SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 1996
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: 0-19815
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THE STANDISH CARE COMPANY
- - --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
DELAWARE 04-3069586
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
SIX NEW ENGLAND EXECUTIVE PARK, BURLINGTON, MA 01803
- - --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(617)270-4500
- - --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has 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__
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT MAY 14, 1996
----- ---------------------------
Common Stock, $.01 par value 3,435,826 shares
THE STANDISH CARE COMPANY
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets 2
Consolidated Statements of Operations 3
Consolidated Statements of Cash Flows 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
</TABLE>
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
--------- ------------
(Unaudited)
ASSETS
------
<S> <C> <C>
Current assets:
Cash and cash equivalents .............................. $ 649,715 $ 367,631
Restricted cash ........................................ 230,149 199,719
Accounts receivable, less allowance for
doubtful accounts of $102,790 and $448,425
at March 31, 1996 and December 31, 1995, respectively 134,787 176,818
Note receivable ........................................ -- 2,835
Due from related parties ............................... 98,131 437,234
Other current assets ................................... 111,970 53,790
------------ ------------
Total current assets ................................... 1,224,752 1,238,027
Restricted deposits ......................................... 610,732 610,732
Assets held for sale ........................................ -- 24,471
Investment in Adams Square Limited Partnership .............. 127,000 127,000
Investment in Cornish Realty Associates, L.P. ............... 125,000 125,000
Note receivable ............................................. 46,794 50,467
Due from related parties, less allowance for
doubtful accounts of $50,000 and $0
at March 31, 1996 and December 31, 1995, respectively 230,215 130,215
Property, plant and equipment, net .......................... 11,007,425 11,079,454
Prepaid lease deposit, net .................................. 523,317 539,843
Non-compete agreement, net .................................. 200,306 219,671
Resident leases, net ........................................ 164,562 176,979
Goodwill, net ............................................... 1,492,000 1,504,000
Other assets, net ........................................... 41,644 148,972
------------ ------------
Total assets ........................................... $ 15,793,747 $ 15,974,831
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ....................................... $ 437,239 $ 522,992
Accrued payroll and related taxes ...................... 223,359 217,304
Accrued severance costs ................................ 203,874 232,874
Accrued professional fees .............................. 457,080 570,997
Resident security deposits ............................. 160,129 172,945
Current portion of long-term debt ...................... 853,853 626,298
Other current liabilities .............................. 345,235 478,999
------------ ------------
Total current liabilities .............................. 2,680,769 2,822,409
Deferred gain on sale of bonds .............................. 520,815 520,815
Long-term debt .............................................. 12,456,447 12,457,003
Minority interest ........................................... 137,863 156,970
Commitments and contingencies
Stockholders' equity
Preferred stock (aggregate liquidation preference of
$1,309,300 and $1,281,175 at March 31, 1996
and December 31, 1995, respectively) .............. 1,125,000 1,125,000
Common stock, $.01 par value
30,000,000 shares authorized and
3,435,826 shares issued and outstanding
at March 31, 1996 and December 31, 1995 ............. 34,359 34,359
Additional paid-in capital ............................. 8,749,060 8,746,096
Accumulated deficit .................................... (9,910,566) (9,887,821)
------------ ------------
Total stockholders' (deficit) equity ................... ($ 2,147) 17,634
------------ ------------
Total liabilities and stockholders' equity ............. $ 15,793,747 $ 15,974,831
============ ============
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements
2
<TABLE>
<CAPTION>
For the three months ended
March 31, March 31,
1996 1995
------------ ------------
(unaudited)
<S> <C> <C>
Revenues:
Service revenue ........................... $ 2,187,209 $ 1,642,534
Management fees and marketing revenue ..... 125,444 109,070
Development fees and other revenue ........ 11,250 38,000
----------- -----------
2,323,903 1,789,604
Operating costs and expenses:
Community operating expense ............... 1,582,304 1,301,797
Community rent expense .................... 149,771 129,547
Selling, general and administrative expense 467,326 533,552
Merger termination costs .................. 158,971 --
Depreciation and amortization expense ..... 196,632 151,871
----------- -----------
Total operating costs and expenses ........ 2,555,004 2,116,767
----------- -----------
Loss from operations ........................... (231,101) (327,163)
Interest expense ............................... (417,649) (308,073)
Interest income ................................ 10,648 39,323
Other income (Note K) .......................... 596,249 --
Minority interest .............................. 19,108 25,688
----------- -----------
Loss before income taxes ....................... (22,745) (570,225)
Provision for income taxes ..................... -- --
----------- -----------
Net loss ....................................... ($ 22,745) ($ 570,225)
=========== ===========
Net loss per common share ...................... ($ 0.01) ($ 0.18)
Weighted average number of common
shares outstanding ........................ 3,435,826 3,395,152
=========== ===========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements
3
<TABLE>
<CAPTION>
For the three months
ended March 31,
-------------------
1996 1995
------ ------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss ....................................................... $ (22,745) $(570,225)
Adjustments to reconcile net loss
to net cash used by operating activities:
Depreciation and amortization ............................. 196,632 151,871
Accretion associated with capital lease obligations ....... 50,325 50,325
Other income (Note K) ..................................... (596,249) --
Costs associated with discontinued business combination ... 158,971 --
Provision for corporate related party accounts ............ 50,000 --
Provision for facility doubtful accounts .................. 7,500 9,000
Amortization of deferred costs ............................ 11,835 17,292
Minority interest in net (loss) of consolidated partnership (19,108) (25,688)
Compensation expense associated with issuance of warrants . 3,167 --
Decrease in restricted cash .................................... -- 21,233
Decrease (increase) in accounts receivable ..................... 34,531 (12,428)
Increase in interest receivable ................................ -- (29,130)
Decrease in note receivable .................................... 6,508 --
Decrease in due from related parties ........................... 189,103 106,947
Increase in other current assets ............................... (58,180) (20,037)
Decrease in accounts payable ................................... (85,753) (162,513)
Increase in accrued payroll and related taxes .................. 6,055 52,851
(Decrease) increase in accrued professional fees ............... (113,917) 1,944
Decrease in accrued severance costs ............................ (29,000) --
Decrease in other current liabilities .......................... (133,764) (25,889)
--------- ---------
Net cash used by operating activities .......................... (344,089) (434,447)
--------- ---------
INVESTING ACTIVITIES:
Additions to property, plant and equipment ..................... (61,724) (47,355)
Refundable deposits tendered ................................... -- (25,000)
Line of credit to related party ................................ (150,000) --
(Decrease) increase in security deposits ....................... (12,816) 9,651
Decrease in assets held for sale ............................... (24,471) --
Return of previous investment in Cornish Realty Associates, Ltd. -- 125,000
Use of prepaid deposit ......................................... -- 516
Proceeds from sale of bonds .................................... 825,554 --
Funds set aside for credit enhancement escrow .................. (50,000) --
Decrease (increase) in other assets ............................ 93,761 (40,515)
--------- ---------
Net cash provided by investing activities ...................... 620,304 22,297
--------- ---------
FINANCING ACTIVITIES:
Expenses from proposed business combination ............... (158,971) --
Proceeds from borrowings .................................. $ 250,000 $ 515,000
Payment of Convertible Preferred Stock dividends .......... -- (32,012)
Repayment of debt ......................................... (73,922) (14,099)
Principal payments on capital lease obligations ........... (11,238) (11,086)
--------- ---------
Net cash provided by financing activities ...................... 5,869 457,803
--------- ---------
Net increase in cash and cash equivalents ...................... 282,084 45,653
--------- ---------
Cash and cash equivalents at beginning of year ................. 367,631 232,716
--------- ---------
Cash and cash equivalents at end of year ....................... $ 649,715 $ 278,369
========= =========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements
4
THE STANDISH CARE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PART I - FINANCIAL INFORMATION
A. BASIS OF PRESENTATION
The accompanying financial statements and notes do not include all of the
disclosures made in the Company's Annual Report on Form 10-K and Form 10-K/A for
1995, which should be read in conjunction with these statements. The financial
information included herein, with the exception of the consolidated balance
sheet at December 31, 1995, has not been audited. However, in the opinion of
Management, the financial statements include all adjustments necessary for a
fair presentation of the quarterly results. The results of the three month
period ended March 31, 1996 are not necessarily indicative of the results to be
expected for the full year.
B. RESTRICTED CASH
Restricted cash consists of the following:
<TABLE>
<CAPTION>
March 31, 1996 December 31, 1995
-------------- -----------------
(Unaudited)
<S> <C> <C>
Resident security deposits $161,447 $172,945
Capital improvements reserve - Bailey 4,032 15,481
Expansion funds - Piedmont 10,409 10,261
Real estate tax escrow - Sunny Knoll 4,261 1,032
Credit enhancement escrow - Fox Ridge Manor 50,000 --
----------- -----------
$230,149 $199,719
======== ===========
</TABLE>
C. RELATED PARTY TRANSACTIONS
The Company has conducted various transactions with its officers, directors,
principal stockholders and/or their affiliated companies and unconsolidated
affiliates. Accounts affected by these transactions were as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1996
--------------
(Unaudited)
<S> <C>
Accounts receivable from Carriage Hill Retirement Center, Inc. ("Carriage Hill")
owned by Emeritus Corporation ("Emeritus") for management fees 8,750
Accounts receivable from Emeritus for management fees and reimbursable expenses 29,265
Accounts receivable from Cornish for management and reimbursable expenses 17,260
Accounts receivable from Adams Square Limited Partnership for management
and marketing fees and reimbursable expenses 42,856
Accounts receivable from Cornish affiliates for repayment of the Company's
investment and related interest 99,545
Note receivable from Adams Square Limited Partnership 23,170
Loans to officers 7,500
Note receivable from Northwood Retirement, Inc. 100,000
Management fees and marketing revenue from Emeritus 14,900
</TABLE>
5
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1996
--------------
(Unaudited)
<S> <C>
Management fee revenue from Cornish 39,150
Marketing fee revenue from Adams Square Limited Partnership 54,931
Expenses incurred through or reimbursed to stockholders, officers, directors and
their affiliates:
Selling and marketing $33,781
General and administrative 2,000
</TABLE>
D. RESTRICTED DEPOSITS
Restricted deposits consists of the following:
<TABLE>
<CAPTION>
March 31, 1996 December 31, 1995
-------------- -----------------
(Unaudited)
<S> <C> <C>
Cash collateral for letter of credit-Dominion $231,200 $231,200
Cash collateral for letter of credit-Lowry 65,000 65,000
Cash collateral for letter of credit-Piedmont 237,750 237,750
Debt service reserve-Bailey refinancing 61,032 61,032
Debt service reserve-SLI bonds (until March 27,
1996) and Northwood Bonds (thereafter) 15,750 15,750
----------- -----------
$610,732 $610,732
======== ========
</TABLE>
The letters of credit are required under the terms of the lease agreements for
Dominion, Lowry and Piedmont. The letters of credit are required to stay in
place for the duration of the leases. The Bailey debt service reserve is
required to stay in place for the five-year life of the loan. The debt service
reserve fund related to the Northwood Bonds represents approximately two months
of interest on the face amount of $750,000 of Northwood Bonds (as defined in
Note K) outstanding for which the Company provided certain credit enhancements
in the form of guarantees in March 1996 (Note K).
E. PROPERTY, PLANT & EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
March 31, 1996 December 31, 1995
-------------- -----------------
(Unaudited)
<S> <C> <C>
Land $ 1,616,628 $ 1,616,628
Land improvements 24,864 21,964
Furniture, fixtures & equipment 1,235,057 1,221,239
Buildings & improvements 9,359,001 9,313,995
-------------- --------------
12,235,550 12,173,826
Less accumulated depreciation (1,228,125) (1,094,372)
-------------- --------------
$11,007,425 $11,079,454
============== ==============
</TABLE>
F. OTHER ASSETS
Other assets consists of the following:
<TABLE>
<CAPTION>
March 31, 1996 December 31, 1995
-------------- -----------------
(Unaudited)
<S> <C> <C>
Investment in SLI $ -- $ 100,000
Closing costs associated with the Bailey refinancing 22,930 24,670
Organizational costs 8,881 9,712
Security deposits 9,833 13,587
Other -- 1,003
--------- -----------
$41,644 $148,972
========= ===========
</TABLE>
6
G. SHORT-TERM BORROWINGS AND LONG-TERM DEBT
Short-term borrowings and long-term debt consist of the following:
<TABLE>
<CAPTION>
March 31, 1996 December 31, 1995
-------------- -----------------
(Unaudited)
<S> <C> <C>
Mortgages Payable:
Bailey Mortgage payable with interest at the one-month London Interbank
offered rate for US dollars plus 2.25% (7.69% at March 31, 1996),
principal payable monthly in varying amounts. All remaining principal and
interest due in February 1999,
collateralized by real estate. $ 927,411 $ 936,804
Sunny Knoll Mortgage Payable with interest equal to the base rate of Primary
Bank plus 1.75% (10.75% at March 31, 1996), principal payable monthly in
varying amounts, all remaining
principal due April 1997, collateralized by real estate. 742,569 744,764
Notes payable:
Note payable with 9% interest, principal payments of varying amounts and
interest payable over five years. All remaining
principal and interest due January 1999. 62,044 66,853
Note payable with interest at First Union Bank and Trust's prime rate plus
1% (9.25% at March 31, 1996), payable in fifty-nine installments of $833
each month. All remaining principal and
interest due in December 2000, collateralized by real estate 137,500 140,000
Note payable with 9.47% interest and principal due December
1999, collateralized by automobile 13,381 14,901
Notes payable with 9% interest and principal payments in
varying amounts due February 1997 147,782 149,430
Note payable to a minority partner with 8% interest, entire principal
balance is due April 1997 137,500 137,500
Note payable to Adams Square L.P., interest-free, due on demand 127,000 127,000
Note payable with 12% interest through April 1996, and 14%
thereafter, entire principal due April 1997 1,100,000 1,100,000
Note payable to Emeritus with 10% interest, quarterly principal payments
based on excess cash flow, all remaining principal due due April 1998,
collateralized by the Company's stock in
Sunny Knoll 499,878 551,732
Note payable to Integrated Health Services, Inc. with 8.5%
interest payable semi-annually. Under certain circumstances,
$100,000 could become due prior to January 15, 1998.
Otherwise, entire principal is due in January 1998. 250,000 --
Deferred liability associated with the Piedmont operating lease 172,079 160,244
------------- -------------
Subtotal 4,317,144 4,129,228
Convertible debentures with 8.5% interest due in June 1998,
convertible to common stock at $4.16 per share 2,000,000 2,000,000
Capital lease obligations 6,993,156 6,954,073
------------- -------------
Subtotal 13,310,300 13,083,301
Less current maturities 853,853 626,298
------------- -------------
Long-term debt $12,456,447 $ 12,457,003
=========== ==============
</TABLE>
7
H. OMISSION OF PREFERRED STOCK DIVIDEND
On March 29, 1996, the Company's Board of Directors voted to omit the $.25
quarterly dividend on the Series A Cumulative Convertible Preferred Stock
("Convertible Preferred Stock") for the quarter ended March 31, 1996. These
dividends, although not declared or paid, remain cumulative without interest.
Failure to pay any quarterly dividend results in a reduction of the conversion
price of the shares of Common Stock issuable upon conversion of the Convertible
Preferred Stock. As a result of omitting more than four quarterly dividend
payments, holders of the Convertible Preferred Stock are entitled to vote, on a
one vote per share of Convertible Stock basis, with the holders of Common Stock
on all matters submitted to stockholders including the election of directors.
I. EARNINGS PER SHARE
Net loss per common share is computed by dividing the net loss for the period
plus any dividends accrued, paid or in arrears on the Company's Convertible
Preferred Stock by the weighted average number of outstanding shares of common
stock. Dividends paid in the three month periods ended March 31, 1996 and March
31, 1995 totaled $0 and $32,013, respectively. As of March 31, 1996, aggregate
dividends in arrears on the Convertible Preferred Stock totaled approximately
$184,300 and the conversion price of the Preferred Stock was $3.50 (subject to
anti-dilution adjustments).
J. PRO FORMA RESULTS OF OPERATIONS
The following represents the unaudited pro forma results of operations as if
Sunny Knoll was acquired at the beginning of 1995:
<TABLE>
<CAPTION>
For Three Months Ended
March 31, 1995
--------------
(Unaudited)
<S> <C>
Net revenues $2,088,707
Loss before extraordinary items (469,592)
Net loss 469,592
Net loss per common share $ (.15)
</TABLE>
The pro forma operating results include results of operations for the three
months ended March 31, 1995 with increased depreciation and amortization on
property, plant and equipment associated with the acquisition of Sunny Knoll.
The pro forma information given above does not purport to be indicative of the
results that actually would have been attained if the operations were combined
during the period presented, and is not intended to be a projection of future
results or trends.
K. COMMITMENTS AND CONTINGENCIES
Working Capital Loan
On January 16, 1996, pursuant to a letter of intent for a then proposed
business combination, Integrated Health Services, Inc. ("IHS") loaned the
sum of $250,000 to the Company for working capital purposes. In February
1996, IHS informed the Company that it was terminating their business
combination discussions. This loan could become repayable to IHS in
accordance with a promissory note which bears interest at 8.5%, interest
payable semi-annually. Under certain circumstances up to $100,000 of the
promissory note could become payable prior to the maturity date of January
15, 1998. On or about April 9, 1996, the Company asserted a claim against
IHS based on IHS's unilateral breach of its contractual obligations under
its letter of intent with the Company as well as for its duties of good
faith and fair dealing. In addition, the Company has asserted claims that
IHS's conduct constitutes unfair and deceptive trade practices under
applicable Massachusetts law. Although no law suit has been commenced by
the Company, the Company intends to vigorously pursue its claims against
IHS.
8
Fox Ridge Manor Transaction
On March 25, 1996, the Company received approximately $825,000 in back
management fees, prior investments and advances in connection with the
refinancing and sale by a third party owner of the Fox Ridge Manor
community located in Dover, Pennsylvania. The Company recorded a gain of
approximately $596,000 related to this transaction in the first quarter of
1996. That community had been owned by Senior Lifestyles, Inc. ("SLI"), an
unrelated third party, and the Company had managed that community for SLI
since July 1992. The Company has been retained by the new owner, Northwood
Retirement Community, Inc. ("Northwood"), a Pennsylvania not-for-profit
corporation, to manage the Fox Ridge community under a three year
management agreement (with two 1 year renewable options). The Company
expects to receive management fees in a fixed monthly amount of
approximately $5,200 plus an additional incentive management fee of
approximately 2% of monthly operating revenues during the term of its new
management agreement. Under certain circumstances, the fixed and incentive
management fees may be subordinate to payments due certain holders of bonds
issued in connection with the acquisition of Fox Ridge by the new owner.
Simultaneously with its management agreement, the Company made available to
Northwood a $150,000 line of credit to be used by the new owner in
connection with the Fox Ridge Manor community. In connection with these
transactions, SLI bonds in the face amount of $900,000 (the "Group A SLI
Bonds") resold by the Company to an investor group in 1993 and guaranteed
by the Company as to the payment of interest and principal, were refinanced
and exchanged for new subordinated 1996 Series C Bonds (the "Northwood
Bonds") in the face amount of $800,000. Of these bonds, $750,000 face
amount are held for the benefit of the investor group and $50,000 are held
for the benefit of the Company. The Company has provided credit enhancement
commitments to the investor group with respect to the $750,000 1996 Series
C bonds. Reference is made to the financial statements and the footnotes to
the financial statements included under Part I of this report.
L. RECLASSIFICATION
Certain amounts in the 1995 consolidated financial statements have been
reclassified to conform with the 1996 presentation.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The Standish Care Company (the "Company" or "Standish") is a long term care
services company which operates assisted living communities throughout the
eastern United States. The Company also provides management, marketing,
development and other services to third party owners of assisted living
communities.
Since its organization in October 1989, the Company has achieved significant
growth in revenues, primarily by acquiring existing senior living communities
and by providing management, marketing, development and other services to
communities owned by third parties, but it has not realized income from
operations. The Company operates ten communities for its own account, consisting
of 388 units and 535 beds, and provides managing and marketing services for
communities consisting of 318 units and 385 beds. For the three months ended
March 31, 1996, the Company generated total revenues of $2,324,000, and incurred
a loss from operations of $231,000.
In February 1996, the Company consummated agreements with Cornish Realty
Associates, L.P. ("Cornish") and the principals of its corporate general
partner. Under the agreements, the Company agreed to resign as the manager of
Laurelmead effective April 1, 1996. In addition, the Company sold its limited
partnership investment interest in Cornish to the two principals of the
corporate general partner for an amount equal to the sum of the Company's then
remaining $125,000 capital investment in Cornish plus an amount equivalent to
the accrued priority return on that capital investment less certain adjustments.
The net amount due the Company of $215,000 is payable as follows: monthly
installments of $10,000 each for the months of May through October 1996, the sum
of $80,000 in December 1996 and the sum of $75,000 in December 1997.
On March 15, 1996, the Company and Emeritus jointly announced the signing of an
agreement in principal to merge in a tax-free stock-for-stock transition. On May
6, 1996, the Company announced it had terminated merger discussions with
Emeritus. The Company and Emeritus could not reach agreement on an exchange
ratio.
On March 25, 1996, the Company received approximately $825,000 in back
management fees, prior investments and advances in connection with the
refinancing and sale by a third party owner of the Fox Ridge Manor community
located in Dover, Pennsylvania. The Company recorded a gain of approximately
$596,000 related to this transaction in the first quarter of 1996. That
community had been owned by Senior Lifestyles, Inc. ("SLI"), an unrelated third
party, and the Company had managed that community for SLI since July 1992. The
Company has been retained by the new owner, Northwood Retirement Community, Inc.
("Northwood"), a Pennsylvania not-for-profit corporation, to manage the Fox
Ridge community under a three year management agreement (with two 1 year
renewable options). The Company expects to receive management fees in a fixed
monthly amount of approximately $5,200 plus an additional incentive management
fee of approximately 2% of monthly operating revenues during the term of its new
management agreement. Under certain circumstances, the fixed and incentive
management fees may be subordinate to payments due certain holders of bonds
issued in connection with the acquisition of Fox Ridge by the new owner.
Simultaneously with its management agreement, the Company made available to
Northwood a $150,000 line of credit to be used by the new owner in connection
with the Fox Ridge Manor community. In connection with these transactions, SLI
bonds in the face amount of $900,000 (the "Group A SLI Bonds") resold by the
Company to an investor group in 1993 and guaranteed by the Company as to the
payment of interest and principal, were refinanced and exchanged for new
subordinated 1996 Series C Bonds in the face amount of $800,000. Of these bonds,
$750,000 face amount are held for the benefit of the investor group and $50,000
are held for the benefit of the Company. The Company has provided credit
enhancement commitments to the investor group with respect to the $750,000 1996
Series C bonds. Reference is made to the financial statements and the footnotes
to the financial statements included under Part I of this report.
The Company anticipates an improvement in operating cash flow during the
remainder of 1996 as compared to 1995 primarily as a result of the Company's
continuing efforts to improve operating
10
performance of certain of the communities operated by it for its own account and
the expansion of its Statesville, North Carolina community. However, the Company
expects to continue to incur losses from operations through at least the third
quarter of 1996.
Of the ten communities currently operated by the Company for its own account,
two communities (Bailey and Sunny Knoll) are owned and the others are leased
under either capital lease or operating lease arrangements. Community rent
expense represents lease payments paid by the Company as lessee under operating
lease arrangements at its Piedmont Village and Bailey Suites communities.
The Company recognizes service revenue in the period in which it provides
services to residents at the communities that it operates for its own account.
Management fees and marketing revenue are realized in the period in which the
Company provides services. Development fees and other revenue are recorded when
the Company fulfills its contractual obligations and all contingencies for
payment are met.
The results of operations for the three months ended March 31, 1996 include the
accounts of the Company, Bailey Retirement Center, Inc., ("Bailey"), an assisted
living community in Gainesville, Florida which the Company acquired in July
1992, Dominion Villages, Inc. ("Dominion"), a chain of three assisted living
communities in the Tidewater, Virginia area which the Company acquired on
November 10, 1993, Lowry Village, Inc. ("Lowry"), a stand-alone Alzheimer's
facility in Tampa, Florida which the Company acquired in January 1994, Piedmont
Villages, Inc. ("Piedmont"), a chain of three assisted living facilities in
North Carolina which the Company acquired on March 2, 1994, Bailey Home Suites
("Bailey Suites"), an assisted living community in Gainesville, Florida which
the Company began leasing in September 1994 and Lakes Region, L.L.C. ("Sunny
Knoll"). The Company and Emeritus, through a limited liability company, acquired
51% and 49% ownership interests, respectively, in the Sunny Knoll community
located in Franklin, New Hampshire on May 1, 1995.
The results of operations for the three months ended March 31, 1995 include the
accounts of the Company, Bailey, Dominion, Lowry, Piedmont and Bailey Suites.
The following table sets forth the approximate percentage of the Company's total
revenues represented by certain items from the Company's consolidated financial
statements for the respective periods presented:
<TABLE>
<CAPTION>
For the Three Months Ended For the Three Months Ended
March 31, 1996 March 31, 1995
-------------- --------------
(Unaudited) (Unaudited)
<S> <C> <C>
Revenues:
Service revenue 94.1% 91.8%
Management fees and marketing revenue 5.4 6.1
Development fees and other revenue .5 2.1
------- ------
Total revenues 100.0% 100.0%
Operating costs and expenses:
Community operating expense 68.1 72.7
Community rent expense 6.5 7.3
Selling, general and administrative expense 20.1 29.8
Discontinued business combination costs 6.8 --
Depreciation and amortization expense 8.5 8.5
------- ------
Total operating costs and expenses 110.0 118.3
Income (loss) from operations (10.0) (18.3)
Interest expense (18.0) (17.2)
Interest income .5 2.2
Other income 25.6 --
Minority interest .8 1.5
------- ------
Loss before income taxes (1.1%) (31.8%)
==== =====
</TABLE>
The following table sets forth the approximate percentage of the Company's
service revenue represented by certain items from the Company's consolidated
financial statements for the respective periods presented:
<TABLE>
<CAPTION>
For the Three Months Ended For the Three Months Ended
March 31, 1996 March 31, 1995
-------------- --------------
(Unaudited) (Unaudited)
<S> <C> <C>
Service revenue 100.0% 100.0%
Community operating expense 72.3 79.2
Community rent expense 6.9 7.9
</TABLE>
11
Results of Operations
Three Months Ended March 31, 1996 Compared to the Three Months Ended March 31,
1995
Revenues
Revenues for the three months ended March 31, 1996 were $2,324,000,
representing an increase of $534,000 or 30% from revenues of $1,790,000 in
the comparable period in 1995.
Service revenue for the three months ended March 31, 1996 was $2,187,000,
representing an increase of $544,000 or 33% from service revenue of
$1,643,000 in the comparable period in 1995. Of this increase, $283,000 was
attributable to the acquisition of Sunny Knoll consummated in May 1995. The
remaining $261,000 increase in service revenue was attributable to an
increase in service revenue of communities operated by the Company
throughout both periods. This increase was primarily attributable to growth
in resident census and higher average rates charged for services provided
at these communities. The increase in service revenue was also attributable
to higher revenues at the Company's Statesville, North Carolina facility
which was expanded by approximately 20 beds in the fourth quarter of 1995.
Management fees and marketing revenue for the three months ended March 31,
1996 was $125,000, representing an increase of $16,000 or 15% from
management fee and marketing revenue of $109,000 in the comparable period
in 1995. The increase in management fees and marketing revenue in 1996 was
primarily due to increased management and marketing fees at two communities
the Company began providing management services during the fourth quarter
of 1995 and the first quarter of 1996. This increase was partially offset
by a decrease in management fees from a community in Bedford, Virginia
which the Company managed for Emeritus through December 31, 1995. Emeritus
began managing this facility effective January 1, 1996.
Development fees and other revenue for the three months ended March 31,
1996 was $11,000, representing a decrease of $27,000 or 71% from
development fees and other revenue of $38,000 in the comparable period in
1995. The decrease in development fee revenue was primarily attributable to
a development contract which expired during 1995. The Company recorded
$20,000 of development revenue related to this contract in 1995 versus none
in 1996.
Community Operating Expense
Community operating expense for the three months ended March 31, 1996 was
$1,582,000, representing an increase of $280,000 or 22% from community
operating expense of $1,302,000 in the comparable period in 1995. As a
percentage of service revenue, community operating expense was 72.3% and
79.2% for the three months ended March 31, 1996 and 1995, respectively. Of
the $280,000 increase in the amount of community operating expense,
$172,000 was attributable to the Sunny Knoll acquisition which was
consummated in May 1995. The remaining $108,000 increase was attributable
to an increase in community operating expense of communities operated by
the Company throughout both periods, primarily due to increases in resident
occupancy at these communities. The decrease in community operating expense
as a percentage of service revenue was due primarily to the acquisition of
Sunny Knoll and improved operating margins at the Bailey, Dominion and
Piedmont communities and to increased occupancy at certain of the Company's
communities.
Community Rent Expense
Community rent expense represents lease payments the Company is required to
make under operating leases at Piedmont Village and Bailey Suites.
Community rent expense for the three months ended March 31, 1996 was
$150,000, representing an increase of $20,000 or 15% from community rent
expense of $130,000 in the comparable period in 1995. As a percentage of
service revenue, community rent expense was 6.9% and 7.9% for the three
month periods ended March 31, 1996 and 1995, respectively. The increase in
the amount of community rent expense is due primarily to increased rent
expense at Piedmont due to increased borrowings to fund an expansion at the
Company's Statesville, North Carolina facility.
12
Selling, General and Administrative Expense
Selling, general and administrative expense for the three months ended
March 31, 1996 was $467,000, representing a decrease of $67,000 or 13% from
selling, general and administrative expense of $534,000 in the comparable
period in 1995. As a percentage of total revenues, selling, general and
administrative expense was 20.1% and 29.8% for the three months ended March
31, 1996 and 1995, respectively. The decrease in the amount of selling,
general and administrative expense was primarily attributable to a decrease
in salaries, travel and related costs and consulting costs. The decrease in
selling, general and administrative expense as a percentage of total
revenues was due to lower spending levels in the three months ended March
31, 1996 versus the comparable period in 1995 and the allocation of these
expenses over increased levels of total revenues in 1996.
Merger Termination Costs
Merger termination costs for the three months ended March 31, 1996 was
$159,000. These costs represent legal, accounting, travel and other related
costs associated with the proposed merger between Integrated Health
Services, Inc. ("IHS") and the Company. In February 1996, IHS informed the
Company that it was terminating their business combination discussions.
Depreciation and Amortization Expense
Depreciation and amortization expense for the three months ended March 31,
1996 was $197,000, representing an increase of $45,000 or 30% from
depreciation and amortization expense of $152,000 in the comparable period
in 1995. As a percentage of total revenues, depreciation and amortization
expense was 8.5% for each of the three months ended March 31, 1996 and
1995, respectively. Of the increase in the amount of depreciation and
amortization expense, approximately $25,000 related to Sunny Knoll which
acquisition was consummated in May 1995. The remaining $20,000 increase was
due to amortization associated with a non-compete agreement and higher
depreciation expense at Dominion Villages associated with certain capital
improvements.
Interest Expense
Interest expense for the three months ended March 31, 1996 was $418,000,
representing an increase of $110,000 or 36% from interest expense of
$308,000 in the comparable period in 1995. As a percentage of total
revenues, interest expense was 18.0% and 17.2% for the three months ended
March 31, 1996 and 1995, respectively. The increase in the amount of
interest expense was due primarily to increased interest expense on
borrowings associated with the Company's acquisition of Sunny Knoll in May
1995. The remaining increase in the amount of interest expense was due to
increased borrowings under the Company's Dominion Village lease and due to
increased borrowings for working capital purposes derived from the
convertible debentures sold to Emeritus.
Other income
Other income for the three months ended March 31, 1996 was $596,000. Other
income represents the receipt of previously reserved for management fees
and certain investments in SLI which the Company received in connection
with the sale and refinancing of Fox Ridge Manor to Northwood and the
refinancing of that community's related debt.
Interest Income
Interest income for the three months ended March 31, 1996 was $11,000,
representing a decrease of $28,000 or 72% from interest income of $39,000
in the comparable period in 1995. As a percentage of total revenues,
interest income was .5% and 2.2% for the three months ended March 31, 1996
and 1995, respectively. Interest income in the three month period ended
March 31, 1996 is primarily comprised of interest on restricted deposits.
Interest income in the three months ended March 31, 1995
13
was primarily due to interest associated with the Company's investment in
Cornish which earned interest at the rate of 15% per annum.
Minority Interest
Minority interest for the three months ended March 31, 1996 was $19,000,
representing a decrease of $7,000 or 27% from minority interest of $26,000
in the comparable period in 1995. As a percentage of total revenues,
minority interest was .8% and 1.5% for the three month periods ending March
1996 and 1995, respectively. The decrease in the amount of minority
interest is due to income from Sunny Knoll. The Company owns 51% of Sunny
Knoll.
Liquidity and Capital Resources
Since its inception, the Company has experienced working capital and liquidity
deficiencies. The Company has provided for its working capital and liquidity
needs through sales of securities in the public markets, including its initial
financing of Common Stock in February 1992 and its financing of Convertible
Preferred Stock in September and October 1993, through private placements of
debt and equity securities and through the sale of assets for cash, as well as
through the deferral of certain payables and preferred stock dividends. Some of
these transactions were with affiliated parties.
Cash and cash equivalents at March 31, 1996 were approximately $700,000 compared
to approximately $368,000 at December 31, 1995, an increase of $332,000 or 90%.
At March 31, 1996, the Company had a working capital deficit of approximately
$1,456,000 compared to a working capital deficit of $1,584,000 at December 31,
1995.
During the three months ended March 31, 1996, the Company financed its working
capital and general corporate needs primarily through three sources: (i) the
Company received approximately $825,000 in back management fees and related
investments from the refinancing of Fox Ridge Manor; (ii) the Company received
the final $300,000 in connection with its assignment of the Green Meadows
communities to Emeritus and (iii) $250,000 in connection with a promissory note
between the Company and IHS.
The Company used the proceeds from these sources approximately as follows: (i)
$459,000 to pay back accounts payable and professional fee payments; (ii)
$183,000 to fund the working capital needs of the Company; (iii) $173,000 to
fund a line of credit to Northwood in connection with the Company's management
of Fox Ridge Manor and to fund other costs associated with the Fox Ridge
transaction; (iv) $86,000 to fund interest payments associated with the
Company's convertible debentures; (v) $85,000 to pay down existing debt and (vi)
$57,000 to fund additions to property, plant and equipment.
At June 30, 1994, the Company had outstanding 782,350 shares of Convertible
Preferred Stock. Effective July 1, 1994, the Company consummated an Exchange
Offer (the "Offer") pursuant to which it exchanged 2.6 shares of its Common
Stock for each share of Convertible Preferred Stock tendered. Subsequent to the
Offer, there were 128,050 shares of Convertible Preferred Stock outstanding. The
Offer had the effect of decreasing the Company's quarterly dividend requirement
on the Convertible Preferred Stock from $195,588 to $32,013. Since issuing the
Convertible Preferred Stock in September 1993, the Company has failed to make
six quarterly dividend payments. Convertible Preferred Stockholders who tendered
their shares in the Offer forfeited any right to a dividend for the quarter
ended June 30, 1994. At September 30, 1995, the Company was in arrears on four
quarterly dividends of approximately $32,013, or approximately $128,050 in the
aggregate. Under the terms of the Convertible Preferred Stock, should the
Company fail to pay any portion of the quarterly dividend on its Convertible
Preferred Stock on four separate payment dates, whether or not consecutively,
holders of the Convertible Preferred Stock would be entitled to voting rights,
including the election of directors. In addition, each quarterly dividend not
paid results in a $0.25 reduction in the initial $5.00 per share conversion
price. The conversion price at March 31, 1996 was $3.50 per share (subject to
anti-dilution adjustments). These voting rights became effective on September
30, 1995 when the Company's Board of Directors voted to omit the dividend for
the quarter ended September 30, 1995, the fourth such dividend which had been
omitted.
14
As of March 31, 1996, the Company had financed three acquisition transactions
involving seven communities with Health Care REIT in the aggregate amount of
$10,750,000. These transactions were structured so that the assets were acquired
by Health Care REIT and leased to the Company under either operating lease or
capital lease arrangements. Health Care REIT may have a right to provide
financing for future acquisitions completed by the Company up to an aggregate
additional amount of $19,250,000. Under the terms of the agreement, Health Care
REIT is entitled to receive a warrant to purchase one share of the Company's
Common Stock at an exercise price (subject to anti-dilution adjustments) which
is currently $4.16 per share, for every $300 advanced. In March 1995, the
Company agreed to re-price all warrants previously granted to Health Care REIT
from $7.09 to $4.16 per share. To date, the Company has granted Health Care
REIT, on account of such financing, warrants to purchase approximately 35,833 of
Common Stock shares. The warrants are exercisable for five years from the date
of issuance, subject to extension under certain circumstances.
During 1995, the Company did not comply with certain of its debt covenants
(primarily related to the debt coverage ratio requirements associated with its
Dominion, Lowry and Piedmont lease agreements). In addition, the Company did not
comply with its covenant of maintaining at least $500,000 of consolidated net
worth. In March 1996, the Company (a) obtained waivers for each of the defaults
which occurred in 1995 and (b) modified certain of its covenants for 1996. The
modified covenants for 1996 require Dominion, Lowry and Piedmont to maintain a
combined quarterly weighted debt coverage ratio of at least 1.0 to 1.0 through
December 31, 1996 and requires the Company to maintain a consolidated negative
net worth no greater than $110,000, $609,000, $1,000,000 and $1,350,000 for the
quarters ended March 31, June 30, September 30 and December 31, 1996,
respectively.
There can be no assurance that the Company will not be in violation of its
covenants in the future or that the Company will be able to obtain waivers of
such violations that may arise in the future. Any such violations, if not
waived, would give Health Care REIT certain rights and/or remedies under the
lease agreements pursuant to which the Company operates the affected
communities, including rights of acceleration of all lease payments, rights of
possession and rights to terminate the lease, which, if exercised, would have a
material adverse effect upon the Company.
The growth of the Company will be dependent primarily on its ability to (i)
continue to expand and improve the results of its existing operations, (ii)
identify and make suitable acquisitions of assisted living communities or
companies which own, lease or manage such communities and (iii) the development
of communities for its own account. The Company has been and will continue to be
dependent upon third party financing for acquisitions and developments. There
can be no assurance that financing for acquisitions or developments will be
available to the Company on acceptable terms, if at all. Even if the Company is
able to obtain financing, the financing terms may impose burdens or restrictions
on the Company's future operations. Moreover, to the extent the Company acquires
or develops communities which do not generate operating cash flow (after
interest and/or community rent expense), the Company may be required to seek
additional financing for working capital and liquidity purposes. Further, any
additional financing obtained by the Company could have a dilutive effect on
then existing stockholders. In the event the Company is not able to meet its
working capital or liquidity needs with bank borrowings (which to date have been
unavailable to the Company) or other financing sources, it would become
necessary for the Company to implement a cost reduction plan for its then
existing operations and consider the sale of certain assets to raise working
capital and potentially defer any planned capital expenditures and to reassess
the timing and extent of its acquisition and development program. Based upon
management's ability to implement these plans, the Company believes it has
sufficient resources to meet its cash flow needs through December 31, 1996.
Although the Company anticipates an improvement in operating cash flow during
1996 as a result primarily of the Company's continuing efforts to improve the
operating performance of certain of its owned communities and the expansion of
certain of its communities, the Company may not attain an operating profit this
year. And although the Company continues to explore opportunities to secure
third-party development, management and marketing contracts intended to improve
its operating results, the magnitude of the Company's potential cash flow
deficit makes it likely that it will for some time remain dependent on external
sources of cash to finance both its operations and its community acquisition and
development activities, which are key to its continued growth and eventual
profitability. There can be no
15
assurance, however, that the Company will be able to obtain additional financing
for its operations and its community acquisition and development activities.
Further, any additional financing obtained by the Company could have a dilutive
effect on then existing stockholders.
Forward-Looking Information is Subject to Risk and Uncertainty
Certain statements in the foregoing management's discussion and analysis of
financial condition and results of operations contain "forward-looking"
information (as defined in the Private Securities Litigation Reform Act of 1995)
that involves risk and uncertainty, including the Company's expectations as to
the success of its efforts to improve operations of its owned communities, the
success of fill-up of expanded communities and access to additional financing.
Actual future results and trends may differ materially depending on a variety of
factors including successful implementation of the Company's operating plans,
certain regulatory uncertainties as more states implement regulations relating
to assisted living communities, possible contractual disputes and/or termination
of agreements and dealing with alleged failures to perform in connection with
third party owners and operators of communities for which the Company provides
service and legal proceedings and other legal claims.
16
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
On September 15, 1995, the Company's Board of Directors voted to omit the
payment of a dividend on the Company's Convertible Preferred Stock for
the quarter ended September 30, 1995. The omission of payment of the
dividend was the fourth such dividend to be omitted. As such, holders of
the Preferred Stock are entitled to vote, on a one vote per share basis
with the holders of Common Stock, on all matters thereafter submitted
including the election of directors. The Company has since omitted the
dividend on the Convertible Preferred Stock for the quarters ended
December 31, 1995 and March 31, 1996.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
January 5, 1996 and February 15, 1996
17
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Michael J. Doyle Chairman of the Board and May 14, 1996
- - -------------------------------- Chief Executive Officer
Michael J. Doyle
/s/ Michael J. Brenan President, Chief Operating May 14, 1996
- - -------------------------------- Officer and Director
Michael J. Brenan
/s/ Kenneth M. Miles Chief Financial Officer, May 14, 1996
- - -------------------------------- Treasurer, Assistant Secretary
Kenneth M. Miles and Director
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 879,864
<SECURITIES> 0
<RECEIVABLES> 232,918
<ALLOWANCES> 102,790
<INVENTORY> 0
<CURRENT-ASSETS> 1,224,752
<PP&E> 12,235,550
<DEPRECIATION> (1,228,125)
<TOTAL-ASSETS> 15,793,747
<CURRENT-LIABILITIES> 2,680,769
<BONDS> 0
0
1,125,000
<COMMON> 34,359
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 15,793,747
<SALES> 2,323,903
<TOTAL-REVENUES> 2,323,903
<CGS> 1,582,304
<TOTAL-COSTS> 2,555,004
<OTHER-EXPENSES> 972,700
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 417,649
<INCOME-PRETAX> (22,745)
<INCOME-TAX> (22,745)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> (596,249)
<CHANGES> 0
<NET-INCOME> (22,745)
<EPS-PRIMARY> (.01)
<EPS-DILUTED> 0
</TABLE>
