-----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, DRDXn194QYiiG4I3wT0bM2ObLVfEJAxXXUihklZszhJxvHi0FmprsY43kK+gqS// BcUsk9T/B/AtuZ/1xNZqoA== 0000950144-98-002589.txt : 19980312 0000950144-98-002589.hdr.sgml : 19980312 ACCESSION NUMBER: 0000950144-98-002589 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19980311 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: 98563927 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 ASSOCIATES 1 U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q/A Amendment No. 1 (Amending Part I - Items 1 and 2 and Part II - Item 1) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarter Ended September 30, 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 [ ] There were 14,749,441 shares of the Registrant's $.0001 par value Common Stock outstanding as of September 30, 1997. 2 RETIREMENT CARE ASSOCIATES AND SUBSIDIARIES FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1997 INDEX
Page(s) PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements Introduction. . . . . . . . . . . . . . . . . . . . 3 Consolidated Statements of Operations (Unaudited) - Three Months Ended September 30, 1997 and September 30, 1996 . . . . . 4 Consolidated Balance Sheets - (Unaudited) September 30, 1997 and (Audited) June 30, 1997. . . 5 - 6 Consolidated Statements of Cash Flows (Unaudited) - Three Months Ended September 30, 1997 and September 30, 1996. . . .. . . . . . . . . 7 Notes to Consolidated Financial Statements (Unaudited). . . . . . . . . . . . . . . 8 - 9 Item 2. Managements' Discussion and Analysis of Results of Operations and Financial Condition . . . . . . . . . . . . . . . . . . . . . 10 - 12 PART II. OTHER INFORMATION. Item 1. Legal Proceedings. . . . . . . . . . . . . . . . .. 12 Signatures. . . . . . . . . . . . . . . . . . . . . 13
-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 Amended Form 10-K/A, Retirement Care Associates, Inc. (the "Company") for the fiscal year ended June 30, 1997, File No. 1-14114. The Company has restated its financial information for periods commencing June 30, 1996 through the nine months ended March 31, 1997, as reflected in the Company's Quarterly Reports on Forms 10-Q/A for the quarters ended September 30, 1996, December 31, 1996 and March 31, 1997. Adjustments and reclassifications were necessary to correct entries relating to (i) receivables due from third-party payors, (ii) the Company's inventory for such periods, (iii) provisions for doubtful accounts, (iv) provisions for contractual allowances for third-party payors, (v) provisions for accrued liabilities, and (vi) pre-recorded operating leases (collectively, the "Restated Entries"). Certain statements in this Form 10-Q/A are "forward-looking statements" made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve a number of risks and uncertainties. Factors which may cause the Company's actual results in future periods to differ materially from forecast results include, but are not limited to: general economic and business conditions, both nationally and in the regions in which the Company operates; industry capacity; demographic changes; existing government regulations and changes in, or the failure to comply with, government regulations; legislative proposals for reform; the ability to enter into lease and management contracts and arrangements on acceptable terms; changes in Medicare and Medicaid reimbursement levels; liability and other claims asserted against the Company; competition; changes in business strategy or development plans; the ability to attract and retain qualified personnel; the significant indebtedness of the Company; and the availability and terms of capital to fund the expansion of the Company's business, including the acquisition of additional facilities. The financial information included in this report has been prepared by the Company, without audit, and should not be relied upon to the same extent as audited financial statements. -3- 4 RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
September 30, September 30, 1997 1996 REVENUES Patient service revenue $ 66,455,791 $ 41,974,970 Medical supply revenue 12,036,835 11,306,195 Management fee revenue: From affiliates 391,501 796,500 From others 48,036 137,546 Other operating revenue 490,589 957,404 79,422,752 55,172,615 EXPENSES Cost of patient services 49,369,697 31,905,623 Cost of medical supplies sold 8,620,525 7,667,200 Lease expense 5,232,503 3,026,791 General and administrative 13,962,512 9,501,727 Depreciation and amortization 1,592,006 1,118,462 Interest 3,981,289 2,397,636 Provision for bad debt -- 1,020,000 82,758,532 56,637,439 (LOSS) BEFORE MINORITY INTEREST AND INCOME TAXES (3,335,780) (1,464,824) Minority interest (91,500) 80,000 (Loss) before income taxes (3,427,280) (1,384,824) Income tax (benefit) (1,340,000) (345,000) NET (LOSS) ($2,087,280) ($1,039,824) Preferred stock dividends 45,000 744,806 (Loss) applicable to common stock (2,132,280) (1,784,630) NET (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE (.15) (.14) WEIGHTED AVERAGE SHARES OUTSTANDING 14,671,059 13,075,978
-4- 5 RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 1997 AND AUDITED AT JUNE 30, 1997
Unaudited Audited September 30, June 30, 1997 1997 ASSETS CURRENT Cash and cash equivalents $ 2,881,066 $ 3,637,878 Accounts receivable 49,644,721 40,391,377 Inventory 7,410,521 7,255,289 Deferred tax asset 4,553,568 4,408,733 Income tax receivables 5,065,431 4,065,431 Note and accrued interest receivable 75,000 75,000 Restricted Bond Fund 4,720,000 3,068,276 Prepaid expenses and other 1,281,152 2,009,467 Total current assets 75,631,459 64,911,451 PROPERTY AND EQUIPMENT 152,676,366 150,492,221 OTHER ASSETS Marketable equity securities --- Investments in unconsolidated affiliates 793,433 734,514 Deferred lease and loan costs 12,841,634 13,065,759 Goodwill 16,231,979 16,357,532 Advances due from non-affiliates 1,276,158 1,421,405 Advances due from affiliates 2,904,098 1,411,379 Restricted bond funds 4,515,609 3,689,969 Other assets 3,002,224 3,286,736 Total other assets 41,565,135 39,967,294 $269,872,960 $255,370,966
-5- 6 RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 1997 AND AUDITED AT JUNE 30, 1997
Unaudited Audited September 30, June 30, 1997 1997 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Lines of credit $ 13,354,000 $ 9,935,036 Current maturities of long-term debt 16,725,842 11,454,059 Loans payable to affiliates 964,831 1,478,368 Accounts payable 37,262,692 34,076,015 Accrued expenses 22,208,889 18,417,258 Deferred gain 40,000 40,000 Total current liabilities 90,556,254 75,400,736 Deferred gain 171,370 181,370 Deferred income taxes 1,098,929 1,098,929 Long-term debt and capitalized leases, less current maturities 141,647,606 141,674,131 Minority interest 4,533,153 4,520,953 Redeemable convertible preferred stock 1,800,000 1,800,000 Shareholders' equity Common stock, $.0001 par value; 300,000,000 shares authorized; 14,749,441 and 14,489,888 shares outstanding 1,475 1,450 Preferred stock 3,000,000 3,250,000 Additional paid-in capital 45,552,673 43,799,617 Retained earnings (18,488,500) (16,356,220) Total shareholders' equity 30,065,648 30,694,847 Total liabilities and shareholders' equity $269,872,960 $255,370,966
-6- 7 RETIREMENT CARE ASSOCIATES, INC. UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
September 30, September 30, 1997 1996 OPERATING ACTIVITIES Net income (loss) $ (2,087,280) $ (1,039,824) Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 1,592,006 1,118,462 Provision for bad debts -- 1,020,000 Amortization of deferred gain (10,000) (160,000) Minority interest 91,500 (80,000) Deferred income taxes (144,835) 230,359 Changes in current assets and liabilities net of effects of acquisitions: Accounts receivable (9,253,344) (9,287,819) Inventory (155,232) (3,533,039) Prepaid expense and other assets 1,012,827 (2,022,759) Accounts payable and accrued expenses 5,978,308 8,922,127 Increase in deferred lease and loan costs -- Cash (used in) operating activities (2,976,050) (4,832,493) INVESTING ACTIVITIES Purchase of property and equipment (3,426,473) (32,703,818) Issuance of advances to affiliates (1,861,009) 14,793,832 Investment in and advances to Atrium Ltd. -- Restricted bond funds (2,477,364) 932,079 Changes in marketable equity securities -- Change in receivable (161,250) Deferred lease cost (2,169,941) Investment in unconsolidated subsidiaries (58,919) (48,494) Cash (used in) investing activities (7,823,765) (19,357,592) FINANCING ACTIVITIES Dividends on preferred stock (45,000) (60,000) Net proceeds from issuance of: Line of credit 3,418,964 (3,556,535) Common stock 1,503,081 -- Long-term debt 5,662,742 27,776,507 Preferred Stock -- 6,598,181 Payments on long-term debt (496,784) (444,250) Purchase and retirement of common stock -- (3,098,004) Cash provided by financing activities 10,043,003 27,215,899 Net increase (decrease) in cash and cash equivalents (756,812) 3,025,814 Cash and cash equivalents, beginning of year 3,637,878 45,365 Cash and cash equivalents, end of year $ 2,881,066 $ 3,071,179
-7- 8 RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1: BASIS OF PRESENTATION The consolidated financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. These consolidated financial statements and the notes thereto should be read in conjunction with the consolidated financial statements included in the Company's Annual Report on Amended Form 10-K/A for the fiscal year ended June 30, 1997, File No 1-14114. In the opinion of management of the Company, the accompanying unaudited consolidated financial statements contain all necessary adjustments to present fairly the financial position, the results of operations and cash flows for the periods reported. All adjustments are of a normal recurring nature. NOTE 2: RESTATEMENT The consolidated financial statements for the three months ended September 30, 1996, as originally reported, reflect certain balances which were subsequently determined to be incorrect and, accordingly, the consolidated financial statements for the three months ended September 30, 1996 have been restated as follows (in thousands):
As Previously Reported As Restated ---------------------- ----------- Revenues $ 55,140 $ 55,173 Operating Expenses $ 53,652 $ 56,637* Net Earnings (Loss) applicable to common stock $ 801 $ (1,785) Shareholders' Equity $ 38,879 $ 33,266 -------------------
* Restated Operating Expenses include (in thousands) (i) an additional accrual for employee benefits of $1,400, (ii) restated operating lease expense of $375, (iii) a provision for doubtful accounts of $1,020, and (iv) restated miscellaneous expenses of $190. 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. NOTE 4. INVENTORIES Inventories consisting mainly of medical supplies, are valued at the lower of cost (first in, first out) or market. -8- 9 RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 5: ADVANCES TO AFFILIATES At September 30, 1997 and June 30, 1997, the Company had notes and advances to (from) affiliates totaling approximately ($1,939,267) and $66,991, respectively, due on demand. NOTE 6. LONG-TERM DEBT Long-term debt consisted of the following:
September 30, June 30, 1997 1997 ------------ ------------ Amounts outstanding under Revenue Bonds secured by retirement facilities $ 74,670,000 $ 74,675,000 Other debt secured by retirement and nursing facilities 40,647,020 40,700,380 Other debt 21,083,626 15,780,008 Capitalized leases 21,972,802 21,972,802 Totals 158,373,448 153,128,190 Current maturities 16,725,842 11,454,059 Total long-term debt $141,647,606 $141,674,131
The terms of the note payable to Sun Healthcare Group, Inc. ("Sun") of $9,750,000, due July 10, 1997, were amended to: (i) increase the applicable interest rate from 9.0% to 11.0% per annum; (ii) extend the maturity date to the close of business on the 120th day after the termination or consummation of the Company's agreement to merge with Sun; and (iii) replace the collateral securing the loan with a second lien on all of the Company's accounts receivable. The note payable is unconditionally and irrevocably guaranteed by two officers and directors of the Company. On July 15, 1997, Sun loaned the Company an additional $5,000,000, for working capital purposes. The loan is secured by a second lien on all of the Company's accounts receivable, bears interest at the rate of 12.0% per annum, and matures on the close of business on the 120th day after the termination or consumation of the Company's agreement to merge with Sun. The note payable is unconditionally and irrovacably guaranteed by two officers and directors of the Company. NOTE 7: MANAGEMENT AGREEMENT On July 15, 1997, the Company and Sun entered into a management agreement pursuant to which Sun agreed to provide management, consulting, and advisory services to sixteen long-term care facilities the Company operates in Virginia and North Carolina. As payment for providing such services, Sun will receive a monthly management fee equal to seven percent of the gross revenues of the facilities. The agreement also authorizes Sun to cause its therapy services and pharmaceutical subsidiaries to provide such ancillary services to the facilities at costs not in excess of those that would be charged to the Company by an unrelated third party in an arms'-length transaction. The Company has agreed to indemnify Sun with respect to any investigations, actions or proceedings on the part of regulatory authorities regarding the facilities. The management agreement will terminate on the earlier of the consummation of the merger with Sun, the repayment of a $5,000,000 loan from Sun, or 120 days after the termination of the merger agreement with Sun. NOTE 8: COMMITMENTS AND CONTINGENCIES The Company is involved in legal proceedings arising in the ordinary course of business. In addition, the Company is in dispute with the Internal Revenue Service ("IRS") concerning the application of certain income and payroll tax liabilities and payments. The IRS contends that the Company is delinquent in the payment of certain taxes and has assessed taxes, penalties and interest in connection with the alleged underpayment of approximately $1.2 million. The Company contends that the IRS has misapplied payments between income and payroll taxes and between the Company and its affiliates. On advise of counsel handling the matter, the Company has estimated and accrued in the accompanying financial statements amounts for ultimate settlement of this dispute, and has recorded an accrual of $400,000 for the ultimate settlement thereof. 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. -9- 10 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1996. The Company's total revenues for the three months ended September 30, 1997, were $79,422,752 compared to $55,172,615 for the three months ended September 30, 1996. Due to the increased number of facilities owned or leased by the Company, patient service revenue increased from $41,974,970 for the quarter ended September 30, 1996, to $66,455,791 for the quarter ended September 30, 1997. The Company was operating 100 facilities for the quarter ended September 30, 1997, compared to 75 for the quarter ended September 30, 1996. The cost of patient services in the amount of $49,369,697 for the quarter ended September 30, 1997, represented 74% of patient service revenue, as compared to $31,905,623, or 76%, of patient service revenue during the quarter ended September 30, 1996. The decrease in the percentage of patient service revenue compared to cost of patient services of 2% is attributed to increased control over facility payroll costs, controllable costs such as supplies and reductions in corporate staff due to attrition from the proposed merger to Sun Healthcare Group, Inc. Medical supply revenue increased from $11,306,195 during the quarter ended September 30, 1996, to $12,036,835 during the quarter ended September 30, 1997. These revenues, which are revenues of Contour Medical, Inc. ("Contour"), a majority-owned subsidiary, increased primarily due to volume. Cost of medical supplies sold as a percentage of medical supply revenue increased to approximately 72% during the quarter ended September 30, 1997, as compared to approximately 68% of such revenue during the same period last year. The increased percentage is primarily a result of increases in the cost of products sold and increased competition in the medical supply industry, which has decreased the sales prices of most products. Management fees decreased from $934,046 in the quarter ended September 30, 1996 to $439,537 in the quarter ended September 30, 1997. As of September 30, 1996, the Company was managing 20 facilities, and as of September 30, 1997, the Company was only managing 9 facilities. The reduced number of facilities managed by the Company is due to the fact that the Company leased three long- term facilities and four assisted living/independent facilities and purchased two assisted living/independent living facilities from Messrs. Brogdon and Lane. Two third-party assisted living/independent living facilities cancelled their management contracts with the Company. The Company purchased and leased these facilities to reduce the affiliated receivable due the Company and to increase the number of facilities owned or leased, rather than just managed, by the Company. Management anticipates that the number of facilities only managed by the Company will continue to decline as a result of the acquisition of such facilities by the Company. Owning or leasing a facility is distinctly different from managing a facility with respect to operating results and cash flows. For an owned or leased facility, the entire revenue/expense stream of the facility is recorded on the Company's income statement. In the case of a management agreement, only the management fee is recorded. The expenses associated with management revenue are somewhat indirect as the infrastructure is already in place to manage the facility. Therefore, the profitability of managing a facility appears more lucrative on a margin basis than that of an owned/leased facility. However, the risk of managing a facility is that the contract generally can be canceled on a relatively short notice, which results in loss of all revenue attributable to the contract. Furthermore, with an owned or leased property the Company benefits from the increase in value of the facility as its performance increases. With a management contract, the owner of the facility maintains the equity value. From a cash flow standpoint, a management contract is more lucrative because the Company does not have to support the ongoing operating cash flow of the facility. Most of the revenue from the management services division of the Company's business is received pursuant to management agreements with entities controlled by Messrs. Brogdon and Lane, two of the Company's officers and directors. These management agreements have three to five year terms and are terminable on 60 days notice with or without cause by either the Company or the owners. Therefore, Messrs. Brogdon and Lane have full control over whether or not these management agreements, and thus the management service revenue, continue in the future. -10- 11 Other operating revenue decreased from $957,404 during the quarter ended September 30, 1996, to $490,589 during the quarter ended September 30, 1997. The decrease was primarily a result of one-time referral fees of $300,000 received from a building contractor, and approximately $180,000 in interest income included in the September 30, 1996 amounts. Lease expense increased from $3,026,791 for the quarter ended September 30, 1996, to $5,232,503 for the quarter ended September 30, 1997. This increase is primarily attributable to the increased number of facilities that the Company has leased. General and administrative expenses for the three months ended September 30, 1997 were $13,962,512 representing 18% of total revenues, as compared to $9,501,727 representing 17% of total revenues, for the three months ended September 30, 1996. The increase in the dollar amount is primarily due to the general and administrative expenses related to operating the additional facilities owned or leased by the Company, and approximately $600,000 was due to legal and accounting expenses related to the pending merger with Sun Healthcare Group, Inc. Interest expense rose from $2,397,636 during the quarter ended September 30, 1996, to $3,981,289 during the quarter ended September 30, 1997, as a result of the increased amount of debt carried by the Company as a result of acquisitions made over the last twelve months. At September 30, 1996, the Company had approximately $144 million in long-term debt, as compared to approximately $158 million in long-term debt at September 30, 1997. For the quarter ended September 30, 1997, the Company received an income tax benefit of $1,340,000 which represents an effective tax benefit of 39%, as compared to a tax benefit of $345,000 which represents an effective tax benefit of 25% for the quarter ended September 30, 1996. The net loss of $2,087,280 for the quarter ended September 30, 1997, compares to a net loss of $1,039,824 for the quarter ended September 30, 1996. The increased loss is attributable to a deterioration in the Company's operations as a result of the pendency of and delays associated with the merger with Sun, including higher-than-normal turnover, and costs associated with the integration and operation of the Company's recently-acquired Virginia and North Carolina facilities (including certain regulatory compliance problems). LIQUIDITY AND CAPITAL RESOURCES At September 30, 1997, the Company had a deficit of $14,924,795 in working capital compared to a deficit of $10,489,285 at June 30, 1997. The Company is increasing it efforts to reduce the increasing working capital deficit by concentrating it resources on collecting current and delinquent accounts receivable, improving the operations of the facilities through better budget management and analysis, and possible refinancing of selected facilities. During the quarter ended September 30, 1997, cash used by operating activities was $2,976,050 as compared to $4,832,493 during the quarter ended September 30, 1996. The cash used during the current period was primarily due to the net loss of $2,087,280 for the quarter ended September 30, 1997, increases in accounts receivable of $9,253,344 due to the increase in facilities operated by the Company. Cash provided by operating activities was primarily attributed to depreciation and amortization of $1,592,006 on the facilities, decreases in prepaid expenses and other of $1,012,827, and increases in accounts payable and accrued expenses of $5,978,308 due to the increase in facilities operated by the Company. Cash flows used in investing activities during the quarter ended September 30, 1997, totaled $7,823,765 as compared to $19,357,592 during the quarter ended September 30, 1996. During the current period, the Company expended $3,426,473 on the purchase of property and equipment paid $1,861,009 and $2,477,364 on advances to affiliated companies controlled by Messrs. Brogdon and Lane and restricted bond funds on facilities, respectively. The advances are due on demand. Cash provided by financing activities during the quarter ended September 30, 1997, totaled $10,043,003 as compared to $27,215,899 during the same period last year. During the current period the Company received $1,503,081 from the exercise of common stock options and the placement of $5,662,742 in long-term debt, including the $5 million loan from Sun Healthcare Group, Inc. and $3,418,964 from a line of credit. On September 30, 1994, the Company purchased a majority of the stock of Contour Medical, Inc. in exchange for shares of the Company's common stock and preferred stock. The Company is obligated to redeem the preferred stock issued in the transaction over five years for $3,000,000 in cash. $600,000 was paid on October 11, 1997 pursuant to this obligation. Management intends to fund future redemptions from cash flow generated from operations. -11- 12 The Company believes that its long-term liquidity needs will generally be met by income from operations. If necessary, the Company believes that it can obtain an extension of its current line of credit and/or other lines of credit from commercial sources. Except as described above, the Company is not aware of any trends, demands, commitments or understandings that would impact its liquidity. The Company maintains various lines of credit with interest rates ranging from prime plus .25% to prime plus 1.25%. At September 30, 1997, the Company had approximately $3,500,000 in unused credit available under such lines. IMPACT OF PENDING FEDERAL HEALTH CARE LEGISLATION Management is uncertain what the financial impact will be of the pending federal health care reform package since the legislation has not been finalized. However, based on information which has been released to the public thus far, management doesn't believe that there will be cuts in reimbursements paid to nursing homes. Legislative and regulatory action at the state and federal level, has resulted in continuing changes in the Medicare and Medicaid reimbursement programs. The changes have limited payment increases under those programs. Also, the timing of payments made under Medicare and Medicaid programs are subject to regulatory action and governmental budgetary constraints. Within the statutory framework of the Medicare and Medicaid programs, there are substantial areas subject to administrative rulings and interpretations which may further affect payments made under these programs. Further, the federal and state governments may reduce the funds available under those programs in the future or require more stringent utilization and quality review of health care facilities. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. The Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1997, includes information in Item 3 - Legal Proceedings, with regard to litigation commenced during the quarter ended September 30, 1997. Such information is incorporated herein by this reference. Since the Form 10-K was filed one additional class action was filed against the Company similar to the nine class actions disclosed in the Form 10-K. This suit was titled TP HOLDING ON BEHALF OF ITSELF AND ALL OTHERS SIMILARY SITUATED, PLAINTIFF V. RETIREMENT CARE ASSOCIATES, INC., CHRIS BROGDON, DARRELL C. TUCKER, JULIAN S. DALEY AND HARLAN MATTHEWS, DEFENDANTS. This class action complaint was filed on October 24, 1997 in the United States District Court, Northern District of Georgia, Atlanta Division , Civil Action No. 1: 97-CV-3228. The complaint alleges that the Company and certain of its officers and directors misrepresented the results of the Company's operations and concealed adverse material information concerning the operations, finances, financial condition, products, inventories, results of operations and future business prospects of the Company in its quarterly reports, filings with the Securities and Exchange Commission, press releases and presentations to securities analysts. The compliant does not specify the amount of damages sought. The class action filed by Panhai Shah against the Company in the Central District of California was dismissed and refiled in the Northern District of Georgia as Civil Action No. 1:97-CV-3192. In the lawsuit filed by Theratx Inc. against the Company, the Company filed a motion for a summary judgment and lost on October 14, 1997. A notice of appeal has been filed in the Georgia Court of Appeals. The appeal has not been docketed, no formal pleadings have been filed and the issues regarding the appeal have not been framed. -12- 13 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: March 11, 1998 By: /s/ Darrell C. Tucker ---------------------------- Darrell C. Tucker, Treasurer -13- -----END PRIVACY-ENHANCED MESSAGE-----