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 June 30, 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
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 July 31, 1996
----- ----------------------------
Common Stock, $.01 par value 3,697,366 shares
<PAGE>
THE STANDISH CARE COMPANY
INDEX
Page
----
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 11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
<PAGE>
THE STANDISH CARE COMPANY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 1996 1995
--------------------- ------------- -------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $355,939 $367,631
Restricted cash 385,745 199,719
Accounts receivable, less allowance for
doubtful accounts of $159,747 and $448,425
at June 30, 1996 and December 31, 1995, respectively 176,546 176,818
Due from related parties 177,625 437,234
Other current assets 239,378 56,625
------------- -------------
Total current assets 1,335,233 1,238,027
Restricted deposits 610,732 610,732
Investment in Adams Square Limited Partnership 127,000 127,000
Investment in Cornish Realty Associates, L.P. - 125,000
Due from related parties 30,670 130,215
Property, plant and equipment, net 10,916,034 11,079,454
Prepaid lease deposit, net 506,792 539,843
Non-compete agreement, net 180,940 219,671
Resident leases, net 152,145 176,979
Goodwill, net 1,480,000 1,504,000
Other assets, net 188,529 223,910
------------- -------------
Total assets $15,528,075 $15,974,831
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $269,058 $522,992
Accrued payroll and related taxes 228,251 217,304
Accrued severance costs 142,000 232,874
Accrued professional fees 441,963 570,997
Resident security deposits 158,442 172,945
Current portion of long-term debt 3,315,586 626,298
Other current liabilities 254,059 478,999
------------- -------------
Total current liabilities 4,809,359 2,822,409
Deferred gain on sale of bonds 520,815 520,815
Long-term debt 10,461,569 12,457,003
Minority interest 108,969 156,970
Commitments and contingencies
Stockholders' equity
Preferred stock (aggregate liquidation preference of
$1,127,300 and $1,281,175 at June 30, 1996
and December 31, 1995, respectively) 920,000 1,125,000
Common stock, $.01 par value
30,000,000 shares authorized and
3,501,053 and 3,435,826 shares issued and
outstanding at June 30, 1996 and December 31, 1995 35,011 34,359
Additional paid-in capital 8,963,953 8,746,096
Accumulated deficit (10,291,601) (9,887,821)
------------- -------------
Total stockholders' (deficit) equity ($372,637) 17,634
------------- -------------
Total liabilities and stockholders' equity $15,528,075 $15,974,831
============= =============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements
2
<PAGE>
<TABLE>
<CAPTION>
THE STANDISH CARE COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended For the six months ended
June 30, June 30, June 30, June 30,
1996 1995 1996 1995
------------------------------------- ------------------------------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues:
Service revenue $2,193,107 $1,875,183 $4,380,316 $3,517,717
Management fees and marketing revenue 87,708 195,741 213,152 304,811
Development fees and other revenue 65,250 120,000 76,500 158,000
---------------- --------------- --------------- ---------------
2,346,065 2,190,924 4,669,968 3,980,528
Operating costs and expenses:
Community operating expense 1,626,134 1,448,080 3,208,438 2,749,877
Community rent expense 154,459 142,141 304,230 271,688
Selling, general and administrative expense 463,478 622,575 930,804 1,156,127
Transaction termination costs 27,381 - 186,352 -
Depreciation and amortization expense 196,637 168,876 393,269 320,747
---------------- --------------- --------------- ---------------
Total operating costs and expenses 2,468,089 2,381,672 5,023,093 4,498,439
---------------- --------------- --------------- ---------------
Loss from operations (122,024) (190,748) (353,125) (517,911)
Interest expense (405,875) (370,249) (823,524) (678,322)
Interest income 17,970 41,909 28,618 81,232
Other income 100,000 - 696,249 -
Minority interest 28,894 24,253 48,002 49,941
---------------- --------------- --------------- ---------------
Loss before income taxes (381,035) (494,835) (403,780) (1,065,060)
Provision for income taxes - - - -
---------------- --------------- --------------- ---------------
Net loss ($381,035) ($494,835) ($403,780) ($1,065,060)
================ =============== =============== ===============
Net loss per common share ($0.12) ($0.16) ($0.13) ($0.33)
Weighted average number of common
shares outstanding 3,442,718 3,395,152 3,439,272 3,395,152
================ =============== =============== ===============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements
3
<PAGE>
THE STANDISH CARE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the six months ended June 30,
---------------------------------
1996 1995
---------- ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(403,780) $(1,065,060)
Adjustments to reconcile net loss
to net cash used by operating activities:
Depreciation and amortization 393,269 320,747
Accretion associated with capital lease obligations 100,648 104,548
Amortization of deferred costs 23,670 34,584
Minority interest in net (loss) of consolidated partnership (48,002) (49,941)
Compensation expense associated with issuance of warrants 6,333 12,667
Other income (696,249) 0
(Increase) in restricted cash (186,026) (638,907)
Decrease (increase) in accounts receivable 272 (28,781)
Decrease (increase) in due from related parties 359,154 (47,570)
Increase in other current assets (132,753) (27,069)
Increase in interest receivable - (9,202)
Decrease in note receivable - 1,226
(Decrease) increase in accounts payable (253,934) 34,174
Increase in accrued payroll and related taxes 10,947 16,636
(Decrease) in accrued severance costs (90,874) -
(Decrease) increase in accrued professional fees (129,034) 25,573
(Decrease) increase in other current liabilities (224,940) 35,167
---------- ----------
Net cash used by operating activities (1,271,299) (1,281,208)
---------- ----------
INVESTING ACTIVITIES:
Additions to property, plant and equipment (104,090) (1,122,713)
(Decrease) increase in security deposits - 91,528
Return of previous investment in Cornish Realty Associates, Ltd. - 125,000
Use of prepaid deposit - 27,651
Proceeds from sale of bonds 825,554 (19,000)
Cash deposited to collateralize letters of credit - (62,750)
Funding of accrued development costs - (54,498)
(Increase) in other assets (38,769) -
---------- ----------
Net cash provided by investing activities 682,695 (1,014,782)
---------- ----------
FINANCING ACTIVITIES:
Proceeds from excercise of stock options $7,375 -
Increase in advance for expansion costs - $750,000
Payment of Convertible Preferred Stock dividends - (64,025)
Proceeds from borrowings $750,000 $2,281,000
Repayment of debt (163,822) (28,118)
Principal payments on capital lease obligations (16,641) (23,605)
---------- ----------
Net cash provided by financing activities 576,912 2,915,252
---------- ----------
Net increase in cash and cash equivalents (11,692) 619,262
---------- ----------
Cash and cash equivalents at beginning of year 367,631 232,716
---------- ----------
Cash and cash equivalents at end of period $355,939 $851,978
========== ==========
-
NON-CASH ACTIVITIES
Purchase of property, plant & equipment by seller note financing $0 $1,852,000
Dividends accrued but not paid on Convertible Preferred Stock $51,125 $32,013
Conversion of 20,500 shares of preferred stock to 61,727 shares
(.01 par value) of common stock $205,000 $0
Refinancing fee from third party $100,000 $0
Reclass of a portion of the Cornish investment to related party $50,000 $0
Reclass of a portion of the Cornish investment to other assets $75,000 $0
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements
4
<PAGE>
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 related 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 and six month periods ended June 30, 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>
June 30, 1996 December 31, 1995
------------- -----------------
(unaudited)
<S> <C> <C>
Resident security deposits $159,573 $172,945
Reserve, line of credit -Northwood Retirement, Inc. 150,534 --
Credit enhancement escrow - Fox Ridge 50,000 --
Capital improvements reserve - Bailey 14,032 15,481
Expansion funds - Piedmont 10,421 10,261
Real estate tax escrow-Sunny Knoll 1,185 1,032
-------- --------
$385,745 $199,719
======== ========
</TABLE>
C. Related Party Transactions
The Company has conducted various transactions with its officers, directors, and
principal stockholders and/or their affiliated companies and unconsolidated
affiliates. Accounts affected by these transactions were as follows:
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1996
-------------
(unaudited)
<S> <C>
Accounts receivable from Emeritus Corporation ("Emeritus")
for refinancing fee $ 100,000
Accounts receivable from Emeritus for management fees and
reimbursable expenses 36,800
Accounts receivable from Adams Square Limited Partnership for
management fees, marketing fees and reimbursable expenses 40,825
Note receivable from Adams Square Limited Partnership 23,170
Loan to Officer 7,500
5
<PAGE>
Management fees and marketing revenue from Emeritus 14,900
Management fees from Cornish 27,402
Management fees from Adams Square Limited Partnership 51,367
Marketing fee revenue from Adams Square Limited Partnership 21,000
Expenses incurred through or reimbursed to stockholders, officers, directors
and their affiliates:
Selling and marketing 69,695
General and administrative 2,000
</TABLE>
D. Restricted Deposits
Restricted deposits consists of the following:
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995
------------- -----------------
(unaudited)
<S> <C> <C>
Cash collateral for letter of credit - Piedmont $237,750 $237,750
Cash collateral for letter of credit - Dominion 231,200 231,200
Cash collateral for letter of credit - Lowry 65,000 65,000
Debt service reserve - Bailey refinancing 61,032 61,032
Debt service reserve - Northwood Bonds 15,750 15,750
-------- --------
$610,732 $610,732
======== ========
</TABLE>
The letters of credit are required under the terms of the financing 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 outstanding for
which the Company provided certain credit enhancements in the form of guarantees
in March 1996.
E. Property, Plant & Equipment
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995
------------- -----------------
(unaudited)
<S> <C> <C>
Land $ 1,616,628 $ 1,616,628
Land improvements 24,864 21,964
Furniture, fixtures & equipment 1,242,760 1,221,239
Buildings & improvements 9,393,664 9,313,995
------------ ------------
12,277,916 12,173,826
Less accumulated depreciation (1,361,882) (1,094,372)
------------ ------------
$10,916,034 $11,079,454
============ ============
</TABLE>
6
<PAGE>
F. Short-term borrowings and long-term debt
Short-term borrowings and long-term debt consists of the following:
<TABLE>
<CAPTION>
June 30, 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% (9.05% at June 30, 1996), principal
payable monthly in varying amounts. All remaining principal and interest
due in February 1999, collateralized by real estate. $ 918,044 $ 936,804
Sunny Knoll mortgage payable with interest equal to the base rate of Primary
Bank plus 1.75% (10.75% at June 30, 1996), principal payable monthly in
varying amounts, all remaining principal due April 1997,
collateralized by real estate. 739,985 744,764
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, collateralized by a second mortgage on Bailey Village. 57,227 66,853
Note payable with interest at First Union Bank and Trust's prime rate plus 1%
(9.25% at June 30, 1996), payable in fifty-nine installments of $833 each
month. All remaining principal and interest due in December 2000,
collateralized by real estate 135,000 140,000
Note payable with 9.47% interest and principal due December
1999, collateralized by automobile 12,779 14,901
Notes payable with 9% interest and principal payments in
varying amounts due February 1997 146,096 149,430
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
7
<PAGE>
Note payable to Emeritus with 10% interest, quarterly principal payments
based on excess cash flow, all remaining principal due April 1998,
collateralized by the Company's stock in Sunny Knoll 431,532 551,732
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 January 15, 1998. (Note K) 250,000 --
Note payable to CareMatrix Corporation ("CareMatrix") with 10% interest
payable annually. All principal and accrued interest due on October 1, 1996
subject to an extension until April 1, 1997 at the election of CareMatrix,
collateralized by a subordinate mortgage on Bailey Village.
(Notes K and M) 500,000 --
Deferred liability associated with the Piedmont operating lease 183,914 160,244
----------- -----------
Subtotal 4,739,077 4,129,228
Convertible debentures payable to Emeritus with 8.5% interest due in June 1998,
convertible to common stock at $4.16 per share
(subject to anti-dilution adjustments) 2,000,000 2,000,000
Capital lease obligations 7,038,078 6,954,073
----------- -----------
Subtotal 13,777,155 13,083,301
Less current maturities 3,315,586 626,298
----------- -----------
Long-term debt $10,461,569 $12,457,003
=========== ===========
</TABLE>
G. Omission of Preferred Stock Dividend
On June 28, 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 June 30, 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.
H. 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 and six month periods ended June 30, 1996 and
June 30, 1995 totaled $0, $0, $32,013 and $64,025 respectively. As of June 30,
1996, aggregate dividends in arrears on the Convertible Preferred Stock totaled
approximately $207,300 and the conversion price of the Preferred Stock was $3.25
(subject to anti-dilution adjustments).
8
<PAGE>
I. 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:
For Six Months Ended
June 30, 1995
--------------------
(unaudited)
Net revenues 4,379,332
Loss before extraordinary items (930,883)
Net loss (930,883)
Net loss per common share (.29)
The pro forma operating results include results of operations for the six months
ended June 30, 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.
J. Stock Option Grants
In June 1996, the Company's Board of Directors voted to grant 75,000 stock
options to two officers and directors of the Company which allow the holder of
such stock options to purchase shares of the Company's common stock at $2.94 per
share, the closing stock price on the day immediately preceding the Board
Meeting. The stock options contain a provision which increases the amount of the
stock options up to a maximum of 750,000 shares at the time of the closing of
the merger with CareMatrix (Note L).
K. Commitments and Contingencies
Working Capital Loans
---------------------
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.
On June 3, 1996, pursuant to a term sheet for a proposed business
combination, CareMatrix Corporation loaned the sum of $1,000,000 to the
Company for working capital purposes. The note is due on October 1, 1996
subject to an extension until April 1, 1997 at the election of CareMatrix.
The note bears interest at 10% and interest is payable annually. In
accordance with the terms of the promissory note, CareMatrix advanced
$500,000 to the Company upon the signing of the term sheet and $500,000 upon
the execution of the merger agreement. (Note M)
L. CareMatrix Merger Transaction
In June 1996, the Company announced that it had signed a term sheet with
CareMatrix Corporation, a privately held group of twelve separate corporations
("CareMatrix"), under which the Company would acquire all of the assets and
operations of CareMatrix and the Company would issue between 40 million and 50
million shares of its common stock to the stockholders of CareMatrix subject to
due diligence and
9
<PAGE>
negotiation of a definitive merger agreement. On July 3, 1996, the Company and
CareMatrix entered into a definitive Agreement and Plan of Merger (the "Merger
Agreement") under which twelve subsidiary corporations of the Company would be
merged into CareMatrix and the Company would issue 50 million shares of its
common stock to the stockholders of CareMatrix. The Merger Agreement was
approved by the Boards of Directors of the Company and CareMatrix on July 10,
1996. The Merger Agreement is subject to the approval of both the Company's and
CareMatrix's stockholders, the receipt of an updated fairness opinion and other
customary closing conditions.
M. Subsequent Events
On July 10, 1996, CareMatrix funded the second installment of $500,000 in
connection with its promissory note with the Company. On July 30, 1996, through
the issuance and sale to a principal stockholder of CareMatrix (the
"purchaser"), for $14,000 per share or $1,400,000 in the aggregate, the Company
issued 100 shares of its newly created Series B Convertible Preferred Stock (the
"Series B Stock") with a liquidation value of $14,000 per share. The Company
used a portion of the proceeds from the share issuance to repay the promissory
note of $1,000,000 and obtained an additional $400,000 to be used for working
capital purposes. The Series B Stock is redeemable by the Company at any time
after December 1, 1996 at $14,000 per share plus accrued dividends provided that
the market price of the common stock exceeds 150% of the conversion price
($4.16) then in effect for twenty consecutive trading days. The Series B Stock
will be entitled to a quarterly dividend of $350 per share with quarterly
dividend payments on each of December 31, March 31, June 30 and September 30.
Concurrently with the issuance of the Series B Stock, the Company issued five
year warrants to the purchaser to purchase 400,000 shares of the Company's
common stock at an exercise price of $4.16 per share.
The following data represents certain unaudited pro forma information of the
Company assuming the issuance of the Series B Stock and the repayment of the
promissory note occurred on June 30, 1996.
Working capital $(2,074,126)
Total assets 16,428,075
Current portion of long-term debt 2,815,586
Long-term debt 10,461,569
Total shareholders equity 1,027,363
N. Reclassification
Certain amounts in the 1995 consolidated financial statements have been
reclassified to conform with the 1996 presentation.
10
<PAGE>
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 and six months
ended June 30, 1996, the Company generated total revenues of $2,346,000, and
$4,670,000 respectively, and incurred a loss from operations of $122,000 and
$353,000, respectively.
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. At December
31, 1995, the $125,000 investment was classified on the Company's balance sheet
as "Investment in Cornish Realty Associates, L.P.". At June 30, 1996, the
Company has reclassified the $125,000 as follows: $50,000 to other current
assets and $75,000 to "other assets, net."
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). Under the management agreement, the Company receives
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") which were 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.
11
<PAGE>
On June 4, 1996, the Company announced it had entered into an agreement to merge
with CareMatrix Corporation ("CareMatrix"), a privately held assisted living
company. Under the terms of the agreement, the Company would acquire the assets
and operations of CareMatrix and in return would issue between 40 million and 50
million shares to the stockholders of CareMatrix. On July 3, 1996, the Company
entered into a definitive merger agreement with CareMatrix subject to the
approval of the Board of Directors of the Company and CareMatrix. The Company
also announced it would issue 50 million shares to the stockholders of
CareMatrix. On July 10, 1996, both the Company and CareMatrix announced that
each of their respective boards of directors had approved the merger agreement.
The closing of the merger is expected to take place in October 1996 and is
subject to the approval of both Company's stockholders, the receipt by the
Company of an updated fairness opinion from its financial advisors and other
customary closing conditions. Also, CareMatrix loaned the Company the sum of
$1,000,000 of which $500,000 was advanced on June 4, 1996 and $500,000 was
advanced on July 10, 1996. As more fully described in "Liquidity and Capital
Resources", the Company repaid the promissory note on July 30, 1996 through the
issuance of a newly created Series B Convertible Preferred Stock and CareMatrix
also loaned the Company an additional $400,000.
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 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 and six month periods ended June 30,
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 in November , 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 in March , 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 in May , 1995.
The results of operations for the three and six month periods ended June 30,
1995 include the accounts of the Company, Bailey, Dominion, Lowry, Piedmont and
Bailey Suites. The results of operations also include the accounts of Sunny
Knoll for the period May 1, 1995 to June 30, 1995.
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 For the six
months ended months ended
June 30, 1996 June 30, 1995 June 30, 1996 June 30, 1995
----------------------------- -----------------------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues:
Service revenue 93.5% 85.6% 93.8% 88.4%
Management fees and marketing revenue 3.7 8.9 4.6 7.7
Development fees and other revenue 2.8 5.5 1.6 3.9
----- ----- ----- -----
100.0 100.0 100.0 100.0
12
<PAGE>
Operating costs and expenses:
Community operating expense 69.3 66.1 68.7 69.1
Community rent expense 6.6 6.5 6.6 6.8
Selling, general and administrative
expense 19.8 28.4 19.9 29.0
Transaction termination costs 1.2 -- 4.0 --
Depreciation and amortization expense 8.3 7.7 8.4 8.1
----- ----- ----- -----
Total operating costs and expenses 105.2 108.7 107.6 113.0
----- ----- ----- -----
Loss from operations (5.2) (8.7) (7.6) (13.0)
Interest expense (17.3) (16.9) (17.6) (17.1)
Interest income 0.8 1.9 0.6 2.0
Other income 4.3 -- 15.0 --
Minority interest 1.2 1.1 1.0 1.3
----- ----- ----- -----
Loss before income taxes (16.2) (22.6) (8.6) (26.8)
===== ==== ===== =====
</TABLE>
The following table sets for 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 For the six
months ended months ended
June 30, 1996 June 30, 1995 June 30, 1996 June 30, 1995
---------------------------- -----------------------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Service revenue 100.0% 100.0% 100.0% 100.0%
Community operating expense 74.1 77.2 73.2 78.2
Community rent expense 7.0 7.6 6.9 7.7
</TABLE>
13
<PAGE>
RESULTS OF OPERATIONS
Six Months Ended June 30, 1996 Compared to the Six Months Ended June 30, 1995
- -----------------------------------------------------------------------------
Revenues
- --------
Revenues for the three and six month periods ended June 30, 1996 were $2,346,000
and $4,670,000, representing increases of $155,000 or 7% and $689,000 or 17%,
respectively, from revenues of approximately $2,191,000 and $3,981,000 in the
comparable periods in 1995.
Service revenue for the three and six month periods ended June 30, 1996 were
$2,193,000 and $4,380,000, representing increases of $318,000 or 17% and
$862,000 or 25%, respectively, from service revenue of $1,875,000 and $3,518,000
in the comparable periods in 1995. Of these increases, $87,000 and $369,000
respectively, was attributable to service revenue for the Sunny Knoll community
acquired by the Company in May 1995 and thus not fully reflected in the
Company's results for the first two quarters of 1995. The $231,000 and $493,000
balances of these increases in service revenue were primarily attributable to
higher service revenues at certain of the communities operated by the Company
throughout both periods, primarily due to increased resident census and higher
average service fee rates at these communities.
Management fees and marketing revenue for the three and six month periods ended
June 30, 1996 were $88,000 and $213,000, representing decreases of $108,000 or
55% and $92,000 or 30%, respectively, from management fees and marketing revenue
of $196,000 and $305,000 in the comparable periods in 1995. The higher
management fees and marketing revenue during the 1995 comparable periods were
attributable primarily to $100,000 of management fee revenue the Company
recorded during the second quarter of 1995 related to Crystal Cove, a senior
living community in Florida. These management fees reflect a partial recovery of
$132,000 of management fees related to Crystal Cove which the Company had
written off in 1992. The Company resigned as manager of Crystal Cove during the
second quarter of 1995.
Development fees and other revenue for the three and six month periods ended
June 30, 1996 were $65,000 and $77,000, representing a decrease of $55,000 or
46% and $81,000 or 51% respectively, from development fees and other revenue of
$120,000 and $158,000 in the comparable periods in 1995. Development fees and
other revenue for the three and six month periods ended June 30, 1996 were
primarily comprised of fees associated with one assisted living community being
developed in Cambridge, Massachusetts while development fees and other revenue
in the comparable periods in 1995 were primarily related to fees associated with
assisted living communities being developed in Pikesville, Maryland, Cambridge,
Massachusetts and the Laurelmead community which was co-developed by the Company
and Cornish in Providence, Rhode Island.
Community Operating Expense
- ---------------------------
Community operating expense for the three and six month periods ended June 30,
1996 were $1,626,000 and $3,208,000, representing increases of $178,000 or 13%
and $458,000 or 17%, respectively, from community operating expense of
$1,448,000 and $2,750,000 in the comparable periods in 1995. As a percentage of
service revenue, community operating expense decreased to 74.1% and 73.2% for
the three and six month periods ended June 30, 1996, respectively, versus 77.2%
and 78.2% in the comparable periods in 1995. Of the increases in the amount of
community operating expense, $82,000 and $255,000, respectively was attributable
to community operating expense for the Sunny Knoll community acquired by the
Company in May 1995 and thus not fully reflected in the Company's results for
the first two quarters of 1995. The $96,000 and $203,000 remaining increases in
community operating expense was primarily attributable to increased community
operating expense at the Company's Piedmont and Bailey communities. The increase
in community operating expense at Piedmont was primarily due to an increase in
census while the increase at Bailey was primarily due to increases in staffing.
14
<PAGE>
Community Rent Expense
- ----------------------
Community rent expense represents lease payments the Company is required to make
under operating leases at its Piedmont Villages and Bailey Suites communities.
Community rent expense for the three and six month periods ended June 30, 1996
were $154,000 and $304,000, representing increases of $12,000 or 9% and $32,000
or 12%, respectively, from community rent expense of $142,000 and $272,000 in
the comparable periods in 1995. As a percentage of service revenue, community
rent expense decreased to 7.0% and 6.9% for the three and six month periods
ended June 30, 1996, respectively, versus 7.6% and 7.7% in the comparable
periods in 1995. The increase in the amount of community rent expense is
primarily due to increased lease advances at Piedmont to fund the expansion at
the Company's Statesville, North Carolina community. The decrease in community
rent expense as a percentage of service revenue was primarily due to the
allocation of these expenses over increased levels of total revenues for the
first two quarters of 1996.
Selling, General and Administrative Expense
- -------------------------------------------
Selling, general and administrative expense for the three and six month periods
ended June 30, 1996 were $463,000 and $931,000, representing decreases of
$160,000 or 26% and $225,000 or 19%, respectively, from selling, general and
administrative expense of $623,000 and $1,156,000 in the comparable periods in
1995. As a percentage of total revenues, selling, general and administrative
expense decreased to 19.8% and 19.9% for the three and six month periods ended
June 30, 1996, respectively, versus 28.4% and 29% in the comparable periods in
1995. The decrease in the amount of selling, general and administrative expense
for the three and six month periods ended June 30, 1996 versus the comparable
periods in 1995 was due primarily to decreases in salaries, recruitment costs,
consulting costs, marketing and public relations costs and travel and related
costs. The decrease in selling, general and administrative expense as a
percentage of total revenues was due to reduced spending and the allocation of
these expenses over increased levels of total revenues for the first two
quarters of 1996.
Transaction Termination Costs
- -----------------------------
Transaction termination costs were $27,000 and $186,000 for the three and six
month periods June 30, 1996, respectively. These costs represent legal,
accounting, travel and other related costs primarily 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. Transaction termination costs also
include legal, accounting, travel and other related costs associated with the
proposed merger between Emeritus Corporation ("Emeritus") and the Company. In
May 1996, the Company informed Emeritus that it was terminating those merger
discussions. The Company and Emeritus could not agree on an exchange ratio.
Depreciation and Amortization Expense
- -------------------------------------
Depreciation and amortization expense for the three and six month periods ended
June 30, 1996 was approximately $197,000 and $393,000, representing increases of
$28,000 or 17% and $72,000 or 22%, respectively, from depreciation and
amortization expense of $169,000 and $321,000 in the comparable periods in 1995.
As a percentage of total revenues, depreciation and amortization expense
increased to 8.3% and 8.4% for the three and six month periods ended June 30,
1996, respectively, versus 7.7% and 8.1% in the comparable periods in 1995. Of
the increases in the amount of depreciation and amortization expense, $9,000 and
$34,000, respectively, was attributable to depreciation and amortization expense
for the Sunny Knoll community acquired by the Company in May 1995 and thus not
fully reflected in the Company's results for the first two quarters of 1995. The
increase in the amount of depreciation and amortization expense was also
attributable to higher depreciation and amortization expense at Dominion due to
certain additions at that facility during the three and six month periods ended
June 30, 1996 versus the comparable periods in 1995. The increase in
depreciation and amortization expense was also attributable to amortization of a
non-compete agreement with a former director and officer of the Company.
15
<PAGE>
Interest Expense
- ----------------
Interest expense for the three and six month periods ended June 30, 1996 was
$406,000 and $824,000, representing increases of $36,000 or 10% and $146,000 or
22%, respectively, from interest expense of $370,000 and $678,000 for the
comparable periods in 1995. As a percentage of total revenues, interest expense
was 17.3% and 17.6% for the three and six month periods ended June 30, 1996,
respectively, versus 16.9% and 17.1% for the comparable periods in 1995. The
increases in the amount of interest expense is attributable primarily to
interest expense due to increased borrowings associated with Dominion Village,
and interest expense associated with the acquisition of Sunny Knoll which was
acquired on May 1, 1995.
Interest Income
- ---------------
Interest income for the three and six month periods ended June 30, 1996 was
$18,000 and $29,000, representing decreases of $24,000 and $52,000 respectively,
compared to interest income of $42,000 and $81,000 in the comparable periods in
1995. As a percentage of total revenues, interest income was 0.8% and 0.6% for
the three and six month periods ended June 30, 1996, respectively, versus 1.9%
and 2.0% in the comparable periods in 1995. Interest income for the three and
six month periods ended June 30, 1996 represents interest earned on cash and
cash equivalents. Interest income for the three and six month periods ended June
30, 1995 is primarily comprised of the accrued preferred return at the rate of
15% per annum on the Company's investment in Laurelmead.
Minority Interest
- -----------------
Minority interest for the three and six month periods ended June 30, 1996 was
$29,000 and $48,000, representing an increase of $5,000 or 21% and a decrease of
$2,000 or 4% respectively, versus $24,000 and $50,000 in the comparable periods
in 1995. As a percentage of total revenues, minority interest was 1.2% and 1.0%
for the three and six month periods ended June 30, 1996, respectively, versus
1.1% and 1.3% in the comparable periods in 1995. The increases in the amount of
minority interest reflect the increased losses associated with Lowry and the
corresponding chargeback of 20% of these losses to the minority partners. These
increases were partially offset by the allocation of 49% of the income of Sunny
Knoll to the minority partner.
Other Income
- ------------
Other income for the three and six month periods ended June 30, 1996 was
$100,000 and $696,000. Other income for the three months ended June 30, 1996
represents the Company's portion of the proceeds to which it is entitled in
connection with the sale of The Pines of Tewksbury community by Emeritus to a
third party. In addition to its development, management and marketing contracts
and its rights to 15% of excess cash flow, the Company owns a 15% residual
interest to share in the proceeds of a sale or refinancing of The Pines of
Tewksbury community. Other income for the six months ended June 30, 1996 is
primarily composed of cash received for previously reserved management fees and
certain investments in SLI which the Company received in connection with the
sale and financing of Fox Ridge Manor to Northwood and the refinancing of that
community's related debt.
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
public offering of Common Stock in February 1992 and its public offering 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 June 30, 1996 were approximately $356,000 compared
to approximately $368,000 at December 31, 1995, a decrease of $12,000 or 3%. At
June 30, 1996, the Company had a
16
<PAGE>
working capital deficit of approximately $3,474,000 compared to a working
capital deficit of $1,584,000 at December 31, 1995.
During the six months ended June 30, 1996, the Company financed its working
capital and general corporate needs primarily through four 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
$500,000 in connection with a $1.0 million promissory note between the Company
and CareMatrix (the balance of $500,000 was received on July 10, 1996); (iii)
the Company received the final $300,000 in connection with its assignment of the
Green Meadows communities to Emeritus and (iv) $250,000 in connection with a
promissory note between the Company and IHS.
The Company used the proceeds from these sources (counting only the initial
$500,000 borrowed from CareMatrix on June 4, 1996) approximately as follows: (i)
$626,000 to reduce accounts payable including certain professional fee payments;
(ii) $509,000 to fund the working capital needs of the Company; (iii) $180,000
to pay down existing debt; (iv) $171,000 to fund interest payments associated
with the Company's convertible debentures; (v) $200,000 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; (vi) $104,000 to
fund additions to property, plant and equipment and (vii) $97,000 for other
corporate and community matters.
On July 10, 1996, CareMatrix funded the second installment of $500,000 in
connection with its promissory note with the Company. On July 30, 1996, through
the issuance and sale to a principal stockholder of CareMatrix (the
"purchaser"), for $14,000 per share or $1,400,000 in the aggregate, the Company
issued 100 shares of its newly created Series B Convertible Preferred Stock (the
"Series B Stock") with a liquidation value of $14,000 per share. The Company
used a portion of the proceeds from the share issuance to repay the promissory
note of $1,000,000 and obtained an additional $400,000 to be used for working
capital purposes. The Series B Stock is redeemable by the Company at any time
after December 1, 1996 at $14,000 per share plus accrued dividends provided that
the market price of the common stock exceeds 150% of the conversion price
($4.16) then in effect for twenty consecutive trading days. The Series B Stock
will be entitled to a quarterly dividend of $350 per share with quarterly
dividend payments on each of December 31, March 31, June 30 and September 30.
Concurrently with the issuance of the Series B Stock, the Company issued five
year warrants to the purchaser to purchase 400,000 shares of the Company's
common stock at an exercise price of $4.16 per share.
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
seven 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. 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. 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 June 30, 1996 was $3.25 per share (subject to anti-dilution
adjustments).
As of June 30, 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 which is currently $4.16 per share (subject to
anti-dilution adjustments), 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
17
<PAGE>
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, the Company may not
attain an operating profit this year. 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 assurance, however, that the Company
will be able to obtain additional financing for its operations and its community
acquisition and development activities.
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
services.
18
<PAGE>
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,
March 31, 1996, and June 30, 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
July 15, 1996
19
<PAGE>
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 July 31, 1996
- --------------------- Chief Executive Officer
Michael J. Doyle
/s/Michael J. Brenan President, Chief Operating July 31, 1996
- --------------------- Officer and Director
Michael J. Brenan
/s/Kenneth M. Miles Chief Financial Officer, July 31, 1996
- --------------------- Treasurer, Assistant Secretary
Kenneth M. Miles and Director
</TABLE>
20
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000879969
<NAME> shq*qd5m
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 741,684
<SECURITIES> 0
<RECEIVABLES> 176,546
<ALLOWANCES> 159,747
<INVENTORY> 0
<CURRENT-ASSETS> 1,335,233
<PP&E> 10,916,034
<DEPRECIATION> (1,361,882)
<TOTAL-ASSETS> 15,528,075
<CURRENT-LIABILITIES> 4,809,359
<BONDS> 0
0
920,000
<COMMON> 35,011
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 15,528,075
<SALES> 4,669,968
<TOTAL-REVENUES> 4,669,968
<CGS> 3,208,438
<TOTAL-COSTS> 5,023,093
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 823,524
<INCOME-PRETAX> (403,780)
<INCOME-TAX> (403,780)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 696,249
<CHANGES> 0
<NET-INCOME> (403,780)
<EPS-PRIMARY> (.13)
<EPS-DILUTED> 0
</TABLE>
