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 March 31, 2000
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.
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(Exact name of small business issuer as specified in its charter)
Maryland 86-0576027
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2940 N. Swan Rd., Suite 212
Tucson, AZ 85712
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(Address of principal executive offices) (Zip Code)
(520) 326-2000
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(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
12 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 May 15, 2000.
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HEALTHCARE INVESTORS OF AMERICA, INC.
INDEX
PAGE
PART I. Financial Information
Item 1. Condensed Financial Statements (Unaudited)
Balance Sheets - December 31, 1999 and March 31, 2000............. 2
Statements of Operations - December 31, 1999 and March 31, 2000... 3
Statement of Cash Flows - December 31, 1999 and March 31, 2000.... 4
Notes to Financial Statements - March 31, 2000.................... 5
Item 2. Management's Discussion and Analysis or Plan of Operation......... 14
PART II. Other Information
Item 1 to 6................................................................ 21
Signatures................................................................. 22
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HEALTHCARE INVESTORS OF AMERICA, INC.
FORM 10-QSB
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
BALANCE SHEETS
MARCH 31, DECEMBER 31,
2000 1999
ASSETS: (UNAUDITED) (AUDITED)
----------- ------------
Real Estate Properties:
Land $ 393,195 $ 393,195
Building and improvements, net of accumulated
depreciation of $1,411,245 and $1,381,974 at
March 31, 2000 and December 31, 1999, respectively 3,272,072 3,301,343
Prepaid expenses 50,000 50,000
Rent and other receivables 215,519 90,000
Cash and cash equivalents 100,856 76,285
Restricted cash 328,864
-------------------------
TOTAL ASSETS $ 4,031,641 $ 4,239,687
=========================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Mortgage notes payable $ 4,134,185 $ 4,325,404
Accounts payable and accrued expenses 112,783 107,413
Disputed claims 92,623 92,623
Purchase deposits 435,000 435,000
-------------------------
TOTAL LIABILITIES $ 4,774,591 $ 4,960,440
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 (4,399,749) (4,377,552)
-------------------------
TOTAL STOCKHOLDERS' EQUITY (742,950) (720,753)
-------------------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 4,031,641 $ 4,239,687
=========================
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 March 31, 2000 and March 31, 1999
Three Months Three Months
Ended March 31, Ended March 31,
2000 1999
REVENUES: (Unaudited) (Unaudited)
--------------- ---------------
Rental income $ 135,457 $ 143,141
Interest income 4,906 4,335
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Total revenues $ 140,362 $ 147,476
EXPENSES:
Depreciation and amortization $ 29,271 $ 29,271
Interest expense 97,121 105,153
Advisory and other fees 7,500 7,500
Directors fees and expenses 8,545 8,250
Other operating expenses 20,123 12,913
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Total expenses $ 162,560 $ 163,087
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NET INCOME (LOSS) $ (22,198) $ (15,611)
=========== ===========
NET INCOME (LOSS) PER SHARE $ (0.06) $ (0.04)
=========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING 397,600 397,600
=========== ===========
Distributions in excess of earnings-
beginning of period $(4,377,552) $(4,343,942)
Net income/(loss) (22,198) (15,611)
Distributions during the period
----------- -----------
Distributions in excess of earnings-
end of period $(4,399,749) $(4,359,553)
=========== ===========
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 March 31, Ended March 31,
2000 1999
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATIONS: --------------- ---------------
Net income/(loss) $ (22,198) $ (15,611)
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:
Rents and other receivables (125,519) -
Prepaid expenses - 1,946
Restricted cash 328,864 -
Accounts payable and accrued expenses 5,371 35,073
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Net cash provided by (used in)
operating activities 215,790 50,679
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term borrowings (191,219) (52,061)
----------- -----------
Net cash provided by (used in)
financing activities (191,219) (52,061)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 24,571 (1,382)
CASH AND CASH EQUIVALENTS - Beginning of period 76,285 38,421
----------- -----------
CASH AND CASH EQUIVALENTS - End of period $ 100,856 $ 37,039
=========== ===========
See Notes to Financial Statements
4
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HEALTHCARE INVESTORS OF AMERICA, INC.
Notes to Financial Statements
For the Three Month Period Ended March 31, 2000 and 1999
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 March 31, 2000, 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 March 31, 2000, the remaining property owned by the Trust is Bayshore
Convalescent Center in North Miami, Florida ("Bayshore") Bayshore was leased to
BHS until September 1, 1999. BHS is an affiliate of the Trust as it is owned by
James R. Sellers, an 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. Under the terms of the Purchase and Sale Agreement, the sale is
to be closed on or before October 31,2000. The Trust entered into a lease of
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Bayshore with an affiliate of the Purchaser, Watercrest Nursing and
Rehabilitation Center, Inc. The term of this lease is from September 1,1999 to
October 31, 2000, unless earlier terminated by the closing of the sale.
The Trust's continuing plan of operation for the year ending December 31, 2000
is as follows: The Trust intends to own, lease or sell its Property, Bayshore.
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. Further, the Trust may recapitalize and extend its life.
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
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 since been further extended to November
30, 2000.
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.
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(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, 2000, 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.
(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 March 31, 2000, the Trust owned one nursing home in Florida (the "Bayshore"
or "theFlorida Property").
At March 31, 2000, 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 FLORIDA PROPERTY
Minimum annual lease payments, including the aforementioned extension, expected
to be received by the Trust on its leased property during the lease term is as
follows:
Florida
Year Ended December 31, Property
- ----------------------- --------
2000 $ 483,140
7
<PAGE>
NOTE 4: MORTGAGE NOTES PAYABLE
3/31/00 12/31/99
------- --------
Bank mortgage note-Florida Property,
payable in monthly installments of $41,314,
including interest at 9.00%, through
November 30, 1999, at which date the
unpaid balance is due in full.
$4,134,185 $4,325,404
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.
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 period ended March 31, 2000.
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 2000.
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
Intended Sale of Bayshore and Related Lease
At January 1, 1999, Bayshore was leased under an operating agreement to
Bayshore Healthcare Services, Inc., an Arizona corporation ("BHS"). See Item 2.
DESCRIPTION OF PROPERTY - The Bayshore Lease. BHS is an affiliate of the Trust
as it is owned by James R. Sellers, an affiliate of the Advisor. Effective
August 30, 1999, the lease with BHS was cancelled and the Trust and BHS,
collectively hereinafter referred to as the "Sellers", and Abraham Shaulson,
hereinafter referenced as the "Buyer", entered into a Purchase and Sale
8
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Agreement (the "Original Agreement"), dated as June 3, 1999, as amended by
Amendment to Purchase and Sale Agreement (the "Amendment," which together with
the Original Agreement is hereinafter collectively referred to as the
"Agreement"), dated as of August 31, 1999. Under the Agreement, Sellers have
agreed to sell all of the real estate, personal property, inventory, trademarks
and other intangibles, and patient contracts (collectively, the "Assets") to
Buyer with respect to the Bayshore Convalescent Center ("Bayshore") located at
16650 West Dixie Highway, Miami, Florida. Excepted from the Asset sale is all
cash, accounts receivables, prepaid expenses, notes receivable and personal
property of the residents at Bayshore.
Buyer agreed to pay Sellers $5,750,000 (the "Purchase Price") for Sellers'
Assets as follows:
(i) $350,000 (the "Deposit") from Buyer to Sellers as a nonrefundable
deposit except in the event of a default by Sellers under the
Agreement; and
(ii) The balance of the purchase price due on the closing date scheduled on
or before October 31, 2000 (the "Closing Date").
The Agreement provides for the allocation of the Purchase Price between the
Sellers in accordance with a schedule that will be attached to the Agreement. To
date, the Sellers have not made an allocation to disclose on the schedule that
the Sellers will attach to the Agreement.
With the execution of the Amendment, the Buyer deposited $150,000 into a
separate interest bearing account of Sellers. The proceeds in this account are
for capital improvements to Bayshore, as described in the Agreement. Buyer is
responsible for the completion of the improvements. Buyer submits evidence of
the completion of the improvements and costs to Sellers for reimbursement by
Sellers. Upon the closing of the sale under the Agreement, any amount not used
for the completion of improvements shall be applied to the Purchase Price. If
the Asset sale fails to close by the Closing Date for any reason other than a
default by the Sellers, any amount not used for capital improvements shall
become the property of the Sellers.
Pending the closing of the sale under the Agreement, Sellers have agreed to
have the Registrant lease Bayshore to a Buyer affiliate. The terms of the Lease
(the "Watercrest Lease"), dated as of July 30, 1999, from the Registrant to
Watercrest Nursing and Rehabilitation Center, Inc. (the "Lessee"), are as
follows:
The initial term of the Watercrest Lease commenced September 1, 1999 and
ends October 31, 2000. The base rent for Bayshore is $47,814 per month payable
on the 20th day of each calendar month plus such additional amounts that may be
necessary to cover the debt service under the loan agreement between the
Registrant and any mortgagee of Bayshore. Lessee assumes the obligation to pay
all taxes and other charges which arise out of Bayshore. Lessee is responsible
for all utilities, insurance premiums related to the premises including a $2,500
monthly insurance administration fee due the Registrant for monitoring the
insurance coverage of Bayshore.
In the event of a partial condemnation or damage to or destruction of
Bayshore, which does not render Bayshore unsuitable for its primary intended
use, the rent shall be abated to the extent that it is fair, just and equitable
to both the Registrant and Lessee. The primary intended use of the property is
as a health care facility licensed for skilled and intermediate long-term
nursing services. Lessee covenants in the Lease to operate Bayshore in
accordance with the primary intended use and to maintain its qualifications for
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licensure and accreditation. Under the Watercrest Lease, Lessee may enter into a
management agreement with the prior written consent of the Registrant and any
mortgagee of Bayshore, subject to the payment of the management fees being
subordinate to all sums due under the Lease.
The Watercrest Lease requires the Lessee to maintain Bayshore in good order
and repair. Lessee is responsible for the cost of any capital additions to
Bayshore which shall be deemed a leasehold improvement. The Watercrest Lease
further requires the Lessee to spend the $150,000 referred to above on
improvements to Bayshore. As of March 24, 2000, Lessee has spent $65,000
primarily on computer equipment, floor coverings, window frame and glass
replacements and exterior painting. Lessee may not create or allow to remain on
the premises of Bayshore any lien or encumbrance on Bayshore. Lessee may,
however, contest any taxes, insurance requirements, liens or encumbrances so
long as Lessee shall provide reasonable security in the event any such lien,
taxes, insurance requirements or encumbrance exceeds $50,000.
Lessee must maintain all-risk insurance in an amount equal to the
replacement costs of Bayshore, boiler insurance, business interruption insurance
covering the Registrant's risk of loss, comprehensive public liability insurance
in an amount not less than $4 million per occurrence for injuries and $2 million
for property damage, malpractice insurance in an amount of not less than $5
million for each person and $10 million for each occurrence, and flood insurance
if Bayshore lies in a flood plain area.
Insurance proceeds as a result of loss or damage to Bayshore are payable to
the Registrant for reconstruction or repair of Bayshore. If Bayshore is totally
or substantially destroyed from a risk covered by insurance, Lessee, subject to
the rights of any mortgagee, shall have the option to restore Bayshore or
acquire Bayshore at fair market value or terminate the Watercrest Lease. If
Bayshore is destroyed from a risk not covered by insurance, the Registrant may
elect to restore Bayshore or absent such an election Lessee may terminate the
Lease.
A partial condemnation of Bayshore so long as Bayshore is not rendered
unsuitable for its primary intended use, shall not cause a termination of the
Watercrest Lease. If the condemnation causes Bayshore to be rendered unsuitable
for its primary intended use, then Lessee has the right to restore Bayshore at
its own expense, to acquire Bayshore for fair market value or terminate the
Watercrest Lease. In the event Lessee or its affiliate purchases Bayshore, any
condemnation award belongs to Lessee, otherwise the award belongs to the
Registrant.
An event of default occurs upon:
(i) the existence of an event of default under any other lease between
the Registrant and Lessee;
(ii) failure of Lessee to make a rental payment under the Watercrest Lease
and such failure continues for a period of 10 days after receipt of
written notice;
(iii) Lessee's failure to observe or perform any other term, covenant or
condition of the Watercrest Lease and such failure is not cured
within 30 days after receipt of notice;
(iv) bankruptcy of Lessee;
(v) voluntary cessation of operations by Lessee at Bayshore for a period
of longer than 30 days; or
(vi) failure of Lessee to provide financial statements or copies of
required licensing information, to maintain quarterly cash flow of
not less than 125% of minimum rent or to operate Bayshore for its
primary intended use.
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If an event a default shall have occurred and be continuing, the Registrant
may terminate the Watercrest Lease. The Registrant may not remove Lessee from
Bayshore until the Registrant provides for a substitute operator acceptable to
any Bayshore mortgagee. Notwithstanding termination of the Watercrest Lease,
Lessee is responsible for all rent due and payable with respect to Bayshore. In
addition, if an event of default shall have occurred and be continuing the
Registrant may require Lessee to purchase Bayshore for the Purchase Price plus
all rent then due and payable. If Lessee fails to perform under the Watercrest
Lease and is removed from Bayshore, such action by the Registrant shall not be
deemed an eviction of Lessee.
Lessee agrees to indemnify the Registrant against all liabilities arising
from the operation of Bayshore. Lessee may not, without the prior written
consent of the Registrant and any mortgagee, assign the Lease or sublet any part
of Bayshore.
BHS owns all personal property used at Bayshore. The Lessee is not paying
any consideration for the personal property and upon termination of the
Watercrest Lease, all the personal property shall be deemed owned by BHS.
The Registrant agrees to indemnify the Lessee from:
(i) any liability arising from any breach of representations, warranties,
covenants or agreements made in the Lease;
(ii) any overpayment or assessment relating to Bayshore from the Medicare
or Medicaid programs;
(iii) any claims by any creditor incurred by Bayshore prior to the
effective date of the Watercrest Lease; and
(iv) any claim arising out of operation of Bayshore prior to the effective
date of the Watercrest Lease.
In the event either Medicaid or Medicare withholds, recoups or offsets any
payment due the Lessee for claims arising prior to the effective date of the
Watercrest Lease, the Registrant agrees to immediately reimburse Lessee for such
withholding, recoupment or offset. Notwithstanding other terms of the Watercrest
Lease, the Lessee may offset any payments that the Registrant fails to make in
this situation from the monthly rent and insurance administration fee. Any
amounts due to the Lessee from the Registrant as a result of the unreimbursed
Medicaid or Medicare payments shall bear interest at 10% per annum until paid by
the Registrant to the Lessee.
One of the principal conditions to the closing of the sale of Bayshore is
the shareholder approval of the sale by the Registrant's shareholders. If
Sellers had not obtained shareholder approval at least six (6) months prior to
the end of the Watercrest Lease, Buyer had the option to extend the Watercrest
Lease for three one-year renewal terms with a rent increase equal to the
consumer price index increase for the preceding twelve (12) months. Such
shareholder approval was received and on February 10, 2000, the Trust Board of
Directors accepted the Inspector of Elections count of 271,162.4806 as an
appropriate number of votes in excess of the required two-thirds super majority.
Under the terms of the Agreement, Buyer was required to file applications
for the appropriate licenses to operate Bayshore with the applicable licensing
agencies by September 30, 1999, with all licenses to be issued on or before
December 31, 1999. This was accomplished effective September 1, 1999. Buyer
further agrees to indemnify and hold Sellers harmless from all liabilities
arising in connection with the operation of Bayshore from and after the date of
the Watercrest Lease until the Closing Date.
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The Agreement contains Sellers' representations and warranties related to,
among others:
(i) due organization and existence;
(ii) authorization of the Agreement;
(iii) good title to the real and personal property of Bayshore;
(iv) the operating condition of the buildings and appurtenances on the
real estate;
(v) proper licensing for operation of Bayshore as a 150 bed nursing
home;
(vi) payment of real estate taxes;
(vii) fair presentation of the financial condition and results of
operations of Bayshore as contained in the financial statements
Sellers have delivered to Buyer;
(viii) no pending labor problems with the existing union at Bayshore;
(ix) no material and adverse litigation with respect to Bayshore;
(x) proper filing of all taxes, tax returns and cost reports;
(xi) sufficient insurance coverage with respect to Bayshore; and
(xii) no environmental claims.
The Agreement contains Buyer's warranties and representations related to due
organization and existence, and proper authorization of the Agreement, among
others.
Conditions to the Buyer's obligation to consummate the Agreement include:
(i) no adverse change in Bayshore and the Sellers' Assets;
(ii) Sellers' compliance with the terms of the Agreement;
(iii) Buyer's receipt of a commitment to finance the Assets on terms
reasonably acceptable to Buyer;
(iv) no material and adverse litigation affecting Bayshore or the Sellers'
Assets;
(v) the patient census shall not be less than 113 with Medicaid certified
beds to be 115 and Medicare certified beds to be 16; and
(vi) Buyer's receipt of evidence that all cost reports of Sellers required
to be filed prior to the Closing Date have been timely filed.
Conditions to the Sellers' obligation to close the sale of Bayshore include
Buyer's continuing compliance with the Agreement, no litigation pending against
Buyer questioning the legality of the transactions under the Agreement, and
Sellers' receipt of shareholder approval of the sale of Sellers' Assets. Such
shareholder approval was secured effective February 10, 2000
Closing adjustments to the Purchase Price shall include proration of:
(i) real estate taxes;
(ii) water, sewage and electricity charges;
(iii) fees for customer annual or periodic licenses and permits;
(iv) employee wages and related payroll taxes and expenses; and
(v) charges on service and maintenance agreements.
Sellers shall also be responsible for the payment of real estate brokerage
commissions. Buyer and Sellers shall pay equally all closing costs including
documentary stamp taxes, county surtax, recording fees and title insurance
premiums.
Sellers jointly and severally indemnify Buyer for, among others items:
(i) liabilities and obligations of Sellers arising prior to the Closing
Date unless otherwise expressly assumed by Buyer;
12
<PAGE>
(ii) damages or deficiencies resulting from any misrepresentation, breach
of warranty or nonfulfillment of any obligation on the part of
Sellers;
(iii) any retroactive payments due to the State of Florida or the United
States for periods prior to the closing unless specifically assumed
by Buyer; and
(iv) liabilities arising out of the transfer of funds or property by any
patient to the Sellers prior to the Closing Date.
Buyer indemnifies Sellers for, among other items:
(i) liabilities of Sellers arising after the Closing Date and expressly
assumed by Buyer or relating to the operation of Bayshore by Buyer;
or
(ii) any damage or deficiency resulting from any misrepresentation, breach
of warranty or nonfulfillment of any obligation on the part of Buyer
under the Agreement.
13
<PAGE>
HEALTHCARE INVESTORS OF AMERICA, INC.
Three Months Ended March 31, 2000
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
MARCH 31, 2000 COMPARED TO MARCH 31, 1999
RENTAL INCOME. The Trust primarily derives its revenues from the leasing of
facilities to healthcare providers. For the three months ended March 31, 2000,
rental income decreased by $7,684 to $135,147 as compared to $143,141 for the
three months ended March 31, 1999.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization for the three
months ended March 31, 2000 were $29,271 which compares with $29,271 for the
three months ended March 31, 1999. These costs are primarily the result of the
one remaining property becoming more fully depreciated.
INTEREST EXPENSE. For three months ended March 31, 2000, interest expense
totaled $97,121 as compared to $105,153 for the same period in 1999. This
decrease in interest expense is the result of principal reduction on mortgages
payable.
ADVISORY AND OTHER FEES. Advisory and other fees consist of the fees charged by
Harbor American Capital Group, the advisor to the Trust. For the three months
ended March 31, 2000, advisory and other fees totaled $7,500.
DIRECTORS FEES AND EXPENSES. Director's fees and expenses for the three months
ended March 31, 2000 were $8,250. 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 three months
ended March 31, 2000 were $20,123 which compares with $12,913 for the three
months ended March 31, 1999. This increase was due primarily to annual audit
costs.
LIQUIDITY AND SOURCES OF CAPITAL
Cash increased from $76,285 at December 31, 1999 to $100,856 at March 31, 2000.
Accounts payable and accrued expenses increased from $67,413 at December 31,
1999 to $112,783 at March 31, 2000. The increase is the result of the timing of
payments of certain operating expenses. Mortgage notes payable decreased from
$4,325,404 at December 31, 1999 to $4,134,185 at March 31, 2000. The decrease is
the result of payments of principal on mortgaged property. Distributions in
excess of net earnings increased from ($4,377,552) at December 31, 1999 to
($4,399,749) at March 31, 2000.
14
<PAGE>
The Trust has relied solely on rental income to pay its expenses in 1999 and
1998. Cash flows provided by operations were ($215,790) for the three months
ended March 31, 2000 as compared to $50,679 for the same period in 1999. This
increase resulted from receipt of the Bayshore sale deposit.
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
March 31, 2000, the Trust had one property remaining, thus limiting cash flows
available to pay operating expenses. Mortgage notes payable on the Trust's
properties mature on November 30, 2000. The current maturity of all of the
Trust's notes payable and accumulated recurring operating losses 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, a 150 bed skilled and intermediate
care nursing home facility in North Miami Beach, Florida, 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 PNC Bank, N.A., Louisville,
Kentucky (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.
INTENDED SALE OF BAYSHORE AND RELATED LEASE
At January 1, 1999, Bayshore was leased under an operating agreement to
Bayshore Healthcare Services, Inc., an Arizona corporation ("BHS"). See Item 2.
DESCRIPTION OF PROPERTY - The Bayshore Lease. BHS is an affiliate of the Trust
as it is owned by James R. Sellers, an affiliate of the Advisor. Effective
August 30, 1999, the lease with BHS was cancelled and the Trust and BHS,
collectively hereinafter referred to as the "Sellers", and Abraham Shaulson,
hereinafter referenced as the "Buyer", entered into a Purchase and Sale
Agreement (the "Original Agreement"), dated as June 3, 1999, as amended by
Amendment to Purchase and Sale Agreement (the "Amendment," which together with
the Original Agreement is hereinafter collectively referred to as the
"Agreement"), dated as of August 31, 1999. Under the Agreement, Sellers have
agreed to sell all of the real estate, personal property, inventory, trademarks
and other intangibles, and patient contracts (collectively, the "Assets") to
Buyer with respect to the Bayshore Convalescent Center ("Bayshore") located at
16650 West Dixie Highway, Miami, Florida. Excepted from the Asset sale is all
cash, accounts receivables, prepaid expenses, notes receivable and personal
property of the residents at Bayshore.
Buyer agreed to pay Sellers $5,750,000 (the "Purchase Price") for Sellers'
Assets as follows:
(i) $350,000 (the "Deposit") from Buyer to Sellers as a nonrefundable
deposit except in the event of a default by Sellers under the
Agreement; and
(ii) The balance of the purchase price due on the closing date scheduled on
or before October 31, 2000 (the "Closing Date").
The Agreement provides for the allocation of the Purchase Price between the
Sellers in accordance with a schedule that will be attached to the Agreement. To
date, the Sellers have not made an allocation to disclose on the schedule that
the Sellers will attach to the Agreement.
15
<PAGE>
With the execution of the Amendment, the Buyer deposited $150,000 into a
separate interest bearing account of Sellers. The proceeds in this account are
for capital improvements to Bayshore, as described in the Agreement. Buyer is
responsible for the completion of the improvements. Buyer submits evidence of
the completion of the improvements and costs to Sellers for reimbursement by
Sellers. Upon the closing of the sale under the Agreement, any amount not used
for the completion of improvements shall be applied to the Purchase Price. If
the Asset sale fails to close by the Closing Date for any reason other than a
default by the Sellers, any amount not used for capital improvements shall
become the property of the Sellers.
Pending the closing of the sale under the Agreement, Sellers have agreed to
have the Registrant lease Bayshore to a Buyer affiliate. The terms of the Lease
(the "Watercrest Lease"), dated as of July 30, 1999, from the Registrant to
Watercrest Nursing and Rehabilitation Center, Inc. (the "Lessee"), are as
follows:
The initial term of the Watercrest Lease commenced September 1, 1999 and
ends October 31, 2000. The base rent for Bayshore is $47,814 per month payable
on the 20th day of each calendar month plus such additional amounts that may be
necessary to cover the debt service under the loan agreement between the
Registrant and any mortgagee of Bayshore. Lessee assumes the obligation to pay
all taxes and other charges which arise out of Bayshore. Lessee is responsible
for all utilities, insurance premiums related to the premises including a $2,500
monthly insurance administration fee due the Registrant for monitoring the
insurance coverage of Bayshore.
In the event of a partial condemnation or damage to or destruction of
Bayshore, which does not render Bayshore unsuitable for its primary intended
use, the rent shall be abated to the extent that it is fair, just and equitable
to both the Registrant and Lessee. The primary intended use of the property is
as a health care facility licensed for skilled and intermediate long-term
nursing services. Lessee covenants in the Lease to operate Bayshore in
accordance with the primary intended use and to maintain its qualifications for
licensure and accreditation. Under the Watercrest Lease, Lessee may enter into a
management agreement with the prior written consent of the Registrant and any
mortgagee of Bayshore, subject to the payment of the management fees being
subordinate to all sums due under the Lease.
The Watercrest Lease requires the Lessee to maintain Bayshore in good order
and repair. Lessee is responsible for the cost of any capital additions to
Bayshore which shall be deemed a leasehold improvement. The Watercrest Lease
further requires the Lessee to spend the $150,000 referred to above on
improvements to Bayshore. As of March 24, 2000, Lessee has spent $65,000
primarily on computer equipment, floor coverings, window frame and glass
replacements and exterior painting. Lessee may not create or allow to remain on
the premises of Bayshore any lien or encumbrance on Bayshore. Lessee may,
however, contest any taxes, insurance requirements, liens or encumbrances so
long as Lessee shall provide reasonable security in the event any such lien,
taxes, insurance requirements or encumbrance exceeds $50,000.
Lessee must maintain all-risk insurance in an amount equal to the
replacement costs of Bayshore, boiler insurance, business interruption insurance
covering the Registrant's risk of loss, comprehensive public liability insurance
in an amount not less than $4 million per occurrence for injuries and $2 million
for property damage, malpractice insurance in an amount of not less than $5
million for each person and $10 million for each occurrence, and flood insurance
if Bayshore lies in a flood plain area.
Insurance proceeds as a result of loss or damage to Bayshore are payable to
the Registrant for reconstruction or repair of Bayshore. If Bayshore is totally
16
<PAGE>
or substantially destroyed from a risk covered by insurance, Lessee, subject to
the rights of any mortgagee, shall have the option to restore Bayshore or
acquire Bayshore at fair market value or terminate the Watercrest Lease. If
Bayshore is destroyed from a risk not covered by insurance, the Registrant may
elect to restore Bayshore or absent such an election Lessee may terminate the
Lease.
A partial condemnation of Bayshore so long as Bayshore is not rendered
unsuitable for its primary intended use, shall not cause a termination of the
Watercrest Lease. If the condemnation causes Bayshore to be rendered unsuitable
for its primary intended use, then Lessee has the right to restore Bayshore at
its own expense, to acquire Bayshore for fair market value or terminate the
Watercrest Lease. In the event Lessee or its affiliate purchases Bayshore, any
condemnation award belongs to Lessee, otherwise the award belongs to the
Registrant.
An event of default occurs upon:
(i) the existence of an event of default under any other lease between
the Registrant and Lessee;
(ii) failure of Lessee to make a rental payment under the Watercrest Lease
and such failure continues for a period of 10 days after receipt of
written notice;
(iii) Lessee's failure to observe or perform any other term, covenant or
condition of the Watercrest Lease and such failure is not cured
within 30 days after receipt of notice;
(iv) bankruptcy of Lessee;
(v) voluntary cessation of operations by Lessee at Bayshore for a period
of longer than 30 days; or
(vi) failure of Lessee to provide financial statements or copies of
required licensing information, to maintain quarterly cash flow of
not less than 125% of minimum rent or to operate Bayshore for its
primary intended use.
If an event a default shall have occurred and be continuing, the Registrant
may terminate the Watercrest Lease. The Registrant may not remove Lessee from
Bayshore until the Registrant provides for a substitute operator acceptable to
any Bayshore mortgagee. Notwithstanding termination of the Watercrest Lease,
Lessee is responsible for all rent due and payable with respect to Bayshore. In
addition, if an event of default shall have occurred and be continuing the
Registrant may require Lessee to purchase Bayshore for the Purchase Price plus
all rent then due and payable. If Lessee fails to perform under the Watercrest
Lease and is removed from Bayshore, such action by the Registrant shall not be
deemed an eviction of Lessee.
Lessee agrees to indemnify the Registrant against all liabilities arising
from the operation of Bayshore. Lessee may not, without the prior written
consent of the Registrant and any mortgagee, assign the Lease or sublet any part
of Bayshore.
BHS owns all personal property used at Bayshore. The Lessee is not paying
any consideration for the personal property and upon termination of the
Watercrest Lease, all the personal property shall be deemed owned by BHS.
The Registrant agrees to indemnify the Lessee from:
(i) any liability arising from any breach of representations, warranties,
covenants or agreements made in the Lease;
(ii) any overpayment or assessment relating to Bayshore from the Medicare
or Medicaid programs;
17
<PAGE>
(iii) any claims by any creditor incurred by Bayshore prior to the
effective date of the Watercrest Lease; and
(iv) any claim arising out of operation of Bayshore prior to the effective
date of the Watercrest Lease.
In the event either Medicaid or Medicare withholds, recoups or offsets any
payment due the Lessee for claims arising prior to the effective date of the
Watercrest Lease, the Registrant agrees to immediately reimburse Lessee for such
withholding, recoupment or offset. Notwithstanding other terms of the Watercrest
Lease, the Lessee may offset any payments that the Registrant fails to make in
this situation from the monthly rent and insurance administration fee. Any
amounts due to the Lessee from the Registrant as a result of the unreimbursed
Medicaid or Medicare payments shall bear interest at 10% per annum until paid by
the Registrant to the Lessee.
One of the principal conditions to the closing of the sale of Bayshore is
the shareholder approval of the sale by the Registrant's shareholders. If
Sellers had not obtained shareholder approval at least six (6) months prior to
the end of the Watercrest Lease, Buyer had the option to extend the Watercrest
Lease for three one-year renewal terms with a rent increase equal to the
consumer price index increase for the preceding twelve (12) months. Such
shareholder approval was received and on February 10, 2000, the Trust Board of
Directors accepted the Inspector of Elections count of 271,162.4806 as an
appropriate number of votes in excess of the required two-thirds super majority.
Under the terms of the Agreement, Buyer was required to file applications
for the appropriate licenses to operate Bayshore with the applicable licensing
agencies by September 30, 1999, with all licenses to be issued on or before
December 31, 1999. This was accomplished effective September 1, 1999. Buyer
further agrees to indemnify and hold Sellers harmless from all liabilities
arising in connection with the operation of Bayshore from and after the date of
the Watercrest Lease until the Closing Date.
The Agreement contains Sellers' representations and warranties related to,
among others:
(i) due organization and existence;
(ii) authorization of the Agreement;
(iii) good title to the real and personal property of Bayshore;
(iv) the operating condition of the buildings and appurtenances on the
real estate;
(v) proper licensing for operation of Bayshore as a 150 bed nursing
home;
(vi) payment of real estate taxes;
(vii) fair presentation of the financial condition and results of
operations of Bayshore as contained in the financial statements
Sellers have delivered to Buyer;
(viii) no pending labor problems with the existing union at Bayshore;
(ix) no material and adverse litigation with respect to Bayshore;
(x) proper filing of all taxes, tax returns and cost reports;
(xi) sufficient insurance coverage with respect to Bayshore; and
(xii) no environmental claims.
The Agreement contains Buyer's warranties and representations related to due
organization and existence, and proper authorization of the Agreement, among
others.
Conditions to the Buyer's obligation to consummate the Agreement include:
(i) no adverse change in Bayshore and the Sellers' Assets;
(ii) Sellers' compliance with the terms of the Agreement;
18
<PAGE>
(iii) Buyer's receipt of a commitment to finance the Assets on terms
reasonably acceptable to Buyer;
(iv) no material and adverse litigation affecting Bayshore or the Sellers'
Assets;
(v) the patient census shall not be less than 113 with Medicaid certified
beds to be 115 and Medicare certified beds to be 16; and
(vi) Buyer's receipt of evidence that all cost reports of Sellers required
to be filed prior to the Closing Date have been timely filed.
Conditions to the Sellers' obligation to close the sale of Bayshore include
Buyer's continuing compliance with the Agreement, no litigation pending against
Buyer questioning the legality of the transactions under the Agreement, and
Sellers' receipt of shareholder approval of the sale of Sellers' Assets. Such
shareholder approval was secured effective February 10, 2000
Closing adjustments to the Purchase Price shall include proration of:
(i) real estate taxes;
(ii) water, sewage and electricity charges;
(iii) fees for customer annual or periodic licenses and permits;
(iv) employee wages and related payroll taxes and expenses; and
(v) charges on service and maintenance agreements.
Sellers shall also be responsible for the payment of real estate brokerage
commissions. Buyer and Sellers shall pay equally all closing costs including
documentary stamp taxes, county surtax, recording fees and title insurance
premiums.
Sellers jointly and severally indemnify Buyer for, among others items:
(i) liabilities and obligations of Sellers arising prior to the Closing
Date unless otherwise expressly assumed by Buyer;
(ii) damages or deficiencies resulting from any misrepresentation, breach
of warranty or nonfulfillment of any obligation on the part of
Sellers;
(iii) any retroactive payments due to the State of Florida or the United
States for periods prior to the closing unless specifically assumed
by Buyer; and
(iv) liabilities arising out of the transfer of funds or property by any
patient to the Sellers prior to the Closing Date.
Buyer indemnifies Sellers for, among other items:
(i) liabilities of Sellers arising after the Closing Date and expressly
assumed by Buyer or relating to the operation of Bayshore by Buyer;
or
(ii) any damage or deficiency resulting from any misrepresentation, breach
of warranty or nonfulfillment of any obligation on the part of Buyer
under the Agreement.
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 experienced no financial or operational impact related to Year
2000 issues. Insofar as could be determined, the Trust's relationship with
19
<PAGE>
suppliers, vendors and other third parties were not adversely affected by the
Year 2000 concerns.
Bayshore is substantially dependent on Medicaid reimbursements from the
State of Florida. There were no identifiable computer problems resulting in the
failure of the State of Florida to make Medicaid payments.
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.
20
<PAGE>
HEALTHCARE INVESTORS OF AMERICA, INC.
PART II - OTHER INFORMATION
Item 1 through 4 and Item 6. Not Applicable.
Item 5. Other Information
The Trust entered into a Purchase and Sale Agreement dated June 3, 1999 with
Abraham Shaulson. See above under Liquidity and Sources of Capital.
21
<PAGE>
HEALTHCARE INVESTORS OF AMERICA, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
HEALTHCARE INVESTORS OF AMERICA, INC.
(Registrant)
Date: May 15, 2000 /s/ F. Dale Markham
---------------------------------------
F. Dale Markham
Director, President and Chief Financial
Officer (Principal Executive, Financial
and Accounting Officer)
22
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