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 June 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
- --------------------------------------- ----------
(Address of principal executive office) (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 August 27,
1998.
<PAGE>
HEALTHCARE INVESTORS OF AMERICA, INC.
FORM 10-QSB
PART I: FINANCIAL INFORMATION
Item 1: Financial Statements
BALANCE SHEETS
<TABLE>
JUNE 30, DECEMBER 31,
1998 1997
(UNAUDITED) (AUDITED)
----------- ------------
ASSETS:
- -------
<S> <C> <C>
Real Estate Properties:
Land $466,301 $466,301
Building and improvements, net of
accumulated depreciation of
$4,442,134 and $4,409,128 at
March 31, 1998 and December 31,
1997, respectively 3,881,960 3,947,972
Prepaid expenses 5,135 3,915
Rent and other receivables 12,500 29,267
Cash and cash equivalents 4,516 89,965
---------- ----------
TOTAL ASSETS $4,370,412 $4,537,420
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
- -------------------------------------
Mortgage notes payable $4,724,443 $4,823,258
Accounts payable and accrued expenses 160,410 180,662
Disputed claims 92,623 92,623
Deferred income 3,189
---------- ----------
TOTAL LIABILITIES 4,977,476 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 (4,263,863) (4,219,111)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY (607,064) (562,312)
---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $4,370,412 $4,537,420
========== ==========
</TABLE>
See Notes to Financial Statements.
2
<PAGE>
HEALTHCARE INVESTORS OF AMERICA, INC.
FORM 10-QSB
PART I: FINANCIAL INFORMATION
STATEMENTS OF EARNINGS AND DISTRIBUTIONS IN EXCESS OF NET EARNINGS
FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND JUNE 30, 1997
<TABLE>
THREE MONTHS THREE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1998 1997
(UNAUDITED) (UNAUDITED)
----------- -----------
REVENUES:
- ---------
<S> <C> <C>
Rental income $ 166,533 $ 174,103
Interest income 39 12
---------- ----------
Total revenues 166,572 174,115
---------- ----------
EXPENSES:
- ---------
Depreciation and amortization $ 33,006 $ 37,292
Interest expense 116,398 102,594
Advisory and other fees 7,500 7,500
Directors fees and expenses 8,250 5,500
Other operating expenses 32,073 24,826
---------- ----------
Total expenses $ 197,227 $ 177,712
---------- ----------
NET INCOME (LOSS) $ (30,654) $ (3,595)
========== ==========
NET INCOME (LOSS) PER SHARE $ (0.08) $ (0.01)
========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING 397,600 397,600
========== ==========
Distributions in excess of
earnings - beginning of period $(4,303,210) $(3,779,087)
Net income/(loss) (30,654) (3,595)
Distributions during the period
---------- ----------
Distributions in excess of
earnings - end of period $(4,333,864) $(3,782,684)
========== ==========
</TABLE>
See Notes to Financial Statements.
3
<PAGE>
HEALTHCARE INVESTORS OF AMERICA, INC.
FORMS 10-QSB
PART I: FINANCIAL INFORMATION
STATEMENTS OF CASH FLOWS
<TABLE>
THREE MONTHS THREE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1998 1997
(UNAUDITED) (UNAUDITED)
----------- -----------
CASH FLOWS FROM OPERATIONS:
- ---------------------------
<S> <C> <C>
Net income/(loss) $ (30,654) $ (3,597)
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 33,006 37,292
Changes in assets and liabilities:
Contract, rents and other receivables 410
Prepaid expenses (5,135)
Accounts payable and accrued expenses 33,631 (45,038)
---------- ----------
Net cash provided by (used in)
operating activities 30,848 (10,933)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
- -------------------------------------
Payments on long-term borrowings (43,018) (50,959)
---------- ----------
Net cash provided by (used in)
financing activities (43,018) (50,959)
---------- ----------
NET DECREASE IN CASH AND CASH
EQUIVALENTS (12,170) (61,892)
CASH AND CASH EQUIVALENTS -
Beginning of period 18,685 162,469
---------- ----------
CASH AND CASH EQUIVALENTS -
End of period $ 4,516 $ 100,577
========== ==========
</TABLE>
See Notes to Financial Statements.
4
<PAGE>
HEALTHCARE INVESTORS OF AMERICA, INC.
FORM 10-QSB
PART I: FINANCIAL INFORMATION
STATEMENTS OF EARNINGS AND DISTRIBUTIONS IN EXCESS OF NET EARNINGS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND JUNE 30, 1997
<TABLE>
SIX MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1998 1997
(UNAUDITED) (UNAUDITED)
----------- -----------
REVENUES:
- ---------
<S> <C> <C>
Rental income $ 352,274 $ 353,032
Interest income 39 912
---------- ----------
Total revenues $ 352,313 $ 353,944
---------- ----------
EXPENSES:
- ---------
Depreciation and amortization $ 66,012 $ 74,580
Interest expense 232,146 225,875
Advisory and other fees 15,000 15,000
Directors fees and expenses 16,500 16,500
Other operating expenses 67,408 57,303
---------- ----------
Total expenses $ 397,066 $ 389,258
---------- ----------
NET INCOME (LOSS) $ (44,753) $ (35,314)
========== ==========
NET INCOME (LOSS) PER SHARE $ (0.11) $ (0.09)
========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING 397,600 397,600
========== ==========
Distributions in excess of
earnings - beginning of period $(4,289,111) $(3,747,370)
Net income/(loss) (44,753) (35,314)
Distributions during the period
---------- ----------
Distributions in excess of
earnings - end of period $(4,333,864) $(3,782,684)
========== ==========
</TABLE>
See Notes to Financial Statements.
3
<PAGE>
HEALTHCARE INVESTORS OF AMERICA, INC.
FORMS 10-QSB
PART I: FINANCIAL INFORMATION
STATEMENTS OF CASH FLOWS
<TABLE>
SIX MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1998 1997
(UNAUDITED) (UNAUDITED)
----------- -----------
CASH FLOWS FROM OPERATIONS:
- ---------------------------
<S> <C> <C>
Net income/(loss) $ (40,753) $ (35,314)
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 66,012 74,580
Changes in assets and liabilities:
Contract, rents and other receivables 16,767 60,310
Prepaid expenses (1,220) 2,751
Accounts payable and accrued expenses (23,441) (84,634)
---------- ----------
Net cash provided by (used in)
operating activities 13,365 17,693
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
- -------------------------------------
Payments on long-term borrowings (98,815) (84,075)
---------- ----------
Net cash provided by (used in)
financing activities (98,815) (84,075)
---------- ----------
NET DECREASE IN CASH AND CASH
EQUIVALENTS (85,450) (66,382)
CASH AND CASH EQUIVALENTS -
Beginning of period 89,965 166,959
---------- ----------
CASH AND CASH EQUIVALENTS -
End of period $ 4,516 $ 100,577
========== ==========
</TABLE>
See Notes to Financial Statements.
4
<PAGE>
HEALTHCARE INVESTORS OF AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE MONTH PERIOD AND THE SIX MONTH PERIOD
ENDED JUNE 31, 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
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. The Trust has three properties, one in Florida and
two in Colorado. As of June 30, 1998, the Florida Property
(defined herein) was leased and both of the Colorado Properties
(defined herein) were unoccupied. 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 7,
Subsequent Events.
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.
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.
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 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 June 30, 1998 and 1997 the Trust owned three nursing homes
(the "Properties"), two of which are located in Colorado (the
"Colorado Properties"), and one 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.
At June 30, 1998, the net book values of the Properties are as
follows:
<TABLE>
FLORIDA COLORADO
PROPERTY PROPERTIES TOTAL
-------- ---------- -----
<S> <C> <C> <C>
Cost:
Land $ 393,195 $ 73,106 $ 466,301
Buildings and improvements 4,683,317 3,673,783 8,357,100
Accumulated depreciation (1,206,350) (497,790) (1,704,140)
Writedown to net realizable
value (2,771,000) (2,771,000)
---------- ---------- ----------
Net Carrying Value $3,870,162 $ 478,099 $4,348,261
---------- ---------- ----------
</TABLE>
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 subsequent sale of both of the Colorado
Properties. Trust management has evaluated the carrying values
of the Properties and believes that the remaining net carrying
value of each of the Properties is realizable.
THE COLORADO PROPERTIES
Country View ("Country View"), one of the Colorado Properties,
was vacant as of June 30, 1998, and has been vacant since
September 30, 1995. As further disclosed in Note 7, this
property was subsequently sold on July 24, 1998. An additional
$200,000 impairment of value has accordingly been recognized as
of December 31, 1997.
The other Colorado facility ("New Life") was leased to Res-Care,
Inc. ("Res-Care") at December 31, 1997. The lease provided for a
basic rent equal to 115% of the annual fair rental allowance as
determined by the State of Colorado, to be adjusted by the
percentage decrease or increase in the "client base" at the
facility. The annual base rent was $150,000 at December 31,
1997. This lease expired on April 30, 1998, at which time New
Life became an unoccupied facility. As further disclosed in Note
7, New Life was subsequently sold on August 25, 1998. An
additional $80,000 impairment of value accordingly has been
recognized as of December 31, 1997.
New Life housed mentally retarded, developmentally disabled
("MRDD") patients for the State of Colorado. The State of
Colorado has interpreted certain federal guidelines pertaining to
the active treatment of MRDD patients and has determined that the
patients must be moved into private housing. As a result, the
MRDD patients were removed prior to the end of the lease term.
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:
<TABLE>
FLORIDA COLORADO
YEAR ENDED DECEMBER 31, PROPERTY PROPERTIES TOTAL
- ----------------------- -------- ---------- -----
<C> <C> <C> <C>
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
---------- ---------- ----------
</TABLE>
NOTE 4: MORTGAGE NOTES PAYABLE
- --------------------------------
6/30/98 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. $3,043,273 $3,142,088
Bank mortgage note-Colorado Properties,
interest at 8.50%, payable in monthly
installments of principal and interest,
through July 31, 1998, at which date
the unpaid balance is due in full. $1,681,170 $1,681,170
---------- ----------
Total mortgage notes payable $4,724,443 $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 June 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 7 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 is being amortized over the term of
the lease.
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 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: SUBSEQUENT EVENTS
- --------------------------
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 present
MRDD use. Trust management worked during 1997 and to date to
develop alternative uses for Country View and New Life.
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 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. Effective 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 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) the Florida Property.
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. 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 Forbearance
Agreement (the "Forbearance Agreement") dated as of April 30,
1998.
Under the Forbearance Agreement, the Bank has 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. While the
Trust is currently negotiating an extension to the Forbearance
Agreement, there can be no assurance that an extension will be
entered into, or if so, what the terms of such an extension would
be. To date, the Bank has exercised no remedies available to it.
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.
<PAGE>
HEALTHCARE INVESTORS OF AMERICA, INC.
Six Months Ended June 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
June 30, 1998 compared to June 30, 1997
RENTAL INCOME. The Trust primarily derives its revenues from the
leasing of facilities to healthcare providers. For the six
months ended June 30, 1998, rental income was $352,274 as
compared to $353,032 for the six months ended June 30, 1997. For
the three months ended June 30, 1998, rental income decreased by
$7,570 to $166,533 as compared to $174,103 for the three months
ended June 30, 1997. These decreases are primarily attributable
to the loss of rents resulting from the expiration of the New
Life lease.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization for
the six months ended June 30, 1998 were $66,012 which compares
with $74,580 for the six months ended June 30, 1997. For the
three months ended June 30, 1998, depreciation and amortization
was $33,006 as compared to $37,292 for the three months ended
June 30, 1997. These costs are primarily the result of assets
becoming fully depreciated.
INTEREST EXPENSE. For six months ended June 30, 1998, interest
expense totaled $232,146 as compared to $225,875 for the same
period in 1997. For the three months ended June 30, 1998,
interest expense was $116,398 as compared to $102,594 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 six months ended June 30, 1998, advisory and other
fees totaled $15,000. For the three months ended June 30, 1998,
advisory and other fees totalled $7,500. These are the same as the
charges for the respective periods in 1997.
DIRECTORS FEES AND EXPENSES. Director's fees and expenses for
the six months and the three months ended June 30, 1998 were
$16,500 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 six months ended June 30, 1998 were
$67,408 which compares with $57,303 for the six months ended
June 30, 1997. For the three months ended June 30, 1998, other
operating expenses were $32,073 as compared to $24,826 for the
three months ended June 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. In the comparable periods in 1997
only one of the facilities was vacant. This accounts for the
increases over 1997.
LIQUIDITY AND SOURCES OF CAPITAL
Cash decreased from $89,965 at December 31, 1997 to $4,516 at
June 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 $12,500 at June 30, 1998. The decrease is the result of
the collection of account balances. Accounts payable and accrued
expenses decreased from $180,662 at December 31, 1997 to $160,410
at June 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 $4,724,443 at
June 30, 1998. The decrease is the result of payments of
principal on mortgaged property. Distributions in excess of net
earnings decreased from ($4,219,111) at December 31, 1997 to
($4,263,863) at June 30, 1998.
The Trust has relied solely on rental income to pay its expenses
in 1998 and 1997. Cash flows provided by operations were $13,365
for the six months ended June 30, 1998 as compared to $17,693 for
the same period in 1997. This decrease resulted from the
increase in the operating loss in the current period. Cash flows
provided by operations were $30,848 for the three months ended
June 30, 1998 as compared to ($10,933) for 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 June 30, 1998
the Trust had three properties remaining, only one of which was
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 mature on July 31, 1998. The current
maturity of all of the Trust's notes payable, accumulated
recurring operating losses and the carrying 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.
<PAGE>
HEALTHCARE INVESTORS OF AMERICA, INC.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Form 8-K filed on March 26, 1998 with respect to date of
earliest event filed March 19, 1998. This filing was in
connection with Item 4, changes in Registrant's Certifying
Accountant (Arthur Anderson LLP to Lavoie, Clark, Charvoz &
May, P.C.) and Item 5, Other Events (Resignation of certain
directors and officers and litigation).
<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 thereunto duly authorized.
HEALTHCARE INVESTORS OF AMERICA, INC.
(Registrant)
Date: August 27, 1998 /s/ F. Dale Markham
--------------------------------------
F. Dale Markham
Director, President and Chief
Financial Officer (Principal
Executive, Financial and Accounting
Officer)
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<PERIOD-END> JUN-30-1998
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