<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
(Mark One)
X ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
- ----- 1934.
For the fiscal year ended December 31, 1995.
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- ----- ACT OF 1934.
For the transition period from ________________ to ________________.
Commission file number 0-24110.
-------
NEWCARE HEALTH CORPORATION
(Name of small business issuer in its charter)
NEVADA
(State or other jurisdiction of incorporation or organization)
86-0594391
(I.R.S. Employer Identification Number)
3600 OAK MANOR LANE, BLDG. 4
LARGO, FL 34644
(Address and zip code of principal executive offices)
Registrant's telephone number, including area code: (813) 586-4262.
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
(Title of Class)
------------
Check whether the issuer (1) filed all reports 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
--- ---
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. X
---
On December 31, 1995, the aggregate market value of the Registrant's voting
common stock held by nonaffiliates of the registrant was $10,098,864.
On December 31, 1995, the number of shares outstanding of the Registrant's
voting common stock was 10,667,524.
<PAGE> 2
NEWCARE HEALTH CORPORATION
ANNUAL REPORT ON FORM 10-KSB/A-1
DECEMBER 31, 1995
TABLE OF CONTENTS
PART I
PAGE
----
Item 1. Business 1
Item 2. Description of Property 11
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security
Holders 12
PART II
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters 12
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 7. Financial Statements 18
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 18
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons 19
Item 10. Executive Compensation 21
Item 11. Security Ownership of Certain Beneficial Owners and
Management 22
Item 12. Certain Relationships and Related Transactions 24
Item 13. Exhibits and Reports on Form 8-K 24
Signatures 25
<PAGE> 3
PART I
ITEM 1. BUSINESS
Background
The Registrant (the "Company") was incorporated in Nevada as Camelback Capital,
Inc. on February 17, 1987 primarily for the purpose of raising capital and
acquiring or merging with all types of businesses. Its authorized capital stock
was 50,000,000 shares of common stock (the "Common Stock"), par value $.001 per
share (the par value of the Common Stock has since been adjusted to reflect the
reverse split of the Common Stock discussed below). The Registrant completed its
initial public offering on December 31, 1987.
In May 1988, the Company entered into an agreement (the "1988 Agreement") with
Grinde Group, Ltd., a Delaware corporation ("GGL"), and O. Henry Grinde, a
majority stockholder in both the Company and GGL. The 1988 Agreement assigned to
the Company the right to sell and service advertising space in a periodical
published by GGL called the "Security Traders Handbook." The Company would
receive commissions for such advertising until December 31, 1990.
In June 1990, the Company acquired from GGL 62 head of Highland Cattle having an
inventory value of $70,250.00 and the "Hornsmatch," a periodical for the
breeders of horned cattle. The Company also acquired all personal property used
in connection with the publication of the "Hornsmatch." During the fiscal year
ended December 31, 1990, the Company received revenues of $95,154 from
advertising commissions and the operation of the "Hornsmatch." The Company had
no other significant revenue-raising activities in fiscal 1990. During the
fiscal year ended December 30, 1991, the Company received revenues of $47,533
from the operation of the "Hornsmatch" and $39,050 from the sales of the
Highland Cattle. The Company had no other significant revenue-raising activities
in fiscal 1991. On October 25, 1991, the Company terminated the registration of
its Common Stock under the Securities Exchange Act of 1934 by filing a Form 15
with the Securities and Exchange Commission. The Company had no significant
revenue-raising activities from fiscal 1991 until the transaction with NewCare,
Inc., a Florida corporation ("NewCare") described below.
Prior to the transaction with NewCare, the business purpose of the Company was
to seek out and obtain an acquisition or merger transaction whereby its
stockholders would benefit by owning an interest in a viable enterprise. Since
the Company had no operations or significant assets, its principal potential for
profits came solely from operations it would receive in any acquisition or
merger transaction. A merger or acquisition
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transaction with the Company would allow a privately held company to become a
publicly held corporation with a dispersed shareholder base without experiencing
the substantial time and filing requirements and financial expenditures imposed
by federal and state securities laws.
Change in Control of the Company
On April 5, 1994, two of the principal officers of NewCare obtained a
controlling interest in the Company by acquiring 78%, or 250,000 shares (this
amount reflects the reverse split in the Company's Common Stock discussed below
in "-- Acquisition of NewCare, Inc."), of the issued and outstanding Common
Stock of the Company from Halter Capital Corporation, a Texas corporation. This
transaction was contemplated by the parties as the first step in a series of
transactions which resulted in NewCare becoming a wholly-owned subsidiary of the
Company. Halter Capital Corporation was not related to NewCare by overlapping
shareholders, officers or directors. The principal shareholders, officers and
directors of Halter Capital Corporation were Kevin B. Halter, Kevin B. Halter,
Jr. and Timothy P. Halter.
Messrs. Robert W. Bell, Sr. and Ashok Dalal each acquired 125,000 shares
(such amount reflects the reverse split of the Company's Common Stock
discussed below in "-- Acquisition of NewCare, Inc.") of the Common
Stock. Messrs. Bell and Dalal each paid cash consideration for such
stock of $128.50. The purchase price for the Common Stock was determined
by arms-length negotiations between Halter Capital Corporation and
Messrs. Bell and Dalal. The consideration was relatively nominal because
the Company had no operations or significant assets at that time. Halter
Capital Corporation believed that Messrs. Bell and Dalal, as principals
of the Company, would cause the Company to acquire NewCare and thereby
increase the value of its ownership interest in the Company.
As discussed above, the reason for entering into the transaction with NewCare
was that the Registrant sought to obtain an acquisition or merger transaction
whereby its shareholders would benefit by owning an interest in a viable
enterprise. Specifically, the Registrant desired to enter into a transaction
with a company that would be listed on a national exchange or the Nasdaq Stock
Market. Upon analysis of NewCare, it was determined that NewCare would meet the
assets and net worth criteria to be listed on the Nasdaq SmallCap Market. For
these reasons, the Registrant believed it could best enhance shareholders'
values by consummating a transaction with NewCare.
Robert W. Bell, Sr. and Ashok Dalal currently serve as directors of the
Registrant. In addition, Mr. Bell serves as the
2
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Registrant's President and Chief Executive Officer, and Mr. Dalal is employed by
the Registrant as Executive Vice President. See "Directors, Executive Officers,
Promoters and Control Persons."
Acquisition of NewCare, Inc.
In April 1994, the Registrant acquired 95.17% of the issued and outstanding
common stock of NewCare. At the time of the acquisition, Messrs. Bell and Dalal
were major shareholders, directors and officers of both the Registrant and
NewCare, and, as a result, effectively controlled both companies. Prior to this
acquisition, the ownership of the common stock of NewCare was as follows (1):
Name of Stockholder Number of Shares
- ------------------- ----------------
Robert W. Bell, Sr. 1,201,376
Ashok Dalal 998,819
Dr. James W. Wooten 292,957
Tyrone Walker 165,921
Patricia McCormack 30,189
Henry H. Sherrill, Jr. 49,956
Robert W. Bell, Jr. 111,104
Veena Holdings, Ltd. 920,180
Dr. Dhiraj Patel 920,180
KDP, Inc. (2) 1,140,832
Employees and Investors (3) 2,375,959
(1) Sanjiv Shah owned 250,000 shares of preferred nonvoting stock.
(2) The issued and outstanding capital stock of KDP, Inc. was
equally owned by Ashok Dalal, Dr. Kishor Karia and Dr. Dhiraj Patel.
(3) Composed of 37 people or organizations who were neither officers,
directors nor 5% shareholders.
The consideration paid by the Registrant to the shareholders of NewCare was an
aggregate of 5,818,976 newly-issued shares of the Registrant's Common Stock
(which did not include the 250,000 shares of Common Stock purchased by Messrs.
Bell and Dalal from Halter Capital Corporation). The exchange ratio was
determined in an arms-length transaction between the principals of Halter
Capital Corporation and Messrs. Bell and Dalal at the time they acquired their
controlling interest in the Company.
The principal factors considered in the determination of the
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consideration given for the NewCare common stock included (1) the tangible and
intangible asset values of the business acquired, (2) the results of operations
of NewCare, and (3) the expected future operations and related contributions
that NewCare was expected to make to the total value of the Registrant. As there
was no market value of the Registrant's Common Stock at the time of the exchange
since the Company had no operations or significant assets, the fair value of the
NewCare common stock was not comparable to the value of the 5,818,976 shares of
Common Stock of the Registrant received in the exchange. Since the operations of
NewCare would comprise 100% of the assets and revenues of the Registrant after
the transaction, the exchange ratio was based more on the amount of equity the
principals of NewCare had to give up rather than a comparison of the fair market
value of the two stocks. The parties also reviewed similar transactions and the
amount of equity given up by the principals of the operating company to
determine the final exchange ratio. The proposal concerning the exchange of
NewCare common stock for the Common Stock was approved by a majority of
disinterested stockholders pursuant to a special meeting held April 6, 1994.
In connection with the transaction with NewCare, the Company amended its
Articles of Incorporation in April 1994 to (1) effect a reverse split of the
issued and outstanding Common Stock on the basis that each 20 shares then
outstanding were converted into one share of Common Stock, (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
references to amounts of the Company's Common Stock contained herein reflect the
reverse split.)
The Registrant is continuing the business conducted by NewCare and its
subsidiaries, which is the ownership, management and operation of skilled
nursing facilities and other related health care businesses. The Registrant's
principal offices are located at 3600 Oak Manor Lane, Building 4, Largo, Florida
34644 and its telephone number is (813) 586-4262. Reference to the "Registrant"
or the "Company" includes, where applicable, the activities of NewCare after the
acquisition of NewCare by the Company was consummated.
History of NewCare, Inc.
The history of NewCare, Inc. began with American Nursing Homes, Inc. ("ANH")
which was incorporated in the State of Florida in September 1987. The primary
purpose of ANH and its subsidiaries was the ownership, management and operation
of health care related businesses, specifically in the skilled nursing industry.
ANH and its subsidiaries managed nursing facilities and owned various interests
in a number of limited partnerships which owned
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or leased such nursing facilities.
NewCare was incorporated in the State of Florida on February 2, 1993 for the
purpose of effectuating a reorganization of ANH, its wholly-owned subsidiaries
and their respective interests in a number of limited partnerships. The founders
of NewCare were Robert W. Bell, Sr., Ashok Dalal and Dr. James W. Wooten.
NewCare had no operations or net assets prior to July 31, 1993. The
reorganization was completed as of July 31, 1993 pursuant to an exchange
memorandum whereby the shareholders of ANH received shares of NewCare in
exchange for their ANH shares.
As an integral part of the July 31, 1993 reorganization of NewCare and its
affiliated entities, the limited partnership interests held directly or
indirectly by Ashok Dalal in three limited partnerships -- Healthcare Facilities
Limited Partnerships I (also known as Dania Nursing Home, Ltd.), Suncoast
Nursing Home, Ltd. and Oak Manor Nursing Home, Ltd. -- were transferred to
NewCare in exchange for an aggregate of 1,370,834 shares of common stock of
NewCare. (Ashok Dalal owned a 33% limited partnership interest in Healthcare
Facilities Limited Partnerships I, a 19.4% limited partnership interest in
Suncoast Nursing Home, Ltd. and 33% common share ownership in KPD, Inc., which
owned 24.5% of the limited partnership interest in Oak Manor Nursing Home, Ltd.)
Robert W. Bell, Sr. owned a 1% general partnership interest in Healthcare
Facilities Limited Partnerships I. Dr. Wooten did not own any limited or general
partnership interests in the limited partnerships listed above. Through direct
and indirect control of the general partners of the three limited partnerships,
Messrs. Bell and Dalal directly or indirectly controlled such limited
partnerships.
NewCare was formed in order to facilitate the management of the related nursing
facilities and the raising of capital through public or private placements. The
reorganization did not involve any outside interests or any consideration except
NewCare common stock. In addition, all parties before the transaction remained
the same after the transaction, though certain individual ownership percentages
changed. Accordingly, the transfers were accounted for at the carrying value
amounts of the net assets (i.e., historical cost basis).
At December 31, 1993, ANH's direct ownership in its subsidiaries and the limited
partnership interests of these subsidiaries were transferred to NewCare. On
March 31, 1994, NewCare acquired another corporation, H. Clark of Florida, Inc.
(a general partner in four of NewCare's limited partnerships), which increased
its ownership interest in certain of the limited partnerships. As of
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that date, NewCare owned, directly and indirectly, the following percentages in
the entities listed below:
<TABLE>
<CAPTION>
General Limited
Total Partnership Partnership
Ownership Interest Interest
--------- -------- --------
<S> <C> <C> <C>
American Nursing Homes, Inc. 99.0% -- --
Equity General Partners, Inc. 100% -- --
H. Clark of Florida, Inc. 100% -- --
Healthcare Facilities, Inc. 100% -- --
Bay to Bay Nursing Home, Ltd. 100% 3% 97%
Dania Nursing Home, Ltd. 99.0% 0% 99%
Oak Manor Nursing Home, Ltd. 74.5% 1% 73.5%
Suncoast Nursing Home, Ltd. 100% 3% 97%
Victoria Martin Nursing Home, Ltd. 100% 3% 97%
</TABLE>
Acquisition of Spectrum
On September 1, 1994, the Company acquired all of the outstanding common shares
of Spectrum Health Services, Inc. Spectrum Health Services, Inc. sells medical
supplies and equipment, enteral products, wound care medication and kits,
respiratory therapy equipment and supplies, and orthopedic rehabilitation
supplies. It also provides 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 Health Services, Inc. has operations
in Florida, Georgia, Kansas and Texas, each of which lease facilities that
maintain appropriate inventories, delivery trucks and equipment.
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 Health Services, Inc. The Spectrum Infusion Services
division provides specialized products to nursing homes for patients that
require prescriptions for dispensing by pharmacists. The Spectrum Infusion
Services division provides products, equipment and disposable supplies required
for IV
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antibiotic hydration, pain management and chemotherapies. These supplies and
services are provided to nursing homes that in turn dispense them to the
patients. The equipment is leased to the various facilities.
Acquisition of Cimerron
On May 22, 1995, the Company acquired all of the outstanding shares of Cimerron
Health Care, Inc. ("Cimerron") from Karen Hagan. Cimerron leases one (1) and
owns three (3) skilled nursing facilities in Georgia. In a related agreement,
Memorial Nursing Center, Inc., a subsidiary of NewCare, acquired a skilled
nursing facility lease from Emory Nursing Center, Inc., an affiliate of Cimerron
also owned by Karen Hagan. The aggregate number of skilled nursing beds involved
in the acquisition of the five (5) skilled nursing facilities from Cimerron and
Emory is 502.
Acquisition of Padgett Nursing Home
On September 15, 1995, the Company 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.
The Company's Services, Markets and Operations
The Company operates through its majority-owned subsidiary, NewCare, and
NewCare's subsidiaries. NewCare presently owns or leases and operates eleven
(11) nursing facilities with 1,042 skilled nursing beds, 74 adult congregate
living facility beds, and a 150-unit retirement complex. These facilities are
located in Georgia and Florida. The Company presently employs approximately
1,020 people.
NewCare's nursing facilities provide both routine and specialty, or ancillary,
services. Routine services such as room and board and basic nursing services are
provided in the skilled nursing facilities, the ACLFs and the retirement
complex. Certain of NewCare's nursing facilities also provide specialty services
such as HIV care, Alzheimer's disease units, wound care, subacute care, and
stroke and accident rehabilitation. NewCare provides a full range of
occupational, physical, speech and respiratory therapy (specialty services) in
its nursing facilities. NewCare derives most of its revenue for specialty
services from Medicare reimbursement. See "--Regulation; Medicaid and Medicare"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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Regulation; Medicaid and Medicare
State and Local Regulation
NewCare's nursing facilities are subject to compliance with various state and
local health care statutes and regulations. In order to maintain such licenses,
the nursing 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.
Nursing facilities are licensed in their respective state to provide residential
health and medical services to patients requiring nursing 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. Nursing facilities are
also required to assist residents in obtaining other services if they do not
provide them directly, including pharmacy, laboratory, X-ray, dental, hearing
and vision care.
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.
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 and Florida 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 is a retrospective reimbursement system that
is based on a prior period's cost report filed with a Medicare intermediary.
However, currently there is a commission considering and reviewing the possible
implementation of a prospective reimbursement system.
Effective October 1, 1990 the Omnibus Budget Reconciliation Act of 1987 ("OBRA")
eliminated the different certification standards
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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 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.
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.
NewCare derives a significant portion of its revenue from these programs,
particularly with respect to specialty, or 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
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determinations and governmental funding restrictions, all of which may
materially increase or decrease program reimbursement to health care 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 the Company's results of
operations. While no federal legislation regarding health care reform was
enacted in the calendar year 1995, 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 believes that it is in material compliance with applicable
environmental laws and regulations. Management believes that there are not any
material environmental contingencies.
Employees
The Company and its subsidiaries employ approximately 1,020 people, with
approximately 770 of those are employed on a full time basis. No employees are
members of collective bargaining units.
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ITEM 2. DESCRIPTION OF PROPERTY
NewCare believes that all facilities owned and leased by NewCare and its
subsidiaries are adequately insured. The following table sets out certain
information relating to NewCare's facilities (1)(2):
<TABLE>
<CAPTION> Maturity
Name/Location Number of Rent/Monthly Note Owned/Leased and Lease Age
- ------------- --------- ------------ ---- ------------ ------------ ---
Nursing Beds Payment Balance Expiration Date
------------ ------- ------- ---------------
12/95
-----
<S> <C> <C> <C> <C> <C> <C>
Bay to Bay 75 $14,600 n/a leased 5/96 35
Nursing Home;
Florida (6)
Central Tampa 100 $24,700 n/a leased 9/15 26
Nursing Home;
Florida (5)
Dania Nursing 88 $17,400 $1,437,900 owned 6/98 28
Home; Florida
Emory Nursing 40 $7,600 $500,000 owned 2/97 42
Center; Georgia $1,625 $195,000 8/98
$2,500 $300,000 9/98
Fitzgerald 167 $15,000 $690,000 owned 2000 37
Nursing Center; $10,900 $1,950,000 2016
Georgia
Fort Valley 75 $10,000 $1,000,000 owned 2009 25
Nursing Center;
Georgia
Oak Manor 180 $46,800 $4,321,000 owned 9/96 27
Villas; Florida $43,500 $5,965,000 12/97
(3)(4)
Pleasant View 120 $15,400 n/a leased 6/97 27
Nursing Center;
Georgia (5)
Suncoast Nursing 59 $5,000 $600,000 owned 1/97 25
Home; Florida
Victoria Martin 38 $3,500 $206,200 owned 2004 27
Nursing Home;
Florida
Windward Nursing 100 $17,800 $1,790,000 owned 2013 13
Center; Georgia
</TABLE>
(1) Spectrum maintains locations in Florida, Kansas and Texas for
administrative, sales and distribution operations, all of which are
under operating leases.
(2) Cimerron maintains its offices in Roswell, Georgia, with a monthly
rental of $3,800.
(3) The Company maintains its principal executive offices at the Oak
Manor facility, with a monthly rental payment of $250.
(4) The Oak Manor Villas has 180 skilled nursing beds, 75
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assisted living beds, and 150 retirement apartments.
(5) The leases for Central Tampa and Pleasant View terminate in
September 2015 and June 1997 respectively.
(6) The Bay to Bay lease expired on May 31, 1996.
The Company considers all of its nursing facilities, both owned and leased,
together with the related equipment contained therein, to be well maintained, in
good operating condition, and suitable and adequate for the present and
foreseeable future needs of each facility.
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Common Stock was publicly traded in the over-the-counter market and was
listed in the "pink sheets" maintained by members of the National Association of
Securities Dealers, Inc. from December 1987 to the third quarter of 1988. There
were no bids on the Common Stock from that time until July 1994.
The Company's Common Stock is traded on NASDAQ under the symbol NWCA. The
following table sets forth the high and low prices for the periods indicated.
<TABLE>
<CAPTION>
1994 HIGH LOW
<S> <C> <C>
Third Quarter (from July 7, 1994) $4.50 $1.75
Fourth Quarter $4.50 $3.00
1995
First Quarter $3.50 $1.00
Second Quarter $4.37 $2.87
</TABLE>
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<TABLE>
<S> <C> <C>
Third Quarter $3.25 $2.25
Fourth Quarter $3.75 $1.75
</TABLE>
At March 25, 1996, the Company had approximately 635 holders of record of its
Common Stock and, the Company estimates, approximately 3,400 beneficial owners
of its Common Stock.
The Company has paid no cash dividends on its Common Stock, and it does not
intend to pay cash dividends on its Common Stock in the future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
For the Year Ended December 31, 1995 Compared to the Year Ended December 31,
1994
Structure of Operations
NewCare Health Corporation currently operates through its three subsidiaries:
NewCare, Inc., Spectrum Health Services, Inc. (acquired on September 1, 1994)
and Cimerron Health Care, Inc. (acquired on May 22, 1995). The Company operates
eleven (11) skilled nursing facilities, six (6) in Florida through NewCare, Inc.
and five (5) in Georgia through Cimerron, and has medical supply and
pharmaceutical sales and service operations in Florida, Georgia, Kansas and
Texas through Spectrum.
Events during the Year Ended December 31, 1995
On February 20, 1996, the Company signed definitive agreements to be acquired
through merger with Retirement Care Associates, Inc. (NYSE-RCA) for 2,650,000
shares of RCA common stock. On April 12, 1996, the Company and RCA agreed to
cancel plans of a merger between the corporations. RCA cited the Company's
fourth quarter operating results as the reason for the merger withdrawal and
indicated the combination of the two firms would be dilutive to RCA's earnings.
On September 15, 1995, the Registrant acquired through a lease Padgett Nursing
Home, a 100-bed skilled nursing facility located in Tampa, Florida. The nursing
facility's name was changed to Central Tampa Nursing Home and is operated by
NewCare, Inc.
On May 22, 1995, the Registrant acquired Cimerron Health Care, Inc. and
Affiliates ("Cimerron"), which operates five (5) nursing
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homes in Georgia with 502-skilled nursing beds.
Occupancy Levels and Payor Mix
The average occupancy level, based on licensed beds, for the Company's skilled
nursing facilities during the years ended December 31, 1995 and 1994 was 91.17%
and 95.45%, respectively. 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>
Years Ended
December 31,
1995 1994
---- ----
<S> <C> <C>
Medicaid 69% 60%
Medicare 10% 14%
Private Pay 18% 18%
HMO 1% 5%
Hospice 1% 2%
Other Payors 1% 1%
--- ---
100% 100%
</TABLE>
The Company received 79% of its twelve month nursing facility revenues from
Medicaid and Medicare, compared to 74% for the same period in 1994. 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 Net Losses of $172,222 and $919,616 for the twelve months
ended December 31, 1995 and 1994. The Company's Operating Revenues and Expenses
have increased primarily due to its acquisitions in 1994 and 1995, which were
accounted under the purchase method of accounting. The discussions below on
Operating Revenues and Expenses reflect the dates of such acquisitions.
Net Revenues Revenues of the Registrant were approximately $39,770,000 and
$20,922,000 for the twelve months ended December 31, 1995 and 1994 respectively,
which represents an increase of
14
<PAGE> 17
$18,848,000, or 89%. Revenues for related 1995 acquisitions of Cimerron and
Padgett were $6,835,000 and $591,000 respectively. Spectrum, which was acquired
in September 1994, had revenues of $16,588,000 in 1995, which is an increase of
$10,897,000 over the four month operation in 1994. NewCare, Inc.'s revenues
increased by approximately $525,000 for the five facilities operated in 1995 and
1994. Total revenues of $39,770,000 were comprised of NewCare, Inc. $16,347,000
(41%), Spectrum $16,588,000 (42%) and Cimerron $6,835,000 (17%).
Operating Expenses Operating Expenses for the twelve month periods ended
December 31, 1995 and 1994 were 100.3% and 104.2% of Revenues or $39,906,682 and
$21,807,712, 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. The Operating and Administrative Expenses increased, as a percentage of
Revenues, from 44% to 49% for the twelve month periods presented. Spectrum is
not as labor intensive as the Company's skilled nursing operations, NewCare,
Inc. and Cimerron, and its Operating Expenses primarily consisted of Operating
and Administrative Expenses. As a result, the Company's Compensation and Related
Expenses have decreased from 51.6% to 43.4% of Revenues for the twelve month
periods presented. The mix of operations (skilled nursing and non-skilled
nursing) has significant affects on the composition of the Company's Operating
Expenses. Such changes in the composition of Operating Expenses are
representative of the Company's acquisitions in 1994 and 1995.
Depreciation and Amortization Expenses for the twelve month periods ended
December 31, 1995 and 1994 were $1,494,836 and $858,232, respectively. The
change in the Depreciation and Amortization Expenses was primarily due to the
acquisitions of Cimerron and Spectrum, as they resulted in material increases in
the Company's consolidated assets. The assets of the Company are depreciated or
amortized over their expected useful lives, ranging from 3 to 40 years.
Interest Expenses were $1,668,901 for the twelve month period ended December 31,
1995 and $957,218 for the same period in 1994. The increase was primarily due to
the related debt financing of the Spectrum and Cimerron acquisitions.
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.
15
<PAGE> 18
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 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 $172,222 for the twelve month period ended
December 31, 1995, with a net decrease in cash of $724,518. Cash flows increased
$1,538,933 by Operating Activities; decreased $2,294,469 by Investing
Activities; and increased $31,018 by Financing Activities, resulting in an
ending Cash balance of $201,639 on December 31, 1995.
Net Cash provided by Operating Activities was $1,538,933 for the twelve month
period ended December 31, 1995. The Company's Accounts Payable increased
$778,678 and the Accounts Receivable increased $1,582,140. The increases in both
accounts payable and accounts receivable are primarily attributable to the
Company's 1995 acquisitions. Cimerron and Central Tampa, which were acquired in
1995, represent $465,000 and $76,000 respectively of the increase in accounts
payable. Also included in accounts receivable at December 31, 1995 is $830,000
and $264,000 for Cimerron and Central Tampa respectively. Depreciation and
Amortization was $1,494,836 as compared to $858,232 for 1994. This increase of
approximately $637,000 is primarily related to the Company's 1994 and 1995
acquisitions. Spectrum's depreciation and amortization was $556,000 as compared
to $209,000 for its four months operation in 1994. Goodwill amortization related
to the Spectrum acquisition was $171,000 as compared to $57,000 for 1994,
representing an increase of $114,000. Cimerron's depreciation and amortization
was $217,000. NewCare, Inc., Spectrum, and Cimerron provisions for bad debts for
1995 were $148,247, $789,529, and $63,672 respectively, totalling $1,001,448.
Net cash used by Investing Activities was $2,294,469 for the twelve month period
ended December 31, 1995. Through acquisitions, NewCare paid net cash
consideration of $1,612,200. The Company paid $564,149 in net purchases of
Property, Plant,
16
<PAGE> 19
and Equipment and $118,120 in payments for Other Assets.
For the twelve month period ended December 31, 1995, Financing Activities
provided net cash of $31,018. The Registrant made payments of $2,710,935 and
received proceeds of $2,741,953 on debt.
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 $4,321,009, the $1,500,000 note payable
related to the restructuring of the Spectrum debt mentioned below, 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 significant adverse consequences upon the Company.
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 has been approved by the Board of Directors of the
Company. The agreement provides 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 capital. The notes are 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. In addition the
Company shall issue 375,000 shares of common stock to the holders of the
Spectrum notes. The $1,500,000 and $1,850,00 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 and by a third mortgage on the Oak Manor facility. A default on the
restructuring agreement by the Company could have a material adverse impact upon
the Company.
17
<PAGE> 20
The current portion of long-term debt for mortgages payable as of December 31,
1995 is approximately $4,677,000, of which $4,321,000 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. It is management's belief that
the refinancing of these properties will generate approximately $4,000,000 in
additional proceeds after paying off the existing debt on the properties. These
proceeds will be used to pay the $1,525,000 note related to the Cimerron
acquisition, pay the $1,500,000 note referred to above related to the Spectrum
acquisition and leave approximately $975,000 in working capital available for
the ongoing operations of the company. The refinancing plan has been submitted
to several 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 and will satisfy its liquidity needs and generate
working capital for the Company. There is no assurance that this financing will
be secured or if the financing is secured, whether the terms will be as
presented above. If the Company is unable to refinance the notes due in 1996, it
would have a material affect on the Company's ability to continue operations.
The Company's financial statements as of March 31, 1996 had an overdraft in its
bank accounts of $318,376. This overdraft has been reduced to $45,080 through
cash flows of the Company as of May 31, 1996.
The Company at this time has no material commitments for capital expenditures.
The Company's working capital (Current Assets less Current Liabilities) as of
December 31, 1995 was a negative $9,400,213. Current Liabilities of $16,151,525
consisted primarily of Current Portion of Long-term Debt of $9,214,389, Accounts
Payable of $3,234,521, notes payable of $1,525,000 and Accrued Liabilities of
$1,891,878. The Current Assets included Cash of $201,639, Accounts Receivable,
Net of $5,169,231 and Inventory of $1,169,404.
ITEM 7. FINANCIAL STATEMENTS
Information with respect to Item 7 is contained in NewCare's consolidated
financial statements and are set forth herein beginning on Page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On December 27, 1994, the Registrant dismissed Grant Thornton LLP as the
Registrant's certifying accountant pursuant to the approval of the Registrant's
Board of Directors. Grant Thornton
18
<PAGE> 21
LLP was the certifying accountant for the Registrant for the fiscal year ended
December 31, 1993 and the subsequent interim period, but was not the certifying
accountant for the fiscal period ended December 31, 1992 or any other earlier
period. In connection with the audit of the fiscal year ended December 31, 1993
and the subsequent interim period, there were no disagreements with Grant
Thornton LLP on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure, which if not resolved to
Grant Thornton LLP's satisfaction would have caused it to make reference to the
subject matter of the disagreements in connection with its reports. The reports
of Grant Thornton LLP for the fiscal year ended December 31, 1993 and the
subsequent interim period contained no adverse opinion or a disclaimer of
opinion or were qualified or modified as to uncertainty, audit scope or
accounting principles. On December 27, 1994, the Registrant appointed Lovelace,
Roby & Company, P.A. as the Registrant's certifying accountant.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Certain information about the directors and executive officers of the Registrant
is contained in the following table:
Name Age Position
- ---- --- --------
Robert W. Bell, Sr. 58 Chairman, Chief Executive Officer
and President
Ashok Dalal 53 Director and Executive Vice President
Matthew Carroll 56 Director
Robert Hagan 40 Director
Dr. Kishor Karia 52 Director
Dr. William A. Newton 44 Director
Henry H. Sherrill, Jr. 59 Chief Financial Officer
Tyrone Walker 48 Vice President of Development
Robert W. Bell, Jr. 31 Secretary and Vice President of
Operations, Finance
19
<PAGE> 22
All directors hold office until the next annual meeting of the shareholders of
the Registrant 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. Additional information regarding the directors and officers is set
forth below.
Robert W. Bell, Sr. has served as Chairman, President and Chief Executive
Officer since April 1994 and has held such positions with ANH since September
1987 and with NewCare since its inception in February 1993. Robert W. Bell, Sr.
is the father of Robert W. Bell, Jr.
Ashok Dalal has served as Executive Vice President and director since April 1994
and has held such positions with ANH since November 1989 and with NewCare since
its inception in February 1993. Mr. Dalal was a private investor in several
limited partnerships whose properties were managed by ANH. He has a B.S. Degree
in Accounting and a Master of Business Administration Degree.
Matthew Carroll has been a director since October 1994 and is the President of
Spectrum Health Services, Inc. From 1985 to 1987, Mr. Carroll served as Regional
Vice President of Sales for Foster Medical Corporation. Mr. Carroll founded
Spectrum Health Services, Inc. in 1987. He sold his interest in Spectrum to the
Company in September 1994.
Robert Hagan became a director in June 1995 and is the President of Cimerron
Health Care, Inc. Mr. Hagan has been the President of Cimerron and its
predecessors since 1980 and his wife, Karen Hagan, sold Cimerron to NewCare in
May 1995. Mr. Hagan has a B.S. Degree in Criminology.
Dr. Kishor Karia became a director in 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
nursing homes operated by the Company until 1993 when he exchanged his ownership
interest in the nursing homes with NewCare, Inc.
Dr. William A. Newton became a director in April 1994. He has been a physician
in the private practice of Obstetrics and Gynecology in Tampa, Florida since
1985. Dr. Newton was a limited partner in Bay to Bay Nursing Home, Ltd. from
1989 to 1993. Dr. Newton received his medical degrees from the University of
South Carolina and the University of South Florida.
20
<PAGE> 23
Henry H. Sherrill, Jr. joined as Chief Financial Officer in April 1994 and has
also served in such position with ANH and NewCare since June 1993. Prior to
joining the Company, Mr. Sherrill was Chief Financial Officer for Advocare,
Inc., a privately-held nursing home company, from January 1986 to May 1993. Mr.
Sherrill received his B.S. Degree in Business Administration from Kent State
University in 1962 and became a Certified Public Accountant in 1964.
Tyrone A. Walker has served as Vice President of Development since April 1994
and has held such position with ANH since September 1988 and with NewCare since
its inception in February 1993. He has a B.A. Degree in Architecture from the
University of Southwestern Louisiana. Mr. Walker was a licensed general
contractor in Louisiana, Kentucky and Tennessee and has a Florida general
contractor license.
Robert W. Bell, Jr. has served as the Secretary and Vice President of
Operations, Finance since April 1994 and has also held such position with
NewCare since April 1994. Mr. Bell received his B.S. Degree in Business
Administration from the University of Southern Mississippi in 1986. Mr. Bell
joined ANH in September 1987 and has served in the capacity of Assistant to the
Chief Financial Officer, Accounts Payable Coordinator, Purchasing Agent and
Assistant Controller of Nursing Homes. In April 1994, Mr. Bell assumed the
position of Vice President of Operations, Finance. Robert W. Bell, Jr. is the
son of Robert W. Bell, Sr.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth a summary of compensation paid by NewCare and its
subsidiaries to its Chief Executive Officer. Mr. Bell has also served as the
Chief Executive officer of the Company since April 1994. There were no other
officers who received compensation exceeding in the aggregate $100,000.
<TABLE>
<CAPTION>
Long Term Compensation
Awards Payouts
------ -------
ANNUAL COMPENSATION
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Name Other
and Annual Restricted
Principal Compen- Stock Options/ LTIPALL Other
Position Year Salary Bonus sation Awards SARs(#) Payouts Compensation
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Robert W. Bell, Sr. 1995 $96,000
President, Chief 1994 $96,000
Executive Officer and 1993 $96,000 $27,500(1)
Chairman
</TABLE>
21
<PAGE> 24
(1) This cash bonus of $27,500 was earned by Mr. Bell in fiscal 1992
and paid in fiscal 1993.
The only other benefit plan offered at the present involves a major medical
plan, which is made available to all full-time employees on a non-discriminatory
basis. The Registrant currently maintains no stock option plans, no long-term
incentive plans and no benefit plan which would constitute "Long Term
Compensation." Management does anticipate installing a Stock Option Plan in the
future. No definitive provisions to be included in such a plan, nor any specific
timetable for implementing a plan, have been determined at this time.
There is no current policy of the Registrant to compensate directors who are not
officers for attending each director's meeting, but the directors are reimbursed
for related expenses.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
On February 20, 1996, the Company signed definitive agreements to be acquired
through merger with Retirement Care Associates, Inc. (NYSE-RCA) for 2,650,000
shares of RCA common stock.
The following information table sets forth certain information regarding the
Common Stock owned on March 10, 1996 by (i) any person (including any "group")
who is known by the Registrant to own beneficially more than 5% of its
outstanding Common Stock, (ii) each director and officer, and (iii) all officers
and directors as a group.
<TABLE>
<CAPTION>
Name and Address Shares Owned Percentage
- ---------------- ------------ ----------
<S> <C> <C>
Robert W. Bell, Jr. (1) 135,420 1.26
4708 Chapin Avenue
Tampa, FL 33611
Robert W. Bell, Sr. (2) 1,260,379 11.81
5146 San Jose Street
Tampa, FL 33629
Matthew J. Carroll 1,255,400 11.76
632 E. Columbus Drive
Tierra Verde, FL 33715
Ashok Dalal (3) 1,031,469 9.66
633 N.E. 167th Street
Suite 607
North Miami Beach, FL 33162
</TABLE>
22
<PAGE> 25
<TABLE>
<S> <C> <C>
Robert Hagan (7) 714,286 6.69
1144 Canton Street, Suite 200
Roswell, Georgia 30075
Dr. Kishor Karia (5) 1,001,138 9.38
11001 Pines Blvd., Suite 106
Pembroke Pines, FL 33024
Dr. William A. Newton (4) 51,733 (8)
506 Riviera Drive
Tampa, FL 33606
Pravinagauri Patel 1,081,388 10.13
11801 N. Island Road
Cooper City, FL 33026
Henry H. Sherrill, Jr 35,469 (8)
1863 Tanglewood Drive, N.E
St. Petersburg, FL 33702
Veena Holdings, Ltd. (5) 1,001,138 9.38
1101 Pines Blvd., Suite 106
Pembroke Pines, FL 33024
Tyrone Walker (6) 134,554 1.26
308 Blanca Avenue
Tampa, FL 33606
Daksha Vakharia 600,000 5.62
3365 Bridle Path Lane
Fort Lauderdale, FL 33331
All directors and officers 7,301,236 68.44
as a group
</TABLE>
(1) This amount includes an aggregate of 36,536 shares held
of record in various trusts for the benefit of Mr. Bell's
minor children. Mr. Bell serves as the trustee for these
trusts and disclaims any beneficial ownership in these shares.
Robert W. Bell, Jr. is the son of Robert W. Bell, Sr.
(2) This amount includes an aggregate of 296,693 shares held
of record in various trusts for the benefit of certain family
members of Robert W. Bell, Sr. Mr. Bell serves as the sole
trustee of these trusts and disclaims any beneficial ownership
in these shares. This amount also includes 183,415 shares
held by Sydney M. Bell, Mr. Bell's wife.
23
<PAGE> 26
(3) This amount includes an aggregate of 31,469 shares held of record by
certain family members of Ashok Dalal.
(4) This amount includes an aggregate of 8,900 shares held of
record in various trusts for the benefit of certain family
members of Dr. Newton. Dr. Newton serves as the trustee of
these trusts and disclaims any beneficial ownership of these
shares. This amount also includes 1,800 shares individually
held by Elizabeth Newton, Dr. Newton's wife.
(5) The shareholders of Veena Holdings, Ltd. are Dr. Kishor
Karia, Veena Karia, Ojus Karia and Tajus Karia.
(6) This amount includes 16,750 shares held by Mr. Walker's
wife.
(7) The shares are owned directly by Karen Hagan, wife of Robert Hagan.
(8) Less than 1%.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Four beneficial shareholders of the Company, Robert W. Bell, Sr., Ashok Dalal,
Kishor Karia and Dhiraj Patel, have personally committed to provide funding of
an aggregate of $1,100,000 to be used if necessary in connection with the
mortgages of Dania, Victoria Martin and Suncoast nursing homes. This commitment
has no stated expiration date.
ITEM 13. 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, 1995.
3.2 By-Laws are incorporated herein by reference to Form 10-QSB for the
quarter ended September 30, 1995 which was filed with the Commission
on November 10, 1995.
99.1 Press release on the Company's results of operations for the year
ended December 31, 1995, dated March 29, 1996.
(b) Reports on Form 8-K:
The Company filed a current report on Form 8-K on December 12,
24
<PAGE> 27
1995, exhibiting a press release by Retirement Care Associates, Inc.
The Company filed a current report on Form 8-K on March 4, 1996, exhibiting the
Agreement and Plan of Merger and two (2) press releases pertaining to Retirement
Care Associates, Inc.
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Act of 1934, the
Registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
NewCare Health Corporation
By: /s/Robert W. Bell, Sr.
---------------------------------------
Robert W. Bell, Sr., Chairman, Chief
Executive Officer, President and
Authorized Signatory of the
Registrant
By: /s/Henry H. Sherrill, Jr.
---------------------------------------
Henry H. Sherrill, Jr., Chief
Financial Officer and Authorized
Signatory of the Registrant
Date: July 10, 1996
25
<PAGE> 28
NEWCARE HEALTH CORPORATION
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995 AND 1994
ORLANDO CLEARWATER TALLAHASSEE SARASOTA MIAMI
<PAGE> 29
C O N T E N T S
-------
Page
----
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F1
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheet as of December 31, 1995 F2
Consolidated Statements of Operations, Years Ended
December 31, 1995 and 1994 F4
Consolidated Statements of Changes in Shareowners' Equity,
Years Ended December 31, 1995 and 1994 F5
Consolidated Statements of Cash Flows,
Years Ended December 31, 1995 and 1994 F7
Notes to Financial Statements F8
<PAGE> 30
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
NewCare Health Corporation
Largo, Florida
We have audited the consolidated balance sheet of NewCare Health Corporation and
subsidiaries as of December 31, 1995, and the related consolidated statements of
operations, changes in shareowners' equity and cash flows for each of the years
in the two-year period 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 audits.
We conducted our audits 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 audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of NewCare Health
Corporation and subsidiaries as of December 31, 1995, and the results of their
operations and their cash flows for each of the years in the two-year period
then ended in conformity with generally accepted accounting principles.
Certified Public Accountants
Orlando, Florida
February 27, 1996, except for Note 12
as to which the date is July 9, 1996
- F1 -
<PAGE> 31
NEWCARE HEALTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 1995
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS
Cash and cash equivalents $ 201,639
Accounts receivable, net of allowance
for doubtful accounts of $899,235 5,169,231
Inventory 1,169,404
Prepaid expenses 211,038
-----------
TOTAL CURRENT ASSETS 6,751,312
PROPERTY AND EQUIPMENT, NET 25,070,716
EXCESS OF COSTS OVER NET ASSETS OF BUSINESSES
ACQUIRED, NET OF ACCUMULATED AMORTIZATION
OF $366,395 6,925,531
OTHER ASSETS, NET 1,233,144
-----------
TOTAL ASSETS $39,980,703
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
- F2 -
<PAGE> 32
LIABILITIES AND SHAREOWNERS' EQUITY
<TABLE>
<S> <C>
CURRENT LIABILITIES
Current maturities of long-term debt $ 9,214,389
Notes payable 1,525,000
Borrowings under line of credit 166,491
Accounts payable 3,234,521
Accrued liabilities 1,891,878
Deferred revenue 61,246
Estimated third-party payor settlements 58,000
------------
TOTAL CURRENT LIABILITIES 16,151,525
ESTIMATED THIRD-PARTY PAYOR SETTLEMENTS 198,639
LONG-TERM DEBT 16,260,560
COMMITMENTS AND CONTINGENCIES
SHAREOWNERS' EQUITY
Common stock, $.02 par value; 50,000,000
shares authorized; 10,667,524 shares issued
and outstanding 213,350
Additional paid-in capital 9,055,724
Accumulated deficit (1,849,095)
Treasury shares (70,168 shares), at cost (50,000)
------------
TOTAL SHAREOWNERS' EQUITY 7,369,979
------------
TOTAL LIABILITIES AND SHAREOWNERS' EQUITY $ 39,980,703
============
</TABLE>
- F3 -
<PAGE> 33
NEWCARE HEALTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
NET REVENUES $ 39,770,460 $ 20,922,846
COSTS AND EXPENSES
Compensation and related 17,253,076 10,778,888
Operating and administrative 19,489,869 9,213,374
Interest 1,668,901 957,218
Depreciation and amortization 1,494,836 858,232
------------ ------------
TOTAL COSTS AND EXPENSES 39,906,682 21,807,712
------------ ------------
NET LOSS BEFORE INCOME TAXES (136,222) (884,866)
PROVISION FOR INCOME TAXES 36,000 34,750
------------ ------------
NET LOSS $ (172,222) $ (919,616)
============ ============
NET LOSS PER COMMON SHARE $ (0.02) $ (0.13)
============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 10,390,073 7,289,746
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
- F4 -
<PAGE> 34
NEWCARE HEALTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY
Years Ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
COMMON STOCK
---------------------
NUMBER ADDITIONAL TOTAL
OF PAID-IN ACCUMULATED SUBSCRIPTION TREASURY SHAREOWNERS'
SHARES AMOUNT CAPITAL DEFICIT RECEIVABLE SHARES EQUITY
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT
JANUARY 1, 1994 6,068,976 $ 121,380 $ 812,772 $ (646,610) $ (50,000) $ (50,000) $ 187,542
REVERSE
ACQUISITION
OF SUBSIDIARY 70,025 1,400 152,968 (110,647) - - 43,721
ISSUANCE OF COMMON
SHARES FOR
CONSULTING
AGREEMENT 245,000 4,900 117,600 - - - 122,500
EXERCISE OF STOCK 150,000 3,000 276,000 - - - 279,000
OPTION
COLLECTION OF
SUBSCRIPTION
RECEIVABLE - - - - 50,000 - 50,000
SHARES ISSUED IN
SATISFACTION OF
BORROWINGS 331,183 6,624 219,783 - - - 226,407
ISSUANCE OF COMMON
SHARES FOR
ACQUISITION
OF SUBSIDIARY 1,700,000 34,000 3,145,000 - - - 3,179,000
ISSUANCE OF COMMON
SHARES FOR
ACQUISITION
OF GENERAL
PARTNERSHIP
INTERESTS 10,000 200 32,800 - - - 33,000
</TABLE>
The accompanying notes are an integral part of the financial statements.
- F5 -
<PAGE> 35
NEWCARE HEALTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY
(Continued)
Years Ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
COMMON STOCK
----------------------
NUMBER ADDITIONAL TOTAL
OF PAID-IN ACCUMULATED SUBSCRIPTION TREASURY SHAREOWNERS'
SHARES AMOUNT CAPITAL DEFICIT RECEIVABLE SHARES EQUITY
---------- ----------- ----------- ----------- -------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
PRIVATE
PLACEMENT OF
COMMON SHARES 1,345,304 $ 26,906 $ 2,490,171 $ - - - $ 2,517,077
NET LOSS FOR 1994 - - - (919,616) - - (919,616)
---------- ----------- ----------- ----------- -------- ------- -----------
BALANCE AT
DECEMBER 31, 1994 9,920,488 198,410 7,247,094 (1,676,873) - (50,000) 5,718,631
ISSUANCE OF
COMMON SHARES
FOR ACQUISITION
OF SUBSIDIARY 726,286 14,525 1,801,190 - - - 1,815,715
OTHER COMMON 20,750 415 7,440 - - - 7,855
SHARE ISSUANCES
NET LOSS FOR 1995 - - - (172,222) - - (172,222)
---------- ----------- ----------- ----------- -------- ------- -----------
BALANCE AT
DECEMBER 31, 1995 10,667,524 $ 213,350 $ 9,055,724 $(1,849,095) - (50,000) $ 7,369,979
========== =========== =========== =========== ======== ======= ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
- F6 -
<PAGE> 36
NEWCARE HEALTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (172,222) $ (919,616)
Adjustments to reconcile net loss to net
cash provided by operating activities
Depreciation and amortization 1,494,836 858,232
Common stock issued for services 7,855 122,500
Provision for bad debts 1,001,448 272,741
Deferred tax provision - 34,750
Changes in assets and liabilities, net of effects
from business combinations
Accounts receivable (1,617,140) (564,038)
Inventories 43,475 (12,527)
Prepaid expenses 73,254 (61,889)
Estimated third party payor settlements (105,535) 373,332
Accounts payable 778,678 525,347
Accrued liabilities 31,958 (247,677)
Changes in other assets and liabilities, net 2,326 187,830
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,538,933 568,985
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Net purchases of property, plant and equipment (564,149) (255,280)
Payments for other assets (118,120) -
Cash paid for acquisitions of affiliates, net
of cash acquired (1,612,200) (1,614,576)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (2,294,469) (1,869,856)
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of borrowings (2,710,935) (953,590)
Proceeds from borrowings 2,741,953 211,036
Net proceeds from private placement of stock - 2,517,077
Proceeds from exercise of common stock options - 279,000
Collection of stock subscription receivable - 50,000
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 31,018 2,103,523
----------- -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (724,518) 802,652
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 926,157 123,505
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 201,639 $ 926,157
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
- F7 -
<PAGE> 37
NEWCARE HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1995 and 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of NewCare Health
Corpora-tion and its subsidiaries (the Company). The Company's three
subsidiaries: NewCare, Inc. (NewCare), Spectrum Health Services, Inc. (Spectrum;
acquired on September 1, 1994) and Cimerron Health Care, Inc. (Cimerron;
acquired on May 22, 1995) operate predominately in the long-term healthcare
industry. The Company operates eleven skilled nursing facilities, six in Florida
through NewCare and five in Georgia through Cimerron, and has medical supply and
pharmaceutical sales and service operations in Florida, Georgia, Kansas and
Texas through Spectrum. All significant intercompany transactions have been
eliminated in the consolidation process.
OPERATIONS
As of December 31, 1995, current liabilities exceeded current assets by
approximately $9,400,000 and the Company has incurred losses of approximately
$172,000 and $920,000 in 1995 and 1994, respectively. Management's plans with
regard to operations include continuing improvement of budget controls and
restructuring the current maturities of its debts. In addition, the Company has
entered into an agreement to be acquired (see Note 12).
CASH EQUIVALENTS
Cash equivalents include all highly liquid investments with an original maturity
of three months or less.
INVENTORY
Inventory consists primarily of healthcare supplies and is stated at the lower
of cost (determined using the first-in, first-out method) or market value.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided using the
straight-line method to allocate the cost of property and equipment over the
estimated useful lives, generally ranging from 3 to 40 years.
OTHER ASSETS
Other assets consist primarily of excess of consideration paid over net assets
acquired in business combinations (goodwill), organization costs, deferred
financing costs, deposits and certain other deferred expenses (see Note 11).
Deferred financing costs are amortized using a method approximating the
effective interest method over the terms of the related borrowings. The other
intangible assets are amortized using the straight-line method over the periods
of expected benefit, generally 5 to 40 years. Goodwill is reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. If the sum of the expected future cash
flows is less than the carrying amount of the asset, a loss is recognized.
Offering costs directly related to the Company's offerings of its capital stock
are deferred and 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.
INCOME TAXES
Deferred income taxes are provided for certain temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
tax purposes, using enacted tax rates in effect for the year in which the
differences are expected to reverse.
CREDIT RISK
Financial instruments which potentially subject the Company to concentrations of
- F8 -
<PAGE> 38
credit risk consist principally of accounts receivable. 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 are mitigated by the taxing authority of the governmental
entities funding those programs.
REVENUE RECOGNITION
The Company recognizes revenue from the sale of products in the period that the
products are shipped to customers. Revenue from providing healthcare services is
generally recognized in the period that the services are performed.
Patient service revenue is reported at the estimated net realizable amounts
receivable from residents, third-party payors and others for services rendered.
Revenue under third-party payor agreements is subject to audit and retroactive
adjustment. Provisions for estimated third-party payor settlements are provided
in the period the related services are rendered. Differences between the
estimated amounts accrued and interim and final settlements are reported in
operations in the period of settlement (see Note 7).
PRODUCT WARRANTIES
The Company generally will replace or refund the purchase price of products sold
for which the customer is not satisfied. Historically, the effect of this policy
has not been material to the Company's financial statements which, as a result,
do not include a provision for the effect of product warranty policies.
PER SHARE DATA
Net earnings per common share are computed using the weighted average number of
common shares and common equivalent shares outstanding during each year, as
restated for the one-for-twenty reverse stock split effected in April 1994 (see
Note 2). Common share equivalents repre-sent shares issuable upon the assumed
exercise of stock options. The stock options are included in the computation
using the treasury stock method, if they would have a dilutive effect in years
where there are earnings. Common share equivalents are not considered in
calculations of per share data when their inclusion would be anti-dilutive.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the period reported. Actual results could differ
from those estimates.
2. BUSINESS COMBINATIONS
CIMERRON
During 1995, the Company acquired all of the outstanding capital stock of
Cimerron Healthcare, Inc. (Cimerron). Cimerron operates five skilled nursing
facilities in Georgia with an aggregate of 502 skilled nursing beds. The
purchase price was approximately $10,348,000, composed of $1,500,000 in cash,
726,286 unregistered shares of the Company's common stock valued at $1,815,715
and the assumption of approximately $7,032,000 of debt and operating
liabilities. The Company's shares given in exchange were valued by the Company's
Board of Directors at $2.50 per share, which approximated market value at the
time the transaction was consummated.
The acquisition was accounted for as a purchase and Cimerron's results of
operations have been included in the accompanying consolidated financial
statements beginning on May 22, 1995, the date of the acquisition.
SPECTRUM
During 1994, the Company acquired all of the outstanding capital stock of
Spectrum Health Services, Inc. and Spectrum Infusion Services, Inc. (Spectrum).
Spectrum is engaged in the business of selling medical
- F9 -
<PAGE> 39
supplies, pharmaceutical products and services and therapy services to
healthcare facilities and individuals. The purchase price was $9,581,190,
composed of $1,390,000 in cash, $5,012,190 in notes payable and 1,700,000 shares
of the Company's common stock valued at $3,179,000. The Company's shares given
in the exchange were valued by the Company's Board of Directors at $1.87 per
share, which was the price at which shares were being sold in the concurrent
private placement (see Note 8).
The acquisition was accounted for as a purchase and Spectrum's results of
operations have been included in the consolidated financial statements beginning
on September 1, 1994, the date of the acquisition.
At the acquisition date, Spectrum had net assets with a fair market value of
approximately $2,874,000, resulting in an excess of cost over net assets
acquired, of approximately $6,847,000, which the Company is amortizing over 40
years using the straight-line method.
UNAUDITED PRO-FORMA RESULTS OF OPERATIONS
The following table of unaudited pro-forma results presents the operations of
the Company, as if it had owned Spectrum and Cimerron since January 1, 1994,
after giving effect to certain adjustments and reclassifications, including
amortization of goodwill, additional depreciation expense, increased interest
expense on acquisition related debt, related income tax effects and elimination
of intercompany transactions:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
NET REVENUES $ 44,403,000 $ 40,530,000
NET LOSS $ (94,000) $ (957,000)
NET LOSS PER
SHARE $ (0.01) $ (0.09)
</TABLE>
REORGANIZATION AND RECAPITALIZATION
The Company's subsidiary, NewCare, Inc., was formed during 1993 to effect a
reorganization of its predecessor organization, American Nursing Homes, Inc.,
its subsidiaries, and their interests in a number of limited partnerships
(ANH). The reorganization occurred on July 31, 1993 when substantially all of
ANH's capital stock was exchanged, based on various conversion factors, for
shares of NewCare, Inc.
On April 5, 1994, two of NewCare, Inc.'s principal officers, acting on behalf of
NewCare, Inc., acquired 78% (250,000 post-split shares) of the outstanding
capital stock of Camelback Capital, Inc. (Camelback), which, at that date, was
an inactive public shell. Camelback's net assets at December 31, 1993 and at
April 5, 1994, were approximately $43,700 and $500, respectively. Camelback then
split its common shares on a one-for-twenty reverse split basis and adjusted the
par value of its common shares from $.001 to $.02 per share. Camelback then
acquired 95% of the outstanding capital stock of NewCare, Inc. in exchange for
5,818,976 shares (post split) of its common stock and changed its name to
NewCare Health Corporation. This transaction has been presented in the
consolidated financial statements as a recapitalization of NewCare, Inc., with
NewCare, Inc. as the acquirer (reverse acquisition) and, accordingly, the
historical consolidated financial statements through the date of the
transaction are those of NewCare, Inc. Shareowners' equity reflects the
equivalent number of common shares received in the recapitalization (6,068,976
shares). All references in the financial statements with regard to number of
shares of common stock have been restated to give retroactive effect to the
one-for-twenty reverse stock split.
ACQUISITION OF GENERAL PARTNERSHIP INTERESTS
During 1993, the Company acquired controlling interests in five limited
partnerships that operate skilled nursing facilities. In March 1994, the
Company purchased, for $32,500 and 10,000 shares of its common stock, all of the
outstanding capital stock of the general partner of four of the nursing home
limited partnerships. This transaction was accounted for as a purchase and is
reflected in the consolidated financial statements beginning on its acquisition
date.
- F10 -
<PAGE> 40
Supplemental pro-forma information is not presented for this transaction due to
the entity's insignificance to the consolidated financial statements.
On December 31, 1994, a subsidiary of the Company acquired the president of the
Company's 1% general partnership interest in one of the nursing home limited
partnerships for $3,500. During 1994, the president received no management fees
as a result of his ownership of the 1% general partnership interest.
CENTRAL TAMPA NURSING HOME
In September 1995, the Company acquired, through a lease, the operations of a
100-bed skilled nursing facility located in Tampa, Florida. Supplemental
pro-forma information is not presented for this transaction due to the entity's
insignificance to the consolidated financial statements
3. PATIENT FUNDS HELD IN ESCROW
The Company's skilled nursing facilities offer a cash management service to
their residents. These funds remain the sole property of each respective
resident, to be disbursed only as requested and, accordingly, these funds are
excluded from the Company's financial statements. The facilities have a
fiduciary duty of accountability for these funds. At December 31, 1995, these
fund balances, in the aggregate, were approximately $244,000.
4. LONG-TERM DEBT
Long-term debt consists of the following at December 31, 1995:
<TABLE>
<S> <C>
Mortgage notes payable $11,895,691
Subordinated purchase money mortgage payable to shareowner 5,965,000
Notes and obligations payable to related parties, primarily former Spectrum and
Cimerron owners (see Notes 2 and 12) 6,733,228
Installment notes payable 525,647
Capital lease obligations (see Note 6) 267,128
Subordinated debentures 88,255
-----------
Total long-term debt,
including current
maturities $25,474,949
Current maturities 9,214,389
-----------
Total long-term debt $16,260,560
===========
</TABLE>
MORTGAGE NOTES
Mortgage notes payable to financial institutions bear interest at rates ranging
from 7% to 12%. The mortgages, which mature through 2004, are collateralized by
the assets of the Company's skilled nursing facilities. Certain mortgages are
cross guaranteed among the Company's subsidiaries and guaranteed by related
parties.
One of the mortgage agreements with a bank includes a restrictive financial
covenant requiring the facility to maintain a minimum debt service coverage of
2.0 to 1.0 for the bank debt and a coverage of 1.0 to 1.0 for all of its debt.
As of December 31, 1995, the facility was not in compliance with the debt
covenants and has entered into discussions with the bank to cure the Company's
noncompliance with the debt covenants.
SUBORDINATED MORTGAGE
The subordinated purchase money mortgage payable to shareowner matures December
31, 1997. It bears interest at a rate of 2.0% and is collateralized by land and
buildings.
The agreement with the mortgage holder was modified and renewed in 1992 due to
the need to restructure because of financial difficulties. The modification
agreement provided, among other things, that the carrying value of the loan
remained unchanged and the effective interest rate was reduced by the creditor
as a concession to
- F11 -
<PAGE> 41
the Company's subsidiary, Oak Manor Nursing Home, Ltd. The modification
agreement also provides for a participation in the proceeds in the event the
mortgaged property is sold.
NOTES AND OBLIGATIONS PAYABLE TO RELATED PARTIES
Notes and obligations payable to related parties bear interest at rates ranging
from 6.0% to 10%. The notes and obligations mature through 1999. One note for
$600,000 is collateralized by certain real estate. Approximately $3,763,000 of
notes and obligations payable to related parties are scheduled for repayment
during 1996 (see Note 9).
Notes payable related to the acquisition of Spectrum called for a payment of
$1,333,000 to be paid on January 2, 1996. The Company was unable to make this
payment at that time, and the note holder has agreed to a deferred payment. The
remaining two payments of $1,333,000 each are due September 2, 1996 and 1997.
The Spectrum notes are collateralized by Spectrum common stock.
INSTALLMENT NOTES PAYABLE
Installment notes payable consist of numerous obligations primarily resulting
from the purchase of vehicles and equipment. The notes bear interest at rates
ranging from 6.75% to 10.9% and mature through the year 2000. The notes are
collateralized by vehicles and equipment.
SUBORDINATED DEBENTURES
The subordinated debentures are payable in quarterly payments of $21,000 and
bear interest at the prime rate plus 1.75% (10.5% at December 31, 1995). The
subordinated debentures mature January 15, 1997.
MATURITIES OF LONG-TERM DEBT
At December 31, 1995, the aggregate principal amounts of long-term debt
scheduled for repayment are approximately as follows:
<TABLE>
<CAPTION>
(In Thousands)
--------------------
<S> <C>
1996 $ 9,214
1997 8,529
1998 2,481
1999 305
2000 314
Thereafter 4,632
-----------
Total $ 25,475
===========
</TABLE>
5. BORROWINGS UNDER LINE OF CREDIT
Spectrum has a revolving line of credit agreement (credit line) with a financial
institution which provides, among other things, for monthly interest payments
at the financial institution's prime base rate plus 1% (9.75% at December 31,
1995). Borrowings under the credit line are limited to a maximum of $250,000, of
which $166,491 was borrowed at December 31, 1995. Borrowings under the credit
line are due on demand and are collateralized by Spectrum's accounts receivable,
inventory, equipment and intangible assets. The credit line is subject to
renewal in June 1996.
6. SHORT-TERM ACQUISITION NOTES PAYABLE
The cash needed to effect the Cimerron acquisition was raised through the
issuance of $1,525,000 of short-term notes payable, bearing interest at 12%.
Interest only is payable monthly through April 30, 1996 when all principal and
any accrued unpaid interest is due. The Company also issued one warrant for
every $10 of short-term note, for a total of 152,500 warrants, which are
exercisable for one share each of the Company's common stock until June 1, 1998,
at an exercise price of $3.50 per share. Approximately $1,325,000 of the
short-term acquisition notes are held by parties that are owners of the
Company's shares. Interest paid to the shareowners during 1995 was approximately
$91,000.
7. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases land, buildings and equipment through lease contracts that
expire in various years through 2000. Total rent expense approximated $776,000
in 1995 and $332,000 in 1994. Property and equipment at December 31, 1995
includes
- F12 -
<PAGE> 42
approximately $438,000 of assets acquired under capital leases and related
accumulated amortization of $189,000. The following table shows future minimum
lease payments due under noncancelable leases at December 31, 1995. The total of
such payments approximates $1,298,000 for operating leases. The net present
value of such payments for capital leases approximates $247,000 after deducting
estimated executory costs and imputed interest of approximately $20,000.
<TABLE>
<CAPTION>
(In Thousands)
Capital Operating
Leases Leases
---------------- -------------
<S> <C> <C>
1996 $ 91 $ 707
1997 $ 59 $ 218
1998 $ 43 $ 127
1999 $ 38 $ 123
2000 $ 16 $ 66
</TABLE>
EMPLOYEE BENEFIT PLANS
Prior to its acquisition by the Company, Spectrum had a defined benefit pension
plan (the Plan) that covered employees who qualified as participants according
to the terms of the Plan. As part of the Company's agreement to acquire
Spectrum, the president and majority shareowner of Spectrum agreed to terminate
the Plan and to personally assume any unfunded Plan obligation upon settlement.
The Plan was terminated in December 1994. At termination, the Plan's funded
assets (primarily government securities) were approximately $503,000, and the
accumulated benefit obligation was $498,000.
STOCK OPTIONS
In Connection with the acquisition of a skilled nursing home facility in 1990,
an option was issued to the seller to acquire up to 200,000 shares of common
stock of the Company's predecessor organization, at an exercise price of $1.00
per share. This option remains exercisable through December 1998.
During 1993, an option to acquire up to 33,500 shares of the Company's common
stock, at an exercise price of $2.24 per share, was granted to an officer of the
Company. This option remains exercisable through June 1998.
During September 1994, options were granted to the Company's president and
executive vice president to acquire up to 50,000 shares each of the Company's
common stock, at an exercise price of $4.75 per share. These options remain
exercisable through September 1999.
The stock options 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 (see Note 8).
HEALTH CARE REFORM
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 affect program reimbursement to health care facilities.
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.
LEGAL PROCEEDINGS
The Company's Spectrum subsidiary has been assessed approximately $364,000
relating to the recoupment of an alleged overpayment for services it provided
during the years 1990 through 1993. The Company is appealing this claim and on
the basis of information furnished by counsel, management believes that the
final resolution of this matter will not materially affect the Company.
Currently, Spectrum has entered into an eighteen-month repayment plan with the
claimant, pending the outcome of the appeal. Should the outcome of the appeal be
in the Company's favor, the claimant will reimburse all payments made under the
repayment plan. No provision for possible losses related to this uncertainty has
been made in the accompanying financial statements (see Note 12.)
- F13 -
<PAGE> 43
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, 1995. 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
The Company has filed an application with the Florida Agency for Healthcare
Administration to combine the Certificates of Need for two of its Florida
facilities, which currently operate 38-bed and 59-bed skilled nursing
facilities, respectively. The Company plans to construct a new facility using
lease financing to operate the combined 97 beds. The Company plans to operate
the existing facilities as assisted living facilities. As of December 31, 1995,
the Company had not entered into any formal arrangements for construction or
financing of the new facility.
During 1995, Cimerron obtained a Certificate of Need for 20 skilled nursing beds
and in November 1995, acquired approximately eight acres of undeveloped land in
Georgia. The Company has plans to combine the new 20-bed Certificate of Need
with an existing 40-bed Certificate of Need currently being operated as Emory
Nursing Home (Emory) and to construct a new 60-bed skilled nursing facility.
Current plans call for Emory to be operated as an assisted living facility. As
of December 31, 1995, the Company had not entered into any formal arrangements
for construction or financing of the new facility.
8. SHAREOWNERS' EQUITY
PRIVATE PLACEMENT OFFERING
During 1994, the Company issued approximately 1,345,000 common shares in a
private placement. The shares were issued at $2.00 per share, with a 7%
discount, given in shares, to certain purchasers of large blocks. Net proceeds
from the private placement offering, after deduction of approximately $63,000 of
related offering costs, were $2,517,077.
CONSULTING AGREEMENT AND OPTION
During 1994, the Company entered into a consulting agreement with a related
party which provided, among other things, for issuance to the consultant of
245,000 shares of the Company's common stock in exchange for services and for an
option to acquire 150,000 shares of the Company's common stock, at an exercise
price of $1.86 per share. The issued shares were valued by the Company's Board
of Directors at $.50 per share. Accordingly, a value of $122,500 was recognized
for the consulting services. The option was exercised during 1994.
OTHER STOCK ISSUANCES
Common shares have 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 shares issued equal to the fair value of the services or other
consideration received.
During 1994, the Company entered into two agreements, whereby borrowings in the
amounts of $125,000 and $101,407 were satisfied through issuance to the lender
of 186,290 and 144,893 common shares, respectively.
9. INCOME TAXES
Significant components of the Company's deferred tax liabilities and assets at
December 31, 1995, are as follows:
<TABLE>
<CAPTION>
(In Thousands)
----------------
<S> <C>
Deferred Tax Liabilities
Depreciation and $ (198)
amortization
Deferred Tax Assets
</TABLE>
- F14 -
<PAGE> 44
<TABLE>
<S> <C>
Bad debt allowance 148
Net operating loss
carryforwards 23
Accrued expenses 138
Deferred revenue 21
Other 12
-----
Gross deferred tax assets 342
Valuation allowance (144)
-----
198
-----
Net deferred taxes $ -
-----
</TABLE>
The deferred tax asset valuation allowance was $156,000 at December 31, 1994 and
was decreased to $144,000 at December 31, 1995, a change of $12,000.
The components of income tax expense are approximately as follows:
<TABLE>
<CAPTION>
(In Thousands)
1995 1994
----------- ------------
<S> <C> <C>
Federal
Current $ - $ -
Deferred - net - 30
State
Current 36 -
Deferred - net - 5
--- ---
Total $36 $35
=== ===
</TABLE>
A reconciliation of 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:
<TABLE>
<CAPTION>
(In Thousands)
1995 1994
-------- ---------
<S> <C> <C>
Taxes computed at 35% $ (48) $(287)
Increases (decreases)
in taxes resulting from:
Amortization (87) 22
State income taxes, net
of federal income
tax effect 36 -
Bad debt expense 184 71
Depreciation (111) (7)
Accrued expenses 138 39
Deferred revenue 21 -
Net operating losses (110) 193
Inventories 13 4
----- -----
Total $ 36 $ 35
===== =====
</TABLE>
At December 31, 1995, the Company has net operating loss carryforwards of
approximately $67,000 available to offset future taxable income through 2009.
Under federal tax law, certain changes in ownership of the Company may operate
to restrict future utilization of these carryforwards (see Note 12).
10. TRANSACTIONS WITH RELATED PARTIES
The Company leases a facility used by one of its nursing homes from a
shareowner. Rent payments to the shareowner of approximately $183,000 and
$165,000 were made in 1995 and in 1994, respectively.
A company, controlled by a shareowner, provides contract services to certain of
the Company's retirement centers. Total contract service fees paid to this
company totaled approximately $794,000 and $741,000 in 1995 and 1994,
respectively.
The Company leases office space from a shareowner under an operating lease that
expires December 31, 1999. Annual rental payments under the lease approximate
$45,600.
In November 1995, the Company exercised an option to purchase one of its leased
facilities from the lessor in exchange for $300,000 in cash and the assumption
of approximately $500,000 in debt. The option was exercised with $300,000, which
was raised through a borrowing from a related party. The $300,000 loan bears
interest at 10% and is payable in monthly payments of interest only through
November 1997, 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., which bears interest at 9% and is payable in
monthly installments of interest only through February 1998 (see Note 12).
In November 1995, the Company borrowed $195,000 from a shareowner to purchase
real property. The $195,000 note bears interest at 10% and is payable in monthly
installments of interest only through August
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<PAGE> 45
1998, when all principal and any accrued interest is due. The note is
collateralized by real estate.
In September 1994, the Company loaned $49,000 to its president. The loan, which
was approved by the Board of Directors, is noninterest bearing and was
originally due in September 1995. The note was extended in September 1995 and is
due on demand.
11. SUPPLEMENTARY FINANCIAL INFORMATION
BALANCE SHEET INFORMATION
<TABLE>
<S> <C>
PROPERTY AND EQUIPMENT
Land and improvements $ 3,688,871
Buildings and improvements 21,391,333
Equipment and other 6,265,708
------------
Total property and equipment 31,345,912
Less: Accumulated depreciation
and amortization 6,275,196
------------
Property and equipment, net $ 25,070,716
============
OTHER ASSETS, net
Non-compete agreements $ 675,000
Closing costs 92,968
Bond costs and related 415,611
Deferred expenses 256,300
Organization costs, deposits
and other 251,841
------------
Total other assets 1,691,720
Less: Accumulated amortization (458,576)
------------
Other assets, net $ 1,233,144
============
ACCRUED LIABILITIES
Compensation and related $ 1,161,229
Accrued interest 99,989
Other 630,660
------------
Total $ 1,891,878
============
</TABLE>
STATEMENTS OF OPERATIONS INFORMATION
<TABLE>
<CAPTION>
(In Thousands)
1995 1994
---------- -----------
<S> <C> <C>
OPERATING AND
ADMINISTRATIVE EXPENSES
Cost of sales $ 9,487 $ 3,031
Supplies and food 2,076 1,949
Contract therapy 1,197 1,277
Utilities 1,204 668
Bad debt expense 1,001 273
Rent 776 332
Housekeeping contracts 522 -
Taxes and licenses 393 328
Professional fees 663 179
Insurance 334 206
Advertising and
marketing 68 51
Other 1,769 919
-------- --------
Total $ 19,490 $ 9,213
======== ========
</TABLE>
STATEMENTS OF CASH FLOWS INFORMATION
<TABLE>
<CAPTION>
(In Thousands)
1995 1994
------------- -------------
<S> <C> <C>
CASH PAID DURING
THE YEAR FOR
Interest $ 1,617 $ 925
Income taxes $ - $ -
</TABLE>
INDUSTRY SEGMENT INFORMATION
The Company operates principally in two industries: the operation of skilled
nursing facilities and, through its Spectrum subsidiary, the sale of medical
equipment, supplies and services to the long term health care industry.
<TABLE>
<CAPTION>
(In Thousands)
1995 1994
-------- --------
<S> <C> <C>
NET REVENUES FROM
NONAFFILIATED
CUSTOMERS
Skilled nursing
facilities $ 23,182 $ 15,232
Spectrum 16,588 5,691
-------- --------
39,770 20,923
INTERSEGMENT SALES
Spectrum 603 205
-------- --------
$ 40,373 $ 21,128
======== ========
NET LOSS BEFORE INCOME
TAXES
Skilled nursing
facilities $ (305) $ (892)
Spectrum 169 7
-------- --------
$ (136) $ (885)
======== ========
ASSETS
Skilled nursing
facilities $ 33,823 $ 23,340
Spectrum 6,419 7,438
</TABLE>
- F16 -
<PAGE> 46
<TABLE>
<S> <C> <C>
Eliminations (261) (1,431)
-------- --------
$ 39,981 $ 29,347
======== ========
DEPRECIATION AND
AMORTIZATION
Skilled nursing
facilities $ 939 $ 649
Spectrum 556 209
-------- --------
$ 1,495 $ 858
======== ========
CAPITAL
EXPENDITURES
Skilled nursing
facilities $ 278 $ 105
Spectrum 286 150
-------- --------
$ 564 $ 255
======== ========
</TABLE>
12. SUBSEQUENT EVENTS
In February 1996, the Company was notified by the lessor of one of the Company's
skilled nursing facilities that its lease, which expires in June 1996, will not
be renewed. The loss of the 75-bed skilled nursing facility is not expected to
have a material adverse effect on the Company's results of operations. The
Facility had income from operations of approximately $46,000 in 1995.
In February 1996, the Company entered into an agreement to be acquired through a
merger with Retirement Care Associates, Inc. (RCA). On April 12, 1996, the
Company and RCA announced that their companies had mutually agreed to terminate
the proposed merger.
A $500,000 note payable matured in February 1996 and was refinanced with a loan
from RCA, which bears interest at 9% and is payable in monthly installments of
interest only through February 1998.
In June 1996, the Company received notification from the Medicare program that
it had revised its previous assessment of $364,000 due from the Company's
Spectrum subsidiary to approximately $86,000. The Company is continuing in its
appeal of the assessment.
In June 1996, the Company and certain related party holders of Spectum
acquisition notes payable reached an agreement on restructuring the notes. The
agreement provides, among other things, for a reduction of the amount payable
and extensions of payment terms. Notes payable in the amount of $5,618,672 are
replaced with $4,250,000 of notes and the issuance of 375,000 shares of the
Company's common stock. The replacement notes are 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 due quarterly 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 notes are secured by mortgages on one of the Company's skilled
nursing facilities.
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