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, 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 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 offices) (Zip Code)
(520) 326-2000
------------------------------------------------
(Issuer's telephone number, including area code)
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(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
13 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 6, 1999.
<PAGE>
HEALTHCARE INVESTORS OF AMERICA, INC.
INDEX
PAGE
PART I. Financial Information
Item 1. Condensed Financial Statements (Unaudited)
Balance Sheets - December 31, 1998 and June 30, 1999 2
Statements of Earnings (3 Months) - June 30, 1998 and June 30, 1999 3
Statement of Cash Flows (3 Months) - June 30, 1998 and June 30, 1999 4
Statement of Earnings (6 Months) - June 30, 1998 and June 30, 1999 5
Statement of Cash Flows (6 Months) - June 30, 1998 and June 30, 1999 6
Notes to Financial Statements - June 30, 1999 7
Item 2. Management's Discussion and Analysis or Plan of Operation 14
PART II. Other Information 17
Item 5. 17
Signatures 18
<PAGE>
HEALTHCARE INVESTORS OF AMERICA, INC.
FORM 10-QSB
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
BALANCE SHEETS
June 30, December 31,
1999 1998
(Unaudited) (Audited)
----------- ------------
ASSETS:
Real Estate Properties:
Land $ 393,195 $ 393,195
Building and improvements, net of
accumulated depreciation of $1,323,432 and
$1,264,891 at June 30, 1999 and December 31,
1998, respectively 3,359,884 3,418,426
Prepaid expenses 1,946 5,838
Mortgage receivable 182,500 182,500
Cash and cash equivalents 63,134 38,421
----------- -----------
TOTAL ASSETS $ 4,000,659 $ 4,038,380
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Mortgage notes payable $ 4,399,017 $ 4,462,132
Accounts payable and accrued expenses 187,065 170,768
Disputed claims 92,623 92,623
Option deposit 25,000
----------- -----------
TOTAL LIABILITIES $ 4,703,706 $ 4,725,523
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 (4,359,846) (4,343,942)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY (703,047) (687,143)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 4,000,659 $ 4,038,380
=========== ===========
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 June 30, 1999 and June 30, 1998
Three Months Three Months
Ended June 30, Ended June 30,
1999 1998
(Unaudited) (Unaudited)
-------------- --------------
REVENUES:
Rental income $ 144,341 $ 166,533
Interest income 5,061 39
------------ ------------
Total revenues $ 149,402 $ 166,572
EXPENSES:
Depreciation and amortization $ 29,271 $ 33,006
Interest expense 93,511 116,398
Advisory and other fees 7,500 7,500
Directors fees and expenses 8,250 8,250
Other operating expenses 11,163 32,073
------------ ------------
Total expenses $ 149,695 $ 197,227
------------ ------------
NET INCOME (LOSS) $ (293) $ (30,654)
============ ============
NET INCOME (LOSS) PER SHARE ($0.00) ($0.08)
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 397,600 397,600
============ ============
Distributions in excess of earnings-
beginning of period $ (4,359,553) $ (4,233,209)
Net income/(loss) (293) (30,654)
Distributions during the period
------------ ------------
Distributions in excess of earnings-
end of period $ (4,359,846) $ (4,263,863)
============ ============
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 June 30, Ended June 30,
1999 1998
(Unaudited) (Unaudited)
-------------- --------------
CASH FLOWS FROM OPERATIONS:
Net income/(loss) $ (293) $ (30,654)
Adjustments to reconcile net income to net
cash provide by (used in) operating
activities:
Depreciation and amortization 29,271 33,006
Changes in assets and liabilities:
Contract, rents and other receivables
Prepaid expenses 1,946 (5,135)
Accounts payable and accrued expenses (18,776) 33,631
Bayshore sale deposit 25,000
-------- --------
Net cash provided by (used in) operating
activities 37,148 30,848
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term borrowings (11,053) (43,018)
-------- --------
Net cash provided by (used in) financing
activities (11,053) (43,018)
-------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 26,095 (12,170)
CASH AND CASH EQUIVALENTS - Beginning of period 37,039 16,685
-------- --------
CASH AND CASH EQUIVALENTS - End of period $ 63,134 $ 4,515
======== ========
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 Six Months Ended June 30, 1999 and June 30, 1998
Six Months Six Months
Ended June 30, Ended June 30,
1999 1998
(Unaudited) (Unaudited)
-------------- --------------
REVENUES:
Rental income $ 287,481 $ 352,274
Interest income 9,396 39
------------ ------------
Total revenues $ 296,877 $ 352,313
EXPENSES:
Depreciation and amortization $ 58,541 $ 66,012
Interest expense 198,665 232,146
Advisory and other fees 15,000 15,000
Directors fees and expenses 16,500 16,500
Other operating expenses 24,075 67,408
------------ ------------
Total expenses $ 312,781 $ 397,066
------------ ------------
NET INCOME (LOSS) $ (15,904) $ (44,753)
============ ============
NET INCOME (LOSS) PER SHARE $ (0.04) $ (0.11)
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 397,600 397,600
============ ============
Distributions in excess of earnings-
beginning of period $ (4,343,942) $ (4,219,110)
Net income/(loss) (15,904) (44,753)
Distributions during the period
------------ ------------
Distributions in excess of earnings-
end of period $ (4,359,846) $ (4,263,863)
============ ============
See Notes to Financial Statements
5
<PAGE>
HEALTHCARE INVESTORS OF AMERICA, INC.
FORM 10-QSB
PART I: FINANCIAL INFORMATION
STATEMENT OF CASH FLOWS
Six Months Six Months
Ended June 30, Ended June 30,
1999 1998
(Unaudited) (Unaudited)
-------------- --------------
CASH FLOWS FROM OPERATIONS:
Net income/(loss) $ (15,904) $ (44,753)
Adjustments to reconcile net income to
net cash provide by (used in) operating
activities:
Depreciation and amortization 58,541 66,012
Changes in assets and liabilities:
Contract, rents and other receivables 0 16,767
Prepaid expenses 3,892 (1,220)
Accounts payable and accrued expenses 16,297 (23,441)
Bayshore sale deposit 25,000
--------- ---------
Net cash provided by (used in) operating
activities 87,827 13,365
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term borrowings (63,114) (98,815)
--------- ---------
Net cash provided by (used in) financing
activities (63,114) (98,815)
--------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 24,713 (85,450)
CASH AND CASH EQUIVALENTS - Beginning of period 38,421 89,965
--------- ---------
CASH AND CASH EQUIVALENTS - End of period $ 63,134 $ 4,515
========= =========
See Notes to Financial Statements
6
<PAGE>
HEALTHCARE INVESTORS OF AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE MONTH PERIOD ENDED JUNE 30, 1999 AND 1998
NOTE 1: ORGANIZATION
The affairs of Healthcare Investors of America, Inc. (the "Trust") are managed
by its advisor, 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. As of June 30, 1999, the Trust
has only one property leased. Therefore, the cash flow available to pay
operating expenses is limited.
Management's plans include continuing to seek sources to refinance or sell the
Florida Property.
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 June 30, 1999, the remaining property owned by the Trust is Bayshore
Convalescent Center in North Miami, Florida ("Bayshore") Bayshore was leased to
BHS. BHS is an affiliate of the Trust as it is owned by James R. Sellers, an
7
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affiliate of the Advisor. On June 3, 1999, the Trust entered into a Purchase and
Sale Agreement to sell Bayshore to Abraham Shaulson for $5,750,000. Negotiations
are currently ongoing to amend the terms of this sale.
Trust management worked during 1995-1998 to develop alternative uses for Country
View and New Life, two properties it owned in Colorado. 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. 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. On July 16, 1999, the Harper Notes were paid in full
and the proceeds are being used to pay down on the PNC debt.
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 6,
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. The Trust received $250,000 in cash at closing on August 24,
1998. 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 year ending December 31, 1999
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.
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 agreed to forbear from exercising its remedies until July 31, 1998. In
consideration therefor, 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
8
<PAGE>
security for 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. Effective July 31, 1998, the Forbearance Agreement
was extended to January 31, 1999. It has now been further extended to December
31, 1999.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(1) CASH AND CASH EQUIVALENTS - For purposes of the statements of
cash flows, 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, 1998, the Company had net
operating loss carryforwards for income tax purposes of
approximately $1,466,000 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.
9
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(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, 1999 the Trust owned one nursing home in Florida (the "Florida
Property"). As previously disclosed, the Colorado properties were sold in 1998.
At June 30, 1999, the net book value of the remaining property is as follows:
Florida
Property
--------
Cost:
Land $ 393,195
Buildings and Improvements 4,641,317
Accumulated Depreciation (1,283,564)
Net Carrying Value $3,750,948
----------
Trust management has evaluated the carrying value of the Property and believes
that the remaining net carrying value of the Property is realizable.
THE COLORADO PROPERTIES
Country View ("Country View"), one of the Colorado Properties, was sold on July
24, 1998. An additional $200,000 impairment of value was accordingly recognized
as of December 31, 1997.
The other Colorado facility ("New Life") was sold on August 6, 1998. An
additional $80,000 impairment of value was accordingly 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.
10
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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 original provisions of the Forbearance Agreement (defined
herein), the original monthly payment on the mortgage was subsequently increased
to $51,958, resulting in a monthly payment of $58,958 on the subsequently
extended lease by BHS. The current extension of the forbearance agreement
reduced the monthly payment, commencing in 1999, to $41,314, resulting in a
monthly lease payment of $48,314. 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
Year Ended December 31, Property
- ----------------------- --------
1999 $ 572,568
2000 572,568
2001 572,568
2002 572,568
2003 190,852
----------
$2,481,124
----------
NOTE 4: MORTGAGE NOTES PAYABLE
6/30/99 12/31/98
------- --------
Bank mortgage note-Florida Property,
payable in monthly installments of $41,314,
including interest at 9.00%, through
December 31, 1999, at which date the
unpaid balance is due in full. $4,553,419 $4,767,441
The Property is secured by first mortgages, assignments of the lease and rents
thereunder. The bank mortgage note balance on the Colorado Properties was also
added and secured, to the extent unpaid by sales of the Colorado Properties, in
accordance with the terms of the Forbearance Agreement, by a second mortgage on
the Florida Property.
The Trust entered into a Forbearance Agreement which is further discussed in
Note 1.
11
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NOTE 5: RELATED PARTY TRANSACTIONS
Effective March 1, 1998, 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:
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
$7,500 to the Advisor during the quarterly period ended June 30, 1999.
Property management, acquisition and disposition fees to be paid based
upon contractual agreements between the parties. The Trust incurred no
such fees in the first quarter of 1999.
Leasing transactions with related parties are described in Note 3.
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 the
obligation of former management due to its nonperformance.
NOTE 7: CONTINGENCIES
IMPACT OF YEAR 2000
The Trust is in the process of assessing the financial, operational or other
impact of any Year 2000 issues which may arise, including, but not limited to,
software processing errors arising from calculations using the Year 2000 and
beyond (collectively, the "Year 2000 Problem"). Many existing computer programs
and databases use only two digits to identify a year in the date field (e.g.,
"98" would represent "1998"). If not corrected, many computer systems could fail
or create erroneous results in the Year 2000 (e.g., "01" would represent "1901"
rather than "2001"). It is possible that the Trust's operations and its
relationship with suppliers, vendors and other third parties could be materially
adversely affected by the Year 2000 Problems. The Trust has been unable to
assess this likelihood as of May 10, 1999. The Trust has also been unable to
assess the extent to which its critical business applications, non-information
technology systems (e.g., building and utility systems, etc.) and the systems of
its suppliers, vendors and other third parties are Year 2000 compliant, and if
not, the amount of work required to achieve Year 2000 readiness with respect to
such systems. Additionally, the Trust has not been able to determine the total
cost associated with the identification, remediation and testing relating to the
Year 2000 Problem.
12
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Bayshore is substantially dependent on Medicaid reimbursements from the State of
Florida. To the extent that the State of Florida encounters problems resulting
from the Year 2000 Problem, and is unable to make timely payments, the Trust may
be adversely impacted. The Trust has not currently established contingency plans
to handle the most reasonably likely worst case scenario which the Trust
believes to be the failure of the State of Florida to timely make Medicaid
payments.
NOTE 8: SUBSEQUENT EVENTS
Effective June 3, 1999, the Trust entered into a Purchase and Sale Agreement to
sell the Bayshore facility at an amount in excess of the carrying value of the
property and related debt. Negotiations are ongoing to amend this agreement. The
purchaser has paid the Trust $25,000 which will be refunded only in the event a
sufficient number of shareholders do not approve the sale.
On July 16, 1999, the Harper Notes were paid in full.
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HEALTHCARE INVESTORS OF AMERICA, INC.
Three Months Ended June 30, 1999
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, 1999 compared to June 30, 1998
RENTAL INCOME. The Trust primarily derives its revenues from the leasing of
facilities to healthcare providers. For the six months ended June 30, 1999,
rental income was $287,481 as compared to $352,274 for the six months ended June
30, 1998. For the three months ended June 30, 1999, rental income decreased by
$22,192 to $144,341 as compared to $166,533 for the three months ended June 30,
1998. 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, 1999 were $58,541 which compares with $66,012 for the six months
ended June 30, 1998. These costs are primarily the result of assets becoming
fully depreciated.
INTEREST EXPENSE. For six months ended June 30, 1999, interest expense totaled
$198,665 as compared to $232,146 for the same period in 1998. This increase in
interest expense is the result of an increase in the interest rate on certain
mortgage notes payable and an increase in the principal balance resulting from
an $80,000 additional borrowing.
ADVISORY AND OTHER FEES. Advisor and other fees consist of the fees charged by
Harbor American Capital Group, the advisor to the Trust. For three and six month
periods ended June 30, 1999, advisory and other fees totaled $7,500 and $15,000,
respectively. These are the same as the charges for the three and six month
periods ended June 30, 1998.
DIRECTORS FEES AND EXPENSES. Director's fees and expenses for the three months
ended June 30, 1999 were $8,250. There are three Directors, each of whom
receives $2,750 per quarter. These were the basis for the same charges made in
the three and six month periods ended June 30, 1998.
OTHER OPERATING EXPENSES. Other operating expenses consists primarily of
maintenance and administrative costs. Other operating costs for the six months
ended June 30, 1999 were $24,075 which compares with $67,408 for the six months
14
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ended June 30, 1998. These costs are costs associated with two vacant facilities
in 1998 but not in 1999 and includes wastewater plant maintenance costs,
insurance, real estate taxes and property maintenance costs.
This accounts for the 64% decrease from 1998.
LIQUIDITY AND SOURCES OF CAPITAL
Cash increased from $38,421 at December 31, 1998 to $63,134 at June 30, 1999.
This increase is primarily the result of $25,000 of cash received and released
to the Trust in connection with the sale of the Bayshore property. Accounts
payable and accrued expenses increased from $170,768 at December 31, 1998 to
187,065 at June 30, 1999. The increase is the result of the timing of payments
of certain operating expenses. Mortgage notes payable decreased from $4,462.132
at December 31, 1998 to $4,399,017 at June 30, 1999. The decrease is the result
of payments of principal on mortgaged property. Distributions in excess of net
earnings increased from ($4,343,942) at December 31, 1998 to ($4,359,846) at
June 30, 1999.
The Trust has relied solely on rental income to pay its expenses in 1999 and
1998. Cash flows provided by operations were $87,827 for the six months ended
June 30, 1999 as compared to $13,365 for the same period in 1998. This increase
resulted from the decrease in the operating costs incurred in connection with
the vacant properties owned in 1998.
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, 1999 the Trust had one property remaining, Bayshore Convalescent Center
("Bayshore"), a 150 bed skilled and intermediate care nursing home facility in
North Miami Beach, Florida, thus limiting cash flows available to pay operating
expenses. Effective July 24, 1998 the Trust sold the Country View Property in
Longmont, Colorado for $262,500. On August 25, 1998 the Trust sold the New Life
Property in Greeley, Colorado for $250,000. See Subsequent Events below.
Mortgage notes payable on the Trust's properties mature on December 31, 1999.
The current maturity of the Trust's notes payable raises 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 entered into a Letter of Intent dated March 22, 1999 with Abraham
Shaulson to sell Bayshore. Negotiations are under way to finalize a contract
regarding said sale. If the contract to sell Bayshore is finalized, the Trust
will sell subject to approval of the shareholders. If the sale is completed, the
Trust will have only two other assets, a note payable in the amount of $100,000
15
<PAGE>
and a note payable in the amount of $82,500 each of which are the result of the
sale of the Country View property (the "Harper Notes"). These notes are due on
July 24, 2000. See Subsequent Events below. Following the closing of the
Bayshore sale and payment in full of the Harper Notes, the Trust intends to
liquidate, pay off all debts and disburse any remaining assets to the
shareholders.
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.
IMPACT OF YEAR 2000
The Trust is in the process of assessing the financial, operational or other
impact of any Year 2000 issues which may arise, including, but not limited to,
software processing errors arising from calculations using the Year 2000 and
beyond (collectively, the "Year 2000 Problem"). Many existing computer programs
and databases use only two digits to identify a year in the date field (e.g.,
"98" would represent "1998"). If not corrected, many computer systems could fail
or create erroneous results in the Year 2000 (e.g., "01" would represent "1901"
rather than "2001"). It is possible that the Trust's operations and its
relationship with suppliers, vendors and other third parties could be materially
adversely affected by the Year 2000 Problems. The Trust has been unable to
assess this likelihood as of May 10, 1999. The Trust has also been unable to
assess the extent to which its critical business applications, non-information
technology systems (e.g., building and utility systems, etc.) and the systems of
its suppliers, vendors and other third parties are Year 2000 compliant, and if
not, the amount of work required to achieve Year 2000 readiness with respect to
such systems. Additionally, the Trust has not been able to determine the total
cost associated with the identification, remediation and testing relating to the
Year 2000 Problem.
Bayshore is substantially dependent on Medicaid reimbursements from the State of
Florida. To the extent that the State of Florida encounters problems resulting
from the Year 2000 Problem, and is unable to make timely payments, the Trust may
be adversely impacted. The Trust has not currently established contingency plans
to handle the most reasonably likely worst case scenario which the Trust
believes to be the failure of the State of Florida to timely make Medicaid
payments.
SUBSEQUENT EVENTS
On June 3, 1999, the Trust entered into a Purchase and Sale Agreement to sell
Bayshore to Abraham Shaulson. Negotiations are ongoing to amend the terms of
said Agreement. The purchaser has paid the Trust $25,000 which will be refunded
only in the event a sufficient number of shareholders do not approve the sale.
On July 16 1999, the Harper Notes were paid in full. The $182,500 proceeds
received are being paid to the PNC Bank to reduce the principal balances on the
mortgage notes payable which mature on December 31, 1999.
16
<PAGE>
HEALTHCARE INVESTORS OF AMERICA, INC.
PART II - OTHER INFORMATION
ITEMS 1. THROUGH 4. AND ITEM 6. NOT APPLICABLE
ITEM 5. OTHER INFORMATION
The Trust entered into a Letter of Intent to sell Bayshore on March 22, 1999
with Abraham Shaulson. On June 3, 1999, the Trust entered into a Purchase and
Sale Agreement. Negotiations are ongoing to amend the terms of this agreement.
See Part I, Item 2. Management's Discussion and Analysis or Plan of Operation.
17
<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 6, 1999 /s/ F. Dale Markham
---------------------------------------
F. Dale Markham
Director, President and Chief Financial
Officer (Principal Executive, Financial
and Accounting Officer)
18
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 63,134
<SECURITIES> 0
<RECEIVABLES> 182,500
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,946
<PP&E> 5,076,511
<DEPRECIATION> (1,323,432)
<TOTAL-ASSETS> 4,000,659
<CURRENT-LIABILITIES> 304,689
<BONDS> 4,399,017
0
0
<COMMON> (703,047)
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 4,000,659
<SALES> 0
<TOTAL-REVENUES> 149,402
<CGS> 0
<TOTAL-COSTS> 149,695
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 93,511
<INCOME-PRETAX> (293)
<INCOME-TAX> 0
<INCOME-CONTINUING> (293)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (293)
<EPS-BASIC> (0.00)
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