<PAGE> 1
U. S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended September 30, 1996
------------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period
to .
----------- ------------
Commission file number 0-24110 .
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NEWCARE HEALTH CORPORATION
--------------------------
(Exact name of small business issuer as specified in its charter)
CAMELBACK CAPITAL, INC.
-----------------------
(Former name of Registrant)
NEVADA
------
(State or other jurisdiction of incorporation or organization)
86-0594391
----------
(IRS Employer Identification Number)
3600 OAK MANOR LANE, BLDG. 4, LARGO, FL 33774
---------------------------------------------
(Address of principal executive offices)
(813) 586-4262
--------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such report(s), and (2) has
been subject to such filing requirements for the past 90 days. Yes X No
Number of shares outstanding of issuer's common stock as of November 14, 1996
was 11,047,525.
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NewCare Health Corporation
Index
<TABLE>
<S> <C> <C>
Part I. Financial Information PAGE
- ------- ----
Item 1: Financial Statements:
Condensed Consolidated Balance Sheets 1
Condensed Consolidated Statements of Operations 2
Condensed Consolidated Statements of Cash Flows 3
Notes to the Condensed Consolidated Financial
Statements 4
Item 2:
Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Part II. Other Information:
- --------
Item 1:
Legal Proceedings 19
Item 2:
Changes in Securities 19
Item 3:
Defaults Upon Senior Securities 20
Item 4:
Submission of Matters to a Vote of Security Holders 20
Item 5:
Other Information 20
Item 6:
Exhibits and Reports on Form 8-K. 20
Signature 21
Index to Exhibits 22
</TABLE>
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NewCare Health Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
ASSETS
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
1996 1995
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 426,091 $ 201,639
Accounts receivable, net of allowance
for doubtful accounts of $714,267 4,048,400 5,169,231
Inventory 982,821 1,169,404
Prepaid expenses 221,769 211,038
----------- -----------
Total current assets 5,679,081 6,751,312
Property and equipment, net 24,568,359 25,070,716
Excess of costs over net assets of businesses
acquired, net of accumulated amortization
of $2,215,960 5,075,968 6,925,531
Other assets, net 1,538,598 1,233,144
----------- -----------
$36,862,006 $39,980,703
Total assets =========== ===========
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities
Current maturities of long-term debt $ 6,637,227 $ 9,214,389
Notes payable 1,811,557 1,525,000
Borrowings under line-of-credit 248,608 166,491
Accounts payable 2,374,570 3,234,521
Accrued liabilities 1,879,762 1,891,878
Deferred revenue 75,540 61,246
Estimated third-party payor settlements 58,775 58,000
----------- -----------
Total current liabilities 13,086,039 16,151,525
Estimated third-party payor settlements 141,337 198,639
Deferred interest payable 126,000
Long-term debt 16,819,057 16,260,560
Shareowners' equity
Common stock, $.02 par value; 50,000,000
shares authorized; 11,047,525 issued
and outstanding 220,950 213,350
Additional paid-in capital 9,573,124 9,055,724
Accumulated deficit (3,054,501) (1,849,095)
----------- -----------
6,739,573 7,419,979
Less treasury shares (70,168 shares), at cost (50,000) (50,000)
----------- -----------
Total shareowners' equity 6,689,573 7,369,979
----------- -----------
Total liabilities and shareowners' equity $36,862,006 $39,980,703
=========== ===========
The assets and liabilities of discontinued operations included
in the balance sheets above are:
Working capital $ 1,261,967 $ 2,123,206
Net property and equipment 1,277,188 1,406,301
Other assets 480,023 619,421
Long-term debt 355,247 916,075
</TABLE>
See notes to condensed consolidated financial statements.
1
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NewCare Health Corporation and Subsidiaries
Condensed Consolidated Statements of Operations
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Three months ended Three months ended
September 30, 1996 September 30, 1995
----------------- ---------------
<S> <C> <C>
Net revenues $ 6,880,379 $ 6,729,064
Costs and expenses:
Compensation and related 3,753,803 3,973,038
Operating and administrative 2,138,632 1,998,138
Interest 386,481 489,666
Depreciation and amortization 223,617 301,256
----------- -----------
Total costs and expenses 6,502,533 6,762,098
----------- -----------
Income (loss) from continuing operations 377,846 (33,034)
Discontinued operations:
Income (loss) from operations of Spectrum (735,241) 298,408
Estimated loss on disposal of Spectrum (1,700,000) ---
----------- -----------
(2,435,241) 298,408
----------- -----------
Income (loss) before extraordinary item (2,057,395) 265,374
Extraordinary item - gain on restructuring of debt --- ---
----------- -----------
Net income (loss) $(2,057,395) $ 265,374
=========== ===========
Per share of common stock
Income (loss) from continuing operations $0.03 $ (0.00)
Income (loss) from operations of discontinued segment -0.07 0.02
Loss on disposal of discontinued operation -0.15 ---
----------- -----------
Income (loss) per common share before gain on
restructuring of debt -0.19 0.02
Gain on restructuring of debt 0.00 ---
----------- -----------
Earnings (loss) per share $ (0.19) $ 0.02
=========== ===========
Weighted average number of
common shares outstanding 11,047,525 10,669,525
=========== ===========
<CAPTION>
(Unaudited) (Unaudited)
Nine months ended Nine months ended
September 30, 1996 September 30, 1995
---------------- ------------------
<S> <C> <C>
Net revenues $21,156,954 $15,436,032
Costs and expenses:
Compensation and related 11,965,608 8,943,279
Operating and administrative 6,437,596 4,855,299
Interest 1,270,423 1,153,619
Depreciation and amortization 778,633 708,498
----------- -----------
Total costs and expenses 20,452,260 15,660,695
----------- -----------
Income (loss) from continuing operations 704,694 (224,663)
Discontinued operations:
Income (loss) from operations of Spectrum (901,768) 804,580
Estimated loss on disposal of Spectrum (1,700,000) ---
----------- -----------
(2,601,768) 804,580
----------- -----------
Income (loss) before extraordinary item (1,897,074) 579,917
Extraordinary item - gain on restructuring of debt 691,668 ---
----------- -----------
Net income (loss) $(1,205,406) $ 579,917
=========== ===========
Per share of common stock
Income (loss) from continuing operations $ 0.07 $ (0.02)
Income (loss) from operations of discontinued segment -0.08 0.08
Loss on disposal of discontinued operation -0.16 ---
----------- -----------
Income (loss) per common share before gain on
restructuring of debt -0.17 0.06
Gain on restructuring of debt 0.06 ---
----------- -----------
Earnings (loss) per share (0.11) $ 0.06
=========== ===========
Weighted average number of
common shares outstanding 10,797,525 10,303,423
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE> 5
NewCare Health Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
--------------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $(1,205,406) $ 579,917
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization 1,202,011 734,538
Estimated loss on disposal of Spectrum 1,700,000 ---
Provision for bad debts 826,228 122,248
Gain on debt restructuring and deferred
interest of $126,000 (817,668) ---
Changes in assets and liabilities
Accounts receivable 294,603 (612,585)
Inventories 186,583 93,597
Prepaid expenses (10,731) (8,942)
Estimated third party settlements (56,527) (114,938)
Accounts payable (689,462) (21,653)
Changes in other assets and liabilties, net (334,548) 601,322
----------- ----------
Net cash provided by operating activities 1,095,083 1,373,504
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for acquisitions of affiliates, net
of cash acquired 0 (1,612,200)
Net purchases of property and equipment (319,978) (484,233)
----------- ----------
Net cash used in investing activities (319,978) (2,096,433)
CASH FLOWS FROM FINANCING ACTIVITIES
Net repayments of borrowings (1,254,355) (1,296,180)
Loan proceeds 714,837 1,701,142
Loan costs (11,135) (2,271)
----------- ----------
Net cash provided by (used in) financing activities (550,653) 402,691
----------- ----------
Net increase (decrease) in cash and cash equivalents 224,452 (320,238)
Cash and cash equivalents at beginning of period 201,639 926,157
----------- ----------
Cash and cash equivalents at end of period $ 426,091 $ 605,919
=========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
3
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NEWCARE HEALTH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
A. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated balance sheet as of September
30, 1996, unaudited condensed consolidated statements of operations for the
three months and nine months ended September 30, 1996 and 1995, and unaudited
condensed consolidated statements of cash flows for the nine months ended
September 30, 1996 and 1995 have been prepared in accordance with generally
accepted accounting principles for interim financial information. Accordingly,
they do not include all of the information and note disclosures required by
generally accepted accounting principles for complete financial statements. It
is suggested that these financial statements be read in conjunction with the
financial statements and notes thereto included in the company's annual report
on Form 10-KSB/A-1 for the year ended December 31, 1995. In the opinion of
management, the accompanying unaudited condensed consolidated financial
statements include all adjustments necessary for a fair presentation of
condensed consolidated financial position and results of operations and cash
flows for the periods presented. The results of operations for the nine months
ended September 30, 1996 are not necessarily indicative of the operating
results for the full year.
B. EARNINGS PER SHARE
Earnings per share are based on the weighted average number of common stock
outstanding. Common share equivalents are not considered in the calculation of
per share data when their inclusion would be anti-dilutive.
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C. ACQUISITIONS AND DISPOSITIONS
On May 22, 1995, the Company acquired Cimerron Health Care, Inc. and Affiliates
("Cimerron"), which operates five skilled nursing facilities in Georgia.
On September 15, 1995, NewCare acquired through a lease Padgett Nursing Home, a
100-bed skilled nursing facility located in Tampa, Florida. This facility is
operated as Central Tampa Nursing Home.
On October 21, 1996, NewCare Health Corporation ("NewCare") signed a definitive
agreement with NCS Healthcare of Florida, Inc. ("NCS") to sell all the
operating assets of NewCare's Spectrum Health Services, Inc. subsidiary for
cash and the assumption of certain Spectrum debt by NCS. Spectrum operates in
the businesses of institutional and correctional pharmacy, medical supply and
equipment, home infusion and I. V. services. The sale closed on October 24,
1996. The consideration paid by NCS was approximately $10,167,000. Of this
amount, approximately $7,646,000 was received 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 NewCare 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.
Spectrum's assets and liabilities as of September 30, 1996, subject to certain
adjustments, was used in determining the consideration paid by NCS for
Spectrum.
An estimated loss on the disposal of Spectrum of $1,700,000 was recorded by the
Company as of September 30, 1996.
D. ACCOUNTS RECEIVABLE
As of September 30, 1996, the Company's accounts receivable was $4,048,400,
including an allowance for doubtful accounts of $714,267.
E. INVENTORY
Inventory primarily consists of healthcare supplies and is stated at the lower
of cost (FIFO) or market value.
F. PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. The cost of additions and
substantial betterment of property and equipment is
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capitalized. The cost of maintenance and repairs of property and equipment is
charged to operating expenses. Depreciation is provided using the
straight-line method to allocate the cost of property and equipment over
estimated lives, generally ranging from 3 to 40 years.
G. OTHER ASSETS
Other assets consist primarily of excess consideration paid over the fair value
of net assets acquired in business combinations (goodwill), organization costs,
deferred financing costs and certain other deferred expenses. Deferred
financing cost are amortized using a method approximating the effective
interest method over the terms of the related borrowing. The other intangible
assets are amortized using the straight-line method over the periods of
expected benefit, generally 5 to 40 years.
H. CURRENT PORTION OF LONG-TERM DEBT
The Company's current portion of long-term debt consists of $4,192,692 relating
to the Oak Manor facility's first mortgage, $420,000 for Oak Manor's second
mortgage, other debt of $524,535, and $1,500,000 in notes payable to the former
owners of Spectrum, which debt is the subject of a lawsuit currently pending in
court and is discussed further herein.
I. LINE-OF-CREDIT
Spectrum had a revolving line-of-credit agreement with a financial institution
which provides, among other things, for monthly interest payments at the
financial institution's base rate plus one percent. Borrowing under the
line-of-credit are limited to a maximum of $250,000, of which $248,608 was
borrowed at September 30, 1996. This line of credit was paid in full on
October 24, 1996.
6
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J. NOTES PAYABLE
The Company did not make payment of $1,333,333 of the Spectrum acquisition
notes payable on January 2, 1996. The acquisition notes were primarily payable
to a Director and significant shareholder of the Company. The Company and the
holders of these notes executed an agreement restructuring the notes on June
25, 1996. This agreement was approved by the Board of Directors of the
Company. The agreement provided for a significant reduction of the cash
payable and payment terms on the Spectrum acquisition notes. Total debt of
$5,618,672 related to the Spectrum acquisition has been replaced with
$5,000,000 of notes and stock. The notes were payable as follows: $1,500,000
due September 24, 1996; $450,000 due January 1, 1998; $450,000 due January 1,
1999; and $1,850,000 payable in quarterly installments commencing January 1997
based on the Spectrum subsidiary's operating results and cash flow. The
$1,500,000 and $1,850,000 notes do not bear interest. Both $450,000 notes bear
interest at 8% payable monthly. The quarterly payments relating to the
$1,850,000 payment referred to above is the lesser of (a) 70% of the first
$900,000 of Spectrum's net profits for that quarter; or (b) 70% of the first
$900,000 of net cash flow generated by Spectrum from operations during that
quarter. To the extent that net profits or net cash flow exceed $900,000 for a
quarter, 100% of the amounts over $900,000 are also payable. These notes have
no maturity date and are secured by a pledge of the outstanding stock of
Spectrum. These notes are the subject of a lawsuit filed by Matt Carroll,
Francis Farley, Cheryl Hannant, and Edward R. Meyer (the "Carroll Group") on
October 21, 1996. In June 1996 the Company entered into a debt forbearance
agreement with the Carroll Group to restructure its acquisition related debt.
The agreement provided, among other things, for the issuance of 375,000 shares
of the Company's common stock and payments of $4,250,000, including a payment
of $1,500,000 due September 24, 1996. The 375,000 shares were valued at $1.40
per share, (the approximate market value at the effective date of the
agreement). The reduction of the debt principal in excess of consideration
paid by the Company to achieve the reduction amounted to $691,668 and was
recorded as a gain from restructuring of debt in the Company's financial
statements for the period ended June 30, 1996. Then on August 12, 1996, the
Company and the Carroll Group executed an early payment agreement providing for
further debt reduction. Subsequently, the Carroll Group proposed an amendment
to the debt forbearance agreement which was accepted by the Company. The
Company failed to make the payment of $1,500,000 which was due on September 24,
1996.
On October 22, 1996, the Carroll Group, denying the validity of the early
payment agreement and forbearance agreement amendment, sought, through court
injunction, to sequester proceeds from the sale of Spectrum assets to NCS and
to appoint a receiver. The Company was successful in opposing the injunction.
NewCare
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expects to file substantial counterclaims against the Carroll Group who were
the former owners of Spectrum. A judgement against NewCare in this case could
have a material adverse impact on the Company.
Notes were issued to a group of individuals for $1,525,000 to fund the purchase
of the Cimerron Group in Georgia. The notes carry interest at 12% payable
monthly, and were due on April 30, 1996, but the notes were renewed in varying
periods from January 1997 through January 1998 with one note of $50,000 being
paid in full November 5, 1996. A second mortgage on the Dania Nursing Home was
given to the lenders as security for the debt. Refinancing of Dania is
expected to be completed in three to five months and the proceeds will be used,
in part, to retire these notes, the remainder will be paid from working
capital. As discussed under "Capital Resources and Liquidity", no firm
commitment has been signed for this loan and there can be no certainty that
such a commitment will be received and closed. The note holders are all
shareholders of the Company and two (2) are Directors of the Company. Failure
to refinance the Dania nursing facility could have a material adverse affect
upon the Company.
K. INCOME TAXES
At December 31, 1995, the Company had net operating loss carryforwards of
approximately $800,000 available to offset future taxable income through 2009.
Additionally there was no provision for income taxes for the nine months ended
September 30, 1996 due to the Company's loss during the period. Accordingly,
there was no provision for income taxes for the nine months ended September 30,
1996. As of December 31, 1994, the Company had a net operating loss
carryforward. Accordingly, there was no provision for income taxes for the
nine month period ended September 30, 1995.
L. CAPITAL STOCK
In accordance with the restructuring of the Spectrum acquisition notes on June
25, 1996, the Company agreed it will issue 375,000 shares of common stock to
the Carroll Group. No other shares were issued during the nine month period
ended September 30, 1996.
M. STOCK OPTIONS AND WARRANTS
In connection with the acquisition of Cimerron on May 22, 1995, the Company
issued 152,000 warrants which are exercisable for one (1) share each of the
Company's common stock until June 1, 1998 with an exercise price of $3.50.
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N. RELATED PARTY TRANSACTIONS
In 1995, Karen Hagan, wife of Robert Hagan, a director of the Company, loaned
$495,000 to the Company for its purchase of real property in Georgia and
provided refinancing for the Suncoast Nursing Home with a $600,000 mortgage.
These notes bear interest at 10% and are interest only through various dates in
1997 and 1998. In 1996, Karen Hagan loaned $80,000 working capital to
Fitzgerald Nursing Center, a home owned by the Company, which loan is being
amortized monthly from the cash flow of Fitzgerald. In 1996, Matthew Carroll,
a director of the Company, loaned Spectrum Health Services, Inc. $52,720 for
working capital. This loan was assumed by NCS Healthcare of Florida, Inc. when
it acquired the operating assets of Spectrum on October 24, 1996.
O. LEASE TERMINATION
The lease on Bay to Bay Nursing Home expired on May 31, 1996 and was not
renewed. The loss of this 75-bed skilled nursing facility is not expected to
have an material adverse effect on the Company's operations. For the nine
months ended September 30, 1996 this facility had a profit of $113,265,
including $275,773 from the sale of certain intangible assets, as compared to
an operating profit of $92,481 for the same period in 1995.
P. SIGNIFICANT LEGAL PROCEEDINGS
In June 1996 the Company entered into a debt forbearance agreement with the
previous owners of its Spectrum subsidiary (the "Carroll Group") to restructure
its acquisition related debt. The agreement provided, among other things, for
the issuance of 375,000 shares of the Company's common stock and payments of
$4,250,000, including a payment of $1,500,000 due September 24, 1996. The
375,000 shares were valued at $1.40 per share, (the approximate market value at
the effective date of the agreement). The reduction of the debt principal in
excess of consideration paid by the Company to achieve the reduction amounted
to $691,668 and was recorded as a gain from restructuring of debt in the
Company's financial statements for the period ended June 30, 1996. Then on
August 12, 1996, the Company and the Carroll Group executed an early payment
agreement providing for further debt reduction. Subsequently, the Carroll
Group proposed an amendment to the debt forbearance agreement which was
accepted by the Company.
On October 22, 1996, Matt Carroll, Francis Farley, Cheryl Hannant and Edward R.
Meyer (the "Carroll Group"), denying the validity of the early payment
agreement and forbearance agreement amendment filed a lawsuit against NewCare
and Robert W. Bell in the Circuit Court of the Thirteenth Judicial Circuit
Court in and for Hillsborough County, Florida, seeking, among other things,
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payments for all amounts due under the forbearance agreement, and through court
injunction to sequester proceeds from the sale of Spectrum assets to NCS and to
appoint a receiver. The Company was successful in opposing the injunction,
however, the substantive issues raised by the lawsuit remain before the Circuit
Court and it appears at this time that there will be ongoing litigation between
the Company and the Carroll Group regarding the debt restructuring agreements,
as well as counterclaims for certain actions and omissions of the Carroll
Group. The Company has not altered the accounting for the transaction and the
375,000 shares will be placed in escrow pending the outcome of this matter.
The Company has not made any adjustments to the accompanying financial
statements to provide for any liability, damages, or gain, if any, that may
result from the ultimate outcome of this uncertainty.
Q. INDUSTRY SEGMENT INFORMATION
The Company operated principally in two industries: the operation of skilled
nursing facilities and, through its Spectrum subsidiary, which was sold on
October 24, 1996, the sale of medical equipment, supplies and services to the
long term health care industry. The following summarizes Spectrums's operations
for the nine months ended September 30, 1996 and its significant assets and
liabilities included in the Company's balance sheet at September 30, 1996.
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 1996
<S> <C>
Net revenues $11,866,577
Compensation and related expenses 3,191,564
Operating and administrative expenses 9,010,288
Interest expense 143,115
Depreciation and amortization 423,378
-----------
Total costs and expenses 12,768,345
-----------
Loss from operations of Spectrum $ 901,768
===========
</TABLE>
Assets and liabilities of Spectrum included in the Company's condensed
consolidated balance sheet as of September 30, 1996, consisted of the
following:
<TABLE>
<S> <C>
Working capital $ 1,261,967
Net property and equipment $ 1,277,188
Other assets $ 480,023
Long-term debt $ 355,247
</TABLE>
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MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Structure of Operations
NewCare Health Corporation operated through its three subsidiaries: NewCare,
Inc., Spectrum Health Services, Inc. (acquired September 1, 1994) and Cimerron
Health Care, Inc. (acquired May 22, 1995). Spectrum was sold on October 24,
1996. The Company operates ten (10) skilled nursing facilities, five (5) in
Florida by NewCare, Inc. and five (5) in Georgia by Cimerron. As a result of
the sale of Spectrum to NCS Healthcare of Florida, Inc. the Company has
disposed of its medical supply and pharmaceutical sales and service operations
in Florida, Georgia, Kansas and Texas through Spectrum. Separate industry
segment information in respect to Spectrum is provided below.
Events during the Three Months Ended September 30, 1996
The Registrant had net loss of $2,057,395 for the three months ended September
30, 1996, compared to net income of $265,374 for the same period in 1995. The
loss for the current period included a provision for estimated loss on disposal
of Spectrum of $1,700,000, a loss related to Spectrum's discontinued operations
of $735,241, and income from continuing operations of $377,846. For the same
period in 1995, income from discontinued operations was $298,408 and the loss
from continuing operations was $33,034.
As mentioned in the notes to condensed consolidated financial statements, the
Company did not make payment of $1,333,333 of the Spectrum acquisition notes
payable on January 2, 1996. The acquisition notes were primarily payable to a
Director and significant shareholder of the Company. As mentioned previously,
the Company and the holders of these notes executed an agreement restructuring
the notes on June 25, 1996. This agreement was approved by the Board of
Directors of the Company. A dispute over the notes and various agreements
between the Carroll Group and the Company arose at the time of the sale of the
operating assets of Spectrum to NCS Healthcare of Florida and resulted in a
lawsuit being filed by the Carroll Group against the Company and its President
Robert W. Bell, Sr. NewCare and Bell anticipate filing substantial
counterclaims against the individual note holders who were the former owners of
Spectrum. A judgement against NewCare in this case could have a material
adverse impact upon the Company.
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Notes were issued to a group of individuals in the principal amount of
$1,525,000 to fund the purchase of the Cimerron Group in Georgia. The notes
carry interest at 12% payable monthly, and were due on April 30, 1996, and have
been renewed for varying periods from January 1997 through January 1998. A
second mortgage on the Dania Nursing Home was given to the lenders as security
for the debt. Refinancing of Dania is expected to be completed within three to
five months and the proceeds will be used, in part, to pay these notes. The
note holders are all shareholders of the Company and two (2) are Directors of
the Company. Failure to refinance the Dania nursing facility could have a
material adverse affect upon the Company.
As discussed under "Capital Resources and Liquidity", the Company is
negotiating with several lenders to refinance three nursing facilities.
However, no firm commitment has been signed and there can be no certainty that
such a commitment will be received and closed.
On January 17, 1996, Medicare Part B Financial Services notified Spectrum
Health Services, Inc. that it was claiming a recapture of overpayment to
Spectrum from the years 1990 through 1992 in the amount of $364,391.41. On
appeal this claim was reduced to $85,955.26. which has been paid in full.
Medicare has appealed this decision. During the three months ended June 30,
1996, Spectrum recorded an allowance for this claim of $86,000, with a
corresponding reduction in income for the period. If a favorable ruling is
received by Spectrum on appeal, all monies paid in will be returned to
Spectrum, and the allowance mentioned above will be adjusted accordingly.
Management feels it has a very strong case and the recapture should be
reversed. However, there is no certainty that such a favorable ruling will be
received. If the ruling is unfavorable, then Spectrum would have to pay all
the funds plus interest to Medicare Part B Financial Services.
On July 23, 1996, the Company received correspondence from Ms. Karen Hagan
which purported to exercise an option pursuant to Section 8(c) of the
Supplemental Agreement among NewCare Health Corporation, et al. dated May 22,
1995 (the "Supplemental Agreement"). Section 8(c) of the Supplemental
Agreement provided that if the shares held by Ms. Hagan were not contained in a
registration statement filed with the United States Securities and Exchange
Commission prior to April 30, 1996, Ms. Hagan would have the option to require
the Company to purchase all of Ms. Hagan's shares of NewCare stock for
$2,500,000 within 60 days after receipt by NewCare of written notice of the
exercise of the option. NewCare filed a registration statement containing Ms.
Hagan's shares on May 6, 1996. It is management's opinion that the option
contained in Section 8(c) of the Supplemental Agreement is not available to Ms.
Hagan because Ms. Hagan failed to timely execute the registration statement and
thereby delayed
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its filing date. By letter dated August 2, 1996, the Company was informed that
Ms. Hagan had retained legal counsel to represent her in this matter and has
threatened litigation regarding this matter. Ms. Hagan is a significant
shareholder of the Company and wife of Robert Hagan, a director of the Company.
Occupancy Levels and Payor Mix
The average occupancy level, based on licensed beds, for the Company's skilled
nursing facilities during the nine months ended September 30, 1996 and 1995 was
89% and 94% respectively. Excluding Central Tampa Nursing facility, which was
leased in September 1995, occupancy for the nine months ended September 30,
1996 was 92%. As contemplated before Central Tampa was leased, a plan for
renovating and adding to patient care areas for this facility is in process.
These enhancements are expected to enhance Central Tampa's occupancy. The
financing of this project is to be provided by the lessor.
The Company's nursing facility revenues, exclusive of assisted living, medical
supply and pharmaceutical revenues, are divided into the following classes for
payor mix:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1996 1995
---- ----
<S> <C> <C>
Medicaid 75% 71%
Medicare 9% 12%
Private pay 10% 13%
Other Payors 6% 4%
---- ----
100% 100%
</TABLE>
Medicaid is a major payor for the Company and it continues to have a
significant impact in the long-term care industry. The Company received 84% of
its nursing facility revenues for the nine months ended September 30, 1996 from
Medicaid and Medicare, compared to 83% for the same period in 1995. Future
changes in these major payor programs could possibly have a negative impact on
the Company's operations and ultimately can affect the Company's profitability.
Results of Operations
The Registrant had a net loss of $1,205,406 for the nine months ended September
30, 1996, compared to net income of $579,917 for the same period in 1995. The
loss for the current period included a provision for estimated loss on disposal
of Spectrum of $1,700,000, a loss related to Spectrum's discontinued operations
of $901,768, a gain from restructuring of debt of $691,668, and income from
continuing operations of $704,694. For the same period in 1995, income from
discontinued operations was
13
<PAGE> 16
$804,580 and the loss from continuing operations was $224,663.
The Company's operating revenues and expenses from continuing operations have
increased primarily due to its acquisition of Cimerron in May 1995, which was
accounted for under the purchase method of accounting.
Net Revenues Revenues from continuing operations of the Registrant were
$21,156,954 and $15,436,032 for the nine months ended September 30, 1996 and
1995, increasing $5,720,922 or 37.1%. The revenues were approximately
comprised of: NewCare, Inc. with $12,665,000 (59.9%) and Cimerron with
$8,492,000 (40.1%).
Operating Expenses Operating expenses for continuing operations for the nine
months ended September 30, 1996 and 1995 were 96.7% and 101.5% of revenues or
$20,452,260 and $15,660,695, respectively. Operating expenses consist of
compensation and related expenses, operating and administrative expenses,
interest expenses, and depreciation and amortization expenses. Compensation
and related expenses and operating and administrative expenses are the primary
operating expenses of the Company. Compensation and related expenses and
operating and administrative expenses for continuing operations decreased, as a
percentage of revenues, from 89.4% to 87.0% for the nine month periods
presented. Interest, depreciation and amortization for continuing operations
decreased as a percentage of revenues, from 12.1% to 9.7% for the nine months
presented.
Depreciation and amortization expenses for continuing operations for the nine
months ended September 30, 1996 and 1995 were $778,633 and $708,498,
respectively and included amortization of goodwill of approximately $128,000
related to Spectrum for both periods. The assets of the Company are
depreciated or amortized over their expected useful lives, ranging from 3 to 40
years.
Interest expenses for continuing operations were $1,270,423 for the nine months
ended September 30, 1996 and $1,153,619 for the same period in 1995.
Approximately $643,000 of interest expense for 1996 is related to the Cimerron
acquisition.
The Company's operating results may be affected by issues facing the long-term
care industry, such as occupancy levels, nursing personnel availability,
governmental reimbursement programs (Medicaid and Medicare), and the possible
reforms that may be taken by the federal government. The Registrant's ability
to manage costs, including compensation and related expenses, and payor mix can
significantly affect its future profitability.
14
<PAGE> 17
Industry Segment Information
The Company operated principally in two industries: the operation of skilled
nursing facilities and, through its Spectrum subsidiary, which was sold on
October 24, 1996, the sale of medical equipment, supplies and services to the
long term health care industry. The following summarizes Spectrums's operations
for the nine months ended September 30, 1996 and its significant assets and
liabilities included in the Company's balance sheet at September 30, 1996.
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 1996
<S> <C>
Net revenues $11,866,577
Compensation and related expenses 3,191,564
Operating and administrative expenses 9,010,288
Interest expense 143,115
Depreciation and amortization 423,378
-----------
Total costs and expenses 12,768,345
-----------
Loss from operations of Spectrum $ 901,768
===========
</TABLE>
Assets and liabilities of Spectrum included in the Company's condensed
consolidated balance sheet as of September 30, 1996, consisted of the
following:
<TABLE>
<S> <C>
Working capital $ 1,261,967
Net property and equipment $ 1,277,188
Other assets $ 480,023
Long-term debt $ 355,247
</TABLE>
Seasonality The Company's revenues may fluctuate from quarter to quarter.
Fluctuations are the result of seasonal occupancy changes, the number of
calendar days per quarter and the timing of Medicaid and Medicare reimbursement
rate changes for individual nursing facilities.
Inflation and Labor Supply Nursing 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 Registrant's skilled nursing
operations in the short term until Medicaid and Medicare cost reports can be
filed for appropriate reimbursement rate adjustments for individual
15
<PAGE> 18
nursing facilities. The supply of labor can have possible adverse affects on
the Company's net results of operations.
Capital Resources and Liquidity
The Company had a net loss of $1,205,406 for the nine months ended September
30, 1996, with a net increase in cash of $224,452. Cash flows increased
$1,095,083 from Operating Activities; decreased $319,978 from Investing
Activities; and decreased $550,653 from Financing Activities, resulting in an
ending Cash balance of $426,091 on September 30, 1996.
Net Cash provided by Operating Activities was $1,095,083 for the nine months
ended September 30, 1996. The Company's accounts payable decreased by $689,462
while accounts receivable decreased by $294,603. Inventories decreased by
$186,583 during the nine month period ended September 30, 1996. Depreciation
and amortization was $2,902,011, which includes amortization of $1,700,000 for
impairment of goodwill related to the sale of Spectrum, and the provision for
bad debts was $826,228. The change in other assets and liabilities, net
decreased cash by $334,548, and a gain on debt restructuring and deferred
interest had an effect of $817,668.
Net cash used by Investing Activities was $319,978 for the nine months ended
September 30, 1996 which consisted of purchases of property and equipment.
For the nine months ended September 30, 1996, Financing Activities used net
cash of $550,653. The Registrant made payments of $1,254,355 on long-term debt
that were primarily for scheduled payments on the Company's mortgage debt and
equipment loans. Included in these payments was a $500,000 note payable which
matured in February 1996 and was refinanced with a loan from Retirement Care
Associates, Inc. (RCA). In addition the Company received $82,000 from its
line of credit.
From the sale of Spectrum's operating assets on October 24, 1996, the Company
received net cash at the closing of $7,115,246.
Management believes that the existing cash and cash from operations will be
sufficient to fund its continued operations, excluding current maturities for
notes payable related to the acquisitions of Cimerron and Spectrum and first
mortgage of its Oak Manor facility. Cash reserves are not adequate to fund the
Company's Oak Manor first mortgage of $4,192,692, which has been extended to
March 24, 1997, the $1,500,000 note payable related to the restructuring of the
Spectrum debt mentioned previously, and $1,525,000 in short-term notes related
to the Cimerron acquisition, which are payable to shareholders of the Company.
Should the Company be unable to refinance these notes or borrow against its
assets, its inability to pay these notes would have
16
<PAGE> 19
significant adverse consequences upon the Company.
The current portion of long-term debt for mortgages payable as of December 31,
1995 is approximately $4,847,000, of which $4,192,000 is related to its Oak
Manor facility. The Company at this time has no specific plan to sell and
lease back any of its health care facilities. The Company does have plans and
its management is negotiating with several lenders to refinance its Oak Manor
facility in Largo, Florida, the Dania nursing home in Dania, Florida, and the
Windward nursing home in Flowery Branch, Georgia. The refinancing has been
submitted to several lenders and a preliminary term sheet has been received
from a real estate investment trust. There is no assurance that this financing
will be secured. If the Company is unable to refinance the notes due in 1997,
it would have a material affect on the Company's ability to continue
operations.
The Company at this time has no material commitments for capital expenditures.
The Company's working capital (Current Assets less Current Liabilities) as of
September 30, 1996 was a negative $7,406,000. Current Liabilities of
$13,086,000 consisted primarily of Current Portion of Long-term Debt of
$6,637,000, Accounts Payable of $2,374,000, notes payable of $1,811,000 and
Accrued Liabilities of $1,879,000. The Current Assets included Cash of
$426,000, Accounts Receivable, Net of $4,048,000 and Inventory of $982,000.
Plan of Operations
The Company believes the sale of Spectrum's operating assets will relieve the
Company of some operational burdens. The cash from the sale will be used to
fund its capital needs short term and allow the Company to obtain favorable
refinancing wherever financing is needed over the next twelve months.
Management intends to focus on its core nursing home business and improve its
in house sales and profitability. The Company will continue to actively search
for opportunities to grow its nursing home beds via acquisitions. There is no
assurance that the Company can meet these objectives.
As discussed above in "Capital Resources and Liquidity," management believes
that existing cash and cash from operations will be sufficient to fund its
operations through the next twelve (12) months, excluding current maturities
for notes payable related to the acquisition of Cimerron and Spectrum and the
first mortgage of the Oak Manor nursing facility. The current portion of
long-term debt for mortgages payable as of September 30, 1996 for Oak Manor is
approximately $4,192,000. The Company at this time has no specific plan to
sell and lease back any of its health care facilities. The Company does have
plans and its management is negotiating with several lenders to refinance its
Oak Manor facility in Largo, Florida, the Dania nursing home in Dania, Florida,
and the Windward nursing home in Flowery Branch, Georgia. The refinancing plan
has been submitted to several
17
<PAGE> 20
lenders and a preliminary term sheet has been received from a real estate
investment trust. Management believes that with current market conditions this
financing can be achieved. There is no assurance that this financing will be
secured. If the Company is unable to refinance the notes due in 1997, it would
have a material affect on the Company's ability to continue operations.
Other Matters
The Company currently has no benefits that extend to former or inactive
employees such as disability, layoff, death, or other benefits other than sick
time benefits which accrue ratably based upon hours worked with certain maximum
accrual amounts. These benefits, however, do not vest nor do they carry-over
from year to year. Accordingly, the provisions of the Financial Accounting
Standards Board Statement of Financial Accounting Standard ("FAS") no.106,
"Employers' Accounting For Post-Retirement Benefits other than Pensions," do
not apply. The Company currently does not provide any post-employment
benefits, therefore FAS no. 112 does not apply.
18
<PAGE> 21
PART II. OTHER INFORMATION
Item 1: LEGAL PROCEEDINGS
In June 1996 the Company entered into a debt forbearance agreement with the
previous owners of its Spectrum subsidiary (the "Carroll Group") to restructure
its acquisition related debt. The agreement provided, among other things, for
the issuance of 375,000 shares of the Company's common stock and payments of
$4,250,000, including a payment of $1,500,000 due September 24, 1996. The
375,000 shares were valued at $1.40 per share, (the approximate market value at
the effective date of the agreement). The reduction of the debt principal in
excess of consideration paid by the Company to achieve the reduction amounted
to $691,668 and was recorded as a gain from restructuring of debt in the
Company's financial statements for the period ended June 30, 1996. Then on
August 12, 1996, the Company and the Carroll Group executed an early payment
agreement providing for further debt reduction. Subsequently, the Carroll
Group proposed an amendment to the debt forbearance agreement which was
accepted by the Company.
On October 22, 1996, Matt Carroll, Francis Farley, Cheryl Hannant and Edward R.
Meyer (the "Carroll Group"), denying the validity of the early payment
agreement and forbearance agreement amendment filed a lawsuit against NewCare
and Robert W. Bell in the Circuit Court of the Thirteenth Judicial Circuit
Court in and for Hillsborough County, Florida, seeking, among other things,
payments for all amounts due under the forbearance agreement, and through court
injunction to sequester proceeds from the sale of Spectrum assets to NCS and to
appoint a receiver. The Company was successful in opposing the injunction,
however, the substantive issues raised by the lawsuit remain before the Circuit
Court and it appears at this time that there will be ongoing litigation between
the Company and the Carroll Group regarding the debt restructuring agreements,
as well as counterclaims for certain actions and omissions of the Carroll
Group. The Company has not altered the accounting for the transaction and the
375,000 shares will be placed in escrow pending the outcome of this matter.
The Company has not made any adjustments to the accompanying financial
statements to provide for any liability, damages, or gain, if any, that may
result from the ultimate outcome of this uncertainty.
Item 2: CHANGES IN SECURITIES
None
19
<PAGE> 22
Item 3: DEFAULTS UPON SENIOR SECURITIES
None
Item 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Item 5: OTHER INFORMATION
None
Item 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
3.1 Articles of Incorporation are incorporated herein by reference to Form
10-SB which was filed with the Commission on May 12, 1994.
3.2 By-Laws, as amended are incorporated herein by reference to Form
10-QSB which was filed with the Commission November 9, 1995.
13.1 The Company's annual report is incorporated herein by reference to
Form 10-KSB/A1 which was filed with the Commission on July 10, 1996.
27 Financial Data Schedule (for SEC use only).
99.1 Press release on the Company's results of operations for the nine
months ended September 30, 1996 dated November 20, 1996.
(b) Reports on Form 8-K:
None
20
<PAGE> 23
SIGNATURE
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
NewCare Health Corporation
By: /s/ Henry H. Sherrill, Jr.
---------------------------------------
Henry H. Sherrill, Jr., Principal
Financial and Chief Accounting Officer
and Authorized Signatory for the
Registrant
Date: November 20, 1996
21
<PAGE> 24
INDEX TO EXHIBITS
Page
27 Financial Data Schedule (For SEC Use Only)
99.1 Press release on the Company's results of operations for
the nine months ended September 30, 1996, dated November 20,
1996.
Incorporated by Reference
3.1 Articles of Incorporation are incorporated herein by
reference to Form 10-SB which was filed with the Commission on
May 12, 1994.
3.2 By-laws, as amended are incorporated herein by reference
to Form 10-QSB which was filed with the Commission November
19, 1995.
10.1 Forbearance Agreement dated June 25, 1996, by and among
Matt Carroll, Francis Farley, Cheryl Hannant and Edward R.
Meyer (collectively, the "Sellers") and NewCare Health
Corporation, Spectrum Health Services, Inc. and Robert W.
Bell.
13.1 The Company's annual report is incorporated herein by
reference to Form 10-KSB/A-1 which was filed with the
Commission on July 10, 1996.
22
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF NEWCARE HEALTH CORPORATION FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 426,091
<SECURITIES> 0
<RECEIVABLES> 4,762,667
<ALLOWANCES> 714,267
<INVENTORY> 992,821
<CURRENT-ASSETS> 5,679,081
<PP&E> 31,665,890
<DEPRECIATION> 7,097,531
<TOTAL-ASSETS> 36,862,006
<CURRENT-LIABILITIES> 13,086,039
<BONDS> 0
0
0
<COMMON> 220,950
<OTHER-SE> 6,468,623
<TOTAL-LIABILITY-AND-EQUITY> 36,862,006
<SALES> 21,156,954
<TOTAL-REVENUES> 21,156,954
<CGS> 0
<TOTAL-COSTS> 20,452,260
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 826,228
<INTEREST-EXPENSE> 1,270,423
<INCOME-PRETAX> 704,694
<INCOME-TAX> 0
<INCOME-CONTINUING> 704,694
<DISCONTINUED> (2,601,768)
<EXTRAORDINARY> 691,668
<CHANGES> 0
<NET-INCOME> (1,205,406)
<EPS-PRIMARY> (0.11)
<EPS-DILUTED> (0.11)
</TABLE>
<PAGE> 1
Exhibit 99.1
NEWCARE ANNOUNCES 9 MONTH RESULTS
NewCare Health Corporation's President and CEO, Robert W. Bell, Sr., reports a
loss of $1,205,406 for the nine month period ended September 30, 1996 for the
Largo, Florida based company as compared to earnings of $579,917 for the same
period in 1995. The loss is primarily attributable to the disposal of its
Spectrum Health Services, Inc. subsidiary whose assets were sold on October 24,
1996. The loss from the discontinued operations for the nine months ended
Spetember 30, 1996, was $2,601,768, which included an estimated loss on the
disposal of Spectrum assets of $1,700,000 and $901,768 loss on Spectrum's
operations for the nine month period. Also included in the operating results
for the nine months ended September 30, 1996, is a gain on restructuring of
debt of $691,668. Earnings from continuing operations for the nine months
ended September 30, 1996, were $704,694, as compared to a loss of $224,663 for
the same period in 1995. Revenues from continuing operations were $21,156,000
up from $15,436,000 for the same period last year.
