million.
Net operating revenue from home healthcare operations grew $1.1 million to
$9.1 million, or 14.2% in Third Quarter 1996 over Third Quarter 1995, primarily
reflecting an increase in patient visits to 68,477 in Third Quarter 1996 from
68,138 in Third Quarter 1995 and an increase in treatment hours to 117,760 in
Third Quarter 1996 from 113,835 in Third Quarter 1995. Net operating revenue
from pharmacy operations to non-affiliates increased $3.8 million or 195.7% in
Third Quarter 1996 over Third Quarter 1995, primarily due to the acquisition of
Assist-A-Care in January 1996 and Executive Pharmacy in February 1996
(collectively, the "Pharmacy Acquisitions"). Net operating revenue from the
Pharmacy Acquisitions for Third Quarter 1996 was $3.1 million. Net operating
revenue from contract rehabilitation therapy operations to non-affiliates
increased $5.7 million, or 94.8% in Third Quarter 1996 over Third Quarter 1995,
primarily due to an increase in the number of non-affiliated facilities served
to 103 in Third Quarter 1996, from 73 in Third Quarter 1995.
Costs and Expenses
Total costs and expenses for Third Quarter 1996 increased $37.2
million, or 37%, to $138.0 million (95.8% of net operating
revenue) from $100.8 million (93.7% of net operating revenue) for Third Quarter
1995.
Operating expenses as a percentage of net operating revenue remained
consistent at 81.1% for Third Quarter 1996 and Third Quarter
1995.
Corporate general and administrative expense is the corporate overhead and
regional costs related to the supervision of operations. The expense increased
from $4.6 million in the Third Quarter 1995 to $5.4 million in the Third Quarter
1996. The increase is attributable to the 1996 Acquisitions, however, this
expense decreased as a percentage of net operating revenue to 3.8% for Third
Quarter 1996 from 4.3% in Third Quarter 1995. The decrease, as a percentage of
revenues is attributed to achieving economies of scale through acquisition, the
reduction of certain corporate office expenses and same store growth.
Rent expense as a percentage of net operating revenue increased to 4.6%
in Third Quarter 1996 from 4.0% in Third Quarter 1995 primarily due to the
assumption of lease obligations from the 1996 Acquisitions.
<PAGE>
Depreciation and amortization expense as a percentage of net operating
revenue increased to 2.8% in Third Quarter 1996 from 2.4% in Third Quarter 1995
primarily due to goodwill amortization related to the purchase of SCRS in July
1995 and the 1996 Acquisitions.
Interest expense as a percentage of net operating revenue increased to 3.5%
in Third Quarter 1996 from 1.9% in Third Quarter 1995 primarily due to the
Company issuing the 9-7/8% Senior Subordinated Notes (the "Senior Subordinated
Notes") in October 1995 partially offset by the repayment of the 8.1% Senior
Secured Notes in that month. A portion of the increase is also due to the
Company issuing the 12-1/4% Subordinated Notes in June 1996 partially offset by
the repayment of the 6-1/2% Convertible Subordinated Debentures on July 29,
1996.
The extraordinary item of $1.2 million resulted from the redemption of all
$48.9 million of the outstanding Convertible Subordinated Debentures and the
refinancing of the Industrial Revenue Bond Issues (IRBs). The redemption of the
Convertible Subordinated Debentures produced an extraordinary loss on
extinguishment of debt of $868,000, net of tax, resulting from the write off of
unamortized underwriting costs and the refinancing of the IRBs resulted in an
extraordinary loss on extinguishment of debt of $325,000 net of tax, resulting
from the write off of unamortized underwriting costs and a call premium paid.
Nine Months Comparison 1996 to 1995
Net Operating Revenue
The Company's net operating revenue for the nine months ended September 30,
1996 ("Nine Months 1996") was $411.7 million compared to $304.8 million for the
nine months ended September 30, 1995 ("Nine Months 1995"), an increase of $106.9
million or 35.1%.
Net operating revenue from in-patient operations increased $68.9 million,
or 25.6%, to $338.4 million from $269.5 million due to the 1996 acquisition of
18 in-patient facilities and an increase in average revenue per patient day of
6.1%, on a same store basis. The 18 in-patient facilities acquired by the
Company in February 1996 contributed $54.5 million of net operating revenue
during Nine Months 1996. On a same store basis, the average increase in
reimbursement rates per patient day of 6.1% was primarily due to providing
services to higher acuity patients, an increase in the Medi-Cal reimbursement
rates beginning in August 1996 and the Company recognizing revenue associated
with the elimination of the Medicare RCL inflationary freeze.
Net operating revenue from home healthcare operations grew $4.2 million to
$26.7 million, or 18.9%, in Nine Months 1996 over Nine Months 1995, primarily
reflecting an increase in patient visits to 213,761 in Nine Months 1996 from
196,170 in Nine Months 1995 and an increase in treatment hours to 332,809 in
Nine Months 1996 from 282,577 in Nine Months 1995. Net operating revenue from
pharmacy operations to non-affiliates increased $10.6 million or 203.0% in Nine
Months 1996 over Nine Months 1995, primarily due to the Pharmacy Acquisitions.
Net operating revenue from the Pharmacy Acquisitions for Nine Months 1996 was
$8.7 million. Net operating revenue from contract rehabilitation therapy
operations to non-affiliates increased $22.5 million, or 372.2% to $28.5 million
in Nine Months 1996 from $6.0 million in Nine Months 1995 and was a result of
the purchase of SCRS in July 1995 and an increase in the number of
non-affiliated facilities served by SCRS from 73 to 103.
Costs and Expenses
Total costs and expenses for Nine Months 1996 increased $105.4 million,
or 36.3%, to $395.6 million (96.1% of net operating
revenue) from $290.2 million (95.2% of net operating revenue) for Nine Months
1995.
<PAGE>
Operating expenses as a percentage of net operating revenue increased to
81.5% for Nine Months 1996, from 81.1% for Nine Months 1995. The increase
resulted from the incurrence of increased labor costs in the in-patient
operations while reimbursement rates per patient day for room and board charges
remained relatively flat for the Medi-Cal and Medicare systems during the first
and second quarters of 1996. In addition, the home health agency participating
in the Medicare Prospective Pay System pilot project beginning in 1996 did not
adequately reduce costs at the outset of this program in the first quarter of
1996. The Company made the necessary cost reductions during the second and third
quarters.
Corporate general and administrative expense is the corporate overhead and
regional costs related to the supervision of operations. The expense increased
from $14.3 million in Nine Months 1995 to $17.1 million in Nine Months 1996. The
increase is attributable to the 1996 Acquisitions, however, this expense
decreased as a percentage of net operating revenue to 4.2% for Nine Months 1996
from 4.7% in Nine Months 1995. The decrease as a percentage of revenues is
attributed to achieving economies of scale through acquisition, the reduction of
certain corporate office expenses and same store growth.
Rent expense as a percentage of net operating revenue increased to
4.4% in Nine Months 1996 from 4.1% in Nine Months 1995
primarily due to the assumption of lease obligations from the 1996 Acquisition.
Depreciation and amortization expense as a percentage of net operating
revenue increased to 2.7% in Nine Months 1996 from 2.4% in Nine Months 1995
primarily due to goodwill amortization related to the purchase of SCRS in July
1995 and the 1996 Acquisitions.
Interest expense as a percentage of net operating revenue increased to 3.3%
in Nine Months 1996 from 1.9% in Nine Months 1995 primarily due to the Company
issuing the Senior Subordinated Notes in October 1995 partially offset by the
repayment of the Senior Secured Notes in that month. A portion of the increase
is also due to the Company issuing the 12-1/4% Subordinated Notes in June 1996
partially offset by the repayment of the 6-1/2% Convertible Subordinated
Debentures on July 29, 1996.
Pursuant to the settlement of a class action lawsuit, the Company recorded
a charge of $3.1 million in Nine Months 1995. The amount represents the
Company's portion of the settlement, together with related legal fees and other
costs.
The extraordinary item of $1.2 million resulted from the redemption of all
$48.9 million of the outstanding Convertible Subordinated Debentures and the
refinancing of the IRBs. The redemption of the Convertible Subordinated
Debentures produced an extraordinary loss on extinguishment of debt of $868,000,
net of tax, resulting from the write off of unamortized underwriting costs and
the refinancing of the IRBs resulted in an extraordinary loss on extinguishment
of debt of $325,000 net of tax, resulting from the write off of unamortized
underwriting costs and a call premium paid.
Liquidity and Capital Resources
Working capital at September 30, 1996 decreased $52.6 million to $64.6
million (including cash and cash equivalents of $21.7 million) from $117.2
million (including cash and cash equivalents of $104.2 million) at December 31,
1995. The decrease was primarily attributable to funding the purchase of the
1996 Acquisitions (including funding of working capital), funding of a workers'
compensation trust and the purchase of treasury stock. The Company established a
revocable workers' compensation claims payment trust to pre-fund its workers'
compensation obligations which was funded for fiscal 1995 in March 1996 with
approximately $10.6 million from available cash (see Note 4 to the Consolidated
Financial Statements). During the Nine Months 1996, the Company's receivables
increased approximately $23.0 million primarily related to the 1996
Acquisitions. A portion of the increase in receivables is due to delays in
securing state and federal provider numbers for certain of the 18 healthcare
facilities acquired in the 1996 Acquisitions. Management anticipates the
remaining collections related to the delay will occur in the fourth quarter
1996. The estimated third party settlements increased by $8.9 million primarily
due to recording revenue related to RCL exceptions and the elimination of the
RCL inflationary freeze. As of September 30, 1996 and December 31, 1995, the
Company had RCL exception request receivables totaling $7.1 million and $4.5
million, respectively.
<PAGE>
The Company's major requirements for liquidity relate to funding working
capital, capital improvements and debt service obligations. The Company must
also provide funding to cover potential delays, temporary cessations or
interruptions in payments by third-party payors due to political or budgetary
constraints. Management believes that these liquidity needs can be met from
available cash, internally generated funds and existing borrowing capacity under
a revolving credit loan agreement ("Credit Agreement") with NationsBank of
Texas, N.A. as agent for a group of banks (discussed below).
The Company's healthcare facilities require capital improvements for
renovations and improvements in physical appearance. Future capital improvements
may be required as a result of routine regulatory inspections. In addition, the
Company is and will continue to invest in improving its information systems. The
Company's capital expenditures for the nine months ended September 30, 1996 and
1995 were approximately $11.0 million and $10.9 million, respectively. These
capital expenditures have been financed through a combination of internally
generated funds and debt. The Company expects to spend approximately an
aggregate of $13.0 million for capital expenditures during 1996 to be financed
through borrowings under the Credit Agreement and funds generated from
operations.
The Company has financed its acquisitions from a combination of borrowings
and funds generated by operations. The Company expects to finance future
acquisitions from a combination of existing cash, the Credit Agreement, and
alternative sources such as real estate investment trusts. Depending on the
numbers, size and timing of any such transactions, the Company may in the future
require additional financing in order to continue to make acquisitions.
In April and May 1996, the Company purchased 555,000 shares of Company
common stock at an average price of $9.16 per share. The transaction, accounted
for using the cost method, reduced stockholders' equity by $5.1 million.
On June 28, 1996 the Company issued 12 1/4% Subordinated Notes (the
"Subordinated Notes") in an aggregate amount of $50 million. Interest on the
Notes will be payable semi-annually on January 15 and July 15 of each year,
commencing January 15, 1997. The Notes will mature on July 15, 2003, unless
previously redeemed. Net proceeds received by the Company totaled approximately
$48.4 million and funded the redemption of the Company's outstanding 6 1/2%
Convertible Subordinated Debentures due 2003 on July 29, 1996 (see Note 5 to the
Consolidated Financial Statements).
Effective September 30, 1996, the Company refinanced three of its IRBs with
an aggregate outstanding principal balance of $7,560,000 with three new issues
of tax exempt IRBs maturing through September 2012. One of the new issues bears
interest at rates ranging from 4.2% to 6.0% based on the maturity dates of the
individual bonds. The other two IRBs bear interest at a variable rate initially
set at 4.0%, which is capped at 12.0% (see note 6 to the Consolidated Financial
Statements). The IRBs are now secured by irrevocable letters of credit instead
of mortgages on the specific facilities.
The extraordinary item of $1.2 million resulted from the redemption of all
$48.9 million of the outstanding Convertible Subordinated Debentures and the
refinancing of the IRBs. The redemption of the Convertible Subordinated
Debentures produced an extraordinary loss on extinguishment of debt of $868,000
net of tax resulting from the write off of unamortized underwriting costs and
the refinancing of the IRBs resulted in an extraordinary loss on extinguishment
of debt of $325,000 net of tax, resulting from the write off of unamortized
underwriting costs and a call premium paid. <PAGE>
On December 28, 1995 the Company entered into the Credit Agreement, which
provides up to $50,000,000 in a revolving line of credit and letters of credit.
As of October 31, 1996, no borrowings have been drawn on the Credit Agreement
and approximately $16,702,000 of standby letters of credit have been issued in
connection with the Company's self-insured workers' compensation programs and
the refinanced IRBs.
Seasonality
The Company's income from operations before fixed charges generally
fluctuates from quarter to quarter. The fluctuation is related to several
factors: the timing of Medicaid rate increases, seasonal census cycles, and the
number of calendar days in a given quarter. As a result, the Company's income
from operations before fixed charges tends to be higher in its third and fourth
quarters when compared to the first and second quarters.
Impact of Inflation
The healthcare industry is labor intensive. Wages and other labor costs are
especially sensitive to inflation. Increases in wages and other labor costs as a
result of inflation, or increases in federal or state minimum wages without a
corresponding increase in Medicare and Medicaid reimbursement rates, could
adversely impact the Company. A national increase in the minimum wage and an
additional increase in California have recently been approved, however the
Company estimates that this will not have a significant impact on its results of
operations.
Reimbursement
The majority of the Company's net operating revenue is derived from
services provided under the Medicare and Medicaid programs. Numerous proposals
relating to healthcare reform have been or may be introduced in the United
States Congress, state legislatures or by governmental agencies who regulate the
Medicare and Medicaid programs. It is uncertain what reform will ultimately be
enacted by the federal government, any state government or governmental agencies
and therefore, the Company cannot predict at this time the impact on the Company
of any proposed reforms.
As discussed above, the Company provides contract rehabilitation and
pharmacy services to both Regency operated and non-affiliated facilities. Under
current Medicare regulations, reimbursement for these services provided to
Medicare eligible patients in Regency facilities is based upon the related
entity's cost to provide the services unless a significant portion of the
related entity's revenues is derived from non-affiliated facilities. If a
significant portion of the related entity's revenues is derived from
non-affiliated facilities, Medicare will reimburse the facility's cost, which
includes a profit paid to the related entity. During 1995 and prior years, the
Company was reimbursed by Medicare based on its pharmacy operation costs on
billings to Regency facilities, as it did not meet the significant portion
criteria. After the acquisition of Assist-A-Care Pharmacy and Executive Pharmacy
in 1996, the Company believes it meets the "significant portion" criteria and
began recording a profit on billings for pharmacy services provided to Medicare
eligible patients in Regency facilities. The Company believes it meets the
"significant portion" criteria for its contract rehabilitation therapy
operations provided by SCRS, and therefore has recorded a profit on billings to
Regency facilities since the acquisition of SCRS. Medicare regulations do not
define a "significant portion," therefore, the Company's and Medicare's
interpretations could differ, which could result in retroactive adjustments
related to the profit on billings to Regency facilities for pharmacy and
contract rehabilitation services.
In the federal budget deficit reduction bill, various reimbursement rules
and regulations were adopted by the federal government that pertain to the
Company. The changes to regulations promulgated under OBRA, some of which expand
the remedies available to enforce regulations mandating minimum healthcare
standards, may have an adverse effect on the Company's operations. The Company
is unable to predict the particular effect on the Company until the manner in
which these regulations is implemented becomes known.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 6. Exhibits and Reports on Form 8-K
None
<PAGE>
Pursuant to the requirements 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.
REGENCY HEALTH SERVICES, INC.
By:___________________________________________
Bruce D. Broussard
Executive Vice President and Chief Financial Officer
Date: November 14, 1996
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