1
U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Amendment No. 2
(Amending Part I - Items 1, 2 and 3,
Part II - Item 7, Part III - Item 13 and Part IV -
Item 14 and Financial Statements)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the Fiscal Year ended: June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from:
Commission File No. 1-14114
RETIREMENT CARE ASSOCIATES, INC.
(Exact Name of Registrant as Specified in its Charter)
COLORADO 43-1441789
(State or Other Jurisdiction of (I.R.S. Employer Identi-
Incorporation or Organization) fication Number)
6000 Lake Forrest Drive, Suite 200, Atlanta, Georgia 30328
(Address of Principal Executive Offices, Including Zip Code)
Registrant's telephone number, including area code: (404) 255-7500
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
Common Stock, $.0001 Par Value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: Common Stock
$.0001 Par Value
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
As of September 18, 1997, 14,749,441 shares of common stock were outstanding.
The aggregate market value of the common stock of the Registrant held by
nonaffiliates on that date was approximately $84,064,500.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Documents incorporated by reference: None.
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PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
YEAR ENDED JUNE 30, 1997 COMPARED TO YEAR ENDED JUNE 30, 1996
The Company's total revenues for the year ended June 30, 1997 were
$253,227,861 compared to $134,011,369 for the year ended June 30, 1996.
Management fee revenue decreased from $3,781,433 in the year ended June
30, 1996, to $2,629,329 in the year ended June 30, 1997. The Company leased
three long-term care facilities and four assisted living/independent living
facilities and purchased two assisted living/independent living facilities
during the fiscal year ended June 30, 1997, each of which the Company managed
during the fiscal year ended June 30, 1996. All of these facilities were owned
and controlled by Messrs. Brogdon and Lane. The Company purchased and leased
these facilities to reduce the affiliated receivable due the Company and to
increase the number of facilities owned or leased, rather than just managed, by
the Company. Included in the Company's management fee revenue is $2,212,500 and
$3,472,900 from affiliates during the year ended June 30, 1997 and 1996,
respectively.
Due to the increased number of facilities owned or leased by the
Company, patient service revenue increased from $119,499,849 for the year ended
June 30, 1996 to $202,603,841 for the year ended June 30, 1997. The cost of
patient services in the amount of $148,520,849 for the year ended June 30, 1997,
represent 73% of patient service revenue, as compared to $81,082,972 or 68%, of
patient service revenue during the year ended June 30, 1996. The increase in the
percentage is attributed to the Company's operation of twenty-one long-term care
facilities compared to fourteen assisted living/ independent living facilities
in the year end June 30, 1997. The long-term care facilities require more
everyday skilled patient services than assisted living/independent living
facilities. Additionally, staffing a long-term care facility requires more
nursing specialists, therapy services and higher staffing levels as compared to
assisted living/independent living facilities.
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 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
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Company does not have to support the ongoing operating cash flow of the
facility.
The Company owned or leased 35 additional facilities during fiscal
year ended June 30, 1997 compared to fiscal year ended June 30, 1996, which
resulted in a corresponding increase in net revenues of $36 million during the
fiscal year ended June 30, 1997. The number of leased or owned properties at
year end are presented in the following table (which does not include managed
facilities):
Type Fiscal 1995 Fiscal 1996 Fiscal 1997
Long-Term Care 30 48 69
Assisted Living/Independent
Living 8 18 32
Total 38 66 101
CCMC maintains a cash management account where all operating cash funds
of the Company's managed facilities are pooled into one bank account and
invested daily. Notes and advances due from (to) affiliates consist of advances
to facilities, net of advances from facilities, owned by affiliated entities of
($66,989) and $14,316,661 for the fiscal years 1997 and 1996, respectively.
For facilities that were in place for the entire year ended June 30,
1996 and June 30, 1997, revenue increased approximately $1 million, or 2%,
during the year ended June 30, 1997. For these same facilities, average rates
increased approximately 4% while patient-days decreased approximately 2%.
Medical supply revenue increased from $9,825,252 during the fiscal
year ended June 30, 1996 to $45,500,712 during the fiscal year ended June 30,
1997. These revenues, which are the revenues of Contour, increased primarily due
to the acquisition of Ameridyne Corporation on April 1, 1996 and Atlantic
Medical Supply Company, Inc. on July 1, 1996. The cost of medical supplies sold
during the fiscal year ended June 30, 1996, $5,350,817, represented 54% of the
Company's total medical supply revenue for such period, compared to the cost of
medical supplies sold during the year ended June 30, 1997, $31,045,671, which
represents 68% of the Company's total medical supply revenue for such period.
This increase is primarily due to increases in the cost of the goods sold and
increased competition in the medical supply industry, which has decreased the
sale prices of most products.
Other revenues increased from $904,835 for the fiscal year ended June
30, 1996, to $2,463,979 for the fiscal year ended June 30, 1997. Financing fees
increased from $150,000 for the fiscal year ended June 30, 1996 to approximately
$700,000 for the fiscal year ended June 30, 1997. Financing fees represent fees
received by the Company for assisting other companies to obtain financing for
facilities. The Company recorded income under the equity method of $240,000 for
investments in unconsolidated subsidiaries. The Company also experienced
increases in other revenue not related to resident care, such as guest meals and
beauty and barber services, due to the increased number of facilities the
Company operated.
Lease expense increased from $8,442,671 in the year ended June 30,
1996, to $14,117,392 in the year ended June 30, 1997. This increase is
primarily attributable to the increased numbers of facilities leased during the
year, as well as the full year effect of leased facilities that started during
the year ended June 30, 1996.
General and administrative expenses for the year ended June 30, 1997
were $46,346,051, representing 18% of total revenues, as compared to
$23,192,250 representing 17% of total revenues, for the year ended June 30,
1996.
During the year ended June 30, 1997, the Company recorded a $2,982,063
provision for bad debts. The amount of the provision for bad debts was based
upon the aging and estimated collectibility of receivables from Medicare,
Medicaid and private payors. During the year ended June 30, 1997, the aging of
receivables increased compared with the aging of receivables at June 30, 1996.
The increase in the allowance for doubtful accounts of Contour reflects an
adjustment to the purchase price allocation for Contour's acquisition of
Atlantic Medical and its subsidiaries. The adjustment was required to reduce
acquired trade receivables, principally due from Medicare and Medicaid, to their
net realizable value.
During the year ended June 30, 1997, the Company had $673,655 in
interest income and financing fees as compared to $1,847,868 in interest income
and financing fees for the year ended June 30, 1996. The decrease in interest
income is a result of the decreased amount of advances to related parties
during the current year.
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Interest expense increased from $7,948,091 in the year ended June 30,
1996 to $14,111,843 in the year ended June 30, 1997. This increase is
primarily attributable to the increased numbers of facilities acquired by the
Company during the year, as well as the full year effect of facilities that
were acquired by the Company during the year ended June 30, 1996.
For the year ended June 30, 1997, the Company incurred benefits for
income taxes of $2,343,256 which represents an effective tax benefit rate of
25% as compared to expenses for income taxes of $1,307,091, which represents an
effective tax rate of 48% for the year ended June 30, 1996.
The net loss of $7,535,810 for the year ended June 30, 1997 is lower
than the net income of $1,746,808 for the year ended June 30, 1996, due to the
fact that the Company's operations have deteriorated
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as a result of the pendency of and delays associated with the merger with Sun,
including higher-than-normal turnover, costs associated with the integration and
operation of the Company's recently-acquired Virginia and North Carolina
facilities (including certain regulatory compliance problems), declines in
Medicaid rates and occupancy rates during fiscal year 1997 without a
corresponding reduction in operating costs, and accounting adjustments related
to the restatement of the Company's financial statements. Although difficult to
quantify, the Company believes that such staffing concerns led to increases in
costs of patient care and selling, general and administrative expenses during
fiscal year 1997.
Occupancy rates have also impacted the Company's profitability this
fiscal year versus fiscal year 1996. Occupancy rates have declined because of
the turnover of administrators, social workers, and nurses. With both the
expansion of the number of facilities the Company operated during fiscal year
1997 and the higher than normal staff turnover, the Company's existing
management staff was spread very thin.
Most of the revenue from the management services division of the
Company's business is received pursuant to management agreements with entities
controlled by Messrs. Brogdon and Lane, two of the Company's officers and
directors. These management agreements have three to five year terms, however,
they are all subject to termination on 60 days notice, with or without cause, by
either the Company or the owners. Therefore, Messrs. Brogdon and Lane have full
control over whether or not these management agreements, and thus the management
services revenue, continue in the future. These fees represent .87% and 2.82%
of the total revenues of the Company for the years ended June 30, 1997 and 1996,
respectively.
YEAR ENDED JUNE 30, 1996 COMPARED TO YEAR ENDED JUNE 30, 1995
The Company's management has evaluated the potential effect on periods
prior to 1996 of certain errors that the Company has corrected in a restatement
and reissuance of its 1996 financial statements. Based on such evaluation, the
Company's management determined that a restatement of periods prior to 1996 was
unnecessary. The following summarizes the principal considerations made by the
Company's management in that regard:
Allowance for uncollected accounts during 1996. The Company's accounts
receivable nearly doubled during 1996, and the mix of such receivables also
changed significantly. In 1995, amounts due from Medicare and Medicaid
represented approximately 87% of the Company's total accounts receivable, versus
67% in 1996. Further, amounts due from patients increased from approximately
$11,000 in 1995 to approximately $3,113,000 in 1996, and the Company's other
trade receivables increased from approximately $761,000 in 1995 to approximately
$2,595,000 in 1996. The Company's auditors evaluated the Company's position with
respect to the allowance in 1995 and concluded that the balance was appropriate
for 1995, and nothing was noted that would indicate a misapplication of facts
and circumstances during 1995. Nothing would indicate a potential error
relating to the allowance for uncollectible accounts.
Additional accrual for claims incurred but not reported for
self-insured worker's compensation and health care. Until April 1995, the
Company had been acquiring commercial insurance, which transferred substantially
all risk to a third party insurer. In conjunction with the Company's switch to
self-insurance, the Company experienced significant growth during 1996 compared
to 1995. During 1996, the Company acquired or leased an additional 28
facilities, a 74% increase in total facilities owned or leased. A similar
increase in covered employees can be implied. As a result of the increase in
facilities and the rapid increase in covered employees, the reasonable
conclusion is that the expenses associated with these increases are properly
accounted for in 1996. The Company evaluated what portion of the expenses, if
any, would have been properly accrued in 1995 and determined that the amount was
immaterial to the 1995 financial statements.
Accrual for compensated absences. The Company evaluated what portion
of the expenses, if any, would have been properly accrued in 1995 and determined
that the amount was immaterial to the 1995 financial statements.
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Adjustment of previously recorded inventory. This adjustment applies
only to the 1996 financial statements. Initially, the Company had erroneously
included certain items, such as beds and other insignificant equipment ($200 or
less per item), in its physical inventory by facility. The adjustment to
inventory represents a correction to the inventory balance to only reflect those
items appropriately included as inventory.
Adjustment to lease expense. This adjustment represents the amount
necessary to increase lease expense to reflect straight line expense for those
leases which contained escalation clauses. This adjustment is principally
related to 1996 when the Company acquired an additional 28 facilities. The
Company evaluated the potential effect on the 1995 financial statements and
deemed the expenses to be immaterial to the 1995 financial statements because
most of the leases containing escalations were entered into during 1996.
The Company's total revenues for the year ended June 30, 1996, were
$134,011,369 compared to $79,616,053 for the year ended June 30, 1995.
Management fee revenue decreased from $4,169,694 in the year ended June
30, 1995, to $3,781,433 in the year ended June 30, 1996. The Company leased one
long-term care facility, purchased three long-term care facilities and purchased
two assisted living/independent living facilities during the fiscal year ended
June 30, 1996, each of which it managed during the fiscal year ended June 30,
1995. All of these facilities were owned and controlled by Messrs. Brogdon and
Lane. The Company purchased and leased these facilities to reduce the
affiliated receivable due the Company and to increase the number of facilities
owned or leased, rather than just managed, by the Company. Included in the
Company's management fee revenue is $3,472,900 and $3,517,500 from affiliates
during the years ended June 30, 1996 and 1995, respectively.
Due to the increased number of facilities owned or leased by the
Company, patient service revenue increased from $69,949,822 for the year ended
June 30, 1995 to $119,499,849 for the year ended June 30, 1996. The cost of
patient services in the amount of $81,082,972 for the year ended June 30, 1996,
represents 68% of patient service revenue, as compared to $47,778,410, or 68%,
of patient service revenue during the year ended June 30, 1995. The decrease in
the percentage is attributed to an increase in the ratio of assisted
living/independent living facilities to long-term care facilities operated
during the current year. Assisted living/independent living facilities require
less patient services than long-term care facilities. The ratio of long-term
care facilities to assisted living/independent living facilities decreased to
2.7 from 3.8 during the year ended June 30, 1996.
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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The Company converted four managed properties to leased properties
during the fiscal year ended June 30, 1996, which resulted in an increase in
net revenues of $1 million during the fiscal year ended June 30, 1996 compared
to the fiscal year ended June 30, 1995. The number of leased or owned
properties at year-end are presented in the table below (the table does not
included managed facilities):
TYPE FISCAL 1994 FISCAL 1995 FISCAL 1996
---- ----------- ----------- -----------
Long-term Care 20 30 48
Assisted Living/Independent
Living 6 8 18
----- ----- ------
Total 26 38 66
For facilities that were in place for the entire year ended June 30,
1995 and June 30, 1996, revenue increased approximately $3 million, or 5%,
during the year ended June 30, 1996. For these same facilities, average rates
increased approximately 3% while patient-days increased approximately 2%.
During the year ended June 30, 1996, the Company had revenue from
medical supply sales of $14,542,421, an approximately $6.2 million increase
compared to fiscal year ended June 30, 1995, of which $4,717,169 was
intercompany sales which were eliminated in consolidation. These sales reflect
the operations of Contour Medical, Inc., of which the Company acquired a
majority interest on September 30, 1994. Because the Company acquired Contour
on September 30, 1994, only nine months of activity were recorded for fiscal
year ended June 30, 1995. Sales for those nine months of $3,617,439 have been
annualized and recorded for the year ended June 30, 1995 and comprise $1.2
million of the $6.2 million increase in medical supplies revenue for the fiscal
year ended June 30, 1995. Sales for the nine month period following the
Contour acquisition have been annualized so as not to distort the net increase
in revenues from the fiscal year ended June 30, 1995 to the fiscal year ended
June 30, 1996. Moreover, Contour acquired AmeriDyne on March 1, 1996, which
contributed $3.6 million of revenue for the fiscal year ended June 30, 1996
(see Contour 6/30/96 10-K, page 16). While AmeriDyne contributed $3.6 million
of revenue for the fiscal year ended June 30, 1996 (as set forth correctly in
Contour's 6/30/96 10-K), Contour's $4.7 million in sales should not have been
labeled intercompany because this amount was not attributable to sales to RCA.
The remaining $1.4 million increase in sales increase is attributable to the
internal growth of the business. The change in costs of goods sold as a
percentage of sales during fiscal year ended June 30, 1996 versus fiscal year
ended June 30, 1995 is not meaningful because the method of recording
intercompany elimination changed during the fiscal year ended June 30, 1996.
During the fiscal year ended June 30, 1995, intercompany sales of $4,995,346
were recorded as an elimination of medical supply revenue and an elimination of
routine and ancillary costs. During the fiscal year ended June 30, 1996,
intercompany sales of $4,717,169 was recorded as an elimination of medical
supply revenue and an elimination of medical supply costs of goods sold. If
fiscal year ended June 30, 1996 is treated identically to fiscal year ended
June 30, 1995, the costs of goods sold margin would be 107% of sales as
compared to 87% of sales during fiscal year ended June 30, 1995. The increase
in costs of goods sold margin is primarily attributable to the fact that sales
to RCA comprised 32% of Contour's sales during fiscal year ended June 30, 1996
(representing costs without associated revenues), while sales to RCA comprised
only 22% of Contour's sales during fiscal year ended June 30, 1995. The Cost
of Goods Sold for the year ended June 30, 1996, was $5,773,934.
Lease expense increased from $5,769,232 in the year ended June 30,
1995, to $8,442,671 in the year ended June 30, 1996. This increase is
primarily attributable to the increased numbers of facilities leased during the
year, as well as the full year effect of leased facilities that started during
the year ended June 30, 1995. There were ten new facilities leased during the
fiscal year ended June 30, 1996.
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General and administrative expenses for the year ended June 30, 1996,
were $23,192,250, representing 17% of total revenues, as compared to
$12,769,582 representing 16% of total revenues, for the year ended June 30,
1995.
During the year ended June 30, 1996, the Company recorded a $3,423,117
provision for bad debts. The amount of the provision for bad debts was based
upon the aging and estimated collectibility of receivables from Medicare,
Medicaid and private payors. During the year ended June 30, 1996, the aging of
receivables increased compared with the aging of receivables at June 30, 1995.
In addition, at June 30, 1996, a larger amount of the receivables was deemed to
be uncollectible than at June 30, 1995. As of June 30, 1995, the estimated
allowance for bad debts was immaterial to the financial statements and was,
therefore, not recorded. The Company's consideration of several factors
related to the current accounts receivable balance for fiscal year 1996
resulted in the Company recording a $2.7 million bad debt reserve. The Company
considered the overall increase in patient account balances (approximately 80%)
resulting from the Company's acquisitions during fiscal year 1996, the
deterioration in the aging categories due to untimely collection practices by
individual facilities which in several cases resulted in the expiration of
allowable time periods to bill accounts, the significant rise in accounts
receivable net days, the growth in self-pay balances and the lack of timely
write-off of uncollectible accounts throughout the fiscal year.
During the year ended June 30, 1996, the Company had $1,847,868 in
interest income and financing fees as compared to $658,215 in interest income
and financing fees for the year ended June 30, 1995. Financing fees, which
totaled $150,000 for the year ended June 30, 1996, represents fees received by
the Company for assisting other companies to obtain financing for nursing homes
and retirement facilities. The increase in interest income is a result of the
increased amount of advances to related parties during the current year.
Interest expense increased from $1,179,052 in the year ended June 30,
1995, to $7,948,091 in the year ended June 30, 1996. This increase is
primarily attributable to the increased numbers of facilities acquired by the
Company during the year, as well as the full year effect of facilities that
were acquired by the Company during the year ended June 30, 1995.
For the year ended June 30, 1996, the Company incurred expenses for
income taxes of $1,307,091, which represents an effective tax rate of 48%, as
compared to expenses for income taxes of $3,419,092, which represents an
effective tax rate of 40%, for the year ended June 30, 1995. The increase in
the effective tax rate is mainly the result of a non-deductible tax penalty of
approximately $400,000 which was assessed during the year ended June 30, 1996.
The net income of $1,746,808 for the year ended June 30, 1996, is less
than the net income of $5,058,503 for the year ended June 30, 1995, due to the
provision of an additional allowance for bad debts and increased interest
expense because of the larger number of facilities acquired during the most
recent fiscal year.
Most of the revenue from the management services division of the
Company's business is received pursuant to management agreements with entities
controlled by Messrs. Brogdon and Lane, two of the Company's officers and
directors. These management agreements have three to five year terms; however,
they are all subject to termination on 60 days notice, with or without cause, by
either the Company or the owners. Therefore, Messrs. Brogdon and Lane have full
control over whether or not these management agreements, and thus the management
services revenue, continue in the future. These fees represent 2.82% and 5.24%
of total revenues of the Company for the years ended June 30, 1996 and 1995,
respectively.
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LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1997, the Company had a deficit of $10,489,285 in working
capital compared to a $1,496,160 deficit at June 30, 1996. The funds needed to
reduce such working capital deficit could be provided by a new line of credit
secured by accounts receivable, increased collection efforts on the existing
accounts receivable balances, extended payment terms to major vendors and
possible refinancing of selected facilities.
During the year ended June 30, 1997, cash provided by or (used in)
operating activities was ($3,838,000) as compared to $5,549,626 for the year
ended June 30, 1996. The $9,387,626 decrease was primarily due to the net loss
of $7,535,810 for the year ended June 30, 1997, increases in deferred income
taxes of $11,111,558 arising from the carryback of the loss and refunds of
estimated tax payments, and increases in accounts receivable of $20,987,667 due
to the addition of thirty five facilities for the year ended June 30, 1997. Cash
provided by operating activities was primarily attributed to depreciation and
amortization of $6,514,713 on the facilities and an increase in accounts payable
and accrued expenses of $29,187,587 due to the addition of thirty five
facilities for the year ended June 30, 1997.
Cash used in investing activities during the year ended June 30, 1997,
was $23,581,023. The expenditures primarily related to purchases of property and
equipment of 12,734,389 and acquisitions of facilities and a medical supply
company of $18,807,777. On August 6, 1996, Contour Medical, Inc., a
majority-owned subsidiary of the Company, purchased all of the outstanding stock
of 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 accounted for as a purchase and 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 bore interest at 7% per annum and were paid in full on January
10, 1997. On October 14, 1996, Winter Haven sold two retirement facilities to
the Company at their fair market value, based on an independent appraisal, for a
total purchase price of $19,200,000. The facilities were the Jackson Oaks
retirement facility in Jackson, Tennessee, which the Company previously leased,
and the Cumberland Green retirement facility which the Company previously
managed. The purchase prices for these facilities were $12,400,000 and
$6,800,000, respectively. These facilities were acquired subject to total bond
debt of $7,670,000, resulting $11,530,000 due to Winter Haven, which was applied
to eliminate the $11,214,320 owed to the Company by Winter Haven. On September
27, 1996, Gordon Jensen transferred 399,426 shares of the Company's common stock
to the Company with a fair market value equal to $3,000,000 in exchange for the
cancellation of its debt totalling $2,982,000. The Company subsequently retired
these shares. These shares were loaned to Gordon Jensen by Edward E. Lane, Chris
Brogdon and Connie Brogdon. Gordon Jensen must repay the debt to Mr. Lane, Mr.
Brogdon and Ms. Brogdon with either stock or cash within five years. The
advances were due on demand.
Cash provided by financing activities during the year ended June 30,
1997, totaled $31,012,336. Sources of cash included proceeds of $9,340,000 from
the issuance of 1,000,000 shares of $10.00 Series F Convertible Preferred Stock
which were sold in an offering to foreign investors in September, 1996. Holders
of the Series F Preferred Stock have no voting rights except as required by law,
and have a liquidation preference of $10.00 per share plus 4% per annum from the
date of issuance. The shares of Series F Preferred Stock are convertible into
shares of common stock at a conversion price of $7.425 or 85% of the average
closing bid price for the five trading days prior to the date of conversion,
whichever is lower. At the time of conversion, the holder is also entitled to
additional shares equal to $10.00 per share of Series F Preferred Stock
multiplied by 8% per annum from the date of issuance divided by the applicable
conversion price. Sources of cash also included proceeds from stock options and
warrants exercised of $1,900,306, and proceeds from long-term debt and lines of
credit of $33,919,190. The Company's net borrowing from lines of credit was
$9,935,036, with interest rates ranging from prime plus .25% to prime plus
1.25%. Available borrowings at June 30, 1997 was $14,050,000. The Company
incurred long-term debt of approximately $24 million, due through 2026, with
interest rates ranging from 7.0% to 12.5%. Included in the long-term debt is a
$9,750,000 loan with Sun, used to repay the notes payable associated with the
Contour acquisition of Atlantic Medical, with interest accruing at rates of 11%
and would increase to 15% during any period of default. Principal is due 120
days following the termination of the agreement or merger with Sun. In
connection with bond indentures, the Company is required to meet certain
covenants, including monthly sinking fund deposits, adequate balances in debt
service reserve funds, timely payment of tax obligations and adequate insurance
coverage. At June 30, 1997, the Company was in violation of several of these
covenants creating a technical default on approximately $51 million of bond
indentures. These violations included the failure to make monthly payments to
the bond sinking funds for certain of these facilities and inadequate debt
service reserves for certain of these facilities. The Company is also delinquent
with regard to approximately $1.2 million of property taxes at several
facilities. The trustees have not called the bonds in the past for these
violations and management does not foresee the bonds being called at this time.
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All semi-annual interest and principal payments have been made in a timely
fashion. Cash used in financing activities primarily consisted of $13,329,520 in
payments of long-term debt, $600,000 in redemption of Series AA Preferred Stock,
$841,318 in purchases of treasury stock, and $240,000 for dividends on preferred
stock. Subsequent to June 30, 1997, the Company obtained an additional note
payable from Sun of $5,000,000 for working capital purposes on July 10, 1997.
Interest accrues at the rate of 12% and would increase to 16% during any period
of default. Principal is due 120 days following the termination of the agreement
or merger with Sun.
All of the Company's notes receivable and advances to affiliated
entities issued during fiscal year 1996 were paid in full during 1997, including
interest on the notes receivable at a rate of 12% per annum. Affiliated entities
that received notes receivable and advances during 1996 were Gordon Jensen
Health Care Association, Inc. ("Gordon Jensen"), Winter Haven Homes, Inc.
("Winter Haven"), Southeastern Cottages, Inc. ("SCI"), National Assistance
Bureau, Inc. ("NAB"), Chamber Health Care Society, Inc. ("Chamber") and Senior
Care, Inc. ("Senior Care"), all of which are owned or controlled by officers and
directors of the Company or family members of such officers and directors, and
Sea Breeze Health Care Center ("Sea Breeze"), a wholly-owned subsidiary of the
Company. Further, the Company owed such affiliated entities an aggregate of
$66,989 as of the fiscal year ended June 30, 1997.
At June 30, 1996, the Company had a deficit of $1,496,160 in working
capital compared to a surplus of $2,925,302 at June 30, 1995.
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11
During the year ended June 30, 1996, cash provided by operating
activities was $5,549,626 as compared to $4,208,048 for the year ended June 30,
1995. The $1,341,578 increase was primarily due to net income of $1,746,808 for
the year ended June 30, 1996, depreciation and amortization of $3,406,986 on the
facilities, provisions for bad debts of $3,423,117 on accounts receivable and
increases in accounts payable and accrued expenses of $9,964,620 due to the
addition of twenty eight facilities for the year ended June 30, 1996. Cash used
in operating activities was primarily due to the increase in accounts receivable
of $10,672,485 due to the addition of twenty eight facilities for the year ended
June 30, 1996 and increases in inventories of $2,245,194 on the nursing
facilities and Contour Medical Supply, Inc.
Cash used in investing activities during the year ended June 30, 1996,
was $44,981,326. The expenditures primarily related to purchases of property and
equipment of $12,490,298 and acquisitions of facilities of $21,938,513. On
December 15, 1995, the Company obtained both a sole general and a limited
partnership interest, totaling 74.25% interest, in Encore Partners, L.P. in
exchange for a capital contribution to Encore of $3.5 million. Encore owns three
assisted living/independent living and two long-term care facilities. The
acquisition was accounted under the purchase method of accounting. Profits and
losses of Encore are allocated 74.25% to the Company and 25.75% to other
partners. Available cash, if any, is distributed 74.25% to the Company and
25.75% to the other partners. On February 27, 1996, the Company purchased a
thirty six unit assisted living/independent living facility from individuals who
are officers and directors of the Company. The Purchase price was $2,000,000 and
was financed with $400,000 from the Company and a $1,600,000 mortgage loan from
an unrelated third-party real estate investment trust. The Company issued notes
receivable and advances to Gordon Jensen, Winter Haven, SCI, NAB, Chamber,
Senior Care and Sea Breeze in the aggregate amount of $8,935,677 during the 1996
fiscal year.
Gordon Jensen owned one facility, Magnolia Manor, which was constructed
and opened in fiscal year 1995 and required construction funding and start-up
working capital during fiscal year 1996. This facility's financial condition has
improved as resident census has increased. The facility might, however, require
additional advances until a stable occupancy level is achieved.
Winter Haven owned two facilities which required significant advances
to fund working capital and capital improvements during fiscal year 1996. In
addition, Renaissance of Titusville, a partnership of which Winter Haven is the
sole general partner, required advances during 1996 to fund construction of
forty additional units. Renaissance of Titusville has performed poorly
historically because of the need for additional units to offset overhead
expenses.
SCI and NAB each required advances during fiscal year 1996 to fund
working capital and capital improvements at Summer's Landing -- Vidalia, SCI's
only facility, and Summer's Landing -- Lynn Haven, NAB's only facility. Both of
the facilities have historically operated poorly financially due to poor
residence census at such facilities.
Chamber constructed Parkway Health Care Center, a 120-bed long-term
care facility, in 1996, and the Company advanced funds to Chamber for
construction, preliminary staffing and planning at the Parkway facility. After
Parkway's opening in September 1996, the facility also required additional
advances to fund start-up operations.
The Company made advances of approximately $80,000 to Senior Care
during fiscal year 1996 after the Company's acquisition of the Deerfield Nursing
Facility. Senior Care used such advances to satisfy its accounts payable. The
Company's Board of Directors believed that such advances were necessary to avoid
the possibility of any claims against the Company or its assets by Senior Care's
former vendors and suppliers solely by virtue of the Company's succession to the
Deerfield Nursing Facility. Any actions involving the Company or its assets
could be distracting to management and cause the Company to expend resources in
frivolous litigation.
The Company purchased Sea Breeze with a low census caused by state
imposed sanctions created by quality-of-care issues that arose under its former
operators. Sea Breeze, therefore, required significant working capital and
capital improvements during fiscal year 1996 to cure such sanctions and allow
the admission of new residents. Sea Breeze's financial condition has improved
gradually and admissions have increased, but Sea Breeze may require additional
working capital until a stable occupancy level is reached.
The Company's management fee revenue from its affiliated entities
totalled $2,212,500 and $3,472,900 for fiscal years 1997 and 1996, respectively.
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12
The Company funded an additional $4,720,047 in restricted bond funds
used for debt service reserve requirements, semi-annual principal and interest
payments and project funds for facilities under construction or renovation. Cash
provided by investment activities was primarily the repayment of a $2,200,000
note receivable from an unrelated third-party. The Company issues advances and
notes receivable to affiliated companies controlled by Messrs. Brogdon and Lane
to finance working capital deficits and capital expenditures of facilities which
are managed by the Company. In the opinion of the Company's Board of Directors,
these advances represent a good use of the Company's funds because they enable
such affiliated companies to develop their properties, increase census revenue
and increase the fair market value of the facilities, which gives the Company
greater assurances that the facilities will continue to pay management fees to
the Company. Further, as census revenues increase, management fees payable to
the Company will likewise increase. In addition, as properties mature and
develop, they may be acquired by the Company with a portion of the purchase
price payable through the cancellation of advances and notes receivable due the
Company.
Cash provided by financing activities during the year ended June 30,
1996, totaled $34,269,880. Sources of cash included proceeds of $9,300,000 from
the issuance of 1,000,000 shares of $10.00 Series E Convertible Preferred Stock
which were sold in an offering to foreign investors in April, 1996. Holders of
the Series E Preferred Stock have no voting rights except as required by law,
and have a liquidation preference of $10.00 per share plus 4% per annum from the
date of issuance. The shares of Series E Preferred Stock are convertible into
shares of common stock at a conversion price of $11.55 or 85% of the average
closing bid price for the five trading days prior to the date of conversion,
whichever is lower (but no lower than $5.00). At the time of conversion, the
holder is also entitled to additional shares equal to $10.00 per share of Series
E Preferred Stock multiplied by 8% annum from the date of issuance divided by
the applicable conversion price. Sources of cash also included proceeds from
stock options and warrants exercised of $559,593, and proceeds from long-term
debt and lines of credit of $35,329,244. The Company's net borrowing from lines
of credit was $3,556,535, with interest rates ranging from prime plus .25% to
prime plus 1.25%. Available borrowings at June 30, 1996 was $5,075,000. The
Company incurred long-term debt of approximately $31 million, due through 2025,
with interest rates ranging from 6.75% to 11.28%. In connection with bond
indentures, the Company is required to meet certain covenants, including monthly
sinking fund deposits, adequate balances in debt service reserve funds, timely
payment of tax obligations and adequate insurance coverage. At June 30, 1996,
the Company was in violation of several of these covenants creating a technical
default on approximately $14 million of bond indentures. These violations
included the failure to make monthly payments to the bond sinking funds for
certain of these facilities and inadequate debt service reserves for certain of
these facilities. The Company is also delinquent with regard to approximately
$800,000 of property taxes at several facilities. The trustees have not called
the bonds in the past for these violations and management does not foresee the
bonds being called at this time. All semi-annual interest and principal payments
have been made in a timely fashion. Cash used in financing activities primarily
consisted of $9,443,626 in payments of long-term debt, $600,000 in redemption of
Series AA Preferred Stock, $274,040 in purchases of treasury stock, and $270,000
for dividends on preferred stock.
During the year ended June 30, 1995, cash provided by operating activities
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13
was $4,208,048 as compared to $1,523,311 for the year ended June 30, 1994.
The $2,684,737 increase was primarily due to the increased net income for the
year ended June 30, 1995.
Cash used in investing activities during the year ended June 30, 1995,
was $(10,644,726). The expenditures primarily related to purchases of
property and equipment of $6,079,610, purchases of bonds receivable of
$4,487,936, increases in investments and advances to The Atrium Ltd. of
$2,985,833 and advances to affiliates of $1,742,147 due to capital expenditures
and working capital deficits of the affiliates. These were partially offset by
the proceeds from a sale-leaseback transaction of $4,500,000.
At June 30, 1995, advances to affiliates had increased to $7,328,222
from $5,605,250 at June 30, 1994, due to additional capital expenditures and
working capital deficits of the affiliates.
Cash provided by financing activities during the year ended June 30,
1995, totalled $10,683,801. Sources of cash included capital investment by
minority shareholders of a subsidiary of $1,729,469, net borrowings under lines
of credit of $1,745,316 and proceeds from long-term debt of $9,564,670. Cash
used in financing activities primarily consisted of $2,130,654 in payments of
long-term debt and $225,000 for dividends on preferred stock.
Management's objective is to acquire only those facilities it believes
will be able to generate sufficient revenue to pay all operating costs,
management fees, lease payments or debt service, and still return a 3% to 4%
cash flow. Management believes that the Company's cash flow from operations,
together with lines of credit and the sale of securities described below, will
be sufficient to meet the Company's liquidity needs for the current year.
The Company maintains various lines of credit with interest rates
ranging from prime plus .25% to prime plus 1.25%. At June 30, 1997, the
Company had approximately $4,115,000 in unused credit available under such
lines.
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 the five years for $3,000,000 in cash. $600,000
was paid on September 30, 1996 pursuant to this obligation. Management intends
to fund these redemptions from cash flow generated from operations.
In the event the merger with Sun does not take place, management's
plans include a complete reorganization of operations of the Company and
Contour. With respect to the Company, this reorganization plan would include new
personnel to implement increased census and develop and implement ancillary
businesses (e.g., pharmacy and therapy). A comprehensive plan is being developed
to implement these changes, if necessary. The personnel for this plan have been
identified and could be immediately available. The funds needed to implement
this plan would be provided from a new line of credit, sale and lease-back
transactions for certain identified properties of the Company, as well as
refinancing of other of the Company's targeted facilities.
The Company believes that its long-term liquidity needs will generally
be met by income from operations. If necessary, the Company believes that it
can obtain an extension of its current line of credit and/or other lines of
credit from commercial sources. Except as described above, the Company is not
aware of any trends, demands, commitments or understandings that would impact
its liquidity.
The Company intends to use long-term debt financing in connection with
the purchase of additional assisted living/independent living and long-term care
facilities on terms which can be paid out of the cash flow generated by the
property.
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14
The Company intends to continue to lease or purchase additional
retirement care and/or nursing home facilities in the future.
IMPACT OF INFLATION AND PENDING FEDERAL HEALTH CARE LEGISLATION
Management does not expect inflation to have a material impact on the
Company's revenues or income in the foreseeable future so long as inflation
remains below the 9% level. The Company's business is labor intensive and
wages and other labor costs are sensitive to inflation. Management believes
that any increases in labor costs in its management services segment can be
offset over the long term by increasing the management fees. With respect to
the operations segment, approximately 52% of the Company's net patient service
revenue is received from state Medicaid programs. The two states which make
Medicaid payments to the Company have inflation factors built into the rates
which they will pay. Georgia's inflation factor is nine percent and
Tennessee's inflation is eleven percent. Therefore, increases in operating
costs due to inflation should be covered by increased Medicaid reimbursements.
Management is uncertain what the final impact will be of pending
federal health care reform packages since the legislation has not been
finalized. However, based on information which has been released to the public
thus far, Management doesn't believe that there will be cuts in reimbursements
paid to nursing homes.
Legislative and regulatory action, at the state and federal level, has
resulted in continuing changes in the Medicare and Medicaid reimbursement
programs. The changes have limited payment increases under these programs.
Also, the timing of payments made under the Medicare and Medicaid programs are
subject to regulatory action and governmental budgetary constraints. Within
the statutory framework of the Medicare and Medicaid programs, there are
substantial areas subject to administrative rulings and interpretations which
may further affect payments made under these programs. Further, the federal
and state governments may reduce the funds available under those programs in
the future or require more stringent utilization and quality review of health
care facilities.
ACCOUNTING PRONOUNCEMENT
The Financial Accounting Standard Board has adopted Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" (SFAS No. 115). The Company has adopted this
standard in fiscal 1995. In management's opinion, adopting SFAS No. 115 did
not materially affect the Company's financial statements for the year ended
June 30, 1995.
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15
PART III
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Company has agreements to provide management and accounting
services for nursing homes and personal care facilities which are owned or
controlled by entities which are owned or controlled by Officers, Directors and
principal shareholders of the Company. As of October 1, 1997, the Company had
agreements to manage two facilities owned or controlled by Winter Haven Homes,
Inc. ("Winter Haven"); one facility owned or controlled by Gordon Jensen Health
Care Associates, Inc. ("Gordon Jensen"); two facilities owned or controlled by
National Assistance Bureau, Inc. ("NAB"); one facility owned by Southeastern
Cottages, Inc. ("SCI"); and two facilities owned by Chamber Health Care
Society, Inc. ("Chamber"). The Company previously managed a facility owned by
Senior Care, Inc. ("Senior Care"). Winter Haven is owned by a corporation
which is owned 50% by Edward E. Lane, an Officer and Director of the Company,
and 50% by
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16
Connie Brogdon, the wife of an Officer and Director of the Company. Gordon
Jensen is a non-profit corporation of which Edward E. Lane is President. NAB is
also a non-profit corporation of which Edward E. Lane is President and Chris
Brogdon is Secretary/Treasurer. Chamber and Senior Care are non-profit
corporations. Edward E. Lane is President and a director of Chamber. SCI is a
corporation owned 50% by Chris Brogdon and 50% by Edward E. Lane.
The agreements to provide management and accounting services to the
affiliated entities are for periods of three to five years but are cancelable
upon 60 days' notice by either party. The agreements provide for monthly fees
ranging from $2,000 to $28,000 per facility and expire at various times between
1999 to 2002. During the fiscal year ended June 30, 1997, these agreements
resulted in revenue to the Company of $2,212,500.
The Company currently manages eight facilities owned or controlled by
affiliates of the Company, and as part of its duties, the Company also manages
the cash and pays the bills for the facilities. In doing so, the Company
maintains a cash management system where the deposits of all properties are
swept into an investment account daily. The Company is not obligated by its
management agreements with such affiliates to advance working capital to such
affiliated entities, but the Company has and will continue to advance such
working capital to such affiliated entities when necessary. At June 30, 1996,
aggregate amounts were due from the following entities: Winter Haven -
$8,887,833; Gordon Jensen - $2,982,975; SCI - $679,144; NAB - $1,326,391;
Chamber - $336,857; Senior Care - $84,095; and other affiliates - $19,366.
Subsequent to June 30, 1996, entities controlled by Winter Haven assumed the
liabilities of NAB, SCI, Chamber and Senior Care.
Monthly Management Management
Management Fee Payable at Agreement Renewal
"Facility Fee June 30, 1997 Expiration Provisions
-------- ---------- -------------- ---------- ----------
Midway Health
Care Center 24,000 24,000 12/00 Three year
automatic unless
cancelled
Summers Landing -
Vidalia 2,000 2,000 06/01 No renewal
provision
New Beginnings
Health &
Rehabilitation 28,000 28,000 12/00 Three year
automatic unless
cancelled
Summers Landing -
Lynn Haven 2,000 2,000 01/99 One year
automatic unless
cancelled
Renaissance of
Sanford 15,000 15,000 07/02 No renewal
provision
Marshall C. Voss
Health Care 14,000 14,000 07/01 Three year
automatic unless
cancelled
Parkway Health
& Rehabilitation 4,000 4,000 03/00 No renewal
provision
Sea Breeze
Health Care 12,000 12,000 07/00 Three year
automatic unless
cancelled"
On October 14, 1996, Winter Haven sold two retirement facilities to the
Company for their fair value, based on an independent appraisal, for a total
purchase price of $19,200,000. These include the Jackson Oaks retirement
facility in Jackson, Tennessee, which the Company previously leased, and the
Cumberland Green retirement facility which the Company previously managed. The
purchase prices for these facilities were $12,400,000 and $6,800,000,
respectively. These facilities were acquired subject to total bond debt of
$7,670,000, resulting in $11,530,000 due to Winter Haven, which was applied to
eliminate the $11,214,320 owed to the Company by Winter Haven.
On September 27, 1996, Gordon Jensen transferred 399,426 shares of the
Company's Common Stock to the Company with a fair market value of $3,000,000 in
exchange for the cancellation of its debt totaling $2,982,000. The Company
subsequently retired these shares. These shares were loaned to Gordon Jensen by
Edward E. Lane, Chris Brogdon and Connie Brogdon. Gordon Jensen must repay the
debt to Mr. Lane, Mr. Brogdon and Mrs. Brogdon with either stock or cash within
five years.
In February 1996, the Company purchased a 36-unit retirement facility
known as Summers Landing-Cordele, from Gordon Jensen. The purchase price for the
facility was $2,000,000, $400,000 of which was paid in cash by the Company and
the balance of which was financed through a $1,600,000 mortgage loan from an
unrelated third party real estate investment trust.
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17
In May 1996, the Company leased the 60-bed Lake Forest Health Care
Center from a partnership controlled by Winter Haven. The lease is for a period
of 10 years at $25,000 per month.
On June 30, 1996, the Company leased the 158-unit Jackson Oaks
retirement facility from Winter Haven for a period of 15 years. The Company paid
Winter Haven $50,000 per month under this lease. As noted above, Winter Haven
subsequently sold this facility to the Company in October 1996 to retire a
portion of its debt to the Company.
On September 1, 1996, the Company leased the 58-unit Summer's Landing-
Douglas facility from Gordon Jensen. The Company paid $300,000 to Gordon Jensen
on execution of the lease and is paying the debt service on an existing mortgage
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18
each month during the first year. During year two, there will be an additional
payment of $500 per month; in year three - $750 per month; in year four - $1,000
per month; and in year five (and any extension of the lease) - $1,250 per month.
The lease is for an initial term of five years, but the Company may extend the
lease for additional terms of five years each. As of June 30, 1997, the
Company has paid a total of $260,000 in lease payments for such facility.
The Company has guaranteed the debts of two facilities owned by Winter
Haven totaling approximately $6,000,000. The Company has management agreements
on these facilities which expire in 2000.
On September 30, 1996, the Company leased the 101-unit (with 28
additional units under construction) retirement facility known as The
Renaissance - Titusville in Titusville, Florida from a partnership controlled by
Winter Haven for a period of 10 years. The Company has the right to extend the
lease for an additional five year term. The Company paid Winter Haven $1,500,000
on execution of the lease, and will pay monthly rent equal to 1.1 times the debt
service requirements on the facility. For the purposes of this calculation, the
principal debt will not exceed $6,000,000. As of June 30, 1997, the Company has
paid a total of $387,000 in lease payments for such facility.
During the year ended June 30, 1997, the Company entered into leases on
eight facilities with Retirement Group, L.L.C., the owner of these facilities.
Retirement Group, L.L.C. is owned 41.1% by an entity controlled by Edward E.
Lane; 41.8% by Chris Brogdon and his wife, Connie Brogdon; 10.0% by Winter Haven
Homes; 3.5% by Darrell C. Tucker; and 3.6% by James J. Andrews, an officer of a
subsidiary of the Company. Each of these leases are for an initial term of ten
(10) years, with the Company having the right to extend each lease for an
initial five (5) year term. The amount of the rent payment under each lease is
equal to 110% of the principal and interest that Retirement Group, L.L.C. is
required to pay to the lenders of the respective properties. During the fiscal
year ended June 30, 1997, $1,355,217 was paid to Retirement Group, L.L.C. under
these leases. All lease terms with affiliated entities of the Company are
comparable to terms that could be obtained in an arms' length negotiation with
independent third parties.
As of June 30, 1997, the Company has guaranteed debt in the amount of
approximately $30,000,000 related to eight facilities owned by affiliates and
leased by the Company. The debt is collateralized by such facilities, bears
interest at rates ranging from approximately 10% to 11.5% and matures at various
times through 2007.
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19
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. FINANCIAL STATEMENTS. The following financial statements are
filed as part of this report:
Page(s)
Independent Auditors' Report................................... F-1
Report of Independent Certified Public Accountants............. F-2
Consolidated Balance Sheets as of June 30, 1997 and 1996....... F-3 - F-4
Consolidated Statements of Income for the years ended
June 30, 1997, 1996 and 1995................................. F-5
Consolidated Statements of Shareholders' Equity for the
years ended June 30, 1997, 1996 and 1995..................... F-6 - F-7
Consolidated Statements of Cash Flows for the years ended
June 30, 1997, 1996 and 1995................................. F-8 - F-9
Notes to Financial Statements.................................. F-10 - F-28
(a) 2. FINANCIAL STATEMENT SCHEDULES. All schedules have been omitted,
as the required information is inapplicable or the information is presented in
the financial statements or the notes thereto.
(a) 3. Exhibits:
EXHIBIT
NO. DESCRIPTION LOCATION
2.1 Agreement and Plan of Incorporated by reference
Merger and Reorganization to Exhibit 2.1 to the Company's
dated February 17, 1997, Current Report on Form 8-K
among Sun Healthcare Group, dated February 17, 1997
Peach Acquisition Corporation
2.2 Amendment No. 1 to the Agree- Incorporated by reference
ment and Plan of Merger and to Exhibit 2.1 to the Company's
Reorganization dated as of Current Report on Form 8-K
February 17, 1997, among Sun dated May 23, 1997
Healthcare Group, Inc.,
Peach Acquisition Corporation
and Retirement Care Associates,
Inc.
2.3 Amendment No. 2 to the Agree- Incorporated by reference
ment and Plan of Merger and to Exhibit 2.1 to the Company's
Reorganization dated as of Current Report on Form 8-K
February 17, 1997, among Sun dated August 21, 1997
Healthcare Group, Inc., Peach
Acquisition Corporation
and Retirement Care Associates,
Inc.
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20
3.1 Articles of Incor- Incorporated by reference
poration, as amended to Exhibit No. 3.1 to the
Company's Form S-18 Regis-
tration Statement No. 33-7666-D
3.2 Bylaws, as amended Incorporation by reference
to Exhibit No. 3.2 to the
Company's Form S-18 Regis-
tration Statement No. 33-7666-D
3.3 Articles of Amendment Incorporated by reference
to Articles of Incor- to Exhibit 3.3 to the
poration Company's Annual Report on
Form 10-K for the fiscal year
ended June 30, 1993
3.4 Statements Establish- Incorporated by reference
ing Series A and Series to Exhibit 3.4 to the
D Convertible Preferred Company's Annual Report on
Stock Form 10-K for the fiscal year
ended June 30, 1994
3.5 Articles of Amendment to Incorporated by reference
Articles of Incorporation to Exhibit 3.5 to the
(Series AA Convertible Company's Annual Report on
Preferred Stock) Form 10-K for the fiscal year
ended June 30, 1994
3.6 Articles of Amendment to Incorporated by reference
Incorporation (Series E to Exhibit 3.6 to the
Convertible Preferred Company's Annual Report on
Stock) Form 10-K for the fiscal
year ended June 30, 1996
3.7 Articles of Amendment to Incorporated by reference
Articles of Incorporation to Exhibit 3.7 to the
(Series F Convertible Pre- Company's Annual Report on
ferred Stock) and Certif- Form 10-K for the fiscal
icate of Correction to year ended June 30, 1996
same
10.1 Employment Agreement Incorporated by reference
with Darrell C. Tucker to Exhibit 10.1 to the
Company's Annual Report on
Form 10-K for the fiscal
year ended June 30, 1996
10.2 Management and Marketing *
Agreement with Affiliates
10.3 Nursing Home Management *
Agreements with Affiliates
10.4 Lease Agreements with *
Affiliates
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21
10.5 Loan Agreement between Incorporated by reference
Residential Care Facilities to Exhibit 10.1 to the
for the Elderly Authority of Company's Current Report
the City of Dublin and the on Form 8-K dated February 3,
Company 1994
10.6 Deed to Secured Debt and Incorporated by reference
Security between Residen- to Exhibit 10.2 to the
tial Care Facilities for Company's Current Report
the Elderly Authority of on Form 8-K dated February 3,
the City of Dublin and 1994
the Company
10.7 Trust Indenture between Incorporated by reference
Residential Care Facili- to Exhibit 10.3 to the
ties for the Elderly Company's Current Report
Authority of the City of on Form 8-K dated February 3,
Dublin and the Sentinel 1994
Trust Company
10.8 Loan Agreement between Incorporated by reference
Highlands County (Florida) to Exhibit 10.2 to the
Industrial Development Company's Current Report
Authority and the Company on Form 8-K dated March 3,
1994
10.9 Trust Indenture between Incorporated by reference
Highlands County (Florida) to Exhibit 10.3 to the
Industrial Development Company's Current Report
Authority and the Company on Form 8-K dated March 3,
1994
10.10 Asset Purchase Agreement Incorporated by reference
between the Company and to Exhibit 10.1 to the
Springdale Convalescent Company's Current Report
Center of Atlanta, Ltd., et on Form 8-K dated April 29,
al., and Springdale Conva- 1994
lescent Center Purchase
Agreement between the
Company and Bartow
River L.L.C.
10.11 Promissory Note from the Incorporated by reference
Company to Winter Haven to Exhibit 10.46 to the
Homes Company's Annual Report
on Form 10-K for the fiscal
year ended June 30, 1994
10.12 Promissory Note from the Incorporated by reference
Company to Tiffany Indus- to Exhibit 10.3 to the
tries, Inc. Company's Current Report
on Form 8-K dated April 29,
1994
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22
10.13 Loan Agreement with Cave Incorporated by reference
Spring Housing Develop- to Exhibit 10.57 to the
ment Corporation Company's Annual Report
on Form 10-K for the fiscal
year ended June 30, 1994
10.14 Trust Indenture between Incorporated by reference
Cave Spring Housing to Exhibit 10.58 to the
Development Corporation Company's Annual Report
and Sentinel Trust Company on Form 10-K for the fiscal
year ended June 30, 1994
10.15 Transfer and Assignment of Incorporated by reference to
Loan Asset and Forbearance to Exhibit 10.67 to the
Agreement with R. Wayne Company's Annual Report
Lowe, et al. on Form 10-K for the fiscal
year ended June 30, 1994
10.16 Promissory Note from South- Incorporated by reference
eastern Cottages, Inc. and to Exhibit 10.67 to the
related Mortgage and Company's Registration
Security Agreement Statement on Form S-1
File No. 33-85886
10.17 Promissory Note from Gordon Incorporated by reference
Jensen Health Care, Inc. to Exhibit 10.68 to the
and related Deed to Secure Company's Registration
Debt Statement on Form S-1
File No. 33-85886
10.18 Promissory Note from Incorporated by reference
Renaissance Retirement, to Exhibit 10.69 to the
Ltd. and related Mortgage Company's Registration
and Security Agreement Statement on Form S-1
File No. 33-85886
10.19 Promissory Note from Incorporated by reference
Retirement Village of to Exhibit 10.70 to the
Jackson, Ltd. and related Company's Registration
Deed of Trust Statement on Form S-1
File No. 33-85886
10.20 Promissory Note from Incorporated by reference
Hendersonville Retirement to Exhibit 10.71 to the
Village, Ltd. and related Company's Registration
Deed of Trust Statement on Form S-1
File No. 33-85886
10.21 Agreement and Amendment Incorporated by reference
to Agreement with The to Exhibit 10.77 to the
Atrium of Jacksonville, Company's Annual Report
Ltd. and Assignment to on Form 10-K for the fiscal
the Company year ended June 30, 1994
10.22 Guaranties and Stock Pledge Incorporated by reference
and Maintenance Agreements to Exhibit 10.80 to the
with Edward E. Lane and Company's Registration
Connie B. Brogdon Statement on Form S-1
File No. 33-85886
-48-
23
10.23 Dearfield Nursing Home Incorporated by reference
Purchase Agreement to Exhibit 10.1 to the Com-
pany's Report on Form 8-K
dated April 28, 1995
10.24 Loan Agreement Incorporated by reference
to Exhibit 10.2 to the Com-
pany's Report on Form 8-K
dated April 28, 1995
10.25 Promissory Note Secured by Incorporated by reference
Security Deed to Exhibit 10.3 to the Com-
pany's Report on Form 8-K
dated April 28, 1995
10.26 Security Agreement Incorporated by reference
to Exhibit 10.4 to the Com-
pany's Report on Form 8-K
dated April 28, 1995
10.27 Deed to Secure Debt, Incorporated by reference
Security Agreement, to Exhibit 10.5 to the Com-
Assignment of Rents and pany's Report on Form 8-K
Filing for Dearfield dated April 28, 1995
Nursing Home
10.28 Edwinola Retirement Incorporated by reference
Community Purchase Agree- to Exhibit 10.93 to the
ment Company's Annual Report on
Form 10-K for the fiscal
year ended June 30, 1995
10.29 Loan Agreement between Incorporated by reference
Dade City, Florida and to Exhibit 10.94 to the
the Company Company's Annual Report on
Form 10-K for the fiscal
year ended June 30, 1995
10.30 Promissory Note from The Incorporated by reference
Atrium Nursing Home, Inc. to Exhibit 10.95 to the
Company's Annual Report on
Form 10-K for the fiscal
year ended June 30, 1995
10.31 Promissory Note from Incorporated by reference
Hendersonville Retirement to Exhibit 10.96 to the
Village, Ltd. Company's Annual Report on
Form 10-K for the fiscal
year ended June 30, 1995
10.32 Second Amendment to Incorporated by reference
Agreement with The Atrium to Exhibit 10.97 to the
of Jacksonville, Ltd. Company's Annual Report on
Form 10-K for the fiscal
year ended June 30, 1995
-49-
24
10.33 Promissory Note from Incorporated by reference
National Assistance to Exhibit 10.98 to the
Bureau Company's Annual Report on
Form 10-K for the fiscal
year ended June 30, 1995
10.34 Letter Agreement with Incorporated by reference
R. Wayne Lowe, et al., to Exhibit 10.99 to the
Amending Forebearance Company's Annual Report on
Agreement Form 10-K for the fiscal
year ended June 30, 1995
10.35 Hillview Nursing Home Incorporated by reference
Purchase Agreement to Exhibit 10.100 to the
Company's Annual Report on
Form 10-K for the fiscal
year ended June 30, 1995
10.36 Crestwood Nursing Home Incorporated by reference
Purchase Agreement and to Exhibit 10.101 to the
Lease Assignment Agree- Company's Annual Report on
ment Form 10-K for the fiscal
year ended June 30, 1995
10.37 Florida Retirement Villa Incorporated by reference
Purchase Agreement to Exhibit 10.102 to the
Company's Annual Report on
Form 10-K for the fiscal
year ended June 30, 1995
10.38 Loan Agreement dated Incorporated by reference
September 29, 1995, with to Exhibit 10.103 to the
LTC Properties, Inc. Company's Annual Report on
Form 10-K for the fiscal
year ended June 30, 1995
10.39 Form of Promissory Note *
($5,000,000) by
Retirement Management
Corporation and Capitol
Care Management Company,
Inc. to Sun Healthcare
Group, Inc. dated July
10, 1997
10.40 Form of Subsidiary *
Guaranty dated July 10,
1997
10.41 Form of Subsidiary Pledge *
Agreement dated July 10,
1997
10.42 Form of Security Agreement *
by Retirement Care Associates,
Inc. dated July 10, 1997
10.43 Form of Security Agreement *
by Capitol Care Management
company, Inc. in favor of
Sun Healthcare Group, Inc.
dated July 10, 1997
10.44 Form of Subsidiary Security *
Agreement dated July 10,
1997
10.45 Form of Subsidiary *
Guaranty dated July 10,
1997
10.46 Form of Pledge Agreement by *
Capitol Care Management
Corporation in favor of
Sun Healthcare Group, Inc.
dated July 10, 1997
10.47 Form of Security Agreement *
by Retirement Management
Corporation in favor of
Sun Healthcare Group, Inc.
dated July 10, 1997
-50-
25
10.48 Form of Amended and Restated *
Promissory Note ($9,750,000)
by Retirement Management
Corporation and Capitol Care
Management Company, Inc. to
Sun Healthcare Group, Inc.
dated as of July 10, 1997
10.49 Form of Pledge of Agreement *
by Retirement Management
Corporation in favor of
Sun Healthcare Group, Inc.
dated as of July 10, 1997
10.50 Form of Amended and Restated *
Pledge Agreement by
Retirement Care Associates,
Inc. in favor of Sun
Healthcare Group, Inc.
dated as of July 10, 1997
10.51 Form of Agreement to Provide *
Management Services to Long
Term Care Facilities dated
July 15, 1997
16 Letter re Change in Incorporated by reference
Certifying Accountant to Exhibit 16.1 to the
Company's Current Report on
Form 8-K/A dated as of
August 14, 1997
21 Subsidiaries of the *
Registrant
23.1 Consent of Cherry, Bekaert & *
Holland, L.L.P.
23.2 Consent of BDO Seidman, LLP *
27 Financial Data Schedule *
- --------------------
* Previously filed
(b) REPORTS ON FORM 8-K. The Company filed one Report on Form 8-K
during the last quarter of the period covered by this Report as follows: The
Company filed a Report on Form 8-K dated May 27, 1997, reporting information
under Item 5 - Other Events and Item 7 - Financial Statements, Pro Forma
Financial Information and Exhibits, reporting an amendment to the Company's
Agreement and Plan of Merger with Sun Healthcare Group, Inc.
-51-
26
REPORT OF CHERRY, BEKEART & HOLLAND
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders of
Retirement Care Associates, Inc.
We have audited the accompanying consolidated balance sheets of Retirement Care
Associates, Inc. and subsidiaries as of June 30, 1997 and 1996 and the related
consolidated statements of income, shareholders' equity and cash flows for the
years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsiblity is to express an
opinion on these financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Retirement Care
Associates, Inc. and subsidiaries as of June 30, 1997 and 1996 and the results
of their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
As described in Note 6 to the consolidated financial statements, the Company
changed its method of accounting for certain costs in inventory.
/s/ Cherry, Bekaert & Holland, L.L.P.
CHERRY, BEKAERT & HOLLAND, L.L.P.
Greensboro, North Carolina
October 10, 1997
F-1
27
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders of
Retirement Care Associates, Inc.
We have audited the accompanying consolidated statements of income,
shareholders' equity and cash flows of Retirement Care Associates, Inc. and
Subsidiaries for the year ended June 30, 1995. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Retirement Care Associates, Inc. and Subsidiaries for the year ended June 30,
1995, in conformity with generally accepted accounting principles.
/s/ BDO Seidman, LLP
BDO SEIDMAN, LLP
Atlanta, Georgia
October 9, 1995,
except for Note 1
which is as of May 1, 1996
F-2
28
FINANCIAL STATEMENTS
Retirement Care Associates, Inc. & Subsidiaries
Consolidated Balance Sheets
June 30, 1997 and 1996
1997 1996
Assets:
Current Assets
Cash and cash equivalents $ 3,637,878 $ 45,365
Accounts receivable, net 40,391,377 18,845,780
Inventories 7,255,289 3,998,991
Note and accrued interest receivable 75,000 613,750
Deferred tax asset 4,408,733 2,008,430
Income tax receivable 4,065,431 --
Restricted bond funds 3,068,276 2,342,565
Prepaid expenses and other assets 2,009,467 1,623,679
Total current assets 64,911,451 29,478,560
Property and equipment, net of
accumulated depreciation 150,492,221 111,420,486
Marketable equity securities -- 33,645
Investment in unconsolidated affiliates 734,514 496,800
Deferred lease and loan costs 13,065,759 7,665,891
Goodwill, net of accumulated amortization 16,357,532 6,636,675
Notes and advances due from non-affiliates 1,421,405 1,372,247
Notes and advances due from affiliates 1,411,379 14,316,661
Restricted bond funds 3,689,969 3,514,969
Other assets 3,286,736 2,556,353
Total assets $255,370,966 $177,492,287
The accompanying notes are an integral part of the consolidated financial
statements
F-3
29
Retirement Care Associates, Inc. & Subsidiaries
Consolidated Balance Sheets
June 30, 1997 and 1996
1997 1996
Liabilities and Shareholders' Equity
Current liabilities:
Lines of credit $ 9,935,036 $ 3,556,535
Current maturities of long-term debt 11,454,059 2,220,491
Loans Payable to Affiliates 1,478,368 --
Accounts payable 34,076,015 10,115,347
Accrued expenses 18,417,258 11,316,030
Income taxes payable -- 3,726,317
Deferred gain 40,000 40,000
Total current liabilities 75,400,736 30,974,720
Deferred gain 181,370 371,370
Deferred income taxes 1,098,929 277,000
Long-term debt, less current 141,674,131 108,481,040
Minority interest 4,520,953 4,122,039
Commitments and contingencies
Redeemable convertible preferred stock 1,800,000 2,400,000
Shareholders' equity
Common stock, $.0001; 300,000,000 shares
authorized; 14,489,888 and 12,145,875
shares issued, respectively 1,450 1,214
Preferred stock 3,250,000 8,712,003
Additional paid-in capital 43,799,617 27,025,901
Retained earnings (deficit) (16,356,220) (4,752,880)
Treasury stock, at cost -- (120,120)
30,694,847 30,866,118
$ 255,370,966 $ 177,492,287
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
30
Retirement Care Associates, Inc. & Subsidiaries
Consolidated Statements of Income
For the years ended June 30, 1997, 1996 and 1995
1997 1996 1995
Revenues:
Net patient service revenue 202,603,841 $ 119,499,849 $ 69,949,822
Medical supply revenue 45,500,712 9,825,252 3,617,439
Management fee revenue:
From affiliates 2,212,500 3,472,900 3,517,500
From others 446,829 308,533 652,194
Other revenue 2,463,979 904,835 1,879,098
Total revenues 253,227,861 134,011,369 79,616,053
Expenses:
Cost of patient services 148,520,849 80,815,511 47,778,410
Cost of medical supplies sold 31,045,671 5,350,817 3,153,430
Lease expense 14,117,392 8,442,671 5,769,232
General and administrative 46,346,051 23,192,250 12,769,582
Depreciation and amortization 6,514,713 3,406,986 1,128,183
Provision for bad debts 2,982,063 3,423,117 --
Total expenses 249,526,739 124,631,352 70,598,837
Operating income 3,701,122 9,380,017 9,017,216
Other income (expense):
Interest income 673,655 1,847,868 658,215
Interest expense (14,111,843) (7,948,091) (1)179,052
Income before minority interest, income taxes,
extraordinary item and cumulative effect of
change in accounting principle (9,737,066) 3,279,794 8,496,379
Minority interest 348,000 (597,895) (18,784)
Income before income taxes, extraordinary item
and cumulative effect of change in
accounting principle (9,389,066) 2,681,899 8,477,595
Income taxes (2,343,256) 1,307,091 3,419,092
Income before extraordinary item and cumulative
effect of change in accounting principle (7,045,810) 1,374,808 5,058,503
Extraordinary Charge - loss on extinguishment
of debt, net of tax benefit of $300,000 490,000 -- --
Cumulative effect of change in accounting
principle, net of income taxes of $228,000 -- 372,000 --
Net income (loss) (7,535,810) $ 1,746,808 $ 5,058,503
Preferred stock dividends 2,236,777 2,266,777 225,000
Income (loss) applicable to common stock $ (9,772,587) $ (519,969) $ 4,833,503
Income (loss) per common and common equivalent share:
Income (loss) before extraordinary item
and cumulative effect of change in
accounting principle $ (0.68) $ (.08) $ 0.38
Extraordinary Charge-loss on
extinguishment of debt (.03) -- --
Cumulative effect of change in
accounting principle -- 0.03 --
Net income (loss) (.71) (.05) 0.38
Weighted average shares outstanding 13,709,590 11,324,755 12,616,835
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
31
Retirement Care Associates, Inc. & Subsidiaries
Consolidated Statements of Shareholders' Equity
For the Years Ended June 30, 1997, 1996 and 1995
Preferred Stock Common Stock
Series A Series E Series F Shares Amount
Balance June 30, 1994 $ 364,083 $ -- $ -- 9,526,166 $ 952
Issuance of common stock upon
conversion of
Series A preferred stock (364,083) -- -- 69,508 7
Issuance of common stock upon
conversion of
Series D preferred stock -- -- -- 125,000 12
Issuance of common stock upon
Contour Medical, Inc. acquisition -- -- -- 105,000 11
Stock dividend, 5% -- -- -- 491,409 49
Balance June 30, 1995 $ -- $ -- $ -- 10,317,083 $ 1,031
Issuance of Series E preferred stock -- 9,300,000 -- -- --
Issuance of common stock upon
conversion of
Series E preferred stock -- (534,750) -- 54,516 5
Imputed dividend on Series E preferred
stock -- (1,996,777) -- -- --
Amortization of imputed
Series E Preferred stock dividend -- (1,943,530) -- -- --
Treasury stock purchased -- -- -- -- --
Retirement of treasury stock -- -- -- (15,500) (2)
Stock issued in exchange for
cancellation of warrants and
stock warrants exercised -- -- -- 1,198,894 120
Stock options exercised -- -- -- 22,076 2
Preferred stock, 10% dividend -- -- -- -- --
Stock dividend, 5% -- -- -- 568,806 58
Balance June 30, 1996 $ -- $ 8,712,003 $ -- 12,145,875 $ 1,214
Issuance of Series F preferred stock -- -- 9,340,000 -- --
Amortization of imputed Series E
preferred stock dividend -- 53,247 -- -- --
Issuance of common stock upon
conversion of
Series E preferred stock -- (8,765,250) -- 1,318,533 132
Imputed dividend on Series F
preferred stock -- (1,996,777) -- -- --
Amortization of imputed Series F
preferred stock dividend -- 1,996,777 -- -- --
Issuance of common stock upon
conversion of
Series F preferred stock -- -- (6,090,000) 1,148,698 115
Treasury stock purchased
Retirement of treasury stock -- -- -- (520,272) (52)
Stock issued in exchange for
Cancellation of warrants and
new stock warrants exercised -- -- -- 144,872 15
Stock options exercised -- -- -- 252,182 26
Preferred stock, 10% dividend -- -- -- -- --
Balance June 30, 1997 $ -- $ -- $ 3,250,000 14,489,888 $ 1,450
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
32
Retirement Care Associates, Inc. & Subsidiaries
Consolidated Statements of Shareholders' Equity
For the Years Ended June 30, 1997, 1996 and 1995
Retained
Paid-In Earnings Treasury
Capital (Deficit) Stock
Balance June 30, 1994 $ 12,391,673 $ 643,043 $ --
Issuance of common stock upon conversion
of Series A preferred stock 364,076 -- --
Issuance of common stock upon conversion
of Series D preferred stock 499,989 -- --
Issuance of common stock upon
Contour Medical, Inc. acquisition 999,988 -- --
Preferred stock, 10% dividend -- (225,000) --
Stock dividend, 5% 4,299,951 (4,300,000) --
Net income -- 5,058,503 --
Balance June 30, 1995 $ 18,555,677 $ 1,176,546 $ --
Issuance of Series E preferred stock -- -- --
Issuance of common stock upon conversion
of Series E preferred stock 534,743 -- --
Imputed dividend on Series E
preferred stock 1,996,777 -- --
Amortization of imputed Series E
preferred stock dividend (1,943,530) -- --
Treasury stock purchased -- -- (274,040)
Retirement of treasury stock -- (153,918) 153,920
Stock issued in exchange for cancellation
of warrants and stock warrants exercised 473,673 -- --
Stock options exercised 156,303 -- --
Preferred stock, 10% dividend -- (270,000) --
Stock dividend, 5% 7,252,258 (7,252,316) --
Net income -- 1,746,808 --
Balance June 30, 1996 $ 27,025,901 $ (4,752,880) $ (120,120)
Issuance of Series F preferred stock -- -- --
Amortization of imputed Series E
Preferred stock dividend 53,247 -- --
Issuance of common stock upon conversion
of Series E preferred stock 8,768,297 -- --
Imputed dividend on Series F
preferred stock 1,996,777 -- --
Amortization of imputed Series F
preferred stock dividend (1,996,777) -- --
Issuance of common stock upon conversion
of Series F preferred stock 6,086,446 --
Treasury stock purchased -- -- (3,707,410)
Retirement of treasury stock -- (3,827,530) 3,827,530
Stock issued in exchange for
Cancellation of warrants and
new stock warrants exercised 70,966 -- --
Stock options exercised 1,901,254 -- --
Preferred stock, 10% dividend -- (240,000) --
Net income -- (7,535,810) --
Balance June 30, 1997 $ 43,799,617 $(16,356,220) $ --
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
33
Retirement Care Associates, Inc. & Subsidiaries
Consolidated Statements of Cash Flows
For the Years Ended June 30, 1997, 1996 and 1995
1997 1996 1995
Cash flows from operating activities
Net income (loss) $ (7,535,810) $ 1,746,808 $ 5,058,503
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Gain on sale of assets (608,423) -- --
Depreciation and amortization 6,514,713 3,406,986 1,128,183
Loss on sale of marketable securities -- 29,085 --
Cumulative effect of change in accounting
principles -- (372,000) --
Amortization of deferred gain (40,000) (40,000) (40,000)
Provision for bad debt 2,982,063 3,423,117 --
Equity in income from investees -- 146,800 --
Minority interest (348,000) 597,895 18,784
Deferred income taxes (11,111,558) (1,297,613) 261,092
Changes in assets and liabilities net of
effects of acquisitions
Accounts receivable (20,987,667) (10,672,485) (6,012,900)
Inventories (960,447) (2,245,194) (996,139)
Prepaid expenses and other assets (970,008) 703,690 (642,013)
Accrued interest receivable 38,750 157,917 (196,667)
Accounts payable and accrued expenses 29,187,587 9,964,620 6,608,148
Deferred lease and loan costs -- -- (978,943)
Net cash provided by (used in)
operating activities (3,838,800) 5,549,626 4,208,048
Cash flows from investing activities:
Purchases of property and equipment (12,734,389) (12,490,298) (6,079,610)
Proceeds from sale leaseback transaction -- -- 4,500,000
Proceed from repayment of notes receivable 13,500,000 2,200,000 --
Issuance of notes receivable and advances
to affiliates and non-affiliates (143,876) (8,935,677) (1,742,147)
Purchase of bonds receivable -- -- (4,487,936)
Investments in unconsolidated affiliates (237,714) 3,787,635 (3,335,833)
Restricted bond funds (900,711) (4,720,047) (17,317)
Proceed from sale of fixed assets 3,350,000 -- --
Cash acquired in acquisition of Contour Medical, Inc. -- -- 73,254
Decrease in marketable equity securities -- -- 444,863
Proceed from sale of marketable equity securities 33,645 36,780 --
Goodwill paid in acquisitions (2,109,852) (2,327,736) --
Acquisitions, net of cash required (18,807,777) (21,938,513) --
Payment of deferred lease costs (5,530,349) (593,470) --
Net cash used in investing activities $(23,581,023) $(44,981,326) $(10,644,726)
The accompanying notes are an integral part of the consolidated financial
statements.
F-8
34
Retirement Care Associates, Inc. & Subsidiaries
Consolidated Statements of Cash Flows (continued)
For the Years Ended June 30, 1997, 1996 and 1995
1997 1996 1995
Cash flows from financing activities
Capital investment by minority shareholders
of subsidiary $ -- $ 2,088,492 $ 1,729,469
Redemption of preferred stock (600,000) (600,000) --
Purchase of treasury stock (841,318) (274,040) --
Dividends on preferred stock (240,000) (270,000) (225,000)
Proceeds from issuance of preferred stock 9,340,000 9,300,000 --
Proceeds from stock options and warrants exercised 1,900,306 559,593 --
Proceeds from long-term debt and net borrowings
under line of credit 33,919,190 35,329,244 11,309,986
Payments on long-term debt (13,329,520) (9,443,626) (2,130,654)
Payments on deferred loan costs (614,690) (2,419,783) --
Proceeds from L/P to affiliates 1,478,368 -- --
Net cash provided by financing
activities 31,012,336 34,269,880 10,683,801
Net increase (decrease) in cash and cash equivalents 3,592,513 (5,161,820) 4,247,123
Cash and cash equivalents, beginning of year 45,365 5,207,185 960,062
Cash and cash equivalents, end of year $ 3,637,878 $ 45,365 $ 5,207,185
The accompanying notes are an integral part of the consolidated financial
statements.
F-9
35
RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 and 1996
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF BUSINESS AND BASIS OF PRESENTATION
Retirement Care Associates, Inc. ("RCA" or the "Company") operates 101 leased
and owned nursing and retirement facilities in the Southeast United States and
manages, for both related and unaffiliated third parties, an additional 9
nursing and retirement facilities. The Company also owns a majority interest in
Contour Medical, Inc. ("Contour") whose principal operations consist of
distributing medical supplies to healthcare facilities.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, as well as its majority-owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation.
CASH AND CASH EQUIVALENTS
For purposes of financial statement presentation, the Company considers all
highly liquid investments with maturities of three months or less at issuance
to be cash equivalents.
INVENTORIES
Inventories, consisting mainly of medical supplies, are valued at the lower of
cost (first-in, first-out) or market.
ALLOWANCE FOR POSSIBLE LOAN LOSSES
The Company periodically reviews the adequacy of the allowance for possible
loan losses on affiliate notes receivable by considering various factors, among
others, such as the fair value of the underlying facility collateral in excess
of prior and senior liens, the periodic results of operations of the underlying
collateral, the fair value of other collateral or guarantees pledged as
security for the notes receivable, and the Company's ability to foreclose, if
necessary, against prior and senior liens to protect the collateral value.
During 1996, the Company adopted Statement of Financial Accounting Standards
No. 114, "Accounting by Creditors for Impairment of a Loan" (SFAS No. 114).
All affiliated notes receivable were liquidated subsequent to June 30, 1996
(see Note 19).
PROPERTY, EQUIPMENT AND DEPRECIATION
Property and equipment are recorded at cost less accumulated depreciation.
Depreciation, which includes amortization of assets under capital leases, is
computed using the straight-line method over the estimated useful lives of the
related assets (five to thirty years). Maintenance and repairs are charged to
expense as incurred. Upon sale, retirement or other disposition of these assets
the cost and the related accumulated depreciation are removed from the
respective accounts and any gain or loss on the disposition is included in
income.
INVESTMENT IN UNCONSOLIDATED AFFILIATES
During the year ended June 30, 1995, the Company acquired a 35% interest in
In-House Rehab, Inc. ("In-House"), a therapy service company, for $350,000. The
F-10
36
Company accounts for its investment in In-House on the equity method. The
Company's share of In-House's net income was $327,714 and $146,800 for the
years ended June 30, 1997 and 1996, respectively.
DEFERRED LEASE AND LOAN COSTS
Deferred lease and loan costs, consisting of lease acquisition fees paid to
lessors and loan commitment fees and related expenditures, are amortized over
the respective terms of the lease or loan using the interest method. The
related amortization of the lease and loan cost is recorded as lease and
interest expense, respectively.
RESTRICTED BOND FUNDS
Restricted bond funds relate to the debt service requirements of RCA's
outstanding bond obligations. RCA has several industrial revenue bonds, housing
development mortgage revenue bonds and municipal revenue bonds, which relate to
the restricted bond funds. Current restricted bond funds include principal and
interest funds which are used for payment of principal and interest on or
before the dates required by the trust indenture. Non-current restricted bond
funds include debt service reserve funds (used for payment of principal and
interest when principal and interest funds are insufficient) and project funds
(used for payment of construction, improvement and equipment costs at
facilities under construction).
GOODWILL
Goodwill arises in connection with business combinations accounted for as
purchases where the purchase price exceeds the fair value of the net assets of
the acquired businesses. Goodwill is amortized on a straight-line basis over 15
years. The carrying value of goodwill is reviewed if the facts and
circumstances suggest that it may be impaired. Any permanent impairment would
be recognized by a charge against earnings. Accumulated amortization of
goodwill approximated $719,000 and $233,000 as of June 30, 1997 and 1996,
respectively.
ASSESSMENT OF LONG-LIVED ASSETS
Effective July 1, 1996, the Company adopted FAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of.
The Company periodically reviews the carrying values of its long-lived assets
(primarily property and equipment and intangible assets) whenever events or
circumstances provide evidence that suggests that the carrying amount of
long-lived assets may not be recovered. If this review indicates that the
long-lived assets may not be recoverable, the Company reviews the expected
undiscounted future net operating cash flows from its facilities, as well as
valuations obtained in connection with various refinancings. Any permanent
impairment of value is recognized as a charge against earnings in the statement
of income. As of June 30, 1997, the Company does not believe there is any
indication that the amortization period of its long-lived assets needs to be
adjusted.
DEFERRED GAIN
Deferred gain on a sale-leaseback transaction is recorded at cost and is
amortized into income on a straight-line basis over 10 years, the life of the
lease. The related amortization is recorded as a reduction of lease expense.
STOCK DIVIDENDS
During January 1995 and April 1996, the Company declared 5% stock dividends
which were payable on February 15, 1995 and May 15, 1996, respectively, to
shareholders of record on February 15, 1995 and May 1, 1996, respectively. All
common stock information presented has been retroactively restated to reflect
these stock
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dividends.
NET PATIENT SERVICE REVENUE
Net patient service revenue is derived primarily from services to retirement
center residents and nursing home patients. Retirement center residents
typically pay rent in advance of the month for which it is due. Nursing home
patients are predominately beneficiaries of the Medicare and Medicaid programs.
The Medicare program reimburses nursing homes on the basis of allowable costs,
subject to certain limits. Payments are received throughout the year at amounts
estimated to approximate costs. Following year end, cost reports are filed with
the Medicare program and final settlements are made. Provisions for Medicare
settlements are provided in the financial statements in the period the related
services are rendered. Differences between amounts accrued and final
settlements are reported in the year of settlement.
State Medicaid programs pay nursing homes primarily on a per diem basis with no
retroactive settlement. Revenues from services to Medicaid patients are
recorded at payment rates established by the various state programs in the
period services are rendered.
There has been, and the Company expects that there will continue to be, a
number of proposals to limit Medicare and Medicaid payments for long-term and
rehabilitative services. The Company cannot predict at this time whether any of
these proposals will be accepted or, if adopted and implemented, what effect
such proposals would have on the Company.
TAXES ON INCOME
Deferred income taxes are recognized for the tax consequences of temporary
differences between the financial reporting bases and the tax bases of the
Company's assets and liabilities. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized.
Income tax expense is the tax payable for the period and the change during the
period in deferred tax assets and liabilities.
NET INCOME PER SHARE
Net income per share is computed on the basis of net income applicable to
common stock and the weighted average number of common and common equivalent
shares outstanding during each year, retroactively adjusted to give effect to
the stock dividends. Shares used in the calculation consist of the weighted
average number of shares actually outstanding as well as the weighted average
number of common share equivalents which include dilutive convertible preferred
stock, stock options and warrants.
Common stock equivalents for the years ended June 30, 1997 and 1996 have not
been included since the effect would be antidilutive. Shares used in the
calculation for the year ended June 30, 1995 consisted of the weighted average
number of shares actually outstanding (10,798,292), as well as, the weighted
average number of common share equivalents (1,818,543) which include dilutive
stock options and warrants.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
The Financial Accounting Standards Board released SFAS No. 123, "Accounting for
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38
Stock Based Compensation." SFAS No. 123 encourages, but does not require,
companies to recognize compensation expense based on the fair value of grants
of stock, stock options, and other equity investments to employees. Although
expense recognition for employee stock-based compensation is not mandatory,
SFAS No. 123 requires that companies not adopting must disclose pro forma net
income and earnings per share. The Company will continue to apply the prior
accounting rules and make pro forma disclosures.
RECLASSIFICATIONS
Certain 1995 amounts have been reclassified to conform with the 1997 and 1996
presentations.
2. BUSINESS ACQUISITIONS:
ENCORE
On December 15, 1995, the Company obtained both a sole general and a limited
partnership interest, totaling a 74.25% interest, in Encore Partners, L.P.
("Encore") in exchange for a capital contribution to Encore of $3.5 million.
Encore owns three retirement facilities, totaling 527 beds, and two nursing
homes, totaling 157 beds. The acquisition was accounted under the purchase
method of accounting. The consolidated financial statements include the results
of operations since the date of acquisition.
Profits and losses of Encore are allocated 74.25% to the Company and 25.75% to
other partners. Available cash, if any, is distributed 74.25% to the Company
and 25.75% to the other partners.
ATRIUM
During the year ended June 30, 1995, Winter Haven Homes, Inc. ("Winter
Haven"),an affiliated entity, assigned to the Company its rights under an
agreement between Atrium and Winter Haven. The agreement granted Winter Haven
the right to acquire up to a 75% ownership interest in Atrium in exchange for
and upon meeting certain performance requirements.
In addition to the assignment, Winter Haven and the Company entered into a
separate Compensation Agreement requiring the Company to pay Winter Haven an
amount equal to 25% of the appraised values of Atrium upon each transfer of a
25% interest in Atrium to the Company. Through June 30, 1996, the payment of
each 25% interest in Atrium was reflected as an increase in Investment in
Unconsolidated Affiliates and a decrease in Notes and Advances Due From
Affiliates in the accompanying financial statements.
At June 30, 1995, a 50% interest in Atrium had been transferred to the Company
at a carrying value of $1,913,000 plus advances made by the Company to Atrium
of $2,149,060. This investment was accounted for under the equity method. In
May 1996, the Company obtained an additional 25% interest for $1,230,000,
bringing the total investment to $3,143,000 plus advances made by the Company
to Atrium of $2,602,942, and the total ownership interest to 75%. Effective May
1996, the accounts of Atrium have been consolidated with those of the Company.
The minority partners of Atrium are allocated 25% of the profits and losses and
25% of available cash flow, if any, is distributed to the minority partners.
ATLANTIC MEDICAL
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 accounted for as a
purchase and 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
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39
Atlantic Medical. The purchase price exceeded fair value of the net assets
acquired by approximately $1.3 million. The resulting goodwill is being
amortized on the straight-line method over forty years. The consolidated
financial statements include the results of operation of Atlantic Medical
subsequent to June 30, 1996.
The promissory notes bore interest at 7% per annum and were due in full on
January 10, 1997. In the event of a default in the payment of the promissory
notes, they were convertible into shares of common stock of RCA. On January 10,
1997, Contour retired all outstanding notes due to sellers of Atlantic Medical
in the aggregate principal amount of $10,850,000, along with accrued interest.
The retirement of these notes was funded by a loan of $9,750,000 from the
Company, with the balance funded from Contour's existing line of credit with
Barnett Bank. The loan from the Company was evidenced by a convertible
promissory note bearing interest at 9% per annum and payable upon demand. This
note was convertible into 1,950,000 shares of Contour's Common Stock, and on
January 10, 1997, the Company exercised this conversion right.
OTHER
During the year ended June 30, 1996, the Company purchased a number of other
facilities. Such purchases included both nursing and retirement facilities.
The data related to these purchases is as follows:
1996
Number of Facilities Purchased:
Nursing 7
Retirement 3
Total 10
Cost of acquired facilities:
Cash paid $ 223,000
Debt incurred 19,811,000
Total $20,034,000
The cost of the facilities acquired during 1996 exceeded the fair value of net
assets acquired by approximately $2,660,000. The excess is being amortized over
a 20-year period.
The Company typically obtains financing in excess of the purchase price paid
for acquired facilities. The excess funds are used to cover certain closing
costs associated with the transactions with any residual amounts retained by
the Company.
The acquisitions referred to above have been accounted for using the purchase
method of accounting. The operating results of those acquired facilities have
been included in the consolidated statement of operations from the date of
acquisition.
The following table presents unaudited pro forma results of operations data as
if the acquisitions described above had occurred on July 1, 1995. The pro forma
amounts are provided for information purposes only. It is based on historic
information and does not necessarily reflect the actual results that would have
occurred, nor is it necessarily indicative of future results of operations of
the combined enterprise.
For the year ended June 30,
(Unaudited)
1997 1996
Revenues $254,410,713 $158,534,082
Net income (7,537,686) 1,798,053
Net income (loss) per share (.71) (.04)
The pro forma information includes adjustments for interest expense that would
have been incurred to finance the acquisitions, additional depreciation based
on the fair market value of the facilities and other adjustments, together with
related income tax effects. The pro forma financial information is not
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necessarily indicative of the results of operations as they would have been had
the transactions been effected on the assumed dates.
3. RELATED PARTY TRANSACTIONS:
The Company provides management and administrative services for eight
facilities in addition to leasing twelve facilities, all owned by affiliates.
These affiliates are owned and controlled by two individuals who are officers
and directors of the Company.
The management and administrative services to affiliate facilities are provided
pursuant to agreements which have three to five year terms and are cancelable
with sixty days written notice by either party. The agreements provided for
monthly fees ranging from $2,000 to $28,000 per facility and expire through
2002. Revenue from these management services totaled $2,212,500, $3,472,900 and
$3,517,500 for the years ended June 30, 1997, 1996 and 1995, respectively.
CCMC maintains a cash management account where all operating cash funds of the
managed facilities are pooled into one bank account and invested daily. Notes
and advances due from (to) affiliates consist of advances to facilities, net of
advances from facilities, owned by the following affiliated entities:
June 30,
1997 1996
Gordon Jensen Health Care Association, Inc. $(1,019,474) $2,982,975
Winter Haven Homes, Inc. (458,894) 8,887,833
Southeastern Cottages, Inc. 295,642 679,144
National Assistance Bureau, Inc. 149,815 1,326,391
Chamber Health Care Society, Inc. 964,240 336,857
Senior Care, Inc. 1,682 84,095
Other Affiliates - 19,366
(66,989) $14,316,661
Less current portion (payable) (1,478,368) -
Noncurrent receivable $ 1,411,379 $14,316,661
The above amounts receivable from affiliates as of June 10, 1996 were satisfied
during the acquisition by the Company of two facilities from related parties
and the return of approximately 400,000 shares of Company stock held by Gordon
Jensen to the Company treasury, discussed in following paragraphs. These notes
required quarterly interest payments at 8% per annum. The notes were
collateralized by second mortgages on facilities owned by affiliates, and
certain notes were guaranteed by the principals of Winter Haven, who are
shareholders of the Company.
The amounts receivable from and payable to affiliates as of June 30, 1997 were
unsecured. The amounts receivable of $1,411,379 are noncurrent. The amounts
payable of $1,478,368 are current and payable upon demand.
The Company's exposure to credit loss in the event of nonperformance by its
related parties totaled $1,411,379 and $14,316,661 as of June 30, 1997 and
1996, respectively.
FACILITY ACQUISITIONS FROM AFFILIATES
On February 27, 1996, the Company purchased a 36-unit retirement facility from
an affiliate. The purchase price was $2,000,000 and was financed with $400,000
from the Company and a $1,600,000 mortgage loan from an unrelated third-party
real estate investment trust.
On May 5, 1996, the Company entered into a lease agreement with an affiliate to
rent a 60-unit nursing home. Terms of the agreement are ten years at $300,000
per year beginning on June 1, 1996. The total lease payments in 1996 were
$25,000.
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On October 14, 1996, the Company acquired two retirement facilities from
related parties, individuals who control the Company and its affiliates, for
their fair value, based on independent appraisals, totaling $19,200,000. The
facilities were subject to bond debt of $7,670,000. The remaining balance due
from the Company was $11,530,000. For the purpose of this transaction, Winter
Haven had assumed the amounts due to the Company in the amount of $2,426,487,
from Southeastern Cottages, Inc., National Assistance Bureau, Inc., Chamber
Health Care Society, Inc. and Senior Care, Inc. which, in combination with the
amount of $8,887,833 previously due from Winter Haven to the Company, totaled
$11,314,320. As part of the exchange agreement, the Company and Winter Haven
agreed to offset the Company's debt incurred of $11,530,000 with the Company's
receivable of $11,314,320.
FACILITIES LEASED FROM AFFILIATES
During the years ended June 30, 1997 and 1996, the Company leased nursing
homes and retirement homes from affiliates. In 1996, one facility was leased
with an annual rental of $300,000, expiring in 2006 with one ten-year renewal.
In 1997, a total of eleven facilities were leased with annual rentals ranging
from approximately $290,000 to $850,000, expiration dates through 2007, and
renewal periods of five to ten years. The annual rentals of the ten leases
acquired in 1997 are based upon 110% of the outstanding debt balance, so the
future annual rentals are expected to decline during the lease terms.
ADDITIONAL TRANSACTIONS
On September 27, 1996, Gordon Jensen Health Care Association, Inc. (Gordon
Jensen) returned approximately 400,000 shares of stock in the Company which had
a fair market value of $3,000,000 in payment of Gordon Jensen's debt of
$2,982,000 due to the Company. The retirement of these shares reduced
stockholders' equity of the Company by $3,000,000.
In 1997, the Company received a guarantee fee of $500,000 for guarantee of
Contour's $10,500,000 note payable which arose in connection with its
acquisition of Atlantic Medical. As payment, the Company received 100,000
shares of Contour common stock. Contour's note payable was paid off in January,
1997 and the guarantee was released.
As of June 30, 1997 the Company had guaranteed debt in the amount of
approximately $30,000,000 related to eight facilities of affiliates which the
Company leases or manages. The debt is collateralized by the facilities, bears
interest ranging from approximately 10% to 11.5% with due dates through 2007.
The Company was paid fees of $150,000 by affiliates in connection with
locating financing for three facilities in 1996. These fees were included in
interest income on the accompanying statements of income.
The Company has service and consulting agreements whereby In-House provides to
facilities therapy and case management for a fixed monthly fee plus a charge
per treatment unit provided. In 1997, the Company purchased approximately
$5,129,000 or 77% of the total sales of In-House, and the Company's account
payable to In-House of $1,528,000 was 49% of the total accounts receivable of
In-House. For 1996, total sales and accounts receivable of In-House related to
the Company.
4. ACCOUNTS RECEIVABLE:
Patient accounts receivable and net patient service revenue include amounts
estimated by management to be payable by Medicaid and Medicare under the
provisions of payment formulas in effect. Medicaid and Medicare programs
accounted for approximately 72% and 68% of net patient service revenue during
1997 and 1996, respectively.
The Company grants credit without collateral to its patients most of whom are
local residents of the respective nursing home and retirement facilities and
are insured under third-party payor agreements. The mix of receivables from
patients and third party payors is as follows:
June 30,
1997 1996
Medicaid $17,452,025 $10,644,368
Medicare 9,728,258 4,304,368
Other third-party payors 1,084,008 1,598,816
Patients 12,315,451 3,113,145
Trade receivables - Contour 7,811,635 2,595,083
48,391,377 22,255,780
Allowance for doubtful accounts 8,000,000 3,410,000
$40,391,377 $18,845,780
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In the opinion of management, any differences between the net revenue recorded
and final determination will not materially affect the consolidated financial
statements.
The activity in the allowance for doubtful accounts is as follows:
June 30,
1997 1996 1995
Beginning of Period $3,410,000 $ -- $ --
Provision 2,982,063 3,423,117 --
Other Additions-Contour 1,995,386 -- --
Write Offs (387,449) (13,117) --
End of Period $8,000,000 $3,410,000 --
The increase in the allowance for doubtful accounts of Contour reflects an
adjustment to the purchase price allocation for Contour's acquisition of
Atlantic Medical and its subsidiaries. The adjustment was required to reduce
acquired trade receivables, principally due from Medicare and Medicaid, to their
net realizable value.
5. NOTE RECEIVABLE:
On February 7, 1996, the Company loaned $500,000 to an unaffiliated company.
The note, plus interest at 9% per annum, was due on February 7, 1997 and was
collateralized by a first lien on a 38-bed nursing home in Atlanta, Georgia.
This note was paid in full with interest on May 15, 1997.
6. CHANGE IN ACCOUNTING FOR SUPPLIES INVENTORY:
During the year ended June 30, 1996, the Company changed its method of
accounting for facility supplies inventory from expensing when purchased to
capitalizing and expensing as used. The Company believes that this change is
preferable in the circumstances because it more closely matches inventory costs
with net patient service revenue. In connection with the capitalization
of facility supplies inventory at June 30, 1996, the Company recorded
additional inventory and reduced supplies expense by approximately $1.0
million, of which approximately $600,000 related to inventory on hand as of
June 30, 1995. Accordingly, the cumulative effect of this change in accounting
principle on beginning retained earnings has been shown, net of tax, as a
separate component of the statement of operations for the year ended June 30,
1996. Although the cumulative effect on retained earnings at June 30, 1995
resulting from the change can be determined, the pro forma effects of
retroactive application cannot be computed for individual prior periods.
Accordingly, net income and income per common share computed on a pro forma
basis have not been presented for the years ended June 30, 1995 and 1994.
7. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following:
Estimated
Useful
Lives 1997 1996
Land - $ 8,330,565 $ 7,184,001
Buildings 30 107,901,652 83,281,050
Equipment 5-10 16,115,893 12,179,912
Leasehold improvements 5-10 3,373,755 2,193,228
Buildings and equipment under
capital leases 5-30 18,642,560 8,111,801
154,364,425 112,949,992
Less accumulated depreciation 13,897,697 8,518,084
140,466,728 104,431,908
Construction in progress 10,025,493 6,988,578
Net property and equipment $150,492,221 111,420,486
Construction in progress, consisting of the development of four facilities,
includes approximately $607,000 and $605,000 of capitalized interest costs as
of June 30, 1997 and 1996, respectively. The total contract price of
construction in progress was approximately $13,500,000 for the year ended June
30, 1997.
Substantially all property and equipment is pledged as collateral for long-term
debt.
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8. DEFERRED LEASE AND LOAN COST:
In connection with the execution of certain lease transactions and financing of
acquisitions, the Company incurred lease and loan commitment fees, which are
included in deferred lease and loan costs in the accompanying balance sheets,
as follows:
June 30,
1997 1996
Lease cost:
Affiliated $ 2,000,000 $ 500,000
Non-affiliated 5,831,968 1,801,619
Loan cost:
Affiliated 410,000 410,000
Non-affiliated 6,414,978 5,800,288
14,656,946 8,511,907
Less accumulated amortization 1,591,187 846,016
Net deferred lease and loan cost 13,065,759 $7,665,891
9. SHAREHOLDERS' EQUITY:
STOCK PURCHASE WARRANTS
During the year ended June 30, 1997, the Company issued warrants to an
investment banker and consultants to purchase 250,000 shares of its common
stock at prices ranging from $6.96875 to $9.25 per share. The warrants were
exercisable at varying dates through June 1999. None of the warrants were
exercised during the year ended June 30, 1997.
The Company has issued Class A warrants in connection with a private offering
and Class B and Class C warrants in connection with an offer to Class A warrant
holders to convert their warrants. The Class A and Class C warrants are
exercisable at $1.00 per warrant, the Class B warrants are exercisable at $6.00
per warrant. At any time during the period the warrants are exercisable, the
Company may redeem the warrants at $.05 per warrant upon 45 days written notice
in the event certain listing and registration requirements are achieved, and the
closing bid price of the common stock exceeds $7.00 per share for the Class A
and Class C Warrants, and $10.00 per share for the Class B Warrants, for 20 of
30 consecutive trading days. During the year ended June 30, 1997, Class A
Warrants were exercised to purchase approximately 136,180 shares of common stock
and Class C Warrants were exercised to purchase approximately 8,692 shares of
common stock. As of June 30, 1997, there were Class A warrants outstanding which
entitle the holders to purchase 101,581 shares of common stock, Class B warrants
outstanding which entitle the holders to purchase 426,432 shares of common stock
and Class C Warrants outstanding which entitle the holders to purchase 186,956
shares of common stock.
STOCK OPTIONS
Stock option plans
In October 1995 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation." This new standard defines a fair value based method of
accounting for an employee stock option or similar equity instrument. This
statement gives entities a choice of recognizing related compensation expense
by adopting the new fair value method or to continue to measure compensation
using the intrinsic value approach under Accounting Principals Board (APB)
Opinion No. 25, the former standard. If the former standard for measurement is
elected SFAS No. 123 requires supplemental disclosure to show the effects of
using the new measurement criteria. This statement is effective for the
Company's 1997 fiscal year. The Company intends to continue using the
measurement practices prescribed by APB Opinion No. 25, and accordingly, this
pronouncement will not affect the Company's financial position or results
of operations.
In December 1993, the Company adopted the 1993 Stock Option Plan (the "Plan").
A total of 1,682,625 shares of the Company's common stock have been reserved
for
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issuance under the Plan. Under the Plan, options are granted at an exercise
price of not less than 100% of the fair market value of the shares on the date
of grant. Certain options are exercisable immediately, while others are subject
to vesting provisions as specified by the Board of Directors on the date of
grant. Each option grant under the Plan automatically expires ten years after
the date of grant or at such earlier time as may be determined by the Board of
Directors.
The following is a summary of stock option activity and related information for
the years ended June 30:
1997 1996 1995
Weighted Avg. Weighted Avg. Weighted Avg.
Options Exercise Price Options Exercise Price Options Exercise Price
Outstanding:
Beginning 1,498,368 $6.77 1,066,818 $5.24 882,110 $4.74
Granted 364,025 $7.44 489,300 $9.90 239,138 $7.42
Exercised (246,973) $4.59 (22,076) $4.65 - -
Canceled (30,810) $4.65 (35,674) $5.36 (54,430) $6.67
End of year 1,584,610 $5.40 1,498,368 $6.77 1,066,818 $5.24
Exercisable:
End of year 1,584,610 $5.40 1,498,368 $6.77 1,066,818 $5.24
Weighted average fair
value of options
granted during the
year: $6.72 $7.56 $5.82
Exercise prices for options outstanding as of June 30, 1997 ranged from $4.65
to $10.24. The weighted average remaining contractual life of those options is
7.35 years.
Because the Company has adopted the disclosure-only provisions of SFAS No. 123,
no compensation cost has been recognized for the stock option plans. Had
compensation cost for the Company's stock option plan been determined based on
the fair value at the grant date of the awards consistent with the provisions
of SFAS No. 123, the Company's net earnings and earnings per share would have
been reduced to the pro forma amounts indicated below:
1997 1996
Net income (loss) as reported $(7,535,810) 1,746,808
Net loss - pro forma net (8,908,810) (513,192)
Loss per share - as reported (.71) (.05)
Loss per share - pro forma (.81) (.25)
The fair value of each option grant is estimated on the date of grant using
Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1996 and 1995; dividend yield of 0%, expected
volatility of 66%, risk-free interest rates of 6.0% for 1997 and 5.4% for 1996
and expected lives of four years for 1996 options and five years for 1995
options.
PREFERRED STOCK
As of June 30, 1997, the Company has authorized 40,000,000 shares of preferred
stock and has designated the following series of preferred stock:
- - SERIES AA REDEEMABLE CONVERTIBLE PREFERRED STOCK
300,000 shares of Series AA Redeemable Convertible Preferred Stock are
authorized. These shares were issued in connection with the acquisition of a
majority interest in Contour. Holders of the Series AA Redeemable Convertible
Preferred Stock are entitled to receive cumulative dividends of $1.00 per share
(10%) annually, and are convertible into common stock at any time at the rate of
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5.5125 shares of common stock for each six shares of Series AA Redeemable
Convertible Preferred Stock. Each share is entitled to one vote and has a
preferred rate of $10.00 per share upon voluntary or involuntary liquidation,
dissolution, or winding up of affairs of the Company.
The Company may redeem shares of Series AA Redeemable Convertible Preferred
Stock, in whole or in part, at any time at its option at a price of $10.00 per
share plus any unpaid dividends (the "Redemption Price"). In addition, to the
extent that such funds are legally available, the Company is required to
redeem, at the Redemption Price, at least 20% of each holder's initial number
of shares of Series AA Redeemable Convertible Preferred Stock by September 30,
1995; 40% by September 30, 1996; 60% by September 30, 1997; 80% by September
30, 1998; and 100% by September 30, 1999. In the event that a holder of Series
AA Redeemable Convertible Preferred Stock shall have converted a portion of his
shares into common stock, such converted shares shall be counted toward the
redemption requirement and shall be deemed redeemed for the purposes of the
mandatory redemption requirement. In addition, in the event that the Company
fails to pay any dividend on the Series AA Redeemable Convertible Preferred
Stock within 30 days of the due date, the Company is required to redeem all of
the outstanding Series AA Redeemable Convertible Preferred Stock. During the
year ended June 30, 1996, the Company redeemed 60,000 shares of Series A
Redeemable Preferred Stock.
- - SERIES A CONVERTIBLE PREFERRED STOCK
2,000,000 shares of Series A Convertible Preferred Stock, par value $.10 per
share, are authorized. Each share is entitled to 10 votes and has a preference
rate of $.01 per share with no dividend rights. 750,000 shares of Series A
Preferred Stock were issued in connection with a 1992 acquisition transaction
between the Company and Capitol Care Management Company, Inc. The preferred
shares were converted into common stock in 1994 and 1995.
- - SERIES C CONVERTIBLE PREFERRED STOCK
1,000,000 shares of Series C Convertible Preferred Stock are authorized. Each
share is entitled to one vote per share and had a preference rate of $1.00 per
share with no dividend rights.
The shares of Series C Convertible Preferred Stock were converted in 1994 into
common stock.
- - SERIES E CONVERTIBLE PREFERRED STOCK
1,000,000 shares of Series E Convertible Preferred Stock (the "Series E") are
authorized. These share were sold in an offering to foreign investors in April
1996 at $10.00 per share. Holders of the Series E have no voting rights except
as required by law, and have liquidation preference of $10.00 per share plus 4%
per annum from the date of issuance. The shares of Series E are convertible
into shares of common stock at a conversion price of $11.55 or 85% of the
average closing bid price for the five trading days prior to the date of
conversion, whichever is lower (but no lower than $5.00). At the option of the
holder of the Series E shares, 50% of the shares can be converted to common
shares after 45 days from the date of issuance with the remaining 50% available
for conversion after 75 days from the date of issuance. At the time of
conversion the holder is also entitled to additional shares equal to $10.00 per
share of Series E multiplied by 8% per annum form the date of issuance divided
by the applicable conversion price.
The Company has accounted for the Series E in accordance with Emerging Issues
Task Force Consensus D-60. As a result, at the date of issuance, $1,996,777 of
the proceeds were considered imputed dividends and allocated to additional
paid-in capital. This amount was recognized as preferred dividends over the
period from the date of issuance to the earliest date of conversion permitted
by the terms of the Series E. At June 30, 1997, the entire amount of the
imputed preferred dividends had been recognized. During the year ended June 30,
1997, the remaining 942,500 Series E shares were converted into 1,318,533
shares of common stock.
- - SERIES F CONVERTIBLE PREFERRED STOCK
1,000,000 shares of Series F Convertible Preferred Stock (the "Series F") are
authorized. These share were sold in an offering to foreign investors in April
1996 at $10.00 per share. Holders of the Series E have no voting rights except
as required by law, and have liquidation preference of $10.00 per share plus 4%
per annum form the date of issuance. The shares of Series F are convertible
into shares of common stock at a conversion price of $7.425 or 85% of the
average closing bid price for the five trading days prior to the date of
conversion, whichever is lower. At the option of the holder of the Series F
shares, one-third of the shares can be converted to common shares after 60 days
from the date of issuance, one-third of the shares after 90 days from the date
of issuance, and the remaining one-third after 120 days from the date of
issuance. At the time of conversion the holder is also entitled to additional
shares equal to $10.00 per share of Series F multiplied by 8% per annum form
the date of issuance divided by the applicable conversion price.
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The Company has accounted for the Series F in accordance with Emerging Issues
Task Force Consensus D-60. As a result, at the date of issuance, $1,996,777 of
the proceeds were considered imputed dividends and allocated to additional
paid-in capital. This amount was recognized as preferred dividends over the
period from the date of issuance to the earliest date of conversion permitted
by the terms of the Series F. At June 30, 1997, the entire amount of the
imputed preferred dividends had been recognized. During the year ended June
30, 1997, 651,666 Series F shares were converted into 1,148,698 shares of
common stock.
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TREASURY STOCK
During the year ended June 30, 1997, the Company purchased and retired 520,326
shares of its common stock at an aggregate cost of $3,923,222.
10. LONG-TERM DEBT:
Long-term debt at June 30, 1997 and 1996 is summarized as follows:
1997 1996
Non-affiliates:
Notes payable to a real estate
investment trust ("REIT") $ 40,700,380 $ 39,623,938
Industrial development revenue bonds 22,615,000 20,060,000
Municipal revenue bonds 26,265,000 18,170,000
Housing development mortgage revenue bonds 25,795,000 21,750,000
Notes payable to banks (8.5% or prime plus
1% to 10% due through 2003) 15,780,008 3,049,012
Capitalized lease obligations 21,972,802 8,048,581
153,128,190 110,701,531
Less current maturities 11,454,059 2,220,491
$141,674,131 $108,481,040
Future maturities of debt and capital lease obligations are as follows:
Capital
Year Lease Debt Total
1998 $ 2,408,701 $ 11,980,406 $ 14,389,107
1999 2,416,138 2,538,317 4,954,455
2000 2,423,272 2,963,682 5,386,954
2001 2,430,508 3,455,739 5,886,247
2002 2,437,846 3,552,304 5,990,150
Thereafter 36,798,942 106,664,940 143,463,882
Total 48,915,407 131,155,388 180,070,795
Less amount representing imputed
interest at 11% to 12% 26,942,605 - 26,942,605
Total obligations $ 21,972,802 $131,155,388 $153,128,190
The notes payable to the REIT consist of mortgage notes on sixteen facilities.
Principal amounts are amortized over a 25-year period with monthly installments
payable through 2006. Interest ranges on these notes from 9.75% to 11.28% and
increases annually at rates ranging from 0.1% to 0.25%. The notes are
collateralized by property and equipment of the sixteen facilities.
The industrial development revenue bonds consist of bonds on two facilities: a
retirement community located in San Destin, Florida and Atrium, a nursing and
retirement community located in Jacksonville, Florida. The San Destin facility
serves as collateral for $11,925,000 of bonds payable to the Walton County
Industrial Development Authority. Principal payments range from $150,000 to
$1,300,000 annually through 2019 and interest accrues at 10.5%. The Atrium
facility serves as collateral for three City of Jacksonville Industrial
Development Revenue Refunding bonds totaling $10,690,000. Principal payments
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range from $65,000 to $375,000 annually through 2024, $6,060,000 due in 2011,
and interest accrues at rates ranging from 6.5% to 11.5%.
The housing development mortgage revenue bonds include approximately
$18,525,000 of bond debt assumed by the Company in connection with the
acquisition of Encore. The bond debt, which is collateralized by property and
equipment of five facilities, includes Okaloosa County, Florida Retirement
Rental Housing Revenue Series A bonds totaling $7,925,000 with semi-annual
interest payments at 10.75% due in 2003 and Ohio Rental Housing Revenue Series
A bonds totaling $9,800,000 with semi-annual interest at 10.38% due in 2009.
The remainder of the housing development mortgage revenue bonds consist of
bonds totaling $8,070,000 collateralized by three facilities with interest
ranging from 7% to 11.0% with maturities through 2026. The housing development
mortgage revenue bonds require annual principal payments ranging from $150,000
to $2,000,000.
The municipal revenue bonds, which are collateralized by property and equipment
of seven facilities and require annual principal payments ranging from $370,000
to $1,635,000, consist of the following:
Dade City, Florida Series A and B bonds totaling $6,395,000, with principal
payments due through 2025 and interest ranging from 6.75% to 8%.
Highland County Series A and B bonds totaling $4,230,000, with principal
payments due through 2024 and interest ranging from 6.5% to 8.5%.
City of Dublin Series A and B bonds totaling $2,740,000, with principal
payments due through 2024 and interest ranging from 8.5% to 10.5%
Rome-Floyd County Development Authority Revenue Series A and B bonds totaling
$2,655,000, with principal payments due through 2011 and interest rates ranging
from 7.5% to 10%.
Americus-Sumter Series A and B bonds totaling $1,900,000, with principal
payments due through 2026 and interest rates ranging from 8.0% to 10.25%.
Houston County Series A and B bonds totaling $5,650,000 with principal payments
due through 2026 and interest rates ranging from 7% to 8.4%.
Sumner, TN Series A and B bonds totaling $2,695,000 with principal payments due
through 2010 and interest rates ranging from 10.5% to 12.5%.
The Company recorded an extraordinary charge of $490,000, net of income tax
benefit of $300,000, associated with the early extinguishment of approximately
$9.2 million of long-term debt on the Company's retirement facility located in
Destin, Florida.
In connection with the bond indentures, the Company is required to meet certain
covenants, including monthly sinking fund deposits, adequate balances in debt
service reserve funds, timely payment of tax obligations and adequate insurance
coverage. At June 30, 1997 and 1996, the Company was in default under several
of these covenants including the failure to make monthly payments to the bond
sinking funds for certain of these facilities and inadequate debt service
reserves for certain of the facilities. The Company is also delinquent with
regard to the payment of property taxes at several facilities. The bond
indentures underlie industrial development revenue bonds, municipal revenue
bonds and housing development mortgage bonds that, together, totalled
approximately $51,300,000 at June 30, 1997. The following table includes the
bonds that were in default as of June 30, 1997:
AMOUNT
BOND TRUSTEE OUTSTANDING
---- -------------- -----------
Jacksonville Series 1996....................... Sentinel Trust $ 8,735,000
Jacksonville Series 1994....................... Sentinel Trust 1,955,000
Dublin, Georgia IDA Series A and B............. Sentinel Trust 2,740,000
Highland County IDA Series A and B............. Sentinel Trust 4,230,000
Cave Springs 1994.............................. Sentinel Trust 1,650,000
Dade City, Florida............................. Sentinel Trust 6,395,000
Rome-Floyd 1996 Series A and B................. Sentinel Trust 2,655,000
Walton County.................................. Sentinel Trust 11,925,000
Americus-Sumpter PDA Series A and B............ Sentinel Trust 1,900,000
Cave Springs 1996.............................. Sentinel Trust 1,555,000
Jackson, Tennessee 1993........................ Sentinel Trust 1,600,000
Jackson, Tennessee 1989........................ Sentinel Trust 3,265,000
Sumner, Tennessee 1989 Series A and B.......... Sentinel Trust 2,695,000
-------------- -----------
TOTAL:............................... $51,300,000
The Company generally has a grace period of 30 days to cure defaults after
receipt of written notification from the bond trustee, and no such written
notification has been received. The Company believes that it is probable that,
upon receipt of such written notification, the Company could cure such defaults
within the 30 day grace period.
The trustees have not called the bonds in the past for these defaults and
management does not foresee the bonds being called at this time. All
semi-annual interest and principal payments have been made in a timely fashion.
11. LINES OF CREDIT:
The Company maintains various lines of credit with interest rates ranging from
prime plus .25% to prime plus 1.25%. Available borrowings under the lines of
credit totaled $14,050,000 and $5,075,000 for the years ended June 30, 1997 and
1996, respectively. Total borrowings against the lines of credit were
$9,935,036 and $3,556,535 at June 30, 1997 and 1996, respectively.
12. COMMITMENTS AND CONTINGENCIES:
OPERATING LEASES
The Company leases nursing homes and retirement care facilities from
unaffiliated entities (in addition to leasing eleven nursing and retirement
facilities from affiliated entities. (see Note 3). The lease agreements
commenced on various dates with terms extending through February 2016. The
Company has options to extend most of the leases for an additional five to ten
years. The Company also leases certain facilities under agreements classified
as capital leases. These agreements include purchase options exercisable at
the Company's discretion during, or at the end of, each of the lease terms. The
capital lease agreements commenced on various dates with terms extending
through October 2008.
Included in the above agreements are seven leases whereby a sale to the lessor
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preceded the lease agreement ("sale/leaseback transaction"). The Company has
accounted for six of these sale/leaseback transactions as sales with no gains
or losses recognized on the transactions. The remaining sale/leaseback
transaction was capitalized and included a deferred gain of $381,370 to be
amortized over the term of the lease. Future minimum payments, by year and in
the aggregate, under noncancelable operating leases with initial or remaining
terms of one year or more consist of the following at June 30, 1997:
Year Amount
1998 $ 19,484,267
1999 19,264,153
2000 19,243,829
2001 19,159,033
2002 18,710,901
Future years 119,850,928
Total $215,713,111
The Company's rental expense under operating leases for nursing homes and
retirement care facilities amounted to approximately $13,200,000, $6,040,000
and $5,750,000 for the years ended June 30, 1997, 1996 and 1995, respectively.
The Company leases office space under a noncancelable operating lease which
expires in October 2000. At June 30, 1997, minimum future rental payments under
the noncancelable lease were as follows:
Year Amount
1998 $325,455
1999 341,683
2000 358,673
2001 120,509
Total amounts paid for rental of office facilities totaled approximately
$306,000, $317,000, and $60,000 for the years ended June 30, 1997, 1996 and
1995, respectively.
OTHER
The Company has guaranteed 20% to 100%, or approximately $9,000,000, of debt on
six facilities owned by unaffiliated entities that are currently operated by
the Company under operating leases.
The Company is involved in legal proceedings arising in the ordinary course of
business. In addition, the Company is in dispute with the Internal Revenue
Service ("IRS") concerning the application of certain income and payroll tax
liabilities and payments. The IRS contends that the Company is delinquent in the
payment of certain taxes and has assessed taxes, penalties and interest in
connection with the alleged underpayment of approximately $1.2 million. The
Company contends that the IRS has misapplied payments between income and payroll
taxes and between the Company and its affiliates. Based on the opinion of
counsel handling the matter that it is unlikely that a settlement of the dispute
would require a payment materially greater than $400,000 plus interest, the
Company has estimated and accrued in the accompanying financial statements
$400,000 for ultimate settlement of this matter. 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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13. INCOME TAXES:
The components of the provision for income taxes were as follows:
Year ended June 30,
1997 1996 1995
Current:
Federal $(1,097,110) $2,671,891 $2,659,000
State (240,648) 501,600 499,000
(1,337,758) 3,173,491 3,158,000
Deferred (benefit):
Federal (846,568) (1,571,500) 221,928
State (158,930) (294,900) 39,164
$(1,005,498) (1,866,400) 261,092
Total income tax provision $(2,343,256) $1,307,091 $3,419,092
The income tax provisions (benefit) included in the consolidated statements of
income are as follows:
1997 1996 1995
Income before extraordinary item and
cumulative effect of change in
accounting principle $(2,343,256) $1,307,091 $3,419,092
Cumulative effect of change
in accounting principle - 228,000 -
Extraordinary Item (300,000) - -
(2,643,256) $1,535,091 $3,419,092
Deferred income taxes are provided to reflect temporary differences between
financial and income tax bases of assets and liabilities. The sources of the
temporary differences and their effect on the net deferred taxes at June 30,
1997 and 1996 are as follows:
1997 1996
Current deferred taxes:
Deferred tax assets:
Workers' compensation accrual $1,936,000 $1,062,900
Provision for losses on accounts
receivable 2,039,200 811,300
Health insurance accrual 227,800 227,800
Net operating loss 444,500 355,100
Total current deferred tax asset 4,647,500 2,457,100
Less valuation allowance (444,500) (355,100)
4,203,000 2,102,000
Deferred tax liability - other (137,569) (93,570)
Net current deferred tax asset 4,065,431 $2,008,430
Noncurrent deferred taxes:
Deferred tax asset - deferred gain 276,700 $ 276,700
Deferred tax liabilities:
Property and equipment 673,900 352,600
Deferred lease cost 568,200 201,100
Other 133,529 -
Net noncurrent deferred tax
liability $1,098,929 $ 277,000
The provision for income taxes for the year ended June 30, 1996 and 1995 varies
from the amount determined by applying the Federal statutory rate to pretax
income as a result of the following:
1997 1996
Income tax expense (benefit)
at federal statutory rate (3,310,600) $1,115,130
Nondeductible tax penalties 305,800 417,700
State income taxes, net of
federal tax benefit (192,000) 331,100
Other, net 668,801 (556,839)
$(2,527,999) $1,307,091
The primary difference between the actual income tax rate of approximately 40%
for the year ended June 30, 1995 and the Federal income tax rate of 34% is the
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amount paid for state income taxes.
14. FAIR VALUES OF FINANCIAL INSTRUMENTS AND INVESTMENTS:
The following methods and assumptions were used by the Company in estimating
the fair value of its financial instruments.
CASH AND CASH EQUIVALENTS
The carrying amount reported in the balance sheet for cash and cash equivalents
approximates fair value because of the short maturity of these instruments.
MARKETABLE EQUITY SECURITIES
The carrying amount reported in the balance sheet for marketable equity
securities approximates fair value. All marketable equity securities are
classified as "available for sale" for accounting purposes and, therefore, are
carried at fair value with unrealized gains and losses recorded directly in
equity. There were no significant unrealized gains or losses at June 30, 1996.
NOTES RECEIVABLE
The carrying amount approximates fair value for the notes receivable based on
the fair value being estimated as the net present value of cash flows that
would be received on the notes over the remaining notes' terms using the
current market interest rates rather than stated interest rates.
SHORT- AND LONG-TERM DEBT
The fair value of all debt has been estimated based on the present value of
expected cash flows related to existing borrowings discounted at rates
currently available to the Company for debt with similar terms and remaining
maturities.
The cost basis and estimated fair values of the Company's financial instruments
at June 30 are as follows:
June 30, 1997
Carrying Fair
Amount Value
Financial assets:
Cash and cash equivalents $ 3,637,878 $ 3,637,878
Financial liabilities:
Short-term debt 21,389,095 21,389,095
Long-term debt 141,674,131 128,718,000
June 30, 1996
Carrying Fair
Amount Value
Financial assets:
Cash and cash equivalents $ 45,365 $ 45,365
Marketable equity securities 33,645 33,645
Financial liabilities:
Short-term debt 5,777,026 5,777,026
Long-term debt 108,481,040 112,338,000
As of June 30, 1995, the carrying amount of all financial instruments
approximated fair value.
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15. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
As described in Note 2, the Company acquired certain businesses during 1997.
The fair value of the assets acquired was $30,411,391 and the fair value of the
liabilities assumed was $11,603,614, which resulted in net cash payments of
$18,807,777.
As described in Note 2, the Company acquired certain businesses during 1996.
The fair value of assets acquired was $69,826,951 and the fair value of
liabilities assumed was $47,888,438, which resulted in net cash payments of
$21,938,513.
During 1997, the Company entered into approximately $14,000,000 of capital
lease agreements.
Contour acquired Atlantic Medical Supply Company, Inc. and sold CFI with
noncash transactions of $16,073,970 and $624,252, respectively.
Cash paid for interest during the years ended June 30, 1997, 1996 and 1995 was
$13,851,484, $6,561,954, and $1,172,883, respectively.
Cash paid for income taxes during the years ended June 30, 1997, 1996 and 1995
was $3,265,632, $3,561,089, and $829,292, respectively.
Dividends on preferred stock of $15,000 and $1,996,777 were accrued but not
paid at June 30, 1996.
Dividends on preferred stock of $1,966,777 were accrued but not paid at June
30, 1997.
During 1997 and 1996, approximately $13,730,000 and $8,112,000, respectively,
of lease assets and obligations were capitalized.
16. ACCRUED EXPENSES:
Accrued expenses consisted of the following as of June 30:
1997 1996
Payroll and payroll taxes $ 5,808,124 $ 3,587,217
Interest 2,129,164 1,868,805
Workers Compensation 5,275,000 2,975,000
Other 5,204,970 2,885,008
Total $18,417,258 $11,316,030
17. EMPLOYEE RETIREMENT PLAN:
During the year ended June 30, 1996, the company established a defined
contribution retirement plan. Employees qualify for the plan upon the
completion of three months of service with the Company and reaching the age of
twenty-one. Company contributions to the plan represent a matching percentage
of certain employee contributions. The matching percentage is subject to
management's discretion based upon consolidated financial performance. For the
years ended June 30, 1997 and 1996, the Company has not made any contributions
to the plan.
18. BUSINESS SEGMENT INFORMATION:
Retirement Care Associates; Inc. and Subsidiaries is a long-term health care
provider which engages in two distinct business segments. The Retirement Care
Associates entity operates and manages nursing homes and retirement facilities
throughout the Southeast. As of June 30, 1997, approximately 11,100 beds were
owned or operated by this entity.
The Contour entity manufacturers a full line of orthopedic care and
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rehabilitation products and distributes them to nursing facilities throughout
the Southeast. The Contour entity was acquired in 1995. The following
represents business segment information for the years ended June 30, 1997,
1996 and 1995.
1997 1996 1995
Operating revenues:
Retirement Care Associates $204,612,388 $124,951,954 $76,656,829
Contour Medical 48,615,473 9,059,415 2,959,224
253,227,861 $134,011,369 $79,616,053
Depreciation and amortization
expense:
Retirement Care Associates $ 5,653,472 $ 2,806,637 $ 1,051,842
Contour Medical 861,241 600,349 76,341
$ 6,514,713 $ 3,406,986 $ 1,128,183
Identifiable assets:
Retirement Care Associates $227,984,979 $165,094,536 $72,644,179
Contour Medical 27,385,987 12,397,751 7,613,367
$255,370,966 $177,492,287 $80,257,546
Capital expenditures:
Retirement Care Associates $ 11,764,903 $ 11,741,135 $ 5,763,553
Contour Medical 969,486 749,163 316,057
$ 12,734,389 $ 12,490,298 $ 6,079,610
Operating Income
Retirement Care Associates $ 3,006,819 $ 8,540,815 $ 8,865,388
Contour Medical 694,303 839,202 151,820
$ 3,701,122 $ 9,380,017 $ 9,017,208
19. SUBSEQUENT EVENTS
The board of directors of RCA has unanimously approved and adopted the
Agreement and Plan of Merger and reorganization, dated as of February 17, 1997,
as amended by Amendment No. 1 thereto dated as of May 27, 1997, and also
amended by Amendment No. 2 thereto dated as of August 21, 1997, with Sun
Healthcare Group, Inc. ("Sun"). The proposed RCA merger is contingent upon,
among other things, the approval of the holders of the requisite number of
shares of Sun Common Stock and RCA Capital Stock, which is described in a Joint
Proxy Statement/Prospectus/Information Statement. The proposed RCA Merger will
be consummated as soon as practicable after such approvals are obtained and the
other conditions to the RCA Merger are satisfied or waived.
The Company renewed debt of $9,750,000 and obtained $5,000,000 of additional
debt with Sun Healthcare Group, Inc. on July 10, 1997. Interest accrues at
rates ranging from 11% to 12% and would increase from 15% to 16% during any
period of default. Principal is due 120 days following the termination of the
agreement or merger with Sun.
Subsequent to June 30, 1997, the Company became obligated on approximately
$2,500,000 bonds to construct a twenty-five unit addition to its Jackson,
Tennessee facility.
20. ADJUSTMENTS TO 1996 FINANCIAL STATEMENTS
As discussed in Note 19, on February 17, 1997, following a series of meetings
and negotiations, the company agreed to be acquired by Sun Healthcare Group,
Inc. (Sun) through an exchange of shares of Sun for shares of the Company.
During due diligence procedures associated with the transaction, certain
adjustments to previously issued financial statements were discovered to be
required. Those adjustments, together with additional amounts, have been
applied to the financial statements for the year ended June 30, 1996 as
restatements and corrections as follows:
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Additional provision for uncollectible accounts $1,705,000
Additional accrual for claims incurred, but not
reported for self-insured worker's compen-
sation and health care 3,400,000
Accrual for compensated absences 300,000
Adjustment of previously recorded inventory 809,219
Adjustment to lease expense 530,000
6,744,219
Less:
Adjustment to income taxes (2,921,219)
Decrease in net income $3,823,000
Decrease in net income per share $ .34
21. LIQUIDITY
During the period ending June 30, 1997, the Company experienced a significant
net operating loss and at the same time a decline in liquidity, resulting from
the operating loss and a heightened level of investment in new facilities.
Management believes that the operating loss is the result of a decline in the
overall census of residents and patients in the Company's facilities, together
with losses at Contour Medical, Inc. resulting from costs of consolidation of
subsidiaries acquired during the period. Closing of the merger of the Company
with Sun as discussed in Note 19 will provide access to additional sources of
liquidity as the Company's facility proceed through a combination of new
admissions to nursing facilities and set-up of retirement facilities. In the
event the merger does not take place, management's plans include a complete
reorganization of operations of the nursing home segment, assisted living
segment and Contour Medical, Inc. This reorganization plan would include new
personnel to implement increased census, develop and implement ancillary
business (i.e., pharmacy, therapy, etc.) which would be beneficial from an
operations point of view as well as increase profits for the Company. A
comprehensive plan is being developed to implement these changes if necessary.
The personnel for this plan have been identified and could be brought on board
quickly. The funds to implement this plan would be provided from a new line of
credit, sale and lease-back transactions for certain identified properties of
the Company as well as refinancing of other Company targeted facilities.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned thereunto duly authorized.
RETIREMENT CARE ASSOCIATES, INC.
Dated: April 8, 1998
By: /s/ Darrell C. Tucker
---------------------------------
Darrell C. Tucker, Treasurer