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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange
Act of 1934. For the quarterly period ended June 30, 1997.
[_] 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: 0-26502
COMMUNITY CARE OF AMERICA, INC.
(Exact name of registrant as specified in its charter)
Delaware 52-1823411
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
3050 North Horseshoe Drive, Suite 260,
Naples, Florida 34104
(Address of principal executive offices)
Registrant's telephone number, including area code: (941) 435-0085
N/A
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(Former name, former address and former fiscal year,
if changed since last report)
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. [X] Yes [ ] No
As of July 31, 1997, there were outstanding 7,597,801 shares of common stock,
$.0025 par value, per share.
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<PAGE>
INDEX
PART I - FINANCIAL INFORMATION PAGE
Item 1. Condensed Financial Statements (Unaudited)
Consolidated Balance Sheets...................................1
Consolidated Statements of Operations.........................2
Consolidated Statement of Shareholders' Equity................3
Consolidated Statements of Cash Flows.........................4
Notes to Consolidated Financial Statements....................5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................7
PART II - OTHER INFORMATION
Item 2. Changes in Securities..........................................17
Item 5. Other Information .............................................17
Item 6. Exhibits and Reports on Form 8-K...............................18
SIGNATURES..............................................................19
EXHIBIT INDEX...........................................................20
<PAGE>
<TABLE>
<CAPTION>
Community Care of America, Inc.
and Subsidiaries
Consolidated Balance Sheets
December 31, June 30,
1996 1997
------------- -------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,709,000 $ 1,593,000
Accounts receivable net of allowance for doubtful accounts and
contractual adjustments of $4,833,000 and $4,899,000 at
December 31, 1996 and June 30, 1997: 16,407,000 18,855,000
Inventories 1,761,000 1,496,000
Prepaid expenses and other current assets 1,095,000 1,383,000
------------- -------------
Total current assets 20,972,000 23,327,000
Property, plant, and equipment, net of accumulated depreciation 58,424,000 57,288,000
Notes receivable -- 1,500,000
Deposits 6,637,000 1,995,000
Excess of cost over fair value of net assets acquired, net of
accumulated amortization of $710,000 and $1,001,000 at December
31, 1996 and June 30, 1997 13,666,000 13,376,000
Deferred financing costs 1,066,000 2,429,000
Other assets 1,354,000 1,477,000
------------- -------------
$ 102,119,000 $ 101,392,000
============= =============
Liabilities and shareholders' equity Current liabilities:
Current maturities of long-term debt, net of unamortized
debt discount of $0 and $600,000 at December 31, 1996 and
June 30, 1997 $ 6,341,000 $ 3,643,000
Accounts payable and accrued expenses 23,402,000 24,296,000
Put option contracts payable (219,798 shares) 2,181,000 1,681,000
------------- -------------
Total current liabilities 31,924,000 29,620,000
Long-term debt, less current maturities, net of
unamortized debt discount of $0 and $765,000 at
December 31, 1996 and June 30, 1997 54,030,000 56,672,000
Unamortized debt discount, less current portion -- (765,000)
Deferred income taxes 162,000 --
Shareholders' equity:
Common stock, $.0025 par value; authorized
15,000,000 shares; issued and outstanding
7,597,801 at December 31, 1996 and June 30, 1997 19,000 19,000
Additional paid-in capital 36,465,000 38,004,000
Deficit (19,037,000) (21,479,000)
Receivable from shareholders (1,444,000) (1,444,000)
------------- -------------
Total shareholders' equity 16,003,000 15,100,000
------------- -------------
$ 102,119,000 $ 101,392,000
============= =============
See accompanying notes to consolidated financial statements.
1
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Community Care of America, Inc.
and Subsidiaries
Consolidated Statements of Operations
Three Months Ended Six Months Ended
June 30, June 30,
1996 1997 1996 1997
------------ ------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Operating revenues:
Net patient service revenues $ 30,721,000 $ 32,490,000 $ 56,865,000 $ 64,939,000
Other operating revenues 1,716,000 358,000 4,517,000 603,000
------------ ------------ ------------ ------------
Total operating revenues 32,437,000 32,848,000 61,382,000 65,542,000
------------ ------------ ------------ ------------
Operating expenses:
Facility operating expenses 25,325,000 27,365,000 47,431,000 54,604,000
Corporate administrative and general 1,125,000 603,000 2,559,000 1,642,000
Rent 2,090,000 2,616,000 3,853,000 5,248,000
Depreciation and amortization 641,000 945,000 1,286,000 1,802,000
Interest, net of interest income 1,102,000 1,817,000 1,920,000 3,383,000
Unusual charges 19,185,000 1,467,000 19,185,000 1,467,000
------------ ------------ ------------ ------------
Total operating expenses 49,468,000 34,813,000 76,234,000 68,146,000
------------ ------------ ------------ ------------
Earnings before income taxes (17,031,000) (1,965,000) (14,852,000) (2,604,000)
Federal and state income taxes (6,472,000) -- (5,645,000) (162,000)
------------ ------------ ------------ ------------
Earnings (loss) applicable to common stock $(10,559,000) $ (1,965,000) $ (9,207,000) $ (2,442,000)
============ ============ ============ ============
Earnings (loss) per common share $ (1.41) $ (0.26) $ (1.25) $ (0.32)
============ ============ ============ ============
Weighted average number of common and
common equivalent shares outstanding 7,501,701 7,597,801 7,350,441 7,597,801
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
2
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Community Care of America, Inc.
and Subsidiaries
Consolidated Statement of Shareholders' Equity
Receivable
Total Additional From Shareholders'
Common Stock Paid-in Capital Deficit Shareholder Equity
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $ 19,000 $ 36,465,000 $(19,037,000) $ (1,444,000) $ 16,003,000
Warrants issued in connection
with debt refinancing -- 1,539,000 -- -- 1,539,000
Net loss -- -- (2,442,000) -- (2,442,000)
------------ ------------ ------------ ------------ ------------
Balance at June 30, 1997 (Unaudited) $ 19,000 $ 38,004,000 $(21,479,000) $ (1,444,000) $ 15,100,000
============ ============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
Community Care of America, Inc.
and Subsidiaries
Consolidated Statements of Cash Flows
Six Months Ended
June 30,
----------------------------
1996 1997
------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C>
Net cash provided by (used in) operating activities $ 15,000 $ (1,804,000)
Cash flows from investing activities:
Property, plant and equipment additions (5,551,000) (3,007,000)
Business acquisitions (4,986,000) --
Notes receivable (75,000) --
Deposits held by lessor (516,000) 4,642,000
Sale of Georgiana Hospital -- 315,000
Other assets (942,000) (215,000)
------------ ------------
Net cash provided by (used in) investing activities (12,070,000) 1,735,000
------------ ------------
Cash flows from financing activities:
Principal reductions of long-term debt (1,940,000) (2,005,000)
Proceeds from long-term debt borrowings 14,123,000 4,064,000
Proceeds from Issuance of Stock 162,000 --
Put option contracts payable -- (500,000)
Deferred financing costs (1,667,000) (1,606,000)
------------ ------------
Net cash provided by (used in) financing activities 10,678,000 (47,000)
------------ ------------
Decrease in cash and cash equivalents (1,377,000) (116,000)
Cash and cash equivalents, beginning of period 2,485,000 1,709,000
------------ ------------
Cash and cash equivalents, end of period $ 1,108,000 $ 1,593,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
COMMUNITY CARE OF AMERICA, INC.
Notes to Consolidated Financial Statements
(Unaudited)
June 30, 1997
(1) Basis of presentation
The interim unaudited consolidated financial statements of Community Care of
America, Inc. and subsidiaries (the "Company") presented herein have been
prepared in accordance with generally accepted accounting principles for interim
financial statements and with the instructions to Form 10- Q and Regulation S-X
pertaining to interim financial statements. The interim financial statements
presented herein reflect all adjustments (consisting of normal recurring
adjustments) which, in the opinion of management, are considered necessary for a
fair presentation of the Company's financial condition as of June 30, 1997 and
results of operations for the three and six months ended June 30, 1997 and 1996.
The Company's financial statements should be read in conjunction with the
Company's audited consolidated financial statements and the notes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1996. The results of operations for the three and six months ended June 30,
1997 and 1996 are not necessarily indicative of the results that may be expected
for the full year.
(2) Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings Per Share ("SFAS 128"), which simplifies the standards for
computing earnings per share ("EPS"). SFAS 128 is effective for the Company's
fourth quarter and year ending December 31, 1997. Early application is not
permitted and prior period EPS data will be restated.
Under SFAS 128, primary EPS will be replaced with basic EPS. Basic EPS excludes
the dilutive effect of common stock equivalents. Also, under SFAS 128, fully
diluted EPS will be replaced by diluted EPS. Diluted EPS is calculated similarly
to fully diluted EPS pursuant to Accounting Principles Board Opinion 15.
The change in calculation method is not expected to have a material impact on
previously reported earnings per common share data.
(3) Sale of Georgiana Hospital
On June 11, 1997, the Company sold its 22-bed Georgiana Hospital and the related
clinics and physician practices for cash of $315,000, net of closing costs, a
note receivable of $1.5 million and a reduction of debt of $750,000. The sale
resulted in a non-recurring charge to earnings of $1,467,000.
5
<PAGE>
COMMUNITY CARE OF AMERICA, INC.
Notes to Consolidated Financial Statements
(Unaudited)
June 30, 1997
(4) Stock Warrants
In accordance with Statement of Financial Accounting Standards No. 123,
Accounting for Stock- Based Compensation ("SFAS No. 123"), the Company recorded
the fair value of stock warrants issued in connection with its financial
restructuring plan of $1.5 million in the second quarter of 1997. The fair value
of these stock warrants was estimated using the Black-Scholes option pricing
model and was recorded as an increase to additional paid in capital and
unamortized debt discount. The related unamortized debt discount was $1.4
million at June 30, 1997, net of accumulated amortization of $174,000 which was
charged to interest expense in the second quarter of 1997.
(5) Sandy River Transaction
In April 1997, the Company paid $500,000 to the Sandy River Group shareholders
pursuant to the settlement agreement dated March 1, 1997, to repurchase 219,798
shares of common stock. As of June 30, 1997 the Company is obligated under a
note payable to the Sandy River Group shareholders for $1,681,000.
(6) Subsequent Event
On July 18, 1997, the Company and IHS Holdings, Inc. entered into a second loan
agreement, which entitles the Company to borrow for working capital purposes,
until July 18, 1999, amounts on a revolving credit basis so that no more than
$5.0 million is outstanding at any time. Loan advances are to be made directly
to creditors of the Company, including IHS, in payment of the Company's
obligations to such creditors. Proceeds used to pay the Company's obligations
are directed by IHS in accordance with the management agreement. This revolving
credit facility bears interest at a rate per annum equal to the annual rate of
interest set forth in IHS's revolving credit agreement with Citibank, N.A., plus
4%. Repayment of amounts advanced under this line of credit are subordinated to
the payment of up to an aggregate of $13.6 million of principal and interest on
the Company's obligations to one of the Company's principal unaffiliated
third-party lenders. The revolving credit facility is guaranteed in full by
Community Care of Nebraska, Inc., ECA Holdings, Inc., CCA of Midwest, Inc.,
Quality Care of Columbus, Inc., Quality Care of Lyons, Inc., and W.S.T. Care,
Inc., each wholly-owned subsidiaries of the Company. The revolving line of
credit is secured by the real property assets of the Company and its
subsidiaries. At July 31, 1997, no borrowings were outstanding under this
facility.
6
<PAGE>
COMMUNITY CARE OF AMERICA, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
INTRODUCTION
As of June 30, 1997, the Company operated 54 licensed long-term care facilities
with 4,450 licensed beds, one rural healthcare clinic, two outpatient
rehabilitation centers, one child day care center, a home healthcare agency and
115 assisted living units within six of the communities which the Company
serves. The Company currently operates in Alabama, Colorado, Florida, Georgia,
Iowa, Kansas, Louisiana, Maine, Missouri, Nebraska, Texas and Wyoming.
The following is a discussion of the Company's results of operations and
liquidity and capital resources and should be read in conjunction with the
consolidated financial statements of the Company and notes thereto included
elsewhere in this report.
RESULTS OF OPERATIONS
Three Months Ended June 30, 1997 Compared to Three Months Ended June 30, 1996
Revenues increased by $411,000 or 1.2%, to $32.8 million in the second quarter
of 1997 from $32.4 million for the same period in 1996. This growth was
primarily attributable to the addition of six long-term care facilities acquired
or leased in May of 1996 which produced $1.1 million more revenue in the second
quarter of 1997 (when revenue was included for the full period) then in the
second quarter of 1996 (when revenue was included only from the date of
acquisition) and an increase in revenues per patient day due to an increased
proportion of higher acuity patients resulting in additional revenues of $1.8
million, offset in part, from the effects of the sale of Smith Hospital in
December of 1996 (which produced $1.0 million of revenue in the second quarter
of 1996 subsequent to the date of acquisition) and a decrease in management fees
in 1997 of $1.5 million resulting from the termination of management agreements.
Long-term care facilities accounted for 97.9% of total revenues in the second
quarter 1997, an increase from 85.7% for the same period in 1996.
Net operating revenues per patient day for long-term care and assisted living
facilities increased 6.1% to $96.73 in the second quarter of 1997 from $91.16
for the same period in 1996, primarily resulting from an increased proportion of
higher acuity Medicare patients. Medicare days as a percent of total days
increased from 5.0% in the second quarter of 1996 to 5.7% for the same period in
1997 as a result of higher Medicare utilization in facilities acquired during
the second quarter of 1996. Medicare revenues as a percentage of total revenues
increased from 18.5% in the second quarter of 1996 to 21.7% for the same period
in 1997 as a result of increased Medicare occupancy and additional ancillary
services for these higher acuity patients. Occupancy increased to 85.4% in the
second quarter of 1997 compared to 85.2% for the same period in 1996. Patient
days increased to 317,316, or 4.0%, in the second quarter of 1997 from 305,017
for the same period in 1996 due primarily to the facilities acquired or leased
during the second quarter of 1996.
7
<PAGE>
COMMUNITY CARE OF AMERICA, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
RESULTS OF OPERATIONS (continued)
Three Months Ended June 30, 1997 Compared to Three Months Ended June 30, 1996
Facility operating expenses increased by $2.0 million, or 8.1%, to $27.4 million
in the second quarter of 1997 from $25.3 million for the same period in 1996
primarily as a result of operations acquired or leased during the second quarter
of 1996 and increased payroll at existing facilities. Facility operating expense
increased as a percent of revenues to 83.3% in the second quarter of 1997 from
78.1% for the same period in 1996 primarily as a result of the reduction of
management fee revenues. The payroll related component of facility operating
expenses increased by $2.1 million, or 13.3%, to $17.9 million in the second
quarter 1997 from $15.8 million for the same period in 1996 primarily as a
result of operations acquired or leased during the second quarter of 1996 and
increased staffing levels at existing facilities as a result of higher acuity
levels of residents.
Corporate administrative and general expenses decreased by $522,000, or 46.4%,
to $603,000 in the second quarter of 1997 from $1.1 million for the same period
in 1996, and also as a percent of revenues to 1.8% in the second quarter of 1997
from 3.5% for the same period 1996. The decrease is the result of reorganization
during 1996, the transition of accounting, reimbursement and MIS functions to
Integrated Health Services, Inc. under a management agreement entered into on
December 27, 1996 and, in the case of such expenses as a percent of revenue, the
increase in revenues.
Rent expense increased by $526,000, or 25.2%, to $2.6 million in the second
quarter of 1997 from $2.1 million for the same period 1996. Rent expense as a
percent of revenues increased to 8.0% in the second quarter 1997 from 6.4% for
the same period 1996. The increases were primarily due to the acquisition of
leasehold interests of five leased facilities during the second quarter of 1996,
additional rental costs resulting from landlord financed renovations and an
increase in contingent rentals which are based on the gross revenue of certain
leased facilities.
Depreciation and amortization expense increased by $304,000, or 47.4%, to
$945,000 in the second quarter of 1997 from $641,000 for the same period 1996,
and increased to 2.9% of revenues in the second quarter of 1997 from 2.0% of
revenues for the same period 1996. The increase was due primarily to an increase
in depreciation related to facilities acquired or leased during the second
quarter of 1996 and to renovations of certain owned facilities and the
amortization of additional goodwill related primarily to such acquired
facilities.
Net interest expense increased by $715,000, or 64.9%, to $1.8 million in the
second quarter of 1997 from $1.1 million for the same period 1996. Net interest
expense as a percent of revenues increased to 5.5% in the second quarter of 1997
from 3.4% for the same period 1996. The increase was due to the acquisition of a
leased facility during the second quarter of 1996 which is treated as a capital
lease, additional borrowings to fund cash flow losses from operations and
proposed transactions
8
<PAGE>
COMMUNITY CARE OF AMERICA, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
RESULTS OF OPERATIONS (continued)
Three Months Ended June 30, 1997 Compared to Three Months Ended June 30, 1996
during 1996 and amortization of debt discount costs related to the issuance of
stock warrants during 1997.
The unusual charge in the second quarter of 1997 represents the loss incurred in
connection with the sale of the 22-bed Georgiana Hospital and the related
clinics and physician practices. The unusual charges in the second quarter of
1996 were incurred as a result of the termination of management agreements under
which the Company had been managing nine long-term care facilities, the closure
of two long-term care facilities, and a decision to restructure or close certain
physician practices, primary care clinics and adult day care centers.
The Company has recognized no income tax benefit for the second quarter of 1997.
The Company believes the realization of the income tax benefit is uncertain at
this time. A valuation allowance has been recorded to fully offset the income
tax benefit. The tax provision for the same period in 1996 was $6.5 million at
an annualized effective tax rate of 38%.
Net loss for the second quarter of 1997, before the loss on sale of Georgiana
Hospital, was $498,000, or $.07 per share, compared to net earnings (before
non-recurring charges) of $1.3 million, or $.18 per share, for the same period
in 1996. The consolidated net loss for the second quarter 1997 was $2.0 million,
or $.26 per share, compared to a net loss of $10.6 million, or $1.41 per share,
for the same period in 1996.
Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996
Revenues increased by $4.2 million or 6.8%, to $65.5 million for the six months
ended June 30, 1997 from $61.4 million for the same period 1996. This growth was
primarily attributable to the addition of six long-term care facilities acquired
or leased in May of 1996 which produced $5.5 million more revenue in the six
months ended June 30, 1997 (when revenue was included for the full period) then
for the same period in 1996 (when revenue was included only from the date of
acquisition) and an increase in revenues per patient day due to an increased
proportion of higher acuity patients resulting in additional revenues of $3.8
million, offset in part, from the effects of the sale of Smith Hospital in
December 1996 (which produced $1.0 million of revenue for the six months ended
June 30, 1996 subsequent to the date of acquisition) and a decrease in
management fees in 1997 of $4.1 million resulting from the termination of
management agreements. Long-term care facilities accounted for 95.1% of total
revenues for the six months ended June 30, 1997, an increase from 85.5% for the
same period in 1996.
9
<PAGE>
COMMUNITY CARE OF AMERICA, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
RESULTS OF OPERATIONS (continued)
Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996
Net operating revenues per patient day for long-term care and assisted living
facilities increased 7.2% to $96.29 for the six months ended June 30, 1997 from
$89.76 for the same period in 1996, primarily resulting from an increased
proportion of higher acuity Medicare patients. Medicare days as a percent of
total days increased from 4.7% for the six months ended June 30, 1996 to 5.6%
for the same period in 1997 as a result of higher Medicare utilization in
facilities acquired during the six months ended June 30, 1996. Medicare revenues
as a percentage of total revenues increased from 15.0% for the six months ended
June 30, 1996 to 20.8% for the same period in 1997 as a result of increased
Medicare occupancy and additional ancillary services for these higher acuity
patients. Occupancy increased to 85.6% for the six months ended June 30, 1997
compared to 85.4% for the same period in 1996. Patient days increased to
631,429, or 7.9%, for the six months ended June 30, 1997 from 584,885 for the
same period in 1996 due primarily to the facilities acquired or leased during
the six months of 1996.
Facility operating expenses increased by $7.2 million, or 15.1%, to $54.6
million in the six months ended June 30, 1997 from $47.4 million for the same
period in 1996 primarily as a result of operations acquired or leased during the
six months ended June 30, 1996 and increased payroll at existing facilities.
Facility operating expense increased as a percent of revenues to 83.3% for the
six months ended June 30, 1997 from 77.3% for the same period in 1996 primarily
as a result of the reduction of management fee revenues. The payroll related
component of facility operating expenses increased by $5.8 million, or 19.3%, to
$35.8 million for the six months ended June 30, 1997 from $30.0 million for the
same period in 1996 primarily as a result of operations acquired during the six
months ended June 30, 1996 and increased staffing levels at existing facilities
as a result of higher acuity levels of residents.
Corporate administrative and general expenses decreased by $917,000, or 35.8%,
to $1.6 million for the six months ended June 30, 1997 from $2.6 million for the
same period in 1996 and also as a percent of revenues to 2.5% for the six months
ended June 30, 1997 from 4.2% for the same period in 1996. The decrease is the
result of reorganization during 1996, the transition of accounting,
reimbursement and MIS functions to Integrated Health Services, Inc. under a
management agreement entered into on December 27, 1996 and, in the case of such
expenses as a percent of revenue, the increase in revenues.
Rent expense increased by $1.4 million, or 36.2%, to $5.2 million for the six
months ended June 30, 1997 from $3.9 million for the same period in 1996. Rent
expense as a percent of revenues increased to 8.0% for the six months ended June
30, 1997 from 6.3% for the same period 1996. The increases were primarily due to
the acquisition of leasehold interests of five leased facilities during the six
months ended June 30, 1996, additional rental costs resulting from landlord
financed renovations and an increase in contingent rentals which are based on
the gross revenue of certain leased facilities.
10
<PAGE>
COMMUNITY CARE OF AMERICA, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
RESULTS OF OPERATIONS (continued)
Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996
Depreciation and amortization expense increased by $516,000, or 40.1%, to $1.8
million for the six months ended June 30, 1997 from $1.3 million for the same
period in 1996, and increased to 2.8% of revenues for the six months ended June
30, 1997 from 2.1% of revenues for the same period 1996. The increase was due
primarily to an increase in depreciation related to facilities acquired or
leased during the six months ended June 30, 1996 and to renovations of certain
owned facilities and amortization of the additional goodwill related primarily
to such acquired facilities.
Net interest expense increased by $1.5 million, or 76.2%, to $3.4 million for
the six months ended June 30, 1997 from $1.9 million for the same period in
1996. Net interest expense as a percent of revenues increased to 5.2% for the
six months ended June 30, 1997 from 3.1% for the same period 1996. The increase
was due to the acquisition of a leased facility during the six months ended June
30, 1996 treated as a capital lease, additional borrowings to fund cash flow
losses from operations and proposed transactions during 1996 and amortization of
debt discount costs related to the issuance of stock warrants during 1997.
The unusual charge for the six months ended June 30, 1997 represents the loss
incurred in connection with the sale of the 22-bedGeorgiana Hospital and the
related clinics and physician practices. The unusual charges for the six months
ended June 30, 1996 were incurred as a result of the termination of management
agreements under which the Company had been managing nine long-term care
facilities, the closure of two long-term care facilties, and a decision to
restructure or close certain physician practices, primary care clinics and adult
day care centers.
The Company recognized (to the extent of deferred tax liabilities) an income tax
benefit of $162,000 for the six months ended June 30, 1997. The Company believes
that the realization of any additional income tax benefit is uncertain at this
time. A valuation allowance has been recorded to fully offset any additional
income tax benefit. The tax benefit for the same period in 1996 was $5.6 million
at an annualized effective tax rate of 38%.
Net loss for the six months ended June 30, 1997, before the loss on sale of
Georgiana Hospital, was $1.1 million, or $.15 per share, compared to net
earnings (before non-recurring charges) of $4.3 million, or $.59 per share, for
the same period in 1996. The consolidated net loss for the six months ended 1997
was $2.4 million, or $.32 per share, compared to a net loss of $9.2 million, or
$1.25 per share, for the same period in 1996.
11
<PAGE>
COMMUNITY CARE OF AMERICA, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Liquidity and Capital Resources
General
As of June 30, 1997, the Company had a working capital deficiency of $6.3
million compared with $11.0 million working capital deficiency as of December
31, 1996. At year end, the Company was in default with respect to certain of its
debt, lease and other agreements. These circumstances would naturally raise
doubt about the Company's ability to continue as a going concern. However, as
discussed in the Company's Annual Report on Form 10-K for the year ended
December 31, 1996, the Company obtained waivers and/or amendments to cure such
defaults, certain debt extensions, an application of lease deposits against
lease obligations and an additional revolving credit facility. Management
believes that these steps, together with available cash, revolving credit
facilities and amounts expected to be generated from operations, will be
sufficient to enable the Company to satisfy its capital expenditures and working
capital requirements for its operations for at least the next year.
If the Company remains an independent company (see Item 5., Other Information,
Section II of this report), the Company will seek to satisfy its capital
requirements for internal growth and development through borrowings from
commercial lenders, seller-financed debt, financing obtained through
sale-leaseback transactions with real estate investment trusts, the public and
private equity, debt capital markets and proceeds from the sale of discontinued
operations and, to the extent available, internally generated cash from
continued operations. On a longer term basis, management believes the Company
will be able to satisfy the principal repayment requirements on its indebtedness
with a combination of funds generated from operations and from securing
refinancings with existing or new commercial lenders. There can be no assurance
that any necessary funds will be available to the Company or if available, the
terms thereof.
Net cash used in operating activities for the six months ended June 30, 1997 was
$1.8 million resulting from a net increase in accounts receivable and other
assets of $3.3 million, offset by, $1.0 million of net earnings after adding
back non-cash charges for depreciation of $1.2 million, amortization of
intangibles of $580,000, amortization of debt discount costs of $174,000 and the
loss on the sale of Georgiana Hospital of $1.5 million and a net increase in
accounts payable, accrued expenses and taxes of $482,000.
Net accounts receivable (patient accounts receivable, third-party payor
settlements receivable and other receivables) were $18.9 million at June 30,
1997. The number of days average net revenues in net patient and third party
receivables was 52.1 at June 30, 1997, compared to 47.0 at December 31, 1996.
The Company anticipates that the number of days average net revenues in net
receivables will fluctuate in the future and will depend, in large part, on the
mix of revenues, as well as the timing of payments by private third-party and
governmental payors.
12
<PAGE>
COMMUNITY CARE OF AMERICA, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Liquidity and Capital Resources (continued)
Net cash provided by investing activities totaled $1.7 million for the six
months ended June 30, 1997 resulting primarily from the utilization of deposits
of $4.6 million to pay rent and mortgage obligations, offset in part, by
property, plant and equipment additions of $3.0 million.
Net cash used in financing activities was $47,000 for the six months ended June
30, 1997 resulting from payments of deferred financing costs of $1.6 million,
payments of long-term debt of $2.0 million and a payment on the put option
contracts payable of $500,000 offset by net proceeds of $4.1 million received
from long-term borrowings.
At June 30, 1997, the Company had total debt outstanding of $61.7 million, of
which $46.7 million bears interest at fixed rates, primarily ranging from 7.0%
to 15.1%. The Company's remaining debt is drawn under its $15.0 million
revolving credit facility with an affiliate of Daiwa Securities of America, Inc.
("Daiwa") entered into in December 1996, its $5.0 million revolving credit
facility with Integrated Health Services, Inc. ("IHS") entered into in December
1996 and a second loan with IHS for an additional $5.0 million entered into on
July 18, 1997, both of which are discussed below.
To date, the Company's major acquisitions have been financed principally through
mortgage and lease financing by Health and Retirement Properties Trust ("HRPT").
At June 30, 1997, the Company was obligated to HRPT under installment notes with
respect to 17 facilities having an outstanding aggregate principal balance of
approximately $36.4 million and as a tenant under three master leases covering
30 facilities having an aggregate minimum rent of approximately $191 million
(subject to increase) during the remainder of their initial terms and first
renewal period. In accordance with a Waiver and Amendment Agreement dated April
14, 1997, the Company applied $6.2 million of deposits as follows: (1) to fund
$2.2 million of accrued lease payments at March 31, 1997, (2) to fund $1.6
million of lease payments during the second quarter of 1997, (3) to fund
$300,000 of future lease payments, (4) to pay an $870,000 financing fee and, (5)
to maintain a $1.5 million deposit balance. In connection therewith, IHS
guaranteed $10.0 million of the Company's obligations to HRPT. The master leases
require the Company to maintain consolidated tangible net worth of at least $5.0
million and a current ratio (ratio of current assets to current liabilities) of
at least one to one. HRPT has waived these covenants through February 1998.
Certain debt instruments with HRPT (aggregating approximately $19.5 million in
principal amount) have been modified to provide that interest only will be
payable until July 31, 1998, at which time principal will again become payable,
with interest, in installments.
The notes and leases contain cross default provisions, such that a default under
any note or lease would entitle HRPT to accelerate payment of all of such notes
and terminate all of such leases (and, subject to mitigation of damages, to
receive future rents).
13
<PAGE>
COMMUNITY CARE OF AMERICA, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Liquidity and Capital Resources (continued)
Included in the installment notes is $10.0 million which the Company borrowed
from HRPT pursuant to an 11% promissory note (the "HRPT Note") to provide
additional renovation and acquisition funding and general working capital. No
principal payments are required until the maturity date of December 31, 2008.
Interest payments are to be made monthly. However, this loan, together with a
prepayment premium of approximately $2.6 million, must be prepaid from the first
proceeds of certain equity or debt (or any combination thereof) issued by the
Company after August 30, 1996. The HRPT Note is secured by all of the collateral
security which secure the Company's current obligations to HRPT and is subject
to cross default with other obligations to HRPT. As a result of closing this
loan, the Company increased the security deposit held by HRPT for all
obligations by $550,000.
On December 27, 1996, the Company entered into a Healthcare Receivables Purchase
and Transfer Agreement (the "Loan Agreement") with Daiwa providing for a 36
month revolving credit facility pursuant to which the Company may borrow from
time to time up to $15.0 million, subject to a borrowing base formula. The Loan
Agreement is secured by all patient and third-party settlement receivables. This
credit facility replaced, and the proceeds from this new line of credit were
used to pay in full, a $15.0 million revolving credit facility with NationsBank
of Florida, N.A. At June 30, 1997, $12.3 million was outstanding on this line of
credit with Daiwa, of which approximately $2.9 million was in excess of the
borrowing base. In accordance with a waiver and amendment agreement dated April
14, 1997, the Company is required to pay such amount in monthly installments of
$300,000. As of July 31, 1997, the Company had paid $1.2 million towards the
reduction of the amount in excess of the borrowing base. The amount in excess of
the borrowing base has been guaranteed by IHS. In connection therewith, the
Company issued a five year warrant to Daiwa to purchase 1,787,568 shares of
common stock (subject to reduction as the monthly installment payments are made)
at an initial price of $2.25 per share (subject to adjustment in certain
circumstances). The warrants outstanding have been reduced to 1,381,501 as of
July 31, 1997 as a result of the $1.2 million of payments made since April 14,
1997 to reduce the amount of outstanding indebtedness in excess of the borrowing
base. The remaining outstanding loan will mature on December 27, 1999. Effective
as of March 10, 1997, each amount advanced is to bear interest at a rate equal
to the LIBO Rate at the time of the revolving advance plus 2.25% per annum
increasing .50% monthly thereafter. The amount in excess of the borrowing base
bears an interest rate of LIBO Rate plus 4.50% per annum increasing .50% monthly
thereafter.
Additionally, the Company entered into a subordinated revolving credit agreement
with IHS Financial Holdings, Inc., a subsidiary of IHS, pursuant to which, as of
December 27, 1996, the Company may borrow up to $5.0 million for additional
working capital until December 27, 1998. Borrowings under this line of credit
are to bear interest at a rate equal to the annual rate set forth in IHS's
revolving credit agreement with Citibank, N.A. plus 2% per annum.
14
<PAGE>
COMMUNITY CARE OF AMERICA, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Liquidity and Capital Resources (continued)
On July 18, 1997, the Company and IHS Holdings, Inc. entered into a second loan
agreement, which entitles the Company to borrow for working capital purposes,
until July 18, 1999, amounts on a revolving credit basis so that no more than
$5.0 million is outstanding at any time. Loan advances are to be made directly
to creditors of the Company, including IHS, in payment of the Company's
obligations to such creditors. Proceeds used to pay the Company's obligations
are directed by IHS in accordance with the management agreement. This revolving
credit facility bears interest at a rate per annum equal to the annual rate of
interest set forth in IHS's revolving credit agreement with Citibank, N.A., plus
4%. Repayment of amounts advanced under this line of credit are subordinated to
the payment of up to an aggregate of $13.6 million of principal and interest on
the Company's obligations to one of the Company's principal unaffiliated
third-party lenders. The revolving credit facility is guaranteed in full by
Community Care of Nebraska, Inc., ECA Holdings, Inc., CCA of Midwest, Inc.,
Quality Care of Columbus, Inc., Quality Care of Lyons, Inc., and W.S.T. Care,
Inc., each wholly-owned subsidiaries of the Company. The revolving line of
credit is secured by the real property assets of the Company and its
subsidiaries. At July 31, 1997, no borrowings were outstanding under this
facility.
In connection with the initial revolving credit agreement, the Company issued
warrants to purchase an aggregate of 752,182 shares of the Company's common
stock, one-half of which were originally exercisable at $3.22 per share (the
average of the high and low trading prices of the Company's common stock on
January 14 and 15, 1997) for a two-year period and the remaining one-half of
which were originally exercisable at $6.44 per share for a five year period. In
connection with certain guarantees issued by IHS to HRPT and Daiwa of
obligations of the Company on April 14, 1997, the Company issued a warrant to
IHS to purchase 379,900 shares of common stock at $1.937 per share. The Company
has granted IHS registration rights relating to the shares underlying the
warrants. As a result of the issuance of the warrants to IHS and Daiwa in April
1997, the warrants issued to IHS in January 1997 were adjusted to cover 809,374
shares of common stock, one-half of which are exercisable at $2.99 per share for
a two year period and one-half of which are exercisable at $5.99 per share for a
five year period.
In addition to borrowings, the liquidity of the Company is dependent on the
timing of payments by governmental and private third-party payors. The Company's
operations could be adversely affected if it experiences significant delays in
reimbursement of its costs. Continued efforts by governmental third-party payors
to contain or reduce the acceleration of costs, as well as any significant
increase in the Company's proportion of Medicare and Medicaid patients, could
adversely affect the Company's liquidity and results of operations.
15
<PAGE>
COMMUNITY CARE OF AMERICA, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Liquidity and Capital Resources (continued)
Forward-looking Statements: Except for statements of historical fact, statements
made herein are forward-looking in nature and are inherently subject to risks
and uncertainties. The actual results of the Company may differ materially from
those reflected in the forward-looking statements based on a number of important
risk factors and uncertainties. Among the factors that could cause the Company's
future actual results, performance or achievement to differ materially from
those described or implied in forward-looking statements are: (a) the Company's
ability to obtain, on a timely and economically feasible basis, the financing
required to (i) meet its various obligations, (ii) increase its working capital
and tangible net worth in order to meet the working capital maintenance covenant
and tangible net worth covenant contained in the Company's master leases with
HRPT, and (iii) finance any future acquisitions or other transactions that the
Company may consider to implement its growth strategy; (b) the Company's ability
to successfully integrate acquisitions and effectuate economies of scale and
otherwise implement its growth strategy; (c) the government climate towards
healthcare; (d) the continuation of third-party payor programs, including
Medicare and Medicaid, at current levels and reimbursement rates; (e) the
Company's ability to remain in compliance with the requirements for
participation in such programs, as well as remain in compliance with the other
government regulations to which it is subject; (f) the level of, and the
Company's ability to meet, competition; (g) the Company's ability to avoid
significant claims and defense costs, and maintain adequate insurance to cover
any material claims and costs it may incur which may arise out of malpractice
and other claims; (h) the Company's ability to retain qualified personnel; and
(i) general economic conditions. These and other factors are discussed in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996 and
other reports filed from time to time by the Company with the Securities and
Exchange Commission.
16
<PAGE>
PART II - OTHER INFORMATION
Item 2. Changes in Securities
In connection with a waiver and amendment agreement dated April 14, 1997, the
Company issued a five year warrant to Daiwa to purchase 1,787,568 shares of
common stock (subject to reduction as loan principal payments are made) at an
exercise price of $2.25 per share (subject to adjustment in certain
circumstances). The number of shares of common stock subject to the warrants
have been reduced to 1,381,501 as of July 31, 1997 as a result of the $1.2
million of loan principal payments made by the Company since April 14, 1997.
In connection with certain guarantees issued by IHS to HRPT and Daiwa of
obligations of the Company on April 14, 1997, the Company issued a warrant to
IHS to purchase 379,900 shares of common stock at $1.937 per share. In
connection therewith, the Company has granted to IHS certain rights to cause the
shares issuable upon exercise of the warrants to be registered under the
Securities Act of 1933, as amended (the "Act"), at the Company's expense.
As a result of the issuance of the warrants to IHS and Daiwa in April 1997,
warrants issued to IHS in January 1997 were adjusted to cover 809,374 shares of
common stock, one-half of which are exercisable at $2.99 per share for a two
year period and one-half of which are exercisable at $5.99 per share for a five
year period.
The Company believes that the exemption from registration afforded by Section
4(2) of the Act is applicable to the issuance of all of the foregoing warrants.
Item 5. Other Information
On August 1, 1997, the Company, IHS and a wholly-owned subsidiary of IHS entered
into a definitive merger agreement for IHS to acquire all of the outstanding
shares of the Company for $4.00 per share in cash. IHS, based in Owings Mills,
Maryland, is a highly diversified health services provider, offering a broad
spectrum of post-acute medical and rehabilitative services through its
nationwide health care network. IHS' post-acute services include home nursing
services, home infusion services, subacute care, inpatient and outpatient
rehabilitation, respiratory therapy, hospice care and diagnostic services. IHS
currently operates over 1,000 post-acute service locations in 45 states
throughout the United States. Pursuant to the merger agreement on August 7,
1997, the subsidiary of IHS commenced a tender offer at $4.00 per share in cash
for all outstanding shares of the Company common stock. The obligations of IHS'
subsidiary to purchase the tendered shares is subject to a number of conditions,
including there being tendered at least 5,829,119 shares of common stock of the
Company (representing the majority of the outstanding the Company shares on a
fully-diluted basis). Dr. Robert N. Elkins, Director of the Company, is Chairman
and Chief Executive Officer of IHS, and John Silverman, Chairman of the Company,
is a director and employee of IHS.
17
<PAGE>
PART II - OTHER INFORMATION (continued)
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit
Number Description
2 Agreement and Plan of Merger dated August 1, 1997, by and
among IHS, Inc., IHS Acquisition XXVI, Inc., and the
Company (incorporated herein by reference to schedule
14D-1 filed with the Securities and Exchange Commission on
August 7, 1997).
3 Secured Subordinate Note and Revolving Credit Agreement II
between the Company and IHS Financial Holdings, Inc. Dated
July 18, 1997.
27 Financial Data Schedule
(b) Reports on Form 8-K:
On April 14, 1997, the Company filed a Report on Form 8-K dated (date of
earliest event reported): March 31, 1997, reporting under Item 5, Other Events,
and Item 7, Financial Statements, Pro Forma Financial Information and Exhibits.
No financial statements were filed with that report.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
COMMUNITY CARE OF AMERICA, INC.
(Registrant)
Date: August 14, 1997 By: /s/ Deborah A. Lau
------------------- ------------------
Deborah A. Lau
President, Chief Executive Officer
and Chief Financial Officer
19
<PAGE>
EXHIBIT INDEX
(a) Exhibits:
Exhibit
Number Description
2 Agreement and Plan of Merger dated August 1, 1997, by and
among IHS, Inc., IHS Acquisition XXVI, Inc., and the
Company (incorporated herein by reference to schedule
14D-1 filed with the Securities and Exchange Commission on
August 7, 1997).
3 Secured Subordinate Note and Revolving Credit Agreement II
between the Company and IHS Financial Holdings, Inc. Dated
July 18, 1997.
27 Financial Data Schedule
20
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM
10-Q FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1997, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
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<NAME> Community Care of America, Inc.
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<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<CASH> 1,593,000
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<RECEIVABLES> 23,754,000
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<INCOME-TAX> (162,000)
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