FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period 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 ________ to ___________
Commission file number: 1-11144
REGENCY HEALTH SERVICES, INC.
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
DELAWARE 33-0210226
Regency Health Services, Inc.
2742 Dow Avenue
Tustin, California 92780
714-544-4443
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 ____
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Title Outstanding
----- -----------
Common Stock 16,173,695
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
REGENCY HEALTH SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
ASSETS
JUNE 30, DECEMBER 31,
1996 1995
----------- ------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 66,900 $ 104,238
Restricted cash 4,400 -
Accounts receivable, net of allowances of $4,150 at
June 30, 1996 and $3,757 at December 31, 1995 79,737 54,050
Notes and other receivables 1,369 2,182
Deferred income taxes 5,447 5,447
Assets held for sale 7,640 8,970
Other current assets 8,046 6,396
--------- ---------
Total current assets 173,539 181,283
--------- ---------
PROPERTY AND EQUIPMENT:
Land 21,281 21,249
Buildings and improvements 101,432 96,396
Leasehold interest - other 17,554 17,556
Leasehold interest - related party 2,075 2,075
Equipment 29,384 24,610
--------- ---------
171,726 161,886
Less - accumulated depreciation and amortization (39,131) (34,679)
--------- ---------
Total property and equipment 132,595 127,207
--------- ---------
OTHER ASSETS:
Mortgage notes receivable, net of allowances of $949 at
June 30, 1996 and $951 at December 31, 1995 4,651 5,163
Goodwill, net of accumulated amortization of $2,023 at
June 30, 1996 and $563 at December 31, 1995 57,951 13,621
Other assets, net of accumulated amortization of $3,323 at
June 30, 1996 and $2,206 at December 31, 1995 31,201 15,697
--------- ---------
Total other assets 93,803 34,481
--------- ---------
$399,937 $ 342,971
--------- ---------
--------- ---------
The accompanying notes are an integral part of these consolidated financial
statements.
REGENCY HEALTH SERVICES, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands, except par value)
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30, December 31,
1996 1995
----------- ------------
(Unaudited)
CURRENT LIABILITIES:
Current portion of long-term debt $ 51,438 $4,371
Accounts payable 24,748 22,285
Accrued expenses 4,828 5,946
Accrued compensation 21,023 18,051
Accrued workers' compensation 4,892 5,377
Deferred revenue 1,428 1,743
Accrued interest 4,197 4,231
--------- ---------
Total current liabilities 112,554 62,004
LONG-TERM DEBT, NET OF CURRENT PORTION 183,607 179,615
OTHER LIABILITIES AND NONCURRENT RESERVES 11,878 13,017
DEFERRED INCOME TAXES 10,414 7,946
--------- ---------
Total liabilities 318,453 262,582
--------- ---------
OMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; authorized - 35,000
shares; 16,174 and 16,670 shares issued and outstanding
at June 30, 1996 and December 31, 1995, respectively 167 167
Additional paid-in capital 51,972 56,679
Retained earnings 29,345 23,543
--------- ---------
Total stockholders' equity 81,484 80,389
--------- ---------
$ 399,937 $ 342,971
--------- ---------
--------- ---------
The accompanying notes are an integral part of these consolidated financial
statements.
REGENCY HEALTH SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ---------------------
1996 1995 1996 1995
---- ---- ---- ----
(Unaudited) (Unaudited)
NET OPERATING REVENUE $137,632 $99,766 $267,595 $197,314
--------- --------- --------- ---------
COSTS AND EXPENSES:
Operating expenses 112,567 80,881 218,693 159,853
Corporate general and administrative 5,617 4,450 11,680 9,698
Rent expense 6,178 4,205 11,690 8,358
Depreciation and amortization 3,836 2,336 7,186 4,622
Interest expense 4,194 1,925 8,346 3,835
Class action suit settlement - 3,098 - 3,098
--------- --------- --------- ---------
Total costs and expenses 132,392 96,895 257,595 189,464
--------- --------- --------- ---------
INCOME BEFORE PROVISION FOR INCOME TAXES 5,240 2,871 10,000 7,850
PROVISION FOR INCOME TAXES 2,175 1,091 4,198 2,983
--------- --------- --------- ---------
NET INCOME $ 3,065 $ 1,780 $ 5,802 $ 4,867
--------- --------- --------- ---------
--------- --------- --------- ---------
INCOME PER COMMON SHARE:
Primary $ 0.19 $ 0.11 $ 0.35 $ 0.29
--------- --------- --------- ---------
--------- --------- --------- ---------
Fully diluted $ 0.18 $ 0.11 $ 0.33 $ 0.29
--------- --------- --------- ---------
--------- --------- --------- ---------
WEIGHTED AVERAGE SHARES OF COMMON STOCK
AND EQUIVALENTS:
Primary 16,382 16,600 16,617 16,594
--------- --------- --------- ---------
--------- --------- --------- ---------
Fully diluted 20,341 20,567 20,573 20,548
--------- --------- --------- ---------
--------- --------- --------- ---------
The accompanying notes are an integral part of these consolidated financial
statements.
REGENCY HEALTH SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
SIX MONTHS ENDED
JUNE 30,
1996 1995
----- ----
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,802 $ 4,867
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Depreciation and amortization 7,186 4,622
Deferred income taxes and charge in lieu of taxes 2,468 1,252
Other, net 296 2
Change in cash from changes in assets and liabilities,
excluding effects of acquisitions and dispositions:
Accounts receivable (24,158) (1,359)
Other current assets 335 234
Current and other liabilities 2,033 3,418
--------- ---------
Net cash provided by (used in) operating activities (6,038) 13,036
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from mortgage notes receivable 109 87
Acquisitions (48,183) --
Purchases of property and equipment (5,600) (7,829)
Changes in other assets, net (5,823) 1,242
--------- ---------
Net cash used in investing activities (59,497) (6,500)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt (4,898) (2,727)
Proceeds from exercise of warrants and options 232 99
Proceeds from exercise of stock appreciation rights -- 615
Purchase of treasury stock (5,082) --
Workers' compensation trust funding (10,637) --
Proceeds from issuance of long-term debt 48,582 1,066
--------- ---------
Net cash provided by (used in) financing activities 28,197 (947)
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (37,338) 5,589
CASH AND CASH EQUIVALENTS, beginning of period 104,238 25,677
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 66,900 $ 31,266
--------- ---------
--------- ---------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During the six months ended June 30, 1995, $20,000 of the Company's
Convertible Subordinated Debentures were converted into 1,616 shares of
common stock.
The accompanying notes are an integral part of these
consolidated financial statements.
REGENCY HEALTH SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The unaudited consolidated financial statements and related notes have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Accordingly, certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have not been presented. The accompanying
unaudited financial statements and related notes should be read in conjunction
with the consolidated financial statements and related notes included in Regency
Health Services, Inc.'s ("Regency" or the "Company") 1995 Annual Report on Form
10-K.
In the opinion of the management of Regency, all material adjustments
necessary to present fairly the Company's financial condition, results of
operations, and changes in financial position have been made. All material
intercompany balances, profits, and transactions have been eliminated. The
consolidated results of operations presented are not necessarily indicative of
the consolidated results for a full year.
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 revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Certain amounts in the 1995 financial statements have been reclassified
to conform to the 1996 presentation.
2. ACQUISITIONS
Effective January 2, 1996, the Company completed the acquisition of the
assets of Assist-A-Care, a pharmacy located in San Diego, California. The
purchase price was $5.8 million, comprised of $3.2 million cash and a
$2.6 million note payable.
Effective February 1, 1996, the Company acquired leasehold interests in
18 health care facilities in Tennessee and North Carolina with 2,375 beds from
Liberty Healthcare Limited Partnership ("Liberty") through an asset purchase for
$39.3 million cash and a note payable for $2.2 million. The Company also
acquired Executive Pharmacy with a $763,000 note payable and an enteral feeding
business for $1.5 million cash from businesses affiliated with Liberty. In
addition, the Company paid $400,000 cash for the inventory of Liberty. A
portion of the purchase was funded with notes payable, which may be reduced as a
result of certain seller liabilities and audit adjustments. Escrow accounts
established at the time of purchase were funded with $2.96 million for payment
on the notes payable and are included in other assets on the accompanying
consolidated balance sheet as of June 30, 1996.
On April 1, 1996, the Company completed the acquisition of the assets
of Buena Vista Nursing Center ("Buena Vista"), a health care facility with 64
skilled nursing beds and 22 assisted living beds, located in Lexington, North
Carolina. The purchase price was $2.875 million, consisting of $2.675 million
in cash and a $200,000 note payable. Payment of the note is dependent upon
Buena Vista attaining certain financial performance targets.
These transactions were accounted for using the purchase method of
accounting under generally accepted accounting principles. Revenues and
expenses are included in the accompanying financial statements subsequent to the
purchase date. The purchase price allocation related to these transactions has
not yet been finalized.
The following unaudited pro forma condensed consolidated statements of
earnings present the summarized consolidated results of operations of the
Company after giving effect to the acquisitions of Liberty and Liberty-
affiliated businesses for the six months ended June 30, 1996 and 1995, as if
such acquisitions had been consummated on January 1, 1995 (in thousands, except
per share data):
SIX MONTHS ENDED
JUNE 30,
-------------------------
1996 1995
----------- -----------
(Unaudited)
Net operating revenue $ 274,401 $ 237,113
Total costs and expenses 263,820 228,813
---------- ----------
Income before provision for income taxes 10,581 8,300
Provision for income taxes 4,442 3,163
---------- ----------
Net income $ 6,139 $ 5,137
---------- ----------
---------- ----------
Income per common share -
Primary $ 0.37 $ 0.31
---------- ----------
---------- ----------
Fully diluted $ 0.35 $ 0.30
---------- ----------
---------- ----------
The pro forma results are presented for informational purposes only and
are not necessarily indicative of what results of operations actually would have
been had such acquisitions been consummated at the beginning of such period or
of future operations or results. The effect of the other acquisitions is
immaterial.
3. DISPOSITIONS
On March 1, 1996, the Company disposed of a 98-bed facility in Lynwood,
California resulting in a $182,000 charge against the reserve established in the
fourth quarter 1995.
4. WORKERS' COMPENSATION CLAIMS TRUST
In 1995, the Company established a revocable workers' compensation
claims trust ("Trust") to pre-fund its workers' compensation obligations. The
Trust was funded in March 1996 with approximately $10.6 million from available
cash. Of the remaining $9.2 million in the Trust at June 30, 1996, $4.4 million
was classified as current restricted cash and $4.8 million was classified as
other long-term assets.
5. ISSUANCE OF SUBORDINATED NOTES
On June 28, 1996, the Company issued 12 1/4% Subordinated Notes (the
"Subordinated Notes") in an aggregate amount of $50 million. Interest on the
Notes will be payable semi-annually on January 15 and July 15 of each year,
commencing January 15, 1997. The Subordinated Notes will mature on July 15,
2003, unless previously redeemed. Net proceeds received by the Company
totaled approximately $48.4 million and funded the redemption of the
Company's outstanding 6 1/2% Convertible Subordinated Debentures due 2003
(the "Convertible Subordinated Debentures") on July 29, 1996 (see Note 7 -
Subsequent Event). The Subordinated Notes contain certain covenants similar
to the 9-7/8% Senior Subordinated Notes, including limitations on the ability
of the
Company to, among other things, (a) incur additional indebtedness and issue
redeemable preferred stock, (b) sell equity interests in subsidiaries, (c) make
certain restricted payments (as defined), (d) create liens, and (e) engage in
mergers, consolidations or transfers of substantially all of the assets of the
Company to another party.
6. NET INCOME PER SHARE
For the three and six months ended June 30, 1996 and 1995, primary
income per share was calculated based on the weighted average number of common
and common equivalent shares outstanding during the periods. For the three and
six months ended June 30, 1996 and 1995, fully diluted income per share was
computed as described above and includes the issuance of common shares upon the
assumed conversion of the Convertible Subordinated Debentures. Additionally,
interest and amortization of underwriting costs related to such debentures were
added, net of tax, to income for the purpose of calculating fully diluted income
per share. Such amounts aggregated $496,000 and $509,000 for the three months
ended June 30, 1996 and 1995, respectively, and $984,000 and $1,019,000 for the
six months ended June 30, 1996 and 1995, respectively.
7. SUBSEQUENT EVENT
On July 29, 1996, the Company completed the redemption of all $48.9
million of its outstanding Convertible Subordinated Debentures for cash at such
amount. The redemption was financed through the issuance of the Subordinated
Notes and available cash. The redemption reduces fully diluted shares by 3.9
million shares. The full amount of outstanding Convertible Subordinated
Debentures is recorded in the current portion of long-term debt at June 30,
1996.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The following table sets forth certain operating data for the Company
on the dates indicated:
JUNE 30,
---------------------
1996 1995
------ ------
In-patient operations
Facilities. . . . . . . . . . . . . . . . . 112 93
Licensed beds . . . . . . . . . . . . . . . 11,541 9,134
Subacute beds . . . . . . . . . . . . . . . 1,108 1,028
Subacute units. . . . . . . . . . . . . . . 46 43
Contract rehabilitation therapy operations(1)
Non-affiliated facilities served . . . . . 86 --
Regency operated facilities served . . . . 49 --
------ -----
Total . . . . . . . . . . . . . . 135 --
------ -----
------ -----
Pharmacy operations
Non-affiliated facilities served . . . . . 76 5
Regency operated facilities served. . . . . 60 34
------ -----
Total . . . . . . . . . . . . . . 136 39
------ -----
------ -----
__________________
(1) The Company did not provide contract rehabilitation therapy services
until the acquisition of SCRS & Communicology, Inc. ("SCRS") in July 1995.
IN-PATIENT OPERATIONS
The Company's in-patient operations derive its net operating revenue
from the performance of routine and ancillary services at the Company's
facilities. Revenue from routine services is comprised of charges for room and
board and basic nursing services for the care of patients, including those in
the Company's subacute specialty units. Revenue from ancillary services is
comprised of charges for rehabilitative services, subacute specialty services,
and pharmaceutical products and services provided to patients at the Company's
facilities. In-patient operations derive most of its ancillary services revenue
from Medicare- and HMO-eligible patients. The Company has classified revenue
from in-patient operations as either basic nursing care revenue or subacute
revenue. Basic nursing care revenue includes charges for room and board for
non-Medicare and non-HMO patients. Subacute revenue includes room and board and
basic nursing services for Medicare and HMO patients and revenues from all
ancillary services provided to patients at the Company's facilities.
The Company's growth strategy includes the selective acquisition of
both new facilities as well as other service providers. The Company incurs
certain costs and experiences operating inefficiencies in connection with the
acquisition of a new facility following such acquisition, relating to the
integration of such facility's financial and administrative systems, physical
plant and other aspects of its operations into those of the Company. In
addition, the introduction of a substantial portion of the Company's contract
rehabilitation therapy, pharmacy and other ancillary services to a new facility
may take as long as 12 months to fully implement. There can be no assurance
that each of the service providers the Company may acquire will be profitable,
or that the acquisition of new facilities that result in significant integration
costs and inefficiencies will not adversely affect the Company's profitability.
During the fourth quarter of 1995 the Company exchanged leasehold
interests in three healthcare facilities with 360 beds in New Mexico for
leasehold interests in four healthcare facilities with 461 beds in Ohio
previously operated by another company. In October 1995, the Company also
opened a newly constructed facility and disposed of one additional facility.
In December 31, 1995, the Company determined to dispose of 13
facilities located in California as part of its strategic plan of diversifying
from the California Medicaid system ("Medi-Cal"). The results of operations of
these facilities will continue to be reflected in the Company's financial
statements until the disposition is completed. In March 1996, the Company
disposed of one of the thirteen facilities with 98 beds.
Effective February 1, 1996, the Company acquired 18 healthcare
facilities with 2,375 beds in Tennessee and North Carolina (see Note 2 to the
Consolidated Financial Statements).
In addition, effective April 1, 1996, the Company acquired 1 healthcare
facility in North Carolina with 86 beds.
ANCILLARY BUSINESSES OPERATIONS
In July 1995, the Company acquired SCRS which provides rehabilitation
services to Company-operated and non-affiliated healthcare facilities in 14
states in the West, Midwest, and Southeast. In the second quarter 1996, 65% of
SCRS revenues were derived from providing services to non-affiliated healthcare
providers.
The Company's pharmacy operations provide prescription services and
basic pharmaceutical dispensing programs to Company and third party healthcare
facilities. During the first six months of 1996 and 1995, 65% and 55%,
respectively, of revenues from pharmacy operations were derived from providing
services to non-affiliated healthcare providers and patients at Regency
facilities billed directly to third-party payors. In January and February of
1996, the Company acquired three additional pharmacy operations (see Note 2 to
the Consolidated Financial Statements).
The Company's 29 home healthcare locations provide skilled nursing,
rehabilitation and other services in selected areas in California and Ohio.
The acquisitions occurring in the first and second quarters 1996 are
collectively referred to as the "1996 Acquisitions."
RESULTS OF OPERATIONS
The following table sets forth the amounts of certain elements of net
operating revenue and the percentage of total net operating revenue for the
periods presented:
THREE MONTHS ENDED JUNE 30,
---------------------------
1996 1995
---- ----
(dollars in thousands)
Basic nursing care . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $70,660 51% $58,443 59%
Subacute . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42,915 32 31,425 31
--------- ----- --------- ----
Total in-patient operations. . . . . . . . . . . . . . . . . . . . . . . . 113,575 83 89,868 90
Home healthcare operations . . . . . . . . . . . . . . . . . . . . . . . . . . 8,856 6 7,529 7
Contract rehabilitation therapy operations to
non-affiliates (1). . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,292 7 -- --
Pharmacy operations to non-affiliates (2). . . . . . . . . . . . . . . . . . . 5,379 4 1,755 2
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 530 -- 614 1
--------- ----- --------- ----
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $137,632 100% $ 99,766 100%
--------- ----- --------- ----
--------- ----- --------- ----
(1) Net of intercompany billings of $4,962,000 for the three months ended June
30, 1996.
(2) Net of intercompany billings of $2,880,000 and $1,426,000 for the three
months ended June 30, 1996 and 1995, respectively.
SIX MONTHS ENDED JUNE 30,
---------------------------
1996 1995
---- ----
(dollars in thousands)
Basic nursing care . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $137,257 51% $115,719 58%
Subacute . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84,410 32 62,751 32
-------- ---- --------- ----
Total in-patient operations . . . . . . . . . . . . . . . . . . . . . . . 221,667 83 178,470 90
Home healthcare operations . . . . . . . . . . . . . . . . . . . . . . . . . . 17,548 6 14,443 7
Contract rehabilitation therapy operations to
non-affiliates (1). . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,755 6 -- --
Pharmacy operations to non-affiliates (2). . . . . . . . . . . . . . . . . . . 10,105 4 3,287 2
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,520 1 1,114 1
-------- ---- --------- ----
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $267,595 100% $197,314 100%
-------- ---- --------- ----
-------- ---- --------- ----
(1) Net of intercompany billings of $7,890,000 for the six months ended June
30, 1996.
(2) Net of intercompany billings of $5,352,000 and $2,678,000 for the six
months ended June 30, 1996 and 1995, respectively.
The following table sets forth certain operating data for the Company for
the periods presented:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------- -------------------------------
1996 1995 1996 1995
---- ---- ---- ----
Patient Days by Payor:
Medicare 79,733 62,382 156,060 125,051
Private/Other 191,264 171,686 373,923 342,926
Managed Care 27,593 23,221 59,643 47,657
Medicaid 635,352 474,161 1,202,522 940,689
-------- -------- ---------- ----------
Total 933,942 731,450 1,792,148 1,456,323
-------- -------- ---------- ----------
-------- -------- ---------- ----------
Home Health Visits 70,307 66,017 145,284 128,031
Home Health Hours 109,171 101,336 215,049 168,741
Revenue Mix:
Medicare 29.9 % 33.4 % 30.4 % 32.9 %
Private/Other 23.9 % 20.3 % 23.9 % 20.4 %
Managed Care 4.9 % 5.2 % 5.5 % 5.6 %
Medicaid 41.3 % 41.1 % 40.2 % 41.1 %
The following table presents the percentage of net operating revenue
represented by certain items reflected in the Company's Consolidated Statements
of Operations for the periods presented:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------------
1996 1995 1996 1995
---- ---- ---- ----
(Unaudited) (Unaudited)
NET OPERATING REVENUE 100.0 % 100.0 % 100.0 % 100.0 %
--------- -------- -------- --------
COSTS AND EXPENSES:
Operating expenses 81.8 81.1 81.7 81.0
Corporate general and administrative 4.1 4.5 4.4 4.9
Rent expense 4.5 4.2 4.4 4.2
Depreciation and amortization 2.8 2.3 2.7 2.3
Interest expense 3.0 1.9 3.1 2.0
Class action lawsuit settlement 0.0 3.1 0.0 1.6
--------- -------- -------- --------
Total costs and expenses 96.2 97.1 96.3 96.0
--------- -------- -------- --------
INCOME BEFORE PROVISION FOR
INCOME TAXES 3.8 % 2.9 % 3.7 % 4.0 %
--------- -------- -------- --------
--------- -------- -------- --------
QUARTER COMPARISON 1996 TO 1995
NET OPERATING REVENUE
The Company's net operating revenue for the three months ended June 30,
1996 ("Second Quarter 1996") was $137.6 million compared to $99.8 million for
the three months ended June 30, 1995 ("Second Quarter 1995"), an increase of
$37.8 million or 38.0%.
Net operating revenue from in-patient operations increased $23.7 million,
or 26.4%, to $113.6 million from $89.9 million primarily due to the 1996
acquisition of 18 in-patient facilities and, on a same store basis, a shift in
payor mix from Medicaid (42.8% to 41.2%) and private (14.7% to 12.9%) to
Medicare (30.3% to 31.4%) and managed care (5.9% to 6.9%), partially offset by a
slight decrease in total patient days. The 18 in-patient facilities acquired by
the Company in February 1996 contributed $20.9 million of net operating revenue
during Second Quarter 1996. On a same store basis, the average increase in
reimbursement rates per patient day was 5.7% from Second Quarter 1995 and was
primarily due to providing services to higher acuity patients. The Company
experienced a 0.4% net decrease in total patient days in Second Quarter 1996
from Second Quarter 1995 on a same store basis, consisting of a decrease of
3,402 and 7,960 from Medicaid and private and other sources, respectively, and
an increase of 3,830 and 4,447 from Medicare and managed care, respectively.
Net operating revenue from home healthcare operations grew $1.3 million to
$8.9 million, or 17.6% in Second Quarter 1996 over Second Quarter 1995,
primarily reflecting an increase in patient visits to 70,307 in Second Quarter
1996 from 66,017 in Second Quarter 1995 and an increase in treatment hours to
109,171 in Second Quarter 1996 from 101,336 in Second Quarter 1995. Net
operating revenue from pharmacy operations to non-affiliates increased $3.6
million or 206.5% in Second Quarter 1996 over Second Quarter 1995, primarily due
to the acquisition of Assist-A-Care in January 1996 and Executive Pharmacy in
February 1996 (collectively, the "Pharmacy Acquisitions"). Net operating
revenue from the Pharmacy Acquisitions for Second Quarter 1996 was $2.9
million. Net operating revenue from contract rehabilitation therapy
operations to non-affiliates was $9.3 million in Second Quarter 1996 and was
a result of the purchase of SCRS in July 1995. The Company had no net
operating revenue from contract rehabilitation therapy operations in the
Second Quarter 1995.
COSTS AND EXPENSES
Total costs and expenses for Second Quarter 1996 increased $35.5 million,
or 37%, to $132.4 million (96.2% of net operating revenue) from $96.9 million
(97.1% of net operating revenue) for Second Quarter 1995.
Operating expenses as a percentage of net operating revenue increased to
81.8% for Second Quarter 1996, from 81.1% for Second Quarter 1995. The increase
resulted from the incurrence of increased labor costs in the in-patient
operations while reimbursement rates per patient day for room and board charges
remained relatively flat for the Medi-Cal and Medicare systems.
Corporate general and administrative expense is the corporate overhead and
regional costs related to the supervision of operations. This expense decreased
as a percentage of net operating revenue to 4.1% for Second Quarter 1996 from
4.5% in Second Quarter 1995. The decrease as a percentage of revenues is
attributed to achieving economies of scale through acquisition and same store
growth.
Rent expense as a percentage of net operating revenue increased to 4.5% in
Second Quarter 1996 from 4.2% in Second Quarter 1995 primarily due to the 1996
Acquisitions.
Depreciation and amortization expense as a percentage of net operating
revenue increased to 2.8% in Second Quarter 1996 from 2.3% in Second Quarter
1995 primarily due to goodwill amortization related to the purchase of SCRS in
July 1995 and the 1996 Acquisitions.
Interest expense as a percentage of net operating revenue increased to 3.0%
in Second Quarter 1996 from 1.9% in Second Quarter 1995 primarily due to the
Company issuing the 9-7/8% Senior Subordinated Notes (the "Senior Subordinated
Notes") in October 1995 partially offset by the repayment of the 8.1% Senior
Secured Notes in that month.
Pursuant to the settlement of a class action lawsuit, the Company recorded
a charge of $3.1 million in Second Quarter 1995. The amount represents the
Company's portion of the settlement, together with related legal fees and other
costs.
SIX MONTHS COMPARISON 1996 TO 1995
NET OPERATING REVENUE
The Company's net operating revenue for the six months ended June 30, 1996
("Six Months 1996") was $267.6 million compared to $197.3 million for the six
months ended June 30, 1995 ("Six Months 1995"), an increase of $70.3 million or
35.6%.
Net operating revenue from in-patient operations increased $43.2 million,
or 24.2%, to $221.7 million from $178.5 million due to the 1996 acquisition of
18 in-patient facilities and, on a same store basis, a shift in payor mix from
Medicaid (42.8% to 40.4%) and private (14.9% to 13.0%) to Medicare (29.6% to
31.6%) and managed care (6.2% to 7.5%). The 18 in-patient facilities acquired
by the Company in February 1996 contributed $33.5 million of net operating
revenue during Six Months 1996. On a same store basis, the average increase in
reimbursement rates per patient day was 7.2% and was primarily due to providing
services to higher acuity patients.
Net operating revenue from home healthcare operations grew $3.1 million to
$17.5 million, or 21.5%, in Six Months 1996 over Six Months 1995, primarily
reflecting an increase in patient visits to 145,284 in Six Months 1996 from
128,031 in Six Months 1995 and an increase in treatment hours to 215,049 in Six
Months 1996 from 168,741 in Six Months 1995. Net operating revenue from
pharmacy operations to non-affiliates increased $6.8 million or 207.4% in Six
Months 1996 over Six Months 1995, primarily due to the acquisition of
Assist-A-Care in January 1996 and Executive Pharmacy in February 1996
(collectively, the "Pharmacy Acquisitions"). Net operating revenue from the
Pharmacy Acquisitions for Six Months 1996 was $5.6 million. Net operating
revenue from contract rehabilitation therapy operations to non-affiliates was
$16.8 million in Six Months 1996 and was a result of the purchase of SCRS in
July 1995. The Company had no net operating revenue from contract
rehabilitation therapy operations in Six Months 1995.
COSTS AND EXPENSES
Total costs and expenses for Six Months 1996 increased $68.1 million, or
36%, to $257.6 million (96.3% of net operating revenue) from $189.5 million
(96.0% of net operating revenue) for Six Months 1995.
Operating expenses as a percentage of net operating revenue increased to
81.7% for Six Months 1996, from 81.0% for Six Months 1995. The increase
resulted from the incurrence of increased labor costs in the in-patient
operations while reimbursement rates per patient day for room and board charges
remained relatively flat for the Medi-Cal and Medicare systems. In addition,
the home health agency participating in the Medicare Prospective Pay System
pilot project beginning in 1996 did not adequately reduce costs at the outset of
this program.
Corporate general and administrative expense is the corporate overhead and
regional costs related to the supervision of operations. This expense decreased
as a percentage of net operating revenue to 4.4% for Six Months 1996 from 4.9%
in Six Months 1995. The decrease as a percentage of revenues is attributed to
achieving economies of scale through acquisition and same store growth.
Rent expense as a percentage of net operating revenue increased to 4.4% in
Six Months 1996 from 4.2% in Six Months 1995 primarily due to the 1996
Acquisitions.
Depreciation and amortization expense as a percentage of net operating
revenue increased to 2.7% in Six Months 1996 from 2.3% in Six Months 1995
primarily due to goodwill amortization related to the purchase of SCRS in July
1995 and the 1996 Acquisitions.
Interest expense as a percentage of net operating revenue increased to 3.1%
in Six Months 1996 from 2.0% in Six Months 1995 primarily due to the Company
issuing the Senior Subordinated Notes in October 1995 partially offset by the
repayment of the Senior Secured Notes in that month.
Pursuant to the settlement of a class action lawsuit, the Company recorded
a charge of $3.1 million in Six Months 1995. The amount represents the
Company's portion of the settlement, together with related legal fees and other
costs.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at June 30, 1996 decreased $58.3 million to $61.0 million
(including cash and cash equivalents of $66.9 million) from $119.3 million
(including cash and cash equivalents of $104.2 million) at December 31, 1995.
The decrease was primarily attributable to funding the purchase of the 1996
Acquisitions. During the Six Months 1996, the Company's receivables increased
approximately $24 million primarily related to the 1996 Acquisitions. A portion
of the increase in receivables is due to delays in securing state and federal
provider numbers for certain of the 18 healthcare facilities acquired in the
1996 Acquisitions. Management anticipates the collections related to the delay
will occur in the third and fourth quarter 1996. In addition, the Company
established a revocable workers' compensation claims payment trust to pre-fund
its workers' compensation obligations which was funded in March 1996 with
approximately $10.6 million from available cash. (See Note 4 to the Consolidated
Financial Statements).
The Company's major requirements for liquidity relate to funding working
capital, capital improvements and debt service obligations. The Company must
also provide funding to cover potential delays, temporary cessations or
interruptions in payments by third-party payors due to political or budgetary
constraints. Management believes that these liquidity needs can be met from
available cash, internally generated funds and existing borrowing capacity under
a revolving credit loan agreement ("Credit Agreement") with NationsBank of
Texas, N.A. as agent for a group of banks (discussed below).
The Company's healthcare facilities require capital improvements for
renovations and improvements in physical appearance. Future capital
improvements may be required as a result of routine regulatory inspections. In
addition, the Company is and will continue to invest in improving its
information systems. The Company's capital expenditures for the six months ended
June 30, 1996 and 1995 were approximately $5.6 million and $7.8 million,
respectively. These capital expenditures have been financed through a
combination of internally generated funds and debt. The Company expects to
spend approximately an aggregate of $13.0 million for capital expenditures
during 1996 to be financed through leases, borrowings under the Credit Agreement
and funds generated from operations.
The Company has financed its acquisitions from a combination of borrowings
and funds generated by operations. The Company expects to finance future
acquisitions from a combination of existing cash, the Credit Agreement, and
alternative sources such as real estate investment trusts. Depending on the
numbers, size and timing of any such transactions, the Company may in the future
require additional financing in order to continue to make acquisitions.
Periodically, the Company has funded temporary delays in reimbursement from
third-party payors. For example, in July 1995, the State of California, due to
budgetary constraints, delayed payment of significant amounts owed to healthcare
providers under the Medi-Cal program. In 1992, the State of California
reimbursed providers with registered warrants, which some banks temporarily
refused to redeem at face value. The Company has been able to mitigate the
effects of such payment delays by monitoring the related activities of the
California legislature, expediting billings through its direct access electronic
billing arrangement, and obtaining the agreement of creditors to extend the due
date for payables. The Company has not recently experienced any
material adverse effects on its liquidity as a result of such delays. There can
be no assurance, however, that the Company will be able to mitigate the effects
of any future funding delays by the State of California or other third-party
payors.
In April and May 1996, the Company purchased 555,000 shares of Company
common stock at an average price of $9.16 per share. The transaction, accounted
for using the cost method, reduced stockholders' equity by $5.1 million.
On June 28, 1996 the Company issued 12 1/4% Subordinated Notes (the
"Subordinated Notes") in an aggregate amount of $50 million. Interest on the
Notes will be payable semi-annually on January 15 and July 15 of each year,
commencing January 15, 1997. The Notes will mature on July 15, 2003, unless
previously redeemed. Net proceeds received by the Company totaled approximately
$48.4 million and funded the redemption of the Company's outstanding 6 1/2%
Convertible Subordinated Debentures due 2003 on July 29, 1996.
On December 28, 1995 the Company entered into the Credit Agreement, which
provides up to $50,000,000 in a revolving line of credit and letters of credit.
As of July 31, 1996, no borrowings have been drawn on the Credit Agreement and
approximately $9,000,000 of standby letters of credit have been issued in
connection with the Company's self-insured workers' compensation programs.
SEASONALITY
The Company's income from operations before fixed charges generally
fluctuates from quarter to quarter. The fluctuation is related to several
factors: the timing of Medicaid rate increases, seasonal census cycles, and the
number of calendar days in a given quarter. As a result, the Company's income
from operations before fixed charges tends to be higher in its third and fourth
quarters when compared to the first and second quarters.
IMPACT OF INFLATION
The healthcare industry is labor intensive. Wages and other labor costs
are especially sensitive to inflation. Increases in wages and other labor costs
as a result of inflation, or increases in federal or state minimum wages without
a corresponding increase in Medicare and Medicaid reimbursement rates, could
adversely impact the Company.
REIMBURSEMENT
The majority of the Company's net operating revenue is derived from
services provided under the Medicare and Medicaid programs. Numerous proposals
relating to healthcare reform have been or may be introduced in the United
States Congress, state legislatures or by governmental agencies who regulate the
Medicare and Medicaid programs. It is uncertain what reform will ultimately be
enacted by the federal government, any state government or governmental agencies
and therefore, the Company cannot predict at this time the impact on the Company
of any proposed reforms.
As discussed above, the Company provides contract rehabilitation and
pharmacy services to both Regency operated and non-affiliated facilities. Under
current Medicare regulations, reimbursement for these services provided to
Medicare eligible patients in Regency facilities is based upon the related
entity's cost to provide the services unless a significant portion of the
related entity's revenues is derived from non-affiliated facilities. If a
significant portion of the related entity's revenues is derived from
non-affiliated facilities, Medicare will reimburse the facility's cost, which
includes a profit paid to the related entity. During 1995 and prior years,
the Company was reimbursed by Medicare based on its pharmacy operation costs
on billings to Regency facilities, as it did not meet the significant portion
criteria. After the acquisition of Assist-A-Care Pharmacy and Executive
Pharmacy in 1996, the Company believes it meets the "significant portion"
criteria and began recording a profit on billings for pharmacy services
provided to Medicare eligible patients in Regency facilities. The Company
believes it meets the "significant portion" criteria for its contract
rehabilitation therapy operations provided by SCRS, and therefore has
recorded a profit on billings to Regency facilities since the acquisition of
SCRS.
Medicare regulations do not define a "significant portion," therefore, the
Company's and Medicare's interpretations could differ, which could result in
retroactive adjustments related to the profit on billings to Regency facilities
for pharmacy and contract rehabilitation services.
In the recently enacted federal budget deficit reduction bill, various
reimbursement rules and regulations were adopted by the federal government that
pertain to the Company. The recently effective changes to regulations
promulgated under OBRA, some of which expand the remedies available to enforce
regulations mandating minimum healthcare standards, may have an adverse effect
on the Company's operations. The Company is unable to predict the particular
effect on the Company until the manner in which these regulations is implemented
becomes known.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
4.11 Indenture, dated as of June 28, 1996, between Regency Health
Services, Inc. as Issuer, the Guarantors named therein and U.S. Trust Company of
California, N.A., as Trustee.
4.12 Form 12-1/4% Subordinated Note due 2003 of Regency Health
Services, Inc. (included in Exhibit 4.11).
4.13 Registration Rights Agreement, dated as of June 28, 1996, by
and among Regency Health Services, Inc., as Issuer, the Guarantors named therein
and Bear, Stearns & Co., Inc. and NationsBanc Capital Markets, Inc., as Initial
Purchasers.
(b) Reports on Form 8-k
Current Report on Form 8-K/A, dated April 12, 1996, reporting an event
dated February 1, 1996 under Items 2 and 7 of Form 8-K, and filing the following
audited financial statements of Liberty Healthcare Limited Partnership: (i)
balance sheets as of September 30, 1994 and 1995, (ii) statements of partners'
capital for the years ended September 30, 1994 and 1995, (iii) statements of
income for the years ended September 30, 1994 and 1995, and (iv) statements of
cash flows for the years ended September 30, 1994 and 1995.
Pursuant to the requirements 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.
REGENCY HEALTH SERVICES, INC.
By: /s/ BRUCE D BROUSSARD
_____________________________________________________
Bruce D. Broussard
Executive Vice President and Chief Financial Officer
Date: August 14, 1996