-----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, GIkaeGP56P1jGR8cRjncgBXwuS/8YKVWGTqDvw6f4nptOJhdw8iXiHkA/S6VE3Jn gbHBO0qr3ek/DdnZSK6w0A== 0000950144-98-004371.txt : 19980410 0000950144-98-004371.hdr.sgml : 19980410 ACCESSION NUMBER: 0000950144-98-004371 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19971231 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-Q/A SEC ACT: SEC FILE NUMBER: 001-14114 FILM NUMBER: 98590890 BUSINESS ADDRESS: STREET 1: 6000 LAKE FORREST DR STE 200 CITY: ATLANTA STATE: GA ZIP: 30328 BUSINESS PHONE: 4042557500 MAIL ADDRESS: STREET 1: 6000 LAKE FORREST DR STREET 2: STE 200 CITY: ATLANTA STATE: GA ZIP: 30328 10-Q/A 1 RETIREMENT CARE ASSOCIATES, INC. 1 U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q/A Amendment No. 2 (Amending Part I - Items 1 and 2 and Part II - Item 6) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarter Ended December 31, 1997 Commission File No. 1-14114 RETIREMENT CARE ASSOCIATES, INC. ------------------------------------------------------ (Exact Name of Registrant as Specified in its Charter) Colorado 43-1441789 - ------------------------------ ----------------------------------- (State or Jurisdiction of (IRS Employer Identification Number) Incorporation or Organization) 6000 Lake Forrest Drive, Suite 200, Atlanta, Georgia 30328 ---------------------------------------------------------- (Address of Principal Executive Offices) (404) 255-7500 ---------------------------------------------------- (Registrant's Telephone Number, Including Area Code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such report(s), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] There were 14,749,441 shares of the Registrant's $.0001 par value Common Stock outstanding as of December 31, 1997. 2 RETIREMENT CARE ASSOCIATES AND SUBSIDIARIES FORM 10-Q/A FOR THE QUARTER ENDED DECEMBER 31, 1997 INDEX
Page(s) PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements Introduction ..................................... 3 Consolidated Statements of Operations (Unaudited) - Three Months Ended December 31, 1997 and December 31, 1996 .......... 4 Consolidated Statements of Operations (Unaudited) - Six Months Ended December 31, 1997 and December 31, 1996 .......... 5 Consolidated Balance Sheets - (Unaudited) December 31, 1997 and (Audited) June 30, 1997 .... 6 - 7 Consolidated Statements of Cash Flows (Unaudited) - Three Months Ended December 31, 1997 and December 31, 1996 ....................... 8 Notes to Consolidated Financial Statements (Unaudited) ........................... 9 - 12 Item 2. Managements' Discussion and Analysis of Results of Operations and Financial Condition ........................................ 13 - 17 PART II. Item 6. Exhibits and Reports On Form 8-K.................. 18 Signatures ....................................... 19
-2- 3 PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements INTRODUCTION - CONSOLIDATED FINANCIAL STATEMENTS The consolidated financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures have been condensed or omitted pursuant to such rules and regulations. In the opinion of Management, all adjustments, which were of a normal recurring nature, necessary to present fairly the consolidated financial position and results of operations and cash flows for the periods presented have been included. These consolidated financial statements should be read in conjunction with the financial statements and the notes thereto included in the Annual Report on Amended Form 10-K/A, Retirement Care Associates, Inc. (the "Company") for the fiscal year ended June 30, 1997, File No. 1-14114. The Company restated its financial information for periods commencing June 30, 1996 through the nine months ended March 31, 1997, as reflected in the Company's Quarterly Reports on Forms 10-Q/A for the quarters ended September 30, 1996, December 31, 1996 and March 31, 1997. Adjustments and reclassifications were necessary to correct entries relating to (i) receivables due from third-party payors, (ii) the Company's inventory for such periods, (iii) provisions for doubtful accounts, (iv) provisions for contractual allowances for third-party payors, (v) provisions for accrued liabilities, and (vi) pre-recorded operating leases (collectively, the "Restated Entries"). Certain statements in this Form 10-Q/A are "forward-looking statements" made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve a number of risks and uncertainties. Factors which may cause the Company's actual results in future periods to differ materially from forecast results include, but are not limited to: general economic and business conditions, both nationally and in the regions in which the Company operates; industry capacity; demographic changes; existing government regulations and changes in, or the failure to comply with, government regulations; legislative proposals for reform; the ability to enter into lease and management contracts and arrangements on acceptable terms; changes in Medicare and Medicaid reimbursement levels; liability and other claims asserted against the Company; competition; changes in business strategy or development plans; the ability to attract and retain qualified personnel; the significant indebtedness of the Company; and the availability and terms of capital to fund the expansion of the Company's business, including the acquisition of additional facilities. The financial information included in this report has been prepared by the Company, without audit, and should not be relied upon to the same extent as audited financial statements. -3- 4 RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 1997 AND 1996
December 31, December 31, 1997 1996 REVENUES Patient service revenue $ 68,873,798 $ 47,950,464 Medical supply revenue 10,320,899 11,471,114 Management fee revenue: From affiliates 391,500 446,334 From others 138,406 112,241 Other operating revenue 410,684 1,228,305 80,135,287 61,208,458 EXPENSES Cost of patient services 49,206,128 33,415,634 Cost of medical supplies sold 6,914,317 7,666,277 Lease expense 5,645,121 2,988,406 General and administrative 14,273,113 12,393,814 Depreciation and amortization 1,780,825 1,394,664 Interest 4,169,927 2,753,971 Provision for bad debt 380,891 989,000 82,370,322 61,601,766 (LOSS) BEFORE MINORITY INTEREST AND INCOME TAXES (2,235,035) (393,308) Minority interest (33,500) (93,500) (Loss) before income taxes and extraordinary item (2,268,535) (486,808) Income tax (benefit) -- (115,000) (Loss) before extraordinary item (2,268,535) (371,808) Extraordinary item, less applicable income taxes -- (490,000) NET (LOSS) (2,268,535) (861,808) Preferred stock dividends 30,000 1,401,971 (Loss) applicable to common stock (2,298,535) (2,263,779) Basic and diluted (loss) per common share before extraordinary item (.15) (.13) BASIC AND DILUTED NET (LOSS) PER COMMON SHARE (.15) (.17) WEIGHTED AVERAGE SHARES OUTSTANDING 14,770,938 13,301,109
-4- 5 RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED DECEMBER 31, 1997 AND 1996
December 31, December 31, 1997 1996 REVENUES Patient service revenue $ 135,329,589 $ 89,925,434 Medical supply revenue 22,357,734 22,777,309 Management fee revenue: From affiliates 783,000 1,252,501 From others 186,443 240,120 Other operating revenue 901,273 2,185,709 159,558,039 116,381,073 EXPENSES Cost of patient services 98,575,825 65,321,257 Cost of medical supplies sold 15,534,842 15,333,477 Lease expense 10,877,624 6,015,197 General and administrative 28,235,625 21,895,541 Depreciation and amortization 3,372,831 2,513,126 Interest 8,151,216 5,151,607 Provision for bad debt 380,891 2,009,000 165,128,854 118,239,205 (LOSS) BEFORE MINORITY INTEREST AND INCOME TAXES (5,570,815) (1,858,132) Minority interest (125,000) (13,500) (Loss) before income taxes and extraordinary item (5,695,815) (1,871,632) Income tax (benefit) (1,340,000) (460,000) (Loss) before extraordinary item (4,355,815) (1,411,632) Extraordinary item, less applicable income taxes -- (490,000) NET (LOSS) (4,355,815) (1,901,632) Preferred stock dividends 75,000 2,146,777 (Loss) applicable to common stock (4,430,815) (4,048,409) Basic and diluted (loss) per common share before extraordinary item (.30) (.27) BASIC AND DILUTED NET (LOSS) PER COMMON SHARE (.30) (.31) WEIGHTED AVERAGE SHARES OUTSTANDING 14,720,998 13,188,523
-5- 6 RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED BALANCE SHEETS AS OF December 31, 1997 AND AUDITED AT JUNE 30, 1997
Unaudited Audited December 31, June 30, 1997 1997 ASSETS CURRENT Cash and cash equivalents $ 11,663,691 $ 3,637,878 Accounts receivable 51,646,999 40,391,377 Inventory 10,650,558 7,255,289 Deferred tax asset 4,553,568 4,408,733 Income tax receivables 5,065,431 4,065,431 Note and accrued interest receivable 75,000 75,000 Restricted Bond Fund 6,232,411 3,068,276 Prepaid expenses and other 712,699 2,009,467 Total current assets 90,600,357 64,911,451 PROPERTY AND EQUIPMENT 160,015,560 150,492,221 OTHER ASSETS Investments in unconsolidated affiliates 793,433 734,514 Deferred lease and loan costs 13,101,975 13,065,759 Goodwill 16,106,995 16,357,532 Advances due from non-affiliates 1,181,251 1,421,405 Advances due from affiliates 5,429,584 1,411,379 Restricted bond funds 3,940,000 3,689,969 Other assets 3,243,053 3,286,736 Total other assets 43,796,291 39,967,294 $294,412,208 $255,370,966
-6- 7 RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1997 AND AUDITED AT JUNE 30, 1997
Unaudited Audited December 31, June 30, 1997 1997 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Lines of credit $ 27,331,732 $ 9,935,036 Current maturities of long-term debt 17,063,115 11,454,059 Loans payable to affiliates -- 1,478,368 Accounts payable 47,584,501 34,076,015 Accrued expenses 18,965,412 18,417,258 Deferred gain 40,000 40,000 Total current liabilities 110,984,760 75,400,736 Deferred gain 161,370 181,370 Deferred income taxes 1,098,929 1,098,929 Long-term debt and capitalized leases, less current maturities 148,532,538 141,674,131 Minority interest 4,552,509 4,520,953 Redeemable convertible preferred stock 1,200,000 1,800,000 Shareholders' equity Common stock, $.0001 par value; 300,000,000 shares authorized; 14,749,441 and 14,489,888 shares outstanding 1,479 1,450 Preferred stock 2,786,000 3,250,000 Additional paid-in capital 45,881,658 43,799,617 Retained earnings (20,787,035) (16,356,220) Total shareholders' equity 27,882,102 30,694,847 Total liabilities and shareholders' equity 294,412,208 $ 255,370,966
-7- 8 RETIREMENT CARE ASSOCIATES, INC. UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED DECEMBER 31, 1997 AND 1996
December 31, December 31, 1997 1996 OPERATING ACTIVITIES Net income (loss) $ (4,355,815) $ (1,901,632) Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 3,372,831 2,513,126 Provision for bad debts 380,891 2,009,000 Amortization of deferred gain (20,000) (170,000) Minority interest 125,000 13,500 Deferred income taxes (144,835) (729,641) Changes in current assets and liabilities net of effects of acquisitions: Accounts receivable (11,636,513) (16,300,244) Inventory (3,395,269) (3,674,172) Prepaid expense and other assets 1,340,451 (1,793,658) Accounts payable and accrued expenses 13,056,640 8,893,973 Increase in deferred lease and loan costs (2,947,195) Cash (used in) operating activities (1,276,619) (14,086,943) INVESTING ACTIVITIES Purchase of property and equipment (11,788,087) (39,437,345) Issuance of advances to affiliates (5,256,419) 14,316,661 Investment in unconsolidated subsidiaries (58,919) Restricted bond funds (3,414,166) (4,056,194) Changes in marketable equity securities (1,067,748) Change in receivable (957,935) Deferred loan and lease cost (893,762) Investment in unconsolidated subsidiaries (148,449) Cash (used in) investing activities (21,411,353) (31,351,010) FINANCING ACTIVITIES Dividends on preferred stock (75,000) (105,000) Redemption of preferred stock (600,000) (600,000) Net proceeds from issuance of: Line of credit 17,396,696 3,759,182 Common stock 1,988,626 70,676 Long-term debt 13,927,633 38,324,959 Preferred Stock (464,000) 9,340,000 Payments on long-term debt (1,460,170) (1,267,894) Purchase and retirement of common stock Cash provided by financing activities 30,713,785 45,721,512 Net increase in cash and cash equivalents 8,025,813 283,559 Cash and cash equivalents, beginning of year 3,637,878 45,365 Cash and cash equivalents, end of year $ 11,663,691 $ 328,924
-8- 9 RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1: BASIS OF PRESENTATION The consolidated financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. These consolidated financial statements and the notes thereto should be read in conjunction with the consolidated financial statements included in the Company's Annual Report on Amended Form 10-K/A for the fiscal year ended June 30, 1997, File No 1-14114. In the opinion of management of the Company, the accompanying unaudited consolidated financial statements contain all necessary adjustments to present fairly the financial position, the results of operations and cash flows for the periods reported. All adjustments are of a normal recurring nature. In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"), which is required to be adopted for the fiscal years ending after December 15, 1997. SFAS No. 128 supersedes APB Opinion No. 15, "Earnings Per Share" and specifies the computation, presentation and disclosure requirements for earnings per share ("EPS") for entities with publicly held common stock or potential common stock. SFAS 128 essentially replaces the primary EPS and fully diluted EPS presentations under APB Opinion No. 15 with a basic EPS and a diluted EPS calculation. The Company will comply with the disclosure requirements of SFAS No. 128 commencing with its December 31, 1997 Form 10-Q. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income", which establishes standards for the reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. There currently are no additional disclosures in the financial statements of the Company that are expected to be required by the provisions of this statement. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"), which changes the way public companies report information about segments of their business in annual financial statements and requires segment information in quarterly reports to shareholders. SFAS 131 also requires that public companies report certain information about their products and services, the geographic areas in which they operate and their major customers. SFAS 131 is effective for fiscal years beginning after December 15, 1997. The Company has not determined what additional disclosures may be required by the provisions of SFAS 131. NOTE 2: RESTATEMENT The consolidated financial statements for the six months ended December 31, 1996, as originally reported, reflected certain balances which were subsequently determined to be incorrect and, accordingly, the consolidated financial statements for the six months ended December 31, 1996 were restated as follows (in thousands):
As Previously Reported As Restated ---------------------- ----------- Revenues $116,517 $116,381 Operating Expenses $124,548 $118,239* Net Earnings (Loss) applicable to common stock $ (5,528) $ (1,902) Shareholders' Equity $ 34,666 $ 34,462
- ------------------- * Restated Operating Expenses included (in thousands) (i) a reduction in the accrual for employee benefits of $3,700, (ii) restated inventory of $1,955,(iii) a reduction in the provision for doubtful accounts of $580, and (iv) restated general and administrative expenses of $74. NOTE 3. ACCOUNTS RECEIVABLE AND COST REIMBURSEMENTS Accounts receivable and operating revenue include net amounts reimbursed by Medicaid under the provisions of cost reimbursement formulas in effect. The Company operates under a prospective payment system with Medicare, under which annual rates are assigned based on estimated reimbursements. Differences between estimated provisions and final settlement are reflected as adjustments to future rates. -9- 10 RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 4. INVENTORIES Inventories consisting mainly of medical supplies, are valued at the lower of cost (first in, first out) or market. NOTE 5: ADVANCES TO AFFILIATES At December 31, 1997 and June 30, 1997, the Company had advances to (from) affiliates totaling approximately ($5,429,584) and $66,991, respectively, and are due on demand. NOTE 6. LONG-TERM DEBT Long-term debt consisted of the following:
December 31, June 30, 1997 1997 ------------ ------------ Amounts outstanding under Revenue Bonds secured by retirement facilities $ 81,400,000 $ 74,675,000 Other debt secured by retirement and nursing facilities 40,420,000 40,700,380 Other debt 21,802,851 15,780,008 Capitalized leases 21,972,802 21,972,802 Totals 165,595,653 153,128,190 Current maturities 17,063,115 11,454,059 Total long-term debt $148,532,538 $141,674,131
In connection with the bond indentures underlying the revenue bonds, 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 December 31, 1997, the Company was in default under several of these covenants, including the failure to make monthly payments to the bond sinking funds for certain of the 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 bond indentures underlie industrial development revenue bonds, municipal revenue bonds and housing development mortgage bonds that, together, totalled approximately $50,785,000 at June 30, 1997. The following table includes the bonds that were in default as of June 30, 1997:
AMOUNT BOND TRUSTEE OUTSTANDING ---- -------------- ----------- Jacksonville Series 1996....................... Sentinel Trust $ 8,370,000 Jacksonville Series 1994....................... Sentinel Trust 1,955,000 Dublin, Georgia IDA Series A and B............. Sentinel Trust 2,740,000 Highland County IDA Series A and B............. Sentinel Trust 4,230,000 Cove Springs 1994.............................. Sentinel Trust 1,650,000 Dade City, Florida............................. Sentinel Trust 6,230,000 Rome-Floyd 1996 Series A and B................. Sentinel Trust 2,665,000 Walton County.................................. Sentinel Trust 11,925,000 Americus-Sumpter PDA Series A and B............ Sentinel Trust 1,900,000 Cave Springs 1996.............................. Sentinel Trust 1,555,000 Jackson, Tennessee 1993........................ Sentinel Trust 1,600,000 Jackson, Tennessee 1989........................ Sentinel Trust 3,265,000 Sumner, Tennessee 1989 Series A and B.......... Sentinel Trust 2,695,000 -------------- ----------- TOTAL:............................... $50,785,000
The Company generally has a grace period of 30 days to cure defaults after receipt of written notification from the bond trustee, and no such written notification has been received. The Company believes that it is probable that, upon receipt of such written notification, the Company could cure such defaults within the 30 day grace period. -10- 11 On December 15, 1997, HCFP Funding, Inc. ("HCFP"), the Company and certain subsidiaries of the Company entered into a loan and security agreement, pursuant to which HCFP granted to the Company a $14 million revolving line of credit (the "HCFP Loan"). The HCFP Loan is secured by a priority lien on all of the Company's accounts receivable and bears interest at a rate of prime plus 2%. The outstanding principal and interest under the HCFP Loan are due on December 15, 2001, and the HCFP Loan may be renewed for one-year periods thereafter upon the mutual written agreement of the parties. NOTE 7: ANCILLARY SERVICE AGREEMENTS The Company has entered into various agreements with Sun Healthcare Group, Inc. ("Sun") to provide ancillary services such as therapy services and pharmaceutical services to the Company's long-term care facilities. The agreements provided for the Company to cause all of its facilities to promptly take all reasonable action, including, without limitation, terminating existing contracts with other providers of ancillary services in accordance with the terms thereof, and to cause all facilities to begin receiving all of their required ancillary services from Sun or Sun's affiliates as soon as practicable after November 25, 1997. The Company is notifying all existing ancillary service providers of the termination of services and expects to receive all such services from Sun by February 1998. The agreements may not be terminated until 14 days after the termination of the merger agreement with Sun, at which time either party may freely terminate. NOTE 8: EARNINGS PER SHARE The Company and its subsidiaries have adopted the provisions of SFAS 128 for reporting purposes. Earnings available to common shares has been computed as net income less all preferred stock dividends earned during the period, whether or not declared. No additional securities have been included in the computation of diluted earnings per share as they would be antidilutive. See the Company's Annual Report for the fiscal year ended June 30, 1997 for a description of securities which may potentially be dilutive in the future. NOTE 9: YEAR 2000 DISCLOSURE The Company has reviewed all of its current computer applications with respect to the date change from 1999 to the year 2000, as discussed in the Securities and Exchange Commission Staff Legal Bulletin No. 5 (the "Year 2000 Issue"). The Company believes that certain of its applications are substantially in compliance with the Year 2000 Issue and that any additional costs with respect to compliance with the Year 2000 Issue will not be material to the Company. The Company is currently unable to determine the effect of compliance with the Year 2000 Issue by its customers and suppliers. -11- 12 NOTE 10: AMENDMENT NO. 3 TO SUN MERGER AGREEMENT. On November 25, 1997, the Company entered into the third amendment ("Amendment No. 3") to the Agreement and Plan of Merger and Reorganization (the "Merger Agreement") between the Company and Sun. Amendment No. 3 changes the exchange ratio in the Merger Agreement from 0.520 shares of the common stock of Sun for each share the Company's common stock to that number of shares of the common stock of Sun having a market value, based on the average closing price for the common stock of Sun equal to $10.00 per share, subject to adjustment up or down in event of the significant appreciation or depreciation in the price of the common stock of Sun. Amendment No. 3 also (i) waives certain responsibilities and warranties which had become materially incorrect since the date of the original Merger Agreement; (ii) modifies the definition of "Company Material Adverse Effect" to related only to changes in the assets and liabilities of the Company; (iii) contains provisions relating to Sun and its affiliates providing ancillary services to the Company and its affiliates; (iv) contains provisions allowing the Company to obtain up to $15 million in working capital financing under certain conditions; (v) contains provisions relating to certain related company leases; (vi) modifies the conditions to Sun's obligations to consummate the merger with the Company related to the Company's representations and warranties and makes corresponding modifications to Sun's termination rights; (vii) provides a termination fee payable to the Company in the event Sun's board of directors changes its recommendation of the merger in a manner adverse to the Company; (viii) contains certain other technical provisions; and (ix) extends the date after which either party may freely terminate the Merger Agreement from November 30, 1997 (or under certain circumstances, December 31, 1997) to March 31, 1998. NOTE 11: COMMITMENTS AND CONTINGENCIES The Company is involved in legal proceedings arising in the ordinary course of business. In addition, the Company is in dispute with the Internal Revenue Service ("IRS") concerning the application of certain income and payroll tax liabilities and payments. The IRS contends that the Company is delinquent in the payment of certain taxes and has assessed taxes, penalties and interest in connection with the alleged underpayment of approximately $1.2 million. The Company contends that the IRS has misapplied payments between income and payroll taxes and between the Company and its affiliates. Based on the opinion of counsel handling the matter that it is unlikely that a settlement of the dispute would require a payment materially greater than $400,000 plus interest, the Company has estimated and accrued in the accompanying financial statements $400,000 for ultimate settlement of this matter. Further, the Company has filed lawsuits against the IRS related to this matter. In the opinion of management, the ultimate resolution of pending legal proceedings and the IRS dispute will not have a material effect on the Company's financial position or results of operations. On November 25, 1997, the Company, Sun and representatives of the plaintiffs entered into a Memorandum of Understanding ("MOU"). Pursuant to the MOU, Sun has agreed to pay $9 million into an interest bearing escrow account maintained by Sun to settle ten putative class action lawsuits ("Actions") filed in the United States District Court for the Northern District of Georgia against the Company and certain of its officers and directors. The Company has also agreed to assign coverage under its directors' and officers' liability insurance policy for these specific claims to the plaintiffs in the Actions. The payment and assignment (the "Settlement") is contingent upon the closing of the merger with Sun and confirmatory discovery and is subject to the execution of definitive documentation and court approval. Upon satisfaction of the conditions precedent to the Settlement, all claims by the plaintiffs that were or could have been asserted by the plaintiffs against the Company or any of the other defendants in the Actions will be settled and released and the Actions will be dismissed in their entirety with prejudice in exchange for the release of all funds from the Escrow Account to the plaintiffs. -12- 13 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION THREE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO THREE MONTHS ENDED DECEMBER 31, 1996. The Company's total revenues for the three months ended December 31, 1997, were $80,135,287 compared to $61,208,458 for the three months ended December 31, 1996. Due to the increased number of facilities owned or leased by the Company, patient service revenue increased from $47,950,464 for the quarter ended December 31, 1996, to $68,873,798 for the quarter ended December 31, 1997. The Company was operating 101 facilities for the quarter ended December 31, 1997, compared to 75 for the quarter ended December 31, 1996. The cost of patient services in the amount of $49,206,128 for the quarter ended December 31, 1997, represented 71% of patient service revenue, as compared to $33,415,634, or 70%, of patient service revenue during the quarter ended December 31, 1996. Medical supply revenue decreased from $11,471,114 during the quarter ended December 31, 1996, to $10,320,899 during the quarter ended December 31, 1997. These revenues, which are revenues of Contour Medical, Inc. ("Contour"), a majority-owned subsidiary, decreased primarily due to volume. Cost of medical supplies sold as a percentage of medical supply revenue remained constant at approximately 67% during the quarter ended December 31, 1997, as compared to approximately 67% of such revenue during the same period last year. Management fees decreased from $558,575 in the quarter ended December 31, 1996 to $529,906 in the quarter ended December 31, 1997. As of December 31, 1996, the Company was managing 20 facilities, and as of December 30, 1997, the Company was only managing 8 facilities. The reduced number of facilities managed by the Company is due to the fact that the Company leased three long-term facilities and four assisted living/independent facilities and purchased one long-term care facility and two assisted living/independent living facilities from Messrs. Brogdon and Lane. In addition, two third-party assisted living/independent living facilities cancelled their management contracts with the Company. The Company purchased and leased these facilities to reduce the affiliated receivable due the Company and to increase the number of facilities owned or leased, rather than just managed, by the Company. Management anticipates that the number of facilities only managed by the Company will continue to decline as a result of the acquisition of such facilities by the Company. Owning or leasing a facility is distinctly different from managing a facility with respect to operating results and cash flows. For an owned or leased facility, the entire revenue/expense stream of the facility is recorded on the Company's income statement. In the case of a management agreement, only the management fee is recorded. The expenses associated with management revenue are somewhat indirect as the infrastructure is already in place to manage the facility. Therefore, the profitability of managing a facility appears more lucrative on a margin basis than that of an owned/leased facility. However, the risk of managing a facility is that the contract generally can be canceled on a relatively short notice, which results in loss of all revenue attributable to the contract. Furthermore, with an owned or leased property the Company benefits from the increase in value of the facility as its performance increases. With a management contract, the owner of the facility maintains the equity value. From a cash flow standpoint, a management contract is more lucrative because the Company does not have to support the ongoing operating cash flow of the facility. -13- 14 Most of the revenue from the management services division of the Company's business is received pursuant to management agreements with entities controlled by Messrs. Brogdon and Lane, two of the Company's officers and directors. These management agreements have three to five year terms and are terminable on 60 days notice with or without cause by either the Company or the owners. Therefore, Messrs. Brogdon and Lane have full control over whether or not these management agreements, and thus the management service revenue, continue in the future. Other operating revenue decreased from $1,228,305 during the quarter ended December 31, 1996, to $410,684 during the quarter ended December 31, 1997. The decrease was primarily a result of one-time referral fees of $350,000 received from a building contractor, and approximately $400,000 in interest income included in the December 31, 1996 amounts. Lease expense increased from $2,988,406 for the quarter ended December 31, 1996, to $5,645,121 for the quarter ended December 31, 1997. This increase is primarily attibutable to the increased numbers of facilities that the Company has leased. General and administrative expenses for the three months ended December 31, 1997 were $14,273,113, representing 18% of total revenues, as compared to $12,393,814, representing 20% of total revenues, for the three months ended December 31, 1996. The increase in the dollar amount is primarily due to the general and administrative expenses related to operating the additional facilities owned or leased by the Company, and approximately $400,000 was due to legal and accounting expenses related to the pending merger with Sun Healthcare Group, Inc. Interest expense rose from $2,753,971 during the quarter ended December 31, 1996, to $4,169,927 during the quarter ended December 31, 1997, as a result of the increased amount of debt carried by the Company as a result of acquisitions made over the last twelve months. At December 31, 1996, the Company had approximately $153 million in long-term debt, as compared to approximately $165 million in long-term debt at December 31, 1997. For the quarter ended December 31, 1997, the Company received no income tax benefit, as compared to a tax benefit of $115,000 which represents an effective tax benefit of 25% for the quarter ended December 31, 1996. The net loss of $2,268,535 for the quarter ended December 31, 1997, compares to a net loss of $861,808 for the quarter ended December 31, 1996. The increased loss is attributable to a deterioration in the Company's operations as a result of the pendency of and delays associated with the merger with Sun, including higher-than-normal turnover, and costs associated with the integration and operation of the Company's recently-acquired Virginia and North Carolina facilities (including certain relatory compliance problems). SIX MONTHS ENDED DECEMBER 31, 1997 COMPARED TO THE SIX MONTHS ENDED DECEMBER 31, 1996. The Company's total revenues for the six months ended December 31, 1997, were $159,558,039 compared to $116,381,073 for the six months ended December 31, 1996. Due to the increased number of facilities owned or leased by the Company, patient service revenue increased from $89,925,434 for the six months ended December 31, 1996, to $135,329,589 for the six months ended December 31, 1997. The Company was operating 101 facilities for the six months ended December 31, 1997, compared to 75 for the six months ended December 31, 1996. The cost of patient services in the amount of $98,575,825 for the six months ended December 31, 1997, represented 73% of patient service revenue, as compared to $65,321,257, or 73%, of patient service revenue during the six months ended December 31, 1996. Medical supply revenue decreased from $22,777,309 during the six months ended December 31, 1996, to $22,357,734 during the six months ended December 31, 1997. The increased percentage if primarily a result of increases in the cost of products sold and increased competition in the medical supply industry, which has decreased the sales price of most products. These revenues, which are revenues of Contour Medical, Inc. ("Contour"), a majority-owned subsidiary, decreased primarily due to volume. Cost of medical supplies sold as a percentage of medical supply revenue increased to approximately 69% during the six months ended December 31, 1997, as compared to approximately 67% of such revenue during the same period last year. This increased percentage is primarily attributable to increases in the cost of products sold and increased competition in the medical supply industry, which has decreased the sales price of most of Contour's products. -14- 15 Management fees decreased from $1,492,621 in the six months ended December 31, 1996 to $969,443 in the six months ended December 31, 1997. As of December 31, 1996, the Company was managing 20 facilities, and as of December 30, 1997, the Company was only managing 8 facilities. The reduced number of facilities managed by the Company is due to the fact that the Company leased three long-term facilities and four assisted living/independent living facilities and purchased one long-term care facility and two assisted living/independent living facilities from Messrs. Brogdon and Lane. In addition, two third-party assisted living/independent living facilities cancelled their management contracts with the Company. The Company purchased and leased these facilities to reduce the affiliated receivable due the Company and to increase the number of facilities owned or leased, rather than just managed, by the Company. Management anticipates that the number of facilities only managed by the Company will continue to decline as a result of the acquisition of such facilities by the Company. Owning or leasing a facility is distinctly different from managing a facility with respect to operating results and cash flows. For an owned or leased facility, the entire revenue/expense stream of the facility is recorded on the Company's income statement. In the case of a management agreement, only the management fee is recorded. The expenses associated with management revenue are somewhat indirect as the infrastructure is already in place to manage the facility. Therefore, the profitability of managing a facility appears more lucrative on a margin basis than that of an owned/leased facility. However, the risk of managing a facility is that the contract generally can be canceled on a relatively short notice, which results in loss of all revenue attributable to the contract. Furthermore, with an owned or leased property the Company benefits from the increase in value of the facility as its performance increases. With a management contract, the owner of the facility maintains the equity value. From a cash flow standpoint, a management contract is more lucrative because the Company does not have to support the ongoing operating cash flow of the facility. Most of the revenue from the management services division of the Company's business is received pursuant to management agreements with entities controlled by Messrs. Brogdon and Lane, two of the Company's officers and directors. These management agreements have three to five year terms and are terminable on 60 days notice with or without cause by either the Company or the owners. Therefore, Messrs. Brogdon and Lane have full control over whether or not these management agreements, and thus the management service revenue, continue in the future. Other operating revenue decreased from $2,185,709 for the six months ended December 31, 1996, compared to $901,273 for the six months ended December 31, 1997. The decrease is primarily a result of one-time referral fees of $650,000 received from a building contractor, and approximately $580,000 in interest income from affiliated companies included in the December 31, 1996 amount. General and administrative expenses for the six months ended December 31, 1997 were $28,235,625, representing 18% of total revenues, as compared to $21,895,541, representing 18% of total revenues, for the six months ended December 31, 1996. The increase in the dollar amount is primarily due to the general and administrative expenses related to operating the additional facilities owned or leased by the Company, and approximately $800,000 was due to legal and accounting expenses related to the pending merger with Sun. Interest expense rose from $5,151,607 during the six months ended December 31, 1996, to $8,151,216 during the six months ended December 31, 1997, as a result of the increased amount of debt carried by the Company as a result of acquisitions made over the last twelve months. At December 31, 1996, the Company had approximately $153 million in long-term debt, as compared to approximately $165 million in long-term debt at December 31, 1997. For the six months ended December 31, 1997, the Company received an income tax benefit of $1,340,000, as compared to a tax benefit of $460,000 for the six months ended December 31, 1996. The net loss of $4,355,815 for the six months ended December 31, 1997, compares to a net loss of $1,901,632 for the six months ended December 31, 1996. The increased loss in attributable due to the fact that the Company's operations have deteriorated due as result of the pendency of and delays associated with the merger with Sun, including higher-than-normal turnover, and costs associated with the integration and operation of the Company's recently-acquired Virginia and North Carolina facilities (including certain regulatory compliance problems). -15- 16 LIQUIDITY AND CAPITAL RESOURCES At December 31, 1997, the Company had a deficit of $20,384,403 in working capital compared to a deficit of $10,489,285 at June 30, 1997. The funds needed to reduce the increasing deficit in working capital could be provided by increased efforts to collect accounts receivable, possible refinancing of selected facilities, extended payment terms to major vendors for food and supplies, and increased control over expenses. During the six months ended December 31, 1997, cash used by operating activities was $1,276,619, as compared to $14,086,943 during the six months ended December 31, 1996. The cash used during the six months ended December 31, 1997 was primarily due to the net loss of $4,355,815, for the six months ended December 31, 1997; increases in accounts receivable of $11,636,513 from medicare settlements, increases in receivables on the 11 facilities added in the fourth quarter of the year ended June 30, 1997 and increases in Contour accounts receivable; increases in Contour inventory of $3,395,269 for primarily two new distribution centers. Cash provided by operating activities was primarily depreciation and amortization of $3,372,831 on facilities, increases in accounts payable and accrued expenses of $13,056,640 from 11 facilities added in the fourth quarter of the year ended June 30, 1997. Cash flows used in investing activities during the six months ended December 31, 1997, totaled $21,411,535 as compared to $31,351,010 during the six months ended December 31, 1996. The Company expended $11,788,087 on the purchase of property and equipment including the purchase of a long-term facility for $5,400,000 on October 1, 1997 from individuals who are officers and directors of the Company. The facility was subject to bond debt of $4,285,000. The Company applied the remaining purchase price of $1,115,000 against amounts owed from affiliates. The Company paid $3,414,166 for restricted bond funds on facilities and advanced $5,256,419 to affiliated companies. The advances are due on demand. The Company issues advances and notes receivable to affiliated companies controlled by Messrs. Brogdon and Lane to finance working capital deficits and capital expenditures of facilities which are managed by the Company. In the opinion of the Company's Board of Directors, these advances represent a good use of the Company's funds because they enable such affiliated companies to develop their properties, increase census revenue and increase the fair market value of the facilities, which gives the Company greater assurances that the facilities will continue to pay management fees to the Company. Further, as census revenues increase, management fees payable to the Company will likewise increase. In addition, as properties mature and develop, they may be acquired by the Company with a portion of the purchase price payable through the cancellation of advances and notes receivable due the Company. Cash provided by financing activities during the six months ended December 31, 1997, totaled $30,713, 785 as compared to $45,721,512 during the six months ended December 31, 1996. Sources of cash included additional lines of credit of $17,396,696 which included $14,000,000 from Health Care Financial Partners, an unrelated third party. The interest rate on the line of credit is prime plus 2% and is due on December 15, 2001, collateralized by a first lien on accounts receivable of the Company. The Company incurred long-term debt of $13,927,633 including $5,000,000 from Sun and $4,285,000 of bond debt on the acquisition of a long-term care facility from two individuals who are officers and directors of the Company. The bond debt is due 2015, with an interest rate of 9.5%. Sources of cash also included proceeds from issuance of stock options of $1,988,626. Cash used in financing activities primarily consisted of $464,000 in payments on long-term debt, $600,000 in redemption of Series AA Preferred Stock, $75,000 in dividends on preferred stock. On September 30, 1994, the Company purchased a majority of the stock of Contour in exchange for shares of the Company's common stock and preferred stock. The Company is obligated to redeem the preferred stock issued in the transaction over five years for $3,000,000 in cash. The Company paid $600,000 on September 30, 1997 pursuant to this obligation. Management intends to fund future 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 maintains various lines of credit with interest rates ranging from prime plus .25% to prime plus 2.0%. At December 31, 1997, the Company had approximately $3,500,000 in unused credit available under such lines. -16- 17 IMPACT OF PENDING FEDERAL HEALTH CARE LEGISLATION Management is uncertain what the financial impact will be of the pending federal health care reform package since the legislation has not been finalized. However, based on information which has been released to the public thus far, management doesn't believe that there will be cuts in reimbursements paid to nursing homes. Legislative and regulatory action at the state and federal level has resulted in continuing changes in the Medicare and Medicaid reimbursement programs. The changes have limited payment increases under those programs. Also, the timing of payments made under Medicare and Medicaid programs are subject to regulatory action and governmental budgetary constraints. Within the statutory framework of the Medicare and Medicaid programs, there are substantial areas subject to administrative rulings and interpretations which may further affect payments made under these programs. Further, the federal and state governments may reduce the funds available under those programs in the future or require more stringent utilization and quality review of health care facilities. -17- 18 Part II. Item 6. Exhibits and Reports on Form 8-k (a) Insert to Exhibit List for Retirement Care Associates, Inc. 10-Q/A dated December 31, 1997
EXHIBIT NO. DESCRIPTION LOCATION 10.16 Form of Amendment No. 1 to Security * Agreement dated as of January 9, 1998 10.17 Form of Amendment No. 1 to Amended * and Restated Pledge Agreement dated as of January 9, 1998 10.18 Form of Revolving Credit Note * ($10,000,000) by Capitol Care Management Company, Inc. and Retirement Management Corporation to the order of HCFP Funding, Inc. dated December 15, 1998 10.19 Form of Revolving Credit Note * ($10,000,000) by subsidiaries to the order of HCFP Funding, Inc. dated December 15, 1998 10.20 Form of Loan and Security Agreement * by Retirement Care Associates, Inc.; Capitol Care Management Company, Inc.; Retirement Management Corporation and HCFP Funding, Inc. dated December 15, 1997 10.21 Form of Loan and Security Agreement * by Subsidiaries and HCFP Funding, Inc. dated December 15, 1997 10.22 Form of Intercreditor Agreement dated * December 15, 1997
- --------------------- * - Previously filed -18- 19 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. RETIREMENT CARE ASSOCIATES, INC. DATED: April 8, 1998 By:/s/ Darrell C. Tucker --------------------------------------- Darrell C. Tucker, Treasurer -----END PRIVACY-ENHANCED MESSAGE-----