-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WWTSRQX1COJ5mrRfDwyiom5edxO+pxu+LxTedUIP9ESfi/dABlU/qe4I+46Mi5fJ QJxjgR0QRcGYXzmw9Rlq5A== 0000950144-97-011158.txt : 19971024 0000950144-97-011158.hdr.sgml : 19971024 ACCESSION NUMBER: 0000950144-97-011158 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19971023 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: RETIREMENT CARE ASSOCIATES INC /CO/ CENTRAL INDEX KEY: 0000798540 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-SKILLED NURSING CARE FACILITIES [8051] IRS NUMBER: 431441789 STATE OF INCORPORATION: CO FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: SEC FILE NUMBER: 001-14114 FILM NUMBER: 97699915 BUSINESS ADDRESS: STREET 1: 6000 LAKE FORREST DR STE 200 CITY: ATLANTA STATE: GA ZIP: 30328 BUSINESS PHONE: 4042557500 MAIL ADDRESS: STREET 1: 6000 LAKE FORREST DR STREET 2: STE 200 CITY: ATLANTA STATE: GA ZIP: 30328 10-Q/A 1 RETIREMENT CARE ASSOCIATE INC 1 U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q/A Amendment No. 3 (Amending Part I- Items 1, 2 and 6) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarter Ended March 31, 1997 Commission File No. 1-14114 RETIREMENT CARE ASSOCIATES, INC. ------------------------------------------------------ (Exact Name of Registrant as Specified in its Charter) Colorado 43-1441789 - ------------------------------ ---------------------------------- (State or Other Jurisdiction of (IRS Employer Identification Number) Incorporation or Organization) 6000 Lake Forrest Drive, Suite 200, Atlanta, Georgia 30328 ---------------------------------------------------------- (Address of Principal Executive Offices) (404) 255-7500 ---------------------------------------------------- (Registrant's Telephone Number, Including Area Code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such report(s), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] As of March 31, 1997, 14,284,977 shares of Common Stock were outstanding. 2 RETIREMENT CARE ASSOCIATES AND SUBSIDIARIES Form 10-Q/A For the Quarter Ended March 31, 1997
INDEX Page(s) PART I. Financial Information Item 1. Consolidated Financial Statements Introduction 3 Consolidated Statements of Operations (Unaudited) - Three Months Ended March 31, 1997 and March 31, 1996 4 Consolidated Statements of Operations (Unaudited) - Nine Months Ended March 31, 1997 and March 31, 1996 5 Consolidated Balance Sheets - (Unaudited) March 31, 1997 and (Audited) June 30, 1996 6-7 Consolidated Statements of Cash Flows (Unaudited) - Nine Months Ended March 31, 1997 and March 31, 1996 8-9 Notes to Consolidated Financial Statements (Unaudited) 10-13 Item 2. Managements' Discussion and Analysis of Results of Operations and Financial Condition 13-16 Item 6. Exhibits and Reports on Form 8-K 18 Signatures 18
-2- 3 PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements INTRODUCTION - CONSOLIDATED FINANCIAL STATEMENTS The consolidated financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, all adjustments, which were of a normal recurring nature, necessary to present fairly the consolidated financial position and results of operations and cash flows for the periods presented have been included. These consolidated financial statements should be read in conjunction with the financial statements and the notes thereto included in the Annual Report on Form 10-K for Retirement Care Associates, Inc. (the "Company") for the fiscal year ended June 30, 1996, File No. 1-14114. The Company has restated its financial information for periods commencing June 30, 1996 through the nine months ended March 31, 1997, as reflected in amendments to the Company's Quarterly Reports on Forms 10-Q for the quarters ended September 30, 1996, December 31, 1996 and March 31, 1997. Adjustments and reclassifications were necessary to correct entries relating to (i) receivables due from third-party payors, (ii) the Company's inventory for such periods, (iii) provisions for doubtful accounts, (iv) provisions for contractual allowances for third-party payors, (v) provisions for accrued liabilities, and (vi) pre-recorded operating leases (collectively, "Restated Entries"). To show the impact of the Restated Entries with respect to previously reported amounts for each period restated, the Company has provided a description of the Restated Entries and a reconciliation of historical results for each period as previously reported in the filed quarterly report to restated results. Certain statements in this Form 10-Q are "forward-looking statements" made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve a number of risks and uncertainties. Factors which may cause the Company's actual results in future periods to differ materially from forecast results include, but are not limited to: general economic and business conditions, both nationally and in the regions in which the Company operates; industry capacity; demographic changes; existing government regulations and changes in, or the failure to comply with, government regulations; legislative proposals for reform; the ability to enter into lease and management contracts and arrangements on acceptable terms; changes in Medicare and Medicaid reimbursement levels; liability and other claims asserted against the Company; competition; changes in business strategy or development plans; the ability to attract and retain qualified personnel; the significant indebtedness of the Company; and the availability and terms of capital to fund the expansion of the Company's business, including the acquisition of additional facilities. The financial information included in this report has been prepared by the Company, without audit, and should not be relied upon to the same extent as audited financial statements. -3- 4 Retirement Care Associates, Inc. and Subsidiaries Unaudited Consolidated Statements of Operations for the Three Months Ended March 31, 1997 and 1996
March 31, March 31, 1997 1996 Revenues Patient service revenue $ 53,044,270 $ 32,004,561 Medical supply revenue 11,815,392 2,100,600 Management fee revenue: From affiliates 525,001 957,000 From others 107,579 73,882 Other operating revenue 307,614 486,370 65,799,856 35,622,413 Expenses Cost of patient services 36,301,053 18,814,605 Cost of medical supplies sold 8,023,127 2,751,524 Lease expense 3,668,546 1,542,445 General and administrative 10,026,455 6,848,798 Depreciation and amortization 1,668,117 926,608 Interest 3,424,921 1,837,484 Provision for bad debts 848,000 63,960,219 32,721,464 Income before minority interest and income taxes 1,839,637 2,900,949 Minority interest (125,900) (58,097) Income before income taxes 1,713,737 2,842,852 Income taxes 420,000 1,106,272 Net Income $ 1,293,737 $ 1,736,580 Preferred stock dividends 90,000 -- Income applicable to common stock 1,203,737 1,736,580 Net income per common and common equivalent share .08 .15 Weighted average shares outstanding 14,075,232 11,861,885
-4- 5 Retirement Care Associates, Inc. and Subsidiaries Unaudited Consolidated Statements of Operations for the Nine Months Ended March 31, 1997 and 1996
March 31, March 31, 1997 1996 Revenues Patient service revenue: $142,969,704 $ 86,182,010 Medical supply revenue 34,592,701 5,294,915 Management fee revenue: From affiliates 1,777,500 2,538,171 From others 347,701 296,506 Other operating revenue 2,493,323 1,181,165 182,180,929 95,492,767 Expenses Cost of patient services 101,622,310 52,466,995 Cost of medical supplies sold 23,356,604 6,171,863 Lease expense 9,683,743 5,023,376 General and administrative 32,630,996 15,619,316 Depreciation and amortization 4,181,243 2,004,397 Interest 8,576,528 4,110,317 Provision for bad debts 2,148,000 -- 182,199,424 85,396,264 Income (loss) before minority interest and income taxes (18,495) 10,096,503 Minority interest (139,400) (127,057) Income (loss) before income taxes and extraordinary item (157,895) 9,969,446 Income tax provision (benefit) (40,000) 3,854,135 Income (loss) before extraordinary item (117,895) 6,115,311 Extraordinary item, less applicable income taxes (490,000) -- Net Income (loss) $ (607,895) $ 6,115,311 Preferred stock dividend 2,236,777 -- Income (loss) applicable to common stock (2,844,672) 6,115,311 Income (loss) per common and common equivalent share before extraordinary item (.17) .52 Net income per common and common equivalent share (.21) .52 Weighted average shares outstanding 13,484,106 11,861,885
-5- 6 Retirement Care Associates, Inc. and Subsidiaries Unaudited Consolidated Balance Sheets as of March 31, 1997 and Audited at June 30, 1996
Unaudited Audited March 31, June 30, 1997 1996 Assets Current Cash and cash equivalents $ 356,197 $ 45,365 Accounts receivable 38,012,600 18,845,780 Inventory 8,211,753 3,998,991 Deferred income taxes 3,150,000 2,008,430 Note and accrued interest receivable 627,500 613,750 Restricted Bond Fund 3,400,000 2,342,565 Prepaid expenses and other 4,589,134 1,623,679 Total current assets 58,347,184 29,478,560 Property and equipment 149,505,579 111,420,486 Other assets Marketable equity securities 895,846 33,645 Investments in unconsolidated affiliates 734,514 496,800 Deferred lease and loan costs 11,232,824 7,665,891 Goodwill, net of accumulated amortiza- tion 12,582,436 6,636,675 Notes and advances due from non- affiliates 1,649,191 1,372,247 Notes and advances due from affiliates -- 14,316,661 Restricted bond funds 6,136,604 3,514,969 Other assets 3,150,805 2,556,353 Total other assets 36,382,220 36,593,241 $244,234,983 $177,492,287
-6- 7 Retirement Care Associates, Inc. and Subsidiaries Unaudited Consolidated Balance Sheets as of March 31, 1997 and Audited at June 30, 1996
Unaudited Audited March 31, June 30, 1997 1996 Liabilities and Shareholders' Equity Current liabilities Lines of credit $ 9,598,902 $ 3,556,535 Current maturities of long-term debt 11,622,020 2,220,491 Accounts payable 23,862,246 10,115,347 Accrued expenses 14,454,260 11,316,030 Income taxes payable -- 3,726,317 Deferred gain 40,000 40,000 Total current liabilities 59,577,428 30,974,720 Deferred gain 191,370 371,370 Deferred income taxes 1,098,929 277,000 Long-term debt, less current maturities 140,051,551 108,481,040 Minority interest 4,735,556 4,122,039 Redeemable convertible preferred stock 1,800,000 2,400,000 Shareholders' equity Common stock, $.0001 par value; 300,000,000 shares authorized; 14,284,977 and 12,145,875 shares outstanding 1,429 1,214 Preferred stock 3,767,000 7,408,279 Additional paid-in capital 42,391,319 28,329,625 Retained earnings (9,379,599) (4,752,880) Treasury stock ( -- ) (120,120) Total shareholders' equity 36,780,149 30,866,118 Total Liabilities and shareholders' equity $244,234,983 $177,492,287
-7- 8 Retirement Care Associates, Inc. Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 1997 and 1996
March 31, March 31, 1997 1996 Operating activities Net income $ (607,895) $ 6,115,311 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 4,181,243 1,947,411 Provision for bad debt 2,148,000 Amortization of deferred gain (180,000) -- Minority interest 139,400 127,057 Deferred income taxes (319,641) -- Changes in current assets and liabili- ties net of effects of acquisitions: Accounts receivable (21,314,820) (12,552,151) Inventory (4,212,762) (1,494,627) Prepaid expense and other assets (3,559,907) (6,814,868) Accounts payable and accrued expenses 13,158,812 6,299,946 Increase in deferred lease and loan costs (4,067,891) (1,916,123) Cash (used in) operating activities (14,635,461) (8,288,044) Investing activities Purchase of property and equipment (41,765,378) (41,025,608) Issuance of notes receivable and advances to affiliates 14,316,661 (2,285,205) Investment in and advances to Atrium Ltd. -- (1,278,684) Restricted bond funds (3,679,070) -- Changes in marketable equity securities (862,201) (574,766) Change in receivable (290,694) 2,396,667 Investment in unconsolidated subsidiaries (237,714) -- Cash (used in) investing activities (32,518,396) (42,767,596)
-8- 9 Retirement Care Associates, Inc. Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 1997 and 1996
March 31, March 31, 1997 1996 Financing activities Dividends on preferred stock (150,000) (225,000) Redemption of preferred stock (600,000) (600,000) Net proceeds from issuance of: Line of credit 6,042,367 -- Common stock 1,080,628 355,161 Long-term debt 37,196,676 48,036,000 Preferred stock 9,340,000 -- Payments on long-term debt (1,644,579) (1,377,466) Purchase and retirement of common stock (3,800,403) -- Cash provided by financing activities 47,464,689 46,188,695 Net increase (decrease) in cash and cash equivalents 310,832 (4,866,945) Cash and cash equivalents, beginning of year 45,365 5,207,185 Cash and cash equivalents, end of year $ 356,197 $ 340,240
-9- 10 RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1: BASIS OF PRESENTATION The consolidated financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. These consolidated financial statements and the notes thereto should be read in conjunction with the consolidated financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1996, File No. 1-14114. In the opinion of management of the Company, the accompanying unaudited consolidated financial statements contain all necessary adjustments to present fairly the financial position, the results of operations and cash flows for the periods reported. All adjustments are of a normal recurring nature. NOTE 2: RESTATEMENT The consolidated financial statements for the nine months ended March 31, 1997, as reported in Amendment No. 2 to the Company's Quarterly Report on Form 10-Q, reflect certain accounting policies and estimates which were subsequently determined to be incorrect and, accordingly, the consolidated financial statements for the nine months ended March 31, 1997 have been restated as follows (in thousands):
As Previously Reported As Restated Revenues $182,181 $182,181 Operating Expenses $188,365 $182,199* Net Earnings (Loss) $ (4,369) $ (608) Shareholders' Equity $ 36,790 $ 36,780
- -------------------- * Restated Operating Expenses include (in thousands) (i) a reduction in the accrual for employee benefits of $3,700, (ii) restated inventory of $1,955, (iii) a reduction in the provision for doubtful accounts of $580, and (iv) restated general and administrative expenses of $69. NOTE 3. ACCOUNTS RECEIVABLE AND COST REIMBURSEMENTS Accounts receivable and operating revenue include net amounts reimbursed by Medicaid under the provisions of cost reimbursement formulas in effect. The Company operates under a prospective payment system with Medicare, under which annual rates are assigned based on estimated reimbursements. Differences between estimated provisions and final settlement are reflected as adjustments to future rates. -10- 11 RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 4. INVENTORIES Inventories consist of the following at March 31, 1997: Raw material $ 352,485 Work in process 84,181 Finished goods 7,775,087 ----------- $ 8,211,753
NOTE 5: NOTES RECEIVABLE AND ADVANCES TO AFFILIATES At March 31, 1997 and June 30, 1996, the Company had notes and advances to affiliates totaling approximately $0 and $14,316,661, respectively. The notes were repaid by the sale of two retirement homes to the Company at fair market value and the retirement of 399,992 shares of the Company's common stock held by affiliates. (See Note 8) NOTE 6: LONG-TERM DEBT Long-term debt payable consisted of the following:
March 31, June 30, 1997 1996 Amounts outstanding under Revenue Bonds secured by retirement facilities $ 64,295,000 $59,986,000 Other debt secured by retirement and nursing facilities 52,127,681 39,848,938 Other debt 16,402,309 10,866,593 Capital leases 18,848,581 Totals 151,673,571 110,701,531 Current maturities 11,622,020 2,220,491 Total long-term debt $ 140,051,551 $108,481,040
NOTE 7: COMMITMENTS AND CONTINGENCIES The Company is involved in legal proceedings arising in the ordinary course of business. In addition, the Company is in dispute with the Internal Revenue Service ("IRS") concerning the application of certain income and payroll tax liabilities and payments. The IRS contends that the Company is delinquent in the payment of certain taxes and has charged penalties and interest in connection with the alleged underpayments. The Company contends that the IRS has misapplied payments between income and payroll taxes and between the Company and its affiliates. The Company has estimated in the accompanying financial statements amounts for ultimate settlement of this dispute, and has recorded an accrual of $600,000, which is based upon the best available information after consulting -11- 12 RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) with the Company's advisors concerning this matter. Further, the Company has filed lawsuits against the IRS related to this matter. In the opinion of management, the ultimate resolution of pending legal proceedings and the IRS dispute will not have a material effect on the Company's financial positions or results of operations. NOTE 8: FACILITY ACQUISITIONS During the quarter ended December 31, 1996, the Company entered into a series of transactions with Winter Haven, Gordon Jensen Health Care Association, Inc. ("Gordon Jensen"), National Assistance Bureau, Inc. ("NAB"), Southeastern Cottages, Inc. ("Southeastern"), Chamber Health Care Society, Inc. ("Chamber"), and Senior Care, Inc. ("Senior"); all are entities which principal shareholders of the Company either own or control. The result of the transactions was to eliminate all notes receivable and advances due to the Company from affiliates. The following is a summary of the transactions: On September 30, 1996, Winter Haven sold to the Company two retirement facilities for their fair value, based on independent appraisal, totaling $19,200,000. The facilities were acquired by the Company subject to bond debt of $7,670,000, resulting in debt due to Winter Haven from the Company of $11,530,000. As part of the sales agreement, the Company and Winter Haven agreed that the debt of $11,530,000 would be applied to eliminate the receivable, totaling $11,214,320, due to the Company by Winter Haven. On September 27, 1996, Gordon Jensen contributed to the treasury of the Company 400,000 shares of stock in the Company which had a fair market value of $3,000,000. This transaction results in the elimination of the debt, totaling $2,982,000, due to the Company by Gordon Jensen and a reduction of shareholders' equity of the Company by $3,000,000. NOTE 9: OTHER TRANSACTIONS On August 6, 1996, Contour acquired all of the outstanding stock of Atlantic Medical Supply Company, Inc. ("Atlantic"), a distributor of disposable medical supplies and a provider of third-party billing services to the nursing home and home health care markets. The acquisition was made retroactively to July 1, 1996. Contour paid $1.4 million in cash and $10.5 million in promissory notes for all of the outstanding stock of Atlantic. The promissory notes bear interest at 7% per annum and were due in full on January 10, 1997. In the event of a default in the payment of the promissory notes, they were convertible into shares of Common Stock of the Company. On January 10, 1997, Contour retired all outstanding notes due to sellers of Atlantic in the aggregate principal amount of $10,850,000, along with accrued interest. The retirement of these notes was funded by a loan of $9,750,000 from the Company, with the balance funded from Contour's existing line of credit with Barnett Bank. The loan from the Company was evidenced by a convertible promissory note bearing interest at 9% per annum and payable upon demand. This note was convertible into 1,950,000 shares of Contour's common stock, and on January 10, 1997, the Company exercised this conversion right. -12- 13 RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 9: OTHER TRANSACTIONS (Continued) During the period from September 27 through October 2, 1996, the Company sold 1,000,000 shares of Series F Convertible Preferred Stock in an offering to foreign investors at $10.00 per share. Holders of the Series F Convertible Preferred Stock have no voting rights except as required by law, and have liquidation preference of $10.00 per share plus 4% per annum from the date of issuance. The shares of Series F Convertible Preferred Stock are convertible into shares of common stock at a conversion price of the lessor of (a) $7.665625, or (b) 85% of the average closing bid price for the five trading days prior to the date of conversion. The maximum number of shares of common stock which can be issued upon conversion of the Series F Convertible Preferred Stock is 2,588,000. At the time of conversion, the holder is also entitled to additional shares equal to $10.00 per share of Series F Convertible Preferred Stock converted multiplied by 8% per annum from the date of issuance divided by the applicable conversion price. Each holder of the Series F Convertible Preferred Stock has the option to convert up to one-third of such holder's shares at any time from and after the 60th day following the date of issuance, up to an additional one-third of the shares from and after the 90th day following the date of issuance, and all remaining shares may be converted from and after the 120th day following the date of issuance. NOTE 10: EXTRAORDINARY ITEMS During the quarter ended December 31, 1996, the Company recorded an extraordinary charge of $490,000, net of taxes of $300,000. The gross extraordinary charge consists of $790,000 of charges associated with the early extinguishment of approximately $9.2 million of long term debt associated with the Company's retirement facilities located in Destin, Florida. ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1996 The Company's total revenues for the three months ended March 31, 1997, were $65,799,856 compared to $35,622,413 for the three months ended March 31, 1996. Due to the increased number of facilities owned or leased by the Company, patient service revenue increased from $32,004,561 for the quarter ended March 31, 1996, to $53,044,270 for the quarter ended March 31, 1997. The Company was operating 86 facilities for the quarter ended March 31, 1997 compared to 54 for the quarter ended March 31, 1996. The cost of patient services in the amount of $18,814,605 for the quarter ended March 31, 1996 represented 59% of patient service revenue, as compared to $36,301,053 or 68% of patient service revenue during the quarter ended March 31, 1997. This increase is attributed to the Company acquiring skilled nursing facilities which require more skilled care and to delays in Medicaid rate increases discussed in the comparison of the nine month periods ended March 31 below. -13- 14 Medical supply revenue increased from $2,100,600 during the quarter ended March 31, 1996, to $11,815,392 during the quarter ended March 31, 1997. These revenues, which are revenues of Contour, increased primarily as a result of two acquisitions made by Contour. Contour acquired AmeriDyne Corporation ("AmeriDyne") effective March 1, 1997, and Atlantic effective July 1, 1996. Cost of medical supplies sold as a percentage of medical supply revenue decreased to approximately 67.6% during the quarter ended March 31, 1997, as compared to approximately 100% of such revenue during the same period last year. The reduced percentage is primarily a result of higher gross profit margins on the products sold by AmeriDyne and Atlantic. Management fees decreased from $1,030,882 in the quarter ended March 31, 1996 to $632,580 in the quarter ended March 31, 1997, due to the number of facilities which the Company manages. As of March 31, 1996, the Company was managing 24 facilities, and as of March 31, 1997, the Company was managing 11 facilities. The Company has leased or purchased 13 facilities it managed at March 31, 1996. Management anticipates that the number of facilities only managed by the company will continue to decline as a result of acquisition of such facilities by the Company. Owning or leasing a facility is distinctly different from managing a facility with respect to operating results and cash flows. For an owned or leased facility, the entire revenue/expense stream of the facility is recorded on the Company's income statement. In the case of a management agreement, only the management fee is recorded. The expenses associated with management revenue are somewhat indirect as the infrastructure is already in place to manage the facility. Therefore, the profitability of managing a facility appears more lucrative on a margin basis than that of an owned/leased facility. However, the risk of managing a facility is that the contract generally can be canceled on a relatively short notice, which results in loss of all revenue attributable to the contract. Furthermore, with an owned or leased property the Company benefits from the increase in value of the facility as its performance increases. With a management contract, the owner of the facility maintains the equity value. From a cash flow standpoint, a management contract is more lucrative because the Company does not have to support the ongoing operating cash flow of the facility. General and administrative expenses for the three months ended March 31, 1997 were $10,026,455, representing 15% of total revenues, as compared to $6,848,798, representing 19% of total revenues, for the three months ended March 31, 1996. This increase in the dollar amount is due to the general and administrative expenses related to operating the additional facilities owned or leased by the Company and the acquisition by Contour of Atlantic and AmeriDyne. For the quarter ended March 31, 1997, the Company incurred expense for income taxes of $420,000, which represents an effective tax rate of 24%, as compared to expenses for income taxes of $1,106,272, which represents an effective tax rate of 39%, for the quarter ended March 31, 1996. During the quarter ended December 31, 1996, the Company recorded an extraordinary charge of $490,000, net of taxes of $300,000. The gross extraordinary charge consists of $790,000 of charges associated with the early extinguishment of approximately $9.2 million of long term debt. The net income of $1,293,737 for the quarter ended March 31, 1997, decreased from the net income of $1,736,580 for the quarter ended March 31, 1996. The decrease of net income for the quarter ended March 31, 1997 is a result of the increase in the cost of patient services as described above. -14- 15 Most of the revenue from the management services division of the Company's business is received pursuant to management agreements with entities controlled by Messrs. Brogdon and Lane, two of the Company's officers and directors. These management agreements have five year terms. However, each such agreement is subject to termination on 60 days notice after the end of the third year of each such agreement with or without cause by either the Company or the owners. Therefore, Messrs. Brogdon and Lane have full control over whether or not these management agreements, and thus the management service revenue, continue in the future. NINE MONTHS ENDED MARCH 31, 1997 COMPARED TO THE NINE MONTHS ENDED MARCH 31, 1996 The Company's total revenues for the nine months ended March 31, 1997, were $182,180,929 compared to $95,492,767 for the nine months ended March 31, 1996. Due to the increased number of facilities owned or leased by the Company, patient service revenue increased from $86,182,000 for the nine months ended March 31, 1996, to $142,969,704 for the nine months ended March 31, 1997. The Company was operating 86 facilities in the nine months ended March 31, 1997 compared to 54 for the nine months ended March 31, 1996. The cost of patient services in the amount of $101,622,310 for the nine months ended March 31, 1997, represented 71% of patient service revenue, as compared to $52,466,995 or 61% of patient service revenue during the nine months ended March 31, 1996. This increase is attributed to the Company acquiring skilled nursing facilities which require more skilled care and to delays in Medicaid rate increases discussed below. Medical supply revenues increased from $5,294,915 during the quarter ended March 31, 1996, to $34,592,701 during the quarter ended March 31, 1997. These revenues, which are revenues of Contour, a majority-owned subsidiary, increased primarily as a result of two acquisitions made by Contour. Contour acquired AmeriDyne effective March 1, 1996, and Atlantic effective July 1, 1996. Cost of medical supplies sold as a percentage of medical supply revenue decreased to approximately 67.5% during the quarter ended March 31, 1997, as compared to approximately 100% of such revenue during the same period last year. The reduced percentage is primarily a result of higher gross profit margins on the products sold by AmeriDyne and Atlantic. Management fees decreased from $2,834,677 in the nine months ended March 31, 1996 to $2,125,201 in the nine months ended March 31, 1997 because the Company purchased or leased 13 facilities it managed at March 31, 1996. As of March 31, 1996, the Company was managing 24 facilities, and as of March 31, 1997 the Company was managing 11 facilities. General and administrative expenses for the nine months ended March 31, 1997 were $32,630,996, representing 18% of total revenues, as compared to $15,619,316, representing 16% of total revenues, for the nine months ended March 31, 1996. This increase is due to the general and administrative expenses related to operating the additional facilities owned or leased by the Company, and the acquisition by Contour of Atlantic Medical. For the nine months ended March 31, 1997, the Company received an income tax benefit of $40,000 which represents an effective tax benefit of 25%, as compared to expenses for income taxes of $3,854,135 which represents an effective rate of 39% for the nine months ended March 31, 1996. -15- 16 The net loss of $607,895 for the nine months ended March 31, 1997, compares to net income of $6,115,311 for the nine months ended March 31, 1996. The net loss for the nine months ended March 31, 1997, is a result of (1) an extraordinary charge relating to a restructuring of debt, and (2) the increase in the cost of patient services as described above, and the result of delays in annual Medicaid rate increases, which are usually in effect on July 1 of each year. This year the rate increases in Georgia were delayed until August 16, 1996, and the rate increases in Tennessee were delayed until November 1, 1996. Most of the long-term care facilities operated by the Company are located in these two states. The delays in Medicaid rate increases are not related to the extraordinary charge. During the quarter ended December 31, 1996, the Company recorded an extraordinary charge of $490,000, net of taxes of $300,000. The gross extraordinary charge consists of $790,000 of charges associated with the early extinguishment of approximately $9.2 million of long term debt. Most of the revenue from the management services division of the Company's business is received pursuant to management agreements with entities controlled by Messrs. Brogdon and Lane, two of the Company's officers and directors. These management agreements have five year terms, however, they are all subject to termination on 60 days notice, with or without cause by either the Company or the owners. Therefore, Messrs. Brogdon and Lane have full control over whether or not these management agreements, and thus the management services revenue, continue in the future. LIQUIDITY AND CAPITAL RESOURCES At March 31, 1997, the Company had a deficit of $1,230,244 in working capital compared to a deficit of $1,496,160 at June 30, 1996. During the nine months ended March 31, 1997, cash used by operating activities was $14,635,461 as compared to $8,288,044 for the quarter ended March 31, 1996. The $6,347,417 increase was primarily due to the increase in accounts receivable for the nine months ended March 31, 1997 of $21,314,820. These increases in non-cash assets were partially offset by increases in accounts payable and accrued expense of $13,158,812. Cash used in investing activities during the nine months ended March 31, 1997 was 32,518,396. The expenditures related to purchases of equipment, securities, investments in subsidiaries and advances to affiliates. Cash provided by financing activities during the nine months ended March 31, 1997 consisted of $37,196,676 in long term loans and $9,340,000 in issuance of preferred stock. Cash used in financing activities consisted of $1,644,579 in payments of long term debt and the purchase and retirement of common stock of 3,800,403. The Company has no commitments to make material capital expenditures. IMPACT OF PENDING FEDERAL HEALTH CARE LEGISLATION Management is uncertain what the financial impact will be of the pending federal health care reform package since the legislation has not been finalized. However, based on information which has been released to the public thus far, management does not believe that there will be cuts in reimbursements paid to nursing homes. -16- 17 Legislative and regulatory action at the state and federal level has resulted in continuing changes in the Medicare and Medicaid reimbursement programs. The changes have limited payment increases under those programs. Also, the timing of payments made under Medicare and Medicaid programs are subject to regulatory action and governmental budgetary constraints. Within the statutory framework of the Medicare and Medicaid programs, there are substantial areas subject to administrative rulings and interpretations which may further affect payments made under these programs. Further, the federal and state governments may reduce the funds available under those programs in the future or require more stringent utilization and quality review of health care facilities. -17- 18 Item 6. Exhibits and Reports on Form 8-K (a) Exhibit 27 Restated Financial Data Schedule SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. RETIREMENT CARE ASSOCIATES, INC. DATED: October 20, 1997 By: /s/ Darrell C. Tucker ----------------------------------- Darrell C. Tucker, Treasurer -18- EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEETS AND STATEMENTS OF OPERATIONS FOUND ON PAGES 4-7 OF THE COMPANY'S FORM 10-Q FOR THE YEAR TO DATE, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 9-MOS JUN-30-1996 MAR-31-1997 356,197 0 38,012,600 0 8,211,753 58,347,184 149,505,579 0 244,234,983 59,577,428 0 0 3,767,000 1,429 33,011,720 244,234,983 179,687,606 182,180,929 124,978,914 124,978,914 48,643,982 0 8,576,528 (157,895) (40,000) 0 0 (490,000) 0 (607,895) (0.21) (0.21)
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