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 March 31, 1997
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, Inc.
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 15,874,414
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
REGENCY HEALTH SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS
<CAPTION>
March 31, December 31,
1997 1996
----------- ------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents........................................... $ 34,569 $ 22,875
Restricted cash..................................................... 5,776 4,425
Accounts receivable, net of allowances of $5,414 and $4,723 at
March 31, 1997 and December 31, 1996, respectively............... 89,763 80,949
Estimated third party settlements................................... 9,324 10,180
Notes and other receivables......................................... 908 1,355
Deferred income taxes............................................... 6,897 6,898
Assets held for sale................................................ 6,798 6,915
Other current assets................................................ 8,873 7,819
----------- ----------
Total current assets........................................ 162,908 141,416
----------- ----------
PROPERTY AND EQUIPMENT:
Land................................................................ 24,440 21,207
Buildings and improvements.......................................... 124,600 100,120
Leasehold interests................................................. 19,628 19,629
Equipment........................................................... 46,329 38,054
----------- ----------
214,997 179,010
Less accumulated depreciation and amortization...................... (46,851) (43,938)
----------- ----------
Total property and equipment................................ 168,146 135,072
----------- ----------
OTHER ASSETS:
Mortgage notes receivable, net of allowances of $1,352 at
March 31, 1997 and December 31, 1996............................. 574 1,014
Goodwill, net of accumulated amortization of $4,501 and $3,700 at
March 31, 1997 and December 31, 1996, respectively............... 54,589 53,753
Other assets, net of accumulated amortization of $4,270 and $3,736
at March 31, 1997 and December 31, 1996, respectively............ 27,098 22,321
----------- ----------
Total other assets.......................................... 82,261 77,088
----------- ----------
$413,315 $353,576
=========== ==========
<FN>
The accompanying notes are an integral part of these consolidated statements.
</FN>
</TABLE>
1
<PAGE>
<TABLE>
REGENCY HEALTH SERVICES, INC.
CONSOLIDATED BALANCE SHEETS (Continued)
(In thousands, except par value)
LIABILITIES AND STOCKHOLDERS' EQUITY
<CAPTION>
March 31, December 31,
1997 1996
---------- ------------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt................................ $ 3,313 $ 2,418
Accounts payable................................................. 23,349 24,958
Accrued expenses................................................. 9,800 8,290
Accrued compensation............................................. 26,986 26,253
Accrued workers' compensation.................................... 5,808 4,338
Deferred revenue................................................. 1,990 2,407
Accrued interest................................................. 6,768 5,578
---------- ----------
Total current liabilities................................ 78,014 74,242
LONG-TERM DEBT, NET OF CURRENT PORTION.............................. 234,641 182,490
OTHER LIABILITIES AND NONCURRENT RESERVES........................... 10,578 10,878
DEFERRED INCOME TAXES............................................... 7,091 5,018
---------- ----------
Total liabilities........................................ 330,324 272,628
---------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; authorized - 35,000 shares; 15,856
and 15,919 shares issued and outstanding at March 31, 1997
and December 31, 1996, respectively, net of 1,008 and 862
shares held in treasury, respectively......................... 169 168
Additional paid-in capital....................................... 50,917 52,031
Retained earnings................................................ 31,905 28,749
---------- ----------
Total stockholders' equity............................... 82,991 80,948
---------- ----------
$413,315 $353,576
========== ==========
<FN>
The accompanying notes are an integral part of these consolidated statements.
</FN>
</TABLE>
2
<PAGE>
<TABLE>
REGENCY HEALTH SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<CAPTION>
Three months ended
March 31,
1997 1996
--------- ---------
(Unaudited)
<S> <C> <C>
NET OPERATING REVENUE............................................... $159,447 $128,973
--------- ---------
COSTS AND EXPENSES:
Operating expenses............................................... 127,685 106,459
Corporate general and administrative............................. 8,705 5,730
Rent expense..................................................... 8,372 5,512
Depreciation and amortization.................................... 4,596 3,350
Interest expense................................................. 4,992 3,162
--------- ---------
Total costs and expenses...................................... 154,350 124,213
--------- ---------
INCOME BEFORE MINORITY INTEREST AND PROVISION FOR INCOME TAXES...... 5,097 4,760
MINORITY INTEREST................................................... (77) --
--------- ---------
INCOME BEFORE PROVISION FOR INCOME TAXES............................ 5,174 4,760
PROVISION FOR INCOME TAXES.......................................... 2,018 2,023
--------- ---------
NET INCOME.......................................................... $ 3,156 $ 2,737
========= =========
INCOME PER SHARE.................................................... $ 0.20 $ 0.16
========= =========
WEIGHTED AVERAGE SHARES OF COMMON STOCK AND EQUIVALENTS............. 15,861 16,803
========= =========
<FN>
The accompanying notes are an integral part of these consolidated statements.
</FN>
</TABLE>
3
<PAGE>
<TABLE>
REGENCY HEALTH SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<CAPTION>
Three months ended
March 31,
1997 1996
----------- -----------
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................... $ 3,156 $ 2,737
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.............................. 4,596 3,350
Deferred income taxes and charge in lieu of taxes.......... 2,067 1,467
Other, net................................................. (1) 3
Change in cash from changes in assets and liabilities,
excluding effects of acquisitions and dispositions:
Accounts receivable...................................... (3,850) (13,740)
Estimated third party settlements........................ 4,470 (3,337)
Other current assets..................................... (1,007) (108)
Current and other liabilities............................ 424 4,219
---------- ----------
Net cash provided by (used in) operating activities...... 9,855 (5,409)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions.................................................. (36,301) (47,283)
Purchases of property and equipment........................... (2,725) (2,641)
Collection on mortgage notes receivable....................... 816 109
Changes in other assets, net.................................. 1,332 (694)
---------- ----------
Net cash used in investing activities.................... (36,878) (50,509)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt.................................... (2,670) (3,918)
Proceeds from issuance of long-term debt...................... 49,000 --
Workers compensation trust funding............................ (6,500) (10,637)
Purchase of treasury stock.................................... (1,442) --
Proceeds from exercise of options............................. 329 190
---------- ----------
Net cash provided by (used in) financing activities...... 38,717 (14,365)
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ 11,694 (70,283)
CASH AND CASH EQUIVALENTS, beginning of period................... 22,875 104,238
---------- ----------
CASH AND CASH EQUIVALENTS, end of period......................... $ 34,569 $ 33,955
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the quarter for interest..................... 3,801 1,311
========== ==========
Cash paid during the quarter for income taxes................. 1,019 --
========== ==========
<FN>
The accompanying notes are an integral part of these consolidated statements.
</FN>
</TABLE>
4
<PAGE>
REGENCY HEALTH SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During the quarter ended March 31, 1997:
The Company issued a promissory note in the amount of $6.7
million in connection with the acquisition of four acute
rehabilitation hospitals, ten outpatient rehabilitation
clinics and six neurological treatment centers in California.
During the quarter ended March 31, 1996:
The Company acquired Assist-A-Care Pharmacy in San Diego,
California and issued a promissory note in the amount of $2.6
million as part of the purchase price.
The Company issued a promissory note in the amount of
$2.2 million in connection with the acquisition of 18
healthcare facilities in Tennessee and North Carolina.
The Company acquired Executive Pharmacy and issued a
promissory note in the amount of $763,000.
The accompanying notes are an integral part of these consolidated statements.
5
<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") 1996 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.
Certain amounts have been reclassified in the 1996 financial statements
to conform to the 1997 presentation.
2. Acquisitions
Effective January 1, 1997, the Company acquired four acute
rehabilitation hospitals, ten outpatient rehabilitation clinics and six
neurological treatment centers from Horizon/CMS Healthcare Corporation ("CMS").
The purchase price was $43.0 million, made up of a cash payment of $36.3 million
and notes payable totaling $6.7 million. The Company funded the acquisition with
borrowings against the Amended and Restated Credit Agreement dated December 20,
1996 with NationsBank of Texas, N.A. as agent for a group of banks (the
"NationsBank Credit Agreement"). Two of the acquired hospitals have joint
venture partners with 30% and 50% interests. Accordingly, the income statement
reflects minority interest related to the joint venture partners' share of the
revenues and expenses of the two hospitals. This transaction was 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 accounting for this
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 acquisition of the four acute rehabilitation
hospitals, ten outpatient rehabilitation clinics and six neurological treatment
centers for the three months ended March 31, 1997 and 1996, as if such
acquisition had been consummated on January 1, 1996 (in thousands, except per
share data):
6
<PAGE>
<TABLE>
<CAPTION>
Three months ended March 31,
1997 1996
--------- ---------
(Unaudited)
<S> <C> <C>
Net operating revenue $159,447 $144,682
Total costs and expenses (including minority interest) 154,273 139,599
--------- ---------
Income before provision for income taxes 5,174 5,083
Provision for income taxes 2,018 2,160
========= =========
Net income $ 3,156 $ 2,923
========= =========
Income per common share: $ 0.20 $ 0.17
========= =========
</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.
3. Dispositions
In connection with the 13 facilities identified for disposition by the
Company during the fourth quarter of 1995, the Company disposed of an 81-bed
facility in Pomona, California effective January 1, 1997 for a nominal amount,
resulting in a $233,000 charge against the reserve established for such
dispositions.
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. In March 1997, the Company pre-funded its fiscal 1996
workers' compensation obligations with approximately $6.5 million from available
cash. Of the remaining $11.3 million in the Trust at March 31, 1997, $5.8
million was classified as current restricted cash and $5.5 million was
classified as other long-term assets.
5. Subsequent Event
On April 1, 1997, the Company acquired HHC Health Group, Inc., a home
health and infusion therapy provider with four locations in California, for $2.3
million, consisting of a cash payment of $1.7 million and a note payable of $.6
million. On May 1, 1997, the Company acquired Asher Clinic, an outpatient clinic
in California, for $1.7 million in cash. On May 1, 1997, the Company also
acquired Advanced Physical Therapy, Inc., which operates three outpatient
clinics in California, for $1.7 million, consisting of a cash payment of $1.4
million and a note payable of $.3 million.
These transactions were accounted for under the purchase method of
accounting.
6. Earnings per Share
The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share". This
statement is effective for both interim and annual reporting periods ending
after December 15, 1997. SFAS No. 128 replaces primary EPS with basic EPS and
fully diluted EPS with diluted EPS. Basic EPS is computed by dividing reported
earnings by weighted average shares outstanding. Diluted EPS is computed in the
same way as fully diluted EPS, except that the calculation now uses the average
share price for the reporting period to compute dilution from options under the
treasury stock method. The Company will adopt the new standard in its reporting
for the year ending December 31, 1997. Management does not believe that adoption
of this standard will have a significant impact on earnings per share.
7
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Quarterly Report on Form 10-Q of Regency Health Services, Inc.
("the Company") contains statements which constitute "forward looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such statements appear in a number of places in this Quarterly Report
under the heading Management's Discussion and Analysis of Financial Condition
and Results of Operations. Such forward looking statements include the views,
opinions and expectations of the Company, its officers and directors with
respect to the matters there discussed, and as to the intent, belief and
anticipation of such persons expressed in this Quarterly Report. Readers are
cautioned that any such forward looking statements involve risks, uncertainties
and factors that may impact the actual results or activities of the Company.
These risks and items are discussed in greater detail in the portion of the
Company's Annual Report on Form 10-K for the year ended December 31, 1996
entitled "Factors Which May Affect the Company".
Overview of Strategic Plan
The healthcare industry continues to change as the government,
commercial payors and healthcare providers like the Company focus on rising
healthcare costs. It is the Company's belief, as well as that of the government
and commercial payors, that the most effective delivery system for reducing
costs is a regionally oriented market based model within the context of the
evolving managed care system. Presently, only 6.7% of the Company's revenues are
generated from managed care payors, however, management and other members of the
industry believe the Medicare system will be adopting a prospective pay system
in the coming years for skilled nursing facilities. Furthermore, the Company
believes more Medicare participants will be entering managed care plans as they
typically offer more services at a fixed price.
Considering the anticipated changes in the industry, the Company
believes that the most successful business strategy in the future will be to
provide both payors and patients, collectively the customers, cost effective
delivery of care with high customer satisfaction. This will mean significant
changes in the current delivery system. The Company believes its future delivery
system will need to have the following components:
o Focus on customers through a fully integrated delivery system which will
allow for "one-stop shopping". This means that the Company will need to
provide multiple low cost services across the continuum of care in each of
the regions in which it provides care. In the future, acquisitions will
focus on completing the continuum of care within the Company's various
regional markets.
o Name recognition as customers must be convinced that the Company provides
consistent service throughout the continuum of care.
o Regionally focus to ensure that diverse services are available in each
market and that those services are integrated rather than the traditional
focus on separate business lines.
o Focus on placing the patient in the most effective setting with the lowest
cost while demonstrating positive outcomes from the delivery of medicine
and care. Basically, the Company will strive to provide high quality
service across the continuum of care at a low cost.
o Focus on a low overhead cost structure. Reengineering to eliminate non-value
added services and investments in information technology will be required
in order to reduce costs and enable the Company to provide consistent,
integrated, low cost services. The investment in information technology
will also provide management critical information in a timely manner to
effectively manage its business in the managed care environment.
8
<PAGE>
During 1996 the Company developed and began to implement its strategic
plan to address these issues. In connection with this plan, on January 1, 1997,
the Company acquired four acute rehabilitation hospitals, ten outpatient
rehabilitation clinics and six neurological treatment centers (the
"Rehabilitation and Specialty Services Division Acquisition"). The purchase
price was $43.0 million, made up of a cash payment of $36.3 million and notes
payable totaling $6.7 million. This acquisition was one of many steps in the
Company's plan to complete the continuum of care in its various regional
markets. The Company has also hired two individuals with extensive experience in
acquisitions to focus on the acquisition of home health agencies and outpatient
clinics, primarily in our existing nursing operations markets to complete the
continuum of care in those markets. As a result of their efforts during the
first quarter of 1997, the Company acquired a home health and infusion therapy
provider with four locations in California effective April 1, 1997. The purchase
price of $2.3 million included a cash payment of $1.7 million and a note payable
totaling $.6 million.
During the first quarter of 1997, the Company continued its progress
toward lowering the overhead cost structure primarily through reengineering the
corporate support structure in its nursing and subacute operations. Effective
April 1, 1997, the Company implemented the new corporate support model which
will provide the resources and incentives necessary for the nursing facilities
to operate in a relatively self-reliant environment, with anticipated lowered
operating costs. In addition, the Company brought the automated pharmacy to near
completion during the first quarter of 1997.
Another major component of the Company's strategy, in terms of
importance and cost, will involve integrating the Company's information systems
to allow for the integrated delivery of patient care across all service lines
within the continuum of care. The Company will therefore be making a significant
investment in information technology over the next five years. This investment
will result in cost savings in the future. The first phase of the investment in
information technology will be investments in the infrastructure such as a
communications network and servers combined with upgrades of the accounts
payable software, the acquisition of Kronos time clocks and other transaction
systems, which are expected to be completed during 1997. The second phase will
be the integration of the various computer systems used by the different
divisions of the Company to allow for a seamless transfer of patient care
information across the entire continuum of care. The integration of the various
systems is expected to begin during 1998.
The Company incurs certain costs and operating inefficiencies in
connection with acquisitions following such acquisition, relating to the
integration of such entity'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 operation
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. In
addition, there can be no assurance that new acquisitions that result in
significant integration costs and inefficiencies will not adversely affect the
Company's profitability.
General
In connection with the strategy and acquisitions discussed above, the
Company has created the Regency Rehabilitation and Specialty Services Division
which includes the four Acute Rehabilitation Hospitals, ten outpatient clinics
and six neurological treatment centers acquired on January 1, 1997 and the
Contract Rehabilitation Therapy Operations of SCRS and Communicology, Inc.
("SCRS").
9
<PAGE>
<TABLE>
The following table sets forth certain operating data for the Company
on the dates indicated:
<CAPTION>
March 31,
1997 1996
------- -------
(Unaudited)
<S> <C> <C>
Facilities (healthcare providers):
Nursing and subacute.............................................. 106 111
Rehabilitation hospitals.......................................... 4 -
Neurological centers.............................................. 6 -
Outpatient clinics................................................ 10 -
Home health agencies.............................................. 28 29
Ancillary facilities served:
Contract rehabilitation:
Affiliated................................................... 64 34
Non-affiliated............................................... 114 78
======== =======
Total........................................................ 178 112
======== =======
Pharmacy:
Affiliated................................................... 79 59
Non-affiliated............................................... 85 73
======== =======
Total........................................................ 164 132
======== =======
Number of licensed beds:
Nursing and subacute.............................................. 11,119 11,455
Rehabilitation hospitals.......................................... 292 -
Neurological centers.............................................. 53 -
</TABLE>
Nursing and Subacute Operations
The Company's nursing and subacute operations derive 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. Nursing and subacute operations derive most of its ancillary
services revenue from Medicare- and HMO-eligible patients. The Company has
classified revenue from nursing and subacute 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.
Effective February 1, 1996, the Company acquired 18 healthcare
facilities with 2,375 beds in Tennessee and North Carolina, accounted for under
the purchase method of accounting.
Effective April 1, 1996, the Company acquired a healthcare facility
with 64 nursing beds and 22 assisted living beds located in Lexington, North
Carolina, accounted for under the purchase method of accounting.
These two acquisitions are collectively referred to as the "1996
Nursing and Subacute Acquisitions".
10
<PAGE>
In connection with the 13 facilities identified for disposition by the
Company during the fourth quarter of 1995, the Company closed an 81-bed facility
in Pomona, California effective January 1, 1997, resulting in a $233,000 charge
against the reserve established for such dispositions.
Home Health Operations
The Company's home health operations provide skilled nursing,
rehabilitation and other services in selected areas in California and Ohio. The
Company has positioned its home healthcare capabilities to serve its facilities'
home health needs. During January 1997, two of the home healthcare agencies were
consolidated for cost saving measures resulting in a reduction of one agency.
On April 1, 1997, the Company acquired HHC Health Group, Inc., a home
health and infusion therapy provider with four locations in California, for $2.3
million, consisting of a cash payment of $1.7 million and notes payable of $.6
million. This transaction was accounted for under the purchase method of
accounting.
Pharmacy Operations
The Company's pharmacy operations provide prescription services and
basic pharmaceutical dispensing programs to Company and third party healthcare
facilities. During the first three months of 1997 and 1996, 61.3% and 65.7%,
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 accounted for
under the purchase method of accounting.
The 1996 Nursing and Subacute Acquisitions and the three pharmacy
acquisitions which took place in January and February of 1996 are collectively
referred to as the "1996 Acquisitions".
Rehabilitation and Specialty Services Division Operations
The Company's rehabilitation hospitals derive net operating revenue
from the provision of acute rehabilitation and subacute services. Revenues from
outpatient services are derived primarily from providing physical and
occupational therapy at the Company's outpatient clinics. Revenues from the
neurological treatment centers are derived from providing long-term residential
care to catastrophically injured patients.
SCRS provides physical, occupational and speech therapy services to
Company-operated and third party healthcare facilities, primarily nursing and
subacute centers, in 14 states in the West, Midwest, and Southeast. During the
first quarter of 1997 and 1996, 72.6% and 71.8%, respectively, of SCRS revenues
were derived from providing services to non-affiliated healthcare providers.
11
<PAGE>
<TABLE>
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):
<CAPTION>
Three months ended March 31,
1997 1996
-------------------- -------------------
(Unaudited)
<S> <C> <C> <C> <C>
Nursing and subacute operations - basic nursing... $ 69,408 43% $ 65,615 51%
Nursing and subacute operations - subacute........ 44,361 28 42,481 33
--------- ----- --------- -----
Subtotal nursing and subacute operations...... 113,769 71 108,096 84
--------- ----- --------- -----
Rehabilitation hospitals - acute.................. 7,070 5 -- --
Rehabilitation hospitals - subacute............... 5,211 3 -- --
Outpatient........................................ 1,340 1 -- --
--------- ----- --------- -----
Subtotal rehabilitation hospitals............. 13,621 9 -- --
Home healthcare operations........................ 8,867 6 8,692 6
Contract rehabilitation therapy operations to
non-affiliates (1)............................ 14,769 9 7,459 6
Pharmacy operations to non-affiliates (2)......... 6,430 4 4,726 4
Neurological treatment centers operations......... 1,991 1 -- --
========= ===== ========= =====
Total......................................... $159,447 100% $128,973 100%
========= ===== ========= =====
<FN>
(1) Net of intercompany billings of $5,582,000 and $2,928,000 for the three
months ended March 31, 1997 and 1996, respectively.
(2) Net of intercompany billings of $4,061,000 and $2,472,000 for the three
months ended March 31, 1997 and 1996, respectively.
</FN>
</TABLE>
<TABLE>
The following table sets forth certain operating data for the Company
for the periods presented:
<CAPTION>
Three months ended
March 31,
-------------------------
1997 1996
--------- ---------
(Unaudited)
<S> <C> <C>
Patient Days by Payor:
Medicare................................................ 91,580 76,327
Private/Other........................................... 188,610 182,659
Managed Care............................................ 34,749 32,050
Medicaid................................................ 584,164 567,170
--------- ---------
Total.............................................. 899,103 858,206
========= =========
Statistics:
Nursing occupancy percentage............................ 90.5% 91.3%
Rehabilitation hospitals occupancy percentage........... 64.7% --
Rehabilitation hospitals average length of stay......... 22.3 --
Outpatient visits....................................... 12,479 --
Outpatient treatments................................... 54,585 --
Contract rehabilitation modules delivered............... 918,514 418,443
Home Health Visits (Medicare)........................... 62,692 68,462
Home Health Hours (Non-Medicare)........................ 106,285 105,879
Pharmacy beds services.................................. 15,848 12,536
Revenue Mix:
Medicare................................................ 31.9% 31.1%
Private/Other........................................... 26.2% 23.4%
Managed Care............................................ 6.7% 6.2%
Medicaid................................................ 35.2% 39.3%
</TABLE>
12
<PAGE>
<TABLE>
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:
<CAPTION>
Three months ended
March 31,
---------------------
1997 1996
------- -------
(Unaudited)
<S> <C> <C>
NET OPERATING REVENUE................................ 100.0% 100.0%
------- -------
COSTS AND EXPENSES:
Operating expenses................................... 80.1 82.5
Corporate general and administrative................. 5.5 4.4
Rent expense......................................... 5.2 4.3
Depreciation and amortization........................ 2.9 2.6
Interest expense..................................... 3.1 2.5
------- -------
Total costs and expenses........................ 96.8 96.3
------- -------
INCOME BEFORE MINORITY INTEREST AND PROVISION FOR
INCOME TAXES......................................... 3.2% 3.7%
======= =======
</TABLE>
Quarter Comparison 1997 to 1996
Net Operating Revenue
The Company's net operating revenue for the three months ended March
31, 1997 ("First Quarter 1997") was $159.4 million compared to $129.0 million
for the three months ended March 31, 1996 ("First Quarter 1996"). This is an
increase of $30.4 million or 23.6%, of which, $15.6 million was attributable to
the Rehabilitation and Specialty Services Division Acquisition, including $2.0
million of revenue related to the neurological treatment centers included in
other revenue.
Net operating revenue from nursing and subacute operations increased
$5.7 million, or 5.2%, to $113.8 million from $108.1 million primarily due to
revenues from the 1996 Nursing and Subacute Acquisitions of approximately $8.0
million and an increase in same store revenues of approximately $1.5 million,
partially offset by the disposal of seven facilities. The increase in same store
revenues is primarily due to the increase in the average rate per patient day of
3.5% from First Quarter 1996 which was primarily due to an increase in the
Medi-Cal reimbursement rates and the Company recognizing revenue associated with
the elimination of the Medicare Routine Cost Limit (RCL) freeze, partially
offset by a decrease in patient days of 15,119.
Net operating revenue from pharmacy operations to non-affiliates
increased $1.7 million or 36.1% in First Quarter 1997 over First Quarter 1996,
primarily due to the acquisition of Executive Pharmacy in February 1996 and the
start up of a joint venture pharmacy located in Ohio in September 1996. Net
operating revenue from contract rehabilitation therapy operations to
non-affiliates increased $7.3 million, or 98.0% in First Quarter 1997 over First
Quarter 1996, primarily due to an increase in the number of non-affiliated
facilities served to 178 in First Quarter 1997, from 112 in First Quarter 1996
and an increase in number of modules delivered from 418,433 to 918,514.
13
<PAGE>
Costs and Expenses
Total costs and expenses for First Quarter 1997 increased $30.1
million, or 24.3%, to $154.3 million (96.8% of net operating revenue) from
$124.2 million (96.3% of net operating revenue) for First Quarter 1996.
Operating expenses for First Quarter 1997 increased $21.2 million, or
19.9%, to $127.7 million from $106.5 million. However, operating expenses as a
percentage of revenue dropped from 82.5% for First Quarter 1996 to 80.1% for
First Quarter 1997. The reduction in operating expenses as a percentage of
revenues was due primarily to the Rehabilitation and Specialty Services
Acquisition and growth in the SCRS operations, both of which are higher margin
businesses as well as the rate increases discussed above.
Corporate general and administrative expense is the corporate and
divisional overhead costs related to the supervision of operations. The expense
increased from $5.7 million in the First Quarter 1996 to $8.7 million in the
First Quarter 1997 due primarily to the Rehabilitation and Specialty Services
Division Acquisition, the Company's investment in information technology and
growth in the Company's existing operations. This expense increased as a
percentage of revenue from 4.4% in the First Quarter 1996 to 5.5% in the First
Quarter 1997 primarily due to the Company's investment in information technology
and the Rehabilitation and Specialty Services Division Acquisition.
Rent expense as a percentage of net operating revenue increased to 5.3%
in First Quarter 1997 from 4.3% in First Quarter 1996 primarily due to the
Rehabilitation and Specialty Services Division Acquisition which has higher rent
expense as a percentage of revenue and the assumption of lease obligations from
the 1996 Nursing and Subacute Acquisitions.
Depreciation and amortization expense as a percentage of net operating
revenue increased to 2.9% in First Quarter 1997 from 2.6% in First Quarter 1996
primarily due to goodwill amortization related to the acquisition of 18
healthcare facilities in February 1996, depreciation of buildings and equipment
associated with the Rehabilitation and Specialty Services Acquisition and the
Company's investment in information technology.
Interest expense as a percentage of net operating revenue increased to
3.1% in First Quarter 1997 from 2.5% in First Quarter 1996 due primarily to the
Company borrowing $49 million against the Amended and Restated Credit Agreement
dated December 20, 1996 with NationsBank of Texas, N.A. as agent for a group of
banks (the "NationsBank Credit Agreement") principally to fund the
Rehabilitation and Specialty Services Acquisition and the related working
capital. A portion of the increase is also due to the Company issuing 12-1/4%
Subordinated Notes in June 1996 in the aggregate amount of $50 million partially
offset by the redemption of the 6-1/2% Convertible Subordinated Debentures due
2003 in July 1996 in the amount of $48.9 million.
Liquidity and Capital Resources
Working capital at March 31, 1997 increased $17.7 million to $84.9
million (including cash and cash equivalents of $34.6 million) from $67.2
million (including cash and cash equivalents of $22.9 million) at December 31,
1996. The increase was primarily attributable to an increase in cash associated
with the borrowings under the NationsBank Credit Agreement of $49 million less
the Rehabilitation and Specialty Services Acquisition cash purchase price of
$36.3 million, the increase in receivables primarily associated with the
Rehabilitation and Specialty Services Acquisition and funds generated from
operations. In addition, the Company pre-funded an additional $6.5 million
related to its 1996 worker's compensation obligations in March 1997 (see Note 4
to the Consolidated Financial Statements) and the estimated third party
settlements decreased by $.9 million primarily due to cash received related to
Medicare and Medicaid prior year settlements. Subsequent to March 31, 1997, the
Company repaid $10 million of Credit Facility borrowings.
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
interruption in payments by third-party payors due to political or budgetary
constraints. In addition, as part of its strategic plan, the Company anticipates
investing approximately $40 million in information technology over the next five
years. A significant portion of this investment will be financed through
operating leases. Management believes that these liquidity needs can be met from
available cash, internally generated funds and existing borrowing capacity under
the NationsBank Credit Agreement.
14
<PAGE>
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 three months ended March 31, 1997 and
1996 were approximately $2.7 million and $2.6 million, respectively. These
capital expenditures have been financed through a combination of internally
generated funds and debt. The Company expects to spend an aggregate of
approximately $14.0 million for capital expenditures during 1997 to be financed
through borrowings under the NationsBank 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 NationsBank 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.
During 1996, the Company purchased 862,000 shares of Company common
stock at an average price of $9.56 per share. During First Quarter 1997, the
Company purchased an additional 146,000 shares at an average price of $9.82 per
share. These transactions, accounted for under the cost method, reduced
stockholders' equity by $9.7 million.
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.
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.
15
<PAGE>
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 are derived from non-affiliated facilities. If a
significant portion of the related entity's revenues are 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 is
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.
Further, the federal government has announced that it will be devoting
increased resources to investigating fraud or abuse in healthcare providers'
billings and business practices, and has publicly identified various large
healthcare providers as targets of such investigations, without alleging any
actual violations by these persons. In addition, the governmental agency charged
with prosecuting such alleged activities has on occasion asserted that certain
customary practices in the healthcare industry may, under certain circumstances,
constitute "fraud and abuse" although such positions have not always been
validated by the courts. While the Company believes that its billings have been
accurate and proper in all material respects, and that its business practices,
facilities and operations are in substantial compliance with all applicable laws
and regulations, it is unable to predict the consequences to the Company were it
to be identified publicly as a target of any such investigation.
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 are implemented becomes known.
16
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 6. Exhibits and Reports on Form 8-K
During January 1997, the Company filed a Report on Form 8-K dated
January 1, 1997 related to the acquisition of four acute rehabilitation
hospitals, ten outpatient rehabilitation clinics and six neurological treatment
centers from Horizon/CMS Healthcare Corporation for an aggregate purchase price
of $43.0 million made up of a cash payment of $36.3 million and notes payable
issued by the Company totaling $6.7 million.
17
<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: /S/ Bruce D. Broussard
_________________________________________
Bruce D. Broussard
Executive Vice President and Chief Financial Officer
Date: May 14, 1997
18
<PAGE>
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 34,569
<SECURITIES> 0
<RECEIVABLES> 95,177
<ALLOWANCES> 5,414
<INVENTORY> 0
<CURRENT-ASSETS> 162,908
<PP&E> 214,997
<DEPRECIATION> 46,851
<TOTAL-ASSETS> 413,315
<CURRENT-LIABILITIES> 78,014
<BONDS> 234,641
0
0
<COMMON> 169
<OTHER-SE> 82,822
<TOTAL-LIABILITY-AND-EQUITY> 413,315
<SALES> 0
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