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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 1998
Commission File No. 0-24110
NEWCARE HEALTH CORPORATION
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(Exact name of registrant as specified in its charter)
Nevada 86-0594391
- ------------------------------ ------------------------------------
(State or other jurisdiction of (IRS Employer Identification Number)
Incorporation or Organization)
6000 Lake Forrest Drive, Suite 200, Atlanta, Georgia 30328
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(Address of Principal Executive Offices including zip code)
(404) 255-7500
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(Registrant's telephone number)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ X ] No [ ]
There were 12,128,525 shares of the Registrant's Common Stock outstanding as
of September 30, 1998.
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NEWCARE HEALTH CORPORATION
FORM 10-Q
INDEX
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of September 30,
1998 and December 31, 1997.................................. 3
Consolidated Statements of Operations for
the three months ended September 30, 1998 and 1997.......... 5
Consolidated Statements of Operations for
the nine months ended September 30, 1998 and 1997........... 6
Consolidated Statements of Cash Flows for
the nine months ended September 30, 1998 and 1997........... 7
Notes to Consolidated Financial Statements.................. 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS......................... 11
PART II. OTHER INFORMATION........................................... 18
ITEM 1. LEGAL PROCEEDINGS........................................... 18
ITEM 2. CHANGES IN SECURITIES....................................... 18
ITEM 3. DEFAULTS UPON SENIOR SECURITIES............................. 18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 18
ITEM 5. OTHER INFORMATION........................................... 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................ 18
SIGNATURES.................................................. 19
2
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NEWCARE HEALTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
September 30, December 31,
1998 1997
------------ ------------
ASSETS (Unaudited)
Current assets
Cash and cash equivalents $ -- $ 2,297,599
Accounts receivable, net 8,699,845 4,569,319
Management fees receivable 988,014 --
Other receivables -- 160,113
Notes receivable - related parties 893,113 1,039,500
Due from related party 8,858,278 1,201,063
Marketable securities (available for
sale) and other investments 11,802,120 10,083,000
Restricted investments, current 1,185,056 469,119
Inventory 155,619 132,680
Deferred taxes 947,204 412,204
Acquisition deposit 6,750,000 --
Prepaid expenses and other
current assets 1,031,369 873,130
----------- -----------
Total current assets 41,310,618 21,237,727
Property and equipment, net 50,122,037 42,972,686
Deferred loan costs, net 1,902,824 999,057
Goodwill, net 1,639,715 1,057,096
Organizational costs, net 26,400 31,596
Deposits 1,133,275 926,511
Restricted investments,
less current portion 153,076 1,543,686
----------- -----------
Total assets $96,287,945 $68,768,359
=========== ===========
See Accompanying Notes To Consolidated Financial Statements.
3
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NEWCARE HEALTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
September 30, December 31,
1998 1997
----------- ----------
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Bank overdraft $ 1,172,472 $ --
Current maturities of long-term debt 896,559 1,380,735
Notes payable 8,710,250 --
Borrowings under line of credit 5,269,971 3,189,755
Brokerage investment margin payable 7,573,670 6,740,653
Accounts payable 9,899,750 6,163,548
Accrued expenses 6,032,141 3,288,527
Due to related parties 404,000 2,776,177
----------- -----------
Total current liabilities 39,958,813 23,539,395
Long-term debt 42,918,285 39,754,836
Minority interest in subsidiary 13,900 13,900
Commitments and contingencies
Convertible debentures 5,000,000 --
Shareholders' equity
Common stock, $.02 par value; 50,000,000
shares authorized; 12,128,525 and
11,372,524 issued and outstanding,
respectively 242,570 227,450
Additional paid-in capital 15,533,833 11,579,575
Accumulated deficit (8,832,548) (7,174,889)
Unrealized gain on marketable securities 1,453,092 828,092
----------- -----------
Total shareholders' equity 8,396,947 5,460,228
----------- -----------
Total liabilities and shareholders'
equity $96,287,945 $68,768,359
=========== ===========
See Accompanying Notes To Consolidated Financial Statements.
4
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NEWCARE HEALTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
September 30, September 30,
1998 1997
----------- ----------
(Unaudited) (Unaudited)
Net revenues
Patient service revenue $16,276,685 $ 8,480,380
Management service revenue 655,270 --
Other income 160,204 171,280
----------- -----------
17,092,159 8,651,660
Operating expenses
Cost of patient services 13,892,817 7,688,499
Lease expense 1,172,809 419,432
General and administrative 4,699,472 2,250,983
Provision for bad debt 818,995 72,197
Depreciation and amortization 584,296 365,202
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21,168,389 10,796,313
----------- -----------
Operating loss (4,076,230) (2,144,653)
Other income (expense)
Investment income 9,236,595 --
Interest expense (2,112,226) (655,322)
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7,124,369 (655,322)
----------- -----------
Income (loss) before income taxes 3,048,139 (2,799,975)
Income tax benefit (provision) (1,040,000) 1,059,000
----------- -----------
Net income (loss) $ 2,008,139 $(1,740,975)
=========== ===========
Net income (loss) per common and
common equivalent share:
Basic $ 0.17 $ (0.16)
Diluted $ 0.16 $ (0.16)
Weighted average number of common and
common equivalent shares outstanding
Basic 12,128,525 10,682,525
Diluted 12,319,625 10,682,525
See Accompanying Notes To Consolidated Financial Statements
5
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NEWCARE HEALTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
September 30, September 30,
1998 1997
----------- ----------
(Unaudited) (Unaudited)
Net revenues
Patient service revenue $45,861,040 $22,323,453
Management service revenue 2,119,260 --
Other income 492,770 394,770
----------- -----------
48,473,070 22,718,223
Operating expenses
Cost of patient services 37,548,381 18,340,887
Lease expense 2,952,573 724,050
General and administrative 11,705,048 4,056,906
Provision for bad debts 1,457,935 425,000
Shareholder settlements -- 668,750
Depreciation and amortization 1,645,601 864,485
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55,309,538 25,080,078
----------- -----------
Operating loss (6,836,468) (2,361,855)
Other income (expense)
Investment income 9,808,513 --
Interest expense (5,489,704) (1,653,656)
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4,318,809 (1,653,656)
----------- -----------
Loss from continuing operations (2,517,659) (4,015,511)
Income tax benefit 860,000 1,545,000
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Loss before discontinued operations
and extraordinary item (1,657,659) (2,470,511)
Loss from discontinued operations,
net of tax provosion of $30,000 -- (77,852)
----------- -----------
Loss before extraordinary item (1,657,659) (2,548,363)
Extraordinary item, net of tax
provision of $510,000 -- 798,616
----------- -----------
Net loss $(1,657,659) $(1,749,747)
=========== ===========
Comprehensive income:
Unrealized gain on marketable
securities 625,000 --
----------- -----------
Total comprehensive income $(1,032,659) $(1,749,747)
=========== ===========
Basic and diluted net income (loss)
per common share from:
Loss before discontinued operations
and extraordinary item $ (0.14) $ (0.23)
Discounted operations $ -- $ (0.01)
Extraordinary item $ -- $ 0.08
----------- -----------
Net loss $ (0.14) $ (0.16)
=========== ===========
Weighted average number of common
shares outstanding 12,056,955 10,677,252
=========== ===========
See Accompanying Notes To Consolidated Financial Statements
6
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NEWCARE HEALTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
September 30, September 30,
1998 1997
----------- ----------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,657,659) $(1,749,747)
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities:
Depreciation and amortization 1,645,601 864,485
Deferred income taxes (860,000) --
Provision for bad debts 1,457,935 425,000
Extraordinary item, net of tax
provision -- (798,615)
Decrease (increase) in assets:
Accounts receivable (5,588,461) (1,972,108)
Other receivables (827,901) --
Inventories (22,939) (238)
Prepaid expenses (158,239) 92,141
Deposits (206,764)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 6,479,816 2,339,863
Other liabilities (1,726,269)
----------- -----------
Net cash (used in) provided by
operating activities 261,389 (2,525,488)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (7,750,486) (13,806,608)
Payments of deferred costs (1,103,063) --
Advances to related parties (7,657,215) --
Change in note receivable 146,387 1,852,377
Change in restricted investments 674,673 (56,977)
Change in investments 63,897 --
Acquisition deposit (6,750,000) --
Increase in other accounts receivable -- 588,832
Increase in receivables from affiliates
and shareholders -- (1,997,713)
----------- -----------
Net cash used in investing activities (22,375,807) (13,420,089)
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of long-term debt (5,956,671) (21,256,251)
Advances to related parties (2,372,177) --
Proceeds from long-term debt 8,635,944 32,569,300
Net borrowing on line of credit 2,080,216 1,483,158
Proceeds from notes payable 8,710,250 --
Proceeds from convertible debentures 5,000,000 --
Proceeds from issuance of common stock 2,546,785 --
Bank overdraft 1,172,472 --
----------- -----------
Net cash provided by financing activities 19,816,819 12,769,207
----------- -----------
Net decrease in cash (2,297,599) (3,149,370)
Cash and cash equivalents at beginning
of period 2,297,599 3,198,700
----------- -----------
Cash and cash equivalents at end of
period $ -- $ 49,330
=========== ===========
See Accompanying Notes To Consolidated Financial Statements
7
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NEWCARE HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
The consolidated financial statements included herein have been prepared by
the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although the Company believes that the
disclosures are adequate to make the information presented not misleading.
These consolidated financial statements and the notes thereto should be read
in conjunction with the consolidated financial statements included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997,
File No. 0-24110.
In the opinion of management of the Company, the accompanying unaudited
consolidated financial statements contain all necessary adjustments to present
fairly the financial position, the results of operations and cash flows for
the periods reported. All adjustments are of a normal recurring nature.
In the first quarter of 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income."
Comprehensive income is defined as the change in equity of a business during a
period from transactions and other events and circumstances from non-owner
sources.
The adoption of SFAS 130 did not impact the calculations of net earnings or
earnings per share, nor did it it impact reported assets, liabilities or total
stockholders' equity.
NOTE 2. EARNINGS PER SHARE
The Company adopted SFAS No. 128 during the fourth quarter of 1997. SFAS No.
128 establishes revised standards for computing and presenting earnings per
share (EPS) data. It requires dual presentation of "basic" and "diluted" EPS
on the face of the statements of operations and a reconciliation of the
numerators and denominators used in the basic and diluted EPS calculations.
As required by SFAS No. 128, EPS data for prior periods presented have been
restated to conform to the new standard.
Basic EPS is calculated by dividing net earnings (loss) by the weighted
average number of common shares outstanding for the applicable period.
Diluted EPS is calculated after adjusting the numerator and the denominator of
the basic EPS calculation for the effect of all potential dilutaive common
shares outstanding during the period. Information related to the calculation
of net earnings per share of common stock is summarized as follows:
8
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EARNINGS
BEFORE EXTRAORDINARY SHARES
ITEM (NUMERATOR) (DENOMINATOR)
-------------------- ----------------
For The Three Months Ended
September 30, 1998:
Basic EPS: $ 2,008,139 $12,128,525
Incremental shares from
assumed exercise of dilutive
options and warrants: -- 191,100
------------ -----------
Diluted EPS: $ 2,008,139 $12,319,625
============ ===========
NOTE 3. RELATED PARTY TRANSACTIONS
In July 1997, the Company loaned $990,000 to several of the Company's
Directors, Officers and other related parties. The proceeds were used to
purchase stock from several former shareholders. The loans bear a 10%
interest rate and were due June 30, 1998. The Company extended the loans to
June 30, 1999.
The Company had net advances to related parties of $8,454,278, at September
30, 1998, and net borrowings from related parties of $1,575,114 at December
31, 1997.
NOTE 4. LONG-TERM DEBT
Long-term debt consisted of the following at September 30, 1998 and December
31, 1997:
September 30, December 31,
1998 1997
------------ ------------
Amounts outstanding under
Revenue Bonds secured by a
nursing facilities $ 5,715,000 $ 5,715,000
Other debt secured by retirement,
hospitals and nursing facilities 38,023,372 35,313,535
Other debt 76,472 107,036
----------- -----------
43,814,844 41,135,571
Less: current maturities 896,559 1,380,735
----------- -----------
Total long-term debt $42,918,285 $39,754,836
=========== ===========
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NOTE 5. FACILITY ACQUISITIONS AND DISPOSITIONS
During the three months ended September 30, 1998 the Company purchased Pasco
Nursing Home in Dade City, Florida, for $1,000,000 consisting of $500,000 in
cash and the assumption of a $500,000 mortgage. The Company also purchased
Jesup Health & Rehabilitation in Jesup, Georgia for $1,240,000 in cash. These
facilities have a combined 112 nursing home beds and, according to the
Company, should generate approximately $3,000,000 in combined annual revenues.
The Company also disposed of two under-performing nursing homes. On July 1,
1998, the Company sold the stock of Fitzgerald Nursing Center in Fitzgerald,
Georgia and Pleasant View Nursing Center in Metter, Georgia to officers of the
Company. These two facilities represented 287 nursing home beds and
approximately $5,000,000 in annual revenues. As a result of this transaction,
the Company recognized $1,422,593 of additional paid-in capital.
NOTE 6. SUBSEQUENT EVENTS
The Company has obtained permission from the Commonwealth of Massachusetts to
convert four facilities the Company currently manages to leased or owned
facilities. The facilities should produce approximately $12 million in annual
revenues, and the Company expects to complete the transaction before the end
of the year.
On November 1, 1998, NewCare executed a 20 year lease for Bonner Health
Center, a 50-bed nursing home in Bonner Springs, Kansas. The initial annual
lease payment is $120,000 and increases 2% per year for the first ten years
and 3% per year for the last ten years of the lease.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
This Report contains forward-looking statements that involve a number of risks
and uncertainties. While these statements represent the Company's current
judgment in the future direction of the business, such risks and uncertainties
could cause actual results to differ materially from any future performance
suggested herein. Certain factors that could cause results to differ
materially from those projected in the forward-looking statements include the
Company's ability to service debt, the ability to improve occupancy rates,
risks related to the prospective payment system, risks associated with related
party transactions, year 2000 risk, extensive regulation and general economic
conditions.
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1997
For the three months ended September 30, 1998, the Company reported a net
income of $2,008,139 ($0.17 basic and $0.16 diluted per common share) compared
to a net loss of $1,740,975 ($0.16 basic and diluted per common share)
reported for the three months ended September 30, 1997. Included in the
current year's results was a net investment income resulting from gains of
approximately $9.7 million from the sale of hospital bonds the Company owned
and $400,000 from the sale of a purchase option on a nursing home. These
gains were partially offset by the write-off of approximately $1.1 million
related to the Company's investment in Iatros.
Revenues from continuing operations for the three months ended September 30,
1998 totaled $17,092,159 compared to $8,651,660 reported for the three months
ended September 30, 1997. The nearly doubling of revenues from the prior year
was principally the result of an increase in the number of facilities owned,
leased or managed between the two time periods. At September 30, 1998, the
Company operated a total of 35 facilities compared to 16 facilities at
September 30, 1997. Included in the current period was $655,270 in management
service revenue related to two hospitals the Company started managing in the
December 1997 quarter and four nursing homes in Massachusetts started in the
March 1998 quarter. Other income, principally the result of interest income,
totaled $160,204 in the current period and $171,280 last year.
Operating expenses for the September 1998 quarter totaled $21,168,389 versus
$10,796,313 reported in the September 1997 quarter. Once again, the principal
reason for the near doubling of expenses was related to the increase in the
number of facilities operated in the current year versus last year. Cost of
patient services rose to $13,892,817 for three months ended September 30, 1998
from $7,688,499 reported for the three months ended September 30, 1997, an
increase of 81%. Lease expense grew to $1,172,809 in the current quarter from
$419,432 in the same period last year, as the number of leased facilities
increased from two to seven. General and administrative expense totaled
$4,699,472 in the September 1998 quarter compared to $2,250,983 reported in
the September 1997 quarter. These expenses reflect the tremendous growth in
operations from a year earlier and the resulting impact on corporate salaries,
insurance, travel expenses, supplies, legal and audit fees. Also, the current
period was impacted by the addition of several senior officers and staff
members from Retirement Care Associates after its merger with Sun HealthCare
Group on July 1, 1998.
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The provision for bad debts in the current period includes a reserve of
$598,320 related to management fee receivables from Princeton and TriCity
Hospitals. The Company believes these reserves are prudent in light of the
on-going litigation with TriCity Hospital and the continuing turnaround at
Princeton Hospital. Depreciation and amortization expense totaled $584,296 in
the current period and $365,202 last year, reflecting the growth in
facilities.
The operating loss for the three months ended September 30, 1998 was
$4,076,230 compared to an operating loss of $2,144,653 reported for the three
months ended September 30, 1997. The increase in operating loss for the most
recent three month period was mainly attributable to a reduction in census, or
percent of beds occupied, at the Company's nursing home facilities. For the
three months ended September 30, 1998, the average census at these facilities
dropped to 72.2% from the 88.6% level achieved a year earlier. The reason for
the drop in census stems from the Company's strategy of acquiring distressed
facilities with normally a low census, at typically below market rates. The
Company's objective is to turn these facilities around in a reasonable time
frame, usually within one to two years. During the past year, the Company
added a significant number of these facilities, resulting in the decline in
census.
Partially offsetting the lower census was an improvement in payer mix at the
nursing homes. For the most recent period, Medicaid residents comprised 77.6%
of the total versus 87.1% last year. The higher reimbursement rates from
Medicare residents produced a marginal increase, improving from 4.1% to 5.4%
of the total, while private pay nearly doubled to 14.4% from 7.7%.
Although comprising a much smaller percent of total facilities, the Company's
assisted living facilities saw a more significant improvement in census in the
current period, increasing to 65.7% from 42.9% in 1997. The sole hospital
owned by the Company produced only a small census increase, rising to 29.7%
from 26.3%.
Interest expense totaled $2,112,226 in the current period versus $655,322 a
year earlier, reflecting a higher level of debt. The results for the
September 1998 quarter included a tax provision of $1,040,000 compared to a
tax benefit of $1,059,000 recorded in the September 1997 quarter.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1997
For the nine months ended September 30, 1998, the Company reported a net loss
of $1,657,659 ($0.14 basic and diluted per common share) compared to a net
loss of $1,749,747 ($0.16 basic and diluted per common share) for the nine
months ended September 30, 1997. Included in the current year's results were
gains from the refinancing of hospital bonds and the sale of a purchase option
on a nursing home, and a loss on the investment in a long-term care entity.
The previous year's results included an after-tax loss from discontinued
operations and an after-tax gain on the refinancing and retirement of debt.
Revenues from continuing operations for the nine months ended September 30,
1998 totaled $48,473,070 versus $22,718,223 for the nine months ended
September 30, 1997. The over 100% increase in revenues was attributable to
the increase in the number of facilities added since the year earlier time
period. Patient service revenue in the current period more than doubled to
$45,861,040 from $22,323,453. Management service revenue totaled $2,119,260,
12
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reflecting the addition of two managed hospitals and four managed nursing
homes since September 30, 1997. Other income was $492,770 for the first nine
months of 1998 versus $394,770 in the same period in 1997, stemming from a
modest increase in interest income.
Operating expenses for the nine months ended September 30, 1998 totaled
$55,309,538 compared to $25,080,078 for the nine months ended September 30,
1997, principally the result in the growth in the number of facilities
operated. Cost of patient services doubled to $37,548,381 in the current year
versus $18,340,887 reported last year. Lease expense totaled $2,952,573 this
year compared to $724,050 a year earlier, reflecting an increase in the number
of leased facilities. General and administrative expense was $11,705,048 in
the first nine months of 1998 versus $4,056,906 in 1997, and was impacted by
the growth in operations and the build up of the administrative staff begun in
the second half of 1997.
Provision for bad debts rose to $1,457,935 in the current period from $425,000
reported last year, and reflected a separate $598,320 reserve against the
managed hospitals receivables. The previous year's results also included a
$668,750 expense related to shareholder settlements. Depreciation and
amortization expense totaled $1,645,601 for the nine months ended September
30, 1998 compared to $864,485, principally the result of a higher number of
facilities operated in the current year.
The operating loss for the nine months ended September 30, 1998 was $6,836,468
versus an operating loss of $2,361,855 for the nine months ended September 30,
1997. The increase in operating loss for the first nine months of 1998 versus
1997 was mainly the result of a decline in census at nursing homes. The
average census fell from 85.3% in 1997 to 73.2% in 1998, the result of an
increase in a number of low census facilities the Company added over the past
year. The Company generally paid below market rates for these facilities and
expects to turn them around within the next 12-24 months. Offsetting the
decline in census was an improvement in payer mix, with Medicare and private
pay residents comprising a combined 19.7% of the total in 1998 compared to
only 11.2% in 1997. Medicaid residents as a percent of total fell to 78.2%
from 87.3%.
The assisted living facilities and the Company's sole hospital had a combined
slight increase in census in the first 9 months of 1998 over the prior year.
Interest expense increased to $5,489,704 in the current period from $1,653,656
reported last year, due to an increase in the level of debt. Tax benefits
totaled $860,000 in the current year compared to $1,545,000 recorded last
year.
FINANCIAL IMPROVEMENT INITIATIVE
Subsequent to the end of the quarter, the Company initiated a comprehensive
program to improve its financial condition and operating efficiencies. The
first stage of this initiative involved a thorough review of administrative
functions, focusing on the consolidation of duties and the elimination of
unnecessary tasks. As a result of this review, a number of administrative
staff positions were determined to be in excess of the Company's needs and
were eliminated during the month of October. This first stage of the
initiative should produce an immediate improvement in the Company's financial
results in the December 1998 quarter.
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The second stage of the initiative will focus on all facilities, and will be
centered on two areas. Growth in census will be one focus, aimed mainly at
attracting Medicaid and Private Pay residents initially to build a revenue
base. Attracting Medicare residents under the new PPS program will follow, as
the Company considers itself to be well prepared to handle the added
complexities of this new program.
The second focus at the facility level will be on controlling costs. This
will be accomplished by establishing goals and standards at each facility
aimed at improving productivity and lowering unit costs. Regional personnel
already in place will constantly monitor the progress at their assigned
facilities and will take steps necessary to insure these goals and standards
are being met.
YEAR 2000 UPDATE
The Company has already completed a comprehensive review of the internal Year
2000 issues it needs to address. From this review, the Company has
established a timetable for the implementation of all necessary changes, and
it expects to be completed by the summer of 1999. The status of material
third party relationships on Year 2000 issues has also been addressed. These
relationships include the Company's main banking partner, the Health Care
Financing Administration (HCFA), Medicaid reimbursements from individual
states, and the outside payroll vendor.
In discussions with our main bank, the Company has been informed that four
stages of testing have already been completed. Furthermore, the Company was
assured that final stages of testing would be completed well in advance of
2000 in order to make any necessary corrections that could have a material
impact on our Company.
Concerning HCFA and Medicare reimbursements, the Company has received
information from a fiscal intermediary for the Medicare program that states
"HCFA has a program to systematically assess, renovate and test each mission
critical system in all its facilities, as well as those of each carrier and
intermediary by December 31, 1998. This target will have given HCFA a full
year to fix any problems that might have escaped detection during renovation
and testing. In addition, Medicare carriers and intermediaries will test
their electronic data interchanges with the hospital information system,
billing system, and billing service. This testing ensures that these systems
interface and work properly with no interruption in claims and payments
processing after the clock ticks at midnight on January 1, 2000."
As for Medicaid, the Company does not currently have detailed information on
the progress made on addressing Year 2000 issues, but it is known that work is
in process.
In discussions with the Company's outside payroll provider, the Company
received a comprehensive detailed listing of all applications and systems
currently being worked on. In addition, information received stated "We have
been addressing the challanges of the Y2K for the last several years and have
the technical, financial and human resources in place to successfully address
them."
Information on other entities which interact with the Company is not available
at this time, but it is felt that the four specifically identified above would
have more of a material adverse impact on the Company if issues related to
Year 2000 were not addressed successfully.
14
<PAGE>
<PAGE>
To date, the Company's review of the potential internal cost of addressing
Year 2000 issues will be immaterial. These costs will be expensed when
incurred and should not have an adverse impact on the Company's financial
condition.
No contingency plans have been established at this time should the Company or
material third party relationships fail to resolve Year 2000 issues by the end
of next year. These plans will have to be addressed in the near future.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Company had positive working capital of $1,351,805
versus a working capital deficit of $2,301,668 at December 31, 1997. During
the June 1997 quarter, the Company implemented a new $10 million line of
credit, with the available amount based on the balance of specific accounts
receivable. At September 30, 1998, the available amount was approximately $5
million, of which all was drawn. The term of the agreement is for three years
with an annual one year roll over feature.
During the nine months ended September 30, 1998, cash provided by operating
activities totaled $261,389 versus cash used in operations of $2,525,488 for
the nine months ended September 30, 1997. The primary reason for the increase
in cash provided by operating activities was the decrease in net loss for the
current nine months, increases in accounts payable and accrued expenses,
depreciation and amortization and provision for bad debts. These were offset
to a certain degree by increases in accounts receivable and other receivables
and provision for deferred taxes.
Cash used in investing activities totaled $22,375,807 for the nine months
ended September 30, 1998 versus cash used in investing activities of
$13,420,089 in 1997. The increase in investing activities was principally the
result of purchases of property and equipment, advances to related parties,
payments of deferred costs and an acquisition deposit.
Cash provided by financing activities during the nine months ended September
30, 1998 totaled $19,816,819 compared to cash provided by financing activities
of $12,769,207 for the nine months ended September 30, 1997. In the nine
months ended September 30, 1998 cash was provided by two private placement
transactions, a convertible debenture offering and a common stock offering,
which totaled $5,000,000 and $2,546,785 respectively. In addition, proceeds
from notes payable were $8,710,250 and an additional $2,080,216 was drawn on
the Company's line of credit. Repayment of long-term debt totaled $5,956,671.
During the nine months ended September 30, 1997, proceeds from long-term debt
were $32,569,300 and repayment of long-term debt totaled $21,256,251.
The Company believes that its long-term liquidity needs will generally be met
by improved cash flows from operations and it will be able to, when necessary,
obtain extensions of its current line of credit and/or secure other financing
from the private or public sector.
15
<PAGE>
<PAGE>
FACILITIES
Listed below are the facilities operated by the Company at September 30, 1998:
NUMBER OCCUPANCY
SKILLED NURSING FACILITIES LOCATION TYPE OF BEDS AT 9/30/98
- -------------------------- -------- ---- ------- ----------
Emory Nursing Home Georgia Owned 40 95.0%
Ft. Valley Nursing Home Georgia Owned 75 85.3
Rest Awhile Nursing Home Georgia Owned 72 76.4
Pecan Manor Nursing Home Georgia Owned 60 95.0
Whigham Nursing Center Georgia Leased 142 99.3
Windward Nursing Center Georgia Owned 100 91.0
Central Tampa Nursing Home Florida Owned 100 65.0
Dania Nursing Home Florida Owned 88 29.5
Oak Manor Nursing Home Florida Owned 180 84.4
Pasco Nursing Center Florida Owned 40 87.5
Suncoast Nursing Home Florida Owned 59 69.6
Venice Nursing Pavilion Florida Owned 120 73.3
Victoria Martin Nursing Home Florida Owned 38 80.6
Wakulla Manor Florida Owned 120 90.8
Dallas Nursing & Rehab Texas Managed 185 60.0
Leisure Lodge Texas Managed 70 57.1
Park Place Nursing Center Texas Owned 118 67.8
Rosewood Rehab & Care Texas Leased 100 89.0
Woodland Park Texas Leased 100 84.0
Wortham Nursing Center Texas Managed 95 24.2
Coffeyville Nursing Home Kansas Leased 45 57.8
Great Plains Rehab Kansas Owned 104 91.3
Salina Nursing Home Kansas Leased 60 53.3
Meadowood Nursing Home Mass. Managed 120 96.7
Elms Nursing Home Mass. Managed 60 67.1
Oak Manor Nursing Home Mass. Managed 60 90.0
Pine Manor Nursing Home Mass. Managed 92 66.3
----- -----
Totals 2,475 74.5%
NUMBER OCCUPANCY
ASSISTED LIVING FACILITIES LOCATION TYPE OF BEDS AT 9/30/98
- -------------------------- -------- ---- ------- ----------
Oak Manor Village Florida Owned 224 50.5%
Remington House-New Port Richie Florida Leased 124 75.2
Remington House-Pompano Beach Florida Managed 120 78.8
Remington House-Kingsport Tennessee Managed 50 28.0
Pine Valley Alabama Leased 110 98.0
----- -----
Totals 628 67.3%
NUMBER OCCUPANCY
HOSPITALS LOCATION TYPE OF BEDS AT 9/30/98
- --------- -------- ---- ------- ----------
Meadowbrook Rehab Kansas Owned 84 40.4%
Princeton Hospital Florida Managed 150 24.0
TriCity Hospital Texas Managed 131 48.0
----- -----
Totals 365 36.4%
16
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<PAGE>
IMPACT OF FEDERAL HEALTH CARE LEGISLATION
Legislative and regulatory action at the state and federal level, has resulted
in continuing changes in Medicare and Medicaid reimbursement programs. The
changes have limited payment increases under these programs. Also, the timing
of payments made under Medicare and Medicaid programs are subject to
regulatory action and governmental budgetary constraints. Within the statutory
framework of the Medicare and Medicaid programs, there are substantial areas
subject to administrative rulings and interpretations which may further affect
payments made under these programs. Further, the federal and state
governments may reduce the funds available under these programs in the future
or require more stringent utilization and quality review of health care
facilities.
17
<PAGE>
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. None.
ITEM 2. CHANGES IN SECURITIES. None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On July 9, 1998, the Company held an Annual Meeting of Shareholders at
which Ashok Dalal, Chris Brogdon, Dr. Kishor Karia, Harlan Mathews, Darrell C.
Tucker, Jeff M. Moore and Mark P. Clein were each elected to the Board of
Directors. In addition, the Company's shareholders ratified the appointment
of Laney, Boteler & Killinger. The following sets forth the votes cast for,
against or withheld, as well as the number of abstentions and broker non-
votes, as to each of the matters presented at the meeting:
ELECTION OF DIRECTORS:
NOMINEES FOR WITHHELD
-------- --- --------
Ashok Dalal 6,562,300 45,673
Chris Brogdon 6,562,520 45,453
Dr. Kishor Karia 6,574,336 33,637
Harlan Mathews 6,574,254 33,719
Darrell C. Tucker 6,562,520 45,453
Jeff M. Moore 6,574,508 33,465
Mark P. Clein 6,574,272 33,701
APPOINTMENT OF LANEY, BOTELER & KILLINGER:
FOR AGAINST ABSTENTIONS
--- ------- -----------
6,555,117 Shares 4,716 Shares 48,140 Shares
AMENDMENT TO AUTHORIZE PREFERRED STOCK:
FOR AGAINST ABSTENTIONS BROKER NON-VOTES
--- ------- ----------- ----------------
6,459,437 Shares 110,330 Shares 38,206 Shares -0- Shares
ITEM 5. OTHER INFORMATION. None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following exhibit has been filed with this report:
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K. None.
18
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
NEWCARE HEALTH CORPORATION
Date: November 13, 1998 By /s/ Darrell C. Tucker
Darrell C. Tucker, President
Date: November 13, 1998 By /s/ James H. Sanregret
James H. Sanregret
Chief Financial Officer
19
<PAGE>
<PAGE>
EXHIBIT INDEX
EXHIBIT METHOD OF FILING
- ------- ------------------------------
27. Financial Data Schedule Filed herewith electronically
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
balance sheets and statements of operations found on pages 3-4 of the
Company's Form 10-QSB for the year to date, and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1998
<CASH> 0
<SECURITIES> 11,802,120
<RECEIVABLES> 9,687,859
<ALLOWANCES> 0
<INVENTORY> 155,619
<CURRENT-ASSETS> 41,310,618
<PP&E> 50,122,037
<DEPRECIATION> 0
<TOTAL-ASSETS> 96,287,945
<CURRENT-LIABILITIES> 39,958,813
<BONDS> 0
<COMMON> 242,570
0
0
<OTHER-SE> 6,701,285
<TOTAL-LIABILITY-AND-EQUITY> 96,287,945
<SALES> 47,980,300
<TOTAL-REVENUES> 48,473,070
<CGS> 40,500,954
<TOTAL-COSTS> 40,500,954
<OTHER-EXPENSES> 14,808,584
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,489,704
<INCOME-PRETAX> (2,517,659)
<INCOME-TAX> 860,000
<INCOME-CONTINUING> (1,657,659)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,657,659)
<EPS-PRIMARY> (.14)
<EPS-DILUTED> (.14)
</TABLE>
