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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Amendment No. 2
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1933
For the fiscal year ended: December 31, 1997
Commission file number: 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 (I.R.S. Employer
incorporation or organization) Identification No.)
6000 Lake Forrest Drive, Suite 315, Atlanta, Georgia 30328
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(Address of principal executive offices, including zip code)
(404) 252-2923
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(Registrant's telephone number)
Securities Registered Pursuant to Section 12(b) of the Act: None.
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $.02 Par Value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the
preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
As of March 5, 1998, 12,039,193 shares of the Registrant's common stock were
outstanding, and the aggregate market value of the shares held by
non-affiliates was approximately $24,390,000.
DOCUMENTS INCORPORATED BY REFERENCE: None.
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PART I
ITEM 1. BUSINESS
THE COMPANY
NewCare Health Corporation (the "Company") provides senior residential
care services including long-term care and assisted living/independent living
services. The Company's long-term care facilities provide skilled nursing
care and ancillary services to patients, while its assisted living/independent
living facilities provide services to residents in need of varying degrees of
assistance with the activities of daily living.
Beginning in August 1997, the Company also entered the business of
operating and managing hospitals through NewCare Hospital Corporation
("NCHC"), a majority owned subsidiary. On August 1, 1997, NCHC purchased
substantially all of the assets of Meadowbrook Rehabilitation Hospital in
Gardner, Kansas. NCHC also manages two not for profit hospitals for which it
holds options to purchase.
As of March 19, 1998, the Company owned or leased and operated 14
long-term care facilities with 1,467 skilled nursing beds, and two assisted
living/independent living facilities with 348 units. These facilities are
located in Georgia, Florida and Texas. As of that date, the Company also
managed four long-term care facilities in Massachusetts and three long-term
care facilities in Texas which it is in the process of purchasing or leasing.
On the same date, NCHC owned 84 hospital beds and managed two hospitals as
previously stated.
The Company's principal offices are located at 6000 Lake Forrest Drive,
Suite 315, Atlanta, Georgia 30328, and its telephone number is (404) 252-2923.
BACKGROUND
The Company was incorporated in Nevada on February 17, 1987, under the
name Camelback Capital, Inc. primarily for the purpose of raising capital and
acquiring or merging with a private business. The Company completed its
initial public offering on December 31, 1987. During the period from 1988
until 1993, the Company conducted minimal business activities, and during
1993, the Company terminated all business activity except for the search for a
private company to acquire or merge with.
ACQUISITION OF NEWCARE, INC.
In April 1994, the Company acquired 95.17% of the issued and outstanding
common stock of NewCare, Inc. ("NewCare"). NewCare was engaged in the
business of owning, managing and operating skilled long-term care facilities.
In connection with the transaction with NewCare, the Company amended its
Articles of Incorporation to (1) effect a one for twenty (1 for 20) reverse
stock split, (2) adjust the par value of the Common Stock to $.02 per share to
reflect the reverse stock split, and (3) change the name of the Company to
NewCare Health Corporation. All financial information and share data in this
Report give retroactive effect to the reverse split.
Unless the context otherwise requires, the term "Company" as used herein
refers to the Company and its subsidiaries.
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ACQUISITION AND SUBSEQUENT DISPOSITION OF SPECTRUM HEALTH SERVICES, INC.
On September 1, 1994, the Company acquired all of the outstanding common
shares of Spectrum Health Services, Inc.("Spectrum"). Spectrum sold medical
supplies and equipment, enteral products, wound care medication and kits,
respiratory therapy equipment and supplies, and orthopedic rehabilitation
supplies. It also provided services for billing, medical records computer
software, assessments software, referenced care plans, inventory supply
systems as well as providing educational programs, in-servicing and other
procedures in nursing, consulting and care plans. Spectrum had operations in
Florida, Georgia, Kansas and Texas.
On September 1, 1994, the Company also acquired all of the outstanding
shares of Spectrum Infusion Services, Inc. Spectrum Infusion Services, Inc.
was then merged into Spectrum. The Spectrum Infusion Services division
provided specialized products to long-term care facilities for patients that
require prescriptions for dispensing by pharmacists. The Spectrum Infusion
Services division provided products, equipment and disposable supplies
required for IV antibiotic hydration, pain management and chemotherapies.
These supplies and services were provided to long-term care facilities that in
turn dispensed them to the patients.
On October 24, 1996, the Company sold all of the operating assets of
Spectrum for cash and the assumption of certain debts to NCS Healthcare of
Florida, Inc. ("NCS"). The consideration paid by NCS was approximately
$10,167,000. Of this amount, $7,795,000 was paid in cash, $680,000 was held
in escrow pending the outcome of inventory, accounts receivable, and certain
other adjustments and approximately $1,841,000 was in the form of liabilities
assumed by NCS. In connection with the transaction, the Company paid
approximately $531,000 of the cash proceeds to retire certain Spectrum
obligations and borrowings that were not assumed by NCS and to pay certain
costs of the transaction.
ACQUISITION OF CIMERRON HEALTH CARE, INC.
On May 22, 1995, the Company acquired all of the outstanding shares of
Cimerron Health Care, Inc. ("Cimerron") from Karen Hagan. Cimerron leases one
(1) and owns three (3) skilled long-term care facilities in Georgia. In a
related agreement, Memorial Nursing Center, Inc., a subsidiary of NewCare,
acquired a skilled long-term care facility lease from Emory Nursing Center,
Inc., an affiliate of Cimerron also owned by Karen Hagan. The aggregate
number of skilled long-term care beds involved in the acquisition of the five
(5) skilled long-term care 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 long-term care facility located in Tampa,
Florida. This facility is operated as the Central Tampa Nursing Home. In May
1997, the Company purchased this facility for $2,672,543. This purchase was
financed in the Company's $21.5 million loan transaction which closed during
May 1997.
ACQUISITION OF LONG-TERM CARE AND ASSISTED LIVING/INDEPENDENT LIVING
FACILITIES IN 1997
In May 1997, the Company entered into a lease of the Whigham Nursing
Center, a 142-bed long-term care facility in Whigham, Georgia. The current
lease on this facility expires on April 20, 2012.
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On September 16, 1997, the Company purchased all of the outstanding
stock of Wakulla Acquisition, Inc., which owns a 120-bed long-term care
facility in Crawfordville, Florida, for $1,200,000 in cash. In addition, the
Company assumed and paid off approximately $3,240,000 of existing debt on the
property. The Company financed this transaction through a loan of $4.8
million from LTC Properties, Inc. The loan is secured by a mortgage on the
long-term care facility and is due on September 1, 2007. The loan bears
interest at an initial rate of 10.83% per annum, which interest rate will
increase by 12.5 Basis Points on the first day of September of each calendar
year commencing on September 1, 1998. The loan is payable in monthly
installments of interest and principal based on a 25 year amortization
schedule with a balloon payment due on September 1, 2007. The Company paid
LTC Properties, Inc. a loan fee of $48,000 in connection with this
transaction.
In November, 1997, the Company purchased all of the outstanding stock of
Tyler Park Place, Inc., which is the general partner of Park Place Ltd., a
limited partnership, which owns an 118-bed long-term care facility in Tyler,
Texas. Tyler Park Place, Inc. owns a 58.8% interest in Park Place Ltd. The
Company paid $575,000 for all of the stock of Tyler Park Place, Inc., of which
$475,000 was paid in cash and $100,000 was in the form of a promissory note.
COMMENCEMENT OF HOSPITAL OPERATIONS IN 1997
On August 1, 1997, the Company's NCHC subsidiary purchased substantially
all of the operating assets such as furniture, equipment and inventory of the
Meadowbrook Rehabilitation Hospital located in Gardner, Kansas. The purchase
price of this acquisition was approximately $1,396,000. Also on August 1,
1997, in a separate transaction, the subsidiary acquired the building and land
where the Meadowbrook Rehabilitation Hospital is located for $3,500,000.
NCHC financed these transactions through a loan of $4.5 million from
HCFP Funding II, Inc., and approximately $396,000 from cash on hand. The loan
is in the form of a secured bridge note which is due on July 31, 1999. The
note bears interest at 3% over the prime rate and the interest is payable
monthly. NCHC paid the lender an origination fee of 1% of the loan ($45,000)
and will also pay the lender a success fee equal to the greater of (i) 10% of
the excess received from the sale, refinancing or other disposition of the
Meadowbrook Rehabilitation Hospital over $5 million, or (ii) $150,000 if the
disposition occurs within one year or $300,000 if the disposition occurs after
that time. The note is secured by all of the real estate and assets of the
hospital.
The Meadowbrook Rehabilitation Hospital is an 84-bed speciality hospital
located in Gardner, Kansas, approximately 20 miles southwest of Kansas City,
Kansas. The facility focuses its care on acute and subacute rehabilitation
therapy, occupational therapy, speech-language pathology and respiratory
therapy.
On September 30, 1997, NCHC entered into agreements to manage Tri-City
Hospital, a 131-bed osteopathic acute care hospital located in Dallas, Texas,
and Princeton Hospital, a 150-bed hospital in Orlando, Florida. Tri-City
Hospital is a private, non-profit hospital comprised of a general acute
medical/surgical hospital, offering alcohol and drug treatment services,
psychiatric services, and various clinics. Princeton Hospital is a private,
non-profit general acute/medical surgical hospital.
In addition, NCHC paid $25,000 for a five year option to purchase the
Tri-City Hospital for a price equal to the debt on the hospital at such time
as the option is exercised. The balance of this debt is currently
approximately $18.2 million of which the Company owns $9.1 million.
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The management agreement for Tri-City Hospital has a five year term
commencing October 17, 1997, and either party may terminate the agreement
without cause or penalty, effective September 30, 2000, by giving 90 days
prior written notice. The agreement provides for a base fee of $100,000 per
month plus a performance incentive in an amount not to exceed a cumulative
total of four percent (4%) of net revenues billed per month. The performance
incentive will be based on the accomplishment of certain performance criteria
to be agreed upon by the parties. NCHC also paid $25,000 for a five year
option to purchase the Princeton Hospital for a price equal to the debt on the
hospital at such time as the option is exercised. The balance of this debt is
currently approximately $45 million.
NCHC also agreed to make available to Tri-City Hospital during the first
twelve months of the management agreement an amount not to exceed $2 million
for the purpose of making capital improvement expenditures and for such other
purposes as the hospital and NCHC may agree. The repayment of principal and
interest on this loan will be subordinate to the payment of principal and
interest on any tax exempt debt of the hospital then outstanding.
In March 1998, the Board of Directors of Tri-City Hospital advised NCHC
that the management agreement was void or had been terminated. Tri-City
Hospital has also taken the position that the option is not valid. Due to the
actions taken, NCHC is not presently able to manage this hospital. NCHC has
filed a lawsuit against Tri-City Hospital in connection with this matter.
(See "ITEM 3 - LEGAL PROCEEDINGS.")
The management agreement for Princeton Hospital has a five year term
commencing October 1, 1997, and either party may terminate the agreement
without cause or penalty, effective September 30, 2000, by giving 90 days
prior written notice. The agreement provides for a base fee of $75,000 per
month plus a performance incentive in an amount not to exceed a cumulative
total of three percent (3%) of net revenues billed per month. The performance
incentive will be based on the accomplishment of certain performance criteria
to be agreed upon by the parties.
NCHC has agreed to loan to Princeton Hospital during the term of the
management agreement an amount not to exceed $2 million for the purpose of
making capital improvement expenditures and paying its accounts payable,
payroll and other operating expenses. The repayment of principal and interest
on this loan will be subordinate to the payment of principal and interest on
any tax exempt or taxable bond debt of the hospital then outstanding. In
November 1997, the Company also agreed to guarantee a $2 million loan to
Princeton Hospital.
In addition, NCHC has agreed to guarantee payment in an aggregate amount
not to exceed $4,100,000 of the interest payments due in January 1998 and July
1998 by Princeton Hospital on its existing tax exempt bond debt and due in
October 1997 and January, April and July 1998 by the hospital on its taxable
bonds. Any funds advanced by NCHC pursuant to this obligation will be added
to and increase the maximum amount of the capital improvement/working capital
loan described above.
NCHC is obligated to provide each hospital a hospital administrator and
a controller during the term of the agreements, and such persons will be
employees of NCHC. The hospitals will reimburse NCHC for the costs and
expenses associated with NCHC's provision of these key personnel.
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FACILITY ACQUISITIONS IN 1998
In January 1998, the Company acquired a 124-unit assisted living
facility in New Port Richey, Florida. The purchase price for this facility
was $5.9 million and was financed through a sale and leaseback transaction
with LTC Properties, Inc. The Company's lease on this facility is initially
through December 31, 2012. The Company has options to extend the lease for
two additional five year periods. The Company has no option to repurchase the
property from LTC Properties, Inc.
In January 1998, the Company also closed on the acquisition of Venice
South, a 120-bed long-term care facility in Venice, Florida. The Company
purchased this facility for $4,790,000 in a bankruptcy proceeding. The
purchase price was paid with $3,000,000 from a bridge note from HCFP Funding
II, Inc., which is secured by the property and $1,790,000 from cash on hand.
The bridge note bears interest at 4% over the prime rate and is due on April
27, 1998. The Company also paid the lender a $45,000 loan commitment fee.
The Company intends to refinance this bridge note with a long-term loan from
LTC Properties, Inc. in the amount of $4,800,000 which would be amortized over
20 years, although there is no assurance that such a loan can be negotiated.
In February 1998, the Company entered into agreements under which the
Company agreed to take over the rights and obligations of the lessees of five
long-term care facilities in Texas. The Company is paying approximately
$450,000 for the assignment of these leases. The Company's acquisition of
these leases is contingent on the approval of the State of Texas licensing
authorities. During the interim, the Company is managing three of these
facilities. The names, locations and other information concerning these
leases are set forth below:
NUMBER LEASE OPTION EXTEN-
NAME LOCATION OF BEDS EXPIRATION SIONS AVAILABLE
---- -------- ------- ---------- ----------------
Dallas Health Dallas, TX 185 2/28/11 Two five-year options
Care
Shepherd Nurs- Shepherd, TX 100 5/31/17 None
ing Center
Converse Nurs- Converse, TX 100 5/31/17 None
ing Center
Wortham Health Worthham, TX 84 8/31/02 Two five-year options
Care
Junction Nurs- Junction, TX 62 12/31/03 None
ing Care
Also in January 1998, the Company entered into an agreement to purchase
four long-term care facilities in Massachusetts in a bankruptcy proceeding for
$6,750,000 plus the cost of the outstanding bond debt on three of the
facilities. During February 1998, the Company paid $1,740,633 for all of the
outstanding bonds on these three facilities. The Company expects that this
purchase will be financed by a loan from HCFP Funding, however, no binding
agreement regarding the funding has been reached. HCFP Funding has deposited
the $6,750,000 in an escrow account under the jurisdiction of the bankruptcy
court, however, HCFP Funding has the option to withdraw the funds. The
acquisition of these long-term care facilities is contingent on the approval
of the State of Massachusetts licensing
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authorities which is expected in the second quarter of 1998 and the approval
of the bankruptcy trustee. During the interim, the Company is managing these
four long-term care facilities. Information concerning these long-term care
facilities is summarized below:
NAME OF FACILITY LOCATION NUMBER OF BEDS
---------------- -------- --------------
Meadowood Health Care South Hadley, MA 120
Summerfield Elms Manor Chicopee, MA 60
Summerfield Pine Manor Springfield, MA 92
Summerfield Oak Manor Holyoke, MA 60
Effective April 1, 1998, the Company began leasing the Pecan Manor
Nursing Home, a 60-bed long-term care facility in Statesboro, Georgia. The
Company also has an agreement to purchase this facility for $1,800,000 to
$2,000,000 (depending on the results of an independent appraisal), and expects
to close on this purchase on April 15, 1998. In the event that the purchase
agreement is terminated for any reason, the lease will end 30 days after such
termination.
PROPOSED CORPORATE ACQUISITIONS
In December 1997, the Company announced that it had agreed to acquire
Renaissance Senior Living, Inc., which is partially owned by the Company's
Chairman of the Board, for $2 million plus the assumption of debt. There is
no written agreement concerning this proposed acquisition which would be
subject to the approval of the Company's shareholders. Renaissance Senior
Living, Inc. currently owns a 100-unit assisted living facility in Florida and
a 50-unit assisted living facility in Tennessee, which is under construction.
Renaissance Senior Living, Inc. has also started construction of a 233-unit
assisted living/independent living / long-term care facility in Conyers,
Georgia.
In December 1997, the Company also announced that it had agreed to
acquire IATROS Health Network, Inc., a Nasdaq listed company, for
approximately $17 million in the Company's Common Stock. There is presently
no written agreement concerning this acquisition and the terms are still
being negotiated. The acquisition will be subject to the execution of a
definitive agreement and shareholder approval. IATROS owns, leases or manages
11 facilities in the New England market with 1997 consolidated revenues
approximating $31 million. IATROS also provides pharmacy and rehabilitation
therapy services, and operates a medical supply and durable medical equipment
company with 1997 combined ancillary revenues annualized at $12 million. In
connection with its negotiations with IATROS, the Company has purchased from
IATROS twenty percent of its shares outstanding for a total of $1 million.
LONG-TERM CARE FACILITY AND ASSISTED LIVING/INDEPENDENT LIVING FACILITY
OPERATIONS
As of March 19, 1998, the Company owned or leased and operated 14
long-term care facilities with 1,467 skilled long-term care beds, and two
assisted living/independent living facilities with 348 units. These
facilities are located in Georgia, Florida and Texas.
The Company's long-term care facilities provide both routine and
ancillary services. Routine services such as room and board and basic nursing
care services are provided in the skilled long-term care facilities and the
assisted living/independent living facilities. Certain of the Company's
long-term care facilities also provide specialty services such as HIV care,
Alzheimer's disease units, wound care, subacute care, and stroke and accident
rehabilitation. The Company provides a full range of occupational, physical,
speech and respiratory
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therapy in its long-term care facilities. The Company derives most of its
revenue for ancillary services from Medicare reimbursement. See
"--Regulation; Medicaid and Medicare" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
The average occupancy level, based on licensed beds, for the Company's
skilled long-term care facilities during the years ended December 31, 1997,
1996 and 1995 was 85.7%, 89.4% and 91.2%, respectively. The Company's
long-term care facility revenues, exclusive of assisted living, medical supply
and pharmaceutical revenues, are divided into the following classes for payor
mix:
YEARS ENDED DECEMBER 31,
1997 1996 1995
----------------------------
Medicaid 65% 76% 69%
Medicare 14% 10% 10%
Private Pay 18% 11% 18%
HMO 1% 1% 1%
Hospice 1% 1% 1%
Other Payors 1% 1% 1%
---- ---- ----
100% 100% 100%
For the year ended December 31, 1997, the Company received 79% of its
long-term care facility revenues from Medicaid and Medicare, compared to 86%
and 79% for 1996 and 1995, respectively. Future changes in programs could
possibly have a negative impact on the Company's operations and ultimately can
affect the Company's profitability.
LONG-TERM CARE FACILITY AND ASSISTED LIVING/INDEPENDENT LIVING STRATEGY
The Company's strategy is to increase the number of long-term care and
assisted living/independent living facilities that it operates primarily by
(i) acquiring by purchase or lease independently-owned long-term care
facilities and assisted/independent living facilities located in the United
States and secondarily by (ii) developing assisted/independent living centers
adjacent or complementary to its existing facilities. Key elements of this
strategy include: (i) acquiring and developing additional long-term care and
assisted/independent living facilities; (ii) increasing facility occupancy
rates; (iii) improving the payor mix at the Company's long-term care
facilities; and (iv) achieving operating efficiencies.
ACQUIRE AND DEVELOP FACILITIES. The Company intends to acquire and
develop additional long-term care facilities and assisted/independent living
facilities in its existing markets and contiguous areas. Management believes
that such expansion will allow the Company to take better advantage of its
existing expertise and organizational resources and improve margins by
reducing overhead costs. As a result of the growing complexity of regulatory
requirements and the continued pressure on reimbursement rates, the Company
believes that other smaller, independent providers may be more willing to
consider selling or leasing their facilities on terms acceptable to the
Company. The Company believes it is well positioned to make acquisitions
because of its reputation and established geographic presence. In addition,
the Company intends to offer a broad range of senior residential care
services. Towards that end, the Company has recently implemented a strategy
to develop assisted living centers adjacent to its long-term care facilities
or independent living centers, thereby creating senior residential care
campuses which offer a greater variety of senior residential care services in
one location. The Company presently has one senior residential care campus.
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In evaluating an existing facility for acquisition, the Company primarily
considers the facility's historical occupancy rates and payor mix, reputation
and compliance history, physical condition and appearance, labor force
stability, the availability of financing on acceptable terms and, in the case
of assisted/independent living facilities, the demographics of the surrounding
area. In evaluating a development project, the Company primarily considers
the strength of the market demand for the senior residential care services.
Upon the acquisition of a facility, the Company implements its management
information and control systems and provides capital for necessary physical
plant improvements to enable its professionals to increase occupancy and
attain the Company's standards for quality of care. The Company's strategy
with respect to its long-term care facilities is to seek Medicare
certification while simultaneously marketing the facility to attract more
Medicare and private pay residents. The Company believes that with effective
cost controls, the Company's facilities can continue to be profitable with a
highly concentrated Medicaid payor mix.
INCREASE FACILITY OCCUPANCY RATES. The Company believes its occupancy
rates in existing assisted/independent living centers should increase
primarily due to three factors: (i) an enhanced emphasis on facility-specific
marketing efforts; (ii) the continued growth of the elderly segment of the
population in the Company's markets; and (iii) the limited supply of long-term
care beds and assisted/independent living units. Increasing occupancy rates
will allow the Company to further reduce its fixed costs per patient day.
IMPROVE PAYOR MIX. The Company intends to improve its payor mix at its
long-term care facilities by making capital improvements which management
believes are necessary to attract more private pay residents, by aggressively
marketing such facilities to prospective private pay residents and by seeking
Medicare certification for newly acquired facilities. The Company has
recently implemented a strategy to develop assisted living centers adjacent to
its long-term care facilities or independent living centers, thereby creating
a senior residential care campus which offers a greater variety of senior
residential care services in one location. Management believes that providing
a "continuum of care" to its residents enhances the marketing efforts of its
assisted/independent living centers and that these centers should provide a
referral source to the other facilities on the same campus. The Company also
has intensified efforts to provide the full range of Medicare services to
eligible patients and is increasingly concentrating its marketing efforts on
private third party payors, such as managed care and insurance companies, as
well as hospital discharge planners, thereby developing referral sources for
both its long-term care and assisted/independent living centers.
LONG-TERM CARE SERVICES. Basic resident services are those traditionally
provided to elderly patients in long-term care facilities with respect to
daily living activities and general medical needs. The Company provides in
all of its facilities room and board, 24-hour skilled nursing care by
registered nurses, licenced practical nurses and certified nursing aides, and
a broad range of support services, including dietary services, therapeutic
recreational activities, social services, housekeeping and laundry services,
pharmaceutical and medical supplies, physical, speech, occupational and
respiratory therapy, wound care and other ancillary services.
ASSISTED LIVING SERVICES. The Company's assisted living centers are
designed to assist those persons generally 75 years of age or over who may
require assistance with any of the five basic activities of daily life (i.e.,
bathing, dressing, eating, walking and toileting). The Company assesses
incoming residents and develops an individualized care plan based on their
acuity level.
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The Company reassesses each of its residents on a regular basis to determine
if they require additional care. Each of the Company's assisted living
facilities offers its residents with private or semi-private accommodations,
ongoing health assessments, three meals per day and snacks approved by a
registered dietician, as well as 24-hour assistance with activities or daily
life, housekeeping service, linen and personal laundry service, organized
social activities and transportation. The Company's assisted living services
are provided in freestanding assisted living centers and in certain units in
each of the Company's independent living centers.
INDEPENDENT LIVING SERVICES. The Company's independent living centers
offer independent living to seniors. Each center offers a standard package of
services that typically include meal service, laundry and linen service,
housekeeping, organized social activities and transportation. In addition,
each of the Company's independent living facilities offers a menu of
separately priced additional services available at the option of the resident.
HOSPITAL OPERATIONS
NCHC currently owns one hospital with 84 beds and provides management
services to two hospitals with a total of 281 beds. NCHC also holds options
to purchase the two hospitals that it manages.
In operating or managing hospitals, NCHC implements policies and
procedures to improve each hospital's operating and financial performance.
NCHC implements an operating plan designed to reduce costs by improving
operating efficiency and increasing revenue through the expansion of the
breadth of services offered by the hospitals and the recruitment of physicians
to the community. Management believes that the long-term growth potential of
a hospital is dependent on the ability to add appropriate health care services
and effectively recruit physicians.
Each hospital management team is comprised of a hospital administrator
and controller. The Company believes that the quality of the local management
team at each hospital is critical to the hospital's success, because the
management team is responsible for implementing the elements of the operating
plan. The operating plan is developed by the local management team in
conjunction with NCHC's senior management team and sets forth revenue
enhancement strategies and specific expense benchmarks.
While the local management team is responsible for the day-to-day
operations of the hospitals, NCHC's corporate staff provides support services
to each hospital, including physician recruiting, corporate compliance,
reimbursement advice, human resources, accounting, cash management and other
finance activities, tax and insurance support. Financial controls are
maintained through utilization of standardized policies and procedures.
To achieve the operating efficiencies set forth in the operating plan,
NCHC (i) evaluates existing hospital management; (ii) adjusts staffing levels
according to patient volumes using best demonstrated practices by each
department; and (iii) capitalizes on purchasing efficiencies and renegotiates
certain vendor contracts. NCHC also enforces strict protocols for compliance
with the Company's supply contracts.
The average occupancy level, based on licensed beds, for the Company's
one owned hospital during the year ended December 31, 1997, was 24%. The
Company's hospital revenues are divided into the following classes for payor
mix:
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YEAR ENDED DECEMBER 31, 1997
----------------------------
Medicaid 1%
Medicare 63%
Private Pay 20%
Private Insurance 16%
----
100%
For the year ended December 31, 1997, the Company received 64% of its
revenues from Medicaid and Medicare from its one hospital. Future changes in
programs could possibly have a negative impact on the Company's operations and
ultimately can affect the Company's profitability.
REGULATION; MEDICAID AND MEDICARE
STATE AND LOCAL REGULATION
The Company's long-term care facilities and hospitals are subject to
compliance with various state and local health care statutes and regulations.
In order to maintain such licenses, the facilities must meet certain statutory
and administrative requirements. These requirements relate to the condition
of the facilities and the adequacy and condition of the equipment used
therein, the quality and adequacy of personnel and the quality of medical
care. Such requirements are subject to change.
Long-term care facilities are licensed in their respective state to
provide residential health and medical services to patients requiring
long-term care including the following minimum services: 24-hour nursing
care; personal or custodial care as needed; both routine and emergency
physician services; and access to dental, recreational, rehabilitative and
social work services.
Compliance with state licensing requirements imposed upon all health
care facilities is a prerequisite for the operation of the facilities and for
participation in government-sponsored health care funding programs such as
Medicaid and Medicare.
Some states require approval for construction and expansion of health
care facilities, including findings of need for additional or expanded heath
care facilities or services. Certificates of Need ("CON's"), which are issued
by governmental agencies with jurisdiction over health care facilities, are at
times required for capital expenditures exceeding a prescribed amount, changes
in bed capacity or services and certain other matters. The Company is unable
to predict whether it will be able to obtain any CON that may be necessary to
accomplish its business objectives in any jurisdiction where such CON's are
required.
MEDICAID AND MEDICARE PROGRAMS; RELATED REGULATION
Medicaid is a state-administered program financed by state and matching
federal funds. The program provides for federal assistance to the indigent
and certain other eligible persons. Although administered under broad federal
regulations, states are given flexibility to construct programs and payment
methods consistent with their individual goals. The current Georgia, Florida,
Texas, Massachusetts and Kansas Medicaid reimbursement plans are prospective
systems of reimbursement. Under a prospective system, per diem rates are
established based on cost of services provided for a prior year, and are
adjusted to reflect such factors as inflation.
11
<PAGE>
Medicare is a federally-administered and financed program which provides
health insurance protection to qualified individuals over the age of 65 and
the chronically disabled. This program has been a retrospective reimbursement
system that is based on a prior period's cost report filed with a Medicare
intermediary. In 1997, Congress passed the Balance Budget Act of 1997 ("BBA")
which provides for a phase-in of a prospective payment system ("PPS") for
skilled nursing facilities over a four year period, effective for the Company
in January 1999. Under PPS, Medicare will pay skilled nursing facilities a
fixed fee per patient day based on the acuity level of the patient to cover
all post-hospital extended care routine service costs, including ancillary and
capital related costs for beneficiaries receiving skilled services. The per
diem rate will also cover substantially all items and services furnished
during a covered stay for which reimbursement was formerly made separately
under Medicare. During the phase-in, payments will be based on a blend of the
facility's historical costs and a federally established per diem rate. Since
the federally established per diem rates have not been finalized, it is
unclear what the impact of PPS will be on the Company.
Effective October 1, 1990 the Omnibus Budget Reconciliation Act of 1987
("OBRA") eliminated the different certification standards for "skilled" and
"intermediate care" nursing facilities under Medicaid and Medicare programs in
favor of a single "nursing facility" standard. This standard has required the
Company to have at least one registered nurse on each shift and has increased
training requirements for nurses' aides by requiring a minimum number of
training hours and a certification test before a nurses' aide can commence
work. States also must certify that nursing facilities provide skilled care
in order to obtain Medicare reimbursement. OBRA has also increased the
enforcement powers of state and federal certification agencies. Additional
sanctions have been authorized including fines, temporary suspension of
admission of new patients to nursing facilities, decertification from
participation in the Medicaid or Medicare programs and, in extreme
circumstances, revocation of a nursing facility's license.
The Medicaid and Medicare programs provide criminal penalties for
entities that knowingly and willfully offer, pay, solicit or receive
remuneration in order to induce business that is reimbursed under these
programs. The illegal remuneration provisions of the Social Security Act,
also known as the anti-kickback statute, prohibit remuneration intended to
induce the purchasing, leasing, ordering, or arranging for any good, facility,
service or item paid by Medicaid or Medicare programs.
There is increasing scrutiny by law enforcement authorities, the Office
of Inspector General ("OIG") of the Department of Health and Human Services
("HHS"), the courts, and Congress of arrangements between health care
providers and potential referral sources to ensure that the arrangements are
not designed as a mechanism to exchange remuneration for patient care
referrals and opportunities. Investigators have also demonstrated a
willingness to look behind the formalities of a business transaction to
determine the underlying purpose of payments between health care providers and
potential referral sources. Enforcement actions have increased, as evidenced
by recent highly publicized enforcement investigations of certain hospital
activities. Although, to its knowledge, the Company is not currently the
subject of any investigation which is likely to have a material adverse effect
on its business, financial condition or results of operations, there can be no
assurance that the Company and its hospitals will not be the subject of
investigations or inquiries in the future.
The Social Security Act also imposes criminal and civil penalties for
making false claims to the Medicaid and Medicare programs for services not
12
<PAGE>
rendered or for misrepresenting actual services rendered in order to obtain
higher reimbursement. The Medicare program has published certain "Safe
Harbor" regulations which describe various criteria and guidelines for
transactions which are deemed to be in compliance with the anti-remuneration
provisions. Although the Company has contractual arrangements with some
health care providers, management believes it is in compliance with the
anti-kickback statute and other provisions of the Social Security Act and with
the state statutes. However, there can be no assurance that government
officials responsible for enforcing these statutes will not assert that the
Company or certain transactions in which it is involved are in violation of
these statutes.
The Company derives a significant portion of its revenue from these
programs, particularly with respect to ancillary services. With respect to
Medicaid, reimbursement rates are determined by the appropriate administrative
state agency based on the cost report filed by each individual nursing
facility. Changes in the reimbursement policies of the Medicaid and Medicare
programs as a result of legislative and regulatory actions by federal and
state governments could adversely affect the revenues of the Company.
Governmental funding for health care programs is subject to statutory and
regulatory changes, administrative rulings, interpretations of policy,
intermediary determinations and governmental funding restrictions, all of
which may materially increase or decrease program reimbursement to health care
facilities. Congress has consistently attempted to curb the growth of federal
spending on such programs. Recent actions include limitations on payments to
hospitals and nursing facilities under the Medicaid and Medicare programs,
limitations on payments for physicians' services and elimination of funding
for health planning agencies. No assurance can be given that the future
funding of Medicaid and Medicare programs will remain at levels comparable to
the present levels.
HEALTH CARE REFORM
The Clinton Administration and various federal legislators have
introduced health care reform proposals, which are intended to control health
care costs and to improve access to medical services for uninsured
individuals. These proposals include proposed cutbacks to the Medicare and
Medicaid programs and steps to permit greater flexibility in the
administration of Medicaid. Changes in reimbursement levels under Medicare or
Medicaid and changes in applicable governmental regulations could
significantly affect the Company's results of operations. While no federal
legislation regarding health care reform was enacted in the calendar year
1997, it is uncertain at this time what legislation on health care reform will
ultimately be enacted or whether other changes in the administration or
interpretation of governmental health care programs will occur. There can be
no assurance that future health care legislation or other changes in the
administration or interpretation of governmental health care programs will not
have an adverse effect on the results of operations of the Company.
COMPLIANCE WITH ENVIRONMENTAL LAWS
The Company's health care operations generate medical waste that must be
disposed of in compliance with federal, state and local environmental laws,
rules and regulations. The Company's operations, as well as the Company's
purchases and sales of facilities, are also subject to various other
environmental laws, rules and regulations. The Company believes that it is in
material compliance with applicable environmental laws and regulations.
Management believes that there are not any material environmental
contingencies.
13
<PAGE>
EMPLOYEES
At December 31, 1997, the Company and its subsidiaries employed
approximately 1,350 people, of which approximately 1,125 are employed on a
full time basis. This includes 26 full time and two part time employees who
work at the Company's headquarters.
The employees at two of the Company's long-term care facilities are
represented by collective bargaining units. The employees at the Whigham
Nursing Home, which totaled approximately 90 at December 31, 1997, are
represented by the United Food and Commercial Workers Union under a contract
which expires July 1, 2000. The employees at the Dania Nursing Home, which
totaled approximately 50 at December 31, 1997, are represented by South
Florida Council, UNITE, AFL-CIO, under a contract which expires June 3, 2000.
INSURANCE
Providing health care services entails an inherent risk of liability.
The Company maintains liability insurance providing coverage which it believes
to be adequate. In addition, the Company maintains property, business
interruption and workers' compensation insurance covering all facilities in
amounts deemed adequate by the Company. The Company carries malpractice
insurance coverage for each of the facilities that it owns, operates or
manages in the amount of $1 million per incident per facility and $3 million
annual aggregate per facility. The Company also carries an umbrella excess
liability insurance policy which has a $5 million per incident limit with an
aggregate limit of $5 million. There can be no assurance that any future
claims will not exceed applicable insurance coverage or that the Company will
be able to continue its present insurance coverage on satisfactory terms, if
at all.
ITEM 2. PROPERTIES
The Company currently occupies approximately 2,481 square feet of office
space for its corporate offices at 6000 Lake Forrest Drive, Suite 315,
Atlanta, Georgia. From April 1997 through December 1997, this space was
provided by Renaissance Senior Living, Inc., which in turn is leasing the
space from an unaffiliated party pursuant to a lease which expires in April
2002 and currently requires base monthly lease payments of approximately
$3,473. Effective January 1, 1998, this lease was assigned to the Company and
the Company has paid the lease payments since that date. The Company believes
that these facilities are suitable and adequate to meet its present and
anticipated needs.
The Company believes that all facilities owned and leased by the Company
and its subsidiaries are adequately insured. The following table sets forth
certain information relating to the Company's facilities as of March 19, 1998:
14
<PAGE>
NUMBER OCCUPANCY
LEASED/ OF BEDS AS OF
NAME LOCATION OWNED OR UNITS 3/19/98
---- -------- ------- -------- ---------
LONG-TERM CARE FACILITIES:
1. Central Tampa Tampa, Florida Owned 100 70.0%
Nursing Home
2. Dania Nursing Dania, Florida Owned 88 83.0%
Home
3. Oak Manor Largo, Florida Owned 180 88.9%
Nursing Home
4. Suncoast St. Petersburg, Owned 59 72.9%
Nursing Home Florida
5. Victoria Martin St. Petersburg, Owned 38 78.9%
Nursing Home Florida
6. Wakulla Manor Crawfordville, Owned 120 96.7%
Nursing Home Florida
7. Venice Nursing Venice, Florida Owned 120 35.0%
Pavillion
8. Emory Nursing Atlanta, Georgia Owned 40 92.5%
Home
9. Fitzgerald Fitzgerald, Owned 167 72.5%
Nursing Home Georgia
10. Ft. Valley Fort Valley, Owned 75 89.3%
Nursing Home Georgia
11. Pleasant View Metter, Georgia Leased 120 88.3%
Nursing Center
12. Whigham Nursing Whigham, Georgia Leased 142 95.1%
Center
13. Winward Nursing Flowery Branch, Owned 100 88.0%
Center Georgia
14. Tyler Park Place Tyler, Texas 58% Owned 118 73.7%
Nursing Home -----
Total 1,467
ASSISTED LIVING/INDEPENDENT LIVING CENTERS:
1. Oak Manor Villas Largo, Florida Owned 224 33.5%
Retirement Center
2. New Port Inn New Port Richey, Leased 124 81.8%
Florida ---
Total 348
15
<PAGE>
HOSPITAL:
1. Meadowbrook Gardner, Kansas Owned 84 26.2%
Rehabilitation
Hospital
The Company considers all of its facilities, both owned and leased,
together with the related equipment contained therein, to be well maintained,
in good operating condition, and suitable for the present and foreseeable
future needs of each facility.
ITEM 3. LEGAL PROCEEDINGS
TRI-CITY HOSPITAL LAWSUIT
On March 27, 1998, NCHC filed a lawsuit in the United States District
Court for the Northern District of Texas, Dallas Division, against Tri-City
Health Center, Inc., which owns the Tri-City Hospital in Dallas, Texas (the
"Hospital"), requesting injunctive and other relief against the Hospital in
connection with NCHC's management agreement with the Hospital and NCHC's
option to purchase the Hospital. In its Complaint, NCHC alleges that the
Hospital's Board of Directors has wrongfully taken the position that the
management agreement and option are not valid, and that if the management
agreement is valid, that NCHC is in default of that agreement. NCHC also
claims that since March 17, 1998, the Hospital has wrongfully not allowed
NCHC's employees on its premises, and that if any defaults have occurred under
the management agreement that the exclusion of NCHC's employees from the
premises prevents NCHC from curing any defaults as permitted under the
management agreement. NCHC also alleges that the Hospital wrongfully induced
the NCHC employee who had served as the Chief Executive Officer of the
Hospital to resign and become an employee of the Hospital.
NCHC has requested that the court declare that the management agreement
and option are valid and that the actions taken by the Hospital are wrongful.
NCHC is also requesting that the court enter a preliminary injunction against
the Hospital enjoining it from taking actions contrary to the management
agreement, requiring it to allow NCHC to resume management of the Hospital,
and to prohibit the Hospital from employing NCHC's former employee. The
Complaint also seeks to recover NCHC's attorney's fees and costs from the
Hospital.
As of April 6, 1998, the hospital had not filed an answer to the
Complaint.
CARROLL GROUP LAWSUIT
In June 1996 the Company entered into a debt forbearance agreement with
the previous owners of its Spectrum subsidiary Matthew Carroll, Francis
Farley, Cheryl Hannant and Edward R. Meyer (the "Carroll Group") to
restructure its acquisition related debt. The agreement provided, among other
things, for the issuance of 375,000 shares of the Company's common stock and
payments of $4,250,000, including a payment of $1,500,000 due September 24,
1996. On August 12, 1996, the Company and the Carroll Group executed an early
payment agreement providing for further debt reduction. Subsequently the
Carroll Group proposed an amendment to the debt forbearance agreement which
was accepted by the Company.
The payment due on September 24, 1996 was not paid by the Company. On
October 22, 1996 the Carroll Group, denying the validity of the early payment
agreement and forbearance agreement amendment filed a lawsuit against the
Company and Robert W. Bell, who was the President and Chairman of the Board at
the time, in the Circuit Court of the Thirteenth Judicial Circuit Court in
and for
16
<PAGE>
Hillsborough County, Florida, seeking, among other things, payments for all
amounts due under the forbearance agreement, and through court injunction to
sequester proceeds from the sale of Spectrum assets to NCS Healthcare of
Florida, Inc. and to appoint a receiver. The Company was successful in
opposing the injunction.
On February 14, 1997, the Company entered into a Settlement Agreement
("Agreement") with the Carroll Group. The purpose of the Agreement was to
settle the outstanding litigation filed by the Carroll Group against the
Company in October 1996.
The Agreement provided that among other things, the Company would pay
the Carroll Group $6,000,000 as follows:
(a) $1,000,000 was due and paid on February 21, 1997;
(b) $1,000,000 was due and paid on March 3, 1997, from the refinancing
of its long-term care facility in Fitzgerald, Georgia;
(c) $4,000,000 was due and paid by June 14, 1997.
(d) Interest accrued from all unpaid sums at the rate of 8.75%
commencing February 21, 1997, and it was due and paid by June 14, 1997.
The Agreement further provided that upon payment of the $6,000,000, the
Carroll Group would transfer 1,200,000 shares of the Company's common stock to
the Company or its designees. These shares were transferred to persons who
paid a total of $1,800,000 to the Carroll Group. Thus the Company's
obligation to the Carroll Group was $4,200,000.
The Agreement further provided for the sale of 300,000 shares of the
Company's common stock held by the Carroll Group as follows:
(a) If the price of the Company's common stock does not trade at a
price of at least $4.00 during 30 consecutive trading days during the two year
period ending February 1, 1999, the Carroll Group can put 300,000 shares to
the Company at a price of $3.50 per share, during the 30 day period commencing
February 1, 1999. If the common stock does trade at or above $4.00 for 30
consecutive trading days during the two year period, the Company has no
obligation to repurchase the shares. The stock traded at or above $4.00 for
30 consecutive trading days during July and August 1997, so the Company has no
obligation to repurchase the 300,000 shares.
(b) If the Carroll Group decides to sell the shares to someone other
than the Company during the 30 day period commencing February 1, 1999, the
Company has the right of first refusal to buy the shares at the market price.
The Agreement also provided that Matthew Carroll would resign from the
Company's Board of Directors on February 14, 1997. This resignation was
accepted by the Board on February 14, 1997.
LORA HENDERSON LAWSUIT
On April 19, 1996, Lora Henderson, an employee of the Oak Manor Nursing
Home, filed a complaint in federal district court in Tampa, Florida against
the Company and Robert W. Bell, Sr., former President and Chairman of the
Board of the Company. The complaint contained two counts, one for sexual
harassment under Title VII of the Federal Civil Rights Act and the other for
intentional
17
<PAGE>
infliction of emotional distress. The Court dismissed Robert W. Bell, Sr.
from the case and the count for intentional infliction of emotional distress
was dismissed. Henderson claimed an unspecified amount of damages for alleged
emotional distress and pain and suffering. The case had been scheduled for a
jury trial during the month of January 1998, but was settled in October 1997
for a payment of $20,000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's shareholders during
the fourth quarter of the year ended December 31, 1997.
18
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
MARKET INFORMATION. The Company's Common Stock is traded in the
over-the-counter market, and since April 28, 1995, has been traded on the
Nasdaq Small-Cap Market under the symbol "NWCA".
The following table sets forth the high and low bid prices of the
Company's Common Stock as reported by the Nasdaq Small-Cap Market for the
periods presented. These prices are believed to be representative interdealer
quotations, without retail markup, markdown or commissions, and may not
represent prices at which actual transactions occurred.
BID
HIGH LOW
1996
First Quarter $2.625 $2.375
Second Quarter $2.375 $1.25
Third Quarter $1.50 $1.00
Fourth Quarter $1.3125 $0.25
The following table sets forth the high and low sales prices of the
Company's Common Stock as reported by the Nasdaq Small-Cap Market for the
periods presented:
HIGH LOW
1997
First Quarter $3.00 $1.0625
Second Quarter $4.625 $2.50
Third Quarter $5.25 $3.875
Fourth Quarter $4.3125 $3.3125
APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK. At March 30, 1998, the
Company had approximately 685 holders of record of its Common Stock.
DIVIDENDS. The Company has paid no cash dividends on its Common Stock,
and has no present intention of paying cash dividends in the foreseeable
future.
SALES OF RESTRICTED SECURITIES. During the quarter ended December 31,
1997, the Company issued restricted securities as follows:
In November 1997, the Company sold 172,500 Units, each Unit consisting
of four shares of Common Stock and two Warrants to purchase Common Stock, to
34 accredited investors at a purchase price of $15.00 per Unit. Each Warrant
is exercisable to purchase one share of Common Stock at $5.00 per share until
October 30, 2000.
In connection with such sales the Company paid cash commissions to the
following registered broker/dealers as set forth next to their names:
International Trading Group - $29,700
Marion Bass Securities Corp. - $35,775
Bathgate McColley Capital Group LLC - $27,675
Lawson Financial Corporation - $22,950
Centex Securities, Inc. - $ 5,400
19
<PAGE>
With respect to these sales, the Company relied on Section 4(2) of the
Act, and Rule 506 of Regulation D promulgated thereunder. Each investor was
given a copy of a Private Placement Memorandum containing information
concerning the Company, a Form D was filed with the SEC and the Company
complied with the other applicable requirements of Rule 506. Each investor
signed a subscription agreement in which he represented that he was purchasing
the shares for investment only and not for the purpose of resale or
distribution. The appropriate restrictive legends were placed on the
certificates and stop transfer orders were issued to the transfer agent.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial information for the years ended
December 31, 1997 and 1996, is derived from financial statements of the
Company audited by Laney, Boteler & Killinger, independent certified public
accountants. The selected financial information for the years ended December
31, 1995 and 1994, is derived from financial statements of the Company audited
by Lovelace, Roby & Company, P.A., independent certified public accountants.
The selected financial information for the year ended December 31, 1993, is
derived from financial statements of the Company audited by Grant Thornton,
independent certified public accountants.
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
AT DECEMBER 31,
1997 1996 1995 1994 1993
<FN1> <FN1> <FN1> <FN1><FN2> <FN1><FN2>
<S> <C> <C> <C> <C> <C>
Current Assets $21,237,727 $ 7,717,162 $ 6,751,312 $ 6,606,450 $ 2,027,541
Total Assets 68,768,359 32,267,101 39,980,703 29,347,359 16,215,529
Current Liabili-
ties 23,539,395 20,242,609 16,151,525 7,160,213 3,223,000
Working Capital
(Deficit) (2,300,668)(12,525,447) (9,400,213) (553,763) (1,195,459)
Long-term Debt 39,754,836 6,880,805 16,260,560 16,266,226 12,730,195
Shareholders'
Equity 5,460,228 5,143,687 7,369,979 5,718,631 187,542
- ------------------
<FN>
<FN1>
During the years ended December 31, 1993 and 1994, the Company and its
predecessors operated five long-term care facilities and one assisted
living/independent living complex. During 1995, through the acquisition of
Cimerron Health Care, Inc. and other transactions, the Company began operating
an additional six long-term care facilities. No additional acquisitions were
made during 1996. During 1997, the Company began operating three additional
long-term care facilities, purchased and began operating one hospital, and
started managing two additional hospitals.
<FN2>
Effective April 5, 1994, the Company acquired the stock of NewCare in a
reverse acquisition in which NewCare's stockholders acquired voting control of
the Company. The transaction was accounted for as a purchase with NewCare as
the acquiring company because NewCare's stockholders acquired a majority of
the voting rights in the combined company. Accordingly, the results of
operations prior to April 5, 1994, are those of NewCare and its predecessor.
</FN>
</TABLE>
20
<PAGE>
STATEMENT OF INCOME DATA:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
1997 1996 1995 1994 1993
------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues $32,984,930 $28,683,704 $23,176,905 $20,922,846 $15,276,727
Operating
Expenses 35,928,002 26,700,758 21,972,145 21,807,712 14,841,069
Net Income (Loss)
from Continuing
Operations (3,979,353) 99,936 (340,654) (919,616) 207,061
Net Income (Loss)
from Continuing
Operations Per
Common Share<FN1> $ (.37) $ .01 $ (.03) $ (.13) $ .06
Weighted Average
Shares<FN1> 10,769,829 10,667,524 10,390,073 7,289,746 3,353,272
Cash Dividends
Per Common Share $ -0- $ -0- $ -0- $ -0- $ -0-
- ------------------
<FN>
<FN1>
The Company has retroactively restated net income per share and weighted
average shares outstanding for the effect of a reverse stock split which
occurred in April 1994.
</FN>
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1996
STRUCTURE OF OPERATIONS
The Company is currently an operator of long-term care facilities,
rehabilitation and acute-care hospitals, and assisted-independent living
centers. As of December 31, 1997, the Company operated thirteen (13)
long-term care facilities in Georgia, Florida and Texas, one (1) assisted
living center in Florida, and one (1) hospital in Kansas. The Company also
managed two acute-care hospitals in Florida and Texas.
RESULTS OF OPERATIONS
The Company's total operating revenues from continuing operations for
the year ended December 31, 1997, were $32,984,930 compared to $28,683,704 for
the year ended December 31, 1996. The 15.0% increase in revenues was due to
the acquisition of three long-term care facilities, one hospital and two
management agreements with hospitals, primarily made in the latter half of
1997.
Included in total operating revenues for 1997 were $32,359,366 related
to patient services, $503,577 in management fees stemming from the management
agreements on two hospitals entered into in the December 1997 quarter and
$121,987 in other operating revenues.
Operating expenses for the year ended December 31, 1997, totaled
$35,928,002, an increase of 34.6% over the $26,700,758 in total expenses for
21
<PAGE>
the year ended December 31, 1996. The increase in operating expenses was
primarily the result of additional facility acquisitions during the year, a
larger provision for doubtful accounts (bad debts), two shareholder
settlements and a build-up of the management staff in preparation for
accelerated growth plans in 1998 and beyond.
Total operating expenses in 1997 included $24,913,670 representing the
costs incurred on patient services, and compares to the $20,095,723 incurred
in 1996. The increase in these costs was due mainly to the facility
acquisitions made during the year. Lease expense totaled $771,427 in 1997
versus $709,542 for 1996, and reflected the addition of one leased facility
during the year. Also during the year, the Company settled two shareholder
disputes for $485,000.
General and administrative costs rose $2,752,309 for the year ended
December 31, 1997, to $7,367,125 versus $4,614,816 in 1996. Several expense
categories experienced increases from 1996, due principally from increased
activity surrounding acquisitions, and included management salaries and
related costs, travel expenses, legal and audit fees, supplies, and corporate
insurance.
The provision for doubtful accounts, or bad debts expense, increased to
$1,194,780 for the year ended December 31, 1997, from the $203,937 recorded in
1996. The primary reason for the increase in the provision was a more
thorough review by management of aged receivables, and reaching a decision on
the overall probability of their collection. In addition, a provision was
placed on a portion of receivables from the managed hospitals, pending an
improvement in financial condition at one of the facilities.
Depreciation and amortization expense was $1,196,000 in 1997 versus
$1,076,740 in 1996, mainly due to the increase in facilities during the year.
As a result of a 15.0% increase in revenues and an increase of $34.6% in
expenses, the Company recorded an operating loss of $2,943,072 for the year
ended December 31, 1997, compared to an operating income of $1,982,946 for the
year ended December 31, 1996.
Investment income totaled $794,214 in the current year versus $83,828 in
1996. The principle reason for the increase was the interest received on bond
indentures the Company purchased on one of the hospitals currently under a
management agreement. Interest expense rose to $3,148,460 in 1997 from
$1,912,838 in 1996, principally the result of higher levels of outstanding
long-term debt and borrowings under the Company's line of credit.
The loss before income taxes, discontinued operations and extraordinary
items was $5,311,218 in 1997 versus an income of $153,936 in 1996. The loss
in the current year was reduced by an income tax benefit of $1,331,865, which
compares to an income tax provision of $54,000 in 1996.
The results for the year ended December 31, 1997 were also impacted by a
gain on the restructuring of its debts, net of taxes, of $879,851. The
results for 1996 were impacted by losses from a discontinued business segment
and the disposal of this segment of $2,326,228, net of tax benefits.
The net loss for the year ended December 31, 1997, was $3,099,502 ($0.29
per share) versus a net loss of $2,226,292 ($0.21 per share) for the year
ended December 31, 1996.
22
<PAGE>
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
STRUCTURE OF OPERATIONS
During the year ended December 31, 1996, the Company operated through
its three subsidiaries: NewCare, Spectrum (sold in October 1996), and
Cimerron (acquired in May 1995). The Company's operations are comprised of
ten (10) skilled long-term care facilities, five (5) in Florida through
NewCare and five (5) in Georgia through Cimerron. As a result of the Spectrum
sale, the Company disposed of its medical supply and pharmaceutical sales and
service operations in Florida, Georgia, Kansas and Texas.
RESULTS OF OPERATIONS
The Company's revenues from continuing operations for the year ended
December 31, 1996, totaled $28,683,704 compared to the $23,176,905 reported
for the year ended December 31, 1995. The 23.8% increase in 1996 was
primarily the result of the five Cimerron facilities, acquired in May 1995,
being included in the 1995 results for only eight months. In addition, a
slight decline in the average occupancy levels at the facilities to 89.35% in
1996 from 91.17% in 1995 and a decrease in private pay mix to 11% from 18% had
a negative impact on revenue growth.
Expenses from continuing operations for the year ended December 31, 1996
totaled $26,700,758 compared to $21,972,145 for the year ended December 31,
1995. The 21.5% increase in expenses over 1995 was impacted by the acquisition
of Cimerron in May 1995. Total expenses for 1996 represented 93.1% of total
revenues versus 94.8% of total revenues in 1995.
Cost of patient services rose 9.9% in 1996 to $20,095,723 from
$18,293,388 reported for 1995, and accounted for 70.1% of total revenues in
the current year versus 78.9% in 1995. Lease expense for 1996 totaled
$709,542 versus $494,005 in 1995, with the increase due mainly to the results
for the Cimerron facilities for a full year in 1996.
General and administrative expense for the year ended December 31, 1996,
was $4,614,816 compared to $2,033,887 for the year ended December 31, 1995.
As a percent of revenues, these expenses represented 16.1% of the total in
1996 versus 8.8% in 1995. The principle reason for the increase in 1996 was
the fact that the administration overseeing the Cimerron operations in Georgia
were retained after their acquisition.
The provision for bad debts totaled $203,937 in 1996 and $211,919 in
1995, while depreciation and amortization expense rose to $1,076,740 in 1996
from $938,946 in 1995.
Interest expense increased to $1,912,838 in 1996 from $1,518,910 in 1995
due to the Cimerron acquisition. Investment income totaled $83,828 in 1996
and $9,496 in 1995.
The Company reported a net loss of $2,226,292 ($0.21 per share) for the
year ended December 31, 1996, compared to a net loss of $172,222 ($0.02 per
share) for the year ended December 31, 1995. Included in the results for 1996
were a loss of $970,430 from the discontinued Spectrum operations and a loss
from the sale of Spectrum of $1,355,798. The results for 1995 included a gain
from a discontinued business segment of $168,432.
23
<PAGE>
INFLATION AND LABOR SUPPLY
Long-term care facilities are labor intensive and can be affected by
changes in wages and the supply of labor. Inflationary increases in wages can
have adverse affects on the Company's skilled long-term care operations in the
short term until Medicaid and Medicare cost reports can be filed for
appropriate reimbursement rate adjustments for individual long-term care
facilities. The supply of labor can have possible adverse affects on the
Company's net results of operations.
CAPITAL RESOURCES AND LIQUIDITY
At December 31, 1997, the Company had a deficit of $2,301,668 in working
capital compared to a $12,525,447 deficit at December 31, 1996. The increase
in working capital of $10,223,779 was due primarily to significant mortgage
debt that was classified as a current liability for the year ended December
31, 1996, being refinanced as long-term debt for the year ended December 31,
1997. The funds needed to improve liquidity and reduce the $2,301,668 working
capital deficit for the year ended December 31, 1997, is being provided by
increased collection efforts on existing accounts receivable balances,
extended payment terms using corporate vendors, initiating stronger budgetary
compliance controls and possible refinancing of selected facilities.
During the year ended December 31, 1997, cash used in operating
activities was $2,198,550 as compared to $706,285 for the year ended December
31, 1996. The increase in cash used in operating activities of $1,492,265 for
the year ended December 31, 1997, was primarily attributable to the net loss
before extraordinary item of $3,979,353 for the year ended December 31, 1997,
an increase in deferred tax asset of $1,331,865, and an increase in accounts
receivable of $3,864,217 due to the addition of three long-term care
facilities and one hospital. Cash provided by operating activities was
primarily attributable to depreciation and amortization of $1,196,000 on the
facilities, provision for bad debts of $1,194,780 on accounts receivable
deemed uncollectible, increases in accounts payable of $4,958,541 and other
liabilities of $1,720,217 due to the addition of three long-term care
facilities and one rehabilitation hospital.
Cash used in investing activities during the year ended December 31,
1997, was $19,891,692. The expenditures were related to the acquisition of
facilities and purchase of property and equipment of $14,381,568, payments of
deferred costs of $1,672,918 on the debt incurred to purchase the facilities,
issuance of notes receivable of $990,000 to Messrs. Chris Brogdon - Chairman
of the Board, Timothy Beaulieu - Executive Vice President, and three other
individuals who are consultants, advances to related parties of $1,176,563,
increases in restricted investments of $1,707,761 pledged as collateral on
long-term debt and the purchase of investments of $7,617,015 consisting
primarily of bond indentures on a hospital the Company manages. The related
parties are companies controlled by Mr. Chris Brogdon. Cash provided by
investing activities consisted primarily of repayment on mortgage notes
receivable of $1,852,377, and $5,783,756 in proceeds from the sale of bond
indentures the Company purchased as an investment.
Cash provided by financing activities during the year ended December 31,
1997, was $21,189,141. The sources of cash related to proceeds of long-term
debt and lines of credit of $36,194,951, proceeds from issuance of common
stock of $3,580,476 from a private placement, and advances from related
parties of $2,776,177. The related parties are companies controlled by Mr.
Chris Brogdon. The Company's net borrowing from lines of credit was
$3,189,755, with interest rates at prime plus 2% (10.50% at December 31,
24
<PAGE>
1997). In addition to interest charges, the draws on the line of credit are
subject to monthly management fees (.20% of the average previous months' loan
balance) as well as a monthly usage fee and commitment fees. Available
borrowing at December 31, 1997, was $6,810,245 limited by a borrowing base
which is 80% of "collectible" accounts receivable. The Company incurred
long-term debt of $33,005,196, due through 2020, with interest rates ranging
from 8.00% to 11.88% collateralized by property and equipment of facilities.
Cash used in financing activities consisted of repayment of long-term debt of
$20,318,489, and the purchase of treasury stock of $1,043,974.
The Company's working capital at December 31, 1996 was a negative
$12,755,366 as compared to a negative $9,400,213 on December 31, 1995. The
decrease was due primarily to the fact that a significant amount of mortgage
debt that was classified as long-term debt on December 31, 1995, was
classified as a current liability as of December 31, 1996.
During the year ended December 31,1996, cash used in operating
activities was $706,285 as compared to $1,538,933 of cash provided by
operating activities for the year ended December 31, 1995. The largest
contributing factor to the cash used in the year ended December 31, 1996 was
the net loss of $2,226,292. This figure was offset by the loss on the
disposal of the Spectrum assets of $1,386,798. There was a $2,090,525
decrease in accounts payable in 1996 which was partly offset by a $1,612,136
decrease in accounts receivable. These decreases in accounts payable and
accounts receivable were primarily attributable to the sale of operating
assets of Spectrum. There was also an increase in other receivables of
$486,682 due to the holdback associated with the sale of Spectrum.
Depreciation and amortization was $1,554,219 for 1996 as compared to
$1,494,836 for 1995. Amortization of $94,000 included in the year ended
December 31, 1996, relates to the writeoff of the balance of goodwill for Bay
to Bay, which lost its lease May 31, 1996.
Net cash provided by investing activities was $7,089,285 for the twelve
month period ended December 31, 1996. Proceeds on disposal of property, plant
and equipment, which was primarily related to the sale of Spectrum, was
$10,234,655. The Company paid $1,085,050 in net purchases of property, plant,
and equipment, issued notes receivable of $1,852,377, and made payments for
other assets of $207,943.
For the twelve month period ended December 31, 1996, financing
activities used net cash of $3,385,939. The Company made payments of
$2,405,020 on long-term debt, $1,525,000 on notes payable, and reduced its
line of credit by $166,491. The Company received proceeds of $710,572 from
long-term debt.
The Company believes that its long-term liquidity needs will generally
be met by cash flows from operations. If necessary, the Company believes that
it can obtain an extension of its current line of credit and/or other lines of
credit from commercial sources. Except as described above, the Company is not
aware of any trends, demands, commitments or understandings that would impact
its liquidity.
The Company intends to use long-term debt financing in connection with
the purchase of additional facilities on terms which can be paid out of the
cash flow generated by the property.
The Company intends to continue to lease, purchase and manage additional
facilities in the future.
25
<PAGE>
The Company is obligated to loan up to $2,000,000 each to Tri-City
Hospital and Princeton Hospital for the purpose of making capital improvement
expenditures and for other purposes. These loans are to be made before
October 1998, and are expected to be financed with long-term debt financing.
The Company is also obligated to repay the $3,000,000 bridge note on the
Venice South long-term care facility by April 27, 1998. The Company expects
to finance this with a long-term loan from LTC Properties, Inc.
The Company has a contract to purchase the Pecan Manor Nursing Home for
$1,800,000 to $2,000,000 (depending on the results of an independent
appraisal). The Company expects to close on this purchase during April 1998,
and expects to finance this purchase with a long-term loan.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Information with respect to Item 8 is contained in the Company's
consolidated financial statements and are set forth herein beginning on Page
F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
No response required.
26
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Certain information about the directors and executive officers of the
Company is contained in the following table:
NAME AGE POSITION
Ashok Dalal 58 President, Chief Executive Officer and
Director
Chris Brogdon 49 Chairman of the Board and Director
Timothy Beaulieu 39 Executive Vice President of the Company
in charge of all Long-term care facilities
James H. Sanregret 47 Chief Financial Officer of the Company
Frank Camma 28 Vice President of Strategic Planning
Arthur Doloresco 47 President of NewCare Hospital Corporation
Dr. Kishor Karia 54 Director
Harlan Mathews 70 Director
Dr. Dhiraj Patel 46 Director
William McBride, III 38 Director
All directors hold office until the next annual meeting of the
shareholders of the Company or until their successors have been elected and
qualified. Officers serve at the discretion of the Board of Directors with no
fixed terms of office.
Effective January 6, 1998, the Company established an Audit Committee, a
Compensation Committee and an Executive Committee. The Audit Committee and
Compensation Committee both consist of Harlan Mathews, William McBride, III,
and Ashok Dalal. The Executive Committee consists of Timothy Beaulieu, James
H. Sanregret, and Philip M. Rees (counsel to the Company).
The following sets forth biographical information as to the business
experience of each officer and director of the Company for at least the last
five years.
ASHOK DALAL has served as Executive Vice President and a Director of the
Company since April 1994 and has held such positions with ANH since November
1989 and with NewCare since its inception in February 1993. Mr. Dalal has
served as Chief Executive Officer of the Company since the resignation of
Robert W. Bell, Sr. on January 3, 1997. Mr. Dalal was a private investor in
several limited partnerships whose properties were managed by ANH. He has a
B.S. Degree and a Master of Business Administration Degree.
CHRIS BROGDON has served as a Director of the Company since February 19,
1997. He has served as President and a Director of Retirement Care
Associates, Inc., a publicly-held company headquartered in Atlanta, Georgia,
since October 1991. He has also served as Secretary of Capitol Care
27
<PAGE>
Management Company, Inc. ("Capitol Care") since October 1990. Capitol Care is
a wholly-owned subsidiary of Retirement Care Associates, Inc. Mr. Brogdon has
been involved in financing and operating long-term care facilities and
assisted living/independent living communities since 1982. From 1969 until
1982, Mr. Brogdon was employed in the securities business as a retail
salesman. Mr. Brogdon attended Georgia State University in Atlanta, Georgia.
Since March 1987, Mr. Brogdon has been Secretary/Treasurer of Winter Haven
Homes, Inc. ("WHH") and since August 1990, he has been Secretary/Treasurer of
National Assistance Bureau, Inc. ("NAB"). Both WHH and NAB are engaged in the
business of owning and operating long-term care facilities and assisted
living/independent living communities. Mr. Brogdon also serves as a Director
of Contour Medical, Inc., a publicly-held company, of which Retirement Care
Associates, Inc. is a majority shareholder, and In-House Rehab, Inc., a
publicly-held company of which Retirement Care Associates, Inc. is a minority
shareholder.
TIMOTHY BEAULIEU has served as Executive Vice President of the Company
in charge of all long-term care facilities since July 1997. Mr. Beaulieu was
previously employed by Life Care Centers of America for 14 years and was Chief
Operating Officer from 1994 to May 1997. As Chief Operating Officer, he was
responsible for the operations of approximately 210 long-term care facilities
and 15 assisted living/independent living/assisted living properties. He also
had direct responsibility for marketing, human resources, professional
development, and clinical services support. Mr. Beaulieu was Senior Vice
President of Support Services from 1993 to 1994 and was responsible for the
creation of ancillary companies with the purpose of providing services to Life
Care's facilities in the area of pharmacy, rehab, home health, enteral and
parenteral therapy, etc. He also had oversight of the Associate Benefit Trust
Program, a self-insured group insurance program with approximately 3,500
enrollees with in excess of $8 million in annual premiums. From 1992 to 1993,
he was Eastern Division Vice President and coordinated the operating
activities in 38 facilities on the East Coast from Massachusetts to Florida.
From 1988 to 1992, he was Regional Vice President and was responsible for the
operation of facilities in Florida, Georgia and Tennessee. From 1985 to 1988,
he was acquisition specialist for Life Care Affiliates, a subsidiary of Life
Care. During this time, he was responsible for the generation of leads for
the acquisition of long-term care centers, certificates of need, and
management agreements. From 1984 to 1985, he was an Administrator for Life
Care, opening a new 80-bed long-term care facility and operating a 120-bed
facility. Mr. Beaulieu received his Bachelor of Science degree in Business
Administration, as well as his Associate of Science degree in Health Care
Administration from Southern College of Seventh Day Adventist.
JAMES H. SANREGRET has served as Chief Financial Officer of the Company
since June 1997. Mr. Sanregret was previously employed by Delta Air Lines
for 24 years. He was Treasurer of Delta from 1992 to May 1997. As Treasurer
he was responsible for all Corporate Finance, Tax and Corporate Insurance
activities on a global basis for the $12 billion airline. He was Assistant
Vice President of Financial Planning in 1992 and was responsible for analyzing
the economics of all proposed spending activities, preparation of projected
income statement for quarterly Board of Directors meetings, and the
development of expense levels and capital outlays for all major corporate
acquisitions/mergers. From 1985 to 1992, he was the Director of Financial
Planning. He coordinated all financial activities related to the acquisition
of Western Airlines. He functioned as Manager of Financial Planning from 1981
to 1985, Analyst of Financial Planning from 1974 to 1981, and Accountant of
Property Accounting from 1973 to 1974. Mr. Sanregret received a Bachelor of
Business Administration from the University of Wisconsin in 1972.
28
<PAGE>
FRANK CAMMA has served as Vice President of Strategic Planning of the
Company since July 1997. Mr. Camma began his career in the healthcare
industry in 1990, when he served as an accountant in the Contract Services
division of NovaCare Incorporated, a rehabilitation services company until
1992. From June 1992 to October 1993, he served as a Financial Analyst at
First Fidelity Bank Corporation. He completed the Professional Banker
training program and returned to NovaCare Incorporated as a Financial Analyst
in the Corporate Finance department. In this capacity he was responsible for
the annual budget as well as weekly operating reports. From September 1994 to
August 1996, he served as a Senior Financial Analyst at Acquisition Management
Services. Acquisition Management Services is a captive investment banking
boutique for Foster Management Company, a $250 million venture capital firm
specializing in the consolidation of niche healthcare businesses. He was
responsible for valuing, performing due diligence and negotiating potential
transactions. His primary client was NovaCare Incorporated. From August 1996
to March 1997, he served as an Associate with the investment banking firm of
NatWest Markets. Mr. Camma graduated summa cum laude from Villanova
University with a Bachelors Degree in Business Administration in 1992.
ARTHUR DOLORESCO has served as President of NewCare Hospital Corporation
since August 1997. Mr. Doloresco has served in various leadership positions
in the healthcare industry for the past 20 years. Working with both 501(c)3
and investor-owned facilities, he served from May 1996 to July 1997 as the
President of the Kentucky Division for Columbia/HCA. His responsibilities
included all operations in Kentucky, including 13 hospitals, home health
agencies, and surgery centers, which accounted for over $680 million in net
revenues. Prior to joining Columbia/HCA, he served as a Regional Vice
President for Champion Healthcare Corporation from December 1994 to May 1996
in Houston, Texas, where he was responsible for half of that company's
operations. He has served as the President and Chief Executive Officer of
various hospitals, including an urban teaching facility with over 500 beds.
Mr. Doloresco received his Masters Degree in Health Administration from the
Medical College of Virginia in 1979 and a Bachelor of Science Degree in
Business Administration from Old Dominion University in Norfolk, Virginia in
1975.
DR. KISHOR KARIA has served as a director of the Company since July,
1995. Dr. Karia is an internal medicine physician specializing in Hematology
Oncology and has been practicing in South Florida since 1982. Dr. Karia was a
limited partner in several Florida long-term care facilities operated by the
Company until 1993 when he exchanged his ownership interest in the long-term
care facilities with NewCare, Inc.
HARLAN MATHEWS has been a Director of the Company since February 1997.
Since 1994 he has been a partner in the law firm of Farris, Mathews, Branan &
Hellen, P.L.C., in Nashville, Tennessee. From 1993 to 1994, he served as a
United States Senator from the State of Tennessee. From 1987 to 1993, he was
Deputy to the Governor of Tennessee and Cabinet Secretary. From 1974 to 1987,
Mr. Mathews was Treasurer of the State of Tennessee. He received a Bachelor's
Degree in Business from Jacksonville State University in Alabama in 1949 and a
Master's Degree in Public Administration from Vanderbilt University in 1950.
Mr. Mathews received a law degree from the Nashville School of Law in 1962.
Mr. Mathews currently serves as a Director of Assisted living/independent
living Care Associates, Inc., a publicly-held company based in Atlanta,
Georgia, and Murray Guard, Inc., a publicly-held company based in Jackson,
Tennessee.
DR. DHIRAJ PATEL has served as a Director of the Company since January
1997. Dr. Patel has been a practicing physician in Hollywood, Florida for the
past 14 years. Dr. Patel was a limited partner in several Florida long-term
care
29
<PAGE>
facilities operated by the Company until 1993, when he exchanged his ownership
interest in the long-term care facilities with NewCare Inc.
WILLIAM McBRIDE, III, has served as a Director of the Company since
September 1997. Mr. McBride is Chairman and Chief Executive Officer of
Assisted Living Concepts, which he co-founded and has been a Director since
its formation. Until September 1997, Mr. McBride was President and Chief
Operating Officer of LTC Properties, Inc. ("LTC"), healthcare real estate
investment trust. LTC specializes in the long-term care industry which was
co-founded by Mr. McBride in 1992. Prior to founding LTC, Mr. McBride was
employed from April 1988 to July 1992 by Beverly Enterprises, Inc., an owner
and operator of long-term care facilities, assisted living/independent living
living facilities and pharmacies where he served as Vice President, Controller
and Chief Accounting Officer. From 1982 to 1988, Mr. McBride was employed by
the public accounting firm of Ernst & Young. Mr. McBride serves as a member
of the Board of Directors of LTC and Malan Realty Investors, Inc.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based solely on a review of Forms 3 and 4 and amendments thereto
furnished to the Company during its most recent fiscal year, and Forms 5 and
amendments thereto furnished to the Company with respect to its most recent
fiscal year and certain written representations, no persons who were either a
director, officer or beneficial owner of more than 10% of the Company's Common
Stock, failed to file on a timely basis reports required by Section 16(a) of
the Exchange Act during the most recent fiscal year, except as follows:
Chris Brogdon, Harlan Mathews, Arthur Doloresco, Frank Camma and William
McBride, III, each filed Form 3's late; Chris Brogdon filed two Form 4's late,
reporting a total of 13 transactions late by amending a Form 4 filing; and
James H. Sanregret, Dr. Kishor Karia and Dr. Dhiraj Patel each filed one Form
4 late reporting one transaction.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information regarding the executive
compensation for the Company's President for the years ended December 31,
1997, 1996 and 1995 from the Company and its subsidiaries. No other
executive officer received compensation in excess of $100,000 during these
periods.
<TABLE>
<CAPTION>
30
<PAGE>
SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION
ANNUAL COMPENSATION AWARDS PAYOUTS
--------------------- --------------------------
SECURITIES
UNDERLY-
OTHER RE- ING ALL
ANNUAL STRICTED OPTIONS/ OTHER
NAME AND PRINCIPAL COMPEN- STOCK SARs LTIP COMPEN-
POSITION YEAR SALARY BONUS SATION AWARD(S) (NUMBER) PAYOUTS SATION
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Ashok Dalal, 1997 $24,167 -0- -0- -0- 225,000 -0- -0-
President<FN1>
Arthur Doloresco,1997 $121,875 $10,000 135,000 -0- 50,000 -0- $4,884
President of <FN3> <FN4> <FN5>
Subsidiary<FN2>
Robert Bell, Sr.,1996 $ 96,000 -0- -0- -- -- -- -0-
President<FN6> 1995 $ 96,000 -0- -0- -- -- -- -0-
- -----------------
<FN>
<FN1>
Mr. Dalal became President on January 3, 1997.
<FN2>
Mr. Doloresco became President of the Company's 1997 NewCare Hospital
Subsidiary on during August 1997.
<FN3>
Includes $26,500 paid for Mr. Doloresco's moving expenses and $108,600 which
represents the net cost to the Company of purchasing his former residence from
him and
reselling it.
<FN4>
Does not include the value of restricted stock of NewCare Hospital
Corporation, a majority-owned subsidiary of the Company, issued to Mr.
Doloresco pursuant to
his employment agreement. Please see the description of that agreement under
the
heading "EMPLOYMENT AGREEMENTS" below.
<FN5>
Represents amounts paid for a term life insurance policy provided for the
benefit of Mr. Doloresco.
<FN6>
Mr. Bell resigned as President on January 3, 1997.
</FN>
</TABLE>
<TABLE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
POTENTIAL
REALIZABLE
PERCENT VALUE AT ASSUMED
NUMBER OF OF TOTAL ANNUAL RATES
SECURITIES OPTIONS/SARs EXERCISE OF STOCK PRICE
UNDERLYING GRANTED TO OR BASE APPRECIATION
OPTIONS/SARs EMPLOYEES IN PRICE EXPIRATION FOR OPTION TERM
NAME GRANTED(#) FISCAL YEAR ($/SH) DATE 5%($) 10%($)
- --------------- ----------- ------------ ------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Ashok Dalal 175,000 38.9% $2.25 2-25-2002 $108,786 $240,388
Arthur Doloresco 50,000 11.1% $4.85 8-18-2002 $ 66,998 $148,049
</TABLE>
31
<PAGE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
SECURITIES
UNDERLYING VALUE OF UNEXER-
SHARES UNEXERCISED CISED IN-THE
ACQUIRED OPTIONS MONEY OPTIONS/
ON SARs AT FY-END SARs AT FY-END
EXERCISE VALUE EXERCISABLE/ EXERCISABLE/
NAME (NUMBER) REALIZED UNEXERCISABLE UNEXERCISABLE
- ---------------- -------- -------- -------------- ---------------
Ashok Dalal -0- -0- 225,000/0 $295,312/$0
Arthur Doloresco -0- -0- 0/50,000 $ 0/$0
Except for the Company's 1997 Stock Option Plan described below, the
only 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.
Members of the Board of Directors receive a fee of $500 per meeting
attended. They are also entitled to reimbursement of reasonable expenses
incurred by them in attending board meetings.
EMPLOYMENT AGREEMENTS
Effective June 2, 1997, the Company entered into a three-year employment
agreement with James H. Sanregret, Chief Financial Officer of the Company.
Under this agreement, Mr. Sanregret will receive an annual salary of $144,000
during the first year of the agreement, $184,000 during the second year and
$224,000 during the third year. He also received stock options to purchase
50,000 shares of the Company's Common Stock. The Company is also to provide a
$500,000 term life insurance policy for his benefit and pay him a $700 per
month car allowance. Mr. Sanregret has agreed to keep certain information
confidential and that for a period of two years following the termination of
his employment agreement he will not serve in an executive capacity for any
business which is engaged in a similar business to the Company in its region
without the Company's consent.
Effective July 8, 1997, the Company entered into a three-year employment
agreement with Timothy J. Beaulieu, Vice President of the Company in charge of
all long-term care facility operations. Under this agreement, Mr. Beaulieu
will receive an annual salary of $175,000 during the first year of the
agreement, $200,000 during the second year and $225,000 during the third year.
He also received stock options to purchase 75,000 shares of the Company's
Common Stock in connection with the agreement, and he will be entitled to
receive additional stock options to purchase 50,000 shares of Common Stock on
each anniversary of the agreement at the then current price. The agreement
may be terminated by the Company without notice and without cause. In the
event that the Company terminates the agreement due to Mr. Beaulieu's
disability, he will continue to receive his salary for a period of one year
following termination. Mr. Beaulieu has agreed to keep certain information
confidential and that for a period of one year following the termination of
his employment he will not serve in an executive capacity for any business
which is engaged in a similar business to the Company in its region without
the Company's consent.
Effective August 1, 1997, the Company entered into a three-year
employment agreement with Arthur Doloresco, President of the Company's NewCare
Hospital Corporation ("NCHC") subsidiary. Under this agreement, Mr. Doloresco
will receive an annual salary of $325,000 during the first year of the
agreement, $350,000 during the second year, and $375,000 during the third
year. Mr.
32
<PAGE>
Doloresco is also entitled to an annual bonus of $200,000 for any calendar
year in which NCHC's earnings before interest, taxes, depreciation,
amortization and rent ("EBITDAR") exceeds 20% of net revenues; $275,000 if
EBITDAR exceeds 25% of net revenues; and $350,000 if EBITDAR exceeds 30% of
net revenues. He also received stock options to purchase 50,000 shares of the
Company's Common Stock in connection with the agreement. The Company has
also agreed to provide Mr. Doloresco a $1,000,000 term life insurance policy
for his benefit. The Company also purchased his residence in Houston, Texas
and paid for his moving expenses to Atlanta, Georgia. Mr. Doloresco also
received five shares of the Common Stock of the Company's NewCare Hospital
Corporation subsidiary ("NCHC"), which represents 5% of NCHC's outstanding
Common Stock. The shares of NCHC's stock will vest one share at the end of
each year of his employment, except that if Mr. Doloresco's employment ends on
July 31, 2000, all of the shares will then be vested. The entire five shares
will vest immediately in the event of a termination of Mr. Doloresco's
employment by the Company without cause or by Mr. Doloresco with cause, or in
the event of a merger or combination where NCHC is not the surviving entity,
or its board of directors does not control the surviving entity. The
agreement may be terminated immediately by the Company with or without cause.
Mr. Doloresco may terminate the agreement immediately for cause or on twelve
months notice without cause. In the event of termination by the Company
without cause or by Mr. Doloresco with cause, Mr. Doloresco will be entitled
to twelve months severance pay. The Company and Mr. Doloresco have agreed to
negotiate in good faith to review or extend the term of the agreement not less
than 180 days prior to the end of the term, and if no agreement is reached,
Mr. Doloresco will be entitled to up to six months base salary following
termination of his employment. Mr. Doloresco has agreed to keep certain
information confidential and that for a period of two years following the
termination of his employment he will not serve in an executive capacity for
any business which is engaged in a similar business to the Company in its
region without the Company's consent.
1997 STOCK OPTION PLAN
In April 1997, the Company's Board of Directors approved the
establishment of a Stock Option Plan (the "1997 Plan") subject to approval of
the Company's shareholders. The Board of Directors believes that the 1997
Plan will advance the interests of the Company by encouraging and providing
for the acquisition of an equity interest in the success of the Company by
employees, officers, directors and consultants, and by providing additional
incentives and motivation toward superior Company performance. The Board
believes it also will enable the Company to attract and retain the services of
employees, officers, directors and consultants, and by providing additional
incentives and motivation toward superior Company performance. The Board
believes it also will enable the Company to attract and retain the services of
employees, officers, directors and consultants upon whose judgment, interest
and special effort the successful conduct of its operations is largely
dependent.
The 1997 Plan allows the Board to grant stock options from time to time
to employees, officers and directors of the Company and consultants to the
Company. The Board has the power to determine at the time the option is
granted whether the option will be an Incentive Stock Option (an option which
qualifies under Section 422 of the Internal Revenue Code of 1986) or an option
which is not an Incentive Stock Option. However, Incentive Stock Options will
only be granted to persons who are employees of the Company. Vesting
provisions are determined by the Board at the time options are granted. The
total number of shares of Common Stock subject to options under the 1997 Plan
may not exceed 2,000,000, subject to adjustment in the event of certain
recapitalizations, reorganizations and similar transactions. The option price
may be satisfied by the payment of
33
<PAGE>
cash, or where approved by the Board of Directors, in its sole discretion and
where permitted by law: (a) by cancellation of indebtedness of the Company to
the holder; (b) by surrender of shares of Common Stock of the Company having a
Fair Market Value equal to the exercise price of the option that have been
owned by holder for more than six months, or were obtained by the holder in
the open public market; (c) by waiver of compensation due or accrued to the
holder for services rendered; (d) provided that a public market for the
Company's stock exists, through a "same day sale" commitment from the holder
and a broker-dealer whereby the holder irrevocably elects to exercise the
option and to sell a portion of the shares so purchased to pay for the
exercise price and the broker-dealer irrevocably commits upon receipt of such
shares to forward the exercise price directly to the Company; (e) provided
that a public market for the Company's stock exists, through a "margin"
commitment from the holder and a broker-dealer whereby the holder irrevocably
elects to exercise the option and to pledge the shares so purchased to the
broker-dealer in a margin account, and the broker-dealer irrevocably commits
upon receipt of such shares to forward the exercise price directly to the
Company; or (f) by any combination of the foregoing.
The Board of Directors may amend the 1997 Plan at any time, provided
that the Board may not amend the 1997 Plan to materially increase the number
of shares available under the 1997 Plan, materially increase the benefits
accruing to Participants under the 1997 Plan, or materially change the
eligible class of employees without shareholder approval.
To date, stock options have been granted under the 1997 Plan to four
employees to purchase an aggregate of 215,000 shares of Common Stock at prices
ranging from $2.25 to $4.85 per share, contingent on shareholder approval of
the 1997 Plan. Of these, options to purchase 50,000 shares at $2.25 per share
were granted to Frank Camma, Vice President of Strategic Planning of the
Company; options to purchase 50,000 shares at $4.85 per share were granted to
Arthur Doloresco, President of the Company's NewCare Hospital Corporation
subsidiary; and options to purchase 25,000 shares at $4.50 per share were
granted to Timothy Beaulieu, Executive Vice President.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of March 1, 1998, the shares of the
Common Stock beneficially owned by each person who is the beneficial owner of
more than five percent (5%) of the Company's shares, each of the Company's
Directors and Executive Officers and by all of the Company's Directors and
Executive Officers as a group. Each person has sole voting and investment
power with respect to the shares shown, except as noted.
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT OF BENEFICIAL PERCENTAGE
OF BENEFICIAL OWNER OWNERSHIP OF CLASS
- ----------------------------- -------------------- ----------
<S> <C> <C>
Ashok Dalal 1,156,469<FN1> 9.4%
3703 Bridge Road
Cooper City, FL 33026
Dr. Kishor Karia 901,138<FN2> 7.5%
11001 Pines Blvd., Suite 106
Pembroke Pines, FL 33024
Dr. Dhiraj Patel 907,888<FN3> 7.5%
11801 N. Island Road
Cooper City, FL 33026
34
<PAGE>
Chris Brogdon 2,280,615<FN4> 18.4%
6000 Lake Forrest Drive, Suite 200
Atlanta, GA 30328
Harlan Mathews 0 -0-
420 Hunt Club Road
Nashville, TN 37221
William McBride, III 50,000 0.4%
1647 Logan Creek Drive
Glenbrook, NV 89413
Timothy Beaulieu 125,000<FN5> 1.0%
6000 Lake Forrest Drive, #315
Atlanta, GA 30328
James H. Sanregret 90,000<FN6> 0.7%
6000 Lake Forrest Drive, #315
Atlanta, GA 30328
Frank Camma 85,001<FN7> 0.7%
6000 Lake Forrest Drive, #315
Atlanta, GA 30328
Arthur Doloresco 50,000<FN8> 0.4%
6000 Lake Forrest Drive, #315
Atlanta, GA 30328
Veena Holdings, Ltd.<FN9> 901,138 7.5%
1101 Pines Blvd., Suite 106
Pembroke Pines, FL 33024
Daksha Vakharia Revocable Trust 598,000 5.0%
3365 Bridle Path Lane
Fort Lauderdale, FL 33331
Pro Futures Bridge Capital Fund, 1,000,002<FN10> 8.1%
L.P.
5350 S. Roslyn Street, Suite 350
Englewood, CO 80111
Renaissance Capital Group, Inc. 1,512,336<FN11> 11.1%
Suite 210-LB59
8080 North Central Expressway
Dallas, TX 75206
All Directors and Executive 5,646,111 43.6%
Officers as a Group (10 Persons)
- -------------------
<FN>
<FN1>
Includes 900,000 shares held directly; an aggregate of 31,469 shares held of
record by certain family members of Mr. Dalal; and 225,000 shares underlying
stock options held by Mr. Dalal.
<FN2>
Represents shares held by Veena Holdings, Ltd., a partnership owned by Dr.
Karia and his family.
35
<PAGE>
<FN3>
Includes 801,138 shares held in the name of Dr. Patel's wife, Pravinagauri
Patel; 26,750 shares held in the Karia & Patel Stirling Health Center Annuity
Plan for the benefit of Dr. Patel; and 80,000 shares held jointly by Dr. Patel
and his wife.
<FN4>
Includes 710,978 shares owned by Mr. Brogdon; 397,600 shares owned by Mr.
Brogdon's wife, Connie Brogdon; 209,537 shares of Common Stock which
represents 50% of the shares held by Winter Haven Homes, Inc., of which Connie
Brogdon is a 50% owner; 22,000 shares held by trusts of which Connie Brogdon
is the beneficial owner; 30,000 shares held by Assisted living/independent
living Care Associates, Inc., of which Mr. Brogdon is President, Director and
a principal shareholder of which Mr. Brogdon disclaims beneficial ownership;
375,000 shares underlying currently exercisable stock options held by Mr.
Brogdon; and 535,500 shares underlying options Mr. Brogdon holds to purchase
stock from another shareholder.
<FN5>
Includes 50,000 shares owned by Mr. Beaulieu and 75,000 shares underlying
stock options held by him.
<FN6>
Includes 40,000 shares owned by Mr. Sanregret and 50,000 shares underlying
stock options held by him.
<FN7>
Includes 10,001 shares owned by Mr. Camma and 75,000 shares underlying stock
options held by him.
<FN8>
Represents 50,000 shares underlying stock options held by Mr. Doloresco.
<FN9>
The shareholders of Veena Holdings, Ltd. are Dr. Kishor Karia, Veena Karia,
Ojus Karia and Tajus Karia.
<FN10>
Includes 666,668 shares held directly and 333,334 shares underlying warrants
held by Pro Futures Bridge Capital Fund, L.P.
<FN11>
Includes 200,000 shares underlying stock options held by Renaissance Capital,
Group, and 1,312,336 shares issuable upon the conversion of Convertible
Debentures held by two entities controlled by Renaissance Capital Group, Inc.
The number of shares issuable upon the conversion of the Convertible
Debentures may be increased in April or May 1998 as a result of an adjustment
to the conversion price based on the weighted average closing price of the
Company's Common Stock for the 21 consecutive trading days following the
announcement of the financial results for the year ended December 31, 1997.
</FN>
</TABLE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
RESIGNATION OF ROBERT W. BELL, SR.
During January 1997, Robert W. Bell, Sr., the Company's Chairman and
President, resigned from all of his positions with the Company. In connection
with his resignation, the Company purchased from him and members of his family
a total of 869,978 shares of the Company's common stock for a price of $1.20
per share, or a total consideration of $1,043,973.60. These shares were then
resold to Chris Brogdon and his designees. (See "Letter of Understanding with
Chris Brogdon", below.)
36
<PAGE>
LETTER OF UNDERSTANDING WITH CHRIS BROGDON
On February 19, 1997, the Company's Board of Directors ratified and
approved a Letter of Understanding (the "Letter") between the Company and
Chris Brogdon which was executed on January 31, 1997. Pursuant to this
Letter, the Company agreed to add Chris Brogdon and Harlan Mathews to the
Company's Board of Directors, and these two persons were in fact added on
February 19, 1997. Chris Brogdon currently serves as President and a director
of Retirement Care Associates, Inc. ("RCA"), and Harlan Mathews currently
serves as a director of RCA.
The Letter further provides for and contemplates that Chris Brogdon and
other individuals he selects will become actively involved in the management
of the Company once RCA's proposed merger with Sun HealthCare Group, Inc. is
closed.
Pursuant to the Letter, Chris Brogdon and his designees purchased from
the Company, for a price of $1.20 per share, the 869,978 restricted shares of
the Company's common stock which the Company purchased from Robert W. Bell,
Sr. and members of his family.
The Letter further provides and contemplates that Chris Brogdon and his
designees will purchase from the Company 1,200,000 shares of common stock for
a price of $1.50 per share, contingent upon the Company receiving these shares
from the Carroll Group. (See "Item 3" above.)
The Letter further provided that the Company was to grant to Chris
Brogdon and his designees options to purchase a total of 1,500,000 shares of
common stock at a price of $2.20 per share. These options were granted in
consideration for Mr. Brogdon's agreement to take over management of the
Company. In the event that the Company's common stock does not reach an
average price of at least $5.00 for any 30 consecutive days during the 12
month period following Mr. Brogdon's election as Chief Executive Officer, all
unexercised options will be canceled.
LOANS TO PURCHASE STOCK
In June 1997, the Company loaned an aggregate of $990,000 to five
individuals to allow them to purchase shares of the Company's Common Stock
from Matthew Carroll and certain other shareholders. The loans are due on
June 30, 1998, and bear interest at 10% per annum. Included in these loans
are loans to Chris Brogdon, Chairman of the Board and a principal shareholder
of the Company, in the principal amount of $487,500, and to Timothy Beaulieu,
Executive Vice President of the Company, in the principal amount of $75,000.
In addition, the Company made loans to the following persons who are employed
by Retirement Care Associates, Inc. in the principal amounts shown: Edward E.
Lane - $277,500; Philip Rees - $75,000; and Robert Lancaster - $75,000.
AGREEMENTS WITH RENAISSANCE SENIOR LIVING, INC.
On February 17, 1997, the Company entered into a Management Agreement
with Renaissance Senior Living, Inc. ("Renaissance"), pursuant to which
Renaissance agreed to manage all of the Company's long-term care facilities
and assisted living/independent living facilities. Renaissance was to be paid
a monthly fee for each facility equal to 25% of the increase in profit (a
decrease in loss) at the facility as compared to the profit (or loss) at the
facility as of December 31, 1996, but the fee was not to exceed 6% of the
gross operating revenues of the facility for that month. The agreement
terminated on December 31, 1997, and this arrangement ended. During the year
ended December 31, 1997, Renaissance earned no fees under this agreement
because none of the facilities had the requisite
37
<PAGE>
improvement. Renaissance is owned by Chris Brogdon (20%), Edward E. Lane
(20%), Darrell Tucker (17%) and other officers and employees of Assisted
living/independent living Care Associates, Inc. Chris Brogdon, a director of
the Company, is also a director of Renaissance.
In December 1997, Renaissance formed Conyers Assisted living/independent
living, L.P., a Georgia limited partnership for the purpose of constructing a
senior living community on a 10 acre tract of raw land in Conyers, Georgia.
Renaissance serves as General Partner of the partnership and holds 99% of the
interest in the partnership, and the Company is the sole limited partner and
holds 1% of the interest in the partnership for which it contributed $1.00.
Since the formation of the partnership, the Company has also contributed
approximately $300,000 and guaranteed $9 million in the Development Authority
of Rockdale County First Mortgage Revenue Bonds (Conyers Assisted
living/independent living, L.P. Project), the net proceeds of which were
loaned to the partnership to finance the construction of a 132 unit senior
living community on the site. The Company has agreed to enter into an
agreement to manage the facility for which it will receive a fee of 5% of the
facility's gross revenues. As part of the management agreement the Company
will agree to make non-interest bearing advances to Conyers Assisted
living/independent living, L.P. to the extent that revenues generated by the
facility are not sufficient to pay its current expenses and required principal
and interest under the bonds. The facility is expected to be completed in the
Fall of 1998.
TRANSACTIONS WITH KAREN HAGAN
The Company leased office space from Cimerron Properties, Inc., a
company owned by Karen Hagan, a principal shareholder of the Company, under an
operating lease that was to expire on December 31, 1999. Annual rental
payments under the lease were approximately $45,600. Pursuant to a settlement
agreement with Karen Hagan and others, effective April 15, 1997, this lease
was terminated early in exchange for a cash payment of $65,000.
In September 1995, the Company exercised an option to purchase the Emory
Nursing Center in exchange for $300,000 in cash and the assumption of
approximately $500,000 in debt. The $300,000 was raised by borrowing the
money from Karen Hagan. The $300,000 loan bears interest at 10% and is
payable in monthly payments of interest only through September 15, 1998, when
all principal and any accrued interest is due. The $500,000 note payable
matured in February 1996, and was refinanced with a loan from Assisted
living/independent living Care Associates, Inc. bearing interest at 9%.
Accrued interest and principal were due in February 1997. This note has been
converted to a demand note. Two of the Company's directors are also directors
of Retirement Care Associates, Inc.
In October 1995, the Company borrowed $600,000 from Karen Hagan to
purchase Suncoast Nursing Home. The promissory note bears interest at 10% per
annum and is payable interest only until April 15, 1998, when it is due. The
note is secured by a mortgage on Suncoast Nursing Home.
In August 1995, the Company borrowed $225,000 from Karen Hagan to
purchase real estate adjacent to the Emory Nursing Center. Thirty thousand
dollars ($30,000) was repaid during January 1997. A $195,000 note bears
interest at 10% and is payable in monthly installments of interest only
through August 1998, when all principal and any accrued interest is due. The
note is collateralized by the real estate.
38
<PAGE>
In July 1996, the Company borrowed $80,000 from Karen Hagan to pay
outstanding payroll taxes. The note bore interest at 12% and was payable in
twelve monthly installments of $7,467 with the final payment due July 1, 1997.
The note was repaid as scheduled.
SETTLEMENT WITH ROBERT HAGAN AND KAREN HAGAN
Effective April 15, 1997, the Company entered into and closed a
Settlement Agreement with Karen and Robert Hagan (the "Hagans") and Chris
Brogdon ("Brogdon"). This agreement provides for, among other things, the
following:
1. At the closing, the Company paid Robert Hagan $150,000 for the
termination of his employment agreement dated May 22, 1995.
2. At the closing, the Company paid Cimerron Properties, Inc., a
company owned by the Hagans, $65,000 for termination of a commercial real
estate lease for office space occupied by the Company in Roswell, Georgia,
which was scheduled to terminate on December 31, 1997.
3. Brogdon will purchase a total of 714,000 shares from Karen Hagan
over a two year period commencing April 15, 1997. The transaction is
structured such that Karen Hagan will sell to Brogdon four options for 178,500
shares each. The options will be exercisable in six month intervals at an
exercise price of $3.00 per share, with the first option exercisable at any
time on or before October 15, 1997. Brogdon must pay $21,420 for the first
option (which expires October 15, 1997); $42,820 for the second option;
$64,260 for the third option; and $85,860 for the fourth option. The purchase
price for each option will be payable in monthly installments of $3,570 each
beginning on May 15, 1997, and continuing monthly thereafter until such time
as the option has been exercised by Brogdon or until it lapses.
Brogdon has also granted to Karen Hagan four put options which
essentially provide that during the 10 day periods following each of the four
option periods Karen Hagan can force Brogdon to purchase any shares that he
doesn't purchase under the prior six month option. The purchase price for the
put options is $2.95 per share.
4. At the closing, the Company delivered to the Hagans title to a
1994 Ford Ranger pickup.
5. At the closing, Robert Hagan, Karen Hagan and Richard Vanderberg
tendered his or her resignation as an officer and/or director of the Company
and any of its subsidiaries.
6. The Company agreed to continue to employ Richard Vanderberg
according to his employment agreement as the Chief Financial Officer of
Cimerron Health Care, Inc., until October 1, 1997. At that time, the Company
paid Vanderberg $116,250 to terminate his employment agreement which otherwise
would have continued until May 22, 2000.
On April 15, 1997, Robert Hagan and Chris Brogdon were both directors of
the Company, and Robert Hagan was a principal shareholder by virtue of the
714,287 shares owned by his wife. Robert Hagan resigned as a director
effective on April 15, 1997.
LOAN FROM RETIREMENT CARE ASSOCIATES, INC.
During February 1996, Retirement Care Associates, Inc. ("RCA") loaned
the Company $500,000 pursuant to a one-year promissory note with 9% interest
secured
39
<PAGE>
by an interest in the Emory Nursing facility. The note was converted to a
30-day demand note with interest payable monthly and was paid in full during
August 1997. Chris Brogdon and Harlan Mathews, directors of the Company, are
also directors of RCA, and Chris Brogdon is President and a principal
shareholder of RCA.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K .
(a) 1. The following financial statements are filed herewith:
Page(s)
Independent Auditors' Report F-1
Report of Independent Certified Public Accountants F-2
Consolidated Balance Sheets F-3 - F-4
Consolidated Statements of Operations F-5 - F-6
Consolidated Statements of Changes in Stockholders' Equity F-7
Consolidated Statements of Cash Flows F-8 - F-9
Notes to Consolidated Financial Statements F-10- F-33
2. No financial statement schedules are required to be filed.
3. The following exhibits are filed herewith:
EXHIBIT
NUMBER DESCRIPTION LOCATION
10.4 Settlement Agreement among Incorporated by reference to
Karen Hagan, Robert Hagan, Exhibit 10 to the Company's
Christopher F. Brogdon and Report on Form 8-K dated
the Company dated April April 15, 1997
15, 1997
10.5 Asset Purchase Agreement Incorporated by reference to
with Meadowbrook Neuro- Exhibit 10.1 to the Company's
care-Kansas city, Inc. Report on Form 8-K dated
August 1, 1997
10.6 Agreement of Sale (Real Incorporated by reference to
Estate) Exhibit 10.2 to the Company's
Report on Form 8-K dated
August 1, 1997
10.7 Second Bridge Note and Incorporated by reference to
Security Agreement and Exhibit 10.3 to the Company's
Mortgage, Assignment, Report on Form 8-K dated
of Leases and Rents, August 1, 1997
Security Agreement and
Fixtures Filing
40
<PAGE>
10.8 Management Agreement with Incorporated by reference to
Tri-City Hospital Centre, Exhibit 10.1 to the Company's
Inc. Report on Form 8-K dated
September 30, 1997, concerning
Tri-City Hospital
10.9 Option Agreement Tri-City Incorporated by reference to
Hospital Centre, Inc. Exhibit 10.2 to the Company's
Report on Form 8-K dated
September 30, 1997, concerning
Tri-City Hospital
10.10 Management Agreement with Incorporated by reference to
Princeton Hospital, Inc. Exhibit 10.1 to the Company's
Report on Form 8-K dated
September 30, 1997, concerning
Princeton Hospital
10.11 Option Agreement Prince- Incorporated by reference to
ton Hospital, Inc. Exhibit 10.2 to the Company's
Report on Form 8-K dated
September 30, 1997, concerning
Princeton Hospital
10.12 Stock Purchase Agreement Incorporated by reference to
with Wakulla Manor, Inc. Exhibit 10.1 to the Company's
et al., and First Amend- Report on Form 8-K dated
ment to Stock Purchase September 16, 1997
Agreement
10.13 Loan Agreement and Prom- Incorporated by reference to
issory Note Secured by Exhibit 10.2 to the Company's
Mortgage Report on Form 8-K dated
September 16, 1997
10.14 Employment Agreement Previously filed
with Timothy Beaulieu
10.15 Employment Agreement Previously filed
with James H. Sanregret
10.16 Employment Agreement Previously filed
with Arthur Doloresco
10.17 1997 Stock Option Plan Previously filed
10.18 Convertible Loan Agree- Previously filed
ment among the Company
and Renaissance Capital
Growth & Income Fund
III, Inc., et al. and
Convertible Debentures
10.19 Loan Agreement with Previously filed
Nationwide Health Prop-
erties, Inc. and Secured
Promissory Note
41
<PAGE>
10.20 Loan and Security Agree- Previously filed
ment with HCFP Funding,
Inc.
10.21 Guarantee Agreement for Previously filed
Conyers Retirement, L.P.
21 Subsidiaries of the Previously filed
Registrant
27 Financial Data Schedule Previously filed
(b) REPORTS ON FORM 8-K. No reports on Form 8-K were filed for events
occurring during the quarter ended December 31, 1997.
42
<PAGE>
LANEY
BOTELER &
KILLINGER
- ----------------------------
Certified Public Accountants
- ----------------------------
INDEPENDENT AUDITORS' REPORT
Board of Directors
NewCare Health Corporation and Subsidiaries
Atlanta, Georgia
We have audited the accompanying consolidated balance sheets of NewCare Health
Corporation and Subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of operations, shareholders' equity and cash flows for
the years then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits. The consolidated statements
of operations, shareholders' equity and cash flows of NewCare Health
Corporation and Subsidiaries as of December 31, 1995, were audited by other
auditors whose opinion, dated February 27, 1996, expressed an unqualified
opinion on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the 1997 and 1996 consolidated financial statements referred
to above present fairly, in all material respects, the financial position of
NewCare Health Corporation and Subsidiaries as of December 31, 1997 and 1996,
and the results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles.
/s/ Laney, Boteler & Killinger
Laney, Boteler & Killinger
Atlanta, Georgia
March 17, 1998
100 Ashford Center North - Suite 310 - Atlanta, Georgia 30338 - 7790/394-8000
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
NewCare Health Corporation and Subsidiaries
Largo, Florida
We have audited the consolidated statements of operations, changes in
shareholders' equity and cash flows of NewCare Health Corporation and
Subsidiaries for the year ended December 31, 1995. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatements. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated results of
operations and cash flows of NewCare Health Corporation and aubsidiaries for
the year ended December 31, 1995, in conformity with generally accepted
accounting principles.
/s/ Lovelace, Roby & Company, P.A.
Certified Public Accountants
Orlando, Florida
February 27, 1996
F-2
<PAGE>
NEWCARE HEALTH CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
Assets
DECEMBER 31,
-----------------------------
1997 1996
------------- ------------
Current assets
Cash and cash equivalents $ 2,297,599 $ 3,198,700
Accounts receivable, net of allowance for
doubtful accounts of $976,600 and $191,300 4,569,319 1,829,581
Other receivables 160,113 486,682
Notes receivable - related parties 1,039,500 -
Due from related party 1,201,063 92,000
Mortgage notes receivable - 1,852,377
Marketable securities (available for
sale) and other investments 10,083,000 57,993
Restricted investments, current 469,119 -
Inventory 132,680 27,762
Deferred taxes 412,204 -
Prepaid expenses and other current assets 873,130 172,067
------------ ------------
Total current assets 21,237,727 7,717,162
------------ ------------
Property and equipment, net 42,972,686 23,821,561
------------ ------------
Other assets
Deferred loan costs 1,257,427 248,132
Goodwill 1,219,039 319,039
Organizational costs 76,016 76,016
------------ ------------
2,552,482 643,187
Less accumulated amortization 464,733 280,615
------------ ------------
Deferred costs, net 2,087,749 362,572
Deposits 926,511 60,762
Restricted investments, less current
portion 1,543,686 305,044
------------ ------------
Total other assets 4,557,946 728,378
------------ ------------
Total assets $ 68,768,359 $ 32,267,101
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
NEWCARE HEALTH CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
Liabilities and Shareholders' Equity
DECEMBER 31,
-----------------------------
1997 1996
------------- ------------
Current liabilities
Current maturities of long-term debt $ 1,380,735 $ 16,899,696
Borrowings under line of credit 3,189,755 -
Brokerage investment margin payable 6,740,653 -
Accounts payable 6,163,548 1,143,996
Accrued expenses 3,288,527 2,049,865
Due to related parties 2,776,177 -
Other liabilities - 149,052
------------ ------------
Total current liabilities 23,539,395 20,242,609
------------ ------------
Long-term debt 39,754,836 6,880,805
------------ ------------
Minority interest in subsidiary 13,900 -
------------ ------------
Commitments and contingencies
Shareholders' equity
Common stock, $.02; 50,000,000 shares
authorized; 11,372,524 and 10,667,524
shares issued, respectively 227,350 213,350
Additional paid-in capital 11,579,675 9,055,724
Retained earnings (deficit) (7,174,889) (4,075,387)
Unrealized gain on marketable securities 828,092 -
Treasury stock, at cost - (50,000)
------------ ------------
Total shareholders' equity 5,460,228 5,143,687
------------ ------------
Total liabilities and shareholders'
equity $ 68,768,359 $ 32,267,101
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
NEWCARE HEALTH CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
Years Ended December 31, 1997, 1996, and 1995
1997 1996 1995
----------- ----------- -----------
Revenue
Net patient services revenue $32,359,366 $28,194,431 $23,069,661
Management fees revenue 503,577 - -
Other operating revenue 121,987 489,273 107,244
----------- ----------- -----------
Total operating revenues 32,984,930 28,683,704 23,176,905
Operating expenses
Cost of patient services 24,913,670 20,095,723 18,293,388
Lease expense 771,427 709,542 494,005
Shareholder settlements 485,000 - -
General and administrative 7,367,125 4,614,816 2,033,887
Provision for bad debts 1,194,780 203,937 211,919
Depreciation and amortization 1,196,000 1,076,740 938,946
----------- ----------- -----------
Total operating expenses 35,928,002 26,700,758 21,972,145
----------- ----------- -----------
Operating income (loss) (2,943,072) 1,982,946 1,204,760
----------- ----------- -----------
Other income (expense)
Investment income 794,214 83,828 9,496
Interest expense (3,148,460) (1,912,838) (1,518,910)
----------- ----------- -----------
(2,354,246) (1,829,010) (1,509,414)
Income (loss) before minority
interest, income taxes, dis-
continued operations and extra-
ordinary item (5,297,318) 153,936 (304,654)
Minority interest in subsidiary (13,900) - -
----------- ----------- -----------
Income (loss) before income taxes,
discontinued operations and extra-
ordinary item (5,311,218) 153,936 (304,654)
Income tax benefit (provision) 1,331,865 (54,000) (36,000)
----------- ----------- -----------
Income (loss) before discontinued
operations and extraordinary item (3,979,353) 99,936 (340,654)
Discontinued operations
Income (loss) from discontinued
business segment net of income
tax benefit of $23,000 in 1996 - (970,430) 168,432
Loss on disposal of discontinued
business segment net of income
tax benefit of $31,000 - (1,355,798) -
----------- ----------- -----------
Loss before extraordinary item (3,979,353) (2,226,292) (172,222)
F-5
<PAGE>
NEWCARE HEALTH CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
Years Ended December 31, 1997, 1996, and 1995
(Continued)
1997 1996 1995
----------- ----------- -----------
Extraordinary item - Gain on
forgiveness of debt, net of
income tax provision of $473,765 879,851 - -
----------- ----------- -----------
Net loss $(3,099,502) $(2,226,292) $ (172,222)
=========== =========== ===========
Basic and diluted net income
(loss) per common share from:
Income (loss) before extraor-
dinary item and discontinued
operations $ (.37) $ .01 $ (.03)
Discontinued operations $ - $ (.22) $ .01
Extraordinary item $ .08 $ - $ -
Net loss $ (.29) $ (.21) $ (.02)
Weighted average number of common
shares outstanding 10,769,829 10,667,524 10,390,073
=========== =========== ===========
F-6
<PAGE>
NEWCARE HEALTH CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity
Years Ended December 31, 1997, 1996, and 1995
<TABLE><CAPTION>
UNREALIZED
COMMON STOCK ADDITIONAL GAIN ON TOTAL
------------------- PAIT-IN ACCUMULATED MARKETABLE TREASURY SHAREOLDERS'
SHARES AMOUNT CAPITAL DEFICIT SECURITIES STOCK EQUITY
---------- -------- ----------- ----------- --------- --------- ----------
<C> <S> <S> <S> <S> <S> <S> <S>
Balance at
December 31,
1994 9,920,488 $198,410 $ 7,247,094 $(1,676,873) $ - $ (50,000) $5,718,631
Issuance of
common stock
for acquisition
of subsidiary 726,286 14,525 1,801,190 - - - 1,815,715
Other common
stock issuances 20,750 415 7,440 - - - 7,855
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
Net loss for
1996 - - - (2,226,292) - - (2,226,292)
---------- -------- ----------- ----------- --------- --------- ----------
Balance at
December 31,
1996 10,667,524 213,350 9,055,724 (4,075,387) - (50,000) 5,143,687
Purchase of
common stock
from related
party (869,978) - - - -(1,043,974) (1,043,974)
Issuances of
common stock:
To related
parties 869,978 - - - - 1,043,974 1,043,974
Compensation
for services - - 15,783 - - 50,000 65,783
Other 10,000 200 22,200 - - - 22,400
Private place-
ments 695,000 13,800 2,485,968 - - - 2,499,768
Unrealized gain
on marketable
securities - - - - 828,092 - 828,092
Net loss for
1997 - - - (3,099,502) - - 1,099,502)
---------- -------- ---------- ----------- --------- --------- -----------
Balance at
December 31,
1997 11,372,524 $227,350 $11,579,675 $(7,174,889) $ 828,092 $ - $ 5,460,228
</TABLE>
F-7
<PAGE>
NEWCARE HEALTH CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended December 31, 1997, 1996, and 1995
1997 1996 1995
------------ ----------- -----------
Cash flows from operating activities
Net loss before extraordinary item $ (3,979,353) $(2,226,292) $ (172,222)
Adjustments to reconcile net loss
to net cash provided by operating
activities
Depreciation and amortization 1,196,000 1,554,219 1,494,836
Common stock issued for services 51,449 - 7,855
Provision for bad debts 1,194,780 (707,936) 1,001,448
Gain on sale of investments (177,107) - -
Loss on disposal of business segment - 1,386,798 -
Deferred taxes (1,331,865) - -
Change in minority interest 13,900 - -
Changes in assets and liabilities,
net of effects from business com-
binations
Decrease (increase) in assets
Accounts receivable (3,864,217) 1,612,136 (1,617,140)
Other receivables (160,113) (486,682) -
Inventories (104,918) 181,701 43,475
Other current assets (701,063) 81,142 73,254
Deposits (865,749) - -
Increase (decrease) in liabilities
Accounts payable 4,958,541 (2,090,525) 778,678
Accrued liabilities 1,720,217 157,987 34,284
Other liabilities (149,052) (168,833) (105,535)
------------ ----------- ----------
Net cash provided by (used
in) operating activities (2,198,550) (706,285) 1,538,933
------------ ----------- ----------
Cash flows from investing activities
Proceeds from sale of property and
equipment - 10,234,655 -
Purchases of property and equipment (14,381,568) (1,085,050) (564,149)
Payments of deferred costs (1,672,918) (131,950) (118,120)
Cash paid for acquisitions of
affiliates, net of cash acquired - - (1,612,200)
Issuance of notes receivable -
related parties (990,000) - -
Collections on advances to related
parties 18,000 - -
Advances to related parties (1,176,563) (18,000) -
Issuance of notes receivable - (1,852,377) -
Collections on notes receivable 1,852,377 - -
Change in restricted investments (1,707,761) - -
Proceeds on sale of investments 5,783,756 - -
Purchase of investments (7,617,015) (57,993) -
------------ ----------- ----------
Net cash provided by (used
in) investing activities (19,891,692) 7,089,285 (2,294,469)
------------ ----------- ----------
F-8
<PAGE>
NEWCARE HEALTH CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended December 31, 1997, 1996, and 1995
(Continued)
1997 1996 1995
------------ ----------- ----------
Cash flows from financing activities
Proceeds from long-term debt 33,005,196 710,572 2,741,953
Repayment of long-term debt (20,318,489) (2,405,020) (2,710,935)
Advances from related parties 2,776,177 - -
Repayment of notes payable - (1,525,000) -
Purchase of treasury stock (1,043,974) - -
Proceeds from issuance of common
stock 3,580,476 - -
Net increase (decrease) in
lines of credit 3,189,755 (166,491) -
------------ ----------- ----------
Net cash provided by (used
in) financing activities 21,189,141 (3,385,939) 31,018
------------ ----------- ----------
Net increase (decrease) in cash
and cash equivalents (901,101) 2,997,061 (724,518)
Cash and cash equivalents at
beginning of year 3,198,700 201,639 926,157
------------ ----------- ----------
Cash and cash equivalents at
end of year $ 2,297,599 $ 3,198,700 $ 201,639
============ =========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
F-9
<PAGE>
NEWCARE HEALTH CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS AND BASIS OF PRESENTATION
The financial statements include the accounts of NewCare Health Corporation
and its consolidated subsidiaries (the Company). The Company currently
operates fourteen leased and owned nursing and retirement facilities located
in Georgia, Florida and Texas and one rehabilitative hospital in Kansas. The
company also manages two hospitals located in Florida and Texas for unrelated
third parties. The assets and operations of its medical supply and
pharmaceutical sales and service division, operating through the Company's
Spectrum subsidiary, were sold October 24, 1996 (Note 2).
PRINCIPLES OF CONSOLIDATION
The accompanying financial statements include the accounts of the Company and
its wholly-owned subsidiaries, as well as its majority-owned subsidiaries.
All significant intercompany transactions have been eliminated in the
consolidation process.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include all highly liquid investments with an
original maturity of three months or less.
INVENTORY
Inventories, consisting primarily of health care supplies, are valued at the
lower of cost (first-in, first-out) or market.
PROPERTY, EQUIPMENT AND DEPRECIATION
Property and equipment are stated at cost. Maintenance and repairs are
charged to operations and major improvements are capitalized. Upon sale,
retirement or other disposition, the cost and accumulated depreciation are
eliminated from the accounts and any gain or loss is included in operations.
Depreciation is computed using the straight-line method for financial
reporting purposes and accelerated methods for income tax purposes. Estimated
useful lives of the assets range from three to fifteen years for equipment and
thirty to forty years for real estate. Substantially all property and
equipment owned by the Company is held as collateral for the Company's debt
(Note 7).
INVESTMENTS
In accordance with Statements of Financial Accounting Standards No. 115,
marketable securities are classified as held-to-maturity, available-for-sale
or trading based on the intentions and ability of the Company to hold the
investment. All marketable securities held at December 31, 1997, are
classified as available for sale and are carried at fair market value.
Unrealized holding gains and losses for available for sale securities are
recorded as a separate component of shareholders' equity.
F-10
<PAGE>
DEFERRED COSTS
Deferred loan costs, consisting of loan commitment fees and related
expenditures, are amortized over the repayment term of the loan using the
interest method. Organizational costs relate to costs incurred in connection
with the organization of the Company or a subsidiary of the Company and are
amortized on a straight-line basis over five years.
Offering costs directly related to the Company's offerings of its common stock
are offset against the proceeds from the offerings as a charge to additional
paid-in capital, or expensed in the event the related offering is
unsuccessful.
GOODWILL
Goodwill arises in connection with business combinations accounted for as
purchases where the purchase price exceeds the fair value of the net assets of
the acquired businesses. Goodwill is amortized on a straight-line basis over
the periods of expected benefit, generally ten to twenty years. The carrying
value of goodwill is reviewed if the facts and circumstances suggest that it
may be impaired. Any permanent impairment would be recognized by a charge
against earnings. Accumulated amortization of goodwill approximated $162,000
and $135,000 as of December 31, 1997 and 1996, respectively.
RESTRICTED INVESTMENTS
Restricted investments consist of cash, certificates of deposit and U.S.
Treasury bonds whose use is restricted to meet future service requirements.
Current restricted investments include principal and interest bond and note
payable service funds which are used for payment of principal and interest on
or before the dates required by the respective trust indenture. Non-current
restricted investments include debt service reserve funds which are used for
payment of principal and interest when amounts in the principal and interest
funds are insufficient. Non-current restricted investments also include funds
held by the mortgagor of the Fitzgerald HUD Loan for future repair and
replacement of the facility and a certificate of deposit held by a bank in the
amount of $1,159,000 as security for a letter of credit securing the
Nationwide refinancing loan (Note 7). Fair value approximates cost for these
investments at December 31, 1997 and 1996.
ASSESSMENT OF LONG-LIVED ASSETS
The Company periodically reviews the carrying value of its long-lived assets
(primarily property and equipment and intangible assets) whenever events or
circumstances provide evidence that suggests the carrying amount of long-lived
assets may not be recovered. If this review indicates that the long-lived
assets may not be recoverable, the Company reviews the expected undiscounted
future net operating cash flows from its facilities, as well as valuations
obtained in connection with various refinancings. Any impairment of value is
recognized as a charge against earnings in the statement of operations. As of
December 31, 1997, the Company does not believe that there is any indication
that the amortization period of its long-lived assets needs to be adjusted.
INCOME TAXES
Deferred income taxes are recognized for the tax consequences of temporary
differences between the financial reporting bases and the tax bases of the
Company's assets and liabilities. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized.
F-11
<PAGE>
Income tax expense is the tax payable for the period plus or minus the net
change during the period in deferred tax assets and liabilities.
CREDIT RISK
Financial instruments which potentially subject the Company to concentrations
of credit risk consist principally of accounts receivable and investments.
Credit risk associated with private pay accounts receivable is mitigated by
the large number of such accounts. Credit risk related to accounts receivable
from the Medicaid and Medicare programs is mitigated by the taxing authority
of the governmental entities funding those programs. Credit risk associated
with the Company's investment in bonds is currently mitigated by the Company's
involvement as the management agent of the hospital whose indebtedness is
related to the bonds.
REVENUE RECOGNITION
Net patient service revenue is reported at the estimated net realizable
amounts receivable from residents, third-party payors and others for services
rendered. Patient service revenue is derived primarily from services to
retirement center residents and nursing home patients. Retirement center
residents typically pay rent in advance of the month for which it is due.
Nursing home patients are predominantly beneficiaries of the Medicare and
Medicaid programs.
The Medicare program reimburses nursing homes on the basis of allowable costs
subject to certain limitations. Payments are received throughout the year at
amounts estimated to approximate costs. Following year end, cost reports are
filed with the Medicare program and final settlements are made. Provisions
for Medicare settlements are provided in the financial statements for the
period the related services are rendered. Differences between the amounts
accrued and final settlements are reported in the year of settlement.
State Medicaid programs pay nursing homes primarily on a per diem basis with
no retroactive settlement. Revenues from services to Medicaid patients are
recorded at payment rates established by the various state programs in the
period services are rendered.
The Company recognized revenue in its Spectrum subsidiary from the sale of
products in the period that the products were shipped to customers. Revenue
from providing health care services is generally recognized in the period that
the services are performed.
There has been, and the Company expects that there will continue to be, a
number of proposals to limit Medicare and Medicaid payments for long-term and
rehabilitative services. The Company cannot predict at this time whether any
of these proposals will be accepted or, if adopted and implemented, what
effect such proposals would have on the Company.
PRODUCT WARRANTIES
While operating the Spectrum division sold in October 1996, the Company
generally would replace or refund the purchase price of products sold if the
customer was not satisfied. Historically, the effect of this policy was not
material to the Company's financial statements and, accordingly, the financial
statements do not include a provision for the effect of product warranty
policies resulting from past sales in the Spectrum subsidiary.
F-12
<PAGE>
NET INCOME (LOSS) PER SHARE
Net earnings (loss) per common share are computed using the weighted average
number of common shares and common equivalent shares outstanding during each
year. Common share equivalents represent shares issuable upon the assumed
exercise of stock options and warrants. 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. For purposes of determining diluted earnings (loss) per share,
there were no common stock equivalents at December 31, 1997 and 1996.
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 periods reported. Actual results could
differ from those estimates.
STOCK-BASED COMPENSATION
The Financial Accounting Standards Board released SFAS No. 123, "Accounting
for Stock Based Compensation." SFAS No. 123 encourages, but does not require,
companies to recognize compensation expenses based on the fair value of grants
of stock, stock options, and other equity investments to employees. Although
expense recognition for employee stock-based compensation is not mandatory,
SFAS No. 123 requires that companies not adopting must disclose pro-forma net
income and earnings per share. The Company will continue to apply the prior
accounting rules and make pro-forma disclosures.
RECLASSIFICATIONS
Certain 1995 and 1996 amounts have been reclassified to conform with the 1997
presentation.
NOTE 2 - BUSINESS COMBINATIONS, ACQUISITIONS AND DISPOSITIONS
SPECTRUM
During 1994, the Company acquired all of the outstanding common stock of
Spectrum Health Services, Inc. and Spectrum Infusion Services, Inc.
(Spectrum). Spectrum was engaged in the business of selling medical supplies,
pharmaceutical products and services and therapy services to health care
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 stock given in the
exchange was 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.
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. The Company was amortizing this amount
over forty years using the straight-line method.
On October 24, 1996, the assets of Spectrum were sold. The sale price of
$10,167,000 was comprised of approximately $7,795,000 in cash, assumption of
F-13
<PAGE>
liabilities totaling $1,841,000 and payoff of liabilities and closing costs
totaling $531,000. The 1996 income statement reflects a loss from the sale of
Spectrum of $1,355,798. Basic and diluted income (losses) per share due to
these discontinued operations at December 31, 1996 and 1995 totaled $(.22) and
$.01 per share, respectively.
OTHER
The lease with Bay to Bay Nursing Home expired in June 1996 and was not
renewed. Revenue from this nursing home for the years ended December 31, 1996
and 1995 totaled $20,271 and $161,305, respectively.
In September 1995, the Company acquired, through a lease, the operations of a
100-bed skilled nursing facility located in Tampa, Florida. This facility was
purchased by the Company on May 21, 1997, for $2,753,000 in connection with
the refinancing of debt on four other existing facilities.
In May 1997, the Company entered into a 15 year lease for a 142-bed nursing
facility in Whigham, Georgia.
In August 1997, the Company purchased an 84 bed rehabilitation hospital in
Gardner, Kansas, for $5,000,000. The acquisition was financed with $500,000
in cash and $4,500,000 in new debt.
In September 1997, the Company acquired all of the outstanding stock of a 120
bed nursing facility in Wakulla, Florida, for $1,200,000 plus debt assumption
of $3,200,000. New debt of $4,800,000 was used to purchase the stock, retire
the assumed debt and other liabilities.
In November 1997, the Company acquired all of the outstanding stock of a
corporation which is the sole general partner in a limited partnership which
operates a 120 bed nursing facility in Tyler, Texas, for $575,000, consisting
of $475,000 in cash and a $100,000 note payable. The general partner owns a
combined general and limited partner interest totaling 58.8%.
Total cost for the 1997 acquisitions is $13,128,000, of which $975,000 was
paid in cash and $12,153,000 through issuance of debt.
The Company typically obtains financing in excess of the purchase price paid
for the acquired facilities. The excess funds are used to cover certain
closing costs associated with the transactions with any residual amounts
retained by the Company.
The acquisitions referred to above have been accounted for using the purchase
method of accounting. The operating results of those acquired facilities have
been included in the consolidated statement of operations from the date of
acquisition.
UNAUDITED PRO-FORMA RESULTS OF OPERATIONS
The following table presents unaudited pro-forma results of operations data as
if the acquisitions described above had occurred on January 1, 1996 after
giving effect to certain adjustments and reclassifications, including
additional depreciation expense, increased interest expense on acquisition
related debt, related income tax effects and elimination of intercompany
transactions. The pro-forma amounts are provided for information purposes
only. It is based on historical information and does not necessarily reflect
the actual results that would have occurred, nor is it necessarily indicative
of future results of operations of the combined enterprise.
F-14
<PAGE>
FOR THE YEAR ENDED DECEMBER 31,
(UNAUDITED)
------------------------------
1997 1996
----------- -----------
Net revenues $20,236,000 $20,988,000
Net loss (809,000) (408,000)
Net loss per share (0.07) (0.04)
NOTE 3 - ACCOUNTS RECEIVABLE
Accounts receivable and net patient service revenue include amounts payable by
Medicaid and Medicare programs. These government reimbursement programs
accounted for approximately 87% and 73% of net patient service revenue during
1997 and 1996, respectively.
The Company grants credit without collateral to its patients, most of whom are
local residents of the respective nursing home and retirement facilities and
are insured under third-party payor agreements. The mix of receivables from
patients and third party payors is as follows:
1997 1996
---------- ----------
Medicaid $2,208,011 $1,393,923
Medicare 2,181,035 282,312
Other third party payors 360,038 172,812
Private pay patients 872,732 171,834
---------- ----------
5,621,816 2,020,881
Management fees 344,103 -
---------- ----------
5,965,919 2,020,881
Less allowance for doubtful accounts 976,600 191,300
---------- ----------
$4,569,319 $1,829,581
---------- ----------
In the opinion of management, any differences between the net Medicare and
Medicaid revenue recorded and final determination will not materially affect
the consolidated financial statements.
The activity in the allowance for doubtful accounts is as follows:
1997 1996
---------- ----------
Beginning of period $ 191,300 $ 899,235
Provision for bad debts 1,194,780 203,937
Deductions (409,480) (911,872)
---------- ---------
End of period $ 976,600 $ 191,300
---------- ---------
NOTE 4 - MORTGAGE NOTES RECEIVABLE
On November 15, 1996, the Company acquired two purchase money mortgage notes
from an unrelated party totaling $1,853,300. The notes were collateralized by
all real and personal property of the Central Tampa Nursing Facility (Note 2)
which
F-15
<PAGE>
the Company had previously leased from the issuer of the notes. The notes
bore interest at the rate of 10% per annum. These notes were paid by the
borrower on May 21, 1997, at which time the Company purchased the property and
equipment of the facility.
NOTE 5 - MARKETABLE SECURITIES AND OTHER INVESTMENTS
Marketable securities at December 31, 1997, consisted of approximately fifty
percent of the outstanding bond indebtedness on one of the hospitals the
Company manages for an unrelated third party. The acquisition of the bonds
were financed substantially by a brokerage margin loan. Interest at 8.0% is
charged monthly on the average outstanding balance. The readily determinable
fair value of these bonds at December 31, 1997, was $9,100,000, with a cost
basis of $7,826,012, resulting in an unrealized gain of $1,273,988 which is
recorded, net of tax, as a separate component of shareholders' equity.
During 1997, the Company purchased and sold marketable securities classified
as available for sale with proceeds totaling $5,783,756 and a cost of
$5,606,656 resulting in a realized gain of $177,100 which is included in
investment income.
On December 22, 1997, the Company signed an agreement to acquire approximately
twenty percent of the outstanding shares of Iatros Health Network, Inc.
(Iatros) for $1,000,000. As of December 31, 1997, the Company had paid
$211,000 in cash. The balance of $789,000 is included in accounts payable and
was paid in installments from January through March 1998. The stock purchase
was made as part of initial steps in merger discussions with Iatros (Note 23).
The Company accounts for its investment in Iatros on the equity method and
recorded a loss of $17,000 for its period of ownership.
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
1997 1996
----------- -----------
Land and improvements $ 5,869,814 $ 4,197,271
Buildings and improvements 38,014,213 21,721,772
Equipment and other 4,802,472 3,585,056
----------- -----------
48,686,499 29,504,099
Less: accumulated depreciation
and amortization 6,749,126 5,682,538
----------- -----------
41,937,373 23,821,561
Construction in progress 1,035,313 -
----------- -----------
Net property and equipment $42,972,686 $23,821,561
Construction in progress consists of renovations at one of the nursing home
facilities in Florida and other expenses incurred in combining the
Certificate's of Need at existing facilities.
Substantially all of the property and equipment is pledged as collateral for
long-term debt.
NOTE 7 - LONG-TERM DEBT
Notes payable and long-term debt consisted of the following at December 31,
1997 and 1996:
F-16
<PAGE>
1997 1996
----------- -----------
Note payable with interest at 8.5%, collateral-
ized by a first mortgage on property and equip-
ment at the Oak Manor facility and guarantees
by officers, directors and other related parties
of the Company. The note was paid on May 21,
1997, with proceeds from the Nationwide loan. $ - $ 4,169,296
Note payable with interest at 2%, collateral-
ized by a second mortgage on the Oak Manor
facility. The note was paid on May 21, 1997,
with proceeds from the Nationwide loan. - 5,650,000
Gainesville and Hall County Development Authority
bonds with interest at 10.25%, collateralized by
property and equipment at the Windward facility
and restricted bond trust funds. The bonds
were paid on May 21, 1997, with proceeds from
the Nationwide loan. - 1,760,000
Note payable to a bank with interest at 12%,
due in monthly interest only installments of
$10,000 with principal due at maturity in
January 2009, collateralized by a first mort-
gage on property and equipment at the Fort
Valley facility. 1,000,000 1,000,000
Ben Hill County Development Authority bonds
with interest from 8.75% to 11.5%, collater-
alized by property and equipment at the
Fitzgerald Nursing facility and restricted
bond trust funds. The bonds were paid on
February 28, 1997, with proceeds from the
PFC Corporation loan. - 575,000
Note payable with interest at 10.25%, colla-
teralized by a security interest in the
Fitzgerald Nursing facility. The note was
paid at a discount (Note 16) on January 16,
1997. - 2,041,209
Note payable with interest at prime plus 1%,
collateralized by property and equipment at
the Dania Nursing facility and guaranteed by
a former director. The note was paid on May
21, 1997, with proceeds from the Nationwide
loan. - 1,373,158
Note payable to a bank with interest at prime
plus 1% (9.50% at December 31, 1997) due in
monthly principal installments of $2,083 plus
interest with remaining principal due at matur-
ity in March 2004, collateralized by property
and equipment at the Victoria Martin Nursing
facility. 156,250 181,250
F-17
<PAGE>
Note payable to Retirement Care Associates, Inc.
with interest at 9%, collateralized by a
security interest in the Emory Nursing facility. - 500,000
Notes payable to an individual with interest at
10% due in monthly installments; principal due
at maturity. The notes mature on various dates
through September 1998 and are collateralized by
the property and equipment of the Emory and Sun
Coast facilities. 1,095,000 1,125,000
Notes and obligations payable related to the
acquisition of Spectrum. Terms of the notes
were modified during 1996. Subsequent default
caused the notes to revert to the original
terms. A final settlement agreement was reached
in February 1997, and the notes and obligations
were paid in accordance with the agreement at a
discount during the year (Note 16). - 5,359,595
Note payable to an individual with interest from
6% to 12% due in various monthly installments.
The note was paid during the year. - 45,993
Note payable to Nationwide Health Properties,
Inc. with interest at 10.78%, due in monthly
interest only payments of approximately $187,000.
The note is scheduled to mature June 1, 2009,
and is collateralized by the property and equip-
ment at the Oak Manor, Central Tampa, Dania,
and Windward nursing and retirement home facili-
ties as well as a letter of credit in the amount
of $1,159,000 with a bank. Up to 25% of the
outstanding loan balance is guaranteed by
the Chairman of the Board. 20,892,278 -
Note payable to the PFC Corporation; coinsured
by the Department of Housing and Urban Deve-
lopment with interest at 8.38% due in monthly
payments of principal and interest of $23,003.
The note matures March 1, 2020 and is colla-
teralized by the property and equipment at the
Fitzgerald Nursing facility and the restricted
reserve funds associated with the debt. 2,777,682 -
Note payable to LTC Properties, Inc. with
monthly principal and interest payments of
approximately $48,500. Interest, currently
at 10.83%, is subject to annual increases of
0.125% over the previous years' rate. The
note is scheduled to mature October 1, 2007,
with a final principal payment of $4,251,600.
The note is collateralized by the property and
equipment at the Wakulla Manor facility and the
leasehold interest in the New Port Inn facility
(Note 23). 4,792,325 -
F-18
<PAGE>
Tyler Health Facilities Development Corporation
bonds with interest at 8.50% due in semi-annual
interest payments and annual principal payments
in accordance with the bond agreements. The
bonds, scheduled to mature December 1, 2018, are
collateralized by the property and equipment of
the Park Place Nursing facility and the related
restricted bond trust funds. 5,715,000 -
Unsecured note payable to an individual payable
in annual principal payments of $20,000 plus
interest at 8.0%. The note is scheduled to
mature on December 2, 2002. 100,000 -
Note payable to HCFP Funding II with interest
only payments at prime plus 3% (11.5% at Decem-
ber 31, 1997). The note, scheduled to mature
July 31, 1999, is collateralized by the prop-
erty and equipment of the Meadowbrook Hospital
facility. 4,500,000 -
Note payable to a bank with interest at prime
plus 1% (9.50% at December 31, 1997), payable
in monthly installments of principal and in-
terest of $4,000. The note, scheduled to mature
September 9, 2000, is collateralized by equip-
ment and is guaranteed by the Chairman of the
Board. 107,036 -
----------- -----------
41,135,571 23,780,501
Less current maturities 1,380,735 16,899,696
----------- -----------
Total long-term debt $39,754,836 $ 6,880,805
=========== ===========
At December 31, 1997, $607,722 of the Nationwide loan proceeds have not been
disbursed. This amount has been held back from the loan proceeds to be
advanced to the Company, upon request, to pay for improvements and renovations
at the various facilities secured by the loan.
Future maturities of long-term debt are as follows:
YEAR ENDING
DECEMBER 31, AMOUNT
------------ ------------
1998 $ 1,380,735
1999 4,745,145
2000 253,549
2001 242,792
2002 263,149
Thereafter 34,250,201
-----------
$41,135,571
===========
NOTE 8 - BORROWINGS UNDER LINE OF CREDIT
On June 30, 1997, to facilitate its working capital needs, the Company opened
a revolving line of credit with HCFP Funding, Inc. with a maximum borrowing
F-19
<PAGE>
amount of $10,000,000. Monthly interest payments are due at prime plus 2%
(10.50% at December 31, 1997). In addition to interest charges, the draws on
the line of credit are subject to monthly management fees (.20% of the average
previous months' loan balance) as well as a monthly usage fee and commitment
fees. Commitment fees are due in $20,000 to $30,000 increments based on total
balance thresholds specified in the agreement. Total commitment fees paid,
limited to $100,000, were $30,000 through December 31, 1997. Draws on the
line of credit are secured by substantially all trade receivables of the
Company. In accordance with the loan agreement, draws on the line of credit
are subject to limitations based on a formula that is calculated at each draw
request date. The maximum outstanding balance on the line of credit is
generally limited to 80% of "collectable" accounts receivable, the "borrowing
base" ($3,655,000 at December 31, 1997). Net draws against this line of
credit totaled $3,189,755 at December 31, 1997 with $6,810,245 available for
the Company's use subject to limitations mentioned above. The line of credit
agreement is scheduled to expire on June 30, 2000, with annual renewals
thereafter until terminated by either party.
NOTE 9 - SHORT-TERM ACQUISITION NOTES PAYABLE
The cash needed to effect the acquisition of one of its subsidiaries was
raised through the issuance of $1,525,000 of short-term notes payable, bearing
interest at 12%. Interest only was payable monthly through April 30, 1996,
when all principal and any accrued unpaid interest was due. The notes were
extended and interest continued to accrue until November 30, 1996, when all
principal and accrued interest was paid. At the issuance of the notes, the
Company issued one warrant for every $10 advanced under the note agreements
for a total of 152,500 warrants. The warrants 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. Interest paid on these notes during 1996 and 1995 totaled
approximately $165,000 and $91,000, respectively.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases nursing homes commencing on various dates with terms
expiring through May 31, 2012. Monthly rent expense for these facilities
total $51,333 with one lease payment escalating 2.5% per year.
The Company's rental expense under these operating leases, plus minor
equipment leases for the years ended December 31, 1997, 1996 and 1995, totaled
approximately $731,000, $975,000 and $776,000, respectively.
Lease expense associated with operating leases having initial or remaining
non-cancelable lease terms in excess of one year and containing escalation
clauses has been recorded in the accompanying financial statements on a
straight-line basis. Deferred lease expense due to this straight-line rent
adjustment for the year ended December 31, 1997, totaled $40,359.
The aggregate amount of minimum lease payments due under non-cancelable lease
obligations in excess of one year at December 31, 1997, are as follows:
F-20
<PAGE>
YEAR ENDING
DECEMBER 31, AMOUNT
------------ ----------
1998 $ 621,867
1999 630,813
2000 639,984
2001 517,383
2002 395,018
2003-2007 2,128,252
2008-2012 2,068,054
----------
$7,001,371
==========
OTHER
In connection with the two hospital management agreements, which expire on
September 30, 2002, the Company has agreed to make capital improvement loans
up to $2,000,000 to each of the hospitals during the first year of the
agreement. Interest would be at the Company's borrowing rate. No advances
had been made on the improvement loans as of December 31, 1997. In addition,
the Company guaranteed payment up to $4,100,000 of interest payments due
January 1 and July 1, 1998, on one of the hospital's existing bond
indebtedness.
The Company has guaranteed a $2,000,000 line of credit issued by HCFP Funding,
Inc. to one of the hospitals under management. In December 1997, $1,068,300
was drawn on the line of credit to make a debt service payment due January 1,
1998. The funds drawn were deposited into the Company's bank account and used
to make the interest payment due in excess of $2,000,000. At December 31,
1997, the advance on this credit line is included in due to related parties in
the accompanying financial statements. On January 1, 1998, the Company made
the required interest payment from its funds as part of its guarantee.
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.
In 1997, Congress passed the Balance Budget Act of 1997 which provides for a
phase-in of a prospective payment system (PPS) for skilled nursing facilities
over a four year period. Under PPS, Medicare will pay skilled nursing
facilities a fixed fee per patient per day based on the acuity level of the
patient. During the phase-in, the rate paid to the facility will be a blended
rate based on the facility's historical costs and a federally established
per diem rate. The effect the PPS will have on the Company has not been
determined since the federally established per diem rates have not been
finalized. The PPS will become effective for cost reporting periods beginning
on or after July 1, 1998. These and other 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 and operations of the Company.
LEGAL PROCEEDINGS
During 1995, the Company's Spectrum subsidiary was assessed by Medicare
approximately $364,000 relating to the recoupment of an alleged overpayment of
services it provided during the years 1990 through 1993. The Company appealed
the claim and, in June 1996, received notification that the assessment had
been revised to $86,000. This amount was paid and is included in the income
statement for 1996.
F-21
<PAGE>
During 1996, the facilities operated by the Company's Cimerron subsidiary were
audited by the State of Georgia for the fiscal year ended June 30, 1995. The
audit resulted in disallowed expenses in excess of $270,000. The State
recouped the overpayment and it is included in the income statement for 1997.
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, 1997. These matters could affect the operating
results of any one quarter when resolved in future periods. However,
management believes that after final disposition, any monetary liability or
financial impact to the Company would not be material to the Company's annual
consolidated financial statements.
CONSTRUCTION PLANS
In 1996, the Company filed an application with the Florida Agency for Health
Care Administration to combine the Certificates of Need (CON) for two of its
Florida facilities, which currently operate thirty-eight bed and fifty-nine
bed skilled nursing facilities, respectively. The Company plans to construct
a new facility using lease financing to operate the combined ninety-seven
beds. The Company plans to convert and operate the existing facilities as
assisted living facilities. As of December 31, 1997, and the date of this
report, the request for consolidation of the CON's was still pending. The
Company has not entered into any formal arrangements for construction or
financing of the new facility.
During 1995, Cimerron obtained a Certificate of Need for twenty skilled
nursing beds and, in November 1995, acquired approximately eight acres of
undeveloped land in Georgia. The Company has plans to combine the new twenty-
bed Certificate of Need with the existing forty-bed Certificate of Need
currently operating as Emory Nursing Home (Emory) and construct a new sixty-
bed skilled nursing facility. Current plans call for the existing Emory
facility to be operated as an assisted living facility. As of December 31,
1997, the Company had not entered into any formal arrangements for
construction or financing of the new facility.
NOTE 11 - SHAREHOLDERS' EQUITY
Common stock has been issued by the Company for various purposes. In certain
of these transactions, the Company's Board of Directors assigned a fair value
to the common stock issued equal to the fair value of the services or other
consideration received.
STOCK OPTIONS AND WARRANTS
In connection with the acquisition of a skilled nursing home facility in 1990,
an option was granted to the seller to acquire shares of common stock of the
Company's predecessor organization. The options, after conversion for changes
in capital structure, remain outstanding for the acquisition of 89,332 shares
of common stock at an exercise price of $2.24 per share. This option remains
exercisable through May 1998.
During 1993, an option to acquire up to 33,500 of the Company's common stock,
at an exercise price of $2.24 per share, was granted to an officer of the
Company. In June 1996, the officer exercised his right to purchase 10,000
shares. The remaining 23,500 options remain exercisable through June 1998.
F-22
<PAGE>
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.
On January 31, 1997, the Company granted options to purchase 1,500,000 shares
of the Company's common stock at an exercise price of $2.20 per share. Of
these, 375,000 shares were granted to the Company's new Chairman. The options
were granted in consideration of his undertaking to manage the Company. The
new Chairman will become CEO of NewCare after a company he currently serves as
President and CEO merges with another company. In the event that the per
share stock price of the Company does not reach an average price of at least
$5.00 for any thirty consecutive days during the ensuing twelve month period
after becoming CEO, unexercised options will be canceled.
The Company issued 152,500 warrants in connection with advances made under a
short term note agreement (Note 7). The warrants 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.
During 1997, the Company increased shareholders' equity approximately
$2,500,000 through a private placement. Each private placement unit consisted
of four shares of common stock and two warrants for $15. A total of 345,000
warrants were issued and are exercisable for one share each of the Company's
common stock until October 30, 2000, at an exercise price of $5.00 per share.
In April 1997, the Company reserved 2,000,000 shares of common stock under a
1997 stock option plan which is pending shareholders' approval. As of
December 31, 1997, options to acquire 150,000 shares has been issued to
employees subject to approval of this plan. The option exercise prices range
from $2.50 to $4.85 and expire five years from issuance.
During 1997, additional options to acquire 725,000 shares of the Company's
stock were issued to various other individuals. The option exercise prices
range from $2.25 to $4.50 and expire on various dates from January 24, 2000
through December 3, 2002.
The stock options and warrants described above were issued with exercise
prices determined by the Company's Board of Directors to be equal to, or
greater than, the fair value of the Company's common stock on the respective
grant dates.
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation". This new standard defines a fair value based method of
accounting for an employee stock option or similar equity instrument. This
statement gives entities a choice of recognizing related compensation expense
by adopting the new fair value method or to continue to measure compensation
using the intrinsic value approach under Accounting Principals Board (APB)
Opinion No. 25, the former standard. If the former standard for measurement
is elected, SFAS No. 123 requires supplemental disclosure to show the effects
of using the new measurement criteria. This statement is effective for the
Company's 1997 fiscal year. The Company intends to continue using the
measurement practices prescribed by APB Opinion No. 25 and, accordingly, this
pronouncement will not affect the Company's financial position or results of
operations.
The following is a summary of stock option activity and related information
for the years ended December 31:
F-23
<PAGE>
1997 1996 1995
--------------------- ------------------ ------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
---------- -------- ------- -------- ------- --------
Outstanding:
Beginning 222,832 $3.367 222,832 $3.367 222,832 $3.367
Granted 2,375,000 2.652 - - - -
Exercised 10,000 2.240 - - - -
Canceled - - - - - -
--------- ------ ------- ------ ------- ------
End of Year 2,587,832 $2.715 222,832 $3.367 222,832 $3.367
========= ====== ======= ====== ======= ======
Exercisable:
End of Year 2,587,832 $2.715 222,832 $3.367 222,832 $3.367
========= ====== ======= ====== ======= ======
Weighted average
fair value of
options granted
during the
year: $2.080 $ - $ -
Exercise prices for options outstanding as of December 31, 1997, ranged from
$2.20 to $4.85. The weighted average remaining contractual life of those
options is 3.81 years.
The following is a summary of the outstanding warrants at December 31, 1997:
DATE TOTAL TOTAL EXERCISE EXPIRATION
ISSUED ISSUED OUTSTANDING PRICE DATE
------ ------ ----------- -------- ----------
5/22/95 152,500 152,500 $3.50 06/01/1998
11/11/97 345,000 345,000 $5.00 10/30/2000
05/19/97 100,000 100,000 $2.50 05/19/2009
No value has been assigned to the warrants in the accompanying financial
statements.
Because the Company has adopted the disclosure-only provisions of SFAS No.
123, no compensation cost has been recognized for the stock option plans. Had
compensation cost for the Company's stock option plan been determined based on
the fair value at the grant date of the awards consistent with the provisions
of SFAS No. 123, the Company's net earnings and earnings per share would have
been reduced to the pro forma amounts indicated below:
1997
------------
Net income (loss) as reported $(3,099,502)
Effect if SFAS 123 had been applied - net of tax (3,013,000)
Pro forma net loss (6,112,502)
Loss per share-as reported (.280)
Pro forma loss per share (.560)
F-24
<PAGE>
The fair value of each option grant is estimated on the date of grant using
Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1997; dividend yield of 0%, expected volatility
of 111%, risk-free interest rates of 6.0% and expected option lives of five
years.
EARNINGS PER SHARE
The Company and its subsidiaries have adopted the provisions of SFAS 128 for
purposes of reporting earnings per share. The options and warrants mentioned
above have not been included in the computation of diluted earnings per share
for the years presented due to their antidilutive effect. These options and
warrants are considered antidilutive because in 1997 and 1995, the company had
a loss from continuing operations, and in 1996, the exercise price of all the
outstanding options and warrants exceeded the average market price of the
Company's stock. These options and warrants, as well as the convertible
debenture bonds offered in February 1998 (Note 23), could be considered to be
dilutive in future periods.
NOTE 12 - MANAGEMENT FEES
One of the Company's subsidiaries, NewCare Hospital Corporation, has
management contracts with unrelated third parties to manage the operations of
two hospitals in Florida and Texas. The agreements commenced in October 1997
and expire September 30, 2002, unless terminated by either party after
September 30, 2000. Monthly management fees total $175,000 plus a performance
incentive not to exceed a cumulative total of four percent of net revenues.
The performance incentive will be based on the accomplishment of certain
performance criteria to be agreed upon by both parties. Management fee
revenue also includes reimbursements of payroll and related expenses.
Management fees totaled $503,577 for the period ended December 31, 1997.
The Company also has paid $25,000 each for purchase options for each of the
hospitals where the purchase price for the hospital property will be equal to
the amount of indebtedness on the property. The options also expire on
September 30, 2002.
In March 1998, the Board of Directors of the Texas hospital advised the
Company that the management agreement was void or had been terminated and that
the option agreement was also not valid. As of March 17, 1998, the Company is
not able to manage this hospital and is considering filing a lawsuit against
the hospital and its Board of Directors.
NOTE 13 - INCOME TAXES
Significant components of the Company's deferred tax liabilities and assets at
December 31, 1997 and 1996, are as follows:
F-25
<PAGE>
1997 1996
---------- ----------
Deferred tax liabilities:
Unrealized gain on marketable
securities $ (445,896) $ -
Depreciation and amortization (515,800) (196,700)
---------- ----------
(961,696) (196,700)
---------- ----------
Deferred tax assets
Bad debt allowance 341,800 67,000
Net operating loss carry forward 1,847,300 974,000
Accrued expenses 312,000 252,000
Deferred revenue - 30,500
---------- ----------
Gross deferred tax assets 2,501,100 1,323,900
Valuation allowance (1,127,200) (1,127,200)
---------- ----------
1,373,900 196,700
---------- ----------
Net deferred taxes $ 412,204 $ -
========== ==========
The deferred tax asset valuation allowance was $144,000 at December 31, 1995,
and was increased to $1,127,200 at December 31, 1996, a change of $982,000.
The components of income tax expense are approximately as follows:
1997 1996 1995
----------- --------- ---------
Federal
Current $ - $ - $ -
Deferred-net (858,100) - -
State
Current - - 36,000
Deferred-net - - -
----------- --------- ---------
Total $ (858,100) $ - $ 36,000
=========== ========= =========
A reconciliation of current income tax expense and the amount computed by
applying the statutory federal income tax rate to the net loss before income
taxes is as follows:
F-26
<PAGE>
1997 1996 1995
----------- ---------- ---------
Taxes computed at 35% $(1,385,200) $ (779,000) $(48,000)
Increases (decreases)
in taxes resulting from:
Amortization (19,300) (127,000) (87,000)
State income taxes, net of federal
income tax effect - - -
Bad debt expense 274,900 67,000 36,000
Inventories - - 184,000
Depreciation (119,000) (70,000) (111,000)
Accrued expenses 229,400 253,000 138,000
Deferred revenue - 30,000 21,000
Net operating losses 161,100 626,000 (110,000)
----------- ---------- --------
Total $ (858,100) $ - $ 36,000
=========== ========== ========
At December 31, 1997, the Company has net operating loss carry forwards of
approximately $5,278,000 that are available to offset future taxable income.
The loss carry forwards expire at various times through 2012 as follows:
EXPIRES AMOUNT
------- ----------
2006 $ 1,000
2009 445,000
2010 372,000
2011 764,000
2012 3,696,000
----------
Total $5,278,000
----------
NOTE 14 - TRANSACTIONS WITH RELATED PARTIES
Prior to June 1996, the Company leased a nursing home from a shareholder.
Rent payments to the shareholder of approximately $72,000 and $183,000 were
made in 1996 and in 1995, respectively.
A company controlled by a shareholder provided contract services to certain of
the Company's nursing centers. Total contract service fees paid to this
company totaled approximately $530,130, $1,148,100, and $794,000 in 1997, 1996
and 1995, respectively.
The Company leased office space from a shareholder under an operating lease.
Annual rental payments under the lease were approximately $45,600. In March
1997, this lease was terminated in exchange for a cash payment of $65,000.
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 using
funds borrowed from a related party totaling $300,000. The related party
loan, with interest at 10%, was payable in monthly payments of interest only
through November 1996, at which time the terms were modified to reflect a new
maturity date of September 1998. The $500,000 note payable matured in
February 1996, and was paid using funds from a replacement loan from another
related party. The new loan was a twelve month loan bearing interest at 9%
and was paid in May 1997.
F-27
<PAGE>
In November 1995, the Company borrowed $195,000 and $600,000 from a
shareholder to purchase real property. The notes bear interest at 10% and
are payable in monthly installments of interest only through August 1998 and
November 1998, respectively, when all principal and any accrued interest is
due. The notes are collateralized by real estate.
In September 1994, the Company loaned $74,000 to two of its principal
officers. The loans, which were approved by the Board of Directors, are non-
interest bearing and were originally due in September 1995 but were extended
with new terms requiring payment on demand. Additional advances totaling
$18,000 were made during 1996. Repayments totaling $18,000 were received
during 1997. One of the officers to whom advances totaling $49,000 were made
is no longer with the Company. He has filed a lawsuit against the Company
(Note 10) that has not been resolved as of the date of this report. The
$49,000 advance was written off as uncollectible during 1997. The remaining
$25,000 is included in due from related parties.
In July 1997, the Company loaned $990,000 to some of the Company's Directors,
Officers and other related parties. The proceeds were used to purchase the
stock acquired by the Company in the Spectrum settlement. The loans, with
interest at 10%, are due on June 30, 1998. At December 31, 1997, the
outstanding principal plus accrued interest of $49,500 total $1,039,500.
In July 1996, the Company borrowed $80,000 from a shareholder to pay
outstanding payroll taxes. The note, with interest at 12%, was paid during
the year ended December 31, 1997.
NOTE 15 - EMPLOYEE RETIREMENT PLAN
In October 1997, the Company established a defined contribution retirement
plan. Full-time employees qualify for the plan upon the completion of one
year of service with the Company and reaching the age of twenty-one. Company
contributions to the plan represent a matching percentage of certain employee
contributions. The matching percentage is subject to management's discretion
based upon the consolidated financial performance of the Company. The Company
has not made any matching contributions to the plan.
NOTE 16 - SPECTRUM SETTLEMENT AGREEMENT AND FORGIVENESS OF DEBT
When the Company acquired the Spectrum subsidiary in September 1994, notes
totaling $5,012,190 were issued as part of the purchase price. The initial
principal payments that were payable January 2, 1996, were not made due to a
cash shortage. By agreement with the note holders, the payments were
deferred. In June 1996, the Company and certain related party holders of the
Spectrum acquisition notes reached an agreement on restructuring the notes.
The agreement provided, among other things, for a reduction of the amount
payable and extensions of payment terms. Due to the Company's inability to
make the restructured payments, the notes reverted to their original terms.
The note holders filed a lawsuit against the Company for breach of contract
with respect to the payment of the notes. On February 14, 1997, the Company
and the Spectrum note holders reached a settlement whereby the Company or its
designees would buy back 1,200,000 shares of the original 1,500,000 shares of
NewCare stock offered in the acquisition at $1.50 per share for a total of
$1,800,000. In addition, the Company agreed to pay the Spectrum note holders,
as settlement of all obligations, $4,200,000 plus interest at 8.75% until all
payments were made. The final payment on this note was made on June 14, 1997.
Interest during this period totaled $102,486.
F-28
<PAGE>
At the time of the settlement agreement, the Company carried net liabilities
and obligations associated with the Spectrum acquisition and operations
totaling $5,330,681. This resulted in a gain on forgiveness of debt totaling
$1,130,681. This gain has been combined with the gain on forgiveness on
refinancing of the debt on various facilities for a total of $1,353,616 and is
reported as an extraordinary item in the statement of operations net of the
income tax provision of $473,765. Basic and diluted earnings per share from
this extraordinary gain on forgiveness of debt at December 31, 1997, totaled
$.08 per share.
The Company had agreed to purchase the remaining 300,000 shares held by the
Spectrum note holders for $3.50 per share. The Company's obligation to
purchase the shares terminates if the closing price of the stock equals or
exceeds $4.00 per share for thirty (30) consecutive trading days before
Februuary 1, 1999. The obligation terminated during the third quarter of 1997
when the Company's share price exceeded this threshold for the required period
of time.
NOTE 17 - SHAREHOLDER AND MANAGEMENT CHANGES
In January 1997, the president and chairman of the board of the Company
resigned. As part of agreement, he sold 869,978 shares of the Company's
stock back to the Company. The shares were held in escrow and the right to
purchase the shares was assigned to Mr. Chris Brogdon. Mr. Brogdon was
subsequently elected to the Company's board of directors and has assumed the
position of chairman. Mr. Brogdon and his wife personally acquired 187,000 of
the shares and assigned the right to purchase the remaining 682,978 shares to
business associates.
In other actions, Mr. Brogdon was granted the right to acquire 1,200,000
shares of Company stock in connection with the re-acquisition of shares in the
Spectrum settlement noted above and was granted an option to purchase
1,500,000 shares of unissued stock at a price of $2.20 per share. He has also
signed a letter of intent to purchase 714,000 shares of stock from the wife of
the former president of the Company's Cimerron subsidiary.
Mr. Brogdon is related to Renaissance Senior Living, Inc., (Renaissance)
which, on February 17, 1997, signed a management agreement to manage the
nursing homes of the Company. The agreement expired on December 31, 1997.
The agreement provided for management fees based on an improvement in the
profit position of the Company, not to exceed 6% of revenue. No management
fees were paid or accrued under this agreement.
EMPLOYMENT AND LEASE AGREEMENT TERMINATIONS
Two employment agreements and office space lease were terminated in
conjunction with the acquisition of the shares from the Cimerron former
president's wife by Mr. Brogdon, as noted above, and the takeover of
management of the Company's facilities by Renaissance. Cash payments made to
terminate the agreements totaled approximately $331,000.
NOTE 18 - YEAR 2000 DISCLOSURE
The Company has reviewed all of its current computer applications with respect
to the date change from 1999 to the year 2000, as discussed in the Securities
and Exchange Commission Staff Legal Bulletin No. 5 (the "Year 2000 Issue").
The Company believes that certain of its applications are substantially in
compliance with the Year 2000 Issue and that any additional costs will not be
material to the Company. The Company is currently unable to determine the
effect of compliance with the Year 2000 Issue by its customers and suppliers.
F-29
<PAGE>
NOTE 19 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating
the fair the fair value of its financial instruments.
CASH AND CASH EQUIVALENTS
The carrying amount reported in the balance sheet for cash and cash
equivalents approximates fair value because of the short maturity of these
instruments.
MARKETABLE EQUITY SECURITIES
The carrying amount reported in the balance sheet for marketable equity
securities approximates fair value. All marketable equity securities are
classified as "available for sale" for accounting purposes and therefore, are
carried at fair value with unrealized gains and losses recorded directly in
equity. Unrealized gains at December 31, 1997, totaled approximately
$1,274,000.
NOTES RECEIVABLE
The carrying amount approximates fair value for the notes receivable based on
the fair value being estimated at the net present value of cash flows that
would be received on the notes over the remaining notes' terms using the
stated interest rates that approximates market interest rates.
SHORT AND LONG-TERM DEBT
The fair value of all debt has been estimated based on the present value of
expected cash flows related to existing borrowings discounted at rates
currently available to the Company for debt with similar terms and remaining
maturities.
The cost and estimated fair values of the Company's finanical instruments at
December 31, 1997 and 1996, are as follows:
DECEMBER 31, 1997
---------------------------
CARRYING FAIR
AMOUNT VALUE
Financial asets: ----------- -----------
Cash and cash equivalents $ 2,297,599 $ 2,297,599
Marketable securities 7,826,012 9,100,000
Notes receivable 1,039,500 1,039,350
Financial liabilities
Short-term debt 11,311,143 11,311,143
Long-term debt 39,754,836 39,754,836
DECEMBER 31, 1996
---------------------------
CARRYING FAIR
AMOUNT VALUE
----------- -----------
Financial assets:
Cash and cash equivalents $ 3,198,700 $ 3,198,700
Notes receivable 1,852,377 1,852,377
Financial liabilities
Short-term debt 16,899,696 16,899,696
Long-term debt 6,880,805 6,880,805
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NOTE 20 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
As described in Note 2 , the company acquired certain businesses during 1997.
The fair value of assets acquired was $18,775,933 and the fair value of
liabilities assumed was $18,179,793 which resulted in net cash payments of
$596,140.
Total debt of $33,255,196 was incurred during the year ended December 31,
1997, to purchase property and equipment totaling $10,016,516, pay loan costs
of $772,918, pay off existing indebtedness of $18,972,507, goodwill of
$900,000, and the remaining proceeds used for working capital.
Cash paid for interest during the years ended December 31, 1997, 1996 and 1995
was $3,248,177, $1,517,350, and $1,617,000, respectively.
NOTE 21 - ACCRUED EXPENSES
Accrued expenses consisted of the following as of December 31, 1997 and 1996:
1997 1996
---------- ----------
Payroll and payroll taxes $1,641,186 $ 808,960
Insurance 957,867 -
Interest 192,539 662,895
Other 496,935 578,010
---------- ----------
$3,288,527 $2,049,865
========== ==========
NOTE 22 - COMPREHENSIVE INCOME
The Financial Accounting Standards Board issued SFAS No. 130, "Reporting
Comprehensive Income". SFAS 130 requires companies to report comprehensive
income in its financial statements. Comprehensive income is defined as the
change in equity of a business during a period from the transactions and other
events and circumstances from non-owner sources. It includes all changes in
equity during a period except those resulting from investments by and
distributions to owners. SFAS 130 becomes effective for years beginning after
December 15, 1997. If this statement was applied to 1997, comprehensive
income would be as follows:
Net loss as reported $(3,099,502)
Other comprehensive income, net of tax:
Unrealized gain on securities 828,092
-----------
Comprehensive income (loss) $(2,271,410)
===========
NOTE 23 - SUBSEQUENT EVENTS
In January 27, 1998, the Company issued $5,000,000 in 8.5% convertible
debentures maturing January 27, 2005. Interest only payments are due monthly
until January 27, 2001, at which time principal payments of $10 per $1,000 of
outstanding principal plus interest are payable monthly until maturity. The
debentures are convertible into the Company's common stock at $3.81 per share.
F-31
<PAGE>
FACILITY ACQUISITIONS IN 1998:
In January 1998, the Company acquired in a sale and leaseback transaction, a
124-unit assisted living facility in New Port Richey, Florida. The purchase
price for this facility was $5.9 million. The Company's lease on this
facility is initially through December 31, 2012, with options to extend the
lease for two additional five-year periods.
In January 1998, the Company also closed on the acquisition of a 120-bed long-
term care facility in Venice, Florida. The Company purchased this facility
for $4,790,000 in a bankruptcy proceeding. The purchase price was paid with
$3,000,000 from a bridge note from HCFP Funding II, Inc. (HCFP) and
$1,790,000 from cash on hand. The bridge note, which is secured by the
property acquired, bears interest at 4% over the prime rate and is due on
April 27, 1998. HCFP was paid a $45,000 loan commitment fee as part of the
transaction. The Company is in the process of negotiating a loan totaling
$4,800,000 from LTC Properties, Inc. to refinance the bridge note. Although
there is no assurance that such a loan can be negotiated, it is anticipated
that the amortization period will be twenty years.
Also in January 1998, the Company entered into an agreement to purchase four
long-term care facilities for $6,750,000. The facilities, totaling 332 beds,
are located in Massachusetts and are currently involved in a bankruptcy
proceeding. The Company expects that this purchase will be financed by a loan
from HCFP, however, no binding agreement regarding the funding has been
reached. Due to the situation regarding the bankruptcy, and as a requirement
of the Commonwealth of Massachusetts to consider licensing, HCFP has deposited
the $6,750,000 into an escrow account under the jurisdiction of the bankruptcy
court. However, HCFP has the option to withdraw the funds. The acquisition
of these long-term care facilities is contingent on the Company's approval
from the Commonwealth of Massachusetts licensing authorities, which is
expected in the second quarter of 1998, and the approval of the bankruptcy
trustee. During the interim, the Company is managing the four facilities.
During February 1998, the Company paid $1,387,064 for all of the outstanding
bonds (face value of $3,120,000) on three of the four facilities.
In February 1998, the Company entered into agreements under which the Company
agreed to take over the rights and obligations of the lessees of five long-
term care facilities in Texas. The Company is paying approximately $450,000
for the assignment of these leases. The Company's acquisition of these
leases is contingent on the approval of the State of Texas licensing
authorities. During the interim, the Company is managing three of the four
facilities. The facilities individually range from 62 beds to 185 beds
(total 531 beds) and the leases expire on various dates through May 31, 2017,
before extension options.
PROPOSED CORPORATE ACQUISITIONS
In December 1997, the Company announced that it has agreed to acquire
Renaissance Senior Living, Inc., which is partially owned by the Company's
Chairman of the Board, for $2 million plus the assumption of debt. There is
no written agreement concerning this proposed acquisition which would be
subject to the approval of the Company's shareholders. Renaissance Senior
Living, Inc. currently owns a 100-unit assisted living facility in Florida and
a 50-unit assisted living facility in Tennessee, which is under construction.
Renaissance Senior Living, Inc. has also started construction of a 233-unit
assisted living/independent living/long-term care facility in Conyers,
Georgia.
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In December 1997, the Company also announced that it had agreed to acquire
IATROS Health Network, Inc., a NASDAQ listed company, for approximately $17
million in the Company's common stock. There is presently no written
agreement concerning this acquisition and the terms are being renegotiated.
The acquisition will be subject to the execution of a definitive agreement and
shareholder approval. IATROS owns, leases or manages eleven facilities in the
New England market with 1997 consolidated revenues of approximately $31
million. IATROS also provides pharmacy and rehabilitation therapy services,
and operates a medical supply and durable medical equipment company with 1997
combined ancillary revenues annualized at $12 million. As stated in Note 5,
the Company has already acquired 4,000,000 shares (approximately 20%) of
IATROS' common stock.
NOTE 24 - LIQUIDITY
During the year ended December 31, 1997, the Company experienced a significant
net operating loss and at the same time a decline in liquidity, resulting from
the operating loss and a heightened level of investment in new facilities.
Management believes the operating loss is the result of a decline in the
overall census of residents and patients in the Company's facilities, together
with the formation of current corporate management to operate and oversee the
facilities. The management team in place is adequate to handle the Company's
growth in the foreseeable future even considering the number of facilities
under current consideration for acquisition.
To improve liquidity of the Company until profitable operations can be
attained and maintained, Management has developed and is implementing the
following plans:
1) Comprehensive marketing plan to increase the census at all
facilities;
2) Increased efforts on collection of existing accounts receivable
balances;
3) Negotiation of extended payment terms on accounts payable by
consolidating vendors used in the purchase of supplies and
consumable items;
4) Implement more stringent budgetary controls at the operating
facilities;
5) Identify selected facilities for possible refinancing.
In addition to the above actions, the Company still has available under its
current line of credit an additional $6,810,245 which can be drawn subject to
limitations outlined in the agreement. These funds will be available as new
facilities are acquired and the borrowing base increases.
F-33
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Amendment to be
signed on its behalf by the undersigned, thereunto duly authorized.
NEWCARE HEALTH CORPORATION
Dated: May 6, 1998 By:/s/ James H. Sanregret
James H. Sanregret
Chief Financial Officer
