U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1933
For the fiscal year ended: December 31, 1998
Commission file number: 0-24110
NEWCARE HEALTH CORPORATION
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(Exact name of Registrant as specified in its Charter)
Nevada 86-0594391
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6000 Lake Forrest Drive, Suite 200, Atlanta, Georgia 30328
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(Address of principal executive offices, including zip code)
(404) 255-7500
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(Registrant's telephone number)
Securities Registered Pursuant to Section 12(b) of the Act: None.
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $.02 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 Exchange Act during the
preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate 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. [ ]
As of March 2, 1999, 12,128,525 shares of the Registrant's common stock were
outstanding, and the aggregate market value of the shares held by
non-affiliates was approximately $10,200,000.
DOCUMENTS INCORPORATED BY REFERENCE: None.
PART I
ITEM 1. BUSINESS
THE COMPANY
NewCare Health Corporation (the "Company") provides senior residential
care services including long-term care and assisted living/independent living
services. The Company's long-term care facilities provide skilled nursing
care and ancillary services to patients, while its assisted living/independent
living facilities provide services to residents in need of varying degrees of
assistance with the activities of daily living.
Beginning in August 1997, the Company also entered the business of
operating and managing hospitals through NewCare Hospital Corporation
("NCHC"), a majority owned subsidiary. On August 1, 1997, NCHC purchased
substantially all of the assets of Meadowbrook Rehabilitation Hospital in
Gardner, Kansas. NCHC also manages one not-for-profit hospital.
As of March 1, 1999, the Company owned or leased and operated 24 long-
term care facilities with 2,133 skilled nursing beds, and three assisted
living/independent living facilities with 294 units. These facilities are
located in Alabama, Georgia, Florida, Kansas, Massachusetts and Texas. As of
that date, the Company also managed three long-term care facilities and six
assisted living facilities in Georgia, Florida and Tennessee. On the same
date, NCHC owned one hospital with 84 beds in Kansas and managed one hospital
in Texas.
The Company's principal offices are located at 6000 Lake Forrest Drive,
Suite 200, Atlanta, Georgia 30328, and its telephone number is (404) 255-7500.
BACKGROUND
The Company was incorporated in Nevada on February 17, 1987, under the
name Camelback Capital, Inc. primarily for the purpose of raising capital and
acquiring or merging with a private business. The Company completed its
initial public offering on December 31, 1987. During the period from 1988
until 1993, the Company conducted minimal business activities, and during
1993, the Company terminated all business activity except for the search for a
private company to acquire or merge with.
ACQUISITION OF NEWCARE, INC.
In April 1994, the Company acquired 95.17% of the issued and outstanding
common stock of NewCare, Inc. ("NewCare"). NewCare was engaged in the
business of owning, managing and operating skilled long-term care facilities.
In connection with the transaction with NewCare, the Company amended its
Articles of Incorporation to (1) effect a one for twenty (1 for 20) reverse
stock split, (2) adjust the par value of the Common Stock to $.02 per share to
reflect the reverse stock split, and (3) change the name of the Company to
NewCare Health Corporation. All financial information and share data in this
Report give retroactive effect to the reverse split.
Unless the context otherwise requires, the term "Company" as used herein
refers to the Company and its subsidiaries.
2
ACQUISITION AND SUBSEQUENT DISPOSITION OF SPECTRUM HEALTH SERVICES, INC.
On September 1, 1994, the Company acquired all of the outstanding common
shares of Spectrum Health Services, Inc.("Spectrum"). Spectrum sold medical
supplies and equipment, enteral products, wound care medication and kits,
respiratory therapy equipment and supplies, and orthopedic rehabilitation
supplies. It also provided services for billing, medical records computer
software, assessments software, referenced care plans, inventory supply
systems as well as providing educational programs, in-servicing and other
procedures in nursing, consulting and care plans. Spectrum had operations in
Florida, Georgia, Kansas and Texas.
On September 1, 1994, the Company also acquired all of the outstanding
shares of Spectrum Infusion Services, Inc. Spectrum Infusion Services, Inc.
was then merged into Spectrum. The Spectrum Infusion Services division
provided specialized products to long-term care facilities for patients that
require prescriptions for dispensing by pharmacists. The Spectrum Infusion
Services division provided products, equipment and disposable supplies
required for IV antibiotic hydration, pain management and chemotherapies.
These supplies and services were provided to long-term care facilities that in
turn dispensed them to the patients.
On October 24, 1996, the Company sold all of the operating assets of
Spectrum for cash and the assumption of certain debts to NCS Healthcare of
Florida, Inc. ("NCS"). The consideration paid by NCS was approximately
$10,167,000. Of this amount, $7,795,000 was paid in cash, $680,000 was held
in escrow pending the outcome of inventory, accounts receivable, and certain
other adjustments and approximately $1,841,000 was in the form of liabilities
assumed by NCS. In connection with the transaction, the Company paid
approximately $531,000 of the cash proceeds to retire certain Spectrum
obligations and borrowings that were not assumed by NCS and to pay certain
costs of the transaction.
ACQUISITION OF CIMERRON HEALTH CARE, INC.
On May 22, 1995, the Company acquired all of the outstanding shares of
Cimerron Health Care, Inc. ("Cimerron") from Karen Hagan. Cimerron leased one
(1) and owned three (3) skilled long-term care facilities in Georgia. In a
related agreement, Memorial Nursing Center, Inc., a subsidiary of NewCare,
acquired a skilled long-term care facility lease from Emory Nursing Center,
Inc., an affiliate of Cimerron also owned by Karen Hagan. During 1998, the
Company disposed of two of the facilities owned by Cimerron.
ACQUISITION OF PADGETT NURSING HOME
On September 15, 1995, the Company acquired through a lease Padgett
Nursing Home, a 100-bed skilled long-term care facility located in Tampa,
Florida. This facility is operated as the Central Tampa Nursing Home. In May
1997, the Company purchased this facility for $2,672,543. This purchase was
financed in the Company's $21.5 million loan transaction which closed during
May 1997.
ACQUISITION OF LONG-TERM CARE AND ASSISTED LIVING/INDEPENDENT LIVING
FACILITIES IN 1997
In May 1997, the Company entered into a lease of the Whigham Nursing
Center, a 142-bed long-term care facility in Whigham, Georgia. The current
lease on this facility expires on April 20, 2012.
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On September 16, 1997, the Company purchased all of the outstanding stock
of Wakulla Acquisition, Inc., which owns a 120-bed long-term care facility in
Crawfordville, Florida, for $1,200,000 in cash. In addition, the Company
assumed and paid off approximately $3,240,000 of existing debt on the
property. The Company financed this transaction through a loan of $4.8
million from LTC Properties, Inc. The loan is secured by a mortgage on the
long-term care facility and is due on September 1, 2007. The loan bears
interest at an initial rate of 10.83% per annum, which interest rate will
increase by 12.5 basis points on the first day of September of each calendar
year commencing on September 1, 1998. The loan is payable in monthly
installments of interest and principal based on a 25 year amortization
schedule with a balloon payment due on September 1, 2007. The Company paid
LTC Properties, Inc. a loan fee of $48,000 in connection with this
transaction.
In November, 1997, the Company purchased all of the outstanding stock of
Tyler Park Place, Inc., which is the general partner of Park Place Ltd., a
limited partnership, which owns a 118-bed long-term care facility in Tyler,
Texas. Tyler Park Place, Inc. owns a 58.8% interest in Park Place Ltd. The
Company paid $575,000 for all of the stock of Tyler Park Place, Inc., of which
$475,000 was paid in cash and $100,000 was in the form of a promissory note.
COMMENCEMENT OF HOSPITAL OPERATIONS IN 1997 AND 1998
On August 1, 1997, the Company's NCHC subsidiary purchased substantially
all of the operating assets such as furniture, equipment and inventory of the
Meadowbrook Rehabilitation Hospital located in Gardner, Kansas. The purchase
price of this acquisition was approximately $1,396,000. Also on August 1,
1997, in a separate transaction, the subsidiary acquired the building and land
where the Meadowbrook Rehabilitation Hospital is located for $3,500,000.
NCHC financed these transactions through a loan of $4.5 million from HCFP
Funding II, Inc., and approximately $396,000 from cash on hand. The loan is
in the form of a secured bridge note which is due on July 31, 1999. The note
bears interest at 3% over the prime rate and the interest is payable monthly.
NCHC paid the lender an origination fee of 1% of the loan ($45,000) and will
also pay the lender a success fee equal to the greater of (i) 10% of the
excess received from the sale, refinancing or other disposition of the
Meadowbrook Rehabilitation Hospital over $5 million, or (ii) $150,000 if the
disposition occurs within one year or $300,000 if the disposition occurs after
that time. The note is secured by all of the real estate and assets of the
hospital. During 1998, $1.5 million in principal was paid on this note.
The Meadowbrook Rehabilitation Hospital is an 84-bed speciality hospital
located in Gardner, Kansas, approximately 20 miles southeast of Kansas City,
Kansas. The facility focuses its care on acute and subacute rehabilitation
therapy, occupational therapy, speech-language pathology and respiratory
therapy.
On September 30, 1997, NCHC entered into an agreement to manage Tri-City
Hospital, a 131-bed osteopathic acute care hospital located in Dallas, Texas.
Tri-City Hospital is a private, non-profit hospital comprised of a general
acute medical/surgical hospital, offering alcohol and drug treatment services,
psychiatric services, and various clinics.
In addition, NCHC paid $25,000 for a five year option to purchase the
Tri-City Hospital for a price equal to the debt on the hospital at such time
as the option is exercised.
4
The management agreement for Tri-City Hospital had a five year term
commencing October 17, 1997. The agreement provided for a base fee of
$100,000 per month plus a performance incentive in an amount not to exceed a
cumulative total of four percent (4%) of net revenues billed per month. The
performance incentive was to be based on the accomplishment of certain
performance criteria to be agreed upon by the parties. NCHC also agreed to
make available to Tri-City Hospital during the first twelve months of the
management agreement an amount not to exceed $2 million for the purpose of
making capital improvement expenditures and for such other purposes as the
hospital and NCHC may agree.
In March 1998, the Board of Directors of Tri-City Hospital advised NCHC
that the management agreement was void or had been terminated and that the
option agreement was not valid. NCHC filed a lawsuit against Tri-City
Hospital in connection with this matter. In March 1998, the Hospital filed
for and was granted protection under Chapter 11 of the Bankruptcy Code. As
part of the Bankruptcy proceedings, NCHC agreed to accept as payment for all
amounts owed to it by the Hospital under the management agreement and as
potential damages for the contract termination, $150,000.
On September 30, 1997, the Company also entered into an agreement to
manage Princeton Hospital, a 150-bed hospital in Orlando, Florida. Princeton
Hospital is a private, non-profit general acute/medical surgical hospital
The management agreement for Princeton Hospital had a five year term
commencing October 1, 1997, and either party may terminate the agreement
without cause or penalty, effective September 30, 2000, by giving 90 days
prior written notice. The agreement provided for a base fee of $75,000 per
month plus a performance incentive in an amount not to exceed a cumulative
total of three percent (3%) of net revenues billed per month. NCHC also paid
$25,000 for a five year option to purchase the Princeton Hospital for a price
equal to the debt on the hospital at such time as the option is exercised.
The balance of this debt is currently approximately $45 million.
NCHC agreed to loan to Princeton Hospital during the term of the
management agreement an amount not to exceed $2 million for the purpose of
making capital improvement expenditures and paying its accounts payable,
payroll and other operating expenses. In November 1997, NCHC also agreed to
guarantee up to $4,100,000 in bond payments due in 1998. NCHC advanced
$2,400,000 under this provision.
In January 1999, Princeton Hospital filed for protection under Chapter 11
of the Federal Bankruptcy Laws. On March 1, 1999, the U.S. Bankruptcy Judge
approved the replacement of NCHC as manager of the Hospital. As a result of
the Bankruptcy proceedings, NCHC has taken a reserve for bad debts totaling
$1,285,810 against amounts due it from the Florida hospital for management
fees and for amounts advanced pursuant to the guarantee of certain bond
indebtedness.
During 1998, NCHC entered into an additional management agreement with
Doctors Hospital in Groves, Texas. This agreement commenced August 10, 1998
and expires initially in five years with two five year renewal options, unless
terminated by either party after the initial five year period. Monthly
management fees totaled $18,750 plus a performance incentive with a cumulative
total of 4% of net revenues. This performance incentive is based upon the
hospital achieving certain performance criteria. In addition to the above
fees, NCHC is reimbursed for payroll and related expenses as well as certain
direct costs of managing the facility. In connection with this management
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agreement, NCHC agreed to make a capital improvement loan of up to $1,000,000
during the earlier of sixty months or the expiration or termination of the
agreement. At December 31, 1998, no amounts had been advanced under this
provision.
FACILITY ACQUISITIONS IN 1998
In January 1998, the Company acquired a 124-unit assisted living facility
in New Port Richey, Florida. The purchase price for this facility was $5.9
million and was financed through a sale and leaseback transaction with LTC
Properties, Inc. The Company's lease on this facility is initially through
December 31, 2012. The Company has options to extend the lease for two
additional five year periods. The Company has no option to repurchase the
property from LTC Properties, Inc.
In January 1998, the Company also closed on the acquisition of Venice
South, a 120-bed long-term care facility in Venice, Florida. The Company
purchased this facility for $4,790,000 in a bankruptcy proceeding. The
purchase price was paid with $3,000,000 from a bridge note from HCFP Funding
II, Inc., which is secured by the property and $1,790,000 from cash on hand.
The Company also paid the lender a $45,000 loan commitment fee. In April
1998, the Company refinanced this bridge note with a long-term loan from LTC
Properties, Inc. in the amount of $4,800,000 which is being amortized over 20
years and bears interest at an initial rate of 10.17% which increases by 12.5
basis points each April 1.
Effective February 10, 1998, the Company was assigned leases on the 100-
bed Rosewood Rehabilitation and Care Center in Converse, Texas, and the 100-
bed Woodland Park nursing home in Shepherd, Texas. The Company is paying a
total of $10,400 per month during the terms of the leases for these
assignments. The leases on these facilities end May 31, 2017. The annual
rental rates on the two facilities are currently $402,000 and $420,000,
respectively, for the Converse and Shepherd, Texas facilities. These annual
rental rates increase each year based on a schedule.
Effective April 1, 1998, the Company began leasing the Pecan Manor
Nursing Home, a 60-bed long-term care facility in Statesboro, Georgia.
Effective May 1, 1998, the Company entered into a long-term lease of this
facility in a sale/leaseback transaction. The lease is for a period of 23
years at an initial monthly base rental of $18,500 plus property taxes. The
monthly base rent will increase by 2% to 3% per year.
On May 1, 1998, the Company purchased the Great Plains Rehabilitation &
Nursing Center of Olathe, a 104-bed long-term care center in Olathe, Kansas,
for $2,400,000. The source of cash for this transaction with a $2,400,000
loan from LTC Properties for the amount of the purchase price. The loan is
secured by a mortgage on the facility, payable over twenty years, and has an
initial interest rate of 10.16% which will increase by 12.5 basis points each
year.
Effective April 3, 1998, the Company began leasing the 45-bed Coffeyville
Nursing Home in Coffeyville, Kansas, and the 60-bed Salina Nursing Home in
Salina, Kansas. The lease, which covers both facilities, has an initial term
of 15 years and may be extended for up to two additional 10-year periods.
Commencing July 1, 1998, the minimum annual rent is $172,500 and increases
each year thereafter based on a schedule.
Effective July 1, 1998, the Company conveyed all of its interest in the
167-bed Fitzgerald Nursing Home in Fitzgerald, Georgia, and the 120-bed
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Pleasant View Nursing Center in Metter, Georgia, to an affiliated company in
exchange for the assumption of all of the liabilities related to these
facilities. These facilities had incurred substantial losses, and Management
believed that disposing of these facilities in this manner was in the best
interests of the Company.
Effective September 1, 1998, the Company purchased Pasco Nursing Center,
a 40-bed nursing home in Dade City, Florida, for $1,000,000. During November
of 1998, the facility was sold to an affiliated entity for $1,250,000. The
Company continues to manage this facility under a management contract.
On September 4, 1998, the Company purchased the Rest Awhile Nursing Home,
a 72-bed long-term care center in Jesup, Georgia, for approximately $1,173,000
in cash.
Effective November 1, 1998, the Company began leasing the Great Plains
Rehabilitation & Nursing Center of Bonner Springs, a 50-bed long-term care
facility in Bonner Springs, Kansas. The lease term is for 20 years, the
minimum annual rent is $120,000 and increases each year for the first ten
years by 2.0% and increases each by 3.0% for the last ten years.
On November 30, 1998, the Company purchased three long-term care
facilities in Massachusetts in a bankruptcy proceeding through the assumption
of bond debt on these facilities with a face value of approximately $3.1
million which the Company had purchased for approximately $1.3 million. From
January 1998 to November 30, 1998, the Company managed these facilities.
Information concerning these facilities is set forth below:
NAME OF FACILITY LOCATION NUMBER OF BEDS
Summerfield Elms Manor Chicopee, MA 60
Summerfield Pine Manor Springfield, MA 92
Summerfield Oak Manor Holyoke, MA 60
In a related transaction on November 30, 1998, the Company began leasing,
in a sale/leaseback transaction, the Meadowood Nursing Home, a 120-bed long-
term care center in South Hadley, Massachusetts. The Company had also managed
this facility from January 1998 to November 30, 1998. The lease is for a
period of ten years, with an option to renew for two additional five-year
periods. The minimum annual rent for the first year is approximately $750,000
and will be increased by the increase in the Cost of Living Index thereafter.
PROPOSED CORPORATE ACQUISITIONS
In December 1997, the Company announced that it had agreed to acquire
Renaissance Senior Living, Inc., which is partially owned by the Company's
Chairman of the Board, for $2 million plus the assumption of debt. There was
no written agreement concerning this proposed acquisition which would be
subject to the approval of the Company's shareholders. The Company has now
determined not to proceed with this acquisition.
In December 1997, the Company also announced that it had agreed to
acquire IATROS Health Network, Inc., a Nasdaq listed company, for
approximately $17 million in the Company's Common Stock. IATROS owns, leases
or manages 11 facilities in the New England market. In connection with its
negotiations with IATROS, the Company purchased from IATROS twenty percent
(20%) of its shares outstanding for a total of $1 million. In June 1998, the
Company announced that it had discontinued negotiating with IATROS, but that
it would continue to hold the IATROS stock.
7
LONG-TERM CARE FACILITY AND ASSISTED LIVING/INDEPENDENT LIVING FACILITY
OPERATIONS
As of March 1, 1999, the Company owned or leased and operated 24
long-term care facilities with 2,133 skilled long-term care beds, and three
assisted living/independent living facilities with 294 units. These
facilities are located in Georgia, Florida, Kansas, Massachusetts and Texas.
The Company's long-term care facilities provide both routine and
ancillary services. Routine services such as room and board and basic nursing
care services are provided in the skilled long-term care facilities and the
assisted living/independent living facilities. Certain of the Company's
long-term care facilities also provide specialty services such as HIV care,
Alzheimer's disease units, wound care, subacute care, and stroke and accident
rehabilitation. The Company provides a full range of occupational, physical,
speech and respiratory therapy in its long-term care facilities. The Company
derives most of its revenue for ancillary services from Medicare
reimbursement. See "--Regulation; Medicaid and Medicare" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
The average occupancy level, based on licensed beds, for the Company's
skilled long-term care facilities during the years ended December 31, 1998,
1997 and 1996 was 74.1%, 85.7%, and 89.4%, respectively. The Company's
long-term care facility revenues, exclusive of assisted living, medical supply
and pharmaceutical revenues, are divided into the following classes for payor
mix:
YEARS ENDED DECEMBER 31,
1998 1997 1996
----------------------------
Medicaid 61% 65% 76%
Medicare 22% 14% 10%
Private Pay 14% 18% 11%
Other Payors 3% 3% 3%
---- ---- ----
100% 100% 100%
For the year ended December 31, 1998, the Company received 83% of its
long-term care facility revenues from Medicaid and Medicare, compared to 79%
and 86% for 1997 and 1996, respectively. Changes in these programs which
became effective on January 1, 1999, are expected to have a negative impact on
the Company's operations and profitability. (See "--Regulation; Medicaid and
Medicare.")
LONG-TERM CARE FACILITY AND ASSISTED LIVING/INDEPENDENT LIVING STRATEGY
The Company's strategy is to increase the number of long-term care and
assisted living/independent living facilities that it operates primarily by
(i) acquiring by purchase or lease independently-owned long-term care
facilities and assisted/independent living facilities located in the United
States and secondarily by (ii) developing assisted/independent living centers
adjacent or complementary to its existing facilities. Key elements of this
strategy include: (i) acquiring and developing additional long-term care and
assisted/independent living facilities; (ii) increasing facility occupancy
rates; (iii) improving the payor mix at the Company's long-term care
facilities; and (iv) achieving operating efficiencies.
ACQUIRE AND DEVELOP FACILITIES. The Company intends to acquire and
develop additional long-term care facilities and assisted/independent living
8
facilities in its existing markets and contiguous areas. Management believes
that such expansion will allow the Company to take better advantage of its
existing expertise and organizational resources and improve margins by
reducing overhead costs. As a result of the growing complexity of regulatory
requirements and the continued pressure on reimbursement rates, the Company
believes that other smaller, independent providers may be more willing to
consider selling or leasing their facilities on terms acceptable to the
Company. The Company believes it is well positioned to make acquisitions
because of its reputation and established geographic presence. In addition,
the Company intends to offer a broad range of senior residential care
services. Towards that end, the Company has recently implemented a strategy
to develop assisted living centers adjacent to its long-term care facilities
or independent living centers, thereby creating senior residential care
campuses which offer a greater variety of senior residential care services in
one location. The Company presently has one senior residential care campus.
In evaluating an existing facility for acquisition, the Company primarily
considers the facility's historical occupancy rates and payor mix, reputation
and compliance history, physical condition and appearance, labor force
stability, the availability of financing on acceptable terms and, in the case
of assisted/independent living facilities, the demographics of the surrounding
area. In evaluating a development project, the Company primarily considers
the strength of the market demand for the senior residential care services.
Upon the acquisition of a facility, the Company implements its management
information and control systems and provides capital for necessary physical
plant improvements to enable its professionals to increase occupancy and
attain the Company's standards for quality of care. The Company's strategy
with respect to its long-term care facilities is to seek Medicare
certification while simultaneously marketing the facility to attract more
Medicare and private pay residents. The Company believes that with effective
cost controls, the Company's facilities can continue to be profitable with a
highly concentrated Medicaid payor mix.
INCREASE FACILITY OCCUPANCY RATES. The Company believes its occupancy
rates in existing assisted/independent living centers should increase
primarily due to three factors: (i) an enhanced emphasis on facility-specific
marketing efforts; (ii) the continued growth of the elderly segment of the
population in the Company's markets; and (iii) the limited supply of long-term
care beds and assisted/independent living units. Increasing occupancy rates
will allow the Company to further reduce its fixed costs per patient day.
IMPROVE PAYOR MIX. The Company intends to improve its payor mix at its
long-term care facilities by making capital improvements which management
believes are necessary to attract more private pay residents, by aggressively
marketing such facilities to prospective private pay residents and by seeking
Medicare certification for newly acquired facilities. The Company has
recently implemented a strategy to develop assisted living centers adjacent to
its long-term care facilities or independent living centers, thereby creating
a senior residential care campus which offers a greater variety of senior
residential care services in one location. Management believes that providing
a "continuum of care" to its residents enhances the marketing efforts of its
assisted/independent living centers and that these centers should provide a
referral source to the other facilities on the same campus. The Company also
has intensified efforts to provide the full range of Medicare services to
eligible patients and is increasingly concentrating its marketing efforts on
private third party payors, such as managed care and insurance companies, as
well as hospital discharge planners, thereby developing referral sources for
both its long-term care and assisted/independent living centers.
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LONG-TERM CARE SERVICES. Basic resident services are those traditionally
provided to elderly patients in long-term care facilities with respect to
daily living activities and general medical needs. The Company provides in
all of its facilities room and board, 24-hour skilled nursing care by
registered nurses, licenced practical nurses and certified nursing aides, and
a broad range of support services, including dietary services, therapeutic
recreational activities, social services, housekeeping and laundry services,
pharmaceutical and medical supplies, physical, speech, occupational and
respiratory therapy, wound care and other ancillary services.
ASSISTED LIVING SERVICES. The Company's assisted living centers are
designed to assist those persons generally 75 years of age or over who may
require assistance with any of the five basic activities of daily life (i.e.,
bathing, dressing, eating, walking and toileting). The Company assesses
incoming residents and develops an individualized care plan based on their
acuity level. The Company reassesses each of its residents on a regular basis
to determine if they require additional care. Each of the Company's assisted
living facilities offers its residents with private or semi-private
accommodations, ongoing health assessments, three meals per day and snacks
approved by a registered dietician, as well as 24-hour assistance with
activities or daily life, housekeeping service, linen and personal laundry
service, organized social activities and transportation. The Company's
assisted living services are provided in freestanding assisted living centers
and in certain units in each of the Company's independent living centers.
INDEPENDENT LIVING SERVICES. The Company's independent living centers
offer independent living to seniors. Each center offers a standard package of
services that typically include meal service, laundry and linen service,
housekeeping, organized social activities and transportation. In addition,
each of the Company's independent living facilities offers a menu of
separately priced additional services available at the option of the resident.
HOSPITAL OPERATIONS
NCHC currently owns one hospital with 84 beds and provides management
services to one hospital with 106 beds.
In operating or managing hospitals, NCHC implements policies and
procedures to improve each hospital's operating and financial performance.
NCHC implements an operating plan designed to reduce costs by improving
operating efficiency and increasing revenue through the expansion of the
breadth of services offered by the hospitals and the recruitment of physicians
to the community. Management believes that the long-term growth potential of
a hospital is dependent on the ability to add appropriate health care services
and effectively recruit physicians.
Each hospital management team is comprised of a hospital administrator
and controller. The Company believes that the quality of the local management
team at each hospital is critical to the hospital's success, because the
management team is responsible for implementing the elements of the operating
plan. The operating plan is developed by the local management team in
conjunction with NCHC's senior management team and sets forth revenue
enhancement strategies and specific expense benchmarks.
While the local management team is responsible for the day-to-day
operations of the hospitals, NCHC's corporate staff provides support services
to each hospital, including physician recruiting, corporate compliance,
reimbursement advice, human resources, accounting, cash management and other
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finance activities, tax and insurance support. Financial controls are
maintained through utilization of standardized policies and procedures.
To achieve the operating efficiencies set forth in the operating plan,
NCHC (i) evaluates existing hospital management; (ii) adjusts staffing levels
according to patient volumes using best demonstrated practices by each
department; and (iii) capitalizes on purchasing efficiencies and renegotiates
certain vendor contracts. NCHC also enforces strict protocols for compliance
with the Company's supply contracts.
The average occupancy level, based on licensed beds, for the Company's
one owned hospital during the years ended December 31, 1998 and 1997, was 28%
and 24%, respectively. As of March 31, 1999, this facility had achieved a 66%
occupancy level. The Company's hospital revenues are divided into the
following classes for payor mix:
YEARS ENDED DECEMBER 31,
1998 1997
---- ----
Medicaid 8% 1%
Medicare 64% 63%
Private Pay 14% 20%
Private Insurance 14% 16%
---- ----
100% 100%
For the years ended December 31, 1998 and 1997, the Company received 72%
and 64%, respectively, of its revenues from Medicaid and Medicare from its one
hospital. Future changes in programs could possibly have a negative impact on
the Company's operations and ultimately can affect the Company's
profitability.
REGULATION; MEDICAID AND MEDICARE
STATE AND LOCAL REGULATION
The Company's long-term care facilities and hospitals are subject to
compliance with various state and local health care statutes and regulations.
In order to maintain such licenses, the facilities must meet certain statutory
and administrative requirements. These requirements relate to the condition
of the facilities and the adequacy and condition of the equipment used
therein, the quality and adequacy of personnel and the quality of medical
care. Such requirements are subject to change.
Long-term care facilities are licensed in their respective state to
provide residential health and medical services to patients requiring
long-term care including the following minimum services: 24-hour nursing
care; personal or custodial care as needed; both routine and emergency
physician services; and access to dental, recreational, rehabilitative and
social work services.
Compliance with state licensing requirements imposed upon all health care
facilities is a prerequisite for the operation of the facilities and for
participation in government-sponsored health care funding programs such as
Medicaid and Medicare.
Some states require approval for construction and expansion of health
care facilities, including findings of need for additional or expanded heath
11
care facilities or services. Certificates of Need ("CON's"), which are issued
by governmental agencies with jurisdiction over health care facilities, are at
times required for capital expenditures exceeding a prescribed amount, changes
in bed capacity or services and certain other matters. The Company is unable
to predict whether it will be able to obtain any CON that may be necessary to
accomplish its business objectives in any jurisdiction where such CON's are
required.
MEDICAID AND MEDICARE PROGRAMS; RELATED REGULATION
Medicaid is a state-administered program financed by state and matching
federal funds. The program provides for federal assistance to the indigent
and certain other eligible persons. Although administered under broad federal
regulations, states are given flexibility to construct programs and payment
methods consistent with their individual goals. The current Georgia, Florida,
Texas, Massachusetts and Kansas Medicaid reimbursement plans are prospective
systems of reimbursement. Under a prospective system, per diem rates are
established based on cost of services provided for a prior year, and are
adjusted to reflect such factors as inflation.
Medicare is a federally-administered and financed program which provides
health insurance protection to qualified individuals over the age of 65 and
the chronically disabled. This program has been a retrospective reimbursement
system that is based on a prior period's cost report filed with a Medicare
intermediary. In 1997, Congress passed the Balance Budget Act of 1997 ("BBA")
which provides for a phase-in of a prospective payment system ("PPS") for
skilled nursing facilities over a four year period for cost reporting periods
ending on or after June 30, 1998. Under PPS, Medicare will pay skilled
nursing facilities a fixed fee per patient day based on the acuity level of
the patient to cover all post-hospital extended care routine service costs,
including ancillary and capital related costs for beneficiaries receiving
skilled services. The per diem rate will also cover substantially all items
and services furnished during a covered stay for which reimbursement was
formerly made separately under Medicare.
On May 12, 1998, the Health Care Financing Administration released the
nursing home PPS rates for Part A Medicare Patients that are in effect from
July 1, 1998 through September 30, 1999. The Company's experience thus far
under PPS indicates that PPS has resulted in more intense price competition
and lower margins among ancillary service providers as well as lower overall
reimbursement and margins for the Company's skilled nursing facilities.
The Balanced Budget Act also repealed the Boren Amendment ("Boren"),
which had required state Medicaid programs to reimburse nursing facilities for
the costs that are incurred by efficiently and economically operated providers
in order to meet quality and safety standards. Because of the repeal of
Boren, states now have considerable flexibility in establishing Medicaid
payment rates. In addition, Boren provided a dispute resolution mechanism
whereby providers could challenge Medicaid rates set by the various states,
the repeal of which will now make it more difficult to challenge these rates
in the future. The Company is not able to predict whether any states will
adopt changes in their Medicaid reimbursement programs, or, if adopted and
implemented, which effect such initiatives would have on the Company.
Effective October 1, 1990 the Omnibus Budget Reconciliation Act of 1987
("OBRA") eliminated the different certification standards for "skilled" and
"intermediate care" nursing facilities under Medicaid and Medicare programs in
favor of a single "nursing facility" standard. This standard has required the
Company to have at least one registered nurse on each shift and has increased
12
training requirements for nurses' aides by requiring a minimum number of
training hours and a certification test before a nurses' aide can commence
work. States also must certify that nursing facilities provide skilled care
in order to obtain Medicare reimbursement. OBRA has also increased the
enforcement powers of state and federal certification agencies. Additional
sanctions have been authorized including fines, temporary suspension of
admission of new patients to nursing facilities, decertification from
participation in the Medicaid or Medicare programs and, in extreme
circumstances, revocation of a nursing facility's license.
The Medicaid and Medicare programs provide criminal penalties for
entities that knowingly and willfully offer, pay, solicit or receive
remuneration in order to induce business that is reimbursed under these
programs. The illegal remuneration provisions of the Social Security Act,
also known as the anti-kickback statute, prohibit remuneration intended to
induce the purchasing, leasing, ordering, or arranging for any good, facility,
service or item paid by Medicaid or Medicare programs.
There is increasing scrutiny by law enforcement authorities, the Office
of Inspector General ("OIG") of the Department of Health and Human Services
("HHS"), the courts, and Congress of arrangements between health care
providers and potential referral sources to ensure that the arrangements are
not designed as a mechanism to exchange remuneration for patient care
referrals and opportunities. Investigators have also demonstrated a
willingness to look behind the formalities of a business transaction to
determine the underlying purpose of payments between health care providers and
potential referral sources. Enforcement actions have increased, as evidenced
by recent highly publicized enforcement investigations of certain hospital
activities. Although, to its knowledge, the Company is not currently the
subject of any investigation which is likely to have a material adverse effect
on its business, financial condition or results of operations, there can be no
assurance that the Company and its hospitals will not be the subject of
investigations or inquiries in the future.
The Social Security Act also imposes criminal and civil penalties for
making false claims to the Medicaid and Medicare programs for services not
rendered or for misrepresenting actual services rendered in order to obtain
higher reimbursement. The Medicare program has published certain "Safe
Harbor" regulations which describe various criteria and guidelines for
transactions which are deemed to be in compliance with the anti-remuneration
provisions. Although the Company has contractual arrangements with some
health care providers, management believes it is in compliance with the
anti-kickback statute and other provisions of the Social Security Act and with
the state statutes. However, there can be no assurance that government
officials responsible for enforcing these statutes will not assert that the
Company or certain transactions in which it is involved are in violation of
these statutes.
The Company derives a significant portion of its revenue from these
programs, particularly with respect to ancillary services. With respect to
Medicaid, reimbursement rates are determined by the appropriate administrative
state agency based on the cost report filed by each individual nursing
facility. Changes in the reimbursement policies of the Medicaid and Medicare
programs as a result of legislative and regulatory actions by federal and
state governments could adversely affect the revenues of the Company.
Governmental funding for health care programs is subject to statutory and
regulatory changes, administrative rulings, interpretations of policy,
intermediary determinations and governmental funding restrictions, all of
which may materially increase or decrease program reimbursement to health care
13
facilities. Congress has consistently attempted to curb the growth of federal
spending on such programs. Recent actions include limitations on payments to
hospitals and nursing facilities under the Medicaid and Medicare programs,
limitations on payments for physicians' services and elimination of funding
for health planning agencies. No assurance can be given that the future
funding of Medicaid and Medicare programs will remain at levels comparable to
the present levels.
HEALTH CARE REFORM
The Clinton Administration and various federal legislators have
introduced health care reform proposals, which are intended to control health
care costs and to improve access to medical services for uninsured
individuals. These proposals include proposed cutbacks to the Medicare and
Medicaid programs and steps to permit greater flexibility in the
administration of Medicaid. Changes in reimbursement levels under Medicare or
Medicaid and changes in applicable governmental regulations could
significantly affect the Company's results of operations. While no federal
legislation regarding health care reform was enacted in the calendar year
1998, it is uncertain at this time what legislation on health care reform
will ultimately be enacted or whether other changes in the administration or
interpretation of governmental health care programs will occur. There can be
no assurance that future health care legislation or other changes in the
administration or interpretation of governmental health care programs will not
have an adverse effect on the results of operations of the Company.
COMPLIANCE WITH ENVIRONMENTAL LAWS
The Company's health care operations generate medical waste that must be
disposed of in compliance with federal, state and local environmental laws,
rules and regulations. The Company's operations, as well as the Company's
purchases and sales of facilities, are also subject to various other
environmental laws, rules and regulations. The Company believes that it is in
material compliance with applicable environmental laws and regulations.
Management believes that there are not any material environmental
contingencies.
EMPLOYEES
At March 8, 1999, the Company and its subsidiaries employed approximately
2,662 full-time employees. This includes 67 full-time employees who work at
the Company's headquarters.
The employees at two of the Company's long-term care facilities are
represented by collective bargaining units. The employees at the Whigham
Nursing Home, which totaled approximately 129 at December 31, 1998, are
represented by the United Food and Commercial Workers Union under a contract
which expires July 1, 2000. The employees at the Dania Nursing Home, which
totaled approximately 68 at December 31, 1998, are represented by South
Florida Council, UNITE, AFL-CIO, under a contract which expires June 3, 2000.
INSURANCE
Providing health care services entails an inherent risk of liability.
The Company maintains liability insurance providing coverage which it believes
to be adequate. In addition, the Company maintains property, business
interruption and workers' compensation insurance covering all facilities in
amounts deemed adequate by the Company. The Company carries malpractice
insurance coverage for each of the facilities that it owns, operates or
14
manages in the amount of $1 million per incident per facility and $3 million
annual aggregate per facility. The Company also carries an umbrella excess
liability insurance policy which has a $5 million per incident limit with an
aggregate limit of $5 million. There can be no assurance that any future
claims will not exceed applicable insurance coverage or that the Company will
be able to continue its present insurance coverage on satisfactory terms, if
at all.
ITEM 2. PROPERTIES
The Company currently occupies approximately 23,042 square feet of office
space for its corporate offices at 6000 Lake Forrest Drive, Atlanta, Georgia.
The lease on this space expires in June 2003, and currently requires a base
monthly lease payment of approximately $32,800. The base monthly lease
payments increase by approximately 5% per year during the term of the lease.
The following table sets forth certain information relating to the
Company's long-term care and assisted living/independent living facilities as
of March 1, 1999:
NUMBER OCCUPANCY
LEASED/ OF BEDS AS OF
NAME LOCATION OWNED OR UNITS 3/1/99
---- -------- ------- -------- ---------
LONG-TERM CARE FACILITIES:
1. Central Tampa Tampa, Florida Owned 100 70.0%
Nursing Home
2. Dania Nursing Dania, Florida Owned 88 46.5%
Home
3. Oak Manor Largo, Florida Owned 180 88.3%
Nursing Home
4. Suncoast St. Petersburg, Owned 59 67.7%
Nursing Home Florida
5. Victoria Martin St. Petersburg, Owned 38 60.5%
Nursing Home Florida
6. Wakulla Manor Crawfordville, Owned 120 89.1%
Nursing Home Florida
7. NewCare Nursing Venice, Florida Owned 120 86.6%
of Venice
8. Emory Nursing Atlanta, Georgia Owned 40 97.5%
Home
9. Ft. Valley Fort Valley, Owned 75 93.3%
Nursing Home Georgia
10. Whigham Nursing Whigham, Georgia Leased 142 97.0%
Center
11. Windward Nursing Flowery Branch, Owned 100 94.0%
Center Georgia
15
12. Pecan Manor Statesboro, Leased 60 88.3%
Georgia
13. Rest Awhile Nursing Jesup, Georgia Owned 72 81.9%
14. Park Place Nursing Tyler, Texas 58% Owned 118 67.5%
Home
15. Rosewood Rehabili- Converse, Texas Leased 100 88.0%
tation & Care Center
16. Woodland Park Shephard, Texas Leased 100 92.0%
17. Coffeyville Nursing Coffeyville, Leased 45 64.4%
Home Kansas
18. Salina Nursing Salina, Kansas Leased 60 67.4%
Home
19. Great Plains Olathe, Kansas Owned 104 88.4%
Rehabilitation
& Nursing Center
of Olathe
20. Great Plains Bonner Springs, Leased 50 90.0%
Rehabilitation Kansas
& Nursing Center
of Bonner Springs
21. Elms Nursing Home Chicopee, Owned 82 57.3%
Massachusetts
22. Meadowood Nursing South Hadley, Leased 120 90.8%
Home Massachusetts
23. Pine Manor Nursing Springfield, Owned 100 68.3%
Home Massachusetts
24. Oak Manor Nursing Holyoke, Owned 60 85.0%
Home Massachusetts -----
Total 2,133
ASSISTED LIVING/INDEPENDENT LIVING CENTERS:
1. Oak Manor Villas Largo, Florida Owned 70 57.0%
Retirement Center
2. Remington House- New Port Richey, Leased 124 92.7%
New Pork Richey Florida
3. Pine Valley Tuscaloosa, Leased 100 89.1%
Alabama ---
Total 294
HOSPITAL:
1. Meadowbrook Gardner, Kansas Owned 84 66.7%
Rehabilitation
Hospital
16
The Company considers all of its facilities, both owned and leased,
together with the related equipment contained therein, to be well maintained,
in good operating condition, and suitable for the present and foreseeable
future needs of each facility. The Company believes that all facilities owned
and leased by the Company and its subsidiaries are adequately insured.
ITEM 3. LEGAL PROCEEDINGS
TRI-CITY HOSPITAL LAWSUIT AND BANKRUPTCY
On March 27, 1998, NCHC filed a lawsuit in the United States District
Court for the Northern District of Texas, Dallas Division, against Tri-City
Health Center, Inc., which owns the Tri-City Hospital in Dallas, Texas (the
"Hospital"), requesting injunctive and other relief against the Hospital in
connection with NCHC's management agreement with the Hospital and NCHC's
option to purchase the Hospital. In its Complaint, NCHC alleged that the
Hospital's Board of Directors had wrongfully taken the position that the
management agreement and option were not valid, and that if the management
agreement is valid, that NCHC is in default of that agreement. NCHC also
claims that since March 17, 1998, the Hospital has wrongfully not allowed
NCHC's employees on its premises, and that if any defaults have occurred under
the management agreement that the exclusion of NCHC's employees from the
premises prevents NCHC from curing any defaults as permitted under the
management agreement. NCHC also alleged that the Hospital wrongfully induced
the NCHC employee who had served as the Chief Executive Officer of the
Hospital to resign and become an employee of the Hospital.
In March 1998, the Hospital filed for and was granted protection under
Chapter 11 of the Federal Bankruptcy Act in the Federal Bankruptcy Court for
the Northern District of Texas. As part of the Plan of Reorganization, NCHC
agreed to accept as payment for all amounts owed to it by the Hospital under
the management agreement and as potential damages for the Contract termination
the amount of $150,000.
PRINCETON HOSPITAL BANKRUPTCY
In January 1999, the Princeton Hospital, a subsidiary, which the Company
had managed since October 1, 1997, filed for protection under Chapter 11 of
the Federal Bankruptcy Act in the Federal Bankruptcy Court for the Middle
District of Florida. On March 1, 1999, the U.S. Bankruptcy Judge approved,
with the consent of NCHC, the replacement of the Company's subsidiary as
manager of the Hospital. As a result of this bankruptcy proceeding, NCHC has
taken a reserve for bad debts totaling $1,285,810 against amounts due it from
the Princeton Hospital for management fees and for amounts advanced pursuant
to the guarantee of certain bond indebtedness.
SUN HEALTHCARE LAWSUIT
On March 12, 1999, Sun Healthcare Group, Inc. ("Sun") and certain of its
subsidiaries filed a lawsuit in the Superior Court of Fulton County, Georgia,
against the Company, certain of the Company's subsidiaries and affiliates,
including certain of the Company's Officers and Directors. In its complaint,
Sun alleges that prior to the completion of a merger transaction in which Sun
acquired Retirement Care Associates, Inc. ("RCA") certain persons who were
then officers, directors and affiliates of RCA, many of whom are now Officers,
Directors and affiliates of the Company, caused RCA to make loans to the
Company totaling over $22.4 million on an interest-free basis. The complaint
also alleges, among other things, that NewCare used RCA's facilities,
equipment and employees free of charge, the cash management systems of the
17
Company and RCA were commingled, and the defendants caused RCA to breach its
contracts with vendors. The complaint also alleges that after the acquisition
of RCA by Sun that certain of the defendants caused funds in bank accounts of
facilities managed by a subsidiary of Sun to be transferred to the Company's
bank accounts.
Based on its allegations, Sun claims that the defendants breached
contracts between RCA and NewCare, breached fiduciary duties to RCA, engaged
in self-dealing and other tortious conduct. Sun is seeking damages in excess
of $30 million plus punitive damages. The defendants have not yet filed
answers or counter-claims in this proceeding.
STATE OF FLORIDA CRIMINAL CHARGES AGAINST CERTAIN OFFICERS OF THE COMPANY
In January 1999, the State of Florida filed criminal charges in the
Circuit Court for the Eighth Judicial District of the State of Florida against
two Executive Officers of the Company alleging that these persons, while
serving as officers of Retirement Care Associates, Inc., had engaged in
Medicaid fraud, racketeering, grand theft and abuse of the elderly in
connection with the operation of a nursing home in Gainesville, Florida. The
Executive Officers of the Company named in that proceeding are Chris Brogdon
and Darrell C. Tucker. Also charged in that proceeding are Retirement Care
Associates, Inc. and certain of its subsidiaries and former and current
employees.
Both Mr. Brogdon and Mr. Tucker deny any wrongdoing and intend to
vigorously defend themselves against the allegations.
The Company is not named as a defendant in this proceeding.
ANTHONY LIUZZO LAWSUIT
On February 3, 1999, Anthony Liuzzo and entities owned or controlled by
Liuzzo (collectively, "Liuzzo") filed a lawsuit in the Circuit Court for the
Eighth Judicial District of the State of Florida against the Company and
several other corporate and individual defendants (including a subsidiary of
the Company and certain officers and directors of the Company) alleging breach
of contract with respect to the purchase of real estate located in Ocala,
Florida and attempting to set aside a release of claims previously entered
into between Liuzzo and the defendants. The defendants intend to file
appropriate responses to the claims, including motions to dismiss and possible
counterclaim against Liuzzo.
22 TEXAS PARTNERS LAWSUIT
On April 10, 1998, NewCare Nursing Corporation ("NNC"), a wholly-owned
subsidiary of the Company, executed a purchase agreement (the "Purchase
Agreement") to purchase seven nursing homes from 22 Texas Partners, L.P., a
Texas limited partnership ("22 Texas"). On July 30, 1998, NNC (and a
subsidiary of NNC) notified 22 Texas that as a result of uncured breaches of
the Purchase Agreement by 22 Texas, the Purchase Agreement was being
terminated.
On November 9, 1998, an affiliate of 22 Texas, 22 Texas Partners, Inc.,
filed a lawsuit in the United States District Court for the Eastern District
of Pennsylvania against the Company, NNC and a subsidiary of NNC claiming,
among other things, breach of contract related to the termination of the
Purchase Agreement. On March 24, 1999, the defendants filed a motion to
18
dismiss the claim of 22 Texas and intends to file counterclaims against 22
Texas and certain of its affiliates.
GLOWORTH, INC. LAWSUIT
In April 1998, Gloworth, Inc. ("Gloworth") filed an action in the Circuit
Court for the Sixth Judicial Circuit in Clearwater, Florida, against the
Company and certain affiliated entities. Gloworth is a minority limited
partner in Oak Manor Nursing Home LTD (the "Partnership"), a Florida limited
partnership owned principally by the Company. Gloworth's Complaint asserts
several claims against the Company and the other Defendants, including the
Partnership and the corporate general partner of the Partnership for alleged
breach of fiduciary duty, constructive fraud, fraud and waste. In addition,
the Compliant seeks certain equitable remedies against the Defendants,
including an accounting, the appointment of a receiver for the Partnership and
dissolution of the Partnership. Gloworth's Complaint demands unspecified
damages from the Defendant, plus attorney's fees and costs.
In May 1998, the Defendants filed their Answer to the Complaint in which
they asserted numerous affirmative defenses and denied any liability to
Plaintiff. In addition, the Defendants filed a Third Party Complaint against
Robert W. Bell, Sr. ("Bell"), formerly President of the Company, asserting
that certain alleged damages of the Plaintiff resulted, if at all, from the
acts of Bell. The Third Party Complaint seeks indemnification and
contribution from Bell for any such amounts for which the Defendants may be
found liable to the Plaintiff. In July 1998, Bell filed his Answer to the
Third Party Complaint denying any liability thereon.
In December 1998, Gloworth moved the court for leave to amend its
Compliant to add a claim for punitive damages. Defendants have opposed that
motion, which has not yet been ruled on by the court. In January 1999,
Gloworth filed its motion seeking the appointment of a receiver for the
Partnership pending the resolution of this action. Defendants opposed that
motion. Although an evidentiary hearing on that motion was begun on January
22, 1999, it was terminated before completion and no ruling has been made on
Plaintiff's motion. Rather, the court has decided to consider Gloworth's
request for a receiver along with its other claims at trial. The case is
presently in discovery. A bench trial on all matters involved in this
litigation is currently scheduled for April 28-30, 1999. Defendants intend to
vigorously oppose Gloworth's motion for a receiver as well as all of
Gloworth's other claims for relief at trial.
On March 9, 1999, Bell filed a motion for summary judgment on Defendant's
Third Party Complaint. Defendant's intend to vigorously oppose that motion,
which is scheduled for hearing by the Court on April 13, 1999.
LAWSUIT FILED BY ROBERT R. BELL, ET AL.
In April 1997, Robert W. Bell, Sr., formerly President of the Company;
Sidney M. Bell; M. Suzanne Bell; Eunice R. Bell; Francis H. Bell; and Robert
W. Bell, Sr., as Trustee for the Andrews H. Bell Trust, Mark P. Bell and
Ashley Bell Trust ("Plaintiffs") filed an action in the Circuit Court for the
Sixth Judicial Circuit in Clearwater, Florida against the Company and certain
individuals associated with the Company. Plaintiff's Complaint attempts to
assert claims against the Company and the individual Defendants for purported
violations of the Florida Investors Protection Act, as well as claims for
common-law fraud and conspiracy, in connection with Plaintiff's decision to
sell shares of the Company's stock in January 1997.
19
In June 1997, the Company and the individual Defendants moved to dismiss
Plaintiff's Complaint in its entirety on the grounds that it failed to state
any viable legal claim. On September 5, 1997, the Court denied that motion
to dismiss. Thereafter, on or about September 25, 1997, the Company and the
individual Defendants submitted their Answer to the Plaintiff's Complaint,
denying any liability to Plaintiffs and asserting various affirmative
defenses. Since that time, discovery has been ongoing in the case. The case
has been set for trial in June 1999. The Company intends to vigorously defend
the action and expects to file a motion for summary judgment on all of
Plaintiff's claims after the completion of discovery and prior to the trial
date.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's shareholders during
the fourth quarter of the year ended December 31, 1998.
20
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
MARKET INFORMATION. The Company's Common Stock is traded in the
over-the-counter market, and since April 28, 1995, has been traded on the
Nasdaq Small-Cap Market under the symbol "NWCA".
The following table sets forth the high and low closing prices of the
Company's Common Stock as reported by the Nasdaq Small-Cap Market for the
periods presented:
HIGH LOW
1997 ---- ----
First Quarter $2.875 $1.25
Second Quarter $4.375 $2.313
Third Quarter $5.25 $3.875
Fourth Quarter $4.438 $3.313
1998
First Quarter $4.125 $3.125
Second Quarter $3.75 $2.625
Third Quarter $3.00 $2.031
Fourth Quarter $2.563 $1.563
APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK. At March 24, 1999, the
Company had approximately 660 holders of record of its Common Stock.
DIVIDENDS. The Company has paid no cash dividends on its Common Stock,
and has no present intention of paying cash dividends in the foreseeable
future.
SALES OF RESTRICTED SECURITIES. The Company issued no restricted
securities during the quarter ended December 31, 1998.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial information for the year ended December
31, 1998, is derived from financial statements of the Company audited by
Cherry, Bekaert & Holland, L.L.P., independent certified public accountants.
The following financial information for the years ended December 31, 1997 and
1996, is derived from financial statements of the Company audited by Laney,
Boteler & Killinger, independent certified public accountants. The selected
financial information for the years ended December 31, 1995 and 1994, is
derived from financial statements of the Company audited by Lovelace, Roby &
Company, P.A., independent certified public accountants.
21
BALANCE SHEET DATA:
AT DECEMBER 31,
1998 <FN1> 1997 <FN1> 1996 <FN1> 1995 <FN1> 1994 <FN1>
------------ ----------- ----------- ----------- -----------
Current Assets $ 31,093,622 $20,254,727 $ 7,717,162 $ 6,751,312 $ 6,606,450
Total Assets 90,914,274 68,768,359 32,267,101 39,980,703 29,347,359
Current Liabili-
ties 47,948,145 23,539,395 20,242,609 16,151,525 7,160,213
Working Capital
(Deficit) (16,854,523) (3,284,668) (12,525,447) (9,400,213) (553,763)
Long-term Debt 41,233,386 39,754,836 6,880,805 16,260,560 16,266,226
Shareholders'
Equity 1,732,743 5,460,228 5,143,687 7,369,979 5,718,631
- ------------------
<FN>
<FN1>
During 1994, the Company and its predecessors operated five long-term care facilities
and one assisted living/independent living complex. During 1995, through the
acquisition of Cimerron Health Care, Inc. and other transactions, the Company began
operating an additional six long-term care facilities. No additional acquisitions were
made during 1996. During 1997, the Company began operating three additional long-term
care facilities, purchased and began operating one hospital, and started managing two
additional hospitals. During 1998, the Company began operating a net of ten additional
long-term facilities, and two additional assisted living facilities, and started
managing two additional long-term care and assisted living facilities. Also during
1998, the Company commenced managing one hospital and ceased managing another hospital.
<FN2>
Effective April 5, 1994, the Company acquired the stock of NewCare in a reverse
acquisition in which NewCare's stockholders acquired voting control of the Company. The
transaction was accounted for as a purchase with NewCare as the acquiring company
because NewCare's stockholders acquired a majority of the voting rights in the combined
company. Accordingly, the results of operations prior to April 5, 1994, are those of
NewCare and its predecessor.
</FN>
STATEMENT OF INCOME DATA:
FOR THE YEARS ENDED DECEMBER 31,
1998 1997 1996 1995 1994
------------ ----------- ----------- ----------- -----------
Revenues $66,409,740 $32,984,930 $28,683,704 $23,176,905 $20,922,846
Operating
Expenses 78,564,118 35,928,002 26,700,758 21,972,145 21,807,712
Net Income (Loss)
from Continuing
Operations (7,809,343) (3,979,353) 99,936 (340,654) (919,616)
Net Income (Loss)
from Continuing
Operations Per
Common Share<FN1> $ (.65) $ (.37) $ .01 $ (.03) $ (.13)
Weighted Average
Shares<FN1> 12,074,995 10,769,829 10,667,524 10,390,073 7,289,746
Cash Dividends
Per Common Share $ -0- $ -0- $ -0- $ -0- $ -0-
- ------------------
<FN>
<FN1>
The Company has retroactively restated net income per share and weighted
22
average shares outstanding for the effect of a reverse stock split which
occurred in April 1994.
</FN>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997
STRUCTURE OF OPERATIONS
The Company is currently an operator of long-term care facilities,
rehabilitation and acute-care hospitals, and assisted/independent living
centers. As of December 31, 1998, the Company operated twenty-five long-term
care facilities in Georgia, Florida, Kansas, Massachusetts and Texas; three
assisted living/independent living facilities in Florida and Alabama; and one
rehabilitation hospital in Kansas. The Company also provided management
services to two long-term care facilities in Georgia and Florida; five
assisted living/independent living facilities in Georgia, Florida and
Tennessee; and one acute-care hospital in Texas.
RESULTS OF OPERATIONS
The Company's total operating revenues for the year ended December 31,
1998, were $66,409,740 compared to $32,984,930 for the year ended December 31,
1997. The increase in revenues is mainly the result of the increase in the
number of facilities operated during the current year. As of December 31,
1997, the Company operated fifteen facilities as compared to twenty-nine
facilities at December 31, 1998.
Included in the current year revenue figures is $63,228,244 related to
patient services, $2,481,137 in management fees from long-term care
facilities, assisted/independent living and hospitals the Company managed
during 1998, and $700,359 in other operating revenue derived mainly from non-
related patient care services such as office rental, guest meals, laundry
services and other services.
Operating expenses for the year ended December 31, 1998, totaled
$78,564,118, and represented an increase of 119% over the $35,928,002 in total
operating expenses reported for the year ended December 31, 1997. Expense
increases which were primarily attributable to the growth in the number of
facilities operating during 1998 including cost of patient services (up 101%),
depreciation and amortization expense (up approximately 92%), and lease
expense (up 448%), as the number of leased facilities increased from three in
1997 to over ten in 1998.
General and administrative expenses totaled $17,165,436 for calendar year
1998 versus $7,367,125 incurred in calendar year 1997. Factors contributing
to this increase included the overall growth in operations, administrative
field personnel salaries and related expenses as the Company expanded into
several new states (Kansas, Massachusetts, Texas, Alabama and Tennessee), and
the addition of several senior officers and staff members.
Provision for bad debts expense totaled $4,749,309 for the year ended
December 31, 1998, and included approximately $1,285,810 in bad debt expense
related to accrued management fees and other advances to Princeton Hospital in
Florida which the Company managed in 1998, and which subsequently filed for
reorganization under Chapter 11 bankruptcy on January 5, 1999. The Company
23
also included approximately $1,000,000 in bad debt expense related to accrued
management fees for Tri-City Hospital in Texas. The remainder of the bad
debt expense related to patient accounts receivable based on the Company's
analysis of the ability to collect such receivables.
The operating loss for the year ended December 31, 1998, was $12,154,378
compared to an operating loss of $2,943,072 reported for the year ended
December 31, 1997. This increase in the operating loss for the current year
was significantly impacted by a drop at the Company's nursing homes in their
average daily census, or percent of beds occupied, compared to the prior year
results. In addition, a deterioration in the payor mix, which resulted in a
greater dependence on lower paying Medicaid residents, also played a major
role. The chart below compares the census and payor mix for both time
periods:
Nursing Homes
1998 1997
------ ------
Average Daily Census 74.1% 85.7%
Payor Mix:
Medicaid 77.0% 65.0%
Medicare 7.0% 14.0%
Private 14.0% 18.0%
Other 2.0% 3.0%
------ ------
Total 100.0% 100.0%
The reason for the drop in census and unfavorable payor mix in the
current year is directly related to the Company's strategy of acquiring under-
performing facilities, which usually have a low census, poor payor mix, or
both. The Company's objective is to turn these facilities around within a
reasonable time period, usually within one or two years. During 1998, the
Company added sixteen (16) nursing homes, many of which were under-performing.
Interest expense rose to $7,742,747 from $3,148,460 in 1997, principally
the result of higher levels of outstanding long-term debt and borrowings under
the Company's line of credit. At December 31, 1998, long-term debt, including
current portion, was $45,667,187 versus $41,135,571 at December 31, 1997.
Borrowings under the Company's line of credit totaled $7,655,540 at the end of
1998 compared to $3,189,755 at the end of 1997.
Investment income totaled $11,105,865 for calendar year 1998 versus
$794,214 for calendar year 1997. Included in the current year's results was a
$11,129,000 gain related to the sale of hospital bonds the Company owned, and
a $400,000 gain on the sale of a purchase option on a nursing home. These
were partially offset by a write-down of approximately $600,000 on the
Company's investment in Iatros. Investment income in 1997 resulted from
interest the Company received on the Hospital bonds it acquired in 1997.
The loss before income taxes, discontinued operations and extraordinary
items was $8,777,360 in 1998 versus a loss of $5,311,218 reported in 1997. The
losses in both years were reduced by income tax benefits of $968,017 and
$1,331,865, respectively.
The results for the year ended December 31, 1997 were also impacted by a
gain on the restructuring of the Company's debts, net of taxes, of $879,851.
24
The net loss for the year ended December 31, 1998 was $7,809,343 ($.65
basic and diluted per common share) compared to a net loss of $3,099,502 ($.29
basic and diluted per common share) recorded in the year ended December 31,
1997.
In 1997, Congress passed the Balance Budget Act of 1997 which provides
for a phase-in of a prospective payment system ("PPS") for skilled nursing
facilities over a four year period, effective for all Medicare cost reporting
periods beginning July 1998. Under PPS, Medicare will pay skilled nursing
facilities a fixed fee per patient day based on the acuity level of the
patient to cover all post-hospital extended care routine service costs,
including ancillary and capital related costs for beneficiaries receiving
skilled services. In May 1998, the Health Care Financing Administration
released the nursing home PPS rates for Part A Medicare patients that are in
effect from July 1, 1998 through September 30, 1999. The Company's experience
thus far under PPS indicates that the program has significantly increased
compliance monitoring of patients acuity levels, the purchase and maintenance
of sophisticated information systems to determine correct acuity levels, and
the training of staff to monitor compliance and use new information systems.
The expenses associated with the implementation and compliance of PPS have
significantly decreased margins on Medicare residents.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1996
STRUCTURE OF OPERATIONS
As of December 31, 1997, the Company operated thirteen (13) long-term
care facilities in Georgia, Florida and Texas, one (1) assisted living center
in Florida, and one (1) hospital in Kansas. The Company also managed two
acute-care hospitals in Florida and Texas.
RESULTS OF OPERATIONS
The Company's total operating revenues from continuing operations for the
year ended December 31, 1997, were $32,984,930 compared to $28,683,704 for the
year ended December 31, 1996. The 15.0% increase in revenues was due to the
acquisition of three long-term care facilities, one hospital and two
management agreements with hospitals, primarily made in the latter half of
1997.
Included in total operating revenues for 1997 were $32,359,366 related to
patient services, $503,577 in management fees stemming from the management
agreements on two hospitals entered into in the December 1997 quarter and
$121,987 in other operating revenues.
Operating expenses for the year ended December 31, 1997, totaled
$35,928,002, an increase of 34.6% over the $26,700,758 in total expenses for
the year ended December 31, 1996. The increase in operating expenses was
primarily the result of additional facility acquisitions during the year, a
larger provision for doubtful accounts (bad debts), two shareholder
settlements and a build-up of the management staff in preparation for
accelerated growth plans in 1998 and beyond.
Total operating expenses in 1997 included $24,913,670 representing the
costs incurred on patient services, and compares to the $20,095,723 incurred
in 1996. The increase in these costs was due mainly to the facility
acquisitions made during the year. Lease expense totaled $771,427 in 1997
versus $709,542 for 1996, and reflected the addition of one leased facility
during the year.
25
General and administrative costs rose $2,752,309 for the year ended
December 31, 1997, to $7,367,125 versus $4,614,816 in 1996. Several expense
categories experienced increases from 1996, due principally from increased
activity surrounding acquisitions, and included management salaries and
related costs, travel expenses, legal and audit fees, supplies, and corporate
insurance. Also during the year, the Company settled two shareholder disputes
for $485,000.
The provision for doubtful accounts, or bad debts expense, increased to
$1,194,780 for the year ended December 31, 1997, from the $203,937 recorded in
1996. The primary reason for the increase in the provision was a more
thorough review by management of aged receivables, and reaching a decision on
the overall probability of their collection. In addition, a provision was
placed on a portion of receivables from the managed hospitals, pending an
improvement in financial condition at one of the facilities.
Depreciation and amortization expense was $1,196,000 in 1997 versus
$1,076,740 in 1996, mainly due to the increase in facilities during the year.
As a result of a 15.0% increase in revenues and an increase of $34.6% in
expenses, the Company recorded an operating loss of $2,943,072 for the year
ended December 31, 1997, compared to an operating income of $1,982,946 for the
year ended December 31, 1996.
Investment income totaled $794,214 in the current year versus $83,828 in
1996. The principle reason for the increase was the interest received on bond
indentures the Company purchased on one of the hospitals currently under a
management agreement. Interest expense rose to $3,148,460 in 1997 from
$1,912,838 in 1996, principally the result of higher levels of outstanding
long-term debt and borrowings under the Company's line of credit.
The loss before income taxes, discontinued operations and extraordinary
items was $5,311,218 in 1997 versus an income of $153,936 in 1996. The loss
in the current year was reduced by an income tax benefit of $1,331,865, which
compares to an income tax provision of $54,000 in 1996.
The results for the year ended December 31, 1997 were also impacted by a
gain on the restructuring of its debts, net of taxes, of $879,851. The
results for 1996 were impacted by losses from a discontinued business segment
and the disposal of this segment of $2,326,228, net of tax benefits.
The net loss for the year ended December 31, 1997 was $3,099,502 ($.29
basic and diluted per common share) versus a net loss of $2,226,292 ($.21
basic and diluted per common share) reported for the year ended December 31,
1996.
INFLATION AND LABOR SUPPLY
Long-term care facilities are labor intensive and can be affected by
changes in wages and the supply of labor. Inflationary increases in wages can
have adverse affects on the Company's skilled long-term care operations in the
short term until Medicaid and Medicare cost reports can be filed for
appropriate reimbursement rate adjustments for individual long-term care
facilities. The supply of labor can have possible adverse affects on the
Company's net results of operations.
26
CAPITAL RESOURCES AND LIQUIDITY
At December 31, 1998, the Company had a deficit of $16,854,523 in working
capital compared to a $3,284,668 deficit at December 31, 1997. The decrease
in working capital is primarily a result of the net loss of $7,809,343 for the
year ended December 31, 1998; the reclassification of $5,000,000 in
convertible debentures to a current liability due to the violation of certain
covenants; and $3,000,000 in mortgage debt which is due in July 1999 becoming
a current liability.
During the years ended December 31, 1998 and 1997, the Company
experienced significant operating losses and a decline in liquidity as a
result of the operating losses incurred and investments made in new
facilities. Management believes the operating losses were the result of (a)
declines in census at specific facilities, (b) acquisition of troubled
facilities requiring a period of time to turn around operations at those
facilities, and (c) delays in collecting governmental receivables caused by
the acquisition of new facilities requiring delayed filings for services
rendered.
To improve liquidity and enhance operations, management believes the
following plans can be implemented:
1) The Company has seven facilities which have no mortgage debt and
believes that it can raise approximately $11,000,000 through mortgages or
sale/leaseback financing;
2) The Company has approximately $9,000,000 in marketable securities
which have been financed principally on margin. Over the course of the year,
the Company believes it can liquidate these securities and the related margin
loan payable and realize approximately $1,500,000;
3) At December 31, 1998, the Company was owed approximately $8,400,000
from related health care entities. Management expects that those entities
will refinance certain facilities and remit approximately $3,100,000 to the
Company;
4) At December 31, 1998, the Company had a balloon payment of
approximately $3,000,000 due during the next year. Management believes that
it will be able to refinance this obligation;
5) During 1998, the Company acquired or leased fourteen new facilities.
Management anticipates focusing on turning around these new facilities, and
enhancing profitability at all facilities by controlling expenditures and
enhancing operating efficiencies.
Management believes that the above items are achievable, however, it can
provide no assurance that these items will occur. Completion of the
financings noted above are subject to volatile market conditions, which have
recently been unfavorable for the health care industry. Any significant
changes to any of the facilities operations are subject to review and
rescission by regulatory authorities.
During the year ended December 31, 1998, cash used in operating
activities was $12,863,818 as compared to $2,198,550 for the year ended
December 31, 1997. The increase in cash used in operating activities of
$10,665,268 for the year ended December 31, 1998, was primarily attributed to
the net loss of $7,809,343 for the year ended December 31, 1998, gains on
sales of investments of $11,129,000, an increase in deferred tax provision of
27
$968,017 and an increase in accounts receivables of $9,007,206 due to the
increase in facilities from 1998. Cash provided by operating activities was
primarily attributable to depreciation and amortization of $2,298,577 on the
facilities; provision for bad debts of $4,749,309 on accounts receivable
deemed uncollectible; the write-off of receivables from two hospital
management contracts of approximately $3,000,000; and increases in accounts
payable and accrued expenses of $9,053,108 as a result of the increase in the
number of facilities operated in 1998.
Cash used in investing activities during the year ended December 31,
1998, was $5,795,863. The expenditures were related to the acquisition of
facilities and the purchase of property and equipment of $15,501,882; payments
of deferred costs of $1,162,766 on the debt incurred to purchase the
facilities; advances to related parties of $5,730,937; and the purchase of
investments of $8,462,313 consisting of bond indentures which were
subsequently sold. The related parties are companies controlled by Chris
Brogdon, the Company's Chairman of the Board and Chief Executive Officer.
Cash provided by investing activities consisted primarily of proceeds from
sale of aforementioned securities of $20,976,408, proceeds from sale of
facilities of $2,171,686 and decreases in restricted investments of
$1,862,503.
Cash provided by financing activities during the year ended December 31,
1998, was $16,362,082. The sources of cash were proceeds of long-term debt
and lines of credit of $22,964,762 and proceeds from issuance of common stock
of $2,509,603. The Company's net borrowings from lines of credit was
$6,887,040, with interest rates at prime plus 2.0% (9.75% at December 31,
1998). In addition to interest charges, the draws on the line of credit are
subject to monthly management fees (.20% of the average previous months' loan
balance) as well as monthly usage and commitment fees. Available borrowing at
December 31, 1998, was $2,344,460 limited by a borrowing base which is 80% of
"collectible" accounts receivable.
Cash used in financing activities consisted of repayment of long-term
debt of $7,046,106, and advances to related parties of $2,066,177, primarily
Princeton Hospital in Orlando, Florida.
At December 31, 1997, the Company had a deficit of $3,284,668 in working
capital compared to a $12,525,447 deficit at December 31, 1996. The increase
in working capital of $10,223,779 was due primarily to significant mortgage
debt that was classified as a current liability for the year ended December
31, 1996, being refinanced as long-term debt for the year ended December 31,
1997.
During the year ended December 31, 1997, cash used in operating
activities was $2,198,550 as compared to $706,285 for the year ended December
31, 1996. The increase in cash used in operating activities of $1,492,265 for
the year ended December 31, 1997, was primarily attributable to the net loss
before extraordinary item of $3,979,353 for the year ended December 31, 1997,
an increase in deferred tax asset of $1,331,865, and an increase in accounts
receivable of $3,864,217 due to the addition of three long-term care
facilities and one hospital. Cash provided by operating activities was
primarily attributable to depreciation and amortization of $1,196,000 on the
facilities, provision for bad debts of $1,194,780 on accounts receivable
deemed uncollectible, increases in accounts payable of $4,958,541 and other
liabilities of $1,720,217 due to the addition of three long-term care
facilities and one rehabilitation hospital.
28
Cash used in investing activities during the year ended December 31,
1997, was $19,891,692. The expenditures were related to the acquisition of
facilities and purchase of property and equipment of $14,381,568, payments of
deferred costs of $1,672,918 on the debt incurred to purchase the facilities,
issuance of notes receivable of $990,000 to Messrs. Chris Brogdon - Chairman
of the Board, Timothy Beaulieu - Executive Vice President, and three other
individuals who are consultants, advances to related parties of $1,176,563,
increases in restricted investments of $1,707,761 pledged as collateral on
long-term debt and the purchase of investments of $7,617,015 consisting
primarily of bond indentures on a hospital the Company manages. The related
parties are companies controlled by Mr. Chris Brogdon. Cash provided by
investing activities consisted primarily of repayment on mortgage notes
receivable of $1,852,377, and $5,783,756 in proceeds from the sale of bond
indentures the Company purchased as an investment.
Cash provided by financing activities during the year ended December 31,
1997, was $21,189,141. The sources of cash related to proceeds of long-term
debt and lines of credit of $36,194,951, proceeds from issuance of common
stock of $3,580,476 from a private placement, and advances from related
parties of $2,776,177. The related parties are companies controlled by Mr.
Chris Brogdon. The Company's net borrowing from lines of credit was
$3,189,755, with interest rates at prime plus 2% (10.50% at December 31,
1997). In addition to interest charges, the draws on the line of credit are
subject to monthly management fees (.20% of the average previous months' loan
balance) as well as a monthly usage fee and commitment fees. Available
borrowing at December 31, 1997, was $6,810,245 limited by a borrowing base
which is 80% of "collectible" accounts receivable. The Company incurred
long-term debt of $33,005,196, due through 2020, with interest rates ranging
from 8.00% to 11.88% collateralized by property and equipment of facilities.
Cash used in financing activities consisted of repayment of long-term debt of
$20,318,489, and the purchase of treasury stock of $1,043,974. The Company
intends to use long-term debt financing in connection with the purchase of any
additional facilities on terms which can be paid out of the cash flow
generated by the property.
The Company presently has no commitments for material capital
expenditures. However, the Company intends to continue to lease, purchase and
manage additional facilities in the future. The Company intends to use long-
term debt financing in connection with the purchase of any additional
facilities on terms which can be paid out of the cash flow generated by the
property.
YEAR 2000 UPDATE
The Company has been actively engaged in addressing Year 2000 Issues.
Such issues relate to potential problems resulting from non-Year 2000
compliant systems processing transactions using two-digit date fields rather
than four-digit date fields for the year of a transaction. If these systems
are not identified and reconfigured, Year 2000 transactions would be processed
as year "00," which could lead to processing inaccuracies and potential
inoperability and could have a material adverse effect on the Company's
business.
As a result of the Company's recent expansion, many of the Company's
communications and data processing systems are Year 2000 compliant. However,
the Company has undertaken a Year 2000 Project to identify and modify any non-
Year 2000 compliant systems.
29
The Company has completed a comprehensive review of the internal Year
2000 issues it needs to address. From this review, the Company has
established a timetable for the implementation of all necessary changes, and
it expects to be completed by the summer of 1999. The status of material
third party relationships on Year 2000 issues was also addressed. These
relationships include the Company's main banking partner, the Health Care
Financing Administration (HCFA), Medicaid reimbursements from individual
states, and the outside payroll vendor.
In discussions with our main bank, the Company has been informed that
four stages of testing have already been completed. Furthermore, the Company
was assured that final stages of testing would be completed well in advance of
2000 in order to make any necessary corrections that could have a material
impact on our Company.
Concerning HCFA and Medicare reimbursements, the Company has received
information from a fiscal intermediary for the Medicare program that states
"HCFA has a program to systematically assess, renovate and test each mission
critical system in all its facilities, as well as those of each carrier and
intermediary by December 31, 1998. This target date will have given HCFA a
full year to fix any problems that might have escaped detection during
renovation and testing. In addition, Medicare carriers and intermediaries
will test their electronic data interchanges with the hospital information
system, billing system, and billing service. This testing ensures that these
systems interface and work properly with no interruption in claims and
payments processing after the clock ticks at midnight on January 1, 2000."
As for Medicaid, the Company does not currently have detailed information
on the progress made on addressing Year 2000 issues, but it is known that work
is in process.
In discussions with the Company's outside payroll provider, the Company
received a comprehensive detailed listing of all applications and systems
currently being worked on. In addition, information received stated "We have
been addressing the challanges of the Y2K for the last several years and have
the technical, financial and human resources in place to successfully address
them."
Information on other entities which interact with the Company is not
available at this time, but it is felt that the four entities specifically
identified above could potentialy have a material adverse impact on the
Company if issues related to Year 2000 are not addressed successfully.
To date, the Company has evaluated the potential internal cost of
addressing Year 2000 issues, and estimates these costs will amount to
approximately $5,000 to $20,000. These costs will be expensed when incurred
and should not have an adverse impact on the Company's financial condition.
No contingency plans have been established at this time should the Company
or material third party relationships fail to resolve Year 2000 issues by the
end of 1999. These plans will have to be addressed in the near future.
Unforeseen difficulties may adversely affect the Company's ability to complete
its systems modifications correctly, completely, on time or within its cost
estimates. Additionally, there can be no assurance that third parties that
the Company deals with will resolve their year 2000 issues completely and
timely. Failure to compete the year 2000 project on time could have a
material adverse affect on future operating results and financial condition.
30
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Information with respect to Item 8 is contained in the Company's
consolidated financial statements and are set forth herein beginning on Page
F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
No response required.
31
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Certain information about the directors and executive officers of the
Company is contained in the following table:
NAME AGE POSITION
Chris Brogdon 50 Chairman of the Board, Chief Executive
Officer and Director
Darrell C. Tucker 41 President and Director
Arthur Doloresco 48 President of NewCare Hospital Corporation
James H. Sanregret 48 Treasurer and Chief Financial Officer
James J. Andrews 40 Chief Operating Officer
Philip M. Rees 36 Secretary and General Counsel
Ashok Dalal 59 Director
Dr. Kishor Karia 55 Director
Harlan Mathews 71 Director
Jeff M. Moore 40 Director
Mark P. Clein 39 Director
All directors hold office until the next annual meeting of the
shareholders of the Company or until their successors have been elected and
qualified. Officers serve at the discretion of the Board of Directors with no
fixed terms of office.
The Company presently has an Audit Committee and a Compensation
Committee. The Audit Committee presently consists of Mark P. Clein, Jeff M.
Moore and Ashok Dalal. The Compensation Committee presently consists of Dr.
Kishor Karia, Harlan Mathews and Ashok Dalal.
The following sets forth biographical information as to the business
experience of each officer and director of the Company for at least the last
five years.
CHRIS BROGDON has served as a Director of the Company since February 19,
1997, and as Chief Executive Officer since July 1998. From October 1991 to
June 1998, he served as President and a Director of Retirement Care
Associates, Inc., a publicly-held company headquartered in Atlanta, Georgia,
which was acquired by Sun Healthcare Group in June 1998. Mr. Brogdon has been
involved in financing and operating long-term care facilities and assisted
living/independent living communities since 1982. From 1969 until 1982, Mr.
Brogdon was employed in the securities business as a retail salesman. Mr.
Brogdon attended Georgia State University in Atlanta, Georgia. Since March
1987, Mr. Brogdon has been Secretary/Treasurer of Winter Haven Homes, Inc.
("WHH") and since August 1990, he has been Secretary/Treasurer of National
Assistance Bureau, Inc. ("NAB"). Both WHH and NAB are engaged in the business
32
of owning and operating long-term care facilities and assisted
living/independent living communities.
DARRELL C. TUCKER. Mr. Tucker has been President and a Director of the
Company since July 1998. From October 1990 to June 1998, he was President of
Capitol Care Management Company, Inc. ("Capitol Care"), a subsidiary of
Retirement Care Associates, Inc. ("Retirement Care"). He also served as a
Director of Retirement Care from November 1991 to June 1998, and as Treasurer
of Retirement Care from November 1993 to June 1998. From July 1990 to October
1990, he was a consultant to Winter Haven Homes, Inc. From September 1988 to
July 1990, he was a risk manager for Pruitt Corporation where he was involved
in insurance management for 30 long-term health care facilities. From April
1987 to August 1988, he was Chief Financial Officer for Allgood Health Care,
Inc. which managed 12 nursing home facilities. Mr. Tucker received a
Bachelors Degree in Accounting from the University of Georgia in 1980.
ARTHUR DOLORESCO has served as President of NewCare Hospital Corporation
since August 1997. Mr. Doloresco has served in various leadership positions
in the healthcare industry for the past 20 years. Working with both 501(c)3
and investor-owned facilities, he served from May 1996 to July 1997 as the
President of the Kentucky Division for Columbia/HCA. His responsibilities
included all operations in Kentucky, including 13 hospitals, home health
agencies, and surgery centers, which accounted for over $680 million in net
revenues. Prior to joining Columbia/HCA, he served as a Regional Vice
President for Champion Healthcare Corporation from December 1994 to May 1996
in Houston, Texas, where he was responsible for half of that company's
operations. He has served as the President and Chief Executive Officer of
various hospitals, including an urban teaching facility with over 500 beds.
Mr. Doloresco received his Masters Degree in Health Administration from the
Medical College of Virginia in 1979 and a Bachelor of Science Degree in
Business Administration from Old Dominion University in Norfolk, Virginia in
1975.
JAMES H. SANREGRET has served as Chief Financial Officer of the Company
since June 1997 and as Treasurer since July 1998. Mr. Sanregret was
previously employed by Delta Air Lines for 24 years. He was Treasurer of
Delta from 1992 to May 1997. As Treasurer he was responsible for all
Corporate Finance, Tax and Corporate Insurance activities on a global basis
for the $12 billion airline. He was Assistant Vice President of Financial
Planning in 1992 and was responsible for analyzing the economics of all
proposed spending activities, preparation of projected income statement for
quarterly Board of Directors meetings, and the development of expense levels
and capital outlays for all major corporate acquisitions/mergers. From 1985
to 1992, he was the Director of Financial Planning. He coordinated all
financial activities related to the acquisition of Western Airlines. He
functioned as Manager of Financial Planning from 1981 to 1985, Analyst of
Financial Planning from 1974 to 1981, and Accountant of Property Accounting
from 1973 to 1974. Mr. Sanregret received a Bachelor of Business
Administration from the University of Wisconsin in 1972.
JAMES J. ANDREWS has served as Chief Operating Officer since July 1998.
From June 1994 to July 1998, he was President of Retirement Management
Corporation which became a wholly-owned subsidiary of Retirement Care
Associates, Inc. in December 1993. Mr. Andrews received a Bachelors Degree in
Music from Samford University in 1980.
PHILIP M. REES has served as Secretary of the Company since April 1997
and General Counsel of the Company since July 1998. From June 1994 to June
1998, he was General Counsel for Retirement Care Associates, Inc. From May
33
1989 to June 1994, Mr. Rees was an attorney with the law firm of Vincent,
Chorey, Taylor & Feil in Atlanta, Georgia. He received a Bachelors Degree in
Economics in 1985 and a Juris Doctorate Degree in 1989 from the University of
North Carolina.
ASHOK DALAL has served as a Director of the Company since April 1994.
Mr. Dalal served as Chief Executive Officer of the Company from January 1997
to July 1998, and served as Executive Vice President from April 1994 to
January 1997. He is presently practicing accounting with the firm of Ashok
Dalal, P.C. Mr. Dalal was a private investor in several limited partnerships
whose properties were managed by ANH. He has a B.S. Degree and a Master of
Business Administration Degree.
DR. KISHOR KARIA has served as a director of the Company since July,
1995. Dr. Karia is an internal medicine physician specializing in Hematology
Oncology and has been practicing in South Florida since 1982. Dr. Karia was a
limited partner in several Florida long-term care facilities operated by the
Company until 1993 when he exchanged his ownership interest in the long-term
care facilities with NewCare, Inc.
HARLAN MATHEWS has been a Director of the Company since February 1997.
Since 1994 he has been a partner in the law firm of Farris, Mathews, Branan &
Hellen, P.L.C., in Nashville, Tennessee. From 1993 to 1994, he served as a
United States Senator from the State of Tennessee. From 1987 to 1993, he was
Deputy to the Governor of Tennessee and Cabinet Secretary. From 1974 to 1987,
Mr. Mathews was Treasurer of the State of Tennessee. He received a Bachelor's
Degree in Business from Jacksonville State University in Alabama in 1949 and a
Master's Degree in Public Administration from Vanderbilt University in 1950.
Mr. Mathews received a law degree from the Nashville School of Law in 1962.
Mr. Mathews currently serves as a Director of Murray Guard, Inc., a
publicly-held company based in Jackson, Tennessee.
JEFF M. MOORE has been a Director of the Company since July 1998. He is
a limited partner of Apollo Advisors, L.P., Ares Management L.P. and Lion
Advisors L.P., which act as managing general partner of Apollo Investment
Fund, L.P., Ares Leveraged Investment Fund L.P. and AIF II, L.P.,
respectively, securities investment funds, and a financial advisor to and
representative for certain institutional investors with respect to securities
investments since 1992. From 1990 until joining Apollo, Mr. Moore was Vice
President -- Investment Management at First Executive Corporation, where he
was responsible for the management of a diversified securities portfolio.
Prior to 1990, he was a Certified Public Accountant at Deloitte & Touche LLP,
where he specialized in financial instruments and credit analysis. Mr. Moore
also serves as Chairman of the Board and a Director of Multigraphics, Inc., a
publicly-held company listed on the American Stock Exchange.
MARK P. CLEIN has been a Director of the Company since July 1998. Since
1996, Mr. Clein has been Chief Financial Officer of PMR Corporation, a NASDAQ
National Market System-listed company, which develops, manages and markets
programs and services for individuals who have been diagnosed with serious
mental illness, including outpatient, case management and chemical dependency
programs. From 1982 to 1996, Mr. Clein was employed by several New York based
investment banking firms, including Jefferies & Co., where he held the
position of managing director of investment banking (specializing in the
health care industry), Sprout Group, an affiliate of Donaldson, Lufkin and
Jenrette, Inc., and Merrill Lynch Venture Capital, Inc., where he focused on
early stage investing in the healthcare industry. Mr. Clein received a
34
Masters of Business Administration Degree from Columbia University in 1983 and
a Bachelor's Degree from the University of North Carolina in 1981. He is also
a Director of Children's Discovery Centers of America, Inc., which is publicly
held.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based solely on a review of Forms 3 and 4 and amendments thereto
furnished to the Company during its most recent fiscal year, and Forms 5 and
amendments thereto furnished to the Company with respect to its most recent
fiscal year and certain written representations, no persons who were either a
director, officer or beneficial owner of more than 10% of the Company's Common
Stock, failed to file on a timely basis reports required by Section 16(a) of
the Exchange Act during the most recent fiscal year, except as follows:
Chris Brogdon, Chairman of the Board, Chief Executive Officer and a
Director, reported eight transactions late by amending Form 4's; Darrell C.
Tucker, President and a Director, reported two Form 4 transactions late in a
Form 5 filing; Jeff M. Moore, a Director, filed a Form 3 late; and James J.
Andrews, Chief Operating Officer, filed a Form 3 late, and filed a Form 5
reporting the exempt grant of a stock option late.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information regarding the executive
compensation for the Company's President, Chief Executive Officer, and each
other Executive Officer who received compensation in excess of $100,000 for
the years ended December 31, 1998, 1997 and 1996 from the Company and its
subsidiaries.
SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION
ANNUAL COMPENSATION AWARDS PAYOUTS
--------------------- -------------------- --------
SECURITIES
UNDERLY-
OTHER RE- ING ALL
ANNUAL STRICTED OPTIONS/ OTHER
NAME AND PRINCIPAL COMPEN- STOCK SARs LTIP COMPEN-
POSITION YEAR SALARY BONUS SATION AWARD(S) (NUMBER) PAYOUTS SATION
- ------------------ ---- ------ ----- ------- -------- ---------- ------- -------
Ashok Dalal, 1998 $ 26,000 -0- -0- -0- 25,000 -0- -0-
President<FN1> 1997 $ 24,167 -0- -0- -0- 225,000 -0- -0-
Darrell C. Tucker, 1998 $150,000 -0- -0- -0- 100,000 -0- -0-
President<FN2>
Chris Brogdon, 1998 $150,000 -0- -0- -0- 200,000 -0- -0-
Chairman and
CEO<FN3>
James H. 1998 $165,733 -0- -0- -0- 75,000 -0- -0-
Sanregret,
Treasurer and CFO
Philip M. Rees, 1998 $137,500 -0- -0- -0- 120,000 -0- -0-
Secretary and
General Counsel<FN4>
35
Timothy Beaulieu, 1998 $216,500 -0- -0- -0- 50,000 -0- -0-
Vice President<FN5>
James J. Andrews 1998 $137,500 -0- -0- -0- 100,000 -0- -0-
Chief Operating
Officer
Arthur Doloresco, 1998 $335,417 -0- -0- -0- 75,000 -0- $2,786
President of <FN10>
Subsidiary <FN7> 1997 $121,875 $10,000 135,000 -0- 50,000 -0- $4,884
<FN8> <FN9> <FN10>
Robert Bell, Sr., 1996 $ 96,000 -0- -0- -- -- -- -0-
President<FN11>
- -----------------
<FN>
<FN1>
Mr. Dalal was President from January 1997 to July 1998.
<FN2>
Mr. Tucker became President in July 1998.
<FN3>
Mr. Brogdon became Chief Executive Officer in July 1998.
<FN4>
Mr. Rees became Secretary in April 1997 and General Counsel in July 1998.
<FN5>
Mr. Beaulieu resigned in October 1998.
<FN6>
Mr. Andrews became Chief Operations Officer in July 1998.
<FN7>
Mr. Doloresco became President of the Company's 1997 NewCare Hospital Subsidiary on
during August 1997.
<FN8>
Includes $26,500 paid for Mr. Doloresco's moving expenses and $108,600 which represents
the net cost to the Company of purchasing his former residence from him and reselling
it.
<FN9>
Does not include the value of restricted stock of NewCare Hospital Corporation, a
majority-owned subsidiary of the Company, issued to Mr. Doloresco pursuant to his
employment agreement. Please see the description of that agreement under the heading
"EMPLOYMENT AGREEMENTS" below.
<FN10>
Represents amounts paid for a term life insurance policy provided for the benefit of Mr.
Doloresco.
<FN11>
Mr. Bell resigned as President on January 3, 1997.
</FN>
36
OPTION/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
POTENTIAL
REALIZABLE
PERCENT VALUE AT ASSUMED
NUMBER OF OF TOTAL ANNUAL RATES
SECURITIES OPTIONS/SARs EXERCISE OF STOCK PRICE
UNDERLYING GRANTED TO OR BASE APPRECIATION
OPTIONS/SARs EMPLOYEES IN PRICE EXPIRATION FOR OPTION TERM
NAME GRANTED(#) FISCAL YEAR ($/SH) DATE 5%($) 10%($)
- ---------------- ------------ ------------ ------- ----------- -------- --------
Ashok Dalal 25,000 1.5% $3.00 4/6/03 $20,750 $ 45,750
Darrell C. Tucker 100,000 5.9% $2.188 9/1/03 60,500 133,600
Chris Brogdon 200,000 11.8% $2.188 9/1/03 121,000 267,200
James H. Sanregret 75,000 4.4% $2.188 9/1/03 45,375 100,200
Philip M. Rees 20,000 1.2% $3.00 4/6/03 16,600 36,600
100,000 5.9% $2.188 9/1/03 60,500 133,600
Timothy Beaulieu 50,000 3.0% $3.03 7/8/03 42,000 92,500
James J. Andrews 100,000 5.9% $2.188 9/1/03 60,000 133,600
Arthur Doloresco 75,000 4.4% $2.188 9/1/03 45,375 100,200
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
SECURITIES
UNDERLYING VALUE OF UNEXER-
SHARES UNEXERCISED CISED IN-THE
ACQUIRED OPTIONS MONEY OPTIONS/
ON SARs AT FY-END SARs AT FY-END
EXERCISE VALUE EXERCISABLE/ EXERCISABLE/
NAME (NUMBER) REALIZED UNEXERCISABLE UNEXERCISABLE
- ---------------- -------- -------- -------------- ---------------
Ashok Dalal -0- -- 250,000 / 0 $ 0 / 0
Darrell C. Tucker -0- -- 270,000 / 0 $ 0 / 0
Chris Brogdon -0- -- 575,000 / 0 $ 0 / 0
James H. Sanregret -0- -- 125,000 / 0 $ 0 / 0
Philip M. Rees -0- -- 220,000 / 0 $ 0 / 0
Timothy Beaulieu -0- -- 125,000 / 0 $ 0 / 0
James J. Andrews -0- -- 270,000 / 0 $ 0 / 0
Arthur Doloresco -0- -- 125,000 / 0 $ 0 / 0
Except for the Company's 1997 Stock Option Plan described below, the only
benefit plan presently offered involves a major medical plan, which is made
available to all full-time employees on a non-discriminatory basis.
Members of the Board of Directors receive a fee of $500 per meeting
attended. They are also entitled to reimbursement of reasonable expenses
incurred by them in attending board meetings.
37
EMPLOYMENT AGREEMENTS
Effective June 2, 1997, the Company entered into a three-year employment
agreement with James H. Sanregret, Chief Financial Officer of the Company.
Under this agreement, Mr. Sanregret will receive an annual salary of $144,000
during the first year of the agreement, $184,000 during the second year and
$224,000 during the third year. He also received stock options to purchase
50,000 shares of the Company's Common Stock. The Company is also to provide a
$500,000 term life insurance policy for his benefit and pay him a $700 per
month car allowance. Mr. Sanregret has agreed to keep certain information
confidential and that for a period of two years following the termination of
his employment agreement he will not serve in an executive capacity for any
business which is engaged in a similar business to the Company in its region
without the Company's consent.
Effective July 8, 1997, the Company entered into a three-year employment
agreement with Timothy J. Beaulieu, and became Vice President of the Company
in charge of all long-term care facility operations. He resigned effective
October 1998, but will continue to serve as a consultant through June 30,
1999, at his full salary. Under his agreement, Mr. Beaulieu received an
annual salary of $175,000 during the first year of the agreement, and will
receive $200,000 during the second year. He also received stock options to
purchase 125,000 shares of the Company's Common Stock in connection with the
agreement. Mr. Beaulieu has agreed to keep certain information confidential
and that for a period of one year following the termination of his employment
he will not serve in an executive capacity for any business which is engaged
in a similar business to the Company in its region without the Company's
consent.
Effective August 1, 1997, the Company entered into a three-year
employment agreement with Arthur Doloresco, President of the Company's NewCare
Hospital Corporation ("NCHC") subsidiary. Under this agreement, Mr. Doloresco
will receive an annual salary of $325,000 during the first year of the
agreement, $350,000 during the second year, and $375,000 during the third
year. Mr. Doloresco is also entitled to an annual bonus of $200,000 for any
calendar year in which NCHC's earnings before interest, taxes, depreciation,
amortization and rent ("EBITDAR") exceeds 20% of net revenues; $275,000 if
EBITDAR exceeds 25% of net revenues; and $350,000 if EBITDAR exceeds 30% of
net revenues. He also received stock options to purchase 50,000 shares of the
Company's Common Stock in connection with the agreement. The Company has
also agreed to provide Mr. Doloresco a $1,000,000 term life insurance policy
for his benefit. The Company also purchased his residence in Houston, Texas
and paid for his moving expenses to Atlanta, Georgia. Mr. Doloresco also
received five shares of the Common Stock of the Company's NewCare Hospital
Corporation subsidiary ("NCHC"), which represents 5% of NCHC's outstanding
Common Stock. The shares of NCHC's stock will vest one share at the end of
each year of his employment, except that if Mr. Doloresco's employment ends on
July 31, 2000, all of the shares will then be vested. The entire five shares
will vest immediately in the event of a termination of Mr. Doloresco's
employment by the Company without cause or by Mr. Doloresco with cause, or in
the event of a merger or combination where NCHC is not the surviving entity,
or its board of directors does not control the surviving entity. The
agreement may be terminated immediately by the Company with or without cause.
Mr. Doloresco may terminate the agreement immediately for cause or on twelve
months notice without cause. In the event of termination by the Company
without cause or by Mr. Doloresco with cause, Mr. Doloresco will be entitled
to twelve months severance pay. The Company and Mr. Doloresco have agreed to
negotiate in good faith to review or extend the term of the agreement not less
than 180 days prior to the end of the term, and if no agreement is reached,
38
Mr. Doloresco will be entitled to up to six months base salary following
termination of his employment. Mr. Doloresco has agreed to keep certain
information confidential and that for a period of two years following the
termination of his employment he will not serve in an executive capacity for
any business which is engaged in a similar business to the Company in its
region without the Company's consent.
Effective July 1, 1998, the Company entered into Employment Agreements
with Chris Brogdon, Chairman of the Board and Chief Executive Officer; Darrell
C. Tucker, President; Philip M. Rees, Secretary and General Counsel; James
Andrews, Chief Operations Officer. Each of these agreements are for initial
terms of three years but unless either party gives notice at least 60 days
prior to the end of any term year, the agreement will be automatically
extended for an additional year, thereby maintaining a term of three years.
In the event that any of these employment agreements are terminated by the
Company without cause, or by the employee for "Good Reason", as defined in the
agreement, or in the event of "Terminating Event", as defined in the
agreement, including a take over of the Company, the employee is entitled to a
lump sum payment equal to all amounts of compensation and benefits which would
have been paid over the remaining term of the agreement. In the event of
termination due to disability, the employee is entitled to receive his salary
for one year. The agreements provide that the Company will provide life
insurance policies in the face amount of $2,000,000 for each employee's
benefit at the Company's expense. Mr. Brogdon's initial annual salary is
$300,000; Mr. Tucker's initial annual salary is $300,000; Mr. Rees' initial
annual salary is $275,000; and Mr. Andrews' initial annual salary is $275,000.
The Employment Agreements provide for certain annual salary increases and a
specified number of options to be granted annually. However, each of these
four employees has agreed to waive the automatic annual salary increases and
the granting of automatic annual options until such time as each individual
and the Board of Directors of the Company has agreed to a methodology related
to the performance of the Company and/or specific performance by the employee.
1997 STOCK OPTION PLAN
In April 1997, the Company's Board of Directors approved the
establishment of a Stock Option Plan (the "1997 Plan") subject to approval of
the Company's shareholders. The Board of Directors believes that the 1997
Plan will advance the interests of the Company by encouraging and providing
for the acquisition of an equity interest in the success of the Company by
employees, officers, directors and consultants, and by providing additional
incentives and motivation toward superior Company performance. The Board
believes it also will enable the Company to attract and retain the services of
employees, officers, directors and consultants, and by providing additional
39
incentives and motivation toward superior Company performance. The Board
believes it also will enable the Company to attract and retain the services of
employees, officers, directors and consultants upon whose judgment, interest
and special effort the successful conduct of its operations is largely
dependent.
The 1997 Plan allows the Board to grant stock options from time to time
to employees, officers and directors of the Company and consultants to the
Company. The Board has the power to determine at the time the option is
granted whether the option will be an Incentive Stock Option (an option which
qualifies under Section 422 of the Internal Revenue Code of 1986) or an option
which is not an Incentive Stock Option. However, Incentive Stock Options will
only be granted to persons who are employees of the Company. Vesting
provisions are determined by the Board at the time options are granted. The
total number of shares of Common Stock subject to options under the 1997 Plan
may not currently exceed 2,000,000, subject to adjustment in the event of
certain recapitalizations, reorganizations and similar transactions. The
option price may be satisfied by the payment of cash, or where approved by the
Board of Directors, in its sole discretion and where permitted by law: (a) by
cancellation of indebtedness of the Company to the holder; (b) by surrender of
shares of Common Stock of the Company having a Fair Market Value equal to the
exercise price of the option that have been owned by holder for more than six
months, or were obtained by the holder in the open public market; (c) by
waiver of compensation due or accrued to the holder for services rendered; (d)
provided that a public market for the Company's stock exists, through a "same
day sale" commitment from the holder and a broker-dealer whereby the holder
irrevocably elects to exercise the option and to sell a portion of the shares
so purchased to pay for the exercise price and the broker-dealer irrevocably
commits upon receipt of such shares to forward the exercise price directly to
the Company; (e) provided that a public market for the Company's stock exists,
through a "margin" commitment from the holder and a broker-dealer whereby the
holder irrevocably elects to exercise the option and to pledge the shares so
purchased to the broker-dealer in a margin account, and the broker-dealer
irrevocably commits upon receipt of such shares to forward the exercise price
directly to the Company; or (f) by any combination of the foregoing.
The Board of Directors may amend the 1997 Plan at any time, provided that
the Board may not amend the 1997 Plan to materially increase the number of
shares available under the 1997 Plan, materially increase the benefits
accruing to Participants under the 1997 Plan, or materially change the
eligible class of employees without shareholder approval.
As of December 31, 1998, stock options had been granted under the 1997
Plan to purchase an aggregate of 1,987,500 shares of Common Stock at prices
ranging from $2.156 to $4.85 per share.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of March 1, 1998, the shares of the
Common Stock beneficially owned by each person who is the beneficial owner of
more than five percent (5%) of the Company's shares, each of the Company's
40
Directors and Executive Officers and by all of the Company's Directors and
Executive Officers as a group. Each person has sole voting and investment
power with respect to the shares shown, except as noted.
NAME AND ADDRESS AMOUNT OF BENEFICIAL PERCENTAGE
OF BENEFICIAL OWNER OWNERSHIP OF CLASS
- ----------------------------- -------------------- ----------
Ashok Dalal 1,181,469<FN1> 9.5%
3703 Bridge Road
Cooper City, FL 33026
Dr. Kishor Karia 926,138<FN2> 7.6%
11001 Pines Blvd., Suite 106
Pembroke Pines, FL 33024
Darrell C. Tucker 470,000<FN3> 4.8%
6000 Lake Forrest Drive, Suite 200
Atlanta, GA 30328
Chris Brogdon 2,928,365<FN4> 23.1%
6000 Lake Forrest Drive, Suite 200
Atlanta, GA 30328
Harlan Mathews 25,000<FN5> 0.2%
420 Hunt Club Road
Nashville, TN 37221
Arthur Doloresco 125,000<FN6> 1.4%
6000 Lake Forrest Drive, #315
Atlanta, GA 30328
James H. Sanregret 165,476<FN7> 1.4%
6000 Lake Forrest Drive, #315
Atlanta, GA 30328
Philip M. Rees 304,000<FN8> 2.5%
6000 Lake Forrest Drive, Suite 200
Atlanta, GA 30328
James J. Andrews 395,000<FN9> 3.2%
6000 Lake Forrest Drive, Suite 200
Atlanta, GA 30328
Jeff M. Moore 0 --
1999 Avenue of the Stars, Suite 1900
Los Angeles, CA 90067
Mark P. Clein 0 --
3990 Old Town Avenue
San Diego, CA 92110
Veena Holdings, Ltd.<FN10> 901,138 7.4%
1101 Pines Blvd., Suite 106
Pembroke Pines, FL 33024
Dr. Diraj Patel 932,888<FN11> 7.7%
11801 N. Island Road
Pembroke, FL 33026
41
Pro Futures Bridge Capital Fund, 1,000,002<FN12> 8.0%
L.P.
5350 S. Roslyn Street, Suite 350
Englewood, CO 80111
Renaissance Capital Group, Inc. 1,512,336<FN13> 11.1%
Suite 210-LB59
8080 North Central Expressway
Dallas, TX 75206
All Directors and Executive 6,520,448 46.4%
Officers as a Group (11 Persons)
- -------------------
<FN>
<FN1>
Includes 900,000 shares held directly; an aggregate of 31,469 shares held of
record by certain family members of Mr. Dalal; and 250,000 shares underlying
stock options held by Mr. Dalal.
<FN2>
Represents 901,138 shares held by Veena Holdings, Ltd., a partnership owned by
Dr. Karia and his family, and 25,000 shares underlying stock options held by
Dr. Karia.
<FN3>
Includes 50,000 shares held directly; 35,000 shares held by Mr. Tucker's wife;
115,000 shares held by a trust of which Mr. Tucker's wife is trustee; and
270,000 shares underlying stock options held by Mr. Tucker.
<FN4>
Includes 1,092,278 shares owned by Mr. Brogdon; 407,600 shares owned by Mr.
Brogdon's wife, Connie Brogdon; 295,987 shares of Common Stock which
represents 50% of the shares held by Winter Haven Homes, Inc., of which Connie
Brogdon is a 50% owner; 22,000 shares held by trusts of which Connie Brogdon
is the beneficial owner; 575,000 shares underlying currently exercisable stock
options held by Mr. Brogdon; and 535,500 shares underlying options Mr. Brogdon
holds to purchase stock from another shareholder.
<FN5>
Represents 25,000 shares underlying stock options held by Mr. Mathews.
<FN6>
Represents 125,000 shares underlying stock options held by Mr. Doloresco.
<FN7>
Includes 40,476 shares owned by Mr. Sanregret and 125,000 shares underlying
stock options held by him.
<FN8>
Includes 50,000 shares held by Mr. Rees; 4,000 shares held by his wife;
220,000 shares underlying stock options held by Mr. Rees; and 30,000 shares
underlying stock options held by his wife.
<FN9>
Includes 125,000 shares held by Mr. Andrews and 270,000 shares underlying
stock options held by him.
<FN10>
The shareholders of Veena Holdings, Ltd. are Dr. Kishor Karia, Veena Karia,
Ojus Karia and Tajus Karia.
<FN11>
Includes 801,138 shares held in the name of Dr. Patel's wife, Pravinagauri
Patel; 26,750 shares held in the Karia & Patel Stirling Health Center Annuity
Plan for the benefit of Mr. Patel; 80,000 shares held jointly by Dr. Patel and
his wife; and 25,000 shares underlying stock options held by Mr. Patel.
<FN12>
Includes 666,668 shares held directly and 333,334 shares underlying warrants
held by Pro Futures Bridge Capital Fund, L.P.
42
<FN13>
Includes 200,000 shares underlying stock options held by Renaissance Capital,
Group, and 1,312,336 shares issuable upon the conversion of Convertible
Debentures held by two entities controlled by Renaissance Capital Group, Inc.
The number of shares issuable upon the conversion of the Convertible
Debentures may be increased in April or May 1998 as a result of an adjustment
to the conversion price based on the weighted average closing price of the
Company's Common Stock for the 21 consecutive trading days following the
announcement of the financial results for the year ended December 31, 1998.
</FN>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
RESIGNATION OF ROBERT W. BELL, SR.
During January 1997, Robert W. Bell, Sr., the Company's Chairman and
President, resigned from all of his positions with the Company. In connection
with his resignation, the Company purchased from him and members of his family
a total of 869,978 shares of the Company's common stock for a price of $1.20
per share, or a total consideration of $1,043,973.60. These shares were then
resold to Chris Brogdon and his designees. (See "Letter of Understanding with
Chris Brogdon", below.)
LETTER OF UNDERSTANDING WITH CHRIS BROGDON
On February 19, 1997, the Company's Board of Directors ratified and
approved a Letter of Understanding (the "Letter") between the Company and
Chris Brogdon which was executed on January 31, 1997. Pursuant to this
Letter, the Company agreed to add Chris Brogdon and Harlan Mathews to the
Company's Board of Directors, and these two persons were in fact added on
February 19, 1997. Chris Brogdon currently serves as President and a director
of Retirement Care Associates, Inc. ("RCA"), and Harlan Mathews currently
serves as a director of RCA.
The Letter further provides for and contemplates that Chris Brogdon and
other individuals he selects will become actively involved in the management
of the Company once RCA's proposed merger with Sun HealthCare Group, Inc. is
closed.
Pursuant to the Letter, Chris Brogdon and his designees purchased from
the Company, for a price of $1.20 per share, the 869,978 restricted shares of
the Company's common stock which the Company purchased from Robert W. Bell,
Sr. and members of his family.
The Letter further provides and contemplates that Chris Brogdon and his
designees will purchase from the Company 1,200,000 shares of common stock for
a price of $1.50 per share, contingent upon the Company receiving these shares
from the Carroll Group. (See "Item 3" above.)
The Letter further provided that the Company was to grant to Chris
Brogdon and his designees options to purchase a total of 1,500,000 shares of
common stock at a price of $2.20 per share. These options were granted in
consideration for Mr. Brogdon's agreement to take over management of the
Company. In the event that the Company's common stock does not reach an
average price of at least $5.00 for any 30 consecutive days during the 12
month period following Mr. Brogdon's election as Chief Executive Officer, all
unexercised options will be canceled.
43
LOANS TO PURCHASE STOCK
In June 1997, the Company loaned an aggregate of $990,000 to five
individuals to allow them to purchase shares of the Company's Common Stock
from Matthew Carroll and certain other shareholders. The loans bear interest
at 10% per annum and were originally due on June 30, 1998, but were extended
to December 31, 2000. Included in these loans are loans to Chris Brogdon,
Chairman of the Board and a principal shareholder of the Company, in the
principal amount of $562,500; and Philip M. Rees, who is now Secretary and
General Counsel of the Company, in the principal amount of $75,000. In
connection with the extension of these loans, the loans were secured by the
interests in Renaissance Senior Living, Inc. held by the borrowers.
AGREEMENTS AND TRANSACTIONS WITH RENAISSANCE SENIOR LIVING, INC.
On February 17, 1997, the Company entered into a Management Agreement
with Renaissance Senior Living, Inc. ("Renaissance"), pursuant to which
Renaissance agreed to manage all of the Company's long-term care facilities
and assisted living/independent living facilities. Renaissance was to be paid
a monthly fee for each facility equal to 25% of the increase in profit (a
decrease in loss) at the facility as compared to the profit (or loss) at the
facility as of December 31, 1996, but the fee was not to exceed 6% of the
gross operating revenues of the facility for that month. The agreement
terminated on December 31, 1997, and this arrangement ended. During the year
ended December 31, 1997, Renaissance earned no fees under this agreement
because none of the facilities had the requisite improvement. Renaissance is
owned by Chris Brogdon (20%), Edward E. Lane (20%), Darrell Tucker (17%),
James J. Andrews (15%), Philip M. Rees (13%), and other employees of the
Company. Chris Brogdon and Darrell C. Tucker, officers and directors of the
Company, are also directors of Renaissance.
In December 1997, Renaissance formed Conyers Retirement, L.P., a Georgia
limited partnership for the purpose of constructing a senior living community
on a 10 acre tract of raw land in Conyers, Georgia. Renaissance serves as
General Partner of the partnership and holds 99% of the interest in the
partnership, and the Company is the sole limited partner and holds 1% of the
interest in the partnership for which it contributed $1.00. Since the
formation of the partnership, the Company has also contributed approximately
$300,000 and guaranteed $9 million in the Development Authority of Rockdale
County First Mortgage Revenue Bonds (Conyers Retirement, L.P. Project), the
net proceeds of which were loaned to the partnership to finance the
construction of a 132 unit senior living community on the site. The Company
entered into an agreement to manage the facility for which it will receive a
fee of 5% of the facility's gross revenues. As part of the management
agreement the Company will agree to make non-interest bearing advances to
Conyers Retirement, L.P. to the extent that revenues generated by the facility
are not sufficient to pay its current expenses and required principal and
interest under the bonds. The facility opened in March 1999.
During 1998, the Company provided management services for two facilities
owned by Renaissance for which the Company was paid a total of $61,500. In
addition, the Company has made non-interest bearing advances to Renaissance,
which at December 31, 1998, totaled $2,114,000.
ADVANCES TO AND FROM OTHER AFFILIATED ENTITIES
In addition to Retirement Senior Living, Inc., the Company periodically
advances and borrows money on a short-term basis with entities owned or
controlled by certain of the Company's Executive Officers and Principal
44
Shareholders. At December 31, 1998, approximately $3,150,000 was due from
such entities and $425,000 was due to such entities. These amounts do not
bear interest.
Amount Owed
Name of Entity to Company Nature of Affiliation
-------------- ----------- ---------------------
Brentwood Healthcare, $2,509,000 Owned 50% by an entity affiliated
LLC with Chris Brogdon, Chairman of
the Board and Chief Executive
Officer, and his son; 25% by
Edward E. Lane, a shareholder;
25% by Darrell C. Tucker,
President of the Company
Gordon Jensen Health $ 169,000 A non-profit corporation of which
Care Associates, Inc. Edward E. Lane, a shareholder,
is President
Chamber Health Care $ 20,000 A non-profit corporation of which
Society, Inc. Edward E. Lane, a shareholder,
is President
Southeastern Cottages, $ 18,000 Owned 50% by Chris Brogdon,
Inc. Chairman of the Board and Chief
Executive Officer, and 50% by
Edward E. Lane, a shareholder
Winter Haven Homes, $ 434,000 Owned 50% by Connie Brogdon, wife
Inc. ---------- of Chris Brogdon, Chairman of the
Board and Chief Executive Officer,
and 50% by Edward E. Lane, a
shareholder
Total $3,150,000
Amount Due
Name of Entity From Company Nature of Affiliation
-------------- ------------- ---------------------
Retirement Group LLC $425,000 Owned 41.8% by Chris Brogdon and
his wife; 10% by Winter Haven
Homes, Inc.; 41.1% by a company
owned by Edward E. Lane; 3.5% by
Darrell C. Tucker; and 1.8%
by James J. Andrews, Chief
Operating Officer of the Company
TRANSFER OF PROPERTIES TO AFFILIATES
Effective June 30, 1998, the Company sold its interests in the Fitzgerald
Nursing Center in Fitzgerald, Georgia, and the Pleasant View Nursing Center in
Metter, Georgia, to Brentwood Healthcare, LLC, which is owned 50% by an entity
affiliated with Chris Brogdon, Chairman of the Board and Chief Executive
45
Officer, and his son; 25% by Edward E. Lane, a Shareholder; and 25% by Darrell
C. Tucker, President of the Company. These facilities were sold in exchange
for the assumption of liabilities associated with these facilities. At the
time of the sale, the liabilities exceeded the value of the assets by
approximately $1,400,000. This transaction was approved by the Audit
Committee of the Board of Directors.
Effective September 1, 1998, the Company purchased Pasco Nursing Center,
a 40-bed nursing home in Dade City, Florida, for $1,000,000. During December
of 1998, the facility was sold to an affiliated entity for $1,250,000. The
Company continues to manage this facility under a management contract.
LOANS TO OFFICERS
During the year ended December 31, 1998, the Company loaned $186,000 to
James J. Andrews, Chief Operating Officer, and $90,000 to Darrell C. Tucker,
President and Director of the Company. These amounts do not bear interest.
GUARANTEES BY AFFILIATES
Chris Brogdon, the Company's Chairman of the Board and Chief Executive
Officer, has personally guaranteed loans to the Company and leases of
facilities used by the Company.
TRANSACTIONS WITH KAREN HAGAN
The Company leased office space from Cimerron Properties, Inc., a company
owned by Karen Hagan, a principal shareholder of the Company, under an
operating lease that was to expire on December 31, 1999. Annual rental
payments under the lease were approximately $45,600. Pursuant to a settlement
agreement with Karen Hagan and others, effective April 15, 1997, this lease
was terminated early in exchange for a cash payment of $65,000.
In September 1995, the Company exercised an option to purchase the Emory
Nursing Center in exchange for $300,000 in cash and the assumption of
approximately $500,000 in debt. The $300,000 was raised by borrowing the
money from Karen Hagan. The $300,000 loan bears interest at 10% and is
payable in monthly payments of interest only through September 15, 1998, when
all principal and any accrued interest is due. The $500,000 note payable
matured in February 1996, and was refinanced with a loan from Retirement Care
Associates, Inc. bearing interest at 9%. Accrued interest and principal were
due in February 1997. This note has been converted to a demand note. Two of
the Company's directors were then also directors of Retirement Care
Associates, Inc.
In October 1995, the Company borrowed $600,000 from Karen Hagan to
purchase Suncoast Nursing Home. The promissory note bears interest at 10% per
annum and is payable interest only until April 15, 1998, when it was due. The
note was secured by a mortgage on Suncoast Nursing Home. The note was repaid
during 1998.
In August 1995, the Company borrowed $225,000 from Karen Hagan to
purchase real estate adjacent to the Emory Nursing Center. Thirty thousand
dollars ($30,000) was repaid during January 1997. A $190,000 note bears
interest at 10% and is payable in monthly installments of interest only
through October 1, 1999, when all principal and any accrued interest is due.
The note is collateralized by the real estate.
46
In July 1996, the Company borrowed $80,000 from Karen Hagan to pay
outstanding payroll taxes. The note bore interest at 12% and was payable in
twelve monthly installments of $7,467 with the final payment due July 1, 1997.
The note was repaid as scheduled.
SETTLEMENT WITH ROBERT HAGAN AND KAREN HAGAN
Effective April 15, 1997, the Company entered into and closed a
Settlement Agreement with Karen and Robert Hagan (the "Hagans") and Chris
Brogdon ("Brogdon"). This agreement provides for, among other things, the
following:
1. At the closing, the Company paid Robert Hagan $150,000 for the
termination of his employment agreement dated May 22, 1995.
2. At the closing, the Company paid Cimerron Properties, Inc., a
company owned by the Hagans, $65,000 for termination of a commercial real
estate lease for office space occupied by the Company in Roswell, Georgia,
which was scheduled to terminate on December 31, 1997.
3. Brogdon will purchase a total of 714,000 shares from Karen Hagan
over a two year period commencing April 15, 1997. The transaction is
structured such that Karen Hagan will sell to Brogdon four options for 178,500
shares each. The options will be exercisable in six month intervals at an
exercise price of $3.00 per share, with the first option exercisable at any
time on or before October 15, 1997. Brogdon must pay $21,420 for the first
option (which expires October 15, 1997); $42,820 for the second option;
$64,260 for the third option; and $85,860 for the fourth option. The purchase
price for each option will be payable in monthly installments of $3,570 each
beginning on May 15, 1997, and continuing monthly thereafter until such time
as the option has been exercised by Brogdon or until it lapses.
Brogdon has also granted to Karen Hagan four put options which
essentially provide that during the 10 day periods following each of the four
option periods Karen Hagan can force Brogdon to purchase any shares that he
doesn't purchase under the prior six month option. The purchase price for the
put options is $2.95 per share.
4. At the closing, the Company delivered to the Hagans title to a 1994
Ford Ranger pickup.
5. At the closing, Robert Hagan, Karen Hagan and Richard Vanderberg
tendered his or her resignation as an officer and/or director of the Company
and any of its subsidiaries.
6. The Company agreed to continue to employ Richard Vanderberg
according to his employment agreement as the Chief Financial Officer of
Cimerron Health Care, Inc., until October 1, 1997. At that time, the Company
paid Vanderberg $116,250 to terminate his employment agreement which otherwise
would have continued until May 22, 2000.
On April 15, 1997, Robert Hagan and Chris Brogdon were both directors of
the Company, and Robert Hagan was a principal shareholder by virtue of the
714,287 shares owned by his wife. Robert Hagan resigned as a director
effective on April 15, 1997.
47
LOAN FROM RETIREMENT CARE ASSOCIATES, INC.
During February 1996, Retirement Care Associates, Inc. ("RCA") loaned the
Company $500,000 pursuant to a one-year promissory note with 9% interest
secured by an interest in the Emory Nursing facility. The note was converted
to a 30-day demand note with interest payable monthly and was paid in full
during August 1997. Chris Brogdon and Harlan Mathews, directors of the
Company, were also directors of RCA, and Chris Brogdon was President and a
principal shareholder of RCA.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. The following financial statements are filed herewith:
Page(s)
Independent Auditors' Reports F-1 - F-2
Consolidated Balance Sheets F-3 - F-4
Consolidated Statements of Operations F-5
Consolidated Statements of Changes in Stockholders' Equity F-6
Consolidated Statements of Cash Flows F-7 - F-8
Notes to Consolidated Financial Statements F-9 - F-36
2. No financial statement schedules are required to be filed.
3. The following exhibits are filed herewith:
EXHIBIT
NUMBER DESCRIPTION LOCATION
10.4 Settlement Agreement among Incorporated by reference to
Karen Hagan, Robert Hagan, Exhibit 10 to the Company's
Christopher F. Brogdon and Report on Form 8-K dated
the Company dated April April 15, 1997
15, 1997
10.5 Asset Purchase Agreement Incorporated by reference to
with Meadowbrook Neuro- Exhibit 10.1 to the Company's
care-Kansas city, Inc. Report on Form 8-K dated
August 1, 1997
10.6 Agreement of Sale (Real Incorporated by reference to
Estate) Exhibit 10.2 to the Company's
Report on Form 8-K dated
August 1, 1997
10.7 Second Bridge Note and Incorporated by reference to
Security Agreement and Exhibit 10.3 to the Company's
Mortgage, Assignment, Report on Form 8-K dated
of Leases and Rents, August 1, 1997
Security Agreement and
Fixtures Filing
48
10.8 Management Agreement with Incorporated by reference to
Tri-City Hospital Centre, Exhibit 10.1 to the Company's
Inc. Report on Form 8-K dated
September 30, 1997, concerning
Tri-City Hospital
10.9 Option Agreement Tri-City Incorporated by reference to
Hospital Centre, Inc. Exhibit 10.2 to the Company's
Report on Form 8-K dated
September 30, 1997, concerning
Tri-City Hospital
10.10 Management Agreement with Incorporated by reference to
Princeton Hospital, Inc. Exhibit 10.1 to the Company's
Report on Form 8-K dated
September 30, 1997, concerning
Princeton Hospital
10.11 Option Agreement Prince- Incorporated by reference to
ton Hospital, Inc. Exhibit 10.2 to the Company's
Report on Form 8-K dated
September 30, 1997, concerning
Princeton Hospital
10.12 Stock Purchase Agreement Incorporated by reference to
with Wakulla Manor, Inc. Exhibit 10.1 to the Company's
et al., and First Amend- Report on Form 8-K dated
ment to Stock Purchase September 16, 1997
Agreement
10.13 Loan Agreement and Prom- Incorporated by reference to
issory Note Secured by Exhibit 10.2 to the Company's
Mortgage Report on Form 8-K dated
September 16, 1997
10.14 Employment Agreement Incorporated by reference to
with Timothy Beaulieu Exhibit 10.14 to the Company's
Annual Report on Form 10-K for
the year ended December 31, 1997
10.15 Employment Agreement Incorporated by reference to
with James H. Sanregret Exhibit 10.15 to the Company's
Annual Report on Form 10-K for
the year ended December 31, 1997
10.16 Employment Agreement Incorporated by reference to
with Arthur Doloresco Exhibit 10.16 to the Company's
Annual Report on Form 10-K for
the year ended December 31, 1997
10.17 1997 Stock Option Plan Incorporated by reference to
Exhibit 10.17 to the Company's
Annual Report on Form 10-K for
the year ended December 31, 1997
49
10.18 Convertible Loan Agree- Incorporated by reference to
ment among the Company Exhibit 10.18 to the Company's
and Renaissance Capital Annual Report on Form 10-K for
Growth & Income Fund the year ended December 31, 1997
III, Inc., et al. and
Convertible Debentures
10.19 Loan Agreement with Incorporated by reference to
Nationwide Health Prop- Exhibit 10.19 to the Company's
erties, Inc. and Secured Annual Report on Form 10-K for
Promissory Note the year ended December 31, 1997
10.20 Loan and Security Agree- Incorporated by reference to
ment with HCFP Funding, Exhibit 10.20 to the Company's
Inc. Annual Report on Form 10-K for
the year ended December 31, 1997
10.21 Guarantee Agreement for Incorporated by reference to
Conyers Retirement, L.P. Exhibit 10.21 to the Company's
Annual Report on Form 10-K for
the year ended December 31, 1997
10.22 Lease Agreement with Filed herewith electronically
CarrAmerica Realty
Corporation, as amended
10.23 Executive Employment Filed herewith electronically
Agreement with Christopher
F. Brogdon, as amended
10.24 Executive Employment Filed herewith electronically
Agreement with Darrell C.
Tucker, as amended
10.25 Executive Employment Filed herewith electronically
Agreement with James
J. Andrews, as amended
10.26 Executive Employment Filed herewith electronically
Agreement with Philip M.
Rees, as amended
21 Subsidiaries of the Filed herewith electronically
Registrant
27 Financial Data Schedule Filed herewith electronically
(b) REPORTS ON FORM 8-K. The Company filed one report on Form 8-K during
the quarter ended December 31, 1998. That Report, dated November 20, 1998,
reported information under Item 4 - Changes in Registrant's Certifying
Accountants.
50
Independent Auditors' Report
Board of Directors
NewCare Health Corporation and Subsidiaries
Atlanta, Georgia
We have audited the accompanying consolidated balance sheets of NewCare Health
Corporation and Subsidiaries as of December 31, 1998, and the related
consolidated statements of operations, shareholders' equity and cash flows for
the years then ended. These 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. The consolidated balance sheet
as of December 31, 1997 and the consolidated statements of operations,
stockholders' equity and cash flows of NewCare Health Corporation and
subsidiaries for the years ended of December 31, 1997 and 1996 were audited by
other auditors whose opinion, dated March 17, 1998, expressed an unqualified
opinion on those statements.
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 1998 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of NewCare
Health Corporation and Subsidiaries as of December 31, 1998, and the results
of their operations and their cash flows for the year then ended in conformity
with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 23 to the
financial statements, the Company has suffered recurring losses from
operations, is in violation of certain of its debt covenants and has a minimal
net worth that raise substantial doubt about its ability to continue as a
going concern. Management's plans in regards to these matters are also
described in Note 23. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ Cherry Bekaert & Holland, L.L.P.
Greensboro, North Carolina,
March 5, 1999
F-1
LANEY
BOTELER &
KILLINGER
- ----------------------------
Certified Public Accountants
INDEPENDENT AUDITORS' REPORT
Board of Directors
NewCare Health Corporation and Subsidiaries
Atlanta, Georgia
We have audited the accompanying consolidated balance sheets of NewCare Health
Corporation and Subsidiaries as of December 31, 1997, and the related
consolidated statements of operations, shareholders' equity and cash flows for
the years ended December 31, 1997 and 1996. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 audits provide a reasonable basis
for our opinion.
In our opinion, the 1997 and 1996 consolidated financial statements referred
to above present fairly, in all material respects, the financial position of
NewCare Health Corporation and Subsidiaries as of December 31, 1997,
and the results of their operations and their cash flows for the years
ended December 31, 1997 and 1996 in conformity with generally accepted
accounting principles.
/s/ Laney Boteler & Killinger
Laney, Boteler & Killinger
Atlanta, Georgia
March 17, 1998
100 Ashford Center North - Suite 310 - Atlanta, Georgia 30338 - 7790/394-8000
F-2
NEWCARE HEALTH CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1998 and 1997
1998 1997
----------- -----------
Assets
Current assets:
Cash and cash equivalents $ - $ 2,297,599
Accounts receivable, net of allowance
for doubtful accounts of $2,238,000
and $976,600 8,827,216 4,569,319
Other receivables 701,616 160,113
Notes receivable - related parties 988,062 1,039,500
Due from related party, net of allowance
for doubtful accounts of $1,285,800 in 1998 8,365,775 1,201,063
Marketable securities 9,017,067 9,100,000
Restricted investments - 469,119
Inventory 360,939 132,680
Deferred taxes 1,199,539 412,204
Prepaid expenses 1,633,408 873,130
----------- -----------
Total current assets 31,093,622 20,254,727
----------- -----------
Property and equipment, net 54,696,875 42,972,686
----------- -----------
Other assets:
Other investments - 983,000
Deferred loan costs 1,945,193 1,257,427
Deferred lease costs 475,000 -
Goodwill 1,874,815 1,219,039
Organizational costs - 76,016
Lease acquisition costs 74,561 -
----------- -----------
4,369,569 3,535,482
Less accumulated amortization 772,142 464,733
----------- -----------
Deferred costs, net 3,597,427 3,070,749
Deposits 1,376,048 926,511
Restricted investments, less current
portion 150,302 1,543,686
----------- -----------
Total other assets 5,123,777 5,540,946
----------- -----------
Total assets $90,914,274 $68,768,359
=========== ===========
See accompanying notes to consolidated financial statements.
F-3
NEWCARE HEALTH CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1998 and 1997
1998 1997
----------- -----------
Liabilities and Shareholders' Equity
Current liabilities:
Bank overdraft $ 40,935 $ -
Note payable 1,468,000 -
Current maturities of long-term debt 4,433,801 1,380,735
Borrowings under line of credit 7,655,540 3,189,755
Due to broker 7,693,908 6,740,653
Accounts payable 11,921,199 6,163,548
Accrued expenses 6,543,049 3,288,527
Due to related parties 710,000 2,776,177
Convertible debentures 5,000,000 -
Deferred gain 2,481,713 -
----------- -----------
Total current liabilities 47,948,145 23,539,395
----------- -----------
Long-term debt, net of current maturities 41,233,386 39,754,836
----------- -----------
Minority interest in subsidiary - 13,900
----------- -----------
Commitments and contingencies
Shareholders' equity
Common stock, par value, $.02; 50,000,000
shares authorized; 12,128,524 and
11,372,524 shares outstanding,
respectively 242,570 227,350
Additional paid-in capital 15,507,833 11,579,675
Accumulated deficit (14,984,232) (7,174,889)
Other comprehensive income 966,572 828,092
----------- -----------
Total shareholders' equity 1,732,743 5,460,228
----------- -----------
Total liabilities and shareholders'
equity $90,914,274 $68,768,359
=========== ===========
See accompanying notes to consolidated financial statements.
F-4
NEWCARE HEALTH CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1998, 1997, and 1996
1998 1997 1996
----------- ----------- -----------
Revenue:
Net patient service revenue $63,228,244 $32,359,366 $28,194,431
Management fee revenue 2,481,137 503,577 -
Other operating revenue 700,359 121,987 489,273
----------- ----------- -----------
Total operating revenue 66,409,740 32,984,930 28,683,704
----------- ----------- -----------
Operating expenses:
Cost of patient services 50,119,847 24,913,670 20,095,723
Lease expense 4,230,949 771,427 709,542
Shareholder settlements - 485,000 -
General and administrative 17,165,436 7,367,125 4,614,816
Provision for bad debts 4,749,309 1,194,780 203,937
Depreciation and amortization 2,298,577 1,196,000 1,076,740
----------- ----------- -----------
Total operating expenses 78,564,118 35,928,002 26,700,758
----------- ----------- -----------
Operating income (loss) (12,154,378) (2,943,072) 1,982,946
----------- ----------- -----------
Other income (expense)
Investment income 11,105,865 794,214 83,828
Interest expense (7,742,747) (3,148,460) (1,912,838)
----------- ----------- -----------
Other income (expense), net 3,363,118 (2,354,246) (1,829,010)
----------- ----------- -----------
Income (loss) before minority interest,
income taxes, discontinued operations
and extraordinary item (8,791,260) (5,297,318) 153,936
Minority interest in subsidiary 13,900 (13,900) -
----------- ----------- -----------
Income (loss) before income taxes,
discontinued operations and extraordinary
item (8,777,360) (5,311,218) 153,936
Income tax benefit (provision) 968,017 1,331,865 (54,000)
----------- ----------- -----------
Income (loss) before discontinued operations
and extraordinary item (7,809,343) (3,979,353) 99,936
Discontinued operations
Income (loss) from discontinued business
segment net of income tax benefit of
$23,000 in 1996 - - (970,430)
Loss on disposal of discontinued business
segment net of income tax benefit of $31,000 - - (1,355,798)
----------- ----------- -----------
Loss before extraordinary item (7,809,343) (3,979,353) (2,226,292)
Extraordinary item - Gain on forgiveness
of debt, net of income tax expense of
$473,765 - 879,851 -
----------- ----------- -----------
Net loss $(7,809,343) $(3,099,502) $(2,226,292)
=========== =========== ===========
Basic and dilutive net income (loss) per
common share from:
Income (loss) before extraordinary
item and discontinued operations $ (.65) $ (.37) $ .01
Net loss $ (.65) $ (.29) $ (.21)
Weighted average number of common shares
outstanding 12,074,995 10,769,829 10,667,524
=========== =========== ===========
F-5
NEWCARE HEALTH CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders'
Equity and Other Comprehensive Income
Years Ended December 31, 1998, 1997, and 1996
Accumu-
lated
Other
Additional Compre- Total
Common Stock Paid-In Accumulated hensive Treasury Shareholders'
Shares Amount Capital Deficit Income Stock Equity
---------- -------- ----------- ------------ -------- ---------- -----------
Balance at December
31, 1995 10,667,524 $213,350 $ 9,055,724 $( 1,849,095) $ $ (50,000) $7,369,979
Net loss for 1996 (2,226,292) (2,226,292)
---------- -------- ----------- ------------ -------- ---------- -----------
Balance at December
31, 1996 10,667,524 213,350 9,055,724 (4,075,387) - (50,000) 5,143,687
Comprehensive loss
Net loss (3,099,502) (3,099,502)
Other Comprehensive
income-
Unrealized gain
on securities
available for
sale, net of tax 828,092 828,092
Purchase of common
stock from related
party (869,978) (1,043,974) (1,043,974)
Issuance of common
stock:
To related parties 869,978 1,043,974 1,043,974
Compensation for
services - 15,783 50,000 65,783
Other 10,000 200 22,200 22,400
Private placements 695,000 13,800 2,485,968 2,499,768
---------- -------- ----------- ------------ -------- ---------- -----------
Balance at December
31, 1997 11,372,524 227,350 11,579,675 (7,174,889) 828,092 - 5,460,228
Comprehensive loss
Net loss (7,809,343) (7,809,343)
Other Comprehensive
income-
Unrealized gain
on securities
available for
sale, net of tax 138,480 138,480
Issuances of common
stock:
Private placements 666,668 13,433 2,296,066 2,309,499
Exercise of options 89,332 1,787 198,317 200,104
Disposition of
Subsidiaries 1,433,775 1,433,775
---------- -------- ----------- ------------ -------- ---------- -----------
Balance at December
31, 1998 12,128,524 $242,570 $15,507,833 $(14,984,232) $966,572 $ - $ 1,732,743
========== ======== =========== ============ ======== ========== ===========
See accompanying notes to consolidated financial statements.
F-6
NEWCARE HEALTH CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended December 31, 1998, 1997, and 1996
1998 1997 1996
----------- ----------- -----------
Cash flows from operating activities
Net loss $(7,809,343) $(3,979,353) $(2,226,292)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 2,298,577 1,196,000 1,554,219
Common stock for services - 51,449 -
Provision for bad debts 4,749,309 1,194,780 (707,936)
Gain on sale of investments (11,129,000) (177,107) -
Gain on sale of assets (539,482) - -
Loss on disposal of business segment - - 1,386,798
Deferred tax provision (968,017) (1,331,865) -
Change in minority interest (13,900) 13,900 -
Changes in assets and liabilities,
net of effects from business combinations:
Decrease (increase) in assets
Accounts receivable (9,007,206) (3,864,217) 1,612,136
Other receivables (541,503) (160,113) (486,682)
Inventories (228,259) (104,918) 181,701
Other current assets (760,278) (701,063) 81,142
Deposits (449,537) (865,749) -
Increase (decrease) in liabilities
Accounts payable 5,798,586 4,958,541 (2,090,525)
Accrued liabilities 3,254,522 1,720,217 157,987
Other liabilities 2,481,713 (149,052) (168,833)
----------- ----------- -----------
Net cash used in operating activities (12,863,818) (2,198,550) (706,285)
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from sale of property and
equipment 2,171,686 - 10,234,655
Purchases of property and equipment (15,501,882) (14,381,568) (1,085,050)
Increase in deferred costs (1,162,766) (1,672,918) (131,950)
Issuance of notes receivable - related
parties (124,000) (990,000) -
Collections on notes receivable - related
parties 175,438 18,000 -
Advances to related parties (5,730,937) (1,176,563) (18,000)
Issuance of notes receivable - - (1,852,377)
Collections on notes receivable - 1,852,377 -
Change in restricted investments 1,862,503 (1,707,761) -
Proceeds from sale of investments 20,976,408 5,783,756 -
Purchase of investments (8,462,313) (7,617,015) (57,993)
----------- ----------- -----------
Net cash provided by (used in)
investing activities (5,795,863) (19,891,692) 7,089,285
----------- ----------- -----------
See accompanying notes to consolidated financial statements.
F-7
NEWCARE HEALTH CORPORATION AND SUBSIDIARIES
Consoldiated Statements of Cash Flows (continued)
Years Ended December 31, 1998, 1997, and 1996
1998 1997 1996
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from long-term debt $16,077,722 $33,005,196 $ 710,572
Repayment of long-term debt (7,046,106) (20,318,489) (2,405,020)
Advances from related parties (2,066,177) 2,776,177 -
Repayment of notes payable - - (1,525,000)
Purchase of treasury stock - (1,043,974) -
Proceeds from issuance of common stock 2,509,603 3,580,476 -
Net increase (decrease) in lines of credit 6,887,040 3,189,755 (166,491)
----------- ----------- -----------
Net cash provided by (used in)
financing activities 16,362,082 21,189,141 (3,385,939)
----------- ----------- -----------
Net increase (decrease)
in cash and cash equivalents (2,297,599) (901,101) 2,997,061
Cash and cash equivalents at beginning of year 2,297,599 3,198,700 201,639
----------- ----------- -----------
Cash and cash equivalents at end of year $ - $ 2,297,599 $ 3,198,700
=========== =========== ===========
See accompanying notes to consolidated financial statements.
F-8
NEWCARE HEALTH CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS AND BASIS OF PRESENTATION
The financial statements include the accounts of NewCare Health Corporation
and its consolidated subsidiaries (collectively the "Company"). At December
31, 1998, the Company operates or manages eight assisted living facilities,
twenty-seven skilled nursing facilities, one rehabilitative hospital and two
accute care hospitals located in Georgia, Florida, Kansas, Massachusetts, and
Texas. The assets and operations of its medical supply and pharmaceutical
sales and service division, operating through the Company's Spectrum
subsidiary, were sold October 24, 1996 (Notes 2 and 15).
PRINCIPLES OF CONSOLIDATION
The accompanying financial statements include the accounts of the Company and
its wholly-owned subsidiaries, as well as its majority-owned subsidiaries.
All significant intercompany transactions and balances have been eliminated in
consolidation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include all highly liquid investments with an
original maturity of three months or less.
INVENTORY
Inventories, consisting primarily of health care supplies, are valued at the
lower of cost (first-in, first-out) or market.
PROPERTY, EQUIPMENT AND DEPRECIATION
Property and equipment are stated at cost. Maintenance and repairs are
charged to operations and major improvements are capitalized. Upon sale,
retirement or other disposition, the cost and accumulated depreciation are
eliminated from the accounts and any gain or loss is included in operations.
Depreciation is computed using the straight-line method for financial
reporting purposes and accelerated methods for income tax purposes. Estimated
useful lives of the assets range from three to fifteen years for equipment and
thirty to forty years for real estate. Substantially all property and
equipment owned by the Company is held as collateral for the Company's debt
(Note 7).
INVESTMENTS
In accordance with Statements of Financial Accounting Standards No. 115,
marketable securities are classified upon acquisition as held-to-maturity,
available-for-sale or trading based on the intentions and ability of the
Company to hold the investment. All marketable securities held at December
31, 1998 and 1997, are classified as available for sale and are carried at
fair market value. Unrealized holding gains and losses on available for sale
securities are recorded net of the related tax effect as a separate component
of other comprehensive income.
F-9
NEWCARE HEALTH CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(Continued)
DEFERRED COSTS
Deferred loan costs, consisting of loan commitment fees and related
expenditures, are amortized over the repayment term of the loan using the
interest method. Deferred lease costs, consisting of various legal and other
expenditures directly related to the lease of facilities are amortized over
the initial term of the lease on a straight line basis. Organizational costs
relate to costs incurred in connection with the organization of the Company or
a subsidiary of the Company and were amortized on a straight-line basis over
five years, during 1997 and 1996. During 1998, in accordance with the AICPA
Statement of Position No. 98-5 "Reporting the Costs of Start-up Activities"
the Company expensed all remaining unamortized organization expenses. Lease
acquisition costs relate principally to acquired leases and are amortized over
the remaining life of the acquired lease on a straight line basis.
Offering costs directly related to the Company's offerings of its common stock
are offset against the proceeds from the offerings as a charge to additional
paid-in capital, or expensed in the event the related offering is
unsuccessful.
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
the periods of expected benefit, generally ten to twenty 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 $259,000
and $162,000 as of December 31, 1998 and 1997, respectively.
RESTRICTED INVESTMENTS
As of December 31, 1998, restricted investments consist of cash, certificates
of deposit and U.S. Treasury bonds whose use is restricted to that of future
debt service requirements of the Company's debt. Non-current restricted
investments include debt service reserve funds which are used for payment of
principal and interest when amounts in the principal and interest funds are
insufficient and totaled $150,302. As of December 31, 1997, non-current
restricted investments also include funds held by the mortgagor of the
Fitzgerald HUD Loan for future repair and replacement of the facility and a
certificate of deposit held by a bank in the amount of $1,159,000 as security
for the Nationwide refinancing loan (Note 7). Fair value approximates cost
for these investments at December 31, 1998 and 1997.
ASSESSMENT OF LONG-LIVED ASSETS
The Company periodically reviews the carrying value of its long-lived assets
(primarily property and equipment and intangible assets) whenever events or
circumstances provide evidence that indicate 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
F-10
NEWCARE HEALTH CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(Continued)
impairment of value is recognized as a charge against earnings in the
statement of operations. As of December 31, 1998, the Company does not
believe that there is any indication that long-lived assets are impaired or
that the amortization period of its long-lived assets needs to be adjusted.
INCOME TAXES
Deferred income taxes are recognized for the tax consequences of temporary
differences between the financial reporting basis and the tax basis of the
Company's assets and liabilities. Valuation allowances are established as
necessary to reduce deferred tax assets to the amount expected to be realized.
Income tax expense is the tax payable for the period plus or minus the net
change during the period in deferred tax assets and liabilities and the
related valuation allowance.
CREDIT RISK
Financial instruments which potentially subject the Company to concentrations
of credit risk consist principally of accounts receivable and investments.
Credit risk associated with private pay accounts receivable is mitigated by
the large number of such accounts. Credit risk related to accounts receivable
from the Medicaid and Medicare programs is mitigated by the taxing authority
of the governmental entities funding those programs.
REVENUE RECOGNITION
Net patient service revenue is reported at the estimated net realizable
amounts receivable from residents, third-party payors and others for services
rendered. Patient service revenue is derived primarily from services to
retirement center residents and skilled nursing facility patients. Retirement
center residents typically pay rent in advance of the month for which it is
due. Skilled nursing facility patients are predominantly beneficiaries of the
Medicare and Medicaid programs.
For cost reporting periods commencing prior to July 1, 1998 the Medicare
program reimbursed skilled nursing facilities on the basis of allowable costs
subject to certain limitations. Payments were 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 for the
period the related services are rendered. Differences between the amounts
accrued and final settlements are reported in the year of settlement.
In 1997, Congress passed the Balanced Budget Act of 1997 which provides for a
phase-in of a prospective pay system ("PPS") for skilled nursing facilities
over a four-year period. Under PPS, Medicare will pay skilled nursing
facilities a fixed fee per patient day based on the acuity level of the
patient. During the phase-in, the rate paid to the facility will be a blended
rate based on the facility's historical costs and a federally established per
diem rate. PPS became effective for cost reporting periods beginning on or
after July 1, 1998. Management does not believe that this change in the
reimbursement system will have a material affect on the Company's operations.
F-11
NEWCARE HEALTH CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(Continued)
State Medicaid programs pay skilled nursing facilities 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.
The Company recognized revenue in its Spectrum subsidiary from the sale of
products in the period that the products were shipped to customers. Revenue
from providing health care services is generally recognized in the period that
the services are performed.
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.
PRODUCT WARRANTIES
While operating the Spectrum division sold in October 1996, the Company
generally would replace or refund the purchase price of products sold if the
customer was not satisfied. Historically, the effect of this policy was not
material to the Company's financial statements and, accordingly, the financial
statements do not include a provision for the effect of product warranty
policies resulting from past sales in the Spectrum subsidiary.
NET INCOME PER SHARE
Basic earnings per common share are computed using the weighted average number
of common shares and common equivalent shares outstanding during each year.
Common share equivalents represent shares issuable upon the assumed exercise
of stock options and warrants or conversion of certain debentures (1998). The
stock options are included in the computation using the treasury stock method
if they would have a dilutive effect. Common share equivalents are not
considered in calculations of per share data when their inclusion would be
anti-dilutive. For purposes of determining dilutive earnings per share, there
were no common stock equivalents at December 31, 1998, 1997 and 1996.
USE OF ESTIMATES - GENERAL
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
revenues and expenses during the periods reported. Actual results could
differ materially from those estimates.
SIGNIFICANT ACCOUNTING ESTIMATES
A significant portion of the Company's provision for bad debts relates to
advances due from a Florida Hospital it managed (See Notes 5 and 11) and is
based on the Company's best estimate of the amounts expected to be realized.
However, subsequent to December 31, 1998 the Hospital has filed for protection
under Chapter 11 of the U.S. Bankruptcy Act. As a result, it is at least
F-12
NEWCARE HEALTH CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(Continued)
reasonably possible that the estimate used by the Company to determine the
provision for bad debts with respect to the receivable from the Florida
Hospital, will be materially different from the actual amounts or results.
These differences could result in materially higher than expected bad debt
expense, which could have a materially adverse effect on the Company's
consolidated results of operations and financial condition in the near-term.
STOCK-BASED COMPENSATION
The Financial Accounting Standards Board released SFAS No. 123, "Accounting
for Stock Based Compensation." SFAS No. 123 encourages, but does not require,
companies to recognize compensation expenses 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 1997 and 1996 amounts have been reclassified to conform with the 1998
presentation. These reclassifications did not have any effect on total
assets, shareholders equity or net loss.
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board released SFAS 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS will become effective
for fiscal quarters beginning after June 15, 1999. The Company anticipates
that this standard will affect only certain disclosures contained in its
periodic reporting.
NOTE 2 - BUSINESS COMBINATIONS, ACQUISITIONS AND DISPOSITIONS
DISPOSITIONS
As more fully described in Note 15, on October 24, 1996, the assets of the
Company's Spectrum division were sold. This division, which had been acquired
in 1994, was engaged in the business of selling medical supplies,
pharmaceutical products and services and therapy services to health care
facilities and individuals. The 1996 income statement reflects a loss from
discontinued operations related to the sale of Spectrum of approximately
$1,356,000. Basic and diluted loss per share due to these discontinued
operations at December 31, 1996 totaled $.22 per share.
On July 1, 1998, the Company sold the stock of three of its subsidiaries which
owned two skilled nursing facilities for $1 and the assumption of all the
subsidiary's liabilities to a related party. At the time of the sale,
liabilities exceeded assets by approximately $1,400,000. As a result of the
nature of this transaction, the Company has reflected the $1,400,000 as an
increase to paid in capital.
F-13
NEWCARE HEALTH CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(Continued)
During 1998, the Company acquired and disposed of a skilled nursing facility.
As a result of those transactions, the Company recognized a gain of
approximately $214,000. As the Company operated the facility for a short
period, its effects on 1998 operations were not significant.
PURCHASED FACILITIES
During 1998, the Company acquired seven facilities (which included the
facility acquired and disposed of described above) or operating entities which
included the facilities for approximately $1,685,000 cash, $9,150,000 issuance
of new debt and assumptions of $2,837,000 liabilties. During 1997, the
Company acquired three facilities or operating entities which included the
facilities for $975,000 cash and $12,153,000 issuance of new debt. These
acquisitions were accounted for as purchases, and accordingly, the assets and
liabilities of the acquired entities have been recorded at their estimated
fair values at the dates of acquistion. The excess of the purchase price over
the estimated fair values of the net assets acquired, in the approximate
amount of $656,000 in 1998 and $1,219,000 in 1997 has been recorded as
goodwill and is being amortized over the estimated useful lives of the
facilities acquired.
During 1998, the most significant purchases involved the acquisition of four
facilities as part of bankruptcy proceeding initiated by the facilities'
owner. The facilities were acquired for $6,500,000 in cash and the
outstanding bonds, approximately $3,140,000 par value, of three facilities
which the Company had previously purchased in the open market. The bonds, at
the date of acquisition of the facilities, had a carrying value on the
Company's books of approximately $2,337,000 (see Note 4). The Company entered
into a sale leaseback of the largest of the four facilities, whereby it sold
the facility for $6,750,000 and entered into a 10-year lease for the facility.
The Company deferred approximately $1,541,000 of gain on the sale which will
be amortized against lease expense over the term of the lease.
The Company typically obtains financing in excess of the purchase price paid
for the acquired facilities. The excess funds are used to cover certain
closing costs associated with the transactions with any residual amounts
retained by the Company.
LEASED FACILITIES
In addition to the purchased facilities, the Company entered into operating
lease agreements whereby it increased the number of facilities it was
operating by seven in 1998 and two in 1997.
UNAUDITED PRO-FORMA RESULTS OF OPERATIONS
The following table presents unaudited pro-forma results of operations data as
if the acquisitions and operating leases described above had occurred on
January 1, 1997 after giving effect to certain adjustments and
reclassifications, including additional depreciation expense, increased
interest expense on acquisition related debt, related income tax effects and
elimination of intercompany transactions. The pro-forma amounts are provided
for information purposes only. It is based on historical 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.
F-14
NEWCARE HEALTH CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(Continued)
For the Year Ended December 31,
(Unaudited)
1998 1997
----------- -----------
Net revenues $17,120,000 $47,050,000
Net loss (890,000) (3,070,000)
Net loss per share (.07) (0.29)
NOTE 3 - ACCOUNTS RECEIVABLE
Accounts receivable and net patient service revenue include amounts payable by
Medicaid and Medicare programs. These government reimbursement programs
accounted for approximately 83%, 79% and 86% of net patient service revenue
during 1998, 1997 and 1996, respectively.
The Company grants credit without collateral to its patients, most of whom are
local residents of the respective skilled nursing and retirement facilities
and are insured under third-party payor agreements. The mix of receivables
from patients and third party payors is as follows:
1998 1997
----------- -----------
Medicaid $ 4,319,086 $ 2,043,053
Medicare 4,519,146 2,018,092
Other third party payors 719,772 333,140
Private pay patients 1,357,212 807,531
----------- -----------
10,915,216 5,201,816
Management fees 150,000 344,103
----------- -----------
11,065,216 5,545,919
Less allowance for doubtful
accounts 2,238,000 976,600
----------- -----------
$ 8,827,216 $ 4,569,319
=========== ===========
In the opinion of management, any differences between the net Medicare and
Medicaid revenue recorded and the final determination of allowability will not
materially affect the consolidated financial statements.
The activity in the allowance for doubtful accounts is as follows:
1998 1997
----------- -----------
Beginning of period $ 976,600 $ 191,300
Provision for bad debts 4,739,309 1,194,780
Write-offs and other deductions 3,477,909 409,480
----------- -----------
End of period $ 2,238,000 $ 976,600
=========== ===========
F-15
NEWCARE HEALTH CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(Continued)
NOTE 4 - MARKETABLE SECURITIES
Marketable securities at December 31, 1998 are comprised as follows:
Unrealized
Cost Fair Value Gain/Loss
---------- ---------- ----------
Bonds:
$8,950,000 par value North Central
Texas Health facilities 9.5%
Development Corporation Bonds $7,676,012 $8,413,000 $ 736,988
4,000,000 shares of Iatros stock
(see Note 5) 400,000 400,000 -
Other equity securities 297,905 204,067 (93,838)
---------- ---------- ---------
$8,373,917 $9,017,067 $ 643,150
========== ========== =========
Marketable securities at December 31, 1997 are comprised as follows:
Unrealized
Cost Fair Value Gain/Loss
---------- ---------- ----------
$9,100,000 par value North Central
Texas Health Facilities 9.5%
Development Corporation Bonds $7,826,012 $9,100,000 $1,273,988
========== ========== ==========
The acquisition of the above described bonds were financed substantially by
margin loans with the Company's brokers.
During 1998, the Company purchased $20,215,000 par value of bonds for
$7,075,250 which represented approximately 67.96% of the total Bond
indebtedness of an unrelated third party hospital with which it entered into a
management agreement. As part of the purchase of the Bonds, the former
holders of the Bonds agreed to subordinate the remaining $9,530,000 of Bonds
and to agree to a modification of the bond indenture which extended the Bonds'
maturity schedule and reduced the Senior Bonds' interest rates. The Company
then provided a guarantee of the senior bond obligations and sold the Bonds
for net proceeds of $19,204,250. In connection with this transaction, the
Company recognized a net gain of approximately $11,129,000 and recognized a
liability associated with the guarantee of approximately $1,000,000.
Also during 1998, the Company acquired $3,136,276 par value of Bonds for
$1,387,063. These Bonds were secured by the assets of three nursing homes
which were in Chapter 11 proceedings. As part of the Chapter 11 proceedings,
the Company was provided title to the nursing homes. Prior to the Company
being provided title to the nursing homes, the Bonds had appreciated in value
F-16
NEWCARE HEALTH CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(Continued)
to $2,337,063. This amount has been included in unrealized gains net of taxes
and has been considered part of the cost basis of the assets acquired. At
December 31, 1998, the Bonds were held by the Company and accordingly have
been eliminated in the consolidated financial statements.
During 1997, the Company purchased and sold marketable securities classified
as available for sale, recognizing a gain of approximately $177,000 which is
included in investment income.
NOTE 5 - OTHER INVESTMENTS
On December 22, 1997, the Company signed an agreement to acquire approximately
twenty percent of the outstanding shares of Iatros Health Network, Inc.
(Iatros) for $1,000,000. At December 31, 1997, the Company had paid $211,000
with the remaining $789,000 included in accounts payable. This balance was
paid during the first quarter of 1998. The stock purchase was made as part of
the initial steps in merger discussions with Iatros. Due to the proprosed
merger, and the ability to appoint Board members, the Company believed it
exercised sufficient control to account for the investment on the equity
basis. At December 31, 1997 the carrying value of this investment was
$983,000.
During 1998, the merger discussions were terminated, and the Company resigned
its Board seats. Prior to that time, the Company believed that its investment
had become permanently impaired and wrote it down based on available
information to its estimated realizable value. Subsequent to that date,
Iatros received a cash infusion from an unrelated third party and began to
make operational improvements. The Company, on the basis of the new
information adjusted its basis in the Iatros stock to $400,000.
The Company subsequently transferred the Iatros stock to its available for
sale portfolio, and any subsequent changes in its value have been treated as
unrealized gains or losses.
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
1998 1997
----------- -----------
Land and improvements $ 7,485,177 $ 5,869,814
Buildings and improvements 47,625,866 38,014,213
Equipment and other 6,259,160 4,802,472
----------- -----------
61,370,203 48,686,499
Less accumulated depreciation
and amortization 6,992,494 6,749,126
----------- -----------
54,377,709 41,937,373
Construction in progress 319,166 1,035,313
----------- -----------
Net property and equipment $54,696,875 $42,972,686
=========== ===========
F-17
NEWCARE HEALTH CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(Continued)
Construction in progress consists of renovations at one of the skilled nursing
facilities in Florida and other expenses incurred in combining the
Certificates of Need at existing facilities.
Substantially all of the property and equipment is pledged as collateral for
long-term debt.
NOTE 7 - LONG-TERM DEBT
Notes payable and long-term debt consisted of the following at December 31,
1998 and 1997:
1998 1997
----------- -----------
Note payable to a bank with interest at
12%, due in monthly interest only installments
of $10,000 with principal due at maturity in
January 2009, collateralized by a first
mortgage on property and equipment at the
Fort Valley facility. $ 1,000,000 $ 1,000,000
Note payable to a bank with interest at prime
plus 1% (9.50% at December 31, 1997) due in
monthly principal installments of $2,083 plus
interest with remaining principal due at
maturity in March 2004, collateralized by
property and equipment at the Victoria Martin
Nursing facility. $ - $ 156,250
Notes payable to an individual with interest
at 10% due in monthly installments; principal
due at maturity. The notes mature on
various dates through September 1998 a portion
of which was extended to October 1999 and is
collateralized by the property and equipment
of the Emory facility. 190,000 1,095,000
Note payable to Nationwide Health Properties,
Inc. with interest at 10.78%, due in monthly
interest only payments of approximately
$187,000. The note is scheduled to mature
June 1, 2009, and is collateralized by the
property and equipment at the Oak Manor,
Central Tampa, Dania, and Windward nursing
and retirement home facilities as well as
a letter of credit in the amount of $1,159,000
with a bank. Up to 25% of the outstanding
loan balance is guaranteed by the CEO of the
Company. 21,500,000 20,892,278
F-18
NEWCARE HEALTH CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(Continued)
Note payable to the PFC Corporation; coinsured
by the Department of Housing and Urban
Development with interest at 8.38% due in
monthly payments of principal and interest of
$23,003. The note matures March 1, 2020 and
is collateralized by the property and equipment
at the Fitzgerald Nursing facility and the
restricted reserve funds associated with the
debt. - 2,777,682
Note payable to LTC Properties, Inc. with
monthly principal and interest payments of
approximately $48,500. Interest, currently at
10.83%, is subject to annual increases of 0.125%
over the previous years' rate. The note is
scheduled to mature October 1, 2007, with a
final principal payment of $4,251,600. The note
is collateralized by the property and equipment
at the Wakulla Manor facility and the leasehold
interest in the New Port Inn facility. 4,759,453 4,792,325
Tyler Health Facilities Development Corporation
bonds with interest at 8.50% due in semi-annual
interest payments and annual principal payments
in accordance with the bond agreements. The
bonds, scheduled to mature December 1, 2018,
are collateralized by the property and equipment
of the Park Place Nursing facility and related
restricted bond trust funds. 5,650,000 5,715,000
Unsecured note payable to an individual payable
in annual principal payments of $20,000 plus
interest at 8.0%. The note is scheduled to
mature on December 2, 2002. 100,000 100,000
Note payable to HCFP Funding II with interest
only payments at prime plus 2% (9.75% at
December 31, 1998). The note, scheduled to
mature July 31, 1999, is collateralized by the
property and equipment of the Meadowbrook
Hospital facility. 3,000,000 4,500,000
Note payable to a bank with interest at prime
plus 1% (8.75% at December 31, 1998), payable
in monthly installments of principal of $3,345
plus interest. The note, scheduled to mature
September 9, 2000, is collateralized by
equipment and is guaranteed by the CEO of
the Company. 69,621 107,036
F-19
NEWCARE HEALTH CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(Continued)
Renaissance Capital Growth Fund, Inc. and
Renaissance U.S. Growth Trust Convertible
Debentures with interest only payments at 8.5%,
totaling approximately $420,000, and a maturity
date of January 27, 2005. The debentures contain
a stock option agreement where the holder's are
entitled to convert all, or in multiples of
$100,000, any part of the debentures into such
number of fully paid and non-assessable shares
of common stock at $3.81 per share. For the
year ended December 31, 1998 the Company is
not in compliance with certain covenants and
the debentures have been classified as current. 5,000,000 -
Note payable to a bank with interest only
payments at 8.75% with principal due at maturity
in March, 1999. 480,000 -
Note payable to a vendor payable in monthly
installments of $50,000 plus interest at 9.5%
and a balloon payment on November 16, 2000. 1,787,626 -
Note payable to LTC with interest currently
at 10.17%, is subject to annual increases of
0.125% over the prior year's rate. The note
is scheduled to mature May 1, 2003 with a
final principal payment of $2,463,290. The
note is collateralized by the property and
equipment at the Venice facility. 4,753,681 -
Note payable to LTC with interest currently
at 10.16%, is subject to annual increases of
0.125% over the previous year's rate. The
note is scheduled to mature May 1, 2018.
The note is collateralized by the property
and equipment at the Olathe, Kansas facility. 2,376,806 -
----------- -----------
50,667,187 41,135,571
Less current maturities 9,433,801 1,380,735
----------- -----------
Total long-term debt $41,233,386 $39,754,836
=========== ===========
F-20
NEWCARE HEALTH CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(Continued)
Future maturities of long-term debt are as follows:
Year Ending
December 31, Amount
------------ -----------
1999 $ 9,433,801
2000 1,587,747
2001 398,478
2002 478,562
2003 516,206
Thereafter 38,252,393
-----------
$50,667,187
===========
NOTE 8 - BORROWINGS UNDER LINE OF CREDIT
On June 30, 1997, to facilitate its working capital needs, the Company opened
a revolving line of credit with HCFP Funding, Inc. with a maximum borrowing
amount of $10,000,000. Monthly interest payments are due at prime plus 2%
(9.75% and 10.50% at December 31, 1998 and 1997, respectively). In addition
to interest charges, the draws on the line of credit are subject to monthly
management fees (.20% of the average previous month's loan balance) as well as
a monthly usage fee and commitment fees. Commitment fees are due in $20,000 to
$30,000 increments based on total balance thresholds specified in the
agreement. Total commitment fees paid (limited to $100,000) were $30,000
through December 31, 1998. Draws on the line of credit are secured by
substantially all trade receivables of the Company. In accordance with the
loan agreement, draws on the line of credit are subject to limitations based
on a formula that is calculated at each draw request date. The maximum
outstanding balance on the line of credit is generally limited to 80% of
"collectable" accounts receivable, the "borrowing base" ($8,422,561 and
$3,655,000 at December 31, 1998 and 1997, respectively). Net draws against
this line of credit totaled $7,655,540 and $3,189,755 at December 31, 1998 and
1997, respectively with $2,344,460 and $6,810,245 available for the Company's
use subject to limitations mentioned above. The line of credit agreement is
scheduled to expire on June 30, 2000, with annual renewals thereafter until
terminated by either party.
The line of credit contains various covenants the most restrictive of which is
that the Company's net worth must be greater than $4 million. During 1998,
the Company was not in compliance with certain of these covenants.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases nursing homes commencing on various dates with terms
expiring through January 1, 2018. Monthly rent expense for these facilities
total approximately $397,000. Certain of the leases contain clauses which
increase the monthly rents over the life of the lease.
F-21
NEWCARE HEALTH CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(Continued)
The Company's rental expense under these operating leases, plus minor
equipment leases for the years ended December 31, 1998, 1997 and 1996, totaled
approximately $4,387,000, $731,000 and $975,000, respectively.
Lease expense associated with operating leases having initial or remaining
non-cancelable lease terms in excess of one year and containing escalation
clauses has been recorded in the accompanying financial statements on a
straight-line basis. Deferred lease expense due to this straight-line rent
adjustment for the years ended December 31, 1998 and 1997, totaled $497,913
and $40,359, respectively.
The aggregate amount of minimum lease payments due under non-cancelable lease
obligations in excess of one year at December 31, 1998 are as follows:
Year Ending
December 31, Amount
------------ -----------
1999 $ 5,166,800
2000 5,288,478
2001 5,272,332
2002 5,246,688
2003 4,518,623
2004-2008 20,793,120
2009-2018 19,549,487
-----------
$65,835,528
===========
OTHER
The Company has guaranteed a $2,000,000 line of credit issued by HCFP Funding,
Inc. to one of the hospitals under management. In December 1997, $1,068,300
was drawn on the line of credit to make a debt service payment due January 1,
1998. The funds drawn were deposited into the Company's bank account and used
to make the interest payment due in excess of $2,000,000. At December 31,
1997, the advance on this credit line is included in due to related parties in
the accompanying financial statements. On January 1, 1998, the Company made
the required interest payment from its funds as part of its guarantee.
The Company is party to various employment agreements with certain of its
management personnel which expire at various dates in 1999 through 2001.
Certain of these agreements contain provisions which allow the Company to
terminate the agreements prior to their expiration. Future payments under the
agreements total approximately $3,300,000, $3,400,000 and $2,500,000 for 1999,
2000, and 2001, respectively. If the Company were to terminate the contracts,
its minimum obligations would be approximately $2,800,000, $1,900,000 and
$2,100,000 in 1999, 2000 and 2001, respectively.
LEGAL PROCEEDINGS
During 1996, the facilities operated by the Company's Cimerron subsidiary were
audited by the State of Georgia for the fiscal year ended June 30, 1995. The
audit resulted in disallowed expenses and an overpayment in excess of
$270,000. The State recouped the overpayment and it is included in the income
statement for 1997.
F-22
NEWCARE HEALTH CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(Continued)
The Company is also engaged in various legal and regulatory proceedings
incidental to the Company's normal business activities. Such matters are
subject to many uncertainties, and outcomes are not predictable with
assurance. Consequently, the Company is unable to ascertain the ultimate
aggregate amount of monetary liability or financial impact with respect to
these matters at December 31, 1998. These matters could affect the operating
results of any one quarter when resolved in future periods. However,
management believes that after final disposition, any monetary liability or
financial impact to the Company would not be material to the Company's annual
consolidated financial statements.
CONSTRUCTION PLANS
In 1996, the Company filed an application with the Florida Agency for Health
Care Administration to combine the Certificates of Need (CON) for two of its
Florida facilities, which currently operate thirty-eight bed and fifty-nine
bed skilled nursing facilities, respectively. The Company plans to construct
a new facility using lease financing to operate the combined ninety-seven
beds. The Company plans to convert and operate the existing facilities as
assisted living facilities. As of December 31, the request for consolidation
of the CON's was still pending. The Company has not entered into any formal
arrangements for construction or financing of the new facility.
During 1995, the Company's Cimerron subsidiary obtained a Certificate of Need
for twenty skilled nursing beds and, in November 1995, acquired approximately
eight acres of undeveloped land in Georgia. The Company has plans to combine
the new twenty-bed Certificate of Need with the existing forty-bed Certificate
of Need currently operating as Emory Nursing Home (Emory) and construct a new
sixty-bed skilled nursing facility. Current plans call for the existing Emory
facility to be operated as an assisted living facility. As of December 31,
1998, the Company had not entered into any formal arrangements for
construction or financing of the new facility, however management anticipates
commencing this project in April 1999.
NOTE 10 - COMMON STOCK, STOCK OPTION PLANS AND STOCK COMPENSATION AGREEMENTS
Common stock has been issued by the Company for various purposes. In certain
of these transactions, the Company's Board of Directors assigned a fair value
to the common stock issued equal to the fair value of the services or other
consideration received.
During 1998 and 1997, the Company increased stockholder's equity by
approximately $2,300,000 and $2,500,000, respectively through private
placements. Each private placement unit consisted of four shares of common
stock and two warrants. The price of each unit was $15. A total of 678,334
warrants were issued and are exercisable for one share each of the Company's
common stock, through October 30, 2000 at an exercise price of $5.00 per
share.
In connection with a financing transaction with Nationwide Health Properties,
Inc. the Company issued 100,000 warrants which expire on May 5, 2009 and are
exercisable at $2.50 per warrant.
F-23
NEWCARE HEALTH CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(Continued)
No value has been ascribed to any of the above warrants in the accompanying
financial statements.
From time to time, the Company has issued options in connection with various
transactions or to various individuals.
On January 31, 1997 the Company granted options to purchase 1,500,000 shares
of the Company stock at an exercise price of $2.20. Of these, 325,000 shares
were granted to the Company's Chairman of the Board. The options were granted
in consideration of the Chairman assuming the role of Chief Executive Officer.
These options will be canceled, if unexercised, in the event that the
Company's per share stock price does not achieve a minimum average of $5 for
any consecutive 30 day period in the twelve month period commencing July 1,
1998, (the date the Chairman assumed the role of Chief Executive Officer). As
of December 31, 1998 this minimum average had not been met.
In April 1997, the Company reserved 2,000,000 shares of common stock under a
1997 stock option plan. As of December 31, 1998 and 1997, 1,987,500 and
150,000 options had been granted under this plan. All of the options noted
above expire at various dates through September 8, 2003. The options may be
exercised at prices ranging from $4.85 to $2.188.
The stock options and warrants described above were issued with exercise
prices determined by the Company's Board of Directors to be equal to, or
greater than, the fair value of the Company's common stock on the respective
grant dates (Note 9).
The following is a summary of stock option activity and related information
for the years ended December 31:
1998 1997 1996
------------------- ------------------- -----------------
Weighted Average Weighted Average Weighted Average
Exercise Exercise Exercise
Options Price Options Price Options Price
--------- -------- --------- -------- ------- --------
Outstanding:
Beginning 2,587,832 $2.715 222,832 $3.367 222,832 $3.367
Granted 1,814,000 2.364 2,375,000 2.652 - -
Exercised 89,332 2.240 10,000 2.240 - -
Canceled 150,000 2.858 - - - -
--------- ------ --------- ------ ------- ------
End of Year 4,162,500 $2.597 2,587,832 $2.715 222,832 $3.367
========= ====== ========= ====== ======= ======
Exercisable:
End of Year 4,162,500 $2.597 2,587,832 $2.715 222,832 $3.367
========= ====== ========= ====== ======= ======
Weighted
average fair
value of op-
tions granted
during the year: $1.53 $2.08 $ -
===== ===== ===
F-24
NEWCARE HEALTH CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(Continued)
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.
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:
1998 1997
------------- -------------
Net loss as reported $ (7,809,343) $ (3,099,502)
Affect if SFAS 123 had been
applied - net of tax (2,757,500) (3,013,000)
Net loss-pro forma net (10,566,843) (6,112,502)
Loss per share-as reported (.65) (.29)
Loss per share-pro forma (.84) (.56)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1998 and 1997; dividend yield of 0%, expected
volatility of 74.7% in 1998 and 111% in 1997, risk-free interest rates of
5.71% in 1998 and 6.0% in 1997 and expected option lives of five years.
EARNINGS PER SHARE
The Company and its subsidiaries have adopted the provisions of SFAS 128 for
purposes of reporting earnings per share. The options and warrants mentioned
above as well as the convertible debentures have not been included in the
computation of diluted earnings per share for the years presented due to their
antidilutive effect. These options, warrants and convertible debentures are
considered antidilutive because in 1998 and 1997, the Company had a loss from
continuing operations, and in 1996, the exercise price of all the outstanding
options and warrants exceeded the average market price of the Company's stock.
These options and warrants, as well as the convertible debenture bonds, could
be considered to be dilutive in future periods.
F-25
NEWCARE HEALTH CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(Continued)
NOTE 11 - MANAGEMENT FEES
At December 31, 1997, one of the Company's subsidiaries, NewCare Hospital
Corporation "NHC", had management contracts with unrelated third parties to
manage the operations of two hospitals in Florida and Texas. These agreements
commenced in October 1997 and were to expire September 30, 2002, unless
terminated by either party after September 30, 2000. Monthly management fees
totaled $175,000 plus a performance incentive not to exceed a cumulative total
of four percent of net revenues. The performance incentive is based upon the
Hospital's achieving certain performance criteria. In addition to the above
fees, NHC is reimbursed for payroll and related expenses as well as certain
direct costs of managing the facilities. In addition, NHC paid $25,000 each
for purchase options on each of the Hospitals' assets where the purchase price
would be equal to the indebtedness on those assets. The purchase options
expire on September 30, 2002.
Additionally, in connection with the two management agreements, NHC agreed to
make capital improvement loans up to $2,000,000 each during the first year of
the agreement. No amounts were advanced under this provision. In addition,
NHC guaranteed payment of up to $4,100,000, bond payments due January 1, and
July 1, 1998 on behalf of the Florida hospital. NHC advanced a total of
$2,400,000 under this provision.
In March 1998, the Texas Hospital's Board of Directors advised the Company
that the management agreement was void or had been terminated and that the
option agreement was also not valid. In addition, the Hospital filed for and
was granted protection under Chapter 11 of the Bankruptcy Code. As part of
the Bankruptcy proceedings, NHC agreed to accept as payment for all amounts
owed to it by the Hospital under the management agreement and as potential
damages for the contract termination, $150,000 (see Note 22). NHC has
recognized management fee revenue of $1,087,435 and $306,987 during 1998 and
1997, respectively, and has written off all but $150,000.
As more fully described in Note 22, in January 1999, the Florida Hospital
filed for protection from its creditors under Chapter 11 of the U.S.
Bankruptcy Code, and in March 1999 received approval to terminate the
management contract. NHC has recognized management fee revenues of $953,184
and $196,590 during 1998 and 1997, respectively. As a result of the
Bankruptcy proceedings, NHC has recorded a reserve for bad debts totaling
$1,285,800 against amounts due it from the Florida hospital for management
fees and for amounts advanced pursuant to the guarantee of certain bond
indebtedness.
During 1998, NHC entered into an additional management agreement with an
additional Hospital in Texas. This agreement commenced August 10, 1998 and
expires initially in five years with two five year renewal options, unless
terminated by either party after the initial five year period. Monthly
management fees totaled $18,750 plus a performance incentive with a cumulative
total of 4% of net revenues. This performance incentive is based upon the
Hospital achieving certain performance criteria. In addition to the above
fees NHC is reimbursed for payroll and related expenses as well as certain
direct costs of managing the facility.
F-26
NEWCARE HEALTH CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(Continued)
In connection with this management agreement, NHC agreed to make a capital
improvement loan of up to $1,000,000 during the earlier of sixty months or the
expiration or termination of the agreement. At December 31, 1998, no amounts
had been advanced under this provision.
NOTE 12 - INCOME TAXES
Significant components of the Company's deferred tax liabilities and assets at
December 31, 1998 and 1997, are as follows:
1998 1997
------------- -------------
Deferred tax liabilities:
Unrealized gain on available for sale
securities $ (644,382) $ (445,896)
Depreciation and amortization (781,600) (515,800)
------------- -------------
Gross deferred tax liabilities (1,425,982) (961,696)
------------- -------------
Deferred tax assets
Bad debt allowance 641,700 341,800
Net operating loss carry forward 2,876,200 1,847,300
Accrued expenses 658,800 312,000
Deferred revenue 1,339,400 -
------------- -------------
Gross deferred tax assets 5,516,100 2,501,100
Less valuation allowance (2,890,579) (1,127,200)
------------- -------------
2,625,521 1,373,900
------------- -------------
Net deferred taxes $ 1,199,539 $ 412,204
============= =============
The Company has a net deferred tax asset of $1,199,539 at December 31, 1998.
Management has plans to sell, or enter into sale leaseback transactions with
respect to five of the Company's facilities. The anticipated taxable gain on
the sales is expected to be sufficient to fully utilize the net deferred tax
asset recorded by the Company at December 31, 1998.
The deferred tax asset valuation allowance was $1,127,200 at December 31, 1996
and 1997, and was increased to $2,890,579 at December 31, 1998, a change of
$1,763,379. The components of income tax expense are approximately as
follows:
1998 1997 1996
--------- --------- --------
Federal
Current $ - $ - $ -
Deferred-net (968,017) (858,100) -
State
Current - - -
Deferred-net - - -
--------- --------- --------
Total $(968,017) $(858,100) $ -
========= ========= ========
F-27
NEWCARE HEALTH CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(Continued)
A reconciliation of current income tax expense and the amount computed by
applying the statutory federal income tax rate to the net loss before income
taxes is as follows:
1998 1997 1996
--------- --------- --------
Taxes computed at statutory rate (35)% (35)% (35)%
Increases (decreases)
in taxes resulting from:
Change in valuation allowance 20 % - 44 %
Net permanent differences 4 % 13 % (9)%
----- ----- -----
(11)% (22)% -
===== ===== =====
At December 31, 1998, the Company has net operating loss carry forwards of
approximately $8,218,000 that are available to offset future taxable income.
The loss carry forwards expire at various times through 2013 as follows:
Expires Amount
------- ------
2006 $ 1,000
2009 445,000
2010 372,000
2011 764,000
2012 3,696,000
2013 2,940,000
----------
Total $8,218,000
==========
NOTE 13 - TRANSACTIONS WITH RELATED PARTIES
The Company was previously leased a nursing home from a stockholder. Rent
payments to the stockholder of approximately $72,000 were made in 1996.
A company controlled by a stockholder provided contract services to certain of
the Company's nursing centers. Total contract service fees paid to this
company totaled approximately $0, $530,130, and $1,148,100, in 1998, 1997, and
1996, respectively.
The Company previously leased office space from a stockholder under an
operating lease. Annual rental payments under the lease were approximately
$45,600. In March 1997, this lease was terminated in exchange for a cash
payment of $65,000.
During 1995, the Company borrowed funds from a related party totaling
$800,000. The related party loan in the amount of $300,000, was payable in
monthly payments of interest only, at 10%, through November 1996, at which
time the terms were modified to reflect a new maturity date of September 1998.
The $500,000 note payable matured in February 1996, and was paid using funds
from a replacement loan from another related party.
F-28
NEWCARE HEALTH CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(Continued)
In November 1995, the Company borrowed $195,000 and $600,000 from a
stockholder to purchase real property. The notes bear interest at 10% and
were payable in monthly installments of interest only through August 1998 and
November 1998, respectively, when all principal and any accrued interest
became due. The notes are collateralized by real estate. The balance at
December 31, 1998 is $190,000.
In September 1994, the Company loaned $74,000 to two of its principal
officers. The loans, which were approved by the Board of Directors, are
non-interest bearing and were originally due in September 1995 but were
extended with new terms requiring payment on demand. Additional advances
totaling $18,000 were made during 1996. Repayments totaling $15,000 were
received during 1997. One of the officers to whom advances totaling $52,000
were made is no longer with the Company. He has filed a lawsuit against the
Company (Note 9) that has not been resolved as of the date of these financial
statements. The $52,000 advance was written off as uncollectible during 1997.
The remaining $25,000 is included in due from related parties.
In July 1997, the Company loaned $990,000 to some of the Company's Directors,
Officers and other related parties. The loans, with interest at 10%, are
collateralized by the borrowers interest in Renaissance Senior Living and are
due December 31, 2000.
In July 1996, the Company borrowed $80,000 from a stockholder. The note, with
interest at 12%, was paid during the year ended December 31, 1997.
As described in Note 2, during 1998, the Company transferred ownership of two
facilities to a Company controlled by a related party.
In addition, the Company periodically advances and borrows money on a short
term basis with entities owned or controlled by certain of its shareholders
and officers. At December 31, 1998, approximately $5,540,000 was due from
such Companies and officers and approximately $425,000 was due to such
Companies as a result of this activity. These advances do not bear interest.
In connection with certain of its management agreements, the Company has
advanced funds to certain managed entities. At December 31, 1998 the net
balance due to the Company as a result of these advances totaled $3,250,000.
These amounts have been included in due from related parties. See also Note
11 with respect to these advances.
NOTE 14 - EMPLOYEE RETIREMENT PLAN
In October 1997, the Company established a defined contribution retirement
plan. Full-time employees qualify for the plan upon the completion of one
year 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 the consolidated financial performance of the Company. The Company
has not made any matching contributions to the plan.
F-29
NEWCARE HEALTH CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(Continued)
NOTE 15 - SPECTRUM SETTLEMENT AGREEMENT AND FORGIVENESS OF DEBT
When the Company acquired the Spectrum subsidiary in September 1994, notes
totaling $5,012,190 were issued as part of the purchase price. The initial
principal payments that were payable January 2, 1996, were not made due to a
cash shortage. By agreement with the note holders, the payments were
deferred. In June 1996, the Company and certain related party holders of the
Spectrum acquisition notes reached an agreement on restructuring the notes.
The agreement provided, among other things, for a reduction of the amount
payable and extensions of payment terms. Due to the Company's inability to
make the restructured payments, the notes reverted to their original terms.
The note holders filed a lawsuit against the Company for breach of contract
with respect to the payment of the notes. On February 14, 1997, the Company
and the Spectrum note holders reached a settlement whereby the Company or its
designees would buy back 1,200,000 shares of the original 1,500,000 shares of
NewCare stock offered in the acquisition at $1.50 per share for a total of
$1,800,000. In addition, the Company agreed to pay the Spectrum note holders,
as settlement of all obligations, $4,200,000 plus interest at 8.75% until all
payments were made. The final payment on this note was made on June 14, 1997.
Interest during this period totaled $102,486.
At the time of the settlement agreement, the Company carried net liabilities
and obligations associated with the Spectrum acquisition and operations
totaling $5,330,681. This resulted in a gain on forgiveness of debt totaling
$1,130,681. This gain has been combined with the gain on forgiveness on
refinancing of the debt on various facilities for a total of $1,353,616 and is
reported as an extraordinary item in the statement of operations net of the
income tax provision of $473,765. Basic and dilutive earnings per share from
this extraordinary gain on forgiveness of debt at December 31, 1997, totaled
$.08 per share.
The Company had agreed to purchase the remaining 300,000 shares held by the
Spectrum note holders for $3.50 per share. The Company's obligation to
purchase the shares terminates if the closing price of the stock equals or
exceeds $4.00 per share for thirty (30) consecutive trading days before
February 1, 1999. The obligation terminated during the third quarter of 1997
when the Company's share price exceeded this threshold for the required period
of time.
NOTE 16 - STOCKHOLDER AND MANAGEMENT CHANGES
In January 1997, the president and chairman of the board of the Company
resigned. In connection with his resignation, he sold 869,978 shares of the
Company's stock back to the Company. The shares were held in escrow and the
right to purchase the shares was assigned to Mr. Chris Brogdon. Mr. Brogdon
was subsequently elected to the Company's board of directors and has assumed
the position of chairman. Mr. Brogdon and his wife personally acquired
187,000 of the shares and assigned the right to purchase the remaining 682,978
shares to business associates.
F-30
NEWCARE HEALTH CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(Continued)
In other actions, Mr. Brogdon was granted the right to acquire 1,200,000
shares of Company stock in connection with the re-acquisition of shares in the
Spectrum settlement noted above and was granted an option to purchase
1,500,000 shares of unissued stock at a price of $2.20 per share. He has also
signed a letter of intent to purchase 714,000 shares of stock from the wife of
the former president of the Company's Cimerron subsidiary.
Mr. Brogdon is related to Renaissance Senior Living, Inc., (Renaissance)
which, on February 17, 1997, signed a management agreement to manage the
nursing homes of the Company. The agreement expired on December 31, 1997.
The agreement provided for management fees based on an improvement in the
profit position of the Company, not to exceed 6% of revenue. No management
fees were paid or accrued under this agreement.
EMPLOYMENT AND LEASE AGREEMENT TERMINATIONS
Two employment agreements and office space lease were terminated in
conjunction with the acquisition of the shares from the Cimerron former
president's wife by Mr. Brogdon, as noted above, and the takeover of
management of the Company's facilities by Renaissance. Cash payments made to
terminate the agreements totaled approximately $331,000.
NOTE 17 - FAIR VALUES OF FINANCIAL INSTRUMENTS
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. Unrealized gains at December 31, 1998 and 1997, totaled approximately
$1,453,000 and $1,274,000, respectively.
NOTES RECEIVABLE
The carrying amount approximates fair value for the notes receivable based on
the fair value being estimated at the net present value of cash flows that
would be received on the notes over the remaining notes' terms using the
stated interest rates that approximates market interest rates.
F-31
NEWCARE HEALTH CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(Continued)
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 and estimated fair values of the Company's financial instruments at
December 31, 1998 and 1997, are as follows:
December 31, 1998
---------------------------
Carrying Fair
Amount Value
----------- -----------
Financial assets:
Cash and cash equivalents $ - $ -
Marketable securities 9,167,399 10,873,594
Notes receivable - -
Financial liabilities
Short-term debt 12,127,709 12,127,709
Long-term debt 39,824,649 39,824,649
December 31, 1997
---------------------------
Carrying Fair
Amount Value
----------- -----------
Financial assets:
Cash and cash equivalents $ 2,297,599 $ 2,297,599
Marketable securities 7,826,012 9,100,000
Notes receivable 1,039,500 1,039,350
December 31, 1997
---------------------------
Carrying Fair
Amount Value
----------- -----------
Financial liabilities:
Short-term debt 11,311,143 11,311,143
Long-term debt 39,754,836 39,754,836
NOTE 18 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
As described in Note 2 , the company acquired certain businesses during 1998.
The fair value of assets acquired was approximately $13,672,000; the fair
value of liabilities assumed was approximately $2,837,000; the Company issued
new debt of approximately $12,153,000 and made net cash payments of
approximately $975,000.
F-32
NEWCARE HEALTH CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(Continued)
Total debt of approximately $16,100,000 and approximately $33,300,000 was
incurred during the year ended December 31, 1998 and 1997, to purchase
property and equipment totaling approximately $15,500,000 and $10,000,000,
respectively, pay loan costs of approximately $1,200,000 and $800,000,
respectively, pay off existing indebtedness of approximately $7,800,000 and
$19,000,000, respectively, goodwill of approximately $700,000 and $900,000,
respectively, and the remaining proceeds were used for working capital.
Cash paid for interest during the years ended December 31, 1998, 1997, and
1996 was $4,915,986, $3,248,177, and $1,517,350, respectively.
NOTE 19 - ACCRUED EXPENSES
Accrued expenses consisted of the following as of December 31, 1998 and 1997:
1998 1997
---------- ----------
Payroll and payroll taxes $3,108,774 $1,641,186
Insurance 1,622,225 957,867
Interest 402,537 192,539
Effect of straight-line lease expense 497,919 40,359
Other 911,594 456,576
---------- ----------
$6,543,049 $3,288,527
========== ==========
NOTE 20 - COMPREHENSIVE INCOME
The Financial Accounting Standards Board issued SFAS No. 130, "Reporting
Comprehensive Income". SFAS 130 requires companies to report comprehensive
income in its financial statements. Comprehensive income is defined as the
change in equity of a business during a period from the transactions and other
events and circumstances from non-owner sources. It includes all changes in
equity during a period except those resulting from investments by and
distributions to owners. SFAS 130 became effective for years beginning after
December 15, 1997. The Company has adopted this statement effective January
1, 1998 and all years presented have been presented in accordance with the
statement. During 1998 and 1997 the Company recognized other comprehensive
income of $625,000 and $898,092 respectively which related to unrealized gains
on available for sale securities.
NOTE 21 - SEGMENT INFORMATION
The Company has three reportable segments: nursing homes, assisted living
facilities and a hospital management segment. The nursing home segment owns,
operates and manages skilled nursing care facilities. The assisted living
facilities segment owns, operates and manages assisted living facilities. The
hospital management segment manages acute care hospitals.
The accounting policies of the individual segments are the same as those
described in the summary of significant accounting policies. The Company
evaluates the performance based on the profit or loss from operations before
income taxes and, in the case of nursing homes and assisted living facilities
on occupancy rates. The Company has chosen not to allocate any general
corporate expenses, investment income or assets to its operating segments.
F-33
NEWCARE HEALTH CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(Continued)
The Company's reportable segments are strategic business units that provide
differing levels of health and/or elder care services. They are managed
separately because each business requires different employee skills,
regulatory approval and reporting, and marketing strategies.
The following provides information with respect to the performance of each of
the Company's operating segments:
December 31, 1998:
Assisted
Nursing Living
Homes Facilities Hospitals Total
----------- ----------- ----------- ------------
Patient Service Revenue $60,049,154 $ 4,976,761 $ 65,035,915
Management Fees $ 2,166,305 $ 2,166,305
Segment loss $(7,239,972) $ (787,819) $(2,404,601) $(10,432,392)
Segment Assets $53,569,820 $ 4,609,497 $ - $ 58,179,317
Occupancy rate 69.15% 58.13% N/A N/A
December 31, 1997:
Assisted
Nursing Living
Homes Facilities Hospitals Total
----------- ----------- ----------- ------------
Patient Service Revenue $31,607,821 $ 1,098,943 $ 32,706,764
Management Fees $ 503,577 $ 503,577
Segment income (loss) $(2,302,630) $ (208,158) $ 12,839 $ (2,497,949)
Segment Assets $54,566,885 $ 4,826,723 $ 65,942 $ 59,459,550
Occupancy rate 85.70% 42.51% N/A N/A
The following schedule reconciles amounts shown above for the segments to the
consolidated amounts presented in the Company's financial statements:
1998 1997
---------- ----------
Revenues:
Total revenues for reportable segments $67,202,220 $33,210,341
Unallocated amounts:
Investment Income and other revenues 11,806,234 916,201
Eliminations and other (1,447,839) (347,398)
----------- -----------
Total consolidated revenues $77,560,605 $33,779,144
=========== ===========
Total profit or loss from reportable
segments $(10,432,392) $(2,497,949)
Unallocated amounts:
Investment Income 11,806,234 916,201
Corporate expenses (7,794,099) (4,763,201)
Eliminations and other (1,497,103) 3,245,447
------------ -----------
Total consolidated loss before income taxes $ (7,917,360) $(3,099,502)
============ ===========
F-34
NEWCARE HEALTH CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(Continued)
Assets:
Total assets for reportable segments $ 58,179,317 $32,706,764
Unallocated amounts:
Investments 9,647,905 10,083,000
Other unallocated amounts 23,465,555 25,978,595
------------ -----------
Total consolidated assets $ 91,292,777 $68,768,359
============ ===========
NOTE 22 - SUBSEQUENT EVENTS
In January 1999, A Florida hospital which a subsidiary of the Company, NHC,
was managing filed for protection under Chapter 11 of the United States
Bankruptcy Code. Pursuant to that process, in March 1999, the court agreed to
terminate NHC's management agreement. See Note 11 for a description of the
agreement and amounts due the Company thereto. As a result of the termination
of the management contract, the Company's management believes that certain
Bond payments made by NHC on behalf of the hospital will be considered
preferential payments and will be returned to NHC. As a result, the Company
has established an allowance against amounts owed to it by the Hospital to
reflect management's estimate of the amounts it will ultimately collect.
As described in Note 11, in February 1999, the Company as part of a bankruptcy
proceeding by the Texas hospital it was managing in 1997 agreed to accept
$150,000 as payment for services rendered under the agreement and damages
incurred as a result of the early termination by the Hospital of that
agreement. All amounts due the Company in excess of the $150,000 had been
written off at December 31, 1998.
NOTE 23 - LIQUIDITY
During the years ended December 31, 1998 and 1997, the Company experienced
significant operating losses and decline in liquidity as a result of the
operating losses incurred and investments made in new facilities. Management
believes the operating losses were the result of a) declines in census at
specific facilities, b) acquisition of troubled facilities requiring a period
of time to turn around operations at those facilities and c) delays in
collecting governmental receivables caused by the acquisition of new
facilities requiring delayed filings for services rendered.
To improve liquidity and enhance operations, management believes the following
plans can be implemented.
1) The Company has seven facilities which have no mortgage debt and
believes that it can raise approximately $11,000,000 through mortgages
or sale/lease back financing;
2) The Company has approximately $9,000,000 in marketable securities which
have been financed principally on margin. Over the course of the year,
the Company believes it can liquidate these securities and the related
margin loan payable and realize approximately $1,500,000;
3) At December 31, 1998, the Company was owed approximately $8,400,000
from related health care entities. Management expects that those
entities will refinance certain facilities and remit approximately
$3,100,000 to the Company;
F-35
NEWCARE HEALTH CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(Continued)
4) At December 31, 1998, the Company had a balloon payment of approxi-
mately $3,000,000 due during the next year. Management believes that
it will be able to refinance this obligation;
5) During 1998, the Company acquired or leased fourteen new facilities.
Management anticipates focusing on turning around these new facili-
ties, and enhancing profitability at all facilities by controlling
expenditures and enhancing operating efficiencies.
Management believes that the above items are achievable, however, it can
provide no assurance that these items will occur. Completion of the
financings noted above, are subject to volatile market conditions, which have
recently been unfavorable for the health care industry. Any significant
changes to any of the facilities operations are subject to review and
recission by regulatory authorities.
F-36
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.
NEWCARE HEALTH CORPORATION
Dated: April 15, 1999 By:/s/ Darrell C. Tucker
Darrell C. Tucker, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE
/s/ Darrell C. Tucker President and Director April 15, 1999
Darrell C. Tucker
/s/ James H. Sanregret Chief Financial Officer April 15, 1999
James H. Sanregret and Treasurer (Chief
Accounting Officer)
/s/ Chris Brogdon Chairman of the Board, April 15, 1999
Chris Brogdon Chief Executive Officer
and Director
/s/ Ashok Dalal Director April 15, 1999
Ashok Dalal
/s/ Harlan Mathews Director April 15, 1999
Harlan Mathews
/s/ Dr. Kishor Karia Director April 15, 1999
Dr. Kishor Karia
_____________________________ Director
Mark P. Clein
/s/ Jeff M. Moore Director April 15, 1999
Jeff M. Moore