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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 1999
Commission File No. 0-24110
NEWCARE HEALTH CORPORATION
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(Exact name of registrant as specified in its charter)
Nevada 86-0594391
- ------------------------------ ------------------------------------
(State or other jurisdiction of (IRS Employer Identification Number)
Incorporation or Organization)
6000 Lake Forrest Drive, Suite 200, Atlanta, Georgia 30328
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(Address of Principal Executive Offices including zip code)
(404) 255-7500
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(Registrant's telephone number)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the
past 12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes [ X ] No [ ]
There were 12,128,525 shares of the Registrant's Common Stock outstanding as
of March 31, 1999.
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NEWCARE HEALTH CORPORATION
FORM 10-Q
INDEX
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PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Unaudited Consolidated Statements of Operations for
the Three Months Ended March 31, 1999 and 1998 3
Unaudited Consolidated Balance Sheet as of March 31,
1999 and Audited Consolidated Balance Sheet as of
December 31, 1998 4
Unaudited Consolidated Statements of Cash Flows for
the Three Months Ended March 31, 1999 and 1998 6
Notes to Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF
OPERATIONS AND FINANCIAL CONDITION 9
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 15
ITEM 2. CHANGES IN SECURITIES 16
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 16
ITEM 5. OTHER INFORMATION 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16
SIGNATURES 17
2
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PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
NEWCARE HEALTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
March 31, March 31,
1999 1998
(Unaudited) (Unaudited)
----------- ----------
Revenue:
Net patient service revenue $18,922,884 $12,519,328
Management fee revenue 360,571 725,063
Other operating revenue 150,757 202,330
----------- -----------
Total operating revenue 19,434,212 13,446,721
----------- -----------
Operating expense:
Cost of patient services 15,469,638 10,257,864
Lease expense 1,373,340 531,245
General and administrative 5,212,957 3,027,458
Provision for bad debts 305,438 518,940
Depreciation and amortization 686,280 531,646
----------- -----------
Total operating expense 23,047,653 14,867,153
----------- -----------
Operating loss (3,613,441) (1,420,432)
Other income (expense)
Investment income 134,812 204,632
Interest expense (1,986,383) (1,604,825)
----------- -----------
Other expense, net (1,851,571) (1,400,193)
Loss before income tax benefit (5,465,012) (2,820,625)
Income tax benefit -- 960,000
----------- -----------
Net loss $(5,465,012) $(1,860,625)
=========== ===========
Basic and diluted net loss
per common share $ (.45) $ (.16)
=========== ===========
Weighted average number of common
shares outstanding 12,128,525 11,942,970
=========== ===========
3
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NEWCARE HEALTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 1999 AND DECEMBER 31, 1998
March 31, December 31,
1999 1998
(Unaudited)
----------- ------------
ASSETS
Current assets
Cash and cash equivalents $ 6,430 $ --
Accounts receivable, net 9,350,151 8,827,216
Other receivables 1,038,663 701,616
Notes receivables - related parties 988,062 988,062
Due from related party 9,791,574 8,365,775
Marketable securities 8,829,675 9,017,067
Inventory 360,939 360,939
Deferred taxes 1,199,539 1,199,539
Prepaid expense 1,450,351 1,633,408
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Total current assets 33,015,384 31,093,622
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Property and equipment, net 54,775,850 54,696,875
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Other assets:
Deferred loan costs 2,094,087 1,945,193
Deferred lease costs 475,000 475,000
Goodwill 1,874,815 1,874,815
Lease acquisition costs 587,568 74,561
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5,031,470 4,369,569
Less accumulated amortization 916,690 772,142
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Deferred costs, net 4,114,780 3,597,427
Deposits 714,706 1,376,048
Restricted investments, net 169,665 150,302
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Total other assets 4,999,151 5,123,777
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Total assets $92,790,385 $90,914,274
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4
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NEWCARE HEALTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 1999 AND DECEMBER 31, 1998
LIABILITIES AND SHAREHOLDERS' EQUITY
March 31, December 31,
1999 1998
(Unaudited)
----------- ------------
Liabilities and Shareholders' Equity
Current liabilities:
Bank overdraft $ -- $ 40,935
Notes payable 1,468,000 1,468,000
Current maturities of long-term debt 4,512,511 4,433,801
Borrowings under line of credit 10,336,664 7,655,540
Margin payable 7,518,000 7,693,908
Accounts payable 15,247,650 11,921,199
Accrued expense 8,077,338 6,543,049
Due to related parties 710,000 710,000
Convertible debentures 5,000,000 5,000,000
Deferred gain 2,444,246 2,481,713
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Total current liabilities 55,314,409 47,948,145
Long-term debt, net of
current maturities 41,208,245 41,233,386
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Commitments and contingencies
Shareholders' equity
Common stock, $.02 par value;
50,000,000 shares authorized;
12,128,525 and 12,128,525 issued
and outstanding, respectively 242,570 242,570
Additional paid-in capital 15,507,833 15,507,833
Accumulated deficit (20,449,244) (14,984,232)
Other comprehensive income 966,572 966,572
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Total shareholders' equity (deficit) (3,732,269) 1,732,743
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Total liabilities and shareholders'
equity $92,790,385 $90,914,274
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5
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NEWCARE HEALTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
March 31, March 31,
1999 1998
(Unaudited) (Unaudited)
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CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(5,465,012) $(1,860,625)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 686,280 531,646
Deferred taxes -- (960,000)
Provision for bad debts 305,438 518,940
Decrease (increase) in assets
Accounts receivable (828,373) (2,248,615)
Other receivables (337,047) (272,145)
Inventories 183,057 (42,510)
Prepaid expenses 661,342 (31,759)
Deposits -- 237,602
Increase (decrease) in liabilities,
accounts payable and accrued expenses 4,823,273 (635,420)
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Net cash provided by (used in)
operating activities 28,958 (4,762,886)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (620,707) (6,423,116)
Payments of deferred costs (661,901) (826,787)
Advances to related parties (1,425,799) (1,778,687)
Change in restricted investments (19,363) 1,464,139
Change in investments 11,484 (1,694,591)
Acquisition deposit -- (6,750,000)
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Net cash used in investing activities (2,716,286) (16,009,042)
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of long-term debt (483,865) (198,918)
Advances from related parties -- 681,713
Proceeds from long-term debt 537,434 3,835,944
Change in line of credit 2,681,124 333,759
Proceeds from notes payable-
acquisition deposit -- 6,750,000
Proceeds from convertible debentures -- 5,000,000
Proceeds from issuance of common stock -- 2,546,785
Bank overdraft (40,935) --
---------- ---------
Net cash provided by
financing activities 2,693,758 18,949,283
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Net decrease in cash 6,430 (1,822,645)
Cash and cash equivalents at beginning
of period -- 2,297,599
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Cash and cash equivalents at end of
period $ 6,430 $ 474,954
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6
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NEWCARE HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
The consolidated financial statements included herein have been prepared
by the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although the Company believes that the
disclosures are adequate to make the information presented not misleading.
These consolidated financial statements and the notes thereto should be read
in conjunction with the consolidated financial statements included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1998,
File No. 0-24110.
In the opinion of management of the Company, the accompanying unaudited
consolidated financial statements contain all necessary adjustments to present
fairly the financial position, the results of operations and cash flows for
the periods reported. All adjustments are of a normal recurring nature.
NOTE 2. ACCOUNTS RECEIVABLE AND COST REIMBURSEMENTS
Net patient service revenue is reported at the estimated net realizable
amounts receivable from residents, third-party payors and others for services
rendered. Patient service revenue is derived primarily from services to
retirement center residents and skilled nursing facility patients. Retirement
Center residents typically pay rent in advance of the month for which it is
due. Skilled nursing facility patients are predominately beneficiaries of the
Medicare and Medicaid programs.
For cost reporting periods commencing prior to July 1, 1998, the Medicare
program reimbursed skilled nursing facilities on the basis of allowable costs
subject to certain limitations. Payments were received throughout the year at
amounts estimated to approximate costs. Following year end, cost reports are
filed with the Medicare program and final settlements are made. Provisions
for Medicare settlements are provided in the financial statements for the
period the related services are rendered. Differences between the amounts
accrued and final settlements are reported in the year of settlement.
In 1997, Congress passed the Balanced Budget Act of 1997 which provides
for a phase-in of a prospective pay system ("PPS") for skilled nursing
facilities over a four-year period. Under PPS, Medicare will pay skilled
nursing facilities a fixed fee per patient day based on the acuity level of
the patient. During the phase-in, the rate paid to the facility will be a
blended rate based on the facility's historical costs and a per diem rate.
PPS became effective for the cost reporting periods beginning on or after July
1, 1998. Management does not believe that this change in the reimbursement
system will have a material affect on the Company's operations.
State Medicaid programs pay skilled nursing facilities primarily on a per
diem basis with no retroactive settlement. Revenues from services to Medicaid
patients are recorded at payment rates established by the various state
programs in the period services are rendered.
7
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NOTE 3. INVENTORY
Inventory consists primarily of health care supplies and is stated at the
lower of cost (determined using the first-in, first-out method) or market
value.
NOTE 4. RELATED PARTY TRANSACTIONS
In July 1997, the Company loaned $990,000 to several of the Company's
Directors, Officers and other related parties. The proceeds were used to
purchase stock from several former shareholders. The loans bear a 10%
interest rate and are due on December 31, 2000.
The Company had net receivables from related parties of $9,081,574 and
$7,655,775, at March 31, 1999 and December 31, 1998, respectively.
NOTE 5. LONG-TERM DEBT
Long-term debt consisted of the following at March 31, 1999 and December
31, 1998:
March 31, December 31,
1999 1998
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Amounts outstanding under Revenue Bonds
secured by nursing facilities $ 5,650,000 $ 5,650,000
Other debt secured by retirement,
hospitals and nursing facilities 39,941,972 39,947,566
Other debt 128,784 69,621
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45,720,756 45,667,187
Less: current maturities 4,512,511 4,433,801
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Total long-term debt $41,208,245 $41,233,386
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8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31,
1998
Revenues from continuing operations for the three months ended March 31,
1999 totaled $19,434,212 versus $13,446,721. The 45% increase in revenues was
positively impacted by the number of facilities operated during the current
period compared to the year earlier. At March 31, 1999, the Company owned,
leased or managed twenty-eight (28) nursing homes, five (5) assisted living
centers, and two (2) hospitals. At March 31, 1998, the Company owned, leased
or managed twenty-one (21) nursing homes, three (3) assisted living centers,
and three (3) hospitals. Net patient service revenues rose 51% to $18,922,884
in the March 1999 quarter compared to the same period in 1998. Management fee
revenues dropped to $360,571 in the current period from $725,063 reported last
year, as the two hospital management contracts from last year were terminated
and were replaced by one management contract affecting the current period.
All other operating revenues totaled $150,757 in the March 1999 quarter
compared to $202,330 in 1998.
Operating expenses for the three months ended March 31, 1999 totaled
$23,047,653 compared to $14,867,153 reported for the three months ended March
31, 1998. The cost of patient services increased 51% in the current period
from a year earlier, matching the growth in patient service revenues resulting
from the increase in facilities operated. Lease expense totaled $1,373,340 in
1999 versus $531,245 in 1998, as the number of leased facilities increased
from three (3) at March 31, 1998 to ten (10) at March 31, 1999. Provision for
bad debts decreased from $518,940 in 1998 to $305,438 in 1999, as the previous
year's results included reserves tied to management fees accrued at one of the
hospitals the Company managed.
General and administrative costs increased to $5,212,957 in the March
1999 quarter from $3,027,458 in the March 1998 quarter, and was impacted by
the growth in operations which resulted in increases in corporate salaries,
insurance, supplies, travel expenses, legal and audit fees. In addition, the
current period was impacted by the costs associated with several senior
officers and staff members joining the Company from Retirement Care Associates
after its merger with Sun HealthCare Group on July 1, 1998. Depreciation and
amortization expense totaled $686,280 for the three months ended March 31,
1999 versus $531,646 for the three months ended March 31, 1998, with the
increase principally resulting from the increase in facilities.
The operating loss for the three months ended March 31, 1999 was
$3,613,441 compared to an operating loss of $1,420,432 incurred for the three
months ended March 31, 1998. The increase in operating losses in the current
period was mainly attributable to a decline in average census, or percent of
beds occupied, at the Company's nursing homes. For the March 1999 quarter,
this census was 77.29% compared to a census of 79.65% in the March 1998
quarter. In addition, increases in certain expense categories, particularly
in the administrative area, also adversely affected the results in the current
period.
Partially offsetting the decline in census at the nursing homes was a
slight improvement in the payer mix. For the current period, the generally
higher Medicare and private rates comprised 7.2% and 16.0%, respectively, of
the payer mix versus 6.1% and 14.0%, respectively, for the same period last
year.
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In addition, the assisted living facilities recorded an increase in
census from year ago, rising to 61.76% versus 52.30%. The single hospital
owned by the Company had a significant increase in census, rising to 50.7% in
the current period from 21.45 last year. This was offset, however, by an
increase in lower paying Medicaid patients.
Interest expense for the three months ended March 31, 1999 totaled
$1,986,383 compared to $1,604,825 for the three months ended March 31, 1998,
principally the result of higher borrowings under the Company's line of
credit. Investment income was $134,812 in the current period versus $204,632
last year.
The pre-tax loss in the current quarter was $5,465,012 versus a pre-tax
loss of $2,820,625 reported last year. The net loss for the three months
ended March 31, 1999 was $5,465,012 ($0.45 basic and diluted per common share)
compared to a net loss, after an income tax benefit, of $1,860,625 ($0.16
basic and diluted per common share) for the three months ended March 31, 1998.
The weighted average number of common shares outstanding for the March 1999
quarter was 12,128,525 versus 11,942,970 for the March 1998 quarter.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, the Company had a deficit of $22,299,025 in working
capital compared to a $16,854,523 deficit at December 31, 1998. The decrease
in working capital is primarily a result of the net loss of $5,465,012 for the
quarter ended March 31, 1999. The Company has experienced significant
operating losses and a decline in liquidity as a result of the operating
losses and liquidity shortfalls and investments made in new facilities.
Management believes the operating losses were the result of (a) declines in
census at specific facilities, (b) acquisition of troubled facilities
requiring a period of time to turn around operations at those facilities, and
(c) delays in collecting governmental receivables caused by the acquisition of
new facilities requiring delayed filings for services rendered.
To improve liquidity and enhance operations, management believes the
following plans can be implemented:
1) The Company has seven facilities which have no mortgage debt and
believes that it can raise approximately $11,000,000 through mortgages or
sale/leaseback financing;
2) The Company has approximately $9,000,000 in marketable securities
which have been financed principally on margin. Over the course of this year,
the Company believes it can liquidate these securities and the related margin
loan payable and realize approximately $1,500,000;
3) At March 31, 1999, the Company had a balloon payment of approximately
$3,000,000 due during the next year. Management believes that it will be able
to refinance this obligation;
4) During the twelve months ended December 31, 1998, the Company acquired
or leased fourteen new facilities. Management anticipates focusing on turning
around these new facilities, and enhancing profitability at all facilities by
controlling expenditures and enhancing operating efficiencies.
Management believes that the above items are achievable. However, it can
provide no assurance that these items will occur. Completion of the financing
noted above are subject to very volatile market conditions, which have
recently been unfavorable for the health care industry. Any significant
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changes to any of the facilities operations are subject to review and
rescission by regulatory authorities.
During the three months ended March 31, 1999, cash provided by operating
activities totaled $28,958 versus cash used in operating activities of
$4,762,886 at for the three months ended March 31, 1998. The primary reason
for the increase in cash provided by operating activities was an increase in
accounts payable and accrued liabilities, depreciation and amortization, and
provision for bad debts. These were offset to a certain degree by increases
in accounts receivable and other receivables.
Cash used in investing operations for the three months ended March 31,
1999 totaled $2,716,286 for the three months ended March 31, 1999. Cash was
used for the purchase of property and equipment of $620,707, payments of
deferred costs of $661,901, and advances to related parties of $1,425,799.
Cash provided by financing activities for the three months ended March
31, 1999 totaled $2,693,758 and consisted of proceeds of $2,681,124 from lines
of credit and the issuance of long-term debt of $537,434. Repayments of long-
term debt totaled $483,865.
The Company has no commitments for material capital expenditures.
However, the Company intends to continue to lease, purchase and mortgage
additional facilities in the future. The Company intends to use long-term
debt financing in connection with the purchase of any additional facilities on
terms which can be paid out of the cash flow generated by the property.
The Company believes that its long-term liquidity needs will generally be
met by cash flows from operations and it will be able to obtain, when
necessary, extensions of its current line of credit and/or secure other
financing from the private or public sector.
FACILITIES
Listed below are the facilities operated by the Company at March 31,
1999:
<TABLE>
<CAPTION>
Number
Occupancy
Skilled Nursing Facilities Location Type of Beds at
3/31/99
<S> <C> <C> <C> <C>
Emory Nursing Home Georgia Owned 40 97.5%
Ft. Valley Nursing Center Georgia Owned 75 95.1
Pecan Manor Georgia Leased 60 85.9
Rest-Awhile Nursing Georgia Owned 64 93.5
Whigham Nursing Center Georgia Leased 143 97.7
Windward Nursing Center Georgia Owned 100 96.2
Central Tampa Nursing Home Florida Owned 100 71.3
Dania Nursing Home Florida Owned 88 49.0
Oak Manor Nursing Home Florida Owned 180 87.6
Suncoast Nursing Home Florida Owned 59 71.4
NewCare Nursing of Venice Florida Owned 117 46.7
Victoria Martin Nursing Home Florida Owned 38 58.7
Wakulla Manor Florida Owned 120 90.5
Coffeyville Nursing Home Kansas Leased 45 66.5
Salina Nursing Home Kansas Leased 60 46.9
Great Plains Rehab & Nursing
Center of Olathe Kansas Owned 104 90.9
Great Plains Rehab & Nursing
Center of Bonner Springs Kansas Leased 50 90.8
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Park Place Nursing Home Texas 58% Owned 102 81.8
Rosewood Rehab & Care Center Texas Leased 185 47.2
Woodland Park Texas Leased 99 90.7
Meadowood Nursing Home Massachusetts Leased 120 95.8
Elms Nursing Home Massachusetts Owned 82 57.0
Oak Manor Nursing Home Massachusetts Owned 60 86.1
Pine Manor Nursing Home Massachusetts Owned 100 70.4
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Totals 2,191 77.6%
Number
Occupancy
Assisted Living Facilities Location Type of Units at
3/31/99
Oak Manor Villas Ret. Center Florida Owned 224 42.2%
Remington House-New Port Richie Florida Leased 170 76.0
Pine Valley Alabama Leased 110 83.2
------ -----
Totals 504 62.5%
Number
Occupancy
Hospitals Location Type of Beds at
3/31/99
Meadowbrook Rehab Hospital Kansas Owned 84 53.3%
</TABLE>
YEAR 2000 UPDATE
The Company has been actively engaged in addressing Year 2000 Issues.
Such issues relate to potential problems resulting from non-Year 2000
compliant systems processing transactions using two-digit date fields rather
than four-digit date fields for the year of a transaction. If these systems
are not identified and reconfigured, Year 2000 transactions would be processed
as year "00," which could lead to processing inaccuracies and potential
inoperability and could have a material adverse effect on the Company's
business.
As a result of the Company's recent expansion, many of the Company's
communications and data processing systems are Year 2000 compliant. However,
the Company has undertaken a Year 2000 Project to identify and modify any non-
Year 2000 compliant systems.
The Company has completed a comprehensive review of the internal Year
2000 issues it needs to address. From this review, the Company has
established a timetable for the implementation of all necessary changes, and
it expects to be completed by the summer of 1999. The status of material
third party relationships on Year 2000 issues was also addressed. These
relationships include the Company's main banking partner, the Health Care
Financing Administration (HCFA), Medicaid reimbursements from individual
states, and the outside payroll vendor.
In discussions with our main bank, the Company has been informed that
four stages of testing have already been completed. Furthermore, the Company
was assured that final stages of testing would be completed well in advance of
2000 in order to make any necessary corrections that could have a material
impact on our Company.
Concerning HCFA and Medicare reimbursements, the Company has received
information from a fiscal intermediary for the Medicare program that states
"HCFA has a program to systematically assess, renovate and test each mission
critical system in all its facilities, as well as those of each carrier and
intermediary by December 31, 1998. This target date will have given HCFA a
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full year to fix any problems that might have escaped detection during
renovation and testing. In addition, Medicare carriers and intermediaries
will test their electronic data interchanges with the hospital information
system, billing system, and billing service. This testing ensures that these
systems interface and work properly with no interruption in claims and
payments processing after the clock ticks at midnight on January 1, 2000."
As for Medicaid, the Company does not currently have detailed information
on the progress made on addressing Year 2000 issues, but it is known that work
is in process.
In discussions with the Company's outside payroll provider, the Company
received a comprehensive detailed listing of all applications and systems
currently being worked on. In addition, information received stated "We have
been addressing the challenges of the Y2K for the last several years and have
the technical, financial and human resources in place to successfully address
them."
Information on other entities which interact with the Company is not
available at this time, but it is felt that the four entities specifically
identified above could potentially have a material adverse impact on the
Company if issues related to Year 2000 are not addressed successfully.
To date, the Company has evaluated the potential internal cost of
addressing Year 2000 issues, and estimates these costs will amount to
approximately $5,000 to $20,000. These costs will be expensed when incurred
and should not have an adverse impact on the Company's financial condition.
No contingency plans have been established at this time should the Company
or material third party relationships fail to resolve Year 2000 issues by the
end of 1999. These plans will have to be addressed in the near future.
Unforeseen difficulties may adversely affect the Company's ability to complete
its systems modifications correctly, completely, on time or within its cost
estimates. Additionally, there can be no assurance that third parties that
the Company deals with will resolve their year 2000 issues completely and
timely. Failure to compete the year 2000 project on time could have a
material adverse affect on future operating results and financial condition.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
PRINCETON HOSPITAL BANKRUPTCY
In January 1999, the Princeton Hospital, a subsidiary, which the Company
had managed since October 1, 1997, filed for protection under Chapter 11 of
the Federal Bankruptcy Act in the Federal Bankruptcy Court for the Middle
District of Florida. On March 1, 1999, the U.S. Bankruptcy Judge approved,
with the consent of NCHC, the replacement of the Company's subsidiary as
manager of the Hospital. As a result of this bankruptcy proceeding, NCHC has
taken a reserve for bad debts totaling $1,285,810 against amounts due it from
the Princeton Hospital for management fees and for amounts advanced pursuant
to the guarantee of certain bond indebtedness.
SUN HEALTHCARE LAWSUIT
On March 12, 1999, Sun Healthcare Group, Inc. ("Sun") and certain of its
subsidiaries filed a lawsuit in the Superior Court of Fulton County, Georgia,
against the Company, certain of the Company's subsidiaries and affiliates,
including certain of the Company's Officers and Directors. In its complaint,
Sun alleges that prior to the completion of a merger transaction in which Sun
acquired Retirement Care Associates, Inc. ("RCA") certain persons who were
then officers, directors and affiliates of RCA, many of whom are now Officers,
Directors and affiliates of the Company, caused RCA to make loans to the
Company totaling over $22.4 million on an interest-free basis. The complaint
also alleges, among other things, that NewCare used RCA's facilities,
equipment and employees free of charge, the cash management systems of the
Company and RCA were commingled, and the defendants caused RCA to breach its
contracts with vendors. The complaint also alleges that after the acquisition
of RCA by Sun that certain of the defendants caused funds in bank accounts of
facilities managed by a subsidiary of Sun to be transferred to the Company's
bank accounts.
Based on its allegations, Sun claims that the defendants breached
contracts between RCA and NewCare, breached fiduciary duties to RCA, engaged
in self-dealing and other tortious conduct. Sun is seeking damages in excess
of $30 million plus punitive damages.
In May 1999, each of the corporate and individual defendants, including
the Company, filed an Answer and Counterclaim against Sun and the other
plaintiffs. In the answer, the Company denies having committed any
wrongdoing. The counterclaims by various defendants include allegations of
negligent misrepresentation, fraud and deceit, securities fraud, unjust
enrichment, breach of contract, as well as tortious conduct and conversion by
Sun and several of its subsidiaries. The Answer and Counterclaim also
outlined allegations of additional misconduct by Sun and other individuals and
entities which may be raised in this or other litigation which may be filed
against Sun and its subsidiaries and affiliates.
STATE OF FLORIDA CRIMINAL CHARGES AGAINST CERTAIN OFFICERS OF THE COMPANY
In January 1999, the State of Florida filed criminal charges in the
Circuit Court for the Eighth Judicial District of the State of Florida against
two Executive Officers of the Company alleging that these persons, while
14
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serving as officers of Retirement Care Associates, Inc., had engaged in
Medicaid fraud, racketeering, grand theft and abuse of the elderly in
connection with the operation of a nursing home in Gainesville, Florida. The
Executive Officers of the Company named in that proceeding are Chris Brogdon
and Darrell C. Tucker. Also charged in that proceeding are Retirement Care
Associates, Inc. and certain of its subsidiaries and former and current
employees.
Both Mr. Brogdon and Mr. Tucker deny any wrongdoing and intend to
vigorously defend themselves against the allegations.
The Company is not named as a defendant in this proceeding.
ANTHONY LIUZZO LAWSUIT
On February 3, 1999, Anthony Liuzzo and entities owned or controlled by
Liuzzo (collectively, "Liuzzo") filed a lawsuit in the Circuit Court for the
Eighth Judicial District of the State of Florida against the Company and
several other corporate and individual defendants (including a subsidiary of
the Company and certain officers and directors of the Company) alleging breach
of contract with respect to the purchase of real estate located in Ocala,
Florida and attempting to set aside a release of claims previously entered
into between Liuzzo and the defendants. The defendants intend to file
appropriate responses to the claims, including motions to dismiss and possible
counterclaim against Liuzzo.
GLOWORTH, INC. LAWSUIT
In April 1998, Gloworth, Inc. ("Gloworth") filed an action in the Circuit
Court for the Sixth Judicial Circuit in Clearwater, Florida, against the
Company and certain affiliated entities. Gloworth is a minority limited
partner in Oak Manor Nursing Home LTD (the "Partnership"), a Florida limited
partnership owned principally by the Company. Gloworth's Complaint asserts
several claims against the Company and the other Defendants, including the
Partnership and the corporate general partner of the Partnership for alleged
breach of fiduciary duty, constructive fraud, fraud and waste. In addition,
the Compliant seeks certain equitable remedies against the Defendants,
including an accounting, the appointment of a receiver for the Partnership and
dissolution of the Partnership. Gloworth's Complaint demands unspecified
damages from the Defendant, plus attorney's fees and costs.
In May 1998, the Defendants filed their Answer to the Complaint in which
they asserted numerous affirmative defenses and denied any liability to
Plaintiff. In addition, the Defendants filed a Third Party Complaint against
Robert W. Bell, Sr. ("Bell"), formerly President of the Company, asserting
that certain alleged damages of the Plaintiff resulted, if at all, from the
acts of Bell. The Third Party Complaint seeks indemnification and
contribution from Bell for any such amounts for which the Defendants may be
found liable to the Plaintiff. In July 1998, Bell filed his Answer to the
Third Party Complaint denying any liability thereon.
In December 1998, Gloworth moved the court for leave to amend its
Compliant to add a claim for punitive damages. Defendants have opposed that
motion, which has not yet been ruled on by the court. In January 1999,
Gloworth filed its motion seeking the appointment of a receiver for the
Partnership pending the resolution of this action. Defendants opposed that
motion. Although an evidentiary hearing on that motion was begun on January
15
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<PAGE>
22, 1999, it was terminated before completion and no ruling has been made on
Plaintiff's motion. Rather, the court has decided to consider Gloworth's
request for a receiver along with its other claims at trial. The case is
presently in discovery. A bench trial on all matters involved in this
litigation has been rescheduled for October 1999. Defendants intend to
vigorously oppose Gloworth's motion for a receiver as well as all of
Gloworth's other claims for relief at trial.
On March 9, 1999, Bell filed a motion for summary judgment on Defendant's
Third Party Complaint. Defendant's intend to vigorously oppose that motion,
which is scheduled for hearing by the Court in October 1999.
ITEM 2. CHANGES IN SECURITIES. None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None.
ITEM 5. OTHER INFORMATION. None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27 Financial Data Schedule Filed herewith
electronically
(b) Reports on Form 8-K. The Company filed no reports on Form 8-K
during the three months ended March 31, 1999.
16
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
NEWCARE HEALTH CORPORATION
Date: May 17, 1998 By/s/ Darrell C. Tucker
Darrell C. Tucker, President
By/s James H. Sanregret
James H. Sanregret, Chief Financial
Officer and Treasurer
17
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<PAGE>
EXHIBIT INDEX
EXHIBIT METHOD OF FILING
- ------- ------------------------------
27. Financial Data Schedule Filed herewith electronically
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
balance sheets and statements of operations found on pages 3-5 of the
Company's Form 10-Q for the year to date, and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1999
<CASH> 6,430
<SECURITIES> 8,829,675
<RECEIVABLES> 11,376,876
<ALLOWANCES> 0
<INVENTORY> 360,939
<CURRENT-ASSETS> 33,015,384
<PP&E> 54,775,850
<DEPRECIATION> 0
<TOTAL-ASSETS> 92,790,385
<CURRENT-LIABILITIES> 55,314,409
<BONDS> 0
<COMMON> 242,570
0
0
<OTHER-SE> (3,974,839)
<TOTAL-LIABILITY-AND-EQUITY> 92,790,385
<SALES> 19,434,212
<TOTAL-REVENUES> 19,434,212
<CGS> 15,469,638
<TOTAL-COSTS> 15,469,638
<OTHER-EXPENSES> 7,578,015
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,986,383
<INCOME-PRETAX> (5,465,012)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,465,012)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,465,012)
<EPS-PRIMARY> (.45)
<EPS-DILUTED> (.45)
</TABLE>
