1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
Amendment No. 3
(Amending Part I- Items 1, 2 and 6)
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter Ended September 30, 1996
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
- ------------------------------ ----------------------------------
(State or Other 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 13,474,995 shares of the Registrant's $.0001 par value Common Stock
outstanding as of September 30, 1996.
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RETIREMENT CARE ASSOCIATES AND SUBSIDIARIES
FORM 10-Q/A FOR THE QUARTER ENDED SEPTEMBER 30, 1996
INDEX
Page(s)
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Introduction. . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations
(Unaudited) - Three Months Ended
September 30, 1996 and September 30, 1995 . . . . . 4
Consolidated Balance Sheets - (Unaudited)
September 30, 1996 and (Audited) June 30, 1996. . . 5 - 6
Consolidated Statements of Cash Flows
(Unaudited) - Three Months Ended September 30,
1996 and September 30, 1995. . . .. . . . . . . . . 7
Notes to Consolidated Financial
Statements (Unaudited). . . . . . . . . . . . . . . 8 - 10
Item 2. Managements' Discussion and Analysis of
Results of Operations and Financial
Condition . . . . . . . . . . . . . . . . . . . . . 11 - 14
Item 6. Exhibits and Reports on Form 8-K 15
Signature . . . . . . . . . . . . . . . . . . . . . 15
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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 for
Retirement Care Associates, Inc. (the "Company") for the fiscal year ended June
30, 1996, File No. 1-14114.
The Company has restated its financial information for periods commencing June
30, 1996 through the nine months ended March 31, 1997, as reflected in
amendments to 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").
To show the impact of the Restated Entries with respect to previously reported
amounts for each period restated, the Company has provided a description of the
Restated Entries and a reconciliation of historical results for each period as
previously reported in the filed quarterly report to restated results.
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.
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RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
September 30, September 30,
1996 1995
REVENUES
Patient service revenue $41,974,970 $25,835,329
Medical supply revenue 11,306,195 1,589,073
Management fee revenue:
From affiliates 796,500 797,502
From others 137,546 110,377
Other operating revenue 957,404 307,896
55,172,615 28,640,177
EXPENSES
Cost of patient services 31,905,623 16,044,110
Cost of medical supplies sold 7,667,200 1,589,072
Lease expense 3,026,791 1,751,415
General and administrative 9,501,727 4,455,581
Depreciation and amortization 1,118,462 489,614
Interest 2,397,636 928,852
Provision for bad debt 1,020,000 --
56,637,439 25,258,644
INCOME (LOSS) BEFORE MINORITY INTEREST
AND INCOME TAXES (1,464,824) 3,381,533
Minority interest 80,000 (37,548)
Income (loss) before income taxes (1,384,824) 3,343,985
Income tax provision (benefit) (345,000) 1,285,265
NET INCOME (LOSS) ($1,039,824) $ 2,058,720
Preferred stock dividends 744,806 --
Income (loss) applicable to common stock (1,784,630) 2,058,720
NET INCOME (LOSS) PER COMMON AND COMMON
EQUIVALENT SHARE (.14) .16
WEIGHTED AVERAGE SHARES OUTSTANDING 13,075,978 12,612,040
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RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS AS OF
SEPTEMBER 30, 1996 AND AUDITED AT JUNE 30, 1995
Unaudited Audited
September 30, June 30,
1996 1996
ASSETS
CURRENT
Cash and cash equivalents $ 3,071,179 $ 45,365
Accounts receivable 27,113,599 18,845,780
Inventory 7,532,030 3,998,991
Deferred income taxes 2,600,000 2,008,430
Note and accrued interest receivable 775,000 613,750
Restricted Bond Fund 2,167,000 2,342,565
Prepaid expenses and other 2,150,816 1,623,679
Total current assets 45,409,624 29,478,560
PROPERTY AND EQUIPMENT 143,274,304 111,420,486
OTHER ASSETS
Marketable equity securities 33,645 33,645
Investments in unconsolidated affiliates 545,294 496,800
Deferred lease and loan costs 9,567,370 7,665,891
Goodwill 13,169,781 6,636,675
Notes and advances due from non-affiliates 895,076 1,372,247
Notes and advances due from affiliates -- 14,316,661
Restricted bond funds 2,758,455 3,514,969
Other assets 4,051,975 2,556,353
Total other assets 31,021,596 36,593,241
$219,705,524 $177,492,287
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RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1996 AND AUDITED AT JUNE 30, 1996
Unaudited Audited
September 30, June 30,
1996 1996
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Lines of credit $ -- $ 3,556,535
Current maturities of long-term debt 12,873,452 2,220,491
Accounts payable 17,181,327 10,115,347
Accrued expenses 15,325,948 11,316,030
Income taxes payable 1,572,546 3,726,317
Deferred gain 40,000 40,000
Total current liabilities 46,993,273 30,974,720
Deferred gain 211,370 371,370
Deferred income taxes 1,098,929 277,000
Long-term debt and capitalized leases,
less current maturities 131,299,070 108,481,040
Minority interest 4,436,411 4,122,039
Redeemable convertible preferred stock 2,400,000 2,400,000
Shareholders' equity
Common stock, $.0001 par value;
300,000,000 shares authorized; 13,474,995
and 12,145,875 shares outstanding 1,047 1,214
Preferred stock 8,660,250 7,408,279
Additional paid-in capital 33,676,002 28,329,625
Retained earnings (9,026,233) (4,752,880)
Treasury stock (44,595) (120,120)
Total shareholders' equity 33,266,471 30,866,118
Total liabilities and shareholders= equity $219,705,524 $177,492,287
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RETIREMENT CARE ASSOCIATES, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR
THE THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
September 30, September 30,
1996 1995
OPERATING ACTIVITIES
Net income (loss) $ (1,039,824) $ 2,058,720
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization 1,118,462 489,614
Provision for bad debts 1,020,000 --
Amortization of deferred gain (160,000) (10,000)
Minority interest (80,000) 37,728
Deferred income taxes 230,359 15,500
Changes in current assets and liabilities
net of effects of acquisitions:
Accounts receivable (9,287,819) (4,190,550)
Inventory (3,533,039) (204,789)
Prepaid expense and other assets (2,022,759) 633,412
Accounts payable and accrued expenses 8,922,127 3,036,882
Increase in deferred lease and loan costs -- (615,720)
Cash provided by (used in) operating activities (4,832,493) 1,250,797
INVESTING ACTIVITIES
Purchase of property and equipment (32,703,818) (8,622,131)
Issuance of notes receivable and
advances to affiliates 14,793,832 (1,645,903)
Investment in and advances to Atrium Ltd. -- (972,873)
Restricted bond funds 932,079 --
Changes in marketable equity securities -- (111,878)
Change in receivable (161,250) 854,795
Deferred lease cost (2,169,941) --
Investment in unconsolidated subsidiaries (48,494) --
Cash (used in) investing activities (19,357,592) (10,497,990)
FINANCING ACTIVITIES
Dividends on preferred stock (60,000) (75,000)
Net proceeds from issuance of:
Line of credit (3,556,535) --
Common stock -- 257,989
Long-term debt 27,776,507 8,436,000
Preferred Stock 6,598,181 --
Payments on long-term debt (444,250) (1,729,693)
Purchase and retirement of common stock (3,098,004) --
Cash provided by financing activities 27,215,899 6,889,296
Net increase (decrease) in cash and
cash equivalents 3,025,814 (2,357,897)
Cash and cash equivalents, beginning of year 45,365 5,207,185
Cash and cash equivalents, end of year $ 3,071,179 $ 2,849,288
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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, 1996, 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.
The Financial Accounting Standard Board has adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" (SFAS No. 115). The Company adopted this standard in fiscal
1995. In management's opinion, adopting SFAS No. 115 did not materially affect
the Company's financial statements for the three months ended December 31, 1995.
NOTE 2: RESTATEMENT
The consolidated financial statements for the three months ended September 30,
1996, as reported in Amendment No. 2 to the Company's Quarterly Report on
Form 10-Q, reflect certain accounting policies and estimates which were
subsequently determined to be incorrect and, accordingly, the consolidated
financial statements for the three months ended September 30, 1996 have been
restated as follows (in thousands):
As Previously Reported As Restated
Revenues $ 55,130 $ 55,173
Operating Expenses $ 62,982 $ 56,637*
Net Earnings (Loss)
applicable to common stock $ (4,742) $ (1,785)
Shareholders' Equity $ 33,109 $ 33,266
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* Restated Operating Expenses include (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 $110.
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.
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RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 4. INVENTORIES
Inventories consist of the following at September 30, 1996:
Raw material $ 284,463
Work in process 70,604
Finished goods 7,176,963
$ 7,532,030
NOTE 5: NOTES RECEIVABLE AND ADVANCES TO AFFILIATES
At September 30, 1996 and June 30, 1996, the Company had notes and advances to
affiliates totaling approximately $0.00 and $14,316,661, respectively. The
notes were repaid by the sale of two retirement homes to the Company at fair
market value and the retirement of 399,992 shares of the Company's common stock
held by affiliates. (See Note 8)
NOTE 6. LONG-TERM DEBT
Long-term debt consisted of the following:
September 30, June 30,
1996 1996
Amounts outstanding under Revenue Bonds
secured by retirement facilities $ 68,050,000 $ 59,986,000
Other debt secured by retirement and
nursing facilities 42,671,148 39,848,938
Other debt 17,852,792 10,866,593
Capitalized leases 15,598,582 --
Totals 144,172,522 110,701,531
Current maturities 12,873,452 2,220,491
Total long-term debt $131,299,070 $108,481,040
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 positions or results of operations.
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RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 8: FACILITY ACQUISITIONS
During the quarter ended September 30, 1996, the Company entered into a series
of transactions with Winter Haven, Gordon Jensen Health Care Association, Inc.
("Gordon Jensen"), National Assistance Bureau, Inc. ("NAB"), Southeastern
Cottages, Inc. ("Southeastern"), Chamber Health Care Society, Inc. ("Chamber"),
and Senior Care, Inc. ("Senior"); all are entities which principal shareholders
of the Company either own or control. The result of the transactions was to
eliminate all notes receivable and advances due to the Company from affiliates.
The following is a summary of the transactions:
On September 30, 1996, Winter Haven sold to the Company two retirement
facilities for their fair value, based on independent appraisal, totaling
$19,200,000. The facilities were acquired by the Company subject to bond debt
of $7,670,000, resulting in debt due to Winter Haven from the Company of
$11,530,000. As part of the sales agreement, the Company and Winter Haven
agreed that the debt of $11,530,000 would be applied to eliminate the
receivable, totaling $11,214,320, due to the Company by Winter Haven.
On September 27, 1996, Gordon Jensen contributed to the treasury of the Company
400,000 shares of stock in the Company which had a fair market value of
$3,000,000. This transaction results in the elimination of the debt, totaling
$2,982,000, due to the Company by Gordon Jensen and a reduction of
shareholders' equity of the Company by $3,000,000.
NOTE 9: OTHER TRANSACTIONS
On August 6, 1996, Contour acquired all of the outstanding stock of Atlantic
Medical Supply Company, Inc. ("Atlantic Medical"), a distributor of disposable
medical supplies and a provider of third-party billing services to the nursing
home and home health care markets. The acquisition was made retroactively to
July 1, 1996. Contour paid $1.4 million in cash and $10.5 million in promissory
notes for all of the outstanding stock of Atlantic Medical. The promissory
notes bear interest at 7% per annum and are due in full on January 10, 1997. In
the event of a default in the payment of the promissory notes, they are
convertible into shares of common stock of the Company.
During the period from September 27 through October 2, 1996, the Company sold
1,000,000 shares of Series F Convertible Preferred Stock in an offering to
foreign investors at $10.00 per share. Holders of the Series F Convertible
Preferred Stock have no voting rights except as required by law, and have
liquidation preference of $10.00 per share plus 4% per amount from the date of
issuance. The shares of Series F Convertible Preferred Stock are convertible
into shares of common stock at a conversion price of the lesser of (a)
$7.665625, or (b) 85% of the average closing bid price for the five trading
days prior to the date of conversion. The maximum number of shares of common
stock which can be issued upon conversion of the Series F Convertible Preferred
Stock is 2,588,000. At the time of conversion, the holder is also entitled to
additional shares equal to $10.00 per share of Series F Convertible Preferred
Stock converted multiplied by 8% per annum from the date of issuance divided by
the applicable conversion price. Each holder of the Series F Convertible
Preferred Stock has the option to convert up to one-third of such holder's
shares at any time from and after the 60th day following the date of issuance,
up to an additional one-third of the shares from and after the 90th day
following the date of issuance, and all remaining shares may be converted from
and after the 120th day following the date of issuance.
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1995.
The Company's total revenues for the three months ended September 30, 1996,
were $55,172,615 compared to $28,640,177 for the three months ended September
30, 1995. Due to the increased number of facilities owned or leased by the
Company, patient service revenue increased from $25,835,329 for the quarter
ended September 30, 1995, to $41,974,970 for the quarter ended September 30,
1996. The Company was operating 75 facilities for the quarter ended September
30, 1996, compared to 42 for the quarter ended September 30, 1995. The cost of
patient services in the amount of $31,905,623 for the quarter ended September
30, 1996 represented 76% of patient service revenue as compared to $16,044,110,
or 62%, of patient service revenue during the quarter ended September 30, 1995.
This increase is attributed to the Company's acquisition of skilled nursing
facilities (which have higher personnel costs), delays in Medicaid rate
increases discussed below, and increased reserves for employees benefits.
Medical supply revenue increased from $1,589,073 during the quarter ended
September 30, 1995, to $11,306,195 during the quarter ended September 30, 1996.
These revenues, which are revenues of Contour, increased primarily as a result
of two acquisitions made by Contour. Contour acquired AmeriDyne Corporation
("AmeriDyne") effective March 1, 1996, and Atlantic Medical effective July 1,
1996. Cost of medical supplies sold as a percentage of medical supply revenue
decreased to approximately 68% during the quarter ended September 30, 1996, as
compared to approximately 100% of such revenue during the same period last
year. The reduced percentage is primarily a result of higher gross profit
margins on the products sold by AmeriDyne and Atlantic Medical.
Management fees increased from $907,879 in the quarter ended September 30, 1995
to $934,046 in the quarter ended September 30, 1996. As of September 30, 1995,
the Company was managing 26 facilities, and as of September 30, 1996, the
Company was only managing 20 facilities. Although the number of managed
facilities declined, revenues increased slightly as a result of increased
management fees charged by the Company. 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.
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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, each such agreement is
subject to termination on 60 days notice, after the end of the third year of
eac such 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 increased from $307,896 during the quarter ended
September 30, 1995, to $957,404 during the quarter ended September 30, 1996.
The increase was primarily a result of one-time referral fees of $300,000
received from a building contractor, and approximately $180,000 in interest
income.
General and administrative expenses for the three months ended September 30,
1996 were $9,501,727, representing 17% of total revenues, as compared to
$4,455,581, representing 16% of total revenues, for the three months ended
September 30, 1995. 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. The increased percentage is
attributed to higher payroll costs of general and administrative personnel
which took effect at the beginning of the fiscal year.
Interest expense rose from $928,852 during the quarter ended September 30, 1995
to $2,397,636 during the quarter ended September 30, 1996 as a result of the
increased amount of debt carried by the Company as a result of acquisitions
made over the preceding twelve months. At September 30, 1995, the Company had
approximately $47 million in long-term debt, as compared to approximately $144
million in long-term debt at September 30, 1996.
For the quarter ended September 30, 1996, the Company received an income tax
benefit of $345,000, which represents an effective tax benefit of 25%, as
compared to expenses for income taxes of $1,285,265, which represents an
effective tax rate of 39%, for the quarter ended September 30, 1995.
The net loss of $1,039,824 for the quarter ended September 30, 1996, compares
to net income of $2,058,720 for the quarter ended September 30, 1995. The loss
for the quarter ended September 30, 1996 is primarily a result of increases in
the cost of patient services as described above and delays in annual Medicaid
rate increases, which are usually in effect on July 1 of each year. This year,
the rate increases in Georgia were delayed until mid-August, and the rate
increases in Tennessee were delayed until November 1, 1996. Most of the
long-term care facilities operated by the Company are located in these two
states.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1996, the Company had a deficit of $1,583,649 in working
capital compared to $1,496,160 at June 30, 1996.
During the quarter ended September 30, 1996, cash used by operating activities
was $4,438,121 as compared to $1,250,797 provided by operating activities
during the quarter ended September 30, 1995. The cash used during the current
period was primarily a result of an increase in accounts receivable of
$9,287,819, and an increase in inventory of $3,533,039. These increases are
partially a result of Contour's acquisition of Atlantic Medical effective July
1, 1996. The increases in non-cash assets were partially offset by increases in
accounts payable and accrued expense of $8,922,127.
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Cash flows used in investing activities during the quarter ended September 30,
1996 totaled $19,357,592, as compared to $10,497,990 during the quarter ended
September 30, 1995. During the current period, the Company expended $32,703,818
on the purchase of property and equipment, primarily through acquisitions, and
incurred $2,169,941 in deferred lease costs. These expenditures were partially
offset by repayments of advances from affiliates of $14,793,832.
Cash provided by financing activities during the quarter ended September 30,
1996 totaled $27,215,899, as compared to $6,889,296 during the same period last
year. During the current period, the Company received $6,598,181 from the sale
of preferred stock and the placement of $27,776,507 in long-term debt. These
receipts were partially offset by the purchase and retirement of common stock
in the amount of $3,098,004, payments on long-term debt of $444,250, a
reduction of line of credit borrowings of $3,556,535 and payment of $60,000 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. $600,000 was paid on October 11, 1996
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 September 30, 1996, the Company had
approximately $3,500,000 in unused credit available under such lines.
On August 6, 1996, Contour acquired all of the outstanding stock of Atlantic
Medical, a distributor of disposable medical supplies and provider of
third-party billing services to the nursing home and home health care markets.
The acquisition was made effective retroactively to July 1, 1996. Contour paid
$1,400,000 in cash and promissory notes totaling $10,500,000 for the stock of
Atlantic, and subsequently paid an additional $50,000 in cash and issued a
promissory note for $350,000 to acquire a minority interest in a subsidiary of
Atlantic. The promissory notes bear interest at 7% per annum and are due in
full on January 10, 1997. In the event of a default in the payment of the
promissory notes, they are convertible into shares of common stock of
Retirement Care Associates, Inc. The cash for this transaction came from a $5
million debenture placement by Contour that was completed on July 12, 1996.
Contour intends to pay the promissory notes from the proceeds of an offering of
securities to be conducted by Contour. However, if Contour is unable to pay
these promissory notes, a default could occur and the holders could exercise
their conversion rights. In such event, the Company could be required to issue
shares of its common stock equal to $10,850,000 based on a conversion price of
85% of the average daily closing price on the New York Stock Exchange for the
five consecutive trading days prior to the conversion date. In such event, the
Company has agreed to register such shares for resale under the Securities Act
of 1933, as amended.
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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 healthcare facilities.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27 Restated Financial Data Schedule
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: October 20, 1997 By: /s/ Darrell C. Tucker
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Darrell C. Tucker, Treasurer
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