U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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.
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(Exact Name of Registrant as Specified in its Charter)
Colorado 43-1441789
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(State or Jurisdiction of (IRS Employer Identification Number)
Incorporation or Organization)
6000 Lake Forrest Drive, Suite 200, Atlanta, Georgia 30328
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(Address of Principal Executive Offices)
(404) 255-7500
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(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.
RETIREMENT CARE ASSOCIATES AND SUBSIDIARIES
FORM 10-Q 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. . . 5 - 6
Consolidated Statements of Cash Flows
(Unaudited) - Three Months Ended December 31,
1997 and December 31, 1996. . . .. . . . . . . . . 7
Notes to Consolidated Financial
Statements (Unaudited). . . . . . . . . . . . . . 8 - 10
Item 2. Managements' Discussion and Analysis of
Results of Operations and Financial
Condition . . . . . . . . . . . . . . . . . . . 11 - 14
Signatures. . . . . . . . . . . . . . . . . . . . 15
-2-
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
INTRODUCTION - CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements included herein have been prepared
pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures have been condensed
or omitted pursuant to such rules and regulations. In the opinion of
Management, all adjustments, which were of a normal recurring nature,
necessary to present fairly the consolidated financial position and results of
operations and cash flows for the periods presented have been included. These
consolidated financial statements should be read in conjunction with the
financial statements and the notes thereto included in the Annual Report on
Form 10-K, 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 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 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-
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)
(Loss) per common and equivalent
share before extraordinary item (.15) (.13)
NET (LOSS) PER COMMON AND COMMON
EQUIVALENT SHARE (.15) (.17)
WEIGHTED AVERAGE SHARES OUTSTANDING 14,770,938 13,301,109
-4-
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)
(Loss) per common and common equivalent
share before extraordinary item (.30) (.27)
NET (LOSS) PER COMMON AND
COMMON EQUIVALENT SHARES (.30) (.31)
WEIGHTED AVERAGE SHARES OUTSTANDING 14,720,998 13,188,523
-5-
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
Notes and advances due from non-affiliates 1,181,251 1,421,405
Notes and 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-
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-
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 notes receivable and
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 (3,800,411)
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-
RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1: BASIS OF PRESENTATION
The consolidated financial statements included herein have been prepared by
the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although the Company believes that the
disclosures are adequate to make the information presented not misleading.
These consolidated financial statements and the notes thereto should be read
in conjunction with the consolidated financial statements included in the
Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1997,
File No 1-14114.
In the opinion of management of the Company, the accompanying unaudited
consolidated financial statements contain all necessary adjustments to present
fairly the financial position, the results of operations and cash flows for
the periods reported. All adjustments are of a normal recurring nature.
NOTE 2: RESTATEMENT
The consolidated financial statements for the 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
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* 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.
NOTE 4. INVENTORIES
Inventories consisting mainly of medical supplies, are valued at the lower of
cost (first in, first out) or market.
-9-
RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 5: NOTES RECEIVABLE AND ADVANCES TO AFFILIATES
At December 31, 1997 and June 30, 1997, the Company had notes and advances to
(from) affiliates totaling approximately ($5,429,584) and $66,991,
respectively.
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
NOTE 7: COMMITMENTS AND CONTINGENCIES
The Company is involved in legal proceedings arising in the ordinary course of
business. In addition, the Company is in dispute with the Internal Revenue
Service ("IRS") concerning the application of certain income and payroll tax
liabilities and payments. The IRS contends that the Company is delinquent in
the payment of certain taxes and has charged penalties and interest in
connection with the alleged underpayments. The Company contends that the IRS
has misapplied payments between income and payroll taxes and between the
Company and its affiliates. The Company has estimated in the accompanying
financial statements amounts for ultimate settlement of this dispute, and has
recorded an accrual of $600,000, which is based upon the best available
information after consulting with the Company's advisors concerning this
matter. Further, the Company has filed lawsuits against the IRS related to
this matter. In the opinion of management, the ultimate resolution of pending
legal proceedings and the IRS dispute will not have a material effect on the
Company's financial position or results of operations.
-10-
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 103 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 has acquired, by
lease or purchase, a number of facilities which it previously only managed.
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.
-11-
Most of the revenue from the management services division of the Company's
business is received pursuant to management agreements with entities
controlled by Messrs. Brogdon and Lane, two of the Company's officers and
directors. These management agreements have five year terms; however, they
are subject to termination on 60 days notice, after the end of the third year
of the Agreement with or without cause by either the Company or the owners.
Therefore, Messrs. Brogdon and Lane have full control over whether or not
these management agreements, and thus the management service revenue, continue
in the future.
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.
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.
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 103 facilities for the six months ended December 31,
1997, compared to 81 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. 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.
-12-
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 has acquired, by
lease or purchase, a number of facilities which it previously only managed.
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 five year terms; however, they
are subject to termination on 60 days notice, after the end of the third year
of the Agreement with or without cause by either the Company or the owners.
Therefore, Messrs. Brogdon and Lane have full control over whether or not
these management agreements, and thus the management service revenue, continue
in the future.
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 $400,000 was due
to legal and accounting expenses related to the pending merger with Sun
Healthcare Group, Inc.
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.
-13-
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.
During the quarter ended December 31, 1997, cash used by operating activities
was $1,276,619, as compared to $14,086,943 during the quarter ended December
31, 1996. The Company used cash during the current period primarily as a
result of an increase in accounts receivable of $11,636,513. The increases in
non-cash assets were partially offset by increases in accounts payable and
accrued expense of $13,056,640.
Cash flows used in investing activities during the six months ended December
31, 1997, totaled $21,411,353 as compared to $31,351,010 during the quarter
ended December 31, 1996. During the current period, the Company expended
$11,788,087 on the purchase of property and equipment, primarily through
acquisitions, paid $5,256,419 and $3,414,166 on notes receivable and
restricted bond funds respectively.
Cash provided by financing activities during the quarter ended December 31,
1997, totaled $30,713,785 as compared to $45,721,512 during the same period
last year. During the current period the Company received $1,988,626 from the
exercise of common stock options and the placement of $13,927,633 in long-term
debt and $17,396,696 from a line of credit.
On September 30, 1994, the Company purchased a majority of the stock of
Contour Medical, Inc. in exchange for shares of the Company's common stock and
preferred stock. The Company is obligated to redeem the preferred stock
issued in the transaction over five years for $3,000,000 in cash. The Company
paid $600,000 on October 11, 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 1.25%. At December 31, 1997, the Company had
approximately $3,500,000 in unused credit available under such lines.
IMPACT OF PENDING FEDERAL HEALTH CARE LEGISLATION
Management is uncertain what the financial impact will be of the pending
federal health care reform package since the legislation has not been
finalized. However, based on information which has been released to the
public thus far, management doesn't believe that there will be cuts in
reimbursements paid to nursing homes.
Legislative and regulatory action at the state and federal level has resulted
in continuing changes in the Medicare and Medicaid reimbursement programs.
The changes have limited payment increases under those programs. Also, the
timing of payments made under Medicare and Medicaid programs are subject to
regulatory action and governmental budgetary constraints. Within the
statutory framework of the Medicare and Medicaid programs, there are
substantial areas subject to administrative rulings and interpretations which
may further affect payments made under these programs. Further, the federal
and state governments may reduce the funds available under those programs in
the future or require more stringent utilization and quality review of health
care facilities.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. None.
ITEM 2. CHANGES IN SECURITIES. None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None.
ITEM 5. OTHER INFORMATION. None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27 Financial Data Schedule Filed herewith
electronically
(b) Reports on Form 8-K. The Company filed a Report on Form 8-K
dated November 25, 1997, reporting information under Item 5 - Other Events and
Item 7 - Financial Statements, Pro Forma Financial Information and Exhibits,
concerning an amendment to the Agreement and Plan of Merger with Sun
Healthcare Group, Inc.
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: February 17, 1998 By:/s/ Darrell C. Tucker
Darrell C. Tucker, Treasurer
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EXHIBIT INDEX
EXHIBIT METHOD OF FILING
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27. Financial Data Schedule Filed herewith electronically