UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended September 30, 1998
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 33-11863
HEALTHCARE INVESTORS OF AMERICA, INC.
-----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Maryland 86-0576027
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2990 N. Swan Rd., Suite 228
Tucson, AZ 85712
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(Address of principal executive offices) (Zip Code)
(520) 326-2000
------------------------------------------------
(Issuer's telephone number, including area code)
Harbor American Health Care Trust, Inc.,
75 South Church St., Pittsfield MA, 01201
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
10 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes X No __
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, $.01 Par Value - 397,600 shares as of November 2, 1998.
<PAGE>
HEALTHCARE INVESTORS OF AMERICA, INC.
INDEX
PAGE
----
PART I. Financial Information
Item 1. Condensed Financial Statements (Unaudited)
Balance Sheets - December 31, 1997 and September 30, 1998. . . . . . . 2
3 Mo. Statements of Operations - September 30, 1997 and
September 30, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . 3
3 Mo. Statement of Cash Flows - September 30, 1997 and
September 30, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . 4
9 Mo. Statement of Operations - September 30, 1997 and
September 30, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . 5
9 Mo. Statement of Cash Flows - September 30, 1997 and
September 30, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Notes to Financial Statements - September 30, 1998 . . . . . . . . . . 7
Item 2. Management's Discussion and Analysis or Plan of Operation . . . . . 13
PART II. Other Information
Item 1-6. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
<PAGE>
HEALTHCARE INVESTORS OF AMERICA, INC.
FORM 10-QSB
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
BALANCE SHEETS
September 30, December 31,
1998 1997
ASSETS: (Unaudited) (Audited)
------------- ------------
Real Estate Properties:
Land $ 393,195 $ 466,301
Building and improvements, net of
accumulated depreciation of
$4,475,140 and $4,409,128 at
June 30, 1998 and December 31, 1997,
respectively 3,447,697 3,947,972
Prepaid expenses 1,220 3,915
Mortgages receivable 182,500
Rent and other receivables 29,267
Cash and cash equivalents 53,126 89,965
----------- -----------
TOTAL ASSETS $ 4,077,738 $ 4,537,420
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Mortgage notes payable $ 4,563,146 $ 4,823,258
Accounts payable and accrued expenses 127,670 180,662
Disputed claims 92,623 92,623
Deferred income 3,189
----------- -----------
TOTAL LIABILITIES $ 4,783,439 $ 5,099,732
=========== ===========
Stockholders' Equity:
Common stock, $.01 par value; 10,000,000
shares authorized; issued and outstanding,
397,600 shares 3,976 3,976
Paid in Capital 3,652,823 3,652,823
Distributions in excess of net earnings (4,362,500) (4,219,111)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY (705,701) (562,312)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 4,077,738 $ 4,537,420
=========== ===========
See Notes to Financial Statements
2
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HEALTHCARE INVESTORS OF AMERICA, INC.
FORM 10-QSB
PART I: FINANCIAL INFORMATION
STATEMENT OF EARNINGS AND DISTRIBUTIONS
IN EXCESS OF NET EARNINGS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997
Three Months Three Months
Ended Sept. 30, Ended Sept. 30,
1998 1997
(Unaudited) (Unaudited)
REVENUES: --------------- ---------------
Rental income $ 124,479 $ 184,315
Interest income 1,445
Gain on sale of assets 14,520
----------- -----------
Total revenues $ 140,444 $ 184,315
EXPENSES:
Depreciation and amortization $ 21,800 $ 37,290
Interest expense 168,855 104,737
Advisory and other fees 7,500 7,500
Directors fees and expenses 8,250 8,250
Other operating expenses 32,675 107,456
----------- -----------
Total expenses $ 239,080 $ 265,233
----------- -----------
NET INCOME (LOSS) $ (98,636) $ (80,918)
=========== ===========
NET INCOME (LOSS) PER SHARE $ (0.25) $ (0.20)
=========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING 397,600 397,600
=========== ===========
Distributions in excess of earnings-
beginning of period $(4,263,864) $(3,782,684)
Net income/(loss) (98,636) (80,918)
Distributions during the period
----------- -----------
Distributions in excess of earnings-
end of period $(4,362,500) $(3,863,602)
=========== ===========
See Notes to Financial Statements
3
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HEALTHCARE INVESTORS OF AMERICA, INC.
FORM 10-QSB
PART I: FINANCIAL INFORMATION
STATEMENT OF CASH FLOWS
Three Months Three Months
Ended Sept. 30, Ended Sept. 30,
1998 1997
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATIONS: --------------- ---------------
Net income/(loss) $ (98,636) $ (80,918)
Adjustments to reconcile net income to
net cash provided by (used in) operating
activities:
Depreciation and amortization 21,800 37,290
Changes in assets and liabilities:
Contract, rents and other receivables (170,000)
Prepaid expenses 3,915 5,501
Accounts payable and accrued expenses (32,740) 54,817
--------- ---------
Net cash provided by (used in) operating
activities (275,662) 16,690
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Disposition of real estate properties 485,570
--------- ---------
Net cash provided by (used in) investing
activities 485,570 0
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term borrowings (161,289) (38,301)
--------- ---------
Net cash provided by (used in) financing
activities (161,289) (38,301)
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS 48,610 (21,611)
CASH AND CASH EQUIVALENTS - Beginning of period 4,516 100,577
--------- ---------
CASH AND CASH EQUIVALENTS - End of period $ 53,126 $ 78,966
========= =========
See Notes to Financial Statements
4
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HEALTHCARE INVESTORS OF AMERICA, INC.
FORM 10-QSB
PART I: FINANCIAL INFORMATION
STATEMENT OF EARNINGS AND DISTRIBUTIONS
IN EXCESS OF NET EARNINGS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997
Nine Months Nine Months
Ended Sept. 30, Ended Sept. 30,
1998 1997
(Unaudited) (Unaudited)
REVENUES: --------------- ---------------
Rental income $ 476,752 $ 537,347
Interest income 1,484 912
Gain on sale of assets 14,520
----------- -----------
Total revenues $ 492,757 $ 538,259
EXPENSES:
Depreciation and amortization $ 87,812 $ 111,870
Interest expense 401,001 330,612
Advisory and other fees 22,500 22,500
Directors fees and expenses 24,750 24,750
Other operating expenses 100,083 164,759
----------- -----------
Total expenses $ 636,146 $ 654,491
----------- -----------
NET INCOME (LOSS) $ (143,389) $ (116,232)
=========== ===========
NET INCOME (LOSS) PER SHARE $ (0.36) $ (0.29)
=========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING 397,600 397,600
=========== ===========
Distributions in excess of earnings-
beginning of period $(4,219,111) $(3,747,370)
Net income/(loss) (143,389) (116,232)
Distributions during the period
----------- -----------
Distributions in excess of earnings-
end of period $(4,362,500) $(3,863,602)
=========== ===========
See Notes to Financial Statements
5
<PAGE>
HEALTHCARE INVESTORS OF AMERICA, INC.
FORM 10-QSB
PART I: FINANCIAL INFORMATION
STATEMENT OF CASH FLOWS
Nine Months Nine Months
Ended Sept. 30, Ended Sept. 30,
1998 1997
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATIONS: --------------- ---------------
Net income/(loss) $ (143,389) $ (116,232)
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Depreciation and amortization 87,812 111,870
Changes in assets and liabilities:
Contract, rents and other receivables (153,233) 60,310
Prepaid expenses 2,695 8,252
Accounts payable and accrued expenses (56,181) (29,815)
----------- -----------
Net cash provided by (used in) operating
activities (262,296) 34,385
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Dispostition of real estate properties 485,570
----------- -----------
Net cash provided by (used in) investing
activities 485,570 0
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term borrowings (260,113) (122,378)
----------- -----------
Net cash provided by (used in) financing
activities (260,113) (122,378)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (36,839) (87,993)
CASH AND CASH EQUIVALENTS - Beginning of period 89,965 166,959
----------- -----------
CASH AND CASH EQUIVALENTS - End of period $ 53,126 $ 78,966
=========== ===========
See Notes to Financial Statements
6
<PAGE>
HEALTHCARE INVESTORS OF AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE MONTH PERIOD AND THE NINE MONTH PERIOD ENDED
SEPTEMBER 30, 1998 AND 1997
NOTE 1: ORGANIZATION
The affairs of Healthcare Investors of America, Inc. (the "Trust") are managed
by its advisor, Lenox Healthcare Capital Services, LLC (the "Predecessor
Advisor"), as succeeded by Harbor American Capital Group (the "Advisor")
effective March 1, 1998. The Trust engages in acquiring and leasing health care
facilities (nursing homes and intermediate care mental retardation
developmentally disabled nursing facilities) under long-term leases.
The Advisor is currently evaluating the Trust's compliance with the provisions
of the Internal Revenue Code (the "Code"), Treasury Regulations and other
relevant laws pertaining to the qualification of the Trust as a real estate
investment trust ("REIT"). The historical financial statements presented are
prepared under the assumption that the Trust qualified as a REIT. If the Trust
qualified as a REIT, then it is not subject to federal income taxes on amounts
distributed to stockholders provided distributions to stockholders are at least
95% of the Trust's real estate investment trust taxable income and the Trust
meets certain other conditions. In the event it is determined that the Trust did
not qualify as a REIT, the Trust would be taxable as a C corporation under the
Code. However, as a taxable corporation, the Trust would not owe any current tax
or tax for prior years due to its net operating loss carryovers. Therefore, no
adjustment would be required to the historical financial statements presented
related to any tax provision.
The Advisor and the Trust's independent accountants intend to assist the Trust
in determining the best method to clarify its tax status. The Advisor and the
Trust's independent accountants are reviewing various alternatives, including
having the Trust obtain a tax opinion as to its status, requesting a
determination letter from the Internal Revenue Service and evaluating the
applicability of reelecting status as a REIT. If a determination is made that
the Trust does not qualify as a REIT for purposes of the Code, the Advisor
intends to assist the Trust in implementing procedures to requalify the Trust as
a REIT.
The Trust's financial statements have been presented on the basis that it is a
going concern, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. At the beginning of the
quarter, the Trust owned three properties, one in Florida and two in Colorado.
As of September 30, 1998, the Florida Property (defined herein) was leased and
the two Colorado Properties (defined herein) had been sold. Therefore, the cash
flow available to pay operating expenses is limited.
Management's plans include continuing to seek sources to refinance the loan on
the Florida Property and/or to sell the Florida Property, and minimizing
operating costs. See Note 3, Real Estate Properties and Leases.
The financial statements do not include any adjustments relating to the
recoverability of recorded asset amounts or the amount of liabilities that might
be necessary should the Trust be unable to continue as a going concern.
At September 30, 1998, Bayshore was leased to BHS. BHS is an affiliate of the
Trust as it is owned by James R. Sellers, an affiliate of the Advisor. The
Colorado Properties were sold on July 24, 1998 and August 25, 1998. See Note 3,
Real Estate Properties and Leases.
7
The accompanying notes are an integral part of these financial statements.
<PAGE>
Pursuant to separate letters of resignation, each dated March 2, 1998, Thomas M.
Clarke resigned as President, Chief Executive Officer and Director of the Trust;
Linda M. Clarke resigned as Secretary of the Trust; John F. Lunt resigned as
Director of the Trust; and David Fancher resigned as Chief Financial Officer of
the Trust. The remaining members of the Board of Directors, Messrs. Grady P.
Hunter, F. Dale Markham and Charles E. Trefzger voted to accept the resignations
on March 19, 1998 at a meeting of the Board of Directors. As a result, two
vacancies in the Board of Directors exist.
At the same meeting of the Board of Directors, Mr. Markham was selected to serve
as Chairman, President and Chief Financial Officer of the Trust with Joan M.
Zeller to serve as Secretary of the Trust.
In connection with the accepted resignations, effective March 1, 1998, the
remaining members of the Board of Directors of the Trust voted to terminate the
Trust advisory contract with Lenox Healthcare Capital Services, LLC ("Lenox").
The Trust has entered into a two year contract for advisory services with HACG.
The general partner of HACG is Heritage Advisory Corporation ("Heritage"). The
stock of Heritage is owned by James R. Sellers, an affiliate of BHS, the
successor lessee of Bayshore.
The Trust's continuing plan of operation for the 1998 fiscal year (ending
December 31, 1998) is as follows: The Trust intends to own, lease or sell
(including by auction) its Properties. To the extent it has funds available for
investment (it currently has no such funds available and no plans for raising
such funds), it will invest primarily in healthcare related properties,
including long term care facilities, assisted living facilities, medical office
buildings, retirement housing facilities, psychiatric hospitals and substance
abuse recovery centers through acquisitions, joint ventures and mortgage loans.
The Trust may also invest in commercial, industrial and residential income
producing real properties through similar means. Since the Trust has no
available funds for such investments, its ability to undertake such investments
will be dependent upon the availability of capital to the Trust.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(1) CASH AND CASH EQUIVALENTS - For purposes of the statement of cash flow, the
Trust considers all short-term debt securities purchased with an original
maturity of three months or less to be cash equivalents.
(2) BUILDINGS AND IMPROVEMENTS - Depreciation of these assets is computed by
the straight-line method over the useful lives of the assets which have
been estimated to be 20 to 40 years. The Trust periodically evaluates the
net realizable value of its properties and provides a valuation allowance
when it becomes probable there has been a permanent impairment of value.
Depreciation is suspended while a facility is vacant.
(3) LOAN COSTS - Loan costs have been deferred and are being amortized using
the straight-line method over the term of the related borrowing.
(4) REVENUE RECOGNITION - Rental income from operating leases is recognized as
earned over the life of the lease agreements.
(5) INCOME TAXES - As of December 31, 1997, the Company had net operating loss
carryforwards for income tax purposes of approximately $1,341,000 which
will expire beginning in 2006. The Trust did not file its applicable
Federal and State income tax return for the periods 1992 through 1997 on a
timely basis. The Trust had cumulative net operating losses during the
periods from 1991 through 1997.
(6) FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying values of the financial
instruments disclosed elsewhere in these notes, are deemed to be
8
<PAGE>
representative of their fair values, as the interest rates approximate
market rates giving consideration to their respective risks.
(7) USE OF ESTIMATES - Management has made certain estimates and assumptions
that affect certain reported amounts and disclosures. Accordingly, actual
results could differ from those estimates.
NOTE 3: REAL ESTATE PROPERTIES AND LEASES
At September 30, 1998 and 1997 the Trust owned one property in Florida (the
"Florida Property"). On March 9, 1994, the Trust sold its Marshall Manor
property ("Marshall Manor") which was located in Michigan. Included in the
caption "Rent and other receivables" is the discounted contract balance of
$18,404 at December 31, 1996 resulting from the sale of Marshall Manor. The
contract, requiring quarterly payments of $18,750 was paid in full in April
1997. The two Colorado Properties were sold, one on July 24, 1998 and one on
August 25, 1998. See "The Colorado Properties" below.
At September 30, 1998, the net book values of the Florida Property is as
follows:
Cost:
Land $ 393,195
Buildings and Improvements 4,683,317
Accumulated Depreciation (1,235,620)
----------
Net Carrying Value $3,840,892
----------
The carrying values of the Colorado Properties were reduced in 1992 and 1993 by
$2,491,000 to the amounts expected to be realized upon disposition of such
properties. The carrying value of the Colorado Properties was reduced an
additional $280,000 in 1997. Based on the actual sales proceeds from the sale of
the two Colorado Properties, a gain on sale of $14,520 was recorded for the
quarter ended September 30, 1998. Trust management has evaluated the carrying
values of the Florida Property and believes that the remaining net carrying
value is realizable.
SALE OF THE COLORADO PROPERTIES
The State of Colorado interpreted certain Federal Healthcare Finance Agency
guidelines pertaining to "active treatment" of MRDD patients, such as those
receiving care at the Colorado Properties. The State's interpretation required
these patients to be moved into private housing and out of institutional housing
such as that offered at the Colorado Properties.
The terms of the lease with Res-Care provided for lease payments based on the
number of patients residing at the Colorado Properties as well as those placed
outside of the facilities under the "Community Advantage" program.
Therefore management believed that the Colorado Properties might ultimately have
to be used for purposes other than the MRDD use. Trust management worked during
1997 and 1998 to develop alternative uses for Country View and New Life. Country
View was vacated as of September 30, 1995 and New Life was vacated as of April
30, 1998. Effective July 24, 1998, the Trust sold Country View to William E.
Harper ("Harper"), an individual not affiliated with the Trust or its Advisor,
for $262,500 in accordance with the terms of Commercial Contracts to Buy and
Sell Real Estate (the "Country View Sales Contract"), dated June 17, 1998, as
amended. An additional valuation reserve of $200,000 has accordingly been
recognized as of December 31, 1997 to give effect to the further impaired value
of this property. At closing on July 24, 1998, the Trust received $80,000 in
cash and is the payee of two promissory notes (the "Harper Notes"), each dated
9
<PAGE>
July 24, 1998, from Harper in the respective original principal amounts of
$100,000 and $82,500. The Harper Notes pay interest only at 9.5% per annum until
maturity on July 24, 2000. The Harper Notes are secured by a Deed of Trust (the
"Harper Mortgage"), dated July 24, 1998, from Harper for the benefit of the
Trust, on the Country View property. Pursuant to the Collateral Assignment of
Promissory Notes and Deeds of Trust (the "1998 Collateral Assignment"), dated as
of July 24, 1998, the Trust assigned the Harper Notes and the Harper Mortgage to
PNC Bank, National Association, Louisville, Kentucky (the "Bank") as security
for the debt of the Trust owing to the Bank.
After a number of attempts to privately negotiate a sale of New Life, the Trust
determined that a sale by advertised auction was the best available method to
relieve the Trust of the financial burden of this property. On August 25, 1998,
the Trust sold New Life at auction to Continuum Health Partnership, Inc.
("Continuum"), a Colorado corporation not affiliated with the Trust or its
Advisor, for $250,000 in accordance with the terms of that certain Commercial
Contract to Buy and Sell Real Estate (the "New Life Sales Contract"), dated
August 6, 1998. An additional valuation reserve of $80,000 has accordingly been
recognized as of December 31, 1997 to give effect to the further impaired value
of this property. The proceeds from the sales of Country View and New Life did
not satisfy the outstanding debt related to these facilities.
THE FLORIDA PROPERTY
Effective May 1, 1993, the Trust entered into a five year lease with a successor
lessee, Bayshore Healthcare Services, Inc. ("BHS"), an affiliate of the Advisor.
BHS has the option to renew for an additional five, five year terms. The first
lease renewal option was exercised on May 1, 1998.
The lease provides for monthly rentals consisting of an equity component of
$7,000 and a debt component equal to the amount of the Trust's mortgage payment.
Commencing January 1, 1995, additional rents may be earned, equal to 5% of the
incremental net patient revenue increase over the 1994 base year. No additional
rent has been earned or paid to date.
In accordance with the provisions of the Forbearance Agreement (defined herein),
the monthly payment on the mortgage has been subsequently increased to $51,958,
resulting in a monthly payment of $58,958 on the subsequently extended lease by
BHS. The unaudited financial statements of BHS reflect substantial working
capital and liquidity deficiencies. There is no assurance that the extended
terms of the lease represent a market rate or that BHS has the liquidity to pay
this amount over the duration of the extended term of the lease.
Minimum annual lease payments, including the aforementioned extension, expected
to be received by the Trust on all leased properties during the lease terms are
as follows:
Florida Colorado
Year Ended December 31, Property Properties Total
----------------------- -------- ---------- -----
1998 $ 598,264 $ 37,319 $ 635,583
1999 623,496 623,496
2000 623,496 623,496
2001 623,496 623,496
2002 623,496 623,496
2003 207,832 207,832
---------- ---------- ----------
$3,300,080 $ 37,319 $3,337,399
---------- ---------- ----------
10
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NOTE 4: MORTGAGE NOTES PAYABLE
9/30/98 12/31/97
------- --------
Bank mortgage note-Florida Property,
payable in monthly installments of $38,660,
including interest at 9.50%, through
July 31, 1998, at which date the unpaid
balance is due in full. $2,999,225 $3,142,088
Bank mortgage note-Colorado Properties,
interest at 9.50%, payable in monthly
installments of principal and interest,
through July 31, 1998, at which date the
unpaid balance was due in full. $1,563,921 $1,681,170
---------- ----------
Total mortgage notes payable $4,563,146 $4,823,258
The Properties are secured by first mortgages, assignments of the lease and
rents thereunder. The bank mortgage note on the Colorado Properties is also
secured, to the extent of $1,681,170, by a second mortgage on the Florida
Property.
The Trust entered into a Forbearance Agreement which is further discussed in
Note 7.
NOTE 5: RELATED PARTY TRANSACTIONS
Effective November 1, 1996, the Trust entered into an agreement with the
Predecessor Advisor, and affiliates of the Predecessor Advisor, to provide
various services to the Trust in exchange for fees, as follows:
(a) Advisory fees at an annual rate of the greater of $30,000 or 5% of net
income of the Trust, as defined. The Trust incurred advisory fees of
$30,000 to the Predecessor Advisor and $5,000 to the Advisor during 1997
and 1996, respectively. It incurred advisory fees of $7,500 during the
three month period ended September 30, 1998.
(b) Property management, acquisition and disposition fees to be paid based upon
contractual agreements between the parties. The Trust has incurred no such
fees in 1997 or 1998.
See Note 1 regarding the above referenced changes in the Trust advisor.
Leasing transactions with related parties are described in Note 3.
In 1993, BHS, as successor lessee of the Florida Property, made a $47,921
payment of interest which had been accrued on the related mortgage loan. This
amount was being amortized over the term of the lease. It was fully amortized as
of May, 1998.
NOTE 6: DISPUTED CLAIMS
Management of the Predecessor Advisor entered into certain transactions related
to the potential debt refinancing and/or sale of the Properties. The Trust has
recorded certain professional fees related to those transactions as disputed
claims, believing that they are obligations, not of the Trust, but of former
management or other third parties. In connection with one of these disputes, the
Trust has been named a codefendant with the Predecessor Advisor for payment of
fees totaling approximately $50,000 which relate to establishing the advisory
11
<PAGE>
relationship with the Predecessor Advisor. The advisory relationship was
terminated by the Trust for nonperformance of management of the Predecessor
Advisor. It is the opinion of current management that these claims are not the
obligation of the Trust.
NOTE 7: MORTGAGE LOAN FORBEARANCE AGREEMENT
The Company's mortgage notes payable matured on June 20, 1997 and the Bank
demanded payment in full by letter dated August 15, 1997. In that connection,
the Trust and the Bank entered into a Forbearance Agreement (the "Forbearance
Agreement") dated as of April 30, 1998.
Under the Forbearance Agreement, the Bank agreed to forbear from exercising its
remedies until July 31, 1998. In consideration therefore, the Trust agreed to
increase the outstanding principal amount of a Promissory Note (Renewal and
Increase), dated as of September 20, 1992, in favor of the Bank from $1,000,000
to $1,681,170, a portion of the security of which is a second mortgage on
Bayshore. The Trust agreed to waive any defenses, offset or claims it may have
as of the date of the Forbearance Agreement against the Bank related to the
outstanding debt of the Trust to the Bank. The Forbearance Agreement further
required the Trust to market the Colorado Properties and auction them by June
30, 1998, if by May 31, 1998, the Trust had not sold or had had a binding
contract on the Colorado Properties on terms reasonably acceptable to the Trust
and Bank. The Forbearance Agreement also contained representations of the Trust
that, among other items, it is solvent and has no present intention of filing or
acquiescing in any bankruptcy or insolvency proceeding. To the extent that the
Trust would so file or acquiesce, the Trust agreed not to contest any motion of
the Bank seeking relief from an automatic stay. Upon (i) a breach or violation
of any term covenant or condition of the Forbearance Agreement or related
documents, (ii) a material breach or default under any of the other loan
documents in connection with the Trust indebtedness to the Bank, or (iii) any
representation or warranty or other statement contained in the Forbearance
Agreement or related documents, or any loan documents in connection with Trust
indebtedness to the Bank being false or misleading in any material respect or
omitting a material fact necessary to make such representation, warranty or
statement not misleading, then the Bank could terminate its forbearance. On July
31, 1998, the Forbearance Agreement expired. The Trust is negotiating an
extension to this agreement. The Bank has exercised no remedies available to it.
Although the Trust believes it will conclude such extension negotiations, no
assurance can be given that it will.
12
<PAGE>
HEALTHCARE INVESTORS OF AMERICA, INC.
Nine Months Ended September 30, 1998
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
(a) Not applicable
(b) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
September 30, 1998 compared to September 30, 1997
RENTAL AND OTHER INCOME. The Trust primarily derives its revenues from the
leasing of facilities to healthcare providers. For the nine months ended
September 30, 1998, rental income was $476,752 as compared to $537,347 for the
nine months ended September 30, 1997. For the three months ended September 30,
1998, rental income decreased by $59,836 to $124,479 as compared to $184,315 for
the three months ended September 30, 1997. These decreases are primarily
attributable to the loss of rents resulting from the expiration of the New Life
lease. Total Revenues for the period ending September 30, 1998 included Interest
Income of $1,445 and a $14,250 Gain on Sale of Assets. This gain was due to an
increase in the sale proceeds of the Colorado Properties above the amount which
had previously been written down.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization for the nine months
ended September 30, 1998 were $87,812 which compares with $111,870 for the nine
months ended September 30, 1997. For the three months ended September 30, 1998,
depreciation and amortization was $21,800 as compared to $37,290 for the three
months ended September 30, 1997. These reductions are primarily the result of
assets becoming fully depreciated and/or sold.
INTEREST EXPENSE. For the nine months ended September 30, 1998, interest expense
totaled $401,001 as compared to $330,612 for the same period in 1997. For the
three months ended September 30, 1998 interest expense was $168,855 as compared
to $104,737 for the same period in 1997. These increases in interest expense are
the result of increases in the interest rates on certain mortgage notes payable.
ADVISORY AND OTHER FEES. Advisor and other fees consist of the fees charged by
Lenox Healthcare Capital Services, LLC and its successor Harbor American Capital
Group, the advisor to the Trust. For the nine months ended September 30, 1998,
advisory and other fees totaled $22,500. For the three months ended September
30, 1998, advisory and other fees totaled $7,500. This is the same as the
charges for the respective periods in 1997.
13
<PAGE>
DIRECTORS FEES AND EXPENSES. Director's fees and expenses for the nine months
and the three months ended September 30, 1998 were $24,750 and $8,250
respectively. There are three Directors, each of whom receives $2,750 per
quarter.
OTHER OPERATING EXPENSES. Other operating expenses consists primarily of
maintenance and administrative costs. Other operating costs for the nine months
ended September 30, 1998 were $100,083 which compares with $164,759 for the nine
months ended September 30, 1997. For the three months ended September 30, 1998,
other operating expenses were $32,675 as compared to $107,456 for the three
months ended September 30, 1997. These costs are costs associated with two
vacant facilities and include wastewater plant maintenance costs, insurance,
real estate taxes and property maintenance costs. The current period cost
decreases are the result of the sale of the two Colorado Properties.
LIQUIDITY AND SOURCES OF CAPITAL
Cash decreased from $89,965 at December 31, 1997 to $53,126 at September 30,
1998. The net decrease is primarily the result of cash being expended for legal
and audit costs and operating expenses. Rent and other receivables decreased
from $29,267 at December 31, 1997 to none at September 30, 1998. The decrease is
the result of the collection of account balances and nothing due from the one
remaining property. Accounts payable and accrued expenses decreased from
$180,662 at December 31, 1997 to $127,670 at September 30, 1998. The decrease is
the result of the timing of payments of certain operating expenses. Mortgage
notes payable decreased from $4,823,258 at December 31, 1997 to $4,563,146 at
September 30, 1998. The decrease is the result of payments of principal on
mortgaged property. Distributions in excess of net earnings increased from
($4,219,111) at December 31, 1997 to ($4,362,500) at September 30, 1998.
The Trust has relied solely on rental income to pay its expenses in 1998 and
1997. Cash flows used in operations were $262,296 for the nine months ended
September 30, 1998 as compared to $34,385 provided by operating activities
during the same period in 1997. This decrease resulted from the increase in the
operating loss in the current period. Cash flows used in operations were
$275,662 for the three months ended September 30, 1998 as compared to $16,690
provided by operations in the same period in 1997. This increase resulted
primarily from the increase in accounts payable and the operating loss incurred
in the current period.
The above discussion and the Trust's financial statements have been presented on
the basis that it is a going concern, which contemplated the realization of
assets and the satisfaction of liabilities in the normal course of business. At
September 30, 1998 the Trust had one property remaining under lease, thus
limiting cash flows available to pay operating expenses. Effective July 24, 1998
the Trust sold the Country View Property for $262,500. Effective August 25, 1998
the Trust sold the New Life property for $250,000. Mortgage notes payable on the
Trust's properties matured on July 31, 1998. The current maturity of all of the
Trust's notes payable, accumulated recurring operating losses and the carrying
14
<PAGE>
costs of unleased assets raise a substantial doubt about the Trust's ability to
continue as a going concern for a reasonable period of time.
Management's plans include selling Bayshore or continuing to seek sources to
refinance the mortgage notes payable secured by Bayshore and minimizing
operating costs. In the event the Trust is unsuccessful in refinancing the notes
payable prior to the current maturity date, management believes it will be able
to obtain an extension from the bank or that the bank will not demand payment
prior to such refinancing or sale. There can be no assurance that the Trust's
sale or refinancing efforts will be successful or that the bank will not demand
payment of the mortgage notes payable.
The Trust also anticipates reviewing and evaluating other properties for
possible investment opportunities. However the Trust's efforts are limited by
the resources available and the Trust's ability to raise additional resources.
Much national attention is currently focused on healthcare reform. Although
there is concern as to the status of reimbursement programs on which the Trust
indirectly relies for its rental income, management believes the long term care
industry will benefit from significant healthcare reform.
15
<PAGE>
HEALTHCARE INVESTORS OF AMERICA, INC.
PART II - OTHER INFORMATION
ITEMS 1-6. NOT APPLICABLE
16
<PAGE>
HEALTHCARE INVESTORS OF AMERICA, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned therunto duly authorized.
HEALTHCARE INVESTORS OF AMERICA, INC.
(Registrant)
Date: November 6, 1998 /s/ F. Dale Markham
---------------------------------------
F. Dale Markham
Director, President and Chief Financial
Officer (Principal Executive, Financial
and Accounting Officer)
17
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 53,126
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 5,076,512
<DEPRECIATION> 1,235,620
<TOTAL-ASSETS> 4,077,738
<CURRENT-LIABILITIES> 220,293
<BONDS> 4,563,146
0
0
<COMMON> (705,701)
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 4,077,738
<SALES> 0
<TOTAL-REVENUES> 492,757
<CGS> 0
<TOTAL-COSTS> 636,146
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 401,001
<INCOME-PRETAX> (143,389)
<INCOME-TAX> 0
<INCOME-CONTINUING> (143,389)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (143,389)
<EPS-PRIMARY> (0.36)
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