-----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, TUpzU5ri5K2FZhcBZSaq9NoiEYa2IU/3F1tj/vxDhKshFr4A+HUWp4uFT03xWGXh IuZOS7CPd+LpWGe5l8zD2g== 0000950144-98-004370.txt : 19980410 0000950144-98-004370.hdr.sgml : 19980410 ACCESSION NUMBER: 0000950144-98-004370 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19980409 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-K/A SEC ACT: SEC FILE NUMBER: 001-14114 FILM NUMBER: 98590889 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-K/A 1 RETIREMENT CARE ASSOCIATES, INC. 1 U. S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K/A Amendment No. 4 (Amending Part II - Item 7 and Part IV - Item 14 and Financial Statements) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year ended: June 30, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from: 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 (I.R.S. Employer Identi- Incorporation or Organization) fication Number) 6000 Lake Forrest Drive, Suite 200, Atlanta, Georgia 30328 (Address of Principal Executive Offices, Including Zip Code) Registrant's telephone number, including area code: (404) 255-7500 Securities registered pursuant to Section 12(b) of the Act: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED Common Stock, $.0001 Par Value New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.0001 Par Value Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of September 18, 1996, 13,180,918 shares of common stock were outstanding. The aggregate market value of the common stock of the Registrant held by nonaffiliates on that date was approximately $67,925,000. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Documents incorporated by reference: Part III is incorporated by reference to the Registrant's Proxy Statement relating to the Annual Meeting of Shareholders to be held in December 1996. 2 PART II ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. YEAR ENDED JUNE 30, 1996 COMPARED TO YEAR ENDED JUNE 30, 1995 The Company's management has evaluated the potential effect on periods prior to 1996 of certain errors that the Company has corrected in a restatement and reissuance of its 1996 financial statements. Based on such evaluation, the Company's management determined that a restatement of periods prior to 1996 was unnecessary. The following summarizes the principal considerations made by the Company's management in that regard: Allowance for uncollected accounts during 1996. The Company's accounts receivable nearly doubled during 1996, and the mix of such receivables also changed significantly. In 1995, amounts due from Medicare and Medicaid represented approximately 87% of the Company's total accounts receivable, versus 67% in 1996. Further, amounts due from patients increased from approximately $11,000 in 1995 to approximately $3,113,000 in 1996, and the Company's other trade receivables increased from approximately $761,000 in 1995 to approximately $2,595,000 in 1996. The Company's auditors evaluated the Company's position with respect to the allowance in 1995 and concluded that the balance was appropriate for 1995, and nothing was noted that would indicate a misapplication of facts and circumstances during 1995. Nothing would indicate a potential error relating to the allowance for uncollectible accounts. Additional accrual for claims incurred but not reported for self-insured worker's compensation and health care. Until April 1995, the Company had been acquiring commercial insurance, which transferred substantially all risk to a third party insurer. In conjunction with the Company's switch to self-insurance, the Company experienced significant growth during 1996 compared to 1995. During 1996, the Company acquired or leased an additional 28 facilities, a 74% increase in total facilities owned or leased. A similar increase in covered employees can be implied. As a result of the increase in facilities and the rapid increase in covered employees, the reasonable conclusion is that the expenses associated with these increases are properly accounted for in 1996. The Company evaluated what portion of the expenses, if any, would have been properly accrued in 1995 and determined that the amount was immaterial to the 1995 financial statements. Accrual for compensated absences. The Company evaluated what portion of the expenses, if any, would have been properly accrued in 1995 and determined that the amount was immaterial to the 1995 financial statements. Adjustment of previously recorded inventory. This adjustment applies only to the 1996 financial statements. Initially, the Company had erroneously included certain items, such as beds and other insignificant equipment ($200 or less per item), in its physical inventory by facility. The adjustment to inventory represents a correction to the inventory balance to only reflect those items appropriately included as inventory. Adjustment to lease expense. This adjustment represents the amount necessary to increase lease expense to reflect straight line expense for those leases which contained escalation clauses. This adjustment is principally related to 1996 when the Company acquired an additional 28 facilities. The Company evaluated the potential effect on the 1995 financial statements and deemed the expenses to be immaterial to the 1995 financial statements because most of the leases containing escalations were entered into during 1996. The Company's total revenues for the year ended June 30, 1996, were $134,011,369 compared to $79,616,053 for the year ended June 30, 1995. 25 3 Management fee revenue decreased from $4,169,694 in the year ended June 30, 1995, to $3,781,433 in the year ended June 30, 1996. The Company leased one long-term care facility, purchased three long-term care facilities and purchased two assisted living/independent living facilities during the fiscal year ended June 30, 1996, each of which it managed during the fiscal year ended June 30, 1995. All of these facilities were owned and controlled by Messrs. Brogdon and Lane. 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. Included in the Company's management fee revenue is $3,472,900 and $3,517,500 from affiliates during the years ended June 30, 1996 and 1995, respectively. Due to the increased number of facilities owned or leased by the Company, patient service revenue increased from $69,949,822 for the year ended June 30, 1995 to $119,499,849 for the year ended June 30, 1996. The cost of patient services in the amount of $81,082,972 for the year ended June 30, 1996, represents 68% of patient service revenue, as compared to $47,778,410, or 68%, of patient service revenue during the year ended June 30, 1995. 26 4 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. The Company converted four managed properties to leased properties during the fiscal year ended June 30, 1996, which resulted in an increase in net revenues of $1 million during the fiscal year ended June 30, 1996 compared to the fiscal year ended June 30, 1995. The number of leased or owned properties at year-end are presented in the table below (the table does not included managed facilities):
TYPE FISCAL 1994 FISCAL 1995 FISCAL 1996 ---- ----------- ----------- ----------- Long-term care 20 30 48 Assisted living/independent living 6 8 18 ----- ----- ------ Total 26 38 66
For facilities that were in place for the entire year ended June 30, 1995 and June 30, 1996, revenue increased approximately $3 million, or 5%, during the year ended June 30, 1996. For these same facilities, average rates increased approximately 3% while patient-days increased approximately 2%. During the year ended June 30, 1996, the Company had revenue from medical supply sales of $14,542,421, an approximately $6.2 million increase compared to fiscal year ended June 30, 1995, of which $4,717,169 was intercompany sales which were eliminated in consolidation. These sales reflect the operations of Contour Medical, Inc., of which the Company acquired a majority interest on September 30, 1994. Because the Company acquired Contour on September 30, 1994, only nine months of activity were recorded for fiscal year ended June 30, 1995. Sales for those nine months of $3,617,439 have been annualized and recorded for the year ended June 30, 1995 and comprise $1.2 million of the $6.2 million increase in medical supplies revenue for the fiscal year ended June 30, 1995. Sales for the nine month period following the Contour acquisition have been annualized so as not to distort the net increase in revenues from the fiscal year ended June 30, 1995 to the fiscal year ended June 30, 1996. Moreover, Contour acquired AmeriDyne on March 1, 1996, which contributed $3.6 million of revenue for the fiscal year ended June 30, 1996 (see Contour 6/30/96 10-K, page 16). While AmeriDyne contributed $3.6 million of revenue for the fiscal year ended June 30, 1996 (as set forth correctly in Contour's 6/30/96 10-K), Contour's $4.7 million in sales should not have been labeled intercompany because this amount was not attributable to sales to RCA. The remaining $1.4 million increase in sales increase is attributable to the internal growth of the business. The change in costs of goods sold as a percentage of sales during fiscal year ended June 30, 27 5 1996 versus fiscal year ended June 30, 1995 is not meaningful because the method of recording intercompany elimination changed during the fiscal year ended June 30, 1996. During the fiscal year ended June 30, 1995, intercompany sales of $4,995,346 were recorded as an elimination of medical supply revenue and an elimination of routine and ancillary costs. During the fiscal year ended June 30, 1996, intercompany sales of $4,717,169 was recorded as an elimination of medical supply revenue and an elimination of medical supply costs of goods sold. If fiscal year ended June 30, 1996 is treated identically to fiscal year ended June 30, 1995, the costs of goods sold margin would be 107% of sales as compared to 87% of sales during fiscal year ended June 30, 1995. The increase in costs of goods sold margin is primarily attributable to the fact that sales to RCA comprised 32% of Contour's sales during fiscal year ended June 30, 1996 (representing costs without associated revenues), while sales to RCA comprised only 22% of Contour's sales during fiscal year ended June 30, 1995. The Cost of Goods Sold for the year ended June 30, 1996, was $5,773,934. Lease expense increased from $5,769,232 in the year ended June 30, 1995, to $8,442,671 in the year ended June 30, 1996. This increase is primarily attributable to the increased numbers of facilities leased during the year, as well as the full year effect of leased facilities that started during the year ended June 30, 1995. There were ten new facilities leased during the fiscal year ended June 30, 1996. General and administrative expenses for the year ended June 30, 1996, were $23,192,250, representing 17% of total revenues, as compared to $12,769,582 representing 16% of total revenues, for the year ended June 30, 1995. During the year ended June 30, 1996, the Company recorded a $3,423,117 provision for bad debts. The amount of the provision for bad debts was based upon the aging and estimated collectibility of receivables from Medicare, Medicaid and private payors. During the year ended June 30, 1996, the aging of receivables increased compared with the aging of receivables at June 30, 1995. In addition, at June 30, 1996, a larger amount of the receivables was deemed to be uncollectible than at June 30, 1995. As of June 30, 1995, the estimated allowance for bad debts was immaterial to the financial statements and was, therefore, not recorded. The Company's consideration of several factors related to the current accounts receivable balance for fiscal year 1996 resulted in the Company recording a $2.7 million bad debt reserve. The Company considered the overall increase in patient account balances (approximately 80%) resulting from the Company's acquisitions during fiscal year 1996, the deterioration in the aging categories due to untimely collection practices by individual facilities which in several cases resulted in the expiration of allowable time periods to bill accounts, the significant rise in accounts receivable net days, the growth in self-pay balances and the lack of timely write-off of uncollectible accounts throughout the fiscal year. During the year ended June 30, 1996, the Company had $1,847,868 in interest income and financing fees as compared to $658,215 in interest income and financing fees for the year ended June 30, 1995. Financing fees, which totaled $150,000 for the year ended June 30, 1996, represent fees received by the Company for assisting other companies to obtain financing for nursing homes and retirement facilities. The increase in interest income is a result of the increased amount of advances to related parties during the current year. Interest expense increased from $1,179,052 in the year ended June 30, 1995, to $7,948,091 in the year ended June 30, 1996. This increase is primarily attributable to the increased numbers of facilities acquired by the Company during the year, as well as the full year effect of facilities that were acquired by the Company during the year ended June 30, 1995. For the year ended June 30, 1996, the Company incurred expenses for income taxes of $1,307,091, which represents an effective tax rate of 48%, as compared 28 6 to expenses for income taxes of $3,419,092, which represents an effective tax rate of 40%, for the year ended June 30, 1995. The increase in the effective tax rate is mainly the result of a non-deductible tax penalty of approximately $400,000 which was assessed during the year ended June 30, 1996. The net income of $1,746,808 for the year ended June 30, 1996, is less than the net income of $5,058,503 for the year ended June 30, 1995, due to the provision of an additional allowance for bad debts and increased interest expense because of the larger number of facilities acquired during the most recent fiscal year. 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; 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. These fees represent 2.82% and 5.24% of total revenues of the Company for the years ended June 30, 1996 and 1995, respectively. YEAR ENDED JUNE 30, 1995 COMPARED TO YEAR ENDED JUNE 30, 1994 The Company's total revenues for the year ended June 30, 1995, were $79,616,053 compared to $37,971,052 for the year ended June 30, 1994. Management fees increased from $3,292,949 in the year ended June 30, 1994, to $4,169,694 in the year ended June 30, 1995, due to the increased number of facilities which the Company manages as well as the renegotiation of management agreements resulting in higher management fees. Included in the Company's management fee revenue is $3,517,500 and $3,034,445 from affiliates during the years ended June 30, 1995 and 1994, respectively. Due to the increased number of facilities owned or leased by the Company, patient service revenue increased from $34,340,394 for the year ended June 30, 1994, to $69,949,822 for the year ended June 30, 1995. The cost of patient services in the amount of $47,778,410 for the year ended June 30, 1995, represented 68% of patient service revenue, as compared to $23,088,387, or 67% of patient service revenue during the year ended June 30, 1994. During the year ended June 30, 1995, the Company had revenue from medical supply sales of $3,617,439. These sales reflect the operations of Contour Medical, Inc., of which the Company acquired a 63% interest on September 30, 1994. As a result, these sales only reflect nine months of operations. The cost of goods sold for the year ended June 30, 1995, was $3,153,430, or 87% of medical supply sales. Lease expense increased from $3,714,105 in the year ended June 30, 1994, to $5,769,232 in the year ended June 30, 1995. This increase is primarily attributed to the increased number of facilities leased during the year, as well as the full year effect of leased facilities that started during the year ended June 30, 1994. There were six new facilities leased during the fiscal year ended June 30, 1995. General and administrative expenses for the year ended June 30, 1995, were $12,769,582 representing 16% of total revenues, as compared to $5,953,793 representing 16% of total revenues, for the year ended June 30, 1994. During the year ended June 30, 1995, the Company had $658,215 in interest income and financing fees. The Company had no similar revenue during the year ended June 30, 1994. 29 7 Interest expense increased from $232,365 in the year ended June 30, 1994, to $1,179,052 in the year ended June 30, 1995. This increase is primarily attributed to the increased numbers of facilities acquired by the Company during the year, as well as the full year effect of facilities that were acquired by the Company during the year ended June 30, 1994. For the year ended June 30, 1995, the Company incurred expenses for income taxes of $3,419,092 which represents an effective tax rate of 40% as compared to expenses for income taxes of $1,827,483 which represents an effective tax rate of 39% for the year ended June 30, 1994. The net income of $5,058,503 for the year ended June 30, 1995, is higher than the net income of $2,917,642 for the year ended June 30, 1994, due to the increased number of facilities operated and managed during 1995. LIQUIDITY AND CAPITAL RESOURCES At June 30, 1996, the Company had a deficit of $1,496,160 in working capital compared to a surplus of $2,925,302 at June 30, 1995. During the year ended June 30, 1996, cash provided by operating activities was $5,549,626 as compared to $4,208,048 for the year ended June 30, 1995. The $1,341,578 increase was primarily due to net income of $1,746,808 for the year ended June 30, 1996, depreciation and amortization of $3,406,986 on the facilities, provisions for bad debts of $3,423,117 on accounts receivable and increases in accounts payable and accrued expenses of $9,964,620 due to the addition of twenty eight facilities for the year ended June 30, 1996. Cash used in operating activities was primarily due to the increase in accounts receivable of $10,672,485 due to the addition of twenty eight facilities for the year ended June 30, 1996 and increases in inventories of $2,245,194 on the nursing facilities and Contour. Cash used in investing activities during the year ended June 30, 1996, was $44,981,326. The expenditures primarily related to purchases of property and equipment of $12,490,298 and acquisitions of facilities of $21,938,513. On December 15, 1995, the Company obtained both a sole general and a limited partnership interest, totaling 74.25% interest, in Encore Partners, L.P. in exchange for a capital contribution to Encore of $3.5 million. Encore owns three assisted living/independent living and two long-term care facilities. The acquisition was accounted under the purchase method of accounting. Profits and losses of Encore are allocated 74.25% to the Company and 25.75% to other partners. Available cash, if any, is distributed 74.25% to the Company and 25.75% to the other partners. On February 27, 1996, the Company purchased a thirty six unit assisted living/independent living facility from individuals who are officers and directors of the Company. The purchase price was $2,000,000 and was financed with $400,000 from the Company and a $1,600,000 mortgage loan from an unrelated third-party real estate investment trust. The Company issued notes receivable and advances of $8,935,677 to Gordon Jensen Health Care Association, Inc., Winter Haven Homes, Inc., Southeastern Cottages, Inc., National Assistance Bureau, Inc., Chamber Health Care Society, Inc., and Senior Care, Inc. all owned or controlled by individuals who are officers and directors of the Company The notes receivable bore interest at 12% and were paid in full in 1997. The advances were due on demand and were paid in full in 1997. The Company funded an additional $4,720,047 in restricted bond funds used for debt service reserve requirements, semi-annual principal and interest payments and project funds for facilities under construction or renovation. Cash provided by investment activities was primarily the repayment of a $2,200,000 note receivable from an unrelated third-party. Cash provided by financing activities during the year ended June 30, 1996, totaled $34,269,880. Sources of cash included proceeds of $9,300,000 from the issuance of 1,000,000 shares of $10.00 Series E Convertible Preferred Stock which were sold in an offering to foreign investors in April, 1996. Holders of the Series E Preferred Stock have no voting rights except as required by law, and have a liquidation preference of $10.00 per share plus 4% per annum from the date of issuance. The shares of Series E Preferred Stock are convertible into shares of common stock at a conversion price of $11.55 or 85% of the average closing bid price for the five trading days prior to the date of conversion, whichever is lower (but no lower than $5.00). At the time of conversion, the holder is also entitled to additional shares equal to $10.00 per share of Series E Preferred Stock multiplied by 8% annum from the date of issuance divided by the applicable conversion price. Sources of cash also included proceeds from stock options and warrants exercised of $559,593, and proceeds from long-term debt and lines of credit of $35,329,244. The Company's net borrowing from lines of credit was $3,556,535, with interest rates ranging from prime plus .25% to prime plus 1.25%. Available borrowings at June 30, 1996 was $5,075,000. The Company incurred long-term debt of approximately $31 million, due through 2025, with interest rates ranging from 6.75% to 11.28%. In connection with bond indentures, the Company is required to meet certain covenants, including monthly sinking fund deposits, adequate balances in debt service reserve funds, timely payment of tax obligations and adequate insurance coverage. At June 30, 1996, the Company was in violation of 30 8 several of these covenants creating a technical default on approximately $14 million of bond indentures. These violations included the failure to make monthly payments to bond sinking funds for certain of these facilities and inadequate debt service reserves for certain of these facilities. The Company is also delinquent with regard to approximately $800,000 of property taxes at several facilities. The trustees have not called the bonds in the past for these violations and management does not forsee the bonds being called at this time. All semi-annual interest and principal payments have been made in a timely fashion. Cash used in financing activities primarily consisted of $9,443,626 in payments of long-term debt, $600,000 in redemption of Series AA Preferred Stock, $274,040 in purchases of treasury stock, and $270,000 for dividends on preferred stock. During the year ended June 30, 1995, cash provided by operating activities was $4,208,048 as compared to $1,523,311 for the year ended June 30, 1994. The $2,684,737 increase was primarily due to the increased net income for the year ended June 30, 1995. Cash used in investing activities during the year ended June 30, 1995, was $(10,644,726). The expenditures primarily related to purchases of property and equipment of $6,079,610, purchases of bonds receivable of $4,487,936, increases in investments and advances to The Atrium Ltd. of $2,985,833 and advances to affiliates of $1,742,147 due to capital expenditures and working capital deficits 31 9 of the affiliates. These were partially offset by the proceeds from a sale-leaseback transaction of $4,500,000. At June 30, 1995, advances to affiliates had increased to $7,328,222 from $5,605,250 at June 30, 1994, due to additional capital expenditures and working capital deficits of the affiliates. Cash provided by financing activities during the year ended June 30, 1995, totalled $10,683,801. Sources of cash included capital investment by minority shareholders of a subsidiary of $1,729,469, net borrowings under lines of credit of $1,745,316 and proceeds from long-term debt of $9,564,670. Cash used in financing activities primarily consisted of $2,130,654 in payments of long-term debt and $225,000 for dividends on preferred stock. Management's objective is to acquire only those facilities it believes will be able to generate sufficient revenue to pay all operating costs, management fees, lease payments or debt service, and still return a 3% to 4% cash flow. Management believes that the Company's cash flow from operations, together with lines of credit and the sale of securities described below, will be sufficient to meet the Company's liquidity needs for the current year. The Company maintains various lines of credit with interest rates ranging from prime plus .25% to prime plus 1.25%. At June 30, 1996, the Company had approximately $1,500,000 in unused credit available under such lines. Subsequent to year end, the Company raised approximately $9,340,000 in net proceeds from the sale of the Series F convertible preferred stock in a private offering to foreign investors. The proceeds of this offering are being used for working capital purposes. 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 Series A redeemable convertible preferred stock. The Company is obligated to redeem the preferred stock issued in the transaction over the five years for $3,000,000 in cash. $600,000 was paid on September 30, 1996 pursuant to this obligation. Management intends to fund these redemptions from cash flow generated from operations. 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 intends to use long-term debt financing in connection with the purchase of additional assisted living/independent living and long-term care facilities on terms which can be paid out of the cash flow generated by the property. The Company intends to continue to lease or purchase additional assisted living/independent living and/or long-term care facilities in the future. IMPACT OF INFLATION AND PENDING FEDERAL HEALTH CARE LEGISLATION Management does not expect inflation to have a material impact on the Company's revenues or income in the foreseeable future so long as inflation remains below the 9% level. The Company's business is labor intensive and wages and other labor costs are sensitive to inflation. Management believes that any increases in labor costs in its management services segment can be offset over the long term by increasing the management fees. With respect to the operations segment, approximately 52% of the Company's net patient service revenue is received from state Medicaid programs. The two states which make Medicaid payments to the Company have inflation factors built into the rates which they 32 10 will pay. Georgia's inflation factor is nine percent and Tennessee's inflation is eleven percent. Therefore, increases in operating costs due to inflation should be covered by increased Medicaid reimbursements. Management is uncertain what the final impact will be of pending federal health care reform packages 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 these programs. Also, the timing of payments made under the 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. ACCOUNTING PRONOUNCEMENT The Financial Accounting Standard Board has adopted Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (SFAS No. 115). The Company has adopted this standard in fiscal 1995. In management's opinion, adopting SFAS No. 115 did not materially affect the Company's financial statements for the year ended June 30, 1995. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) 1. FINANCIAL STATEMENTS. The following financial statements are filed as part of this report:
Page(s) Independent Auditors' Reports.................................. F-1 Report of Independent Certified Public Accountants............. F-2 Consolidated Balance Sheets as of June 30, 1996 and 1995....... F-3 - F-4 Consolidated Statements of Income for the years ended June 30, 1996, 1995 and 1994................................. F-5 Consolidated Statements of Shareholders' Equity for the years ended June 30, 1996, 1995 and 1994..................... F-6 - F-7 Consolidated Statements of Cash Flows for the years ended June 30, 1996, 1995 and 1994................................. F-8 - F-9 Notes to Financial Statements.................................. F-10 - F-27
33 11 Independent Auditor's Report Board of Directors and Shareholders of Retirement Care Associates, Inc. We have audited the accompanying consolidated balance sheet of Retirement Care Associates, Inc. and subsidiaries as of June 30, 1996 and the related consolidated statements of income, shareholders' equity and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as, evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Retirement Care Associates, Inc. and subsidiaries as of June 30, 1996 and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. As described in Note 6 to the consolidated financial statements, the Company changed its method of accounting for certain costs in inventory. /s/ Cherry, Bekaert & Holland, L.L.P. CHERRY, BEKAERT & HOLLAND, L.L.P. Greensboro, North Carolina October 7, 1997 F-1 12 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors and Shareholders of Retirement Care Associates, Inc. We have audited the accompanying consolidated statements of income, shareholders' equity and cash flows of Retirement Care Associates, Inc. and Subsidiaries for the year ended June 30, 1995. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Retirement Care Associates, Inc. and Subsidiaries for the year ended June 30, 1995, in conformity with generally accepted accounting principles. /s/ BDO Seidman, LLP BDO SEIDMAN, LLP Atlanta, Georgia October 9, 1995, Except for Note 1 which is as of May 1, 1996 F-2 13 Retirement Care Associates, Inc. & Subsidiaries Consolidated Balance Sheets June 30, 1996 and 1995
1996 1995 ASSETS Current Assets Cash and cash equivalents $ 45,365 $ 5,207,185 Accounts receivable, net 18,845,780 11,282,467 Notes and advances due from affiliates - 2,314,250 Inventories 3,998,991 1,364,569 Note and accrued interest receivable 613,750 2,396,667 Deferred tax asset 2,008,430 - Restricted bond funds 2,342,565 719,175 Prepaid expenses and other assets 1,623,679 2,498,233 Total current assets 29,478,560 25,782,546 Property and equipment, net of accumulated depreciation 111,420,486 37,233,506 Marketable equity securities 33,645 99,510 Investment in unconsolidated affiliates 496,800 4,431,235 Deferred loan and loan costs 7,665,891 3,732,197 Goodwill, net of accumulated amortization 6,636,675 1,798,881 Notes and advances due from non-affiliates 1,372,247 - Notes and advances due from affiliates 14,316,661 5,013,972 Restricted bond funds 3,514,969 418,312 Other assets 2,556,353 1,747,387 Total assets $177,492,287 $80,257,546
The accompanying notes are an integral part of the consolidated financial statements. F-3 14 Retirement Care Associates, Inc. & Subsidiaries Consolidated Balance Sheets June 30, 1996 and 1995
1996 1995 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Lines of credit $3,556,535 $1,745,316 Current maturities of long-term debt 2,220,491 8,640,871 Accounts payable 10,115,347 7,699,640 Accrued expenses 11,316,030 3,184,233 Income taxes payable 3,726,317 3,158,000 Deferred income taxes - 134,500 Deferred gain 40,000 40,000 Total current liabilities 30,974,720 24,602,560 Deferred gain 371,370 261,370 Deferred income taxes 277,000 - Long-term debt, less current 108,481,040 30,680,707 Minority interest 4,122,039 1,979,655 Commitments and contingencies Redeemable convertible preferred stock 2,400,000 3,000,000 Shareholders' equity Common stock, $.0001; 300,000,000 shares authorized; 12,145,875 and 10,317,083 shares issued, respectively 1,214 1,031 Preferred stock 8,712,003 - Additional paid-in capital 27,025,901 18,555,677 Retained earnings (deficit) (4,752,880) 1,176,546 Treasury stock, at cost (120,120) - 30,866,118 19,733,254 $177,492,287 $80,257,546
The accompanying notes are an integral part of the consolidated financial statements. F-4 15 Retirement Care Associates, Inc. & Subsidiaries Consolidated Statements of Income For the Years Ended June 30, 1996, 1995 and 1994
1996 1995 1994 Revenues: Net patient service revenue $119,499,849 $ 69,949,822 $ 34,340,394 Medical supply revenue 9,825,252 3,617,439 - Management fee revenue: From affiliates 3,472,900 3,517,500 3,034,445 From others 308,533 652,194 258,504 Other revenue 904,835 1,879,098 337,709 Total revenues 134,011,369 79,616,053 37,971,052 Expenses: Cost of patient services 80,815,511 47,778,410 23,088,387 Cost of medical supplies sold 5,350,817 3,153,430 - Lease expense 8,442,671 5,769,232 3,714,105 General and administrative 23,192,250 12,769,582 5,953,793 Depreciation and amortization 3,406,986 1,128,183 237,277 Provision for bad debts 3,423,117 - - Total expenses 124,631,352 70,598,837 32,993,562 Operating income 9,380,017 9,017,216 4,977,490 Other income (expense): Interest income 1,847,868 658,215 - Interest expense (7,948,091) (1,179,052) (232,365) Income before minority interest, income taxes and cumulative effect of change in accounting principle 3,279,794 8,496,379 4,745,125 Minority interest (597,895) (18,784) - Income before income taxes and cumulative effect of change in accounting principle 2,681,899 8,477,595 4,745,125 Income taxes 1,307,091 3,419,092 1,827,483 Income before cumulative effect of change in accounting principle 1,374,808 5,058,503 2,917,642 Cumulative effect of change in accounting principle, net of income taxes of $228,000 372,000 - - Net income $1,746,808 $5,058,503 $2,917,642 Preferred stock dividends 2,266,777 225,000 - Net income (loss) applicable to common stock $(519,969) $4,833,503 $2,917,642 Income (loss) per common and common equivalent share: Income (loss) before cumulative effect of change in accounting principle $ (0.08) $ 0.38 $ .30 Cumulative effect of change in accounting principle 0.03 - - Net income (loss) (0.05) 0.38 .30 Weighted average shares outstanding 11,324,755 12,616,835 9,839,993
The accompanying notes are an integral part of the consolidated financial statements. F-5 16 Retirement Care Associates, Inc. & Subsidiaries Consolidated Statements of Shareholders' Equity For the Years Ended June 30, 1996, 1995 and 1994
Preferred Stock Common Stock Series A Series C Series E Shares Amount Balance June 30, 1993 $ 670,642 $ 833,000 $ - 5,391,896 $ 539 Issuance of common stock upon conversion of Series A preferred stock (670,563) - - 558,802 56 Issuance of common stock upon conversion of Series C preferred stock - (833,000 ) - 833,333 83 Private placement Reg D - - - 1,494,165 149 Expenses on private placement Reg D - - - - - Acquisition of Retirement Management Corporation - - - 80,000 8 Stock dividend, 5% - - - 417,970 42 Private placement Reg S - - - 750,000 75 Expenses of private placement Reg S - - - - - Recognition of convertibility of Series A preferred stock 364,004 - - - - Net Income - - - - - Balance June 30, 1994 $ 364,083 $ - $ - 9,526,166 $ 952 Issuance of common stock upon conversion of Series A preferred stock (364,083) 69,508 7 Issuance of common stock upon conversion of Series D preferred stock - - - 125,000 12 Issuance of common stock upon Contour Medical, Inc. acquisition - - - 105,000 11 Preferred stock, 10% dividend - - - - - Stock dividend, 5% - - - 491,409 49 Net Income - - - - - Balance June 30, 1995 $ - $ - $ - 10,317,083 $1,031 Issuance of Series E preferred stock - - 9,300,000 - - Issuance of common stock upon conversion of Series E preferred stock - - (534,750) 54,516 5 Inputed dividend on Series E preferred stock - - (1,996,777) - - Amortization of imputed Series E preferred stock dividend - - (1,943,530) - - Treasury stock purchased - - - - - Retirement of treasury stock - - - (15,500) (2) Stock issued in exchange for cancellation of warrants and stock warrants exercised - - - 1,198,894 120 Stock options exercised - - - 22,076 2 Preferred stock, 10% dividend - - - - - Stock dividend, 5% - - - 568,806 58 Net Income - - - - - Balance June 30, 1996 $ - $ - $ 8,712,003 12,145,875 $1,214
The accompanying notes are an integral part of the consolidated financial statements. F-6 17 Retirement Care Associates, Inc. & Subsidiaries Consolidated Statements of Shareholders' Equity For the Years Ended June 30, 1996, 1995 and 1994
Retained Paid-In Earnings Treasury Capital (Deficit) Stock Balance June 30, 1993 $(1,433,725) $ 705,535 $ - Issuance of common stock upon conversion of Series A preferred stock 670,507 - - Issuance of common stock upon conversion of Series C preferred stock 832,917 - - Private placement Reg D 5,047,349 - - Expenses on private placement Reg D (520,580) - - Acquisition of Retirement Management Corporation 399,992 - - Stock dividend, 5% 2,980,092 (2,980,134) - Private placement Reg S 5,249,925 - - Expenses on private placement Reg S (470,800) - - Recognition of convertibility of Series A preferred stock (364,004) - - Net income - 2,917,642 - Balance June 30, 1994 $12,391,673 $ 643,043 $ - Issuance of common stock upon conversion of Series A preferred stock 364,076 - - Issuance of common stock upon conversion of Series D preferred stock 499,989 - - Issuance of common stock upon Contour Medical, Inc. acquisition 999,988 - - Preferred stock, 10% dividend - (225,000) - Stock dividend, 5% 4,299,951 (4,300,000) - Net income - 5,058,503 - Balance June 30, 1995 $18,555,677 $ 1,176,546 $ - Issuance of Series E preferred stock - - - Issuance of common stock upon conversion of Series E preferred stock 534,743 - - Imputed dividend on Series E preferred stock 1,996,777 - - Amortization of imputed Series E preferred stock dividend (1,943,530) - - Treasury stock purchased - - (274,040) Retirement of treasury stock - (153,918) 153,920 Stock issued in exchange for cancellation of warrants and stock warrants exercised 473,673 - Stock options exercised 156,303 - - Preferred stock, 10% dividend - (270,000) - Stock dividend, 5% 7,252,258 (7,252,316) - Net income - 1,746,808 - Balance June 30, 1996 $27,025,901 $(4,752,880) $(120,120)
The accompanying notes are an integral part of the consolidated financial statements. F-7 18 Retirement Care Associates, Inc. & Subsidiaries Consolidated Statements of Cash Flows For the Years Ended June 30, 1996, 1995 and 1994
1996 1995 1994 Cash flows from operating activities Net income $ 1,746,808 $ 5,058,503 $ 2,917,642 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 3,406,986 1,128,183 237,277 Loss on sale of marketable securities 29,085 - - Cumulative effect of change in accounting principles (372,000) - - Amortization of deferred gain (40,000) (40,000) (40,000) Provision for bad debt 3,423,117 - - Equity in income from investees 146,800 - - Minority interest 597,895 18,784 - Deferred Income (1,297,613) 261,092 (91,237) Changes in assets and liabilities net of effects of acquisitions Accounts receivable (10,672,485) (6,012,900) (4,071,251) Inventories (2,245,194) (996,139) - Prepaid expenses and other assets 703,690 (642,013) (1,373,827) Accrued interest receivable 157,917 (196,667) - Accounts payable and accrued expenses 9,964,620 6,608,148 5,509,837 Deferred lease and loan costs - (978,943) (1,565,130) Net cash provided by operating activities 5,549,626 4,208,048 1,523,311 Cash flows from investing activities: Purchases of property and equipment (12,490,298) (6,079,610) (5,093,344) Proceeds from sale leaseback transaction - 4,500,000 - Proceed from repayment of notes receivable 2,200,000 - - Issuance of note receivable and advances to affiliates and non-affiliates (8,935,677) (1,742,147) (5,142,182) Purchase of bonds receivable - (4,487,936) - Purchase of notes receivable - - (2,200,000) Investments in unconsolidated affiliates 3,787,635 (3,335,833) (783,904) Restricted bond funds (4,720,047) (17,317) 913,857 Proceed from sale of fixed assets - - 2,481,370 Cash acquired in acquisition of Contour Medical, Inc. - 73,254 - Decrease (increase) in marketable equity securities - 444,863 (544,373) Proceed from sale of marketable equity securities 36,780 - - Goodwill paid in acquisitions (2,327,736) - (93,422) Acquisitions, net of cash required (21,938,513) - - Payment of deferred lease costs (593,470) - - Net cash used in investing activities $(44,981,326) $(10,644,726) $(10,461,998)
The accompanying notes are an integral part of the consolidated financial statements. F-8 19 Retirement Care Associates, Inc. & Subsidiaries Consolidated Statements of Cash Flows (continued) For the Years Ended June 30, 1996, 1995 and 1994
1996 1995 1994 Cash flows from financing activities Capital investment by minority shareholders of subsidiary $ 2,088,492 $ 1,729,469 $ - Redemption of preferred stock (600,000) - - Purchase of treasury stock (274,040) - - Dividends on preferred stock (270,000) (225,000) - Proceeds from issuance of preferred stock 9,300,000 - 9,306,118 Proceeds from stock options and warrants exercised 559,593 - - Proceeds from long-term debt and net borrowings under line of credit 35,329,244 11,309,986 112,754 Payments on long-term debt (9,443,626) (2,130,654) - Payments on deferred loan costs (2,419,783) - - Net cash provided by financing activities 34,269,880 10,683,801 9,418,872 Net increase (decrease) in cash and cash equivalents (5,161,820) 4,247,123 480,185 Cash and cash equivalents, beginning of year 5,207,185 960,062 479,877 Cash and cash equivalents, end of year $ 45,365 $ 5,207,185 $ 960,062
The accompanying notes are an integral part of the consolidated financial statements. F-9 20 RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 1996 and 1995 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: NATURE OF BUSINESS AND BASIS OF PRESENTATION Retirement Care Associates, Inc. ("RCA" or the "Company") operates 64 leased and owned nursing and retirement facilities in the Southeast United States and manages, for both related and unaffiliated third parties, an additional 28 nursing and retirement facilities. The Company also owns a majority interest in Contour Medical, Inc. ("Contour") whose principal operations consist of distributing medical supplies to healthcare facilities. PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, as well as its majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. CASH AND CASH EQUIVALENTS For purposes of financial statement presentation, the Company considers all highly liquid investments with maturity of three months or less at issuance to be cash equivalents. INVENTORIES Inventories, consisting mainly of medical supplies, are valued at the lower of cost (first-in, first-out) or market. ALLOWANCE FOR POSSIBLE LOAN LOSSES The Company periodically reviews the adequacy of the allowance for possible loan losses on affiliate notes receivable by considering various factors, among others, such as the fair value of the underlying facility collateral in excess of prior and senior liens, the periodic results of operations of the underlying collateral, the fair value of other collateral or guarantees pledged as security for the notes receivable, and the Company's ability to foreclose, if necessary, against prior and senior liens to protect the collateral value. During 1996, the Company adopted Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" (SFAS No. 114). All affiliated notes receivable were liquidated subsequent to June 30, 1996 (see Note 19). PROPERTY, EQUIPMENT AND DEPRECIATION Property and equipment are recorded at cost less accumulated depreciation. Depreciation, which includes amortization of assets under capital leases, is computed using the straight-line method over the estimated useful lives of the related assets (five to thirty years). Maintenance and repairs are charged to expense as incurred. Upon sale, retirement or other disposition of these assets the cost and the related accumulated depreciation are removed from the respective accounts and any gain or loss on the disposition is included in income. INVESTMENT IN UNCONSOLIDATED AFFILIATES F-10 21 During the year ended June 30, 1995, the Company acquired a 35% interest in In-House Rehab, Inc. ("In-House"), a therapy service company, for $350,000. The Company accounts for its investment in In-House on the equity method. The Company's share of In-House's net income was $146,800 and $0 for the years ended June 30, 1996 and 1995, respectively. Investment in affiliates as of June 30, 1995 included the investment in In-House and The Atrium of Jacksonville, Ltd. ("Atrium"). The accounts of Atrium are consolidated with those of the Company as of June 30, 1996. DEFERRED LEASE AND LOAN COSTS Deferred lease and loan costs, consisting of lease acquisition fees paid to lessors and loan commitment fees and related expenditures, are amortized over the respective terms of the lease or loan using the interest method. The related amortization of the lease and loan cost is recorded as lease and interest expense, respectively. RESTRICTED BOND FUNDS Restricted bond funds relate to the debt service requirements of RCA's outstanding bond obligations. RCA has several industrial revenue bonds, housing development mortgage revenue bonds and municipal revenue bonds, which relate to the restricted bond funds. Current restricted bond funds include principal and interest funds which are used for payment of principal and interest on or before the dates required by the trust indenture. Non-current restricted bond funds include debt service reserve funds (used for payment of principal and interest when principal and interest funds are insufficient) and project funds (used for payment of construction, improvement and equipment costs at facilities under construction). GOODWILL Goodwill arises in connection with business combinations accounted for as purchases where the purchase price exceeds the fair value of the net assets of the acquired businesses. Goodwill is amortized on a straight-line basis over 15 years. The carrying value of goodwill is reviewed if the facts and circumstances suggest that it may be impaired. Any permanent impairment would be recognized by a charge against earnings. Accumulated amortization of goodwill approximated $233,000 and $111,000 as of June 30, 1996 and 1995, respectively. DEFERRED GAIN Deferred gain on a sale-leaseback transaction is recorded at cost and is amortized into income on a straight-line basis over 10 years, the life of the lease. The related amortization is recorded as a reduction of lease expense. STOCK DIVIDENDS During February 1994, January 1995 and April 1996, the Company declared 5% stock dividends which were payable on March 1, 1994, February 15, 1995 and May 15, 1996, respectively, to shareholders of record on February 15, 1994 and 1995 and May 1, 1996, respectively. All common stock information presented has been retroactively restated to reflect these stock dividends. NET PATIENT SERVICE REVENUE Net patient service revenue is derived primarily from services to retirement center residents and nursing home patients. Retirement center residents typically pay rent in advance of the month for which it is due. Nursing home patients are predominately beneficiaries of the Medicare and Medicaid programs. F-11 22 The Medicare program reimburses nursing homes on the basis of allowable costs, subject to certain limits. Payments are received throughout the year at amounts estimated to approximate costs. Following year end, cost reports are filed with the Medicare program and final settlements are made. Provisions for Medicare settlements are provided in the financial statements in the period the related services are rendered. Differences between amounts accrued and final settlements are reported in the year of settlement. State Medicaid programs pay nursing homes primarily on a per diem basis with no retroactive settlement. Revenues from services to Medicaid patients are recorded at payment rates established by the various state programs in the period services are rendered. There has been, and the Company expects that there will continue to be, a number of proposals to limit Medicare and Medicaid payments for long-term and rehabilitative services. The Company cannot predict at this time whether any of these proposals will be accepted or, if adopted and implemented, what effect such proposals would have on the Company. TAXES ON INCOME Deferred income taxes are recognized for the tax consequences of temporary differences between the financial reporting bases and the tax bases of the Company's assets and liabilities. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable for the period and the change during the period in deferred tax assets and liabilities. NET INCOME PER SHARE Net income per share is computed on the basis of net income applicable to common stock and the weighted average number of common and common equivalent shares outstanding during each year, retroactively adjusted to give effect to the stock dividends. Shares used in the calculation consist of the weighted average number of shares actually outstanding as well as the weighted average number of common share equivalents which include dilutive convertible preferred stock, stock options and warrants. Common stock equivalents for the year ended June 30, 1996 have not been included since the effect would be antidilutive. Shares used in the calculation for the year ended June 30, 1995 consisted of the weighted average number of shares actually outstanding (10,798,292), as well as, the weighted average number of common share equivalents (1,818,543) which include dilutive stock options and warrants as described below. Shares used in the calculation for the year ended June 30, 1994 consisted of the weighted average number of shares actually outstanding (8,292,882) together with the weighted average numbers outstanding of common shares expected to be issued upon the conversion of all of the Series A convertible preferred stock (672,497 shares) issued in the merger since the income levels required to permit conversion were currently being attained. Shares used in the calculation also included the weighted average number of common share equivalents (874,614) which include dilutive stock options and warrants as described below. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. F-12 23 NEW PRONOUNCEMENTS The Financial Accounting Standards Board has released Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121 requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. This standard would be effective for the company's fiscal year ended June 30, 1997. The Financial Accounting Standards Board also released SFAS No. 123, "Accounting for Stock Based Compensation." SFAS No. 123 encourages, but does not require, companies to recognize compensation expense based on the fair value of grants of stock, stock options, and other equity investments to employees. Although expense recognition for employee stock-based compensation is not mandatory, SFAS No. 123 requires that companies not adopting must disclose pro forma net income and earnings per share. The Company will continue to apply the prior accounting rules and make pro forma disclosures. This standard would be effective for the Company's fiscal year ending June 30, 1997. RECLASSIFICATIONS Certain 1995 and 1994 amounts have been reclassified to conform with the 1996 presentations. 2. BUSINESS ACQUISITIONS: CONTOUR On September 30, 1994, the Company acquired a 63% interest in Contour through the acquisition of preferred and common stock from the existing shareholders. Contour is a publicly held company based in St. Petersburg, Florida, which manufactures a full line of orthopedic care and rehabilitation products. In connection with the acquisition of the 63% interest in Contour, the Company paid $4,000,000, consisting of 137,813 shares of its common stock and 300,000 shares of a new series of redeemable convertible preferred stock (see Note 9). The acquisition of Contour was accounted for under the purchase method of accounting. The excess of the purchase price over the fair value of identifiable tangible and intangible assets of $899,792 was allocated to goodwill and is being amortized over 15 years. ENCORE On December 15, 1995, the Company obtained both a sole general and a limited partnership interest, totaling a 74.25% interest, in Encore Partners, L.P. ("Encore") in exchange for a capital contribution to Encore of $3.5 million. Encore owns three retirement facilities, totaling 527 beds, and two nursing homes, totaling 157 beds. The acquisition was accounted under the purchase method of accounting. Profits and losses of Encore are allocated 74.25% to the Company and 25.75% to other partners. Available cash, if any, is distributed 74.25% to the Company and 25.75% to the other partners. ATRIUM During the year ended June 30, 1995, Winter Haven Homes, Inc. ("Winter Haven"), an affiliated entity, assigned to the Company its rights under an agreement between Atrium and Winter Haven. The agreement granted Winter Haven the right to acquire up to a 75% ownership interest in Atrium in exchange for and upon meeting certain performance requirements. F-13 24 In addition to the assignment, Winter Haven and the Company entered into a separate Compensation Agreement requiring the Company to pay Winter Haven an amount equal to 25% of the appraised values of Atrium upon each transfer of a 25% interest in Atrium to the Company. The payment of each 25% interest in Atrium was reflected as an increase in Investment in Unconsolidated Affiliates and a decrease in Notes and Advances Due From Affiliates in the accompanying financial statements. At June 30, 1995, a 50% interest in Atrium had been transferred to the Company at a carrying value of $1,913,000 plus advances made by the Company to Atrium of $2,149,060. This investment was accounted for under the equity method. In May 1996, the Company obtained an additional 25% interest for $1,230,000, bringing the total investment to $3,143,000 plus advances made by the Company to Atrium of $2,602,942, and the total ownership interest to 75%. Effective May 1996, the accounts of Atrium have been consolidated with those of the Company. The minority partners of Atrium are allocated 25% of the profits and losses and 25% of available cash flow, if any, is distributed to the minority partners. OTHER During the year ended June 30, 1996, the Company purchased a number of other facilities. Such purchases included both nursing and retirement facilities. The data related to these purchases is as follows:
1996 Number of Facilities Purchased: Nursing 7 Retirement 3 Total 10 Cost of acquired facilities: Cash paid $ 223,000 Debt incurred 19,811,000 Total $20,034,000
The cost of the facilities acquired during 1996 exceeded the fair value of net assets acquired by approximately $2,660,000. The excess is being amortized over a 20-year period. During the year ended June 30, 1995, the Company purchased three nursing facilities and two retirement facilities. The Company typically obtains financing in excess of the purchase price paid for acquired facilities. The excess funds are used to cover certain closing costs associated with the transactions with any residual amounts retained by the Company. The acquisitions referred to above have been accounted for using the purchase method of accounting. The operating results of those acquired facilities have been included in the consolidated statement of operations from the date of acquisition. The following table presents unaudited pro forma results of operations data as if the acquisitions described above had occurred on July 1, 1994.
For the year ended June 30, (Unaudited) 1996 1995 Revenue $148,466,000 $127,671,000 Net income (loss) (1,828,997) 5,568,000 Net income per share (.04) .42
The pro forma information includes adjustments for interest expense that would have been incurred to finance the acquisitions, additional depreciation based on F-14 25 the fair market value of the facilities and other adjustments, together with related income tax effects. The pro forma financial information is not necessarily indicative of the results of operations as they would have been had the transactions been effected on the assumed dates. 3. RELATED PARTY TRANSACTIONS The Company provides management and administrative services for 19 facilities owned by affiliates and also leases one facility from an affiliate. The affiliates are owned and controlled by two individuals who are officers and directors of the Company. These services are provided pursuant to agreements which have five-year terms and are cancelable with sixty days written notice by either party. The agreements provide for monthly fees ranging from $6,000 to $30,000 per facility and expire through 1999. Revenue from these management services totaled $3,472,900, $3,517,500 and $3,034,445 for the years ended June 30, 1996, 1995 and 1994. CCMC maintains a cash management account where all operating cash funds of the managed facilities are pooled into one bank account and invested daily. Notes and advances due from affiliates consist of advances to facilities, net of advances from facilities, owned by the following affiliated entities:
June 30, 1996 1995 Gordon Jensen Health Care Association, Inc. $2,982,975 $2,117,562 Winter Haven Homes, Inc. 8,887,833 4,966,589 Southeastern Cottages, Inc. 679,144 105,533 National Assistance Bureau, Inc. 1,326,391 748,801 Chamber Health Care Society, Inc. 336,857 (610,263) Senior Care, Inc. 84,095 - Other Affiliates 19,366 - $14,316,661 $7,328,222 Less current portion - 2,314,250 $14,316,661 $5,013,972
During 1995 and 1994, the Company received notes as consideration for advances totaling $5,360,000. These notes require quarterly interest payments at 8% per annum with all principal and accrued interest due on or before June 30, 1998. The notes were collateralized by second mortgages on facilities owned by affiliates and certain notes receivables are guaranteed by the principals of Winter Haven, who are shareholders of the Company. All notes and advances due from affiliates which existed at June 30, 1996, were liquidated subsequent to year end. FACILITY ACQUISITIONS AND LEASES On April 28, 1995, the Company purchased a 210-unit nursing home of an affiliate. The purchase price was $5,650,000 and was financed with $500,000 from the Company and a $5,150,000 mortgage loan from an unrelated third-party real estate investment trust. On February 27, 1996, the Company purchased a 36-unit retirement facility from an affiliate. The purchase price was $2,000,000 and was financed with $400,000 from the Company and a $1,600,000 mortgage loan from an unrelated third-party real estate investment trust. On May 5, 1996, the Company entered into a lease agreement with an affiliate to rent a 60-unit nursing home. Terms of the agreement are ten years at $300,000 per year beginning on June 1, 1996. The total lease payments in 1996 were $25,000. F-15 26 The Company's exposure to credit loss in the event of nonperformance by its related parties totaled $14,316,661 and $7,938,485 as of June 30, 1996 and 1995, respectively. ADDITIONAL TRANSACTIONS The Company paid amounts to affiliates for obtaining financing of $190,000 for the year ended June 30, 1995. During 1994, the Company paid amounts to affiliates for lease acquisition and buy out costs, financing fees and financial advisory fees of $350,000, $300,000, and $70,000, respectively. These amounts are deferred and included in deferred lease and loan costs in the accompanying balance sheets. The Company was paid fees of $150,000 and $400,000 by affiliates in connection with locating financing for three facilities in 1996 and two facilities in 1995, respectively. These fees were included in interest income on the accompanying statements of income. The Company has service and consulting agreements whereby In-House provides therapy and case management to facilities for a fixed monthly fee plus a charge per treatment unit provided. For 1996 and 1995, substantially all of the sales and accounts receivable of In-House were to the Company. 4. ACCOUNTS RECEIVABLE Patient accounts receivable and net patient service revenue include amounts estimated by management to be payable by Medicaid and Medicare under the provisions of payment formulas in effect. Medicaid and Medicare programs accounted for approximately 68% and 72% of net patient service revenue during 1996 and 1995, respectively. The Company grants credit without collateral to its patients most of whom are local residents of the respective nursing home and retirement facilities and are insured under third-party payor agreements. The mix of receivables from patients and third party payors is as follows:
June 30, 1996 1995 Medicaid $10,644,368 $5,485,610 Medicare 4,304,368 4,327,868 Other third-party payors 1,598,816 697,402 Patients 3,113,145 10,884 Trade receivables 2,595,083 760,703 22,255,780 11,282,467 Allowance for doubtful accounts 3,410,000 - $18,845,780 $11,282,467
In the opinion of management, any differences between the net revenue recorded and final determination will not materially affect the consolidated financial statements. The activity in the allowance for doubtful accounts is as follows:
June 30, 1996 1995 1994 Beginning of Period $ - - - Provisions for Bad Debts 3,423,117 - - Deductions (13,117) - - End of Period 3,410,000 - -
5. NOTE RECEIVABLE: On February 7, 1996, the Company loaned $500,000 to an unaffiliated company. The note, plus interest at 9% per annum, is due on February 7, 1997 and is collateralized by a first lien on a 38-bed nursing home in Atlanta, Georgia 6. CHANGE IN ACCOUNTING FOR SUPPLIES INVENTORY: During the year ended June 30, 1996, the Company changed its method of accounting for facility supplies inventory from expensing when purchased to capitalizing and expensing as used. The Company believes that this change is preferable in the F-16 27 circumstances because it more closely matches inventory costs with net patient service revenue. In connection with the capitalization of facility supplies inventory at June 30, 1996, the Company recorded additional inventory and reduced supplies expense by approximately $1.0 million, of which approximately $600,000 related to inventory on hand as of June 30, 1995. Accordingly, the cumulative effect of this change in accounting principle on beginning retained earnings has been shown, net of tax, as a separate component of the statement of operations for the year ended June 30, 1996. Although the cumulative effect on retained earnings at June 30, 1995 resulting from the change can be determined, the pro forma effects of retroactive application cannot be computed for individual prior periods. Accordingly, net income and income per common share computed on a pro forma basis have not been presented for the years ended June 30, 1995 and 1994. 7. PROPERTY AND EQUIPMENT: Property and equipment consisted of the following:
Estimated Useful Lives 1996 1995 Land - $ 7,184,001 $ 2,237,133 Buildings 30 83,281,050 28,917,590 Equipment 5-10 12,179,912 5,702,897 Leasehold improvements 5-10 2,193,228 1,110,666 Buildings and equipment under capital leases 5-30 8,111,801 - 112,949,992 37,968,286 Less accumulated depreciation 8,518,084 990,968 Construction in progress 104,431,908 36,977,318 Net property and equipment 6,988,578 256,188 $111,420,486 37,233,506
Construction in progress, consisting of the development of four facilities, includes approximately $605,000 and $4,600 of capitalized interest costs as of June 30, 1996 and 1995, respectively. The total contract price of construction in progress was approximately $8,500,000. Substantially all property and equipment is pledged as collateral for long-term debt. 8. DEFERRED LEASE AND LOAN COST: In connection with the execution of certain lease transactions and financing of acquisitions, the Company incurred lease and loan commitment fees, which are included in deferred lease and loan costs in the accompanying balance sheets, as follows:
June 30, 1996 1995 Lease cost: Affiliated $ 500,000 $ 500,000 Non-affiliated 1,801,619 1,283,149 Loan cost: Affiliated 410,000 410,000 Non-affiliated 5,800,288 1,897,403 Less accumulated amortization 8,511,907 4,090,552 Net deferred lease and loan cost 846,016 358,355 $ 7,665,891 $3,732,197
F-17 28 9. SHAREHOLDERS' EQUITY: STOCK PURCHASE WARRANTS In prior years, the Company issued warrants to an investment banker and consultants to purchase 1,126,500 shares of its common stock at prices ranging from $1.632 to $6.875 per share. All exercise prices approximated the market price at the date of grant. The warrants were exercisable at varying dates through June 1998. During the year ended June 30, 1996, the Company issued 763,386 shares of its common stock in exchange for the cancellation of all of these warrants. The Company has issued Class A warrants in connection with a private offering and Class B and Class C warrants in connection with an offer to Class A warrant holders to convert their warrants. The Class A warrants are exercisable at $.907 per warrent, Class B warrants are exercisable at $5.714 per and the Class C warrants are exercisable at $2.721 per warrant. At any time during the period the warrants are exercisable, the Company may redeem the warrants at $.05 per warrant upon 45 days written notice in the event certain listing and registration requirements are achieved, and the closing bid price of the common stock exceeds $7.00 per share for the Class A and Class C Warrants, and $10.00 per share for the Class B Warrants, for 20 of 30 consecutive trading days. During the year ended June 30, 1996, Class A Warrants were exercised to purchase approximately 156,783 shares of common stock, Class B Warrants were exercised to purchase approximately 56,616 shares of common stock and Class C Warrants were exercised to purchase approximately 222,109 shares of common stock. As of June 30, 1996, there were Class A warrants outstanding which entitles the holders to purchase 136,212 shares of common stock, Class B warrants outstanding which entitles the holders to purchase 302,312 shares of common stock and Class C Warrants outstanding which entitles the holders to purchase 141,312 shares of common stock. STOCK OPTIONS In December 1993, the Company adopted the 1993 Stock Option Plan (the "Plan"). A total of 1,682,625 shares of the Company's common stock have been reserved for issuance under the Plan. Under the Plan, options are granted at an exercise price of not less than 100% of the fair market value of the shares on the date of grant. Certain options are exercisable immediately, while others are subject to vesting provisions as specified by the Board of Directors on the date of grant. Each option grant under the Plan automatically expires ten years after the date of grant or at such earlier time as may be determined by the Board of Directors. Stock option transactions are summarized as follows:
Exercise Price Shares Per Share Balance at June 30, 1993 - Granted 882,110 $4.65 -$ 6.75 Balance at June 30. 1994 882,110 4.65 - 6.75 Granted 184,708 6.46 - 8.57 Balance at June 30, 1995 1,066,818 4.65 - 8.57 Granted 489,300 9.76 - 10.24 Exercised (22,076) 4.65 - 9.76 Canceled (35,674) 4.65 - 9.76 Balance at June 30, 1996 1,498,368 $4.65 -$10.24
PREFERRED STOCK F-18 29 As of June 30, 1996, the Company has authorized 40,000,000 shares of preferred stock and has designated the following series of preferred stock: - SERIES AA REDEEMABLE CONVERTIBLE PREFERRED STOCK 300,000 shares of Series AA Redeemable Convertible Preferred Stock are authorized. These shares were issued in connection with the acquisition of a majority interest in Contour. Holders of the Series AA Redeemable Convertible Preferred Stock are entitled to receive cumulative dividends of $1.00 per share (10%) annually, and are convertible into common stock at any time at the rate of 5.5125 shares of common stock for each six shares of Series AA Redeemable Convertible Preferred Stock. Each share is entitled to one vote and has a preferred rate of $10.00 per share upon voluntary or involuntary liquidation, dissolution, or winding up of affairs of the Company. The Company may redeem shares of Series AA Redeemable Convertible Preferred Stock, in whole or in part, at any time at its option at a price of $10.00 per share plus any unpaid dividends (the "Redemption Price"). In addition, to the extent that such funds are legally available, the Company is required to redeem, at the Redemption Price, at least 20% of each holder's initial number of shares of Series AA Redeemable Convertible Preferred Stock by September 30, 1995; 40% by September 30, 1996; 60% by September 30, 1997; 80% by September 30, 1998; and 100% by September 30, 1999. In the event that a holder of Series AA Redeemable Convertible Preferred Stock shall have converted a portion of his shares into common stock, such converted shares shall be counted toward the redemption requirement and shall be deemed redeemed for the purposes of the mandatory redemption requirement. In addition, in the event that the Company fails to pay any dividend on the Series AA Redeemable Convertible Preferred Stock within 30 days of the due date, the Company is required to redeem all of the outstanding Series AA Redeemable Convertible Preferred Stock. During the year ended June 30, 1996, the Company redeemed 60,000 shares of Series A Redeemable Preferred Stock. - - SERIES A CONVERTIBLE PREFERRED STOCK 2,000,000 shares of Series A Convertible Preferred Stock, par value $.10 per share, are authorized. Each share is entitled to 10 votes and has a preference rate of $.01 per share with no dividend rights. 750,000 shares of Series A Preferred Stock were issued in connection with the Company and Capitol Care Management Company, Inc. The preferred shares were converted into common stock in 1994 and 1995. - - SERIES C CONVERTIBLE PREFERRED STOCK 1,000,000 shares of Series C Convertible Preferred Stock are authorized. Each share is entitled to one vote per share and had a preference rate of $1.00 per share with no dividend rights. The shares of Series C Convertible Preferred Stock were converted in 1994 into common stock. - - SERIES E CONVERTIBLE PREFERRED STOCK 1,000,000 shares of Series E Convertible Preferred Stock (the "Series E") are authorized. These shares were sold in an offering to foreign investors in April 1996 at $10.00 per share. Holders of the Series E have no voting rights except as required by law, and have a liquidation preference of $10.00 per share plus 4% per annum from the date of issuance. The shares of Series E are convertible into shares of common stock at a conversion price of $11.55 or 85% of the average closing bid price for the five trading days prior to the date of conversion, whichever is lower (but no lower than $5.00). At the option of the holder of the Series E shares, 50% of the shares can be converted to common shares after 45 days from the date of issuance with the remaining 50% available for conversion after 75 days from the date of issuance. At the time of conversion the holder is also entitled to additional shares equal to $10.00 per share of Series E multiplied by 8% per annum form the date of issuance divided by the applicable conversion price. The Company has accounted for the Series E in accordance with Emerging Issues Task force consensus D-60. As a result, at the date of issuance, $1,996,777 of the proceeds were considered imputed dividends and allocated to additional paid-in capital. This amount was recognized as preferred dividends over the period from the date of issuance to the earliest date of conversion permitted by the terms of the Series E. At June 30, 1996, $1,943,530 of the imputed preferred dividends had been recognized. During the year ended June 30, 1996, 57,500 Series E shares were converted into 54,516 shares of common stock. F-19 30 TREASURY STOCK In November 1995, the Company purchased and retired 15,000 shares of its common stock at an aggregate cost of $153,920. In December 1995, the Company purchased 10,000 shares of its common stock at an aggregate cost of $120,120. In March 1996, the Company purchased and retired 500 shares of its common stock at an aggregate cost of $5,070. 10. LONG-TERM DEBT: Long-term debt at June 30, 1996 and 1995 is summarized as follows:
1996 1995 Non-affiliates: Notes payable to a real estate investment trust ("REIT") $ 39,623,938 $12,930,347 Industrial development revenue bonds 20,060,000 9,345,000 Municipal revenue bonds 18,170,000 13,350,000 Housing development mortgage revenue bonds 21,750,000 1,660,000 Notes payable to banks (8.5% or prime plus 1% to 10% due through 2003) 3,049,012 1,220,749 Capitalized lease obligations 8,048,581 - Affiliates: Note payable to an affiliate (12% due on July 31, 1996) - 1,000,000 Less discount on bonds payable - 184,518 110,701,531 39,321,578 Less current maturities 2,220,491 8,640,871 $108,481,040 $30,680,707
Future maturities of debt and capital lease obligations are as follows:
Capital Year Lease Debt Total 1997 $ 973,304 $ 2,161,380 $ 3,134,684 1998 980,120 2,368,392 3,348,512 1999 987,068 2,464,109 3,451,177 2000 994,202 2,948,158 3,942,360 2001 1,001,438 2,979,065 3,980,503 Thereafter 15,090,218 89,731,845 104,822,063 Total 20,026,350 102,652,949 122,679,299 Less amount representing imputed interest at 11% to 12% 11,977,768 - 11,977,768 Total obligations $ 8,048,582 $102,652,949 $110,701,531
The notes payable to the REIT consist of mortgage notes on eight facilities. Principal amounts are amortized over a 25-year period with monthly installments payable through 2008. Interest rates on these notes range from 9.75% to 11.18% and increase annually at rates ranging from 0.1% to 0.25%. The notes are collateralized by property and equipment of the eight facilities. The industrial development revenue bonds consist of bonds on two facilities: a retirement community located in San Destin, Florida and the Atrium, a nursing and retirement community located in Jacksonville, Florida. The San Destin facility serves as collateral for $9,225,000 of bonds payable to the Walton County Industrial Development Authority. Principal payments range from $135,000 to $1,000,000 annually through 2017 and interest accrues at 10.5%. The Atrium F-20 31 facility serves as collateral for three City of Jacksonville Industrial Development Revenue Refunding bonds totaling $10,835,000. Principal payments range from $150,000 to $370,000 annually through 2024 and interest accrues at rates ranging from 6.38% to 11.5%. The housing development mortgage revenue bonds include approximately $18,525,000 of bond debt assumed by the Company in connection with the acquisition of Encore. The bond debt, which is collateralized by property and equipment of four facilities, includes Okaloosa County, Florida Retirement Rental Housing Revenue Series A bonds totaling $8,425,000 with semi-annual interest payments at 10.75% due in 2003 and Ohio Rental Housing Revenue Series A bonds totaling $10,100,000 with semi-annual interest at 10.38% due in 2009. The remainder of the housing development mortgage revenue bonds consist of bonds totaling $3,225,000 collateralized by two facilities with interest ranging from 8% to 11.0%. The housing development mortgage revenue bonds require annual principal payments ranging from $10,000 to $2,000,000. The municipal revenue bonds, which are collateralized by property and equipment of five facilities and require annual principal payments ranging from $15,000 to $540,000, consist of the following: Dade City, Florida Series A and B bonds totaling $6,455,000, with principal payments due through 2025 and interest ranging from 6.75% to 8%. Highland County Series A and B bonds totaling $4,275,000, with principal payments due through 2024 and interest ranging from 6.5% to 9.5%. City of Dublin Series A and B bonds totaling $2,780,000, with principal payments due through 2024 and interest ranging from 8.5% to 10.5% Rome-Floyd County Development Authority Revenue Series A and B bonds totaling $2,760,000, with principal payments due through 2011 and interest rates ranging from 7.5% to 10%. Americus-Sumter Series A and B bonds totaling $1,900,000, with principal payments due through 2026 and interest rates ranging from 8.0% to 10.25%. In connection with the bond indentures, the Company is required to meet certain covenants, including monthly sinking fund deposits, adequate balances in debt service reserve funds, timely payment of tax obligations and adequate insurance coverage. At June 30, 1996 and 1995, the Company was in violation of several of these covenants including the failure to make monthly payments to the bond sinking funds for certain of these facilities and inadequate debt service reserves for certain of the facilities. The Company is also delinquent with regard to the payment of property taxes at several facilities. The trustees have not called the bonds in the past for these violations and management does not foresee the bonds being called at this time. All semi-annual interest and principal payments have been made in a timely fashion. 11. LINES OF CREDIT: The Company maintains various lines of credit with interest rates ranging from prime plus .25% to prime plus 1.25%. Available borrowings under the lines of credit totaled $5,075,000 and $1,750,000 for the years ended June 30, 1996 and 1995, respectively. Total borrowings against the lines of credit were $3,556,535 and $1,745,316 at June 30, 1996 and 1995, respectively. 12. COMMITMENTS AND CONTINGENCIES: OPERATING LEASES The Company leases nursing homes and retirement care facilities from unaffiliated entities (in addition to leasing one nursing home from an affiliated entity). The lease agreements commenced on various dates with terms extending through February 2016. The Company has options to extend most of the leases for an additional five to ten years. The Company also leases certain facilities under agreements classified as capital leases. These agreements include purchase options exercisable at the Company's discretion during, or at the end of, each of the lease terms. The capital lease agreements commenced on various dates with terms extending through January 2006. Included in the above agreements are three leases whereby a sale to the lessor preceded the lease agreement ("sale/leaseback transaction"). The Company has F-21 32 accounted for two of these sale/leaseback transactions as sales with no gains or losses recognized on the transactions. The remaining sale/leaseback transaction was capitalized and included a deferred gain of $381,370 to be amortized over the term of the lease. Future minimum payments, by year and in the aggregate, under noncancelable operating leases with initial or remaining terms of one year or more consist of the following at June 30, 1996:
Year Amount 1997 $ 8,712,474 1998 9,101,249 1999 8,686,407 2000 8,357,981 2001 8,177,038 Future years 35,641,998 Total $78,677,147
The Company's rental expense under operating leases for nursing homes and retirement care facilities amounted to approximately $6,040,000, $5,750,000 and $3,000,000 for the years ended June 30, 1996, 1995 and 1994, respectively. The Company leases office space under a noncancelable operating lease which expires in October 2000. At June 30, 1996, minimum future rental payments under the noncancelable lease were as follows:
Year Amount 1997 $303,644 1998 325,455 1999 341,683 2000 358,673 2001 120,509
Total amounts paid for rental of office facilities totaled approximately $317,000, $60,000 and $35,000 for the years ended June 30, 1996, 1995 and 1994, respectively. OTHER The Company has guaranteed the debt of three facilities owned by affiliates totaling approximately $13,000,000. Additionally, the Company has guaranteed 20% to 25%, or approximately $1,900,000, of the debt on five facilities owned by unaffiliated entities that are currently operated by the Company under operating leases. 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 $400,000 for ultimate settlement of this dispute. 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. 13. INCOME TAXES: The components of the provision for income taxes were as follows: F-22 33
Year ended June 30, 1996 1995 1994 Current: Federal $2,671,891 $2,659,000 $1,630,900 State 501,600 499,000 287,820 3,173,491 3,158,000 1,918,720 Deferred (benefit): Federal (1,571,500) 221,928 (77,600) State (294,900) 39,164 (13,637) 261,092 (91,237) (1,866,400) Total income tax provision $1,307,091 $3,419,092 $1,827,483
The income tax provisions included in the consolidated statements of income are as follows:
1996 1995 1994 Income before cumulative effect of change in accounting principle $1,307,091 $3,419,092 $1,827,483 Cumulative effect of change in accounting principle 228,000 - - $1,535,091 $3,419,092 $1,827,483
Deferred income taxes are provided to reflect temporary differences between financial and income tax bases of assets and liabilities. The sources of the temporary differences and their effect on the net deferred taxes at June 30, 1996 and 1995 are as follows:
1996 1995 Current deferred taxes: Deferred tax assets: Workers' compensation accrual $1,062,900 $ - Provision for losses on accounts receivable 811,300 - Health insurance accrual 227,800 - Net operating loss 355,100 - Total 2,457,100 - Less: Valuation allowance (355,100) - Deferred tax liabilities Net current deferred tax asset $2,008,430 $ - Noncurrent deferred taxes: Deferred tax asset - deferred gain $ 276,700 $120,590 Deferred tax liabilities: Property and equipment 352,600 255,090 Deferred lease cost 201,100 - 553,700 255,090 Net noncurrent deferred tax liability $ 277,000 $134,500
The provision for income taxes for the year ended June 30, 1996 varies from the amount determined by applying the Federal statutory rate to pretax income as a result of the following: Income tax expense at federal statutory rate $1,115,130 Nondeductible tax penalties 417,700 State income taxes, net of federal tax benefit 331,100 Other, net (556,839) $1,307,091
The primary difference between the actual income tax rate of approximately 40% and 39% for the years ended June 30, 1995 and 1994, respectively, and the Federal income tax rate of 34% is the amount paid for state income taxes. 14. FAIR VALUES OF FINANCIAL INSTRUMENTS AND INVESTMENTS F-23 34 The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments. CASH AND CASH EQUIVALENTS The carrying amount reported in the balance sheet for cash and cash equivalents approximates fair value because of the short maturity of these instruments. MARKETABLE EQUITY SECURITIES The carrying amount reported in the balance sheet for marketable equity securities approximates fair value. All marketable equity securities are classified as "available for sale" for accounting purposes and, therefore, are carried at fair value with unrealized gains and losses recorded directly in equity. There were no significant unrealized gains or losses at June 30, 1996. NOTES RECEIVABLE The carrying amount approximates fair value for the notes receivable based on the fair value being estimated as the net present value of cash flows that would be received on the notes over the remaining notes' terms using the current market interest rates rather than stated interest rates. SHORT- AND LONG-TERM DEBT The fair value of all debt has been estimated based on the present value of expected cash flows related to existing borrowings discounted at rates currently available to the Company for debt with similar terms and remaining maturities. The cost basis and estimated fair values of the Company's financial instruments at June 30 are as follows:
June 30, 1996 Carrying Fair Amount Value Financial assets: Cash and cash equivalents $ 45,365 $ 45,365 Marketable equity securities 33,645 33,645 Financial liabilities: Short-term debt 5,777,026 5,777,026 Long-term debt 108,491,040 112,349,000
As of June 30, 1995, the carrying amount of all financial instruments approximated fair value. 15. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: In connection with the purchase of Contour in September 1994, the Company issued $1,000,000 of common stock, and $3,000,000 of redeemable convertible preferred stock. Total assets and liabilities acquired were $5,146,493 and $1,146,493, respectively. In June 1995, the Company acquired for $4,488,000 through foreclosure a 116-unit property which secured bonds that the Company held. Total debt of $20,830,000 was incurred during the year ended June 30, 1995, to purchase property and equipment totaling $17,825,642, pay loan costs of $1,004,358, and pay off an existing note for $2,000,000. As described in Note 2, the Company acquired certain businesses during 1996. The fair value of assets acquired was $69,826,951 and the fair value of liabilities assumed was $47,888,438 which resulted in net cash payments of $21,938,513. F-24 35 Through the acquisition of a company in December 1993, the Company recorded $500,000 as goodwill and additional paid-in capital in 1995 based on the fair value of 105,000 shares of common stock issued in connection with the conversion of Series D preferred stock. Cash paid for interest during the years ended June 30, 1996, 1995 and 1994 was $6,561,954, $1,172,883 and $11,172, respectively. Cash paid for income taxes during the years ended June 30, 1996, 1995 and 1994 was $3,561,089, $829,292 and $1,360,720, respectively. Cash dividends on preferred stock of $15,000 and imputed dividends of $1,996,777 on Series E preferred stock were accrued but not paid at June 30, 1996. During 1996, approximately $8,112,000 of lease assets and obligations were capitalized. 16. ACCRUED EXPENSES: Accrued expenses consisted of the following as of June 30:
1996 1995 Payroll and payroll taxes $ 3,587,217 $1,936,927 Interest 1,868,805 452,173 Workers Compensation 2,975,000 - Other 2,885,008 795,133 Total $11,316,030 $3,184,233
17. EMPLOYEE RETIREMENT PLAN: During the year ended June 30, 1996, the company established a defined contribution retirement plan. Employees qualify for the plan upon the completion of three months of service with the Company and reaching the age of twenty-one. Company contributions to the plan represent a matching percentage of certain employee contributions. The matching percentage is subject to management's discretion based upon consolidated financial performance. For the year ended June 30, 1996, the Company has not made any contributions to the plan. 18. BUSINESS SEGMENT INFORMATION: Retirement Care Associates; Inc. and Subsidiaries is a long-term health care provider which engages in two distinct business segments. The Retirement Care Associates entity operates and manages nursing homes and retirement facilities throughout the Southeast. As of June 30, 1996, approximately 10,400 beds were owned or operated by this entity. The Contour entity manufacturers a full line of orthopedic care and rehabilitation products and distributes them to nursing facilities throughout the Southeast. The Contour entity was acquired in 1995. The following represents business segment information for the years ended June 30, 1996 and 1995.
1996 1995 Operating revenues: Retirement Care Associates $124,951,954 $75,998,614 Contour Medical 9,059,415 3,617,439 $134,011,369 $79,616,053 Depreciation and amortization expense: Retirement Care Associates $ 2,806,637 $ 1,051,842 Contour Medical 600,349 76,341 $ 3,406,986 $ 1,128,183 Identifiable assets:
F-25 36 Retirement Care Associates $165,094,536 $72,644,179 Contour Medical 12,397,751 7,613,367 $177,492,287 $80,257,546 Capital expenditures: Retirement Care Associates $ 11,741,135 $ 5,763,553 Contour Medical 749,163 316,057 $ 12,490,298 $ 6,079,610 Operating Income Retirement Care Associates $ 8,540,815 $ 8,865,388 Contour Medical 839,202 151,828 $ 9,380,017 $ 9,017,216
19. SUBSEQUENT EVENTS On October 14, 1996, the Company acquired two retirement facilities from related parties, individuals who control the Company and its affiliates, for their fair value, based on independent appraisals, totaling $19,200,000. The facilities were subject to bond debt of $7,670,000. The remaining balance due from the Company was $11,530,000. For the purpose of this transaction, Winter Haven had assumed the amounts due to the Company in the amount of $2,426,487, from Southeastern Cottages, Inc., National Assistance Bureau, Inc., Chamber Health Care Society, Inc. and Senior Care, Inc. which, in combination with the amount of $8,887,833 previously due from Winter Haven to the Company, totaled $11,314,320. As part of the exchange agreement, the Company and Winter Haven agreed to offset the Company's debt incurred of $11,530,000 with the Company's receivable of $11,314,320. On September 27, 1996, Gordon Jensen Health Care Association, Inc. returned approximately 400,000 shares of stock in the Company which had a fair market value of $3,000,000 in payment of Gordon Jensen s debt of $2,982,000 due to the Company. The retirement of these shares reduced shareholders' equity of the Company by $3,000,000. On August 6, 1996, Contour acquired all of the outstanding stock of Atlantic Medical Supply Company, Inc. ("Atlantic Medical"), 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 Medical. The promissory notes bear interred 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 RCA. On January 10, 1997, Contour retired all outstanding notes due to sellers of Atlantic Medical 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. During the period from September 26 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 Preferred Stock have no voting rights except as required by law, and have a liquidation preference of $10.00 per share plus 4% per annum from the date of issuance. The shares of Series F Preferred Stock are convertible into shares of common stock at a conversion price of the lessor of (a) $9.6525 or 110% of the average closing bid price for the twenty consecutive trading days commencing September 30, 1996, F-26 37 whichever is lower, 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 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 Preferred Stock converted multiplied by 8% per annum from the date of issuance divided by the applicable conversion price. The board of directors of RCA has unanimously approved and adopted the Agreement and Plan of Merger and reorganization, dated as of February 17, 1997, as amended by Amendment No. 1 thereto dated as of May 27, 1997 and Amendment No. 2 thereto dated as of August 21, 1997, with Sun Healthcare Group, Inc. ("Sun"). The proposed RCA merger is contingent upon, among other things, the approval of the holders of the requisite number of shares of Sun Common Stock and RCA Capital Stock, which is described in a Joint Proxy Statement/Prospectus/Information Statement. The proposed RCA Merger will be consummated as soon as practicable after such approvals are obtained and the other conditions to the RCA Merger are satisfied. 20. ADJUSTMENTS TO 1996 FINANCIAL STATEMENTS As discussed in Note 19, on February 17, 1997, following a series of meetings and negotiations, the Company agreed to be acquired by Sun through an exchange of shares of Sun for shares of the Company. During due diligence procedures associated with the transaction, certain adjustments to previously issued financial statements were discovered to be required. Those adjustments, together with additional amounts have been applied to the financial statements for the year ended June 30, 1996 as restatements and corrections as follows: Additional provisions or uncollectible account $ 1,705,000 Additional accrual for claims incurred, but not reported for self-insured worker's compensation and health care 3,400,000 Accrual for compensated absences 300,000 Adjustment of previously recorded inventory 809,219 Adjustment to lease expenses 530,000 ----------- Less: 6,744,219 Adjustment to income taxes (2,921,219) Decrease in net income $ 3,832,000 Decrease in net income per share $ .34
F-27 38 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. RETIREMENT CARE ASSOCIATES, INC. Dated: April 8, 1998 By: /s/ Darrell C. Tucker ------------------------------- Darrell C. Tucker, Treasurer -----END PRIVACY-ENHANCED MESSAGE-----