UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A
(AMENDMENT NO. 2)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1999.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ___________
Commission file number 000-25313
AGEMARK CORPORATION
(Exact name of registrant as specified in its charter)
Nevada 94-3270169
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2614 Telegraph Avenue
Berkeley, CA 94704
(Address of Principal (ZIP Code)
Executive Offices)
Issuer's telephone number: (510) 548-6600
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
value $.001 per share
Check 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 [ ]
Check if there is no disclosure of delinquent filers pursuant to Item
405 of Regulation S-B is not contained in this form, 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-KSB or any
amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year: $10,377,000
State the aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price at which the
common equity was sold, or the average bid and asked price of such common
equity, as of a specified date within the past 60 days. $771,516; based on a
per-share market value of $1.00 as determined by the Board of Directors of the
issuer.
Check whether the issuer has filed all documents and reports required
to be filed by Section 12, 13 or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by a court. Yes [X] No [ ]
At December 20, 1999, there were 1,000,000 shares of common stock, par
value $.001 per share, of the registrant issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Not Applicable.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
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TABLE OF CONTENTS
PAGE
PART I.........................................................................1
Item 1. DESCRIPTION OF BUSINESS...........................................1
Item 2. DESCRIPTION OF PROPERTY..........................................12
Item 3. LEGAL PROCEEDINGS................................................13
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..............13
PART II.......................................................................14
Item 5. MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS..........14
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION........14
ITEM 7. FINANCIAL STATEMENTS.............................................20
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.........................................43
PART III......................................................................43
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.....43
ITEM 10. EXECUTIVE COMPENSATION...........................................44
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...45
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................47
ITEM 13. FINANCIAL STATEMENTS AND EXHIBITS................................48
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL
Agemark Corporation (the "Company") owns and operates assisted living
residences, which offer a combination of housing and personalized services for
senior citizens who can no longer live independently but who do not require the
24-hour medical care provided by a skilled nursing facility. The Company
operates 10 properties located in non-urban, secondary markets in seven states.
The Company's primary focus is on "private pay" residents, who generally pay for
the Company's services from their own funds, with the help of other family
members or through private insurance. The Company was incorporated in Nevada in
April 1997 and commenced operations in January 1998 pursuant to the Plan of
Reorganization discussed below.
BACKGROUND AND FORMATION OF THE COMPANY; PLAN OF REORGANIZATION
Between 1987 and 1989, Westor Financial Group, Inc., now, Opus X Inc.
("Opus"), established Historic Housing for Seniors Limited Partnership, Historic
Housing for Seniors II Limited Partnership, Historic Housing for Seniors III
Limited Partnership (collectively, the "HHS Partnerships"), and Housing for
Seniors Participating Mortgage Fund Limited Partnership ("PIF I" and, together
with the HHS Partnerships, the "Partnerships"). The Partnerships were Delaware
limited partnerships, the securities of which were registered under the
Securities Exchange Act of 1934 (the "Exchange Act"). The HHS Partnerships owned
a portfolio of real properties throughout the United States that were operated
as housing facilities for senior citizens. PIF I, together with similar
partnerships sponsored by Opus (collectively, the "PIF Partnerships"), made
mortgage loans to the HHS Partnerships and owners of other such facilities. Opus
served as general partner for each of the Partnerships. Evergreen Management,
Inc. ("Evergreen"), a corporation owned by the principals of Opus, managed the
operations of the housing facilities owned by the Partnerships pursuant to
management agreements with those entities.
The operating performance of the HHS Partnerships did not reach
feasibility standards and pro forma expectations and by the early 1990s, due to
a variety of factors, the HHS Partnerships were unable to meet the debt service
demands of the PIF Partnerships. Factors that affected the businesses of the
housing facilities owned by the HHS Partnerships included higher resident
turnover than had been expected, slower rent up to full occupancy than
anticipated, higher expenses than anticipated and changes in tenants' needs due
to their deteriorating health. The decline in commercial and residential real
estate and the nationwide economic downturn adversely affected each HHS
Partnership's ability to lease its facilities in the time frame that was
originally anticipated by feasibility studies conducted by third parties on
behalf of the HHS Partnerships. Depressed home sales in many markets made it
difficult for potential residents to sell their homes, which adversely affected
their financial ability to be able to move into a senior citizen housing
facility. An additional factor affecting adversely the overall occupancy rates
and net income stream of the HHS Partnerships' housing facilities was a much
higher than
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anticipated turnover rate due to the age and frailty of the residents and lower
profit margins resulting from more intensive service required to retain the
frail elderly tenants who moved in. As a result, occupancies and income
available for debt service at the HHS Partnerships' facilities were below the
level required to fund both the property operating expenses and full mortgage
payments.
In September 1993, the Partnerships filed voluntary petitions for
relief under Chapter 11 of the United States Bankruptcy Code. In May 1994, the
HHS Partnerships proposed a plan of reorganization that was never confirmed; the
court-appointed liquidating trustee for the PIF Partnerships other than PIF I
objected to the plan pending his further investigation of the operations of
Opus, the HHS Partnerships and the PIF Partnerships. In January 1997, the
Partnerships proposed a Second Amended Joint Plan of Reorganization (as amended
and confirmed, the "Plan of Reorganization") that was supported by the
liquidating trustee of the other PIF Partnerships. The Plan of Reorganization
was confirmed by the United States Bankruptcy Court for the Northern District of
California on April 29, 1997. The Plan of Reorganization was declared effective
on September 30, 1998.
In accordance with the Plan of Reorganization, the Company was
incorporated under the laws of Nevada in April 1997. Some of the facilities
owned by the HHS Partnerships were transferred to the Company pursuant to the
Plan of Reorganization. According to a study conducted in connection with the
formulation of and whose conclusions are included in the Plan of Reorganization,
these facilities were deemed to have the strongest long-term potential for
generating cash flow adequate to support ongoing debt or were needed to secure
certain obligations arising from previous loans. Additionally, two affiliated
limited partnerships of Opus, Dickinson Associates, L.P. and Williston
Associates, L.P., contributed two facilities located in Dickinson, North Dakota
and Williston, North Dakota, respectively, to the Company. Both Dickinson
Associates, L.P. and Williston Associates, L.P. were owned by the individuals
who now comprise the Company's senior management. In consideration for these
facilities, and in satisfaction of certain claims, the Company issued shares of
Common Stock to the Partnerships and the Opus-affiliated limited partnerships.
The Partnerships were dissolved and their equity interests in the Company were
distributed to their respective limited partners. The secured debt on the
Company's facilities was also reduced and modified pursuant to the Plan of
Reorganization. In addition, pursuant to the Plan of Reorganization, the Company
entered into amended management agreements with Evergreen, providing for reduced
fees compared to the agreements with the Partnerships. See Item 12--"Certain
Relationships and Related Transactions" below. The Company also assumed all
assets and liabilities of the Partnerships that were not otherwise disposed of
pursuant to the Plan of Reorganization.
The following table sets forth certain information with respect to the
properties that were acquired by the Company pursuant to the Plan of
Reorganization, including a breakdown of the assets and debt that were assumed
by the Company in respect of each property.
The following is a summary of the properties transferred to the Company
and the adjustments made to historical values to arrive at values approved by
the Bankruptcy Court pursuant to the Plan of Reorganization:
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<TABLE>
(Amounts in thousands of dollars)
<CAPTION>
Accumulated Net Book Write Plan
Property Transferred Historical Depreciation Value Up of Reorg.
Location From Value 12/31/97 12/31/97 (Down) Value
-------- ---- ----- -------- -------- ---- -----
<S> <C> <C> <C> <C> <C> <C>
Beatrice, NE HHS I $ 2,742 $ 888 $ 1,854 $ (618) $ 1,236
Cumberland, MD HHS I 2,188 635 1,553 2,315 3,868
Hastings, NE HHS I 3,211 1,120 2,091 198 2,289
Chanute, KS HHS II 2,602 750 1,852 (901) 951
Rock Island, IL HHS II 4,345 1,212 3,133 (735) 2,398
Fort Madison, IA HHS III 3,460 781 2,679 (464) 2,215
Manitowoc, WI HHS III 3,642 693 2,949 (2,154) 795
Port Huron, IL PIF I 1,090 0 1,090 86 1,176
Dickinson, ND Private 1,380 380 1,000 1,273 2,273
Williston, ND Private 1,932 538 1,394 2,978 4,372
------------ ------------- ------------- ---------- ------------
$ 26,592 $ 6,997 $ 19,595 $ 1,978 $ 21,573
============ ============= ============= ========== ============
</TABLE>
In connection with the transfers of the facilities, the Company also
assumed various notes payable. The following is a summary of the notes payable
assumed by the Company:
<TABLE>
<CAPTION>
(Amounts in thousands of dollars)
<S> <C>
Carrying value of notes (including accrued
interest) by the Partnerships $ 24,186
Less forgiveness of debt recognized by the Partnerships 8,595
----------
Notes payable assumed by the Company $ 15,591
==========
</TABLE>
THE SENIOR CARE INDUSTRY
The senior care industry is characterized by a wide range of living
accommodations and health care services. For those who are able to live in a
home setting, home health care and other limited services can be an appropriate
alternative. Community housing or retirement centers, which are commonly
referred to as independent living facilities, are also available to persons who
need modest assistance, such as with meal preparation, housekeeping and laundry.
Assisted living facilities are typically for those persons whose physical or
cognitive frailties have reached a state where independent living accommodations
can no longer provide the level of care required. These people do not need the
continuous medical attention of a skilled nursing facility. Generally, assisted
living facilities provide a combination of housing and 24-hour personal support
services designed to assist seniors with activities of daily living ("ADLs"),
which include bathing, eating, personal hygiene, grooming, ambulating and
dressing. Certain assisted living facilities also offer higher levels of
personal assistance for residents with Alzheimer's disease or other forms of
dementia but always in a "residential," as compared with a "medical," setting.
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Skilled nursing facilities provide care in a comparatively institutional
environment. Assisted living residences provide a "homelike" atmosphere. For
example, the Company's facilities feature carpeted floors compared with the
linoleum typically found in nursing home, and single-occupancy rooms.
Additionally, assisted living residences operated by the Company encourage
residents to bring their own, more familiar furniture, serve meals in dining
rooms and provide a wide range of social programs including outings to shows,
museums, movies and the like.
The senior care industry, including assisted living, is highly
fragmented and characterized by numerous providers whose services, experience
and capital resources vary widely. The Company believes that the assisted living
industry is evolving as the preferred alternative to meet the growing demand for
a cost-effective setting for those seniors who cannot live independently due to
physical or cognitive frailties, but who do not require the more intensive
medical attention provided by a skilled nursing facility. According to the
United States Bureau of the Census, approximately 45% of persons aged 85 years
and older, approximately 24% of persons aged 80 to 84 and approximately 20% of
persons aged 75 to 79 need assistance with ADLs.
The Company believes that a number of factors will contribute to the
continued growth of the assisted living industry, including:
COST EFFECTIVENESS. The Company believes that assisted living
facilities provide a cost effective alternative to other types of facilities
that may provide more care than many seniors need. Additionally, the Company
also believes that the cost of assisted living services compares favorably with
home health care, particularly when costs associated with housing, meals and
personal care assistance are taken into consideration.
CHANGING INCOME AND FAMILY STRUCTURES. The Company believes that the
increased affluence of the current elderly population and changing family
structures will feed the demand for assisted living and health care services.
The Company believes that cumulative gains in stock prices and rising real
estate values over the past few decades has contributed to increased affluence
in the elderly population. Accordingly, the Company believes that the number of
seniors who are able to afford high-quality senior residential services such as
those offered by the Company will also increase. Additional factors affecting
the demand for assisted senior living arrangements include the past decade's
increase in the number of two-income households and rise in geographical
separation of senior family members from their adult children caused by
work-related moves. Many families that traditionally would have provided the
care and services offered by the Company to senior family members are less able
to do so now than in the past. The Company believes that assisted living
facilities represent an attractive and independent environment for senior family
members.
DEMOGRAPHICS. The target market for the Company's services are persons
75 years and older, one of the fastest growing segments of the United States
population. According to the United States Bureau of the Census, the portion of
the United States population aged 75 and older is expected to increase by
approximately 29%, from approximately 13.0 million in 1990 to approximately 16.8
million by the year 2000. The number of persons aged 85 and older, as a segment
of the United States population, is expected to increase by approximately 43%,
from approximately 3.0 million in 1990 to over 4.3 million by the year 2000. The
Company believes
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that increases in human life expectancy will result in increased demand for
services similar to those provided by the Company.
SERVICES
The Company operates assisted living facilities in the following
locations: Rock Island, Illinois; Fort Madison, Iowa; Chanute, Kansas;
Cumberland, Maryland; Port Huron, Michigan; Beatrice, Nebraska; Hastings,
Nebraska; Dickinson, North Dakota; and Williston, North Dakota. Except for the
facilities in North Dakota, which are modern buildings, the Company's facilities
are located in historic, renovated hotels, most of which are on the National
Register of Historic Places. The Company's facilities range in size from 50
units to 115 units. See Item 2--"Description of Property." In addition, the
Company currently operates a property located in Manitowoc, Wisconsin as an
apartment complex.
ASSISTED LIVING PROPERTIES. The Company's current portfolio of
properties is aimed at the middle to more affordable price range within the
senior care market. The Company offers a range of assisted living care and
services, which are available 24 hours per day at each of its assisted living
facilities. The services offered by the Company include personal care, support
and certain supplemental services. Personal care services include assistance
with ADLs, such as ambulating, bathing, dressing, eating, grooming, personal
hygiene, monitoring or assistance with medications and confusion management.
Support services include meal preparation, assistance with social and
recreational activities, laundry services, general housekeeping, maintenance
services and transportation services. Supplemental services, which are offered
at an extra charge, include beauty and barber services, extra laundry services
and non-routine care services. The rates for assisted living units at the
Company's facilities range from approximately $1,000 to $2,400 per month,
depending, among other things, on the size of the unit and the location of the
community.
ADULT DAY CARE. The Company currently provides adult day care services
at its Cumberland, Maryland property. The Company charges approximately $60 per
day for its adult day care services. The Company believes that adult day care is
a natural complement to its existing assisted living facilities because many of
the Company's properties have large ballrooms or activity rooms which are
underutilized. Adult day care services, because they are offered to senior
citizens who do not reside in the Company's properties, have the potential to
generate new residents for the Company's assisted living residences by
introducing them to the Company.
MARKETING AND SALES
The Company's marketing strategy is intended to create awareness of the
Company and its services among potential residents and their family members and
referral sources, such as physicians, clergy, local area agencies for the
elderly, home health agencies and social workers. A central marketing staff
person located at the Company's facility in Hastings, Nebraska coordinates the
Company's overall strategies for promoting the Company throughout its markets
and monitors the success of the Company's marketing efforts. Additionally, the
Company has hired an outside marketing and public relations firm to develop
marketing materials for the Company as a whole and for each of the Company's
facilities. The Company also relies on print
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advertising, yellow pages advertising, direct mail, signage and special events,
such as grand openings for new facilities and community receptions.
COMPETITION
The health care industry is highly competitive and the Company believes
that the assisted living business will become more competitive in the future.
There are currently few regulatory and other barriers to entry in the assisted
living industry. The Company faces competition for residents and for employees
from numerous local, regional and national providers of facility-based assisted
living and long-term care, including skilled nursing facilities, as well as
medical rehabilitation and home health care providers. Many of the Company's
present and potential competitors are significantly larger or have greater
financial resources than those of the Company. Additionally, some of the
Company's competitors operate on a not-for-profit basis or as charitable
organizations. If the development of new assisted living facilities surpasses
the demand for such facilities in particular markets, such markets could become
saturated. Competition could limit the Company's ability to attract residents
and patients and expand its business and could have a material adverse effect on
the Company's business, results of operations and financial condition.
The Company believes the primary competitive factors in the senior care
industry are: reputation for, and commitment to, high quality care; quality of
support services offered (such as home health care and food services); price of
services; physical appearance and amenities associated with the facilities; and
location. Because seniors tend to choose senior living facilities near their
homes, the Company's principal competitors are other senior living and long-term
care facilities in the same geographic areas as the Company's facilities. The
Company also competes with other health care businesses with respect to
attracting and retaining nurses, technicians, aides, and other high quality
professional and nonprofessional employees and managers.
GOVERNMENT REGULATION
The assisted living industry is subject to extensive federal, state and
local regulation. The various layers of governmental regulation affect the
Company's business by controlling its growth, requiring licensure or
certification of its facilities, regulating the use of its facilities and
controlling reimbursement to the Company for services provided. Licensing,
certification and other applicable governmental regulations vary from
jurisdiction to jurisdiction and are revised periodically. It is not possible to
predict the content or impact of future legislation and regulations affecting
the assisted living industry.
ASSISTED LIVING FACILITIES. The Company's assisted living facilities
are subject to regulation by various state and local agencies. There are
currently no federal laws or regulations specifically governing assisted living
facilities. State requirements relating to the licensing and operation of
assisted living facilities vary from state to state; however, most states
regulate many aspects of a facility's operations, including physical plant
requirements; resident rights; personnel training and education; requisite
levels of resident independence; administration of medications; safety and
evacuation plans; and the level and nature of services to be provided, including
dietary and housekeeping. In most states, assisted living facilities must also
comply
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with state and local building and fire codes and certain other licenses or
certifications, such as a food service license, may be required. Assisted living
facilities are subject to periodic survey by governmental agencies with
licensing authority. In certain circumstances, failure to satisfy survey
standards could result in a loss of licensure and closure of a facility.
Because assisted living facilities historically have not been
considered as traditional health care entities and government and private
insurers have not reimbursed providers for assisted living services, these
facilities have not been subject to the degree of regulation which governs
nursing homes and other health care providers. As assisted living emerges as a
cost-effective alternative to nursing facility care, assisted living facilities
could become subject to more extensive regulation, particularly in the areas of
licensure and reimbursement. The content of such regulations, the extent of any
increased regulation and the impact of any such regulation on the Company cannot
be predicted at this time and there can be no assurance that such regulations
will not adversely affect the Company's business.
The Company believes the structure and composition of government
regulation of health care will continue to change and, as a result, it regularly
monitors developments in the law. The Company expects to modify its agreements
and operations from time to time as the business and regulatory environment
changes. While the Company believes it will be able to structure all its
agreements and operations in accordance with applicable law, there can be no
assurance that its arrangements will not be successfully challenged.
AMERICANS WITH DISABILITIES ACT. Under the Americans with Disabilities
Act of 1990, all places of public accommodation are required to meet certain
federal requirements related to access and use by disabled persons. A number of
additional federal, state and local laws exist which also may require
modifications to existing and planned properties to create access by disabled
persons. While the Company believes that its properties are substantially in
compliance with present requirements or are exempt therefrom, in part because of
their historic value, if required changes involve a greater expenditure than
anticipated or must be made on a more accelerated basis than anticipated,
additional costs would be incurred by the Company. Further, legislation may
impose additional burdens or restrictions with respect to access by disabled
persons, the costs of compliance with which could be substantial.
ENVIRONMENTAL REGULATION. The Company is subject to various federal,
state and local environmental laws and regulations. Such laws and regulations
often impose liability whether or not the owner or operator knew of, or was
responsible for, the presence of hazardous or toxic substances. The costs of any
required remediation or removal of these substances could be substantial and the
liability of an owner or operator as to any property is generally not limited
under such laws and regulations and could exceed the property's value and the
aggregate assets of the owner or operator. The presence of these substances, or
failure to remediate such contamination properly, may also affect adversely the
owner's ability to sell or rent the property, or to borrow using the property as
collateral. Under these laws and regulations, an owner, operator or an entity
that arranges for the disposal of hazardous or toxic substances, such as
asbestos-containing materials, at the disposal site, may also be liable for the
costs of any required remediation or removal of the hazardous or toxic
substances at the disposal site. In connection with the ownership or operation
of its properties, the Company could be liable for these costs, as
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well as certain other costs, including governmental fines and injuries to
persons or properties.
EMPLOYEES
As of November 15, 1999, the Company had approximately 302 employees,
including 130 part-time employees. None of the Company's employees are currently
represented by a union. The Company believes that it has a good relationship
with its employees, in part because it provides them with annual cash bonuses, a
stock option program, health care coverage and a 401(k) program.
FACTORS THAT MAY AFFECT RESULTS
The Company's business, financial condition and results of operations
are subject to many risks, including those discussed under "--Competition" and
"--Government Regulation" above and those set forth below.
LIMITED OPERATING HISTORY. The Company was incorporated in 1997 and
began operations in January 1998 and consequently has a limited operating
history. Accordingly, there can be no assurance that the Company will not incur
losses. Failure to achieve profitability could have a material adverse effect on
the Company's business, results of operations and financial condition.
FORMATION FROM CHAPTER 11 PROCEEDINGS. The Company was formed pursuant
to the Plan of Reorganization, which became effective on September 30, 1998. The
Company's experience with Chapter 11 reorganization may affect the Company's
ability to negotiate favorable trade terms with vendors. The failure to obtain
such favorable terms could have a material adverse effect on the Company's
business, results of operations and financial condition.
NEED FOR ADDITIONAL CAPITAL. The Company's growth is subject to its
ability to maintain or further increase revenues at existing facilities and the
availability of capital. The Company has begun and continues to work with
various sources of long-term financing to refinance existing loans in order to
obtain financing with a longer term and obtain additional liquidity for future
capital projects. In the opinion of management, the Company will have sufficient
cash from operations for the Company's operating and capital expenditure needs
for at least the next 12 months. There can be no assurance that the Company will
be able to maintain or further increase revenues at current facilities or that
sufficient capital will be available or, if available, that it will be available
on terms that the Company considers reasonable. Further, owing to the age of the
Company's historic properties, the Company's facilities may require greater
upkeep and capital expenditures than more modern facilities. The Company's
inability or failure to maintain or further increase such revenues or obtain
such sufficient capital on favorable terms could have a material adverse effect
on its business, results of operations and financial condition.
DEBT OBLIGATIONS. As of September 30, 1999, there was an aggregate
balance of approximately $14,775,000 outstanding on mortgages secured by certain
of the Company's properties. See Item 2--"Description of Property." Virtually
all of the Company's long-term debt will come due in two years, subject to an
extension to as much as an additional three years
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upon the repayment of substantial amounts of principal, a portion of which has
already been paid by the Company. Consequently, a significant portion of the
Company's cash flow is expected to be devoted to debt service, and there is a
risk that the Company will not be able to generate sufficient cash flow from
operations to cover required debt payments. The Company has begun and continues
to work with various sources of long-term financing to refinance the existing
loans in order to obtain financing with a longer term, reduce the impact of debt
financing on future cash flows, and obtain additional liquidity for future
capital projects. If the Company were unable to generate sufficient cash flow
from operations to cover required debt payments in the future, there can be no
assurance that sufficient financing would be available to cover the
insufficiency or, if available, that the financing would be on terms acceptable
to the Company. In the absence of financing, the Company's ability to make
scheduled principal and interest payments on its indebtedness would be adversely
affected.
OBTAINING RESIDENTS AND MAINTAINING RENTAL RATES. As of September 30,
1999, the senior citizen housing facilities owned and operated by the Company
had a combined occupancy rate of approximately 81%. Occupancy may drop in these
facilities primarily due to changes in the health of residents, increased
competition from other providers of assisted living services that may give
residents more choices with respect to the provision of such services, and
changes in state regulations. Turnover among residents is affected by their
health, and higher turnover can adversely affect the Company's results of
operations. There can be no assurance that, at any time, any of the Company's
facilities will be substantially occupied at assumed rents. In addition, full
occupancy may be achievable only at rental rates below those assumed. The
Company's operating expenses could be affected adversely by a variety of
factors, including the level of services required to retain residents, which in
turn is affected by the age and health of residents. If operating expenses
increase, local rental market conditions may limit the extent to which rents may
be increased. In addition, the failure of the Company to generate sufficient
revenue could result in an inability to make interest and principal payments on
its indebtedness.
GENERAL REAL ESTATE RISKS. The performance of the Company's senior
citizen housing facilities is influenced by factors affecting real estate
investments, including the general economic climate and local conditions, such
as an oversupply of, or a reduction in demand for, assisted living residences.
Other factors include the attractiveness of properties to residents, zoning,
rent control, environmental quality regulations or other regulatory
restrictions, competition from other forms of housing and the ability of the
Company to provide adequate maintenance and insurance and to control operating
costs, including maintenance, insurance premiums and real estate taxes. Real
estate investments are also affected by such factors as applicable laws,
including tax laws, interest rates and the availability of financing. Real
estate investments are relatively illiquid and, therefore, limit the ability of
the Company to vary its portfolio promptly in response to changes in economic or
other conditions. Any failure by the Company to operate its senior citizen
housing facilities effectively may have a material adverse effect on the
Company's business, financial condition and results from operations.
LIABILITY AND INSURANCE. Providing assisted living services involves an
inherent risk of liability. Participants in the senior living and health care
industry are subject to lawsuits alleging negligence or related legal theories,
many of which may involve large claims and significant legal costs. The Company
currently maintains liability insurance intended to cover claims in
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amounts and with such coverages and deductibles that it believes are adequate
and in keeping with industry practice. However, claims in excess of the
Company's insurance coverage or claims not covered by the Company's insurance
(E.G., claims for punitive damages) may arise. A successful claim against the
Company not covered by or in excess of the Company's insurance coverage could
have a material adverse effect on the Company's business, results of operations
and financial condition. Claims against the Company, regardless of their merit
or eventual outcome, may also have a material adverse effect upon the Company's
reputation and its ability to attract residents or expand its business. The
Company's insurance policies generally must be renewed annually, and there can
be no assurance that the Company will be able to obtain liability insurance
coverage in the future on acceptable terms, if at all.
DEPENDENCE ON KEY PERSONNEL. The Company's operations have been
significantly dependent on the contributions of management, and the loss of the
services of the Company's senior officers--Messrs. Pittore, Tolley and
Westin--could have a material adverse effect on the Company's business, results
of operations and financial condition. The Company has entered into employment
agreements with each of its senior officers. See Item 10--"Executive
Compensation--Employment Agreements." The Company's success also depends to a
significant extent upon a number of other key employees of the Company,
including the Company's Chief Operating Officer and National Marketing Director.
The loss of the services of one or more of these key employees also could have a
material adverse effect on the Company. The Company does not carry key person
life insurance. In addition, the Company believes that its future success will
depend in part upon its ability to attract and retain additional highly-skilled
professional, managerial, sales and marketing personnel. Competition for such
personnel is intense. There can be no assurance that the Company will be
successful in attracting and retaining the personnel that it requires for its
business and planned growth.
LABOR COSTS. The Company competes with various health care providers
and other employers for limited qualified and skilled personnel in the markets
that it serves. The Company expects that its labor costs will increase over
time. Currently, none of the Company's employees is represented by a labor
union. If employees of the Company were to unionize, the Company could incur
labor costs higher than those of competitors with nonunion employees. The
Company's business, results of operations and financial condition could be
adversely affected if the Company is unable to control its labor costs.
CONFLICTS OF INTEREST. Certain of the Company's officers and directors
may, by virtue of their investment in or involvement with entities providing
services or office space to the Company have an actual or potential conflict of
interest with the interests of the Company. See Item 12--"Certain Relationships
and Related Transactions." From time to time, vendors may require personal
guarantees from the executive officers of the Company and such personal
guarantees may create a conflict of interest for such executive officer.
NO PUBLIC MARKET FOR THE COMMON STOCK. If shares of the Company's
Common Stock are traded after their original issuance pursuant to the Plan of
Reorganization, they are expected to trade at varying prices, depending upon the
market for similar securities and other factors, including general economic
conditions and the financial condition and performance of, and prospects for,
the Company. The Plan of Reorganization provides that, as soon as practicable
10
<PAGE>
after the effective date of the Plan of Reorganization, the Company shall take
the necessary steps to have the Company's Common Stock publicly traded. The
Company's management is currently investigating "over-the-counter" quotation of
the Company's Common Stock on the OTC Bulletin Board(R). However, there can be
no assurance that the Company will be successful in its efforts to establish a
public trading market for the Common Stock or that any market making activity
with respect to the Common Stock will continue in the future, if and once
initiated. See "--Risks of Low-Priced Stock; Possible Effect of `Penny Stock'
Rules on Liquidity for the Company's Securities."
RISKS OF LOW-PRICED STOCK; POSSIBLE EFFECT OF "PENNY STOCK" RULES ON
LIQUIDITY FOR THE COMPANY'S SECURITIES. As discussed above, the Company's
management is currently investigating "over-the-counter" quotation of the
Company's Common Stock on the OTC Bulletin Board(R). See "--No Public Market for
the Common Stock." As such, the Company's securities may become subject to Rule
15g-9 under the Exchange Act, which imposes additional sales practice
requirements on broker-dealers that sell such securities to persons other than
established customers and "accredited investors" (generally, individuals with a
net worth in excess of $1,000,000 or annual incomes exceeding $200,000 or
$300,000 together with their spouses). Rule 15g-9 defines "penny stock" to be
any equity security that has a market price (as therein defined) of less than
$5.00 per share or an exercise price of less than $5.00 per share, subject to
certain exceptions, none of which are currently met or are anticipated to be met
by the Company in the foreseeable future. For transactions covered by Rule
15g-9, a broker-dealer must make a special suitability determination for the
purchaser and have received the purchaser's written consent to the transaction
prior to sale. For any transaction involving a penny stock, unless exempt, the
rules require delivery, prior to any transaction in a penny stock, of a
disclosure schedule prepared by the Securities and Exchange Commission ("SEC")
relating to the penny stock market. Disclosure is also required to be made about
sales commissions payable to both the broker-dealer and the registered
representative and current quotations for the securities. Finally, monthly
statements are required to be sent disclosing recent price information for the
penny stock held in the account of the broker-dealer's client and information on
the limited market in penny stock. Consequently, such Rule may affect the
ability of broker-dealers to sell the Company's securities and may affect the
ability of purchasers to sell any of the Company's securities in the secondary
market.
There can be no assurance that the Company's securities will qualify
for an exemption from the penny stock restrictions. In any event, even if the
Company's securities become exempt from such restrictions, the Company would
remain subject to Section 15(b)(6) of the Exchange Act, which gives the SEC the
authority to restrict any person from participating in a distribution of penny
stock, if the SEC finds that such a restriction would be in the public interest.
If the Company's securities are subject to the rules on penny stocks,
the market liquidity for the Company's securities could be materially and
adversely affected.
LIMITATION ON PAYMENT OF DIVIDENDS ON CAPITAL STOCK. Since the
Company's formation in April 1997, the Company has not paid any dividends on its
common stock and does not anticipate doing so in the foreseeable future.
Moreover, the Plan of Reorganization provides that the Company may not declare
any dividends until certain indebtedness specified in the Plan of
11
<PAGE>
Reorganization is paid in full or otherwise satisfied. There can be no assurance
that the Company will pay out any return on its common stock.
CONTROL BY OFFICERS, DIRECTORS AND AFFILIATED ENTITIES. The Company's
executive officers, directors and certain entities affiliated with such
directors beneficially own in the aggregate approximately 34.2% of the issued
and outstanding shares of the Company's common stock. See Item 11--"Security
Ownership of Certain Beneficial Owners and Management." Such stockholders may
have sufficient voting power to control the outcome of matters (including the
election of directors and any merger, consolidation or sale of all or
substantially all of the Company's assets) submitted to the stockholders for
approval and may be deemed to have effective control over the affairs and
management of the Company. This controlling interest in the Company may also
have the effect of making certain transactions more difficult or impossible,
absent the support of such stockholders. Such transactions could include a proxy
contest, mergers involving the Company, tender offers and open market purchase
programs involving the Company's common stock that could give stockholders of
the Company the opportunity to realize a premium over the then prevailing market
price for their shares of the Company's common stock.
ANTI-TAKEOVER PROVISIONS. Certain provisions of the Company's Bylaws
and Nevada law could have the effect of making it more difficult for a third
party to acquire, or of discouraging a third party from attempting to acquire,
control of the Company. Such provisions could limit the price that certain
investors might be willing to pay in the future for shares of the Company's
Common Stock.
ITEM 2. DESCRIPTION OF PROPERTY.
The following table sets forth, as of September 30, 1999, certain
information as to the facilities owned by the Company:
<TABLE>
<CAPTION>
NO. OF YEAR ORIG. YEAR
FACILITY LOCATION (FACILITY NAME) BEDS BUILT REOPENED(1)
--------------------------------------------------------------------- ------------- ------------- --------------
<S> <C> <C> <C>
Rock Island, Illinois (The Fort Armstrong) 92 1926 1990
Fort Madison, Iowa (The Kensington) 75 1954 1988
Chanute, Kansas (The Tioga) 55 1929 1990
Cumberland, Maryland (The Kensington Algonquin) 86 1926 1989
Port Huron, Michigan (The Harrington Inn) 72 1896 1990
Beatrice, Nebraska (The Kensington Paddock) 64 1934 1989
Hastings, Nebraska (The Kensington) 80 1914 1988
Dickinson, North Dakota (The Evergreen Retirement Inn) 78 1980 1990
Williston, North Dakota (The Kensington) 115 1983 1988
Manitowoc, Wisconsin (Hotel Manitowoc) (2) 50 1927 1993
</TABLE>
---------------
(1) "Year Reopened" refers to the year in which the facility was reopened as an
assisted living facility, after renovation of the historic property. The
Company's facilities at Dickinson, North Dakota and Williston, North Dakota are
not historic properties.
(2) The Company's property in Manitowoc, Wisconsin is operated as an apartment
complex.
12
<PAGE>
Except for the Company's facilities in Chanute, Kansas and Cumberland,
Maryland, which are owned outright by the Company, each of the facilities listed
in the table above is subject to a mortgage. See Item 6--"Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources." As of September 30, 1999, there
was an aggregate balance of $14,775,000 outstanding under the mortgages, with
the amount owing on a property ranging from approximately $1,277,000 to
$4,171,000.
The Company has entered into an agreement with entities controlled by
Richard J. Westin and Jesse A. Pittore, directors and officers of the Company,
to jointly develop, build and operate an Alzheimer's facility in Cumberland,
Maryland. The agreement provides, in part, for the Company to contribute land
located adjacent to its Cumberland, Maryland facility upon which the Alzheimer's
facility is being built. The Westin and Pittore entities will fund or guarantee
financing of all costs to build, furnish and operate the facility. For its
contribution of land, the Company will receive a 25% ownership interest and 25%
of all net income and proceeds from the operation and sale of the facility.
The Company currently maintains insurance on its properties in amounts
and with such coverages and deductibles that it believes are adequate and in
keeping with industry practice. The Company also believes that its properties
are suitable for their use as assisted living facilities.
The Company leases its headquarters in Berkeley, California from The
Waterford Company, which is owned by members of Mr. Westin's family, for $24,000
per year and on terms and conditions that the Company's believes are at or more
favorable than prevailing market rates. See Item 12--"Certain Relationships and
Related Transactions."
ITEM 3. LEGAL PROCEEDINGS.
The Company was formed pursuant to the Plan of Reorganization, which
was proposed by the Partnerships in January 1997 and confirmed by the bankruptcy
court on September 30, 1998. See Item 1--"Business--Formation of the Company and
Plan of Reorganization."
From time to time, the Company is party to litigation arising out in
the ordinary course of business. The Company believes that no pending legal
proceeding will have a material adverse effect on the Company's business,
financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this Report.
13
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
There is currently no public trading market for the Company's Common
Stock. As of December 21, 1999, there were 4,609 stockholders of record.
The outstanding Common Stock of the Company issued pursuant to the Plan
of Reorganization is freely tradable by reason of the exemption from
registration provided by section 1145 of the Bankruptcy Code.
The Plan of Reorganization prohibits the Company from declaring any
dividends on its Common Stock until certain of the notes issued pursuant to the
Plan of Reorganization are paid in full or otherwise satisfied. Since the
Company's formation in April 1997, the Company has not paid any dividends on its
common stock and does not anticipate doing so in the foreseeable future.
In December 1998, the stockholders of the Company approved the adoption
of the Company's 1997 Employee Stock Incentive Plan, a stock option plan for
certain employees and directors. As of September 30, 1999, options to purchase
up to a total of 229,164 shares of common stock were granted at exercise prices
ranging from $1.00 to $1.10 per share to the officers and directors of the
Company. The Company relied on the exemption from the registration requirements
of the Securities Act provided by Rule 701 under the Securities Act.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
When used in this discussion, the words "expects," "anticipates,"
"estimates," and similar expressions are intended to identify forward-looking
statements. Such statements, which include statements as to the adequacy of the
Company's capital resources, the ability to obtain new sources of capital, the
ability to service its debt obligations as they become due and Year 2000 related
actions, are subject to risks and uncertainties that could cause actual results
to differ materially from those projected. These risks and uncertainties
include, but are not limited to, those risks discussed below, as well as the
matters discussed in "Factors That May Affect Results." See Item 1--"Description
of Business--Factors That May Affect Results." These forward-looking statements
speak only as of the date hereof. The Company expressly disclaims any obligation
or undertaking to release publicly any updates or revisions to any
forward-looking statements contained herein to reflect any change in the
Company's expectations with regard thereto or any change in events, conditions
or circumstances on which any such statement is based.
14
<PAGE>
RESULTS OF OPERATIONS
Overview
The Company commenced operations in January 1998. The results of
operations for period ended September 30, 1998 represent partial year results
for varying numbers of operating properties. The Williston, North Dakota
property operated for nine months, the Beatrice, Nebraska; Chanute, Kansas;
Cumberland, Maryland; Manitowoc, Wisconsin and Port Huron, Michigan properties
operated for six months, and the Dickinson, North Dakota; Fort Madison, Iowa;
Hastings, Nebraska and Rock Island, Illinois properties operated for three
months.
The results of operations for the twelve months ended September 30,
1999 reflect a full twelve months of operations of all ten of the Company's
properties. In the discussion of changes in various items of income and expense
which follows, the most significant cause of change is this difference in the
numbers of properties operating for varying periods of time.
Twelve Months Ended September 30, 1999 Compared to the Twelve Months Ended
September 30, 1998
Property gross revenue increased from $3,757,000 for the period ended
September 30, 1998 to $9,785,000 for the twelve months ended September 30, 1999
primarily due to the difference in the number of properties in each period.
Other income increased from $4,000 in the 1998 period to $592,000 in
the 1999 period. Other income for 1999 consists of non-cash income realized from
the settlement and compromise of prepetition liabilities in the amount of
$223,000 and the settlement of disputed property taxes and interest of $315,000;
interest earned on reserves in the amount of $32,000, and miscellaneous income
in the amount of $22,000.
Property operating expenses increased from $3,304,000 in the 1998
period to $8,065,000 in the 1999 period reflecting primarily the costs of
operating ten properties for all twelve months in 1999 versus the operations of
varying numbers of properties for varying numbers of months in 1998.
Administrative and overhead expenses increased from $212,000 in the
1998 period to $915,000 in the 1999 period. The increase primarily reflects
twelve months of operations in the period ended September 30, 1999 versus five
months of operations during the period ended September 30, 1998. Administrative
and overhead expenses for the 1999 period consists of $537,000 in salaries and
other personnel-related costs including employee benefits, payroll taxes and
travel expenses; legal and accounting expenses of $145,000; office and occupancy
costs of $28,000; and other administrative costs of $205,000. Within other
administrative costs are $61,000 of expenses paid and capitalized during the
1998 period for reports and appraisals required to refinance debt which were
expensed in 1999 when financing was not obtained and $65,000 of professional
fees earned by property tax consultants upon the reduction of taxes and interest
discussed above.
15
<PAGE>
During the year ended September 30, 1998, a net deferred tax asset of
$445,000 was recorded to reflect the minimum benefit the Company expects it will
receive from the differences between the higher carrying amounts for income tax
purposes of the property and equipment transferred to the Company pursuant to
the Plan than the lower amounts reported for financial statement purposes.
Although realization is not assured, management believes it is more likely than
not that all of the net deferred tax asset will be realized. During 1999 income
tax expense was $2,000.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased from $1,469,000 at September 30,
1998 to $780,000 at September 30, 1999. Net cash provided by operations was
$244,000 in the 1999 period versus $58,000 in the 1998 period primarily due to
the difference in the number of properties in each period.
Net cash used by investing activities was $380,000 in 1999 reflecting
additions to property and equipment at the Company's facilities. Net cash
provided by investing activities in 1998 was $182,000, reflecting the $375,000
proceeds from the sale of the Sedalia, Missouri property offset by $193,000
spent on capital projects.
Net cash used in financing activities in 1999 was $554,000, reflecting
principal payments on the Company's loans payable; $508,000 was paid on the
Superfirst note and $46,000 was paid on the tax notes. The Superfirst note
payment was a one-time prearranged payment. The capitalization of the Company in
1998 resulted in the transfer of $1,259,000 of cash and cash equivalents in
return of the issuance of its stock. Net cash provided by financing activities
in 1998, consisting primarily of the cash received in return for shares issued,
was $1,229,000, net of $20,000 in principal payments on tax notes and $10,000 in
new loan costs incurred.
Notes payable (in thousands) consist of the following at September 30,
1999:
Notes secured by real estate:
Regular mortgage notes $ 9,277
Rock Island mortgage note 4,171
Superfirst note 885
Reimbursement notes 392
Other notes 50
------------
Total secured notes $ 14,775
Tax notes 242
Total notes payable $ 15,017
===========
There are four regular mortgage notes, dated September 30, 1998, that
bear interest at 8% per annum. Interest on each of the notes is payable monthly
at a rate of 6% per annum. Accrued and unpaid interest resulting from this
deferral provision increased by $188,540 during the year
16
<PAGE>
ended September 30, 1999 to $211,043. The notes are due on September 30, 2001
and can be extended an additional three years upon the payment of substantial
amounts on the principal balance. On a quarterly basis, any portion of the 8%
interest which is unpaid and 75% of any computed net cash flow from the
properties securing the notes is payable. To the extent that this calculation
results in a payment of principal, that sum is to be retained by the lender as a
reserve for capital improvements. No amounts were computed to be payable under
this provision for the year ended September 30, 1999. These notes are secured by
first mortgage liens on properties in Dickinson, North Dakota; Williston, North
Dakota; Fort Madison, Iowa and Hastings, Nebraska.
The Rock Island mortgage note, dated September 30, 1998, bears interest
as follows: from October 1, 1998 through September 30, 1999, the lesser of 3%
per annum on the unpaid principal balance or computed cash flow from the Rock
Island property; from October 1, 1999 through September 30, 2000, the greater of
3% per annum on the unpaid principal balance or computed cash flow from the Rock
Island property; from October 1, 2000 until maturity, the greater of 4% per
annum on the unpaid principal balance or computed cash flow from the Rock Island
property. For the year ended September 30, 1999, interest payable of $43,450.92
was computed, of which $38,152.04 was paid during the period. The note is
secured by a first mortgage lien on the property located in Rock Island,
Illinois and is due on September 30, 2001 and can be extended an additional
three years upon the payment of substantial amounts on the principal balance.
The Superfirst note and two reimbursement notes, dated September 30,
1998, bear interest at 5% per annum. For the year ended September 30, 1999,
accrued and unpaid interest amounted to $69,160. No periodic payments of
interest or principal are required. All of the accrued interest and unpaid
principal is due on September 30, 2001. These notes are secured by first
mortgage liens on properties located in Beatrice, Nebraska; Manitowoc, Wisconsin
and Port Huron, Michigan. On November 10, 1998 a pre-arranged principal payment
of $508,000 was applied to the outstanding balance.
The other secured notes consist of two notes totaling approximately
$50,000 bearing interest at 8% per annum. No periodic interest or principal
payments are required on the two notes totaling $50,000. Interest expense of
$3,976 was added during the year ended September 30, 1999 bringing the total
accrued interest on these notes to $18,224. All of the accrued interest and
unpaid principal is due on September 30, 2001. These two notes are secured by a
second mortgage lien on the property located in Williston, North Dakota.
The tax notes bear interest at 8% per annum. Payments of interest and
principal are due semi-annually each January and July in the amount of $5,886
through January, 2004 and each February and August in the amount of $26,638
through February, 2004.
Future maturities of notes payable (in thousands) at September 30, 1999
are as follows:
17
<PAGE>
Years ending September 30:
2000 46
2001 14,825
2002 55
2003 60
2004 31
---------
$ 15,017
=========
Virtually all of the Company's long-term debt will come due in two
years, subject to an extension to as much as an additional three years upon the
repayment of substantial amounts of principal, a portion of which has already
been paid by the Company. In addition, the loans provide for substantial
discounts for early repayment. The Company has begun and continues to work with
various sources of long-term financing to refinance the existing loans in order
to obtain financing with a longer term, reduce the impact of debt financing on
future cash flows, and obtain additional liquidity for future capital projects.
In the opinion of management, the Company will have sufficient cash from
operations for the Company's operating and capital expenditure needs for at
least the next 12 months.
IMPACT OF INFLATION
Management believes that the Company's operations have not been
materially adversely affected by inflation. The Company expects that it will be
able to offset the effects of inflation on salaries and other operating expenses
by increases in rental rates, subject to applicable restrictions in North
Dakota, where the Company receives subsidies.
YEAR 2000 DISCLOSURE
"Year 2000 issues" relate to the result of computer programs having
been written using two digits rather than four to define the applicable year.
Computer programs and electronic devices that utilize date-sensitive software or
information may recognize a date using the "00" as the year 1900 rather than as
the year 2000. This recognition could result in a system failure or
miscalculations causing disruptions of operations or the inability of suppliers
of material goods or services to continue supporting the Company's operations.
The Company has assessed its readiness in regard to Year 2000 issues.
The Company has completed an assessment of its hardware and software utilized
for accounting and billing purposes to assure that it is Year 2000 compliant. In
addition, the Company has obtained certificates of Year 2000 compliance from
significant vendors of material supplies and services as well as vendors of
certain emergency call systems utilized in the company's facilities. Contingency
plans have been developed and executed with respect to vendors who will not be
Year 2000 ready in a timely manner where such lack of readiness is expected to
have a material adverse impact on the Company's operations. However, because the
Company cannot be certain that its vendors will be able to supply material goods
and services without material interruption, and because the Company cannot be
certain that execution of its contingency plans will be capable of
implementation or result in a continuous and adequate supply of such goods and
18
<PAGE>
services, the Company cannot give assurance that these matters will not have a
material adverse effect on the Company's future financial position, results of
operations or cash flows.
The cost of replacing noncompliant hardware, software and systems has
not had a material adverse effect upon the Company's future operations or
prospects. The Company has developed and implemented appropriate contingency
plans to mitigate to the extent possible the effects of any Year 2000
noncompliance. The Company has evaluated its worst case scenario in the event of
Year 2000 noncompliance. Although the full consequences are unknown, the failure
of either the Company's critical systems or those of its material third parties
to be Year 2000 compliant would result in the interruption of the Company's
business, which could have a material adverse effect on the Company's business,
financial position and results of operations.
19
<PAGE>
Item 7. FINANCIAL STATEMENTS.
The following section includes the Company's Consolidated Financial Statements:
o Independent Auditors' Report
o Balance Sheet - September 30, 1999
o Statements of Income for the Years Ended September 30, 1999 and 1998
o Statements of Shareholders' Equity for the Years Ended September 30,
1999 and 1998
o Statements of Cash Flows for the Years Ended September 30, 1999 and
1998
o Notes to Financial Statements.
20
<PAGE>
AGEMARK CORPORATION
FINANCIAL REPORT
SEPTEMBER 30, 1999
21
<PAGE>
C O N T E N T S
Page
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 1
FINANCIAL STATEMENTS
Balance sheet 2
Statements of operations 3
Statements of stockholders' equity 4
Statements of cash flows 5
Notes to financial statements 6 - 17
SCHEDULE XI
Real estate and accumulated depreciation 18
22
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders and
Board of Directors of
Agemark Corporation
We have audited the accompanying balance sheet of AGEMARK CORPORATION (a Nevada
corporation) as of September 30, 1999, and the related statements of operations,
stockholders' equity, and cash flows for each of the two years ended September
30, 1999 and 1998. We have also audited the financial statement Schedule XI.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of AGEMARK CORPORATION as of
September 30, 1999, and the results of its operations and its cash flows for
each of the two years ended September 30, 1999 and 1998 in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement Schedule XI, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
TIMPSON GARCIA
Oakland, California
December 22, 1999
1
23
<PAGE>
<TABLE>
<CAPTION>
AGEMARK CORPORATION
BALANCE SHEET
SEPTEMBER 30, 1999
(IN THOUSANDS EXCEPT SHARE DATA)
A S S E T S
<S> <C>
Cash and cash equivalents $ 780
Property and equipment, net 21,261
Deferred tax assets 445
Other assets 363
------------------
Total assets $ 22,849
==================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable and accrued liabilities $ 1,961
Notes payable 15,017
------------------
Total liabilities $ 16,978
------------------
STOCKHOLDERS' EQUITY
Common stock, stated value $.001, 20,000,000
shares authorized, 1,000,000 shares issued and
outstanding $ 1
Additional paid in capital 6,086
Accumulated deficit (216)
------------------
Total stockholders' equity $ 5,871
------------------
Total liabilities and stockholders'
equity $ 22,849
==================
</TABLE>
See accompanying notes to financial statements.
2
24
<PAGE>
<TABLE>
AGEMARK CORPORATION
STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 1999 AND 1998
(IN THOUSANDS EXCEPT SHARE DATA)
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Revenue
Property gross revenue $ 9,785 $ 3,757
Other income 592 4
------------------ --------------
Total revenue $ 10,377 $ 3,761
------------------ --------------
Expenses
Property operating expenses $ 8,065 $ 3,304
Administrative and overhead expenses 913 212
Stock option compensation 230
Interest expense 885 303
Depreciation 617 268
------------------ --------------
Total expenses $ 10,710 $ 4,087
------------------ --------------
(Loss) before income taxes $ (333) $ (326)
Income tax expense (benefit) 2 (445)
------------------ --------------
Net income (loss) $ (335) $ 119
================== ==============
Basic earnings (loss) per common share $ (0.33) $ 40.49
================== ==============
Fully diluted earnings (loss) per common share $ (0.29) $ 40.49
================== ==============
</TABLE>
See accompanying notes to financial statements.
3
25
<PAGE>
<TABLE>
AGEMARK CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1999 AND 1998
(IN THOUSANDS)
<CAPTION>
Additional Retained
Common Paid-In Earnings
STOCK CAPITAL (DEFICIT) TOTAL
<S> <C> <C> <C> <C>
Balance, October 1, 1997 $ - $ - $ - $ -
Common stock issued for
net assets acquired 1 5,856 5,857
Net income 119 119
----------------- ------------------ -------------- ------------
Balance, September 30, 1998 $ 1 $ 5,856 $ 119 $ 5,976
Stock option compensation 230
Net (loss) (335) (105)
----------------- ------------------ -------------- ------------
Balance, September 30, 1999 $ 1 $ 6,086 $ (216) $ 5,871
================= ================== ============== ============
</TABLE>
See accompanying notes to financial statements.
4
26
<PAGE>
<TABLE>
AGEMARK CORPORATION
STATEMENTS OF CASH FLOWS
Years Ended September 30, 1999 and 1998
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES
Net income (loss) $ (335) $ 119
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation 617 268
Deferred income taxes (445)
Prepetition liabilities settled or compromised (223)
Real property taxes and accrued interest reduced on appeal (315)
Stock option compensation 230
Change in assets and liabilities:
(Increase) decrease in other assets 15 (9)
Increase in accounts payable and accrued liabilities 256 125
------------ ---------
Net cash provided by operating activities $ 245 $ 58
------------ ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of property in Sedalia, MO $ 375
Additions to property and equipment $ (380) (193)
------------ ---------
Net cash provided by investing activities $ (380) $ 182
------------ ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash acquired in connection with issuance of common stock $ $ 1,259
Principal payments on notes payable $ (554) (20)
New loan costs paid (10)
------------ ---------
Net cash provided by financing activities $ (554) $ 1,229
------------ ---------
Net increase in cash and cash equivalents $ (689) $ 1,469
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,469 0
------------ ---------
Cash and cash equivalents, end of year $ 780 $ 1,469
============ =========
SUPPLEMENTAL DISCLOSURES
Cash payments for:
Interest $ 617 $ 242
============ =========
Taxes $ 2 $ 0
============ =========
Noncash investing and financing transaction:
Common stock issued for net assets acquired:
Property and equipment acquired $ 21,948
Other assets acquired 359
Notes payable assumed (15,591)
Other liabilities assumed (2,118)
---------
Value of noncash assets acquired $ 4,598
Cash and cash equivalents acquired 1,259
---------
Value of assets acquired $ 5,857
=========
</TABLE>
See accompanying notes to financial statements.
5
27
<PAGE>
AGEMARK CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION:
Agemark Corporation (the "Company") was organized in April, 1997
pursuant to an order of the U.S. Bankruptcy Court dated April
27, 1997 (the "Order") to receive the assets of and continue the
businesses of four reorganized, publicly registered limited
partnerships and two privately held limited partnerships (the
"Partnerships"). The order confirmed the Second Amended Joint
Plan of Reorganization (the "Plan") of the Partnerships filed in
January, 1997 and amended in April, 1997. The first of the
property transfers to the Company pursuant to the Plan was
accomplished in January, 1998 and the final transfer took place
in July, 1998. A total of 1,000,000 shares of stock were issued
to the partnerships for these properties as of September 30,
1998 and immediately distributed to their partners.
The property locations and their transfer dates were as follows:
Williston, ND January, 1998
Beatrice, NE April, 1998
Chanute, KS April, 1998
Cumberland, MD April, 1998
Manitowoc, WI April, 1998
Port Huron, MI April, 1998
Fort Madison, IA July, 1998
Hastings, NE July, 1998
Dickinson, ND July, 1998
Rock Island, IL July, 1998
All of the above properties transferred and retained by the
Company are renovated hotels that have been designated as
"Certified Historic Structures," except for the two facilities
in North Dakota, which are modern buildings. All of the
locations are operated as senior residential and assisted living
facilities, except for the Manitowoc, WI property. These
facilities provide an apartment style residence, three meals per
day, housekeeping, transportation, activities and 24-hour
non-medical assistance to elderly residents for a monthly fee.
Revenues are received directly from residents, their family, or
another responsible party. Services are generally not covered by
government or private insurance programs, except in North
Dakota, where the State government provides limited subsidies.
Resident fee revenue is recognized when services are rendered.
6
(Continued)
28
<PAGE>
NOTES TO FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Organization: (Continued)
The property located in Manitowoc, WI is operated as an
apartment complex. These units are generally rented on a
month-to-month basis.
A property located in Sedalia, MO was also transferred to the
Company in April, 1998 and sold in July, 1998 at no gain or
loss.
Use of Estimates:
Management uses estimates and assumptions in preparing financial
statements. Those estimates and assumptions affect the reported
amounts of assets and liabilities, and the reported revenues and
expenses. Actual results could differ from those estimates.
Property and Equipment:
Property and equipment transferred to the Company pursuant to
the Plan is carried at amounts stated in the Plan. Additions to
property and equipment are stated at cost. Depreciation of
buildings is computed using the straight-line method over
estimated useful lives of forty years. Personal property is
depreciated using the straight-line method over useful lives of
fifteen years.
Income Taxes:
Income taxes are provided for the tax effects of transactions
reported in the financial statements and consist of taxes
currently due plus deferred taxes. Deferred taxes are recognized
for differences between the basis of assets and liabilities for
financial statement and income tax purposes. The differences
relate primarily to the accrual of compensated absences that are
not deductible for income tax purposes and differences between
the carrying amounts of the property and equipment transferred
to the Company pursuant to the Plan. The deferred tax assets and
liabilities represent the future tax return consequences of
those differences, which will either be deductible or taxable
when the assets and liabilities are recovered or settled.
Deferred taxes are also recognized for operating losses that are
available to offset future taxable income.
7
(Continued)
29
<PAGE>
NOTES TO FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Stock-Based Compensation:
The Company has elected to account for its stock option plan
under accounting principles board opinion No. 25, ACCOUNTING FOR
STOCK ISSUED TO EMPLOYEES.
Cash and Cash Equivalents:
For purposes of the statement of cash flows, the company
considers all money market funds purchased with a maturity of
three months or less to be cash equivalents.
NOTE 2. CASH AND CASH EQUIVALENTS
At September 30, 1999, cash and cash equivalents included
approximately $534,000 invested in Vanguard Federal Money Market
Fund. Vanguard Federal Money Market Fund invests in United States
Treasury obligations, securities issued or guaranteed by agencies
of the U.S. Government, and repurchase agreements collateralized by
these obligations and securities.
NOTE 3. PROPERTY AND EQUIPMENT
Property and equipment (in thousands) consists of the following at
September 30, 1999:
<TABLE>
<CAPTION>
PLAN
VALUES COST TOTAL
------ ---- -----
<S> <C> <C> <C>
Land $ 1,035 $ - $ 1,035
Buildings 18,345 372 18,717
Personal property 2,193 201 2,394
------------ ------------ -----------
$ 21,573 $ 573 $ 22,146
=========== ===========
Less accumulated depreciation 885
-----------
$ 21,261
===========
</TABLE>
(Continued)
8
30
<PAGE>
NOTES TO FINANCIAL STATEMENTS
NOTE 3. PROPERTY AND EQUIPMENT (CONTINUED)
Plan values represent the assets transferred from the four publicly
registered limited partnerships and two privately held limited
partnerships pursuant to the order of the U.S. Bankruptcy Court.
The partnerships were as follows:
Publicly registered limited partnerships: Historic Housing
For Seniors Limited Partnership (HHS I) Historic Housing
For Seniors Ii Limited Partnership (HHS II) Historic
Housing For Seniors Iii Limited Partnership (HHS III)
Housing For Seniors Participating Mortgage Fund Limited
Partnership (PIF I)
Privately Held Limited Partnerships:
Dickinson Associates Limited Partnership
Williston Associates Limited Partnership
Under the Plan, those facilities which were determined to have the
strongest long-term potential for generating cash flow to support
ongoing debt or which were needed to secure certain obligations
from previous loans were transferred to the Company. The following
is a summary (in thousands) of the properties transferred to the
Company and the adjustments made to historical values to arrive at
Plan values pursuant to the Order of the U.S. Bankruptcy Court:
<TABLE>
<CAPTION>
Trans- Accum. Net Book Write
Property Ferred Historical Depr. Value Up Plan
Location From Value 12/31/97 12/31/97 (Down) Values
-------- -------- ----
<S> <C> <C> <C> <C> <C>
Beatrice, NE HHS I $ 2,742 $ 888 $ 1,854 $ (618) $ 1,236
Cumberland, MD HHS I 2,188 635 1,553 2,315 3,868
Hastings, NE HHS I 3,211 1,120 2,091 198 2,289
Chanute, KS HHS II 2,602 750 1,852 (901) 951
Rock Island, IL HHS II 4,345 1,212 3,133 (735) 2,398
Fort Madison, IA HHS III 3,460 781 2,679 (464) 2,215
Manitowoc, WI HHS III 3,642 693 2,949 (2,154) 795
Port Huron, IL PIF I 1,090 0 1,090 86 1,176
Dickinson, ND Private 1,380 380 1,000 1,273 2,273
Williston, ND Private 1,932 538 1,394 2,978 4,372
------------- ------------ ------------ ---------- ---------
$ 26,592 $ 6,997 $ 19,595 $ 1,978 $ 21,573
============= ============ ============ ========== =========
</TABLE>
(Continued)
9
31
<PAGE>
NOTES TO FINANCIAL STATEMENTS
NOTE 3. PROPERTY AND EQUIPMENT (CONTINUED)
In connection with the transfers of the facilities, the Company
also assumed various notes payable. The following is a summary (in
thousands) of the notes payable assumed by the Company:
<TABLE>
<CAPTION>
<S> <C>
Carrying value of notes (including accrued
interest) by the Partnerships $ 24,186
Less forgiveness of debt recognized by the Partnerships 8,595
--------
Notes payable assumed by the Company $ 15,591
========
</TABLE>
NOTE 4. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities (in thousands) consist of
the following at September 30, 1999:
<TABLE>
<CAPTION>
<S> <C>
Current and continuing operating liabilities $ 1,170
Accrued interest on notes payable 307
Prepetition accounts payable 66
Disputed real estate taxes and interest, settled amounts 418
--------
$ 1,961
</TABLE>
The term "prepetition" refers to liabilities arising in periods
prior to the dates on which the Partnerships filed for Chapter 11
protection, generally prior to September 3, 1993. Included in
disputed real estate taxes and interest is approximately $247,000
due on or before December 31, 1999 on the Port Huron, MI facility.
As a result of filings and hearings in the U.S. Bankruptcy Court
during the year ended September 30, 1999, substantial amounts of
prepetition accounts payable and past due real estate taxes and
interest were reduced to the amounts listed above. These actions
resulted in reductions of approximately $223,000 in prepetition
accounts payable and approximately $315,000 in real estate taxes
and accrued interest. These reductions have been included as other
income in 1999 on the statement of operations.
10
32
<PAGE>
NOTES TO FINANCIAL STATEMENTS
NOTE 5. NOTES PAYABLE
Notes payable (in thousands) consist of the following at September
30, 1999:
<TABLE>
<CAPTION>
<S> <C>
Notes secured by real estate:
Regular mortgage notes $ 9,277
Rock Island mortgage note 4,171
Superfirst note 885
Reimbursement notes 392
Other notes 50
------------
Total secured notes $ 14,775
Tax notes 242
-----------
Total notes payable $ 15,017
===========
</TABLE>
There are four regular mortgage notes, dated September 30, 1998,
that bear interest at 8% per annum. Interest on each of the notes
is payable monthly at a rate of 6% per annum. Accrued and unpaid
interest resulting from this deferral provision increased by
$185,540 during the year ended September 30, 1999 to $211,043. The
notes are due on September 30, 2001 and can be extended an
additional three years upon the payment of substantial amounts on
the principal balance. On a quarterly basis, any portion of the 8%
interest which is unpaid and 75% of any computed net cash flow from
the properties securing the notes is payable. To the extent that
this calculation results in a payment of principal, that sum is to
be retained by the lender as a reserve for capital improvements. No
amounts were computed to be payable under this provision during the
year ended September 30, 1999. These notes are secured by first
mortgage liens on properties in Dickinson, ND, Williston, ND, Fort
Madison, IA and Hastings, NE.
The Rock Island mortgage note, dated September 30, 1998, bears
interest as follows: from October 1, 1998 through September 30,
1999, the lesser of 3% per annum on the unpaid principal balance or
computed cash flow from the Rock Island property; from October 1,
1999 through September 30, 2000, the greater of 3% per annum on the
unpaid principal balance or computed cash flow from the Rock Island
property; from October 1, 2000 until maturity, the greater of 4%
per annum on the unpaid principal balance or computed cash flow
from the Rock Island property. For the year ended September 30,
1999, interest payable of $43,451 was computed based upon cash flow
and $38,152 was paid during the period. The note is secured by a
first mortgage lien on the property located in Rock Island, IL and
is due on September 30, 2001 and can be extended an additional
three years upon the payment of substantial amounts on the
principal balance.
(Continued)
11
33
<PAGE>
NOTES TO FINANCIAL STATEMENTS
NOTE 5. NOTES PAYABLE (CONTINUED)
The Superfirst note and two reimbursement notes, dated September
30, 1998, bear interest at 5% per annum. No periodic payments of
interest or principal are required. Accrued and unpaid interest
resulting from this deferral provision amounted to $69,160 for the
year ended September 30, 1999. All of the accrued interest and
unpaid principal is due on September 30, 2001. These notes are
secured by first mortgage liens on properties located in Beatrice,
NE, Manitowoc, WI and Port Huron, MI. On November 10, 1998 a
pre-arranged principal payment of $508,000 was applied to the
outstanding balance.
The other secured notes consist of two notes totaling approximately
$50,000 bearing interest at 8% per annum. No periodic interest or
principal payments are required on these two notes. Accrued and
unpaid interest resulting from this deferral provision increased by
$3,976 during the year ended September 30, 1999 to $18,224. All of
the accrued interest and unpaid principal is due on September 30,
2001. These two notes are secured by a second mortgage lien on the
property located in Williston, ND.
The tax notes bear interest at 8% per annum. Payments of interest
and principal are due semi-annually each January and July in the
amount of $5,886 through January, 2004 and each February and August
in the amount of $26,638 through February, 2004.
Future maturities of notes payable (in thousands) at September
30, 1999 are as follows:
Years ending September 30:
2000 46
2001 14,825
2002 55
2003 60
2004 31
--------
$ 15,017
NOTE 6. TRANSACTIONS WITH AFFILIATES
The Company contracts with Evergreen Management, Inc. ("EMI") for
the management of its owned and operated properties. EMI is
co-owned by Richard J. Westin and Jesse A. Pittore, directors and
officers of the Company. Compensation for these management services
is 4.5% of gross income paid monthly. Management fees of $441,130
and $183,946 for the years ended September 30, 1999 and 1998,
respectively, are included in the property operating expenses on
the statement of operations for services provided by EMI. At
September 30, 1999, accounts payable includes $37,903 owed by the
Company to EMI.
(Continued)
12
34
<PAGE>
NOTES TO FINANCIAL STATEMENTS
NOTE 6. TRANSACTIONS WITH AFFILIATES (CONTINUED)
For the year ended September 30, 1998, the Company reimbursed
Westor Financial Group, Inc. ("WFG") for salaries and
administrative expenses of $103,091 incurred by WFG on behalf of
the Company for the period May 1, 1998 through September 30, 1998.
WFG is co-owned by Richard J. Westin and Jesse A. Pittore,
directors and officers of the Company. Administrative expenses
include rent for the Company's headquarters in Berkeley, CA in the
amount of $7,500 paid, reimbursed, or accrued pursuant to a lease
between WFG and the Waterford Company, which is owned by members of
Richard J. Westin's family.
Effective October 1, 1998, the lease was rewritten in the name of
the Company for a one-year term starting October 1, 1998 at a rent
of $2,000 per month. The lease will automatically renew unless
terminated by either party. The lessee is responsible for limited
maintenance and repair expenses and all utilities. The Waterford
Company is responsible for major repairs, real estate taxes and
debt service.
For the year ended September 30, 1999, administrative expenses
include rent for the Company's headquarters in the amount of
$24,000 paid pursuant to above lease between the Company and the
Waterford Company.
During 1999, the Company also entered into a joint venture
agreement with entities controlled by Richard J. Westin and Jesse
A. Pittore, directors and officers of the Company (see Note 11).
NOTE 7. 401(K) SAVINGS PLAN
The Company has adopted a Savings Plan effective July 1, 1998 (the
"401(k) Plan") that is intended to qualify under Section 401(k) of
the Internal Revenue Code. After completing twelve months of
service, employees that are at least twenty-one years of age are
eligible to participate in the 401(k) Plan by contributing up to
15% of their gross income to the 401(k) Plan subject to Internal
Revenue Service restrictions. The Company may make contributions to
the 401(k) Plan at the discretion of the Board of Directors, but
such contributions are not required. For the years ended September
30, 1999 and 1998, no contributions to the 401(k) Plan were made by
the Company.
13
35
<PAGE>
NOTES TO FINANCIAL STATEMENTS
NOTE 8. INCOME TAXES
Income taxes (in thousands) for the years ended September 30, 1999
and 1998 consisted of the following:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Current:
Federal $ 0 $ 0
State franchise taxes 2 0
---------- ----------
$ 2 $ 0
Deferred federal tax (benefits) 0 (445)
----------- ----------
Income tax expense (benefit) $ 2 $ (445)
=========== ===========
The following is a reconciliation (in thousands) of the federal
statutory income tax amount on income to the provision for income
tax benefit:
1999 1998
---- ----
Federal statutory income tax (benefit) at 34% $ (280) $ (1,053)
State franchise taxes 2 0
Valuation allowance increase during the period 280 608
----------- ----------
Income tax expense (benefit) 2 $ (445)
=========== ===========
</TABLE>
A summary (in thousands) of the deferred tax assets at September
30, 1999 follows:
<TABLE>
<CAPTION>
ESTIMATED
DEFERRED VALUATION NET
TAX ASSET ALLOWANCE TAX ASSET
--------- --------- ---------
<S> <C> <C> <C>
Difference in basis of property and equipment $ 890 $ 445 $ 445
Accrued compensated absences 21 21 0
Stock option compensation 78 78 0
Net operating loss carryforward 344 344 0
------- ------- -------
$ 1,333 $ 888 $ 445
======= ======== =======
</TABLE>
During the year ended September 30, 1998, a net deferred tax asset
of $445,000 was recorded to reflect the minimum benefit the Company
expects it will receive from the differences between the higher
carrying amounts for income tax purposes of the property and
equipment transferred to the Company pursuant to the Plan than the
lower amounts reported for financial statement purposes. Although
realization is not assured, management believes it is more likely
than not that all of the net deferred tax asset will be realized.
At September 30, 1999, the Company has federal net operating loss
carryforwards of approximately $1,010,000 that will expire as
follows:
Amount expiring in 2018 $ 410,000
Amount expiring in 2019 600,000
14
36
<PAGE>
NOTES TO FINANCIAL STATEMENTS
NOTE 9. EARNINGS PER SHARE
In accordance with Statement of Financial Accounting Standards
No. 128, EARNINGS PER SHARE, the Company is required to present
both basic and diluted earnings per common share.
For the year ended September 30, 1998, the weighted average common
shares outstanding was 2,939 shares for the calculation of basic
earnings per common share. The weighted average common shares
outstanding was computed as follows:
<TABLE>
<CAPTION>
WEIGHTED
SHARES FRACTION AVERAGE
DATES OUTSTANDING OUTSTANDING OF PERIOD SHARES
----------------- ----------- --------- ------
<S> <C> <C> <C>
October 1, 1997 to September 29, 1998 200 364/365 199
September 30, 1998:
- Cancellation of shares issued
at incorporation (200)
- Issuance of shares
to partnerships 1,000,000 1/365 2,740
-------
2,939
=======
</TABLE>
For the year ended September 30, 1999, the weighted average common
shares outstanding was 1,000,000 shares for the calculation of
basic earnings per common share.
For September 30, 1998, there were no other common shares that were
issuable that would have a dilutive effect on the calculation of
earnings per share.
For September 30, 1999, diluted earnings per common share was
computed on the basis of the weighted average number of common
shares outstanding plus the effect of outstanding stock options
using the "treasury stock" method as follows:
<TABLE>
<S> <C>
Weighted average common shares actually outstanding 1,000,000
Employee stock options:
Net effect of shares assumed issued on January 1, 1999 129,284
Net effect of shares assumed issued on April 1, 1999 15,608
-------------
Weighted average common shares and equivalents 1,137,088
=============
</TABLE>
15
37
<PAGE>
NOTES TO FINANCIAL STATEMENTS
NOTE 10. EMPLOYEE STOCK INCENTIVE PLAN
In December, 1998 the stockholders approved the adoption of the
1997 Employee Stock Incentive Plan, a stock option plan for certain
employees and directors. The total number of shares that may be
issued upon the exercise of options under this plan is 250,000.
Also under this plan, no participant may be granted more than
100,000 shares and no awards may be granted after November 21,
2007.
Effective January 1, 1999, options to purchase up to a total of
210,416 shares of common stock were granted at exercise prices
ranging from $1.00 to $1.10 per share to the officers, directors
and employees of the Company. Effective April 1, 1999 additional
options to purchase up to 18,748 shares were granted at an exercise
price of $1.00 to employees of the Company.
The options will vest as follows:
<TABLE>
<CAPTION>
EXERCISE DATE
SHARES PRICE FULLY
GRANTED PER SHARE VESTED
------- --------- ------
<S> <C> <C>
166,666 $ 1.10 July 1, 1999
1,000 1.00 January 1, 2000
42,750 1.00 January 1, 2003
18,748 1.00 April 1, 2003
</TABLE>
The stock of the Company has not been listed for sale on any public
exchange. For purposes of accounting for compensation expense
arising from the granting of stock options under APB Opinion No.
25, the book value of $5.97 per share on September 30, 1998 has
been used in the absence of any other reliable market information.
In the case of the 166,666 options which fully vest July 1, 1999,
the compensation represented by the difference between the $1.10
exercise price and the $5.97 net book value is being recognized
over the 57 months remaining of the terms of the employment
contracts of the officers to whom the options were granted. The
compensation attributable to the remaining 62,498 options is being
recognized over their respective 12 month and 48 month vesting
periods. Total compensation for the year ended September 30, 1999
under APB Opinion No. 25 was $230,000.
If the Company had used the fair value based method of accounting
for its employee stock incentive plan, as prescribed by Statement
of Financial Accounting Standards No. 123, stock option
compensation cost in the statement of operations for the year ended
September 30, 1999 would have increased by $773,000, resulting in a
net loss of $1,108,000 and the basic loss per common share would
have been $1.10.
16
38
<PAGE>
NOTES TO FINANCIAL STATEMENTS
NOTE 11. COMMITMENTS AND CONTINGENCIES
The Company has entered into an agreement with entities controlled
by Richard J. Westin and Jesse A. Pittore, directors and officers
of the Company, to jointly develop, build and operate an
Alzheimer's facility in Cumberland, MD. The agreement provides, in
part, for the Company to contribute land located adjacent to its
Cumberland, MD facility upon which the Alzheimer's facility is
being built. The Westin and Pittore entities will fund or guarantee
financing of all costs to build, furnish and operate the facility.
For its contribution of land, the Company will receive a 25%
ownership interest and 25% of all net income and proceeds from the
operation and sale of the facility.
17
39
<PAGE>
<TABLE>
<CAPTION>
AGEMARK CORPORATION
SCHEDULE XI
REAL ESTATE AND ACCUMULATED DEPRECIATION
September 30, 1999
Column A Column B Column C Column D Column E Column F Column G Column H Column I
COSTS
CAPITALIZED
INITIAL COST (CHARGE OFF)
TO COMPANY SUBSEQUENT GROSS AMOUNT
INITIAL COST TO AT WHICH CARRIED
TO COMPANY ACQUISITION AT CLOSE OF PERIOD ACCUMULATED
---------------- ----------- ------------------------ DEPRECIATION
IMPROVE- AND DATE OF
DESCRIPTION ENCUMBRANCES LAND BUILDINGS MENTS LAND BUILDINGS TOTAL AMORTIZATION CONSTRUCTION ACQUIRED LIFE
---------------- ------------ ------ --------- -------- ------ --------- ------- ------------ ------------ -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assisted Living
Facility
Williston, ND $ 2,550 $ 74 $ 3,860 $ 113 $ 74 $ 3,973 $ 4,047 $ 172 1983 1/1/98 40 yr.
Assisted Living
Facility
Beatrice, NE 1,277 14 1,083 137 14 1,220 1,234 43 1934 4/1/98 40 yr.
Assisted Living
Facility
Port Huron, MI * 98 902 9 98 911 1,009 34 1896 4/1/98 40 yr.
Apartment House
Manitowoc, WI * 286 491 14 286 505 791 18 1927 4/1/98 40 yr.
Assisted Living
Facility
Chanute, KS - 7 868 4 7 872 879 33 1929 4/1/98 40 yr.
Assisted Living
Facility
Cumberland, MD - 187 3,388 36 187 3,424 3,611 128 1926 4/1/98 40 yr.
Assisted Living
Facility
Rock Island, IL 4,171 189 1,855 9 189 1,864 2,053 58 1926 7/1/98 40 yr.
Assisted Living
Facility
Fort Madison, IA 2,215 52 1,915 18 52 1,933 1,985 60 1954 7/1/98 40 yr.
Assisted Living
Facility
Hastings, NE 2,289 92 1,892 2 92 1,894 1,986 59 1914 7/1/98 40 yr.
Assisted Living
Facility
Dickinson, ND 2,273 36 2,091 30 36 2,121 2,157 65 1980 7/1/98 40 yr.
--------- ------ -------- ------- ------ -------- ------- ----------
Totals $ 14,775 $1,035 $ 18,345 $ 372 $1,035 $ 18,717 $19,752 $ 670
========= ====== ========= ======= ====== ======== ======= ==========
</TABLE>
*The notes totaling
$1,277,000 are
secured by a blanket
mortgage on the
properties in
Beatrice, NE, Port
Huron, MI and
Manitowoc, WI.
18
40
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.
As of September 30, 1999, the directors and executive officers and
their respective ages of the Company are as follows:
NAME AGE POSITION
---------------------- --- ---------------------------------------------------
Richard J. Westin 57 Director, Co-Chairman of the Board, Chief Executive
Officer and Secretary
Jesse A. Pittore 58 Director, Co-Chairman of the Board, President
Robert R. Herrick, M.D. 60 Director
James P. Tolley 56 Treasurer and Chief Financial Officer
The business experience of the Company's directors and executive
officers, including each such person's principal occupations and employment
during the last five years, is summarized below.
Richard J. Westin has been Director, Co-Chairman of the Board of
Directors, Chief Executive Officer and Secretary of the Company since its
incorporation in April 1997. From 1986 until 1998, Mr. Westin served as
President of The Westor Financial Group, Inc., now, Opus X Inc. ("Opus"), a
company specializing in financing the development of assisted living facilities
across the county. Mr. Westin received his B.A. degree from the University of
North Carolina at Chapel Hill and his Juris Doctor degree from the University of
California's Hastings College of the Law.
Jesse A. Pittore has been Director, Co-Chairman of the Board of
Directors, President and Chief Operating Officer of the Company since its
incorporation in April 1997. From 1986 until 1998, Mr. Pittore was Chairman of
the Board of Opus. Mr. Pittore holds a Bachelor of Science degree in Industrial
Engineering and Business Management from the University of California, Berkeley.
Robert R. Herrick, M.D. has been a Director of the Company since January
1998. Dr. Herrick has been in private practice in neurology in Northern
California since 1971. In 1997, he served as Chief of Staff to Doctors' Medical
Center in San Pablo, California and currently serves as President of the Board
of Governors of that hospital. Dr. Herrick received his bachelor's degree from
Oberlin College in Ohio and his medical degree from the University of Chicago
Medical School.
41
<PAGE>
James P. Tolley has been Treasurer and Chief Financial Officer of the
Company since its incorporation in April 1997. From 1988 to present, he has
served as Controller of Opus. Mr. Tolley is a Certified Public Accountant and
holds a Bachelor of Science degree from California State University, San
Francisco.
SECTION 16(A) COMPLIANCE. Based upon a review of the Company's records,
the Company is aware that each of Robert R. Herrick, Jesse A. Pittore, James P.
Tolley and Richard J. Westin failed to file timely Forms 3 reporting their
initial statement of beneficial ownership of securities upon the Company's
registering its Common Stock with the Securities and Exchange Commission under
the Securities Exchange Act of 1934, as amended, as required by Section 16 of
such Act, during the fiscal year ended September 30, 1999.
ITEM 10. EXECUTIVE COMPENSATION.
Pursuant to the Plan of Reorganization, for two years after the
effective date of the Plan of Reorganization, which period will end on September
30, 2000, Messrs. Westin and Pittore have agreed not to accept more than $1,000
per month in salary for their services as officers of the Company. The Plan also
provides that neither of Messrs. Westin nor Pittore may receive compensation for
his services as director of the Company except for stock options and other
perquisites as set forth in each of their employment agreements. See
"--Employment Agreements" below. Dr. Herrick, who is a nonemployee director,
receives options to purchase 1,000 shares of the Company's common stock per year
for his services as director, subject to adjustment by the Board of Directors.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION AWARDS
ANNUAL COMPENSATION SECURITIES UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR(1) SALARY BONUS OPTIONS/SARS COMPENSATION(2)
------------------------------- ----------- --------------- ------------ --------------------- -----------------
<S> <C> <C> <C> <C> <C>
Richard J. Westin 1999 $ 12,000 83,333 $12,000
Co-Chairman of the Board 1998 -- -- -- --
and Chief Executive Officer
Jesse A. Pittore 1999 $ 12,000 83,333 $12,000
Co-Chairman of the Board 1998 -- -- -- --
and President
Robert R. Herrick, M.D. 1999 $ 1,000
Director 1998 -- -- -- --
James P. Tolley 1999 $ 102,000 20,000
Chief Financial Officer 1998 $ 25,500 -- -- --
----------------------
<FN>
(1) From January 1 through September 30, 1998 (the end of the Company's prior
fiscal year), the Company paid no compensation to any executive officer or
director except to Mr. Tolley.
(2) Car and travel allowance of $1,000 per month.
</FN>
</TABLE>
42
<PAGE>
EMPLOYMENT AGREEMENTS
Each of Messrs. Pittore and Westin have entered into employment
agreements with the Company dated as of September 30, 1998. The employment
agreements provide that from October 1, 1998 through September 30, 2000, each
shall be paid a salary at the annual rate of $12,000. Thereafter, the salary to
be paid to each shall be at the discretion of the board of directors, but in no
case shall such salary be less than $240,000 per year. The agreements also
provide that each of Messrs. Pittore and Westin is eligible for an annual
incentive bonus to be granted in the discretion of the board of directors with
such bonus to be up to 100% of base salary. The agreements provide further that
the Company shall grant to each of Messrs. Pittore and Westin options to
purchase up to 83,333 shares of the Company's Common Stock, pursuant to the
Company's 1997 Employee Stock Incentive Plan. Pursuant to the agreements, each
of Messrs. Pittore and Westin are eligible for loans from the Company up to
$720,000 subject to certain terms and conditions provided in the employment
agreements.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table shows as of December 21, 1999, (1) the beneficial
owners of more than 5% of the outstanding Common Stock of the Company and their
holdings and (2) the number of shares held by each director and each executive
officer listed in the table under the section titled "Executive Compensation"
below and all directors and executive officers as group, as reported by each
person. Except as noted, each person has sole voting and investment power over
shares indicated in the table.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF COMMON STOCK BENEFICIALLY OWNED
COMMON STOCK HOLDER NUMBER OF SHARES PERCENT OF CLASS
-------------------------------------------------- ------------------------- -----------------------
STOCKHOLDERS
<S> <C> <C>
Opus X Inc. 50,349 (1) 5.0%
2614 Telegraph Avenue
Berkeley, California 94704
DIRECTORS AND OTHER EXECUTIVE OFFICERS
Jesse A. Pittore 192,584 (2) 17.8
Richard J. Westin 192,585 (3) 17.8
Robert Herrick, M.D. 1,631 (4) *
James P. Tolley 14,267 (5) 1.4
Directors and Officers as a Group (4 persons) 401,067 (2)(3)(4)(5) 34.2
------------
<FN>
* Less than 1%
(1) Opus X Inc. ("Opus"), formerly known as Westor Financial Group, Inc., is
jointly held by Messrs. Pittore and Westin.
(2) Includes 25,175 out of 50,349 shares of common stock owned by Opus, of which
Mr. Pittore owns an approximately 50% interest and 83,333 which could be
acquired by exercising options within 60 days of December 21, 1999.
43
<PAGE>
(3) Includes 25,174 out of 50,349 shares of common stock owned by Opus, of which
Mr. Westin owns an approximately 50% interest and 83,333 which could be acquired
by exercising options within 60 days of December 21, 1999.
(4) Includes 1,500 shares that Dr. Herrick could acquire by exercising options
within 60 days of December 21, 1999.
(5) Includes 5,417 shares that Mr. Tolley could acquire by exercising options
within 60 days of December 21, 1999.
</FN>
</TABLE>
STOCK INCENTIVE PLAN
In December 1998, the stockholders of the Company approved the adoption
of the 1997 Employee Stock Incentive Plan, a stock option plan for certain
employees and directors. The total number of shares that may be issued upon the
exercise of options under this plan is 250,000. Also under this plan, no
participant may be granted more than 100,000 shares and no awards may be granted
after November 21, 2007.
Effective January 1, 1999, options to purchase up to a total of 210,416
shares of common stock were granted at exercise prices ranging from $1.00 to
$1.10 per share to officers, directors and employees of the Company. Effective
April 1, 1999, additional options to purchase up to 18,748 shares were granted
at an exercise price of $1.00 to employees of the Company.
44
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Evergreen, which is jointly owned by Messrs. Westin and Pittore,
presently manages all of the Company's properties under management agreements
that were substantially amended pursuant to the Plan of Reorganization. The
Company and Evergreen enter into individual contracts for each of the facilities
owned by the Company. Each management contract's initial term is three years,
and Evergreen has the option to extend each management contract for an
additional three year term. The management fee paid pursuant to each management
contract is based on a percentage of gross revenues of the property, with the
average management fee being 4.5%. The following table sets forth the management
fees earned by Evergreen for each property for the year ended September 30,
1999.
<TABLE>
<CAPTION>
MANAGEMENT FEES
---------------------------
FACILITY LOCATION (FACILITY NAME) 1999 1998
---------------------------------------------------------------- ---- ----
<S> <C> <C>
Rock Island, Illinois (The Fort Armstrong) $ 55,248 $ 14,335
Fort Madison, Iowa (The Kensington) 43,338 11,566
Chanute, Kansas (The Tioga) 32,094 16,235
Cumberland, Maryland (The Kensington Algonquin) 71,819 30,507
Port Huron, Michigan (The Harrington Inn) 50,059 24,542
Beatrice, Nebraska (The Kensington Paddock) 25,995 14,171
Hastings, Nebraska (The Kensington) 46,307 11,130
Dickinson, North Dakota (The Evergreen Retirement Inn) 47,897 11,061
Williston, North Dakota (The Kensington) 63,514 47,630
Manitowoc, Wisconsin (Hotel Manitowoc) 4,810 2,769
--------- -----------
Total $ 441,130 $ 183,946
</TABLE>
A side-by-side comparison of management fees earned with respect to each
property are not necessarily indicative of future fees because the Company did
not hold all of the properties for the full 1998 fiscal year.
The Company leases its headquarters in Berkeley, California from The
Waterford Company, which is owned by members of Mr. Westin's family, for $24,000
per year and on terms and conditions that the Company's believes are at or more
favorable than prevailing market rates. See Item 2--"Description of Property."
The Company has entered into an agreement with entities controlled by
Richard J. Westin and Jesse A. Pittore, directors and officers of the Company,
to jointly develop, build and operate an Alzheimer's facility in Cumberland,
Maryland. The agreement provides, in part, for the Company to contribute land
located adjacent to its Cumberland, Maryland facility upon which the Alzheimer's
facility is being built. The Westin and Pittore entities will fund or guarantee
financing of all costs to build, furnish and operate the facility. For its
contribution of land, the Company will receive a 25% ownership interest and 25%
of all net income and proceeds from the operation and sale of the facility.
45
<PAGE>
ITEM 13. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Exhibit List.
EXHIBIT DESCRIPTION
------- -----------
3.1** Articles of Incorporation
3.2** By-Laws
10.1** Order Confirming Debtors' Second Amended Joint Plan of
Reorganization dated April 29, 1997
10.2** Amended Modification of Debtors' Second Amended Joint
Plan of Reorganization dated April 24, 1997
10.3** Debtors' Second Amended Joint Plan of Reorganization
dated January 15, 1997
10.4** Employment Agreement between the Company and Jesse A.
Pittore
10.5** Employment Agreement between the Company and Richard J.
Westin
10.6** 1997 Employee Stock Incentive Plan
10.7** Form of management contract between Evergreen
Management, Inc. and the Company
10.8*** Lease Agreement between The Waterford Company and
Westor Financial Group, Inc.
11 Statement regarding Computation of Earnings Per Share
24* Power of Attorney
27 Financial Data Schedule
-------------
* Filed previously.
** Incorporated by reference to the registrant's Form 10-SB filed on
January 29, 1999.
*** Incorporated by reference to Amendment No. 1 to Form 10-SB filed on
September 17, 1999.
(b) Reports on Form 8-K. The registrant did not file any reports on
Form 8-K during the fourth quarter of the fiscal year covered by this Report.
46
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
AGEMARK CORPORATION
Date: November 21, 2000
By: /S/ RICHARD J. WESTIN By: /S/ JAMES P. TOLLEY
------------------------------ ----------------------------
Richard J. Westin James P. Tolley
Chief Executive Officer Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dated indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/S/ RICHARD J. WESTIN Chief Executive Officer and Director November 21, 2000
-----------------------------
Richard J. Westin (Principal Executive Officer)
/S/ JAMES P. TOLLEY Chief Financial Officer November 21, 2000
-----------------------------
James P. Tolley (Principal Financial Officer
and Principal Accounting Officer)
/S/ JESSE A. PITTORE* President and Director November 21, 2000
-----------------------------
Jesse A. Pittore
/S/ ROBERT R. HERRICK, M.D.* Director November 21, 2000
------------------------------
Robert R. Herrick, M.D.
*By: /S/ RICHARD J. WESTIN
--------------------------
Richard J. Westin
Attorney-in-fact
</TABLE>
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(D) OF THE EXCHANGE ACT BY NON-REPORTING ISSUERS
No such annual report or proxy material has been sent to security holders.
47
<PAGE>
EXHIBIT INDEX TO
ANNUAL REPORT ON FORM 10-KSB/A
FOR AGEMARK CORPORATION
EXHIBIT DESCRIPTION
------- -----------
3.1** Articles of Incorporation
3.2** By-Laws
10.1** Order Confirming Debtors' Second Amended Joint Plan of
Reorganization dated April 29, 1997
10.2** Amended Modification of Debtors' Second Amended Joint Plan of
Reorganization dated April 24, 1997
10.3** Debtors' Second Amended Joint Plan of Reorganization dated
January 15, 1997
10.4** Employment Agreement between the Company and Jesse A. Pittore
10.5** Employment Agreement between the Company and Richard J. Westin
10.6** 1997 Employee Stock Incentive Plan
10.7** Form of management contract between Evergreen Management, Inc.
and the Company
10.8*** Lease Agreement between The Waterford Company and Westor
Financial Group, Inc.
11 Statement regarding Computation of Earnings Per Share
24* Power of Attorney
27 Financial Data Schedule
-------------
* Filed previously.
** Incorporated by reference to the registrant's Form 10-SB filed on
January 29, 1999.
*** Incorporated by reference to Amendment No. 1 to Form 10-SB filed on
September 17, 1999.
48
