Item 1. DESCRIPTION OF BUSINESS
General
Agemark Corporation (the “Company”) owns and operates assisted living residences, which offer a combination of housing and personalized services for senior citizens who can no longer live independently but who do not require the 24-hour medical care provided by a skilled nursing facility. The Company operates 7 properties located in non-urban, secondary markets in four states. The Company’s primary focus is on “private pay” residents, who generally pay for the Company’s services from their own funds, with the help of other family members or through private insurance.
Background and Formation of the Company; Plan of Reorganization
The Company was organized in April, 1997 pursuant to an order of the U.S. Bankruptcy Court dated April 27, 1997 (the “Order”) to receive the assets of and continue the businesses of four reorganized, publicly registered limited partnerships and two privately held limited partnerships (the “Partnerships”). The Order confirmed the Second Amended Joint Plan of Reorganization (the “Plan”) of the Partnerships filed in January, 1997 and amended in April, 1997. The first of the property transfers to the Company pursuant to the Plan was accomplished in January, 1998 and the final transfer took place in July, 1998. A total of 1,000,000 shares of stock were issued to the Partnerships for these properties as of September 30, 1998 and immediately distributed to their partners.
The following is a summary of the properties transferred to the Company and the adjustments made to historical values to arrive at values approved by the Bankruptcy Court pursuant to the Plan of Reorganization:
In connection with the transfers of the facilities, the Company also assumed various notes payable. The following is a summary of the notes payable assumed by the Company:
The Senior Care Industry
The senior care industry is characterized by a wide range of living accommodations and health care services. For those who are able to live in a home setting, home health care and other limited services can be an appropriate alternative. Community housing or retirement centers, which are commonly referred to as independent living facilities, are also available to persons who need modest assistance, such as with meal preparation, housekeeping and laundry. Assisted living facilities are typically for those persons whose physical or cognitive frailties have reached a state where independent living accommodations can no longer provide the level of care required. These people do not need the continuous medical attention of a skilled nursing facility. Generally, assisted living facilities provide a combination of housing and 24-hour personal support services designed to assist seniors with activities of daily living (“ADLs”), which include bathing, eating, personal hygiene, grooming, ambulating and dressing. Certain assisted living facilities also offer higher levels of personal assistance for residents with Alzheimer’s disease or other forms of dementia but always in a “residential,” as compared with a “medical,” setting. Skilled nursing facilities provide care in a comparatively institutional environment. Assisted living residences provide a “homelike” atmosphere. For example, the Company’s facilities feature carpeted floors compared with the linoleum typically found in nursing home, and single-occupancy rooms. Additionally, assisted living residences operated by the Company encourage residents to bring their own, more familiar furniture, serve meals in dining rooms and provide a wide range of social programs including outings to shows, museums, movies and the like.
The senior care industry, including assisted living, is highly fragmented and characterized by numerous providers whose services, experience and capital resources vary widely. The Company believes that the assisted living industry is evolving as the preferred alternative to meet the growing demand for a cost-effective setting for those seniors who cannot live independently due to physical or cognitive frailties, but who do not require the more intensive medical attention provided by a skilled nursing facility. According to the United States Bureau of the Census, approximately 45% of persons aged 85 years and older, approximately 24% of persons aged 80 to 84 and approximately 20% of persons aged 75 to 79 need assistance with ADLs.
Services
The Company operates assisted living facilities in the following locations: Rock Island, Illinois; Fort Madison, Iowa; Port Huron, Michigan; Beatrice, Nebraska; Hastings, Nebraska; Dickinson, North Dakota; and Williston, North Dakota. Except for the facilities in North Dakota, which are modern buildings, the Company’s facilities are located in historic, renovated hotels, most of which are on the National Register of Historic Places. The Company’s facilities range in size from 64 units to 115 units. See Item 2
Item 2. DESCRIPTION OF PROPERTY
The following table sets forth, as of September 30, 2002, certain information as to the facilities owned by the Company:
(1)
“Year Reopened” refers to the year in which the facility was reopened as an assisted living facility, after renovation of the historic property. The Company’s facilities at Dickinson, North Dakota and Williston, North Dakota are not historic properties.
Each of the facilities listed in the table above is subject to a mortgage, except Port Huron, Michigan and Beatrice, Nebraska. See Item 6 - "Management’s Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources.” As of September 30, 2002 there was an aggregate balance of $11,981,000 outstanding under the mortgages, with the amount owing on a property ranging from approximately $806,000 to $4,171,000.
In July, 2002 the Company disposed of its interest in CountryHouse, LLC. This entity was organized in conjunction with entities controlled by Richard J. Westin and Jesse A. Pittore, directors and officers of the Company, to jointly develop, build and operate an Alzheimer’s facility in Cumberland, Maryland. The Company contributed land located adjacent to its Cumberland, Maryland facility upon which the Alzheimer’s facility has been built. The Westin and Pittore entities have funded or guaranteed financing of all costs to build, furnish and operate the facility. For its contribution of land, the Company received a 25% ownership interest and 25% of all net income and proceeds from the operation of the facility. The Company received $200,000 for its interest which was sold to the joint venturers.
On August 30, 2002, the Company completed the sale of certain assets and liabilities related to the ownership and operation of its 85-bed assisted living facility located in Cumberland, MD (the “Kensington Algonquin”). Title to the Kensington Algonquin facility was transferred to Kensington Algonquin, LLC, a Nevada single member limited liability company, wholly owned by the Company in calendar year 2000 in anticipation of a financing transaction that was never consummated. Since that transfer the entity has been 100% owned by the Company. The form of the August 30, 2002 transaction was the sale of the Company’s member interest to Richard J. Westin and Jesse A. Pittore for a price of $3,300,000 less a credit for repairs of $200,000.
As indicated above, the purchasers in these two transactions are affiliates of the Company. Both Richard J. Westin and Jesse A. Pittore are officers and directors of the Company. Their offers for these property interests of $200,000 and $3,300,000 were tested in an auction process that took place during the month of May, 2002. The auction was advertised in the national edition of the Wall Street Journal and the Baltimore Sun. These advertisements
produced approximately 30 responses for additional information. Each of the respondents to the advertisements was sent additional information regarding the property and the auction process. No further interest in the property was expressed by any of these respondents. None of the respondents pursued the auction further by visiting the property or bidding on the property. The auction was held on June 5, 2002. The only bids made on the property were those by Messrs Westin and Pittore.
On August 26, 2002 the Company signed an agreement to sell its property located in Chanute, KS for $275,000 to an unaffiliated buyer. The contract provides for a 5% commission to an unaffiliated broker and was conditional until October 15, 2002. On November 20, 2002 the sale closed by means of a $100,000 down payment and the execution of Contract for Sale of Real Estate in the amount of $175,000 bearing interest at 8% per annum all due April 23, 2003.
On October 22,2002 the Company signed an agreement to sell its property located in Rock Island, IL for $2,500,000 to an unaffiliated buyer. The property has previously been listed with an unaffiliated broker with an agreed commission of 3%. On December 13, 2002 the buyer removed all contingencies except for financing. Conditional on the buyer obtaining financing, the proposed closing date for the sale is February 28, 2003.
The Company is in the process of considering other sales of its property. The Company does not believe that a sale of all of the Company’s assets would be in the best interests of its stockholders as the buyer in such a sale would likely seek a “bulk sale” discount. However, the Company is actively contemplating undertaking a sale of its assets through the sales of its individual properties in separate transactions. If the Company determines that such a sale of assets is in the best interests of its stockholders, it will solicit stockholder approval for the liquidation of the Company and the sale of its assets. No final decision has been reached to sell the assets of the Company, but the Company anticipates that a final decision will be reached in the near future.
The Company currently maintains insurance on its properties in amounts and with such coverages and deductibles that it believes are adequate and in keeping with industry practice. The Company also believes that its properties are suitable for their use as assisted living facilities.
The Company leases its headquarters in Berkeley, California from The Waterford Company, which is owned by members of Mr. Westin’s family, for $24,000 per year and on terms and conditions that the Company’s believes are at or more favorable than prevailing market rates. See Item 12 - “Certain Relationships and Related Transactions.”
Item 3.
Item 3. LEGAL PROCEEDINGS
The Company was formed pursuant to the Plan of Reorganization, which was proposed by the Partnerships in January 1997 and confirmed by the bankruptcy court on September 30, 1998. See Item 1 - “Business-Formation of the Company and Plan of Reorganization.”
From time to time, the Company is party to litigation arising out in the ordinary course of business. The Company believes that no pending legal proceeding will have a material adverse effect on the Company’s business, financial condition or results of operations.
Item 4.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this Report.
PART II
Item 5.
Item 5. MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
There is currently no public trading market for the Company’s Common Stock. As of December 15, 2002, there were 3,959 stockholders of record.
The outstanding Common Stock of the Company issued pursuant to the Plan of Reorganization is freely tradable by reason of the exemption from registration provided by section 1145 of the Bankruptcy Code.
The Plan of Reorganization prohibits the Company from declaring any dividends on its Common Stock until certain of the notes issued pursuant to the Plan of Reorganization are paid in full or otherwise satisfied. Since the Company’s formation in April 1997, the Company has not paid any dividends on its common stock and does not anticipate doing so in the foreseeable future.
In December 1998, the stockholders of the Company approved the adoption of the Company’s 1997 Employee Stock Incentive Plan, a stock option plan for certain employees and directors. As of September 30, 2002, options to purchase up to a total of 237,164 shares of common stock were granted at exercise prices ranging from $1.00 to $1.10 per share to the officers and directors of the Company. The Company relied on the exemption from the registration requirements of the Securities Act provided by Rule 701 under the Securities Act.
Item 6.
Item 6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
When used in this discussion, the words “expects,” “anticipates,” “estimates,” and similar expressions are intended to identify forward-looking statements. Such statements, which include statements as to the adequacy of the Company’s capital resources, the ability to obtain new sources of capital, and the ability to service its debt obligations as they become due, are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These risks and uncertainties include, but are not limited to, those risks discussed below, as well as the matters discussed in “Factors That May Affect Results.” See Item 1 - “Description of Business-Factors That May Affect Results.” These forward-looking statements speak only as of the date hereof. The Company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in the Company’s expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.
Results of Operations
Overview
Operations for the twelve months ended September 30, 2002 reflect partial year operations for one property and a full year of operations for six of the Company’s eight properties. The property in Chanute, KS closed and is held for sale. Operations for the twelve months ended September 30, 2001 reflect partial year operations for two of the Company’s properties and a full year for eight of the Company’s properties.
Twelve Months Ended September 30, 2002 Compared to the Twelve Months Ended September 30, 2001
Property gross revenue increased from $10,520,000 for the twelve months ended September 30, 2001 to $10,597,000 for the twelve months ended September 30, 2002, reflecting generally higher rental rates. In general, higher rates reflect an increase in the kinds and quantities of services being provided to residents.
Payments on the Company’s secured indebtedness were allowed to be deferred during a moratorium period from June, 2000 through January, 2001. To the extent amounts have been expended to make improvements to the Company’s Hastings, NE property these payments have been forgiven. During the periods ended September 30, 2002 and September 30, 2001, $89,000 and $374,000, respectively, was paid or incurred for such improvements.
Other income decreased from $66,000 in 2001 to $8,000 in 2002.
Property operating expenses decreased from $8,960,000 in the 2001 period to $8,575,000 in the 2002 period, reflecting higher costs of providing higher levels of services primarily driven by higher personnel costs offset by lower costs for insurance and a month less operations at the Cumberland, MD property and no costs for the Chanute, KS and Manitowoc, WI properties.
Administrative and overhead expenses decreased from $734,000 in the 2001 period to $687,000 in the 2002 period. The decrease is reflected in lower amounts for each classification of expense in the 2002 period except for personnel and occupancy costs which increased during the period. Administrative and overhead expenses for the 2002 period consisted of $510,000 in salaries and other personnel-related costs including employee benefits, payroll taxes and travel expenses; legal and accounting expenses of $55,000; office and occupancy costs of $35,000; and other administrative costs of $87,000. Administrative and overhead expenses for the 2001 period consisted of $475,000 in salaries and other personnel-related costs including employee benefits, payroll taxes and travel expenses; legal and accounting expenses of $65,000; office and occupancy costs of $28,000; and other administrative costs of $166,000. Within other administrative costs are $58,000 of expenses paid and capitalized during the 2000 period for reports and appraisals required to refinance debt which were expensed in 2001 when financing was not obtained.
Stock option compensation increased from $210,000 during the 2001 period to $215,000 during the 2002 period, reflecting fewer options being ceded in the 2002 period.
Income tax expense decreased from $445,000 for the 2001 period to $4,000 in 2002, due primarily to the adjustment of deferred taxes in the earlier period.
Interest expense increased from $1,002,000 in the 2001 period to $1,025,000 in the 2002 period, primarily due to interest attributable to a note secured by the Company’s Cumberland, MD facility.
Liquidity and Capital Resources
Cash and cash equivalents increased from $188,000 at September 30, 2001 to $519,000 at September 30, 2002. Net cash provided by operations was $313,000 in the 2002 period compared to net cash provided by operations of $379,000 in the 2001 period. This change was primarily due to greater deferrals of interest payments in the 2001 period.
Net cash provided by investing activities in the 2002 period was $2,507,000 consisting of sales proceeds of $200,000 from the sale of the Company’s interest in the joint venture , sales proceeds of $2,543,000 from the sale of the facility in Cumberland, MD and the recovery of $90,000 in advances to the joint venture. Offsetting these were additions to property and equipment of $326,000 at the Company’s facilities. Net cash used by investing activities was $673,000 in 2001, reflecting additions to property and equipment at the Company’s facilities
Net cash used in financing activities in the 2002 period was $2,489,000 consisting primarily of regular and special principal payments of $2,485,000 on secured notes payable and tax notes. Net cash provided by financing activities in the 2001 period was $127,000 consisting of new notes payable proceeds of $550,000 offset by principal payments on Superfirst notes payable of $366,000, principal payments on tax notes of $50,000 and principal payments on lease obligations of $7,000.
Notes payable (in thousands) consist of the following at September 30, 2002:
As of September 30, 2002 there are four regular mortgage notes, dated September 30, 1998, that bear interest at 8% per annum. Interest on each of the notes is payable monthly at a rate of 6% per annum. Accrued and unpaid interest resulting from this deferral provision increased by $231,926 and $278,309 respectively, during the years ended September 30, 2002 and 2001. As of September 30, 2002, the total amount of accrued and unpaid interest on these notes is $908,680. The notes were originally due on September 30, 2001 but were extended to
September 30, 2002 and additionally extended to September 30, 2003 after significant principal reductions. They may be extended for an additional period of one year upon payment of $222,000 before September 30, 2003. On a quarterly basis, any portion of the 8% interest which is unpaid and 75% of any computed net cash flow from the properties securing the notes is payable. To the extent that this calculation results in a payment of principal, that sum is to be retained by the lender as a reserve for capital improvements. No amounts were computed to be payable under this provision during the years ended September 30, 2002 and 2001. These notes are secured by first mortgage liens on properties in Dickinson, ND, Williston, ND, Fort Madison, IA and Hastings, NE.
The Rock Island mortgage note, dated September 30, 1998, bears interest as follows: from October 1, 1998 through September 30, 1999, the lesser of 3% per annum on the unpaid principal balance or computed cash flow from the Rock Island property; from October 1, 1999 through September 30, 2000, the greater of 3% per annum on the unpaid principal balance or computed cash flow from the Rock Island property; from October 1, 2000 until maturity, the greater of 4% per annum on the unpaid principal balance or computed cash flow from the Rock Island property. For the year ended September 30, 200 interest payable $165,240 was computed and $171,525 was paid. For the year ended September 30, 2001, interest payable of $110,160 was computed and $62,565 was paid. The note is secured by a first mortgage lien on the property located in Rock Island, IL and was due on September 30, 2001 but was extended to September 30, 2003.
By agreement with the holder of the regular mortgage notes and the Rock Island mortgage note, minimum interest payments required to be paid from June, 2000 through January, 2001 have been deferred to provide funds to perform substantial modifications to the property located in Hastings, NE. These modifications are required by local licensing authorities in order to continue the operation of the property as an assisted living facility. Accrued and unpaid interest pursuant to this arrangement amounted to $467,870 by January, 2001. For the years ended September 30, 2002 and 2001, respectively, $89,162 and $374,049 were incurred for the modifications required on the Hastings, NE property leaving a remaining balance of $4,659 deferred.
The tax notes bear interest at 8% per annum. Payments of interest and principal are due semi-annually each January and July in the amount of $5,886 through January, 2004 and each February and August in the amount of $26,638 through February,2004.
Future maturities of notes payable (in thousands) at September 30, 2002 are as follows:
Virtually all of the Company’s long-term debt will come due next year, subject to an extension of an additional year upon the repayment of substantial amounts of principal. In addition, the loans provide for substantial discounts for early repayment. As a result of the Company’s economic difficulty, we have been actively pursuing strategic transactions in order to
satisfy the needs of our creditors and to maximize stockholder value. Unfortunately, we have met with little success in these endeavors. Accordingly, we believe it is in the best interests of our stockholders to sell substantially all of the Company’s assets, dissolve the corporation and distribute any available proceeds to the Company’s stockholders. Management believes that in order to obtain the largest possible discount on the secured indebtedness, we must offer the note holder payment well before the final due date for these notes, which is September 30, 2004 if all of the possible extensions are exercised. The Company has engaged in preliminary discussions with the holder of the secured obligations and believes that an agreement may be reached to reduce the existing debt from over $12 million to approximately $6 million, representing a discount of approximately 50% from the total otherwise due. The board of directors believes that if the Company is unable to negotiate this discount, there will be no proceeds available for distribution to our stockholders. Subject to stockholder approval, we intend to liquidate and distribute to our stockholders available proceeds from the sale of the assets. We believe that we will be able to generate enough cash through these sales to pay creditors, and subject to our ability to obtain a discount on the repayment of our secured indebtedness, that the sale of such assets would be sufficient to effect a distribution of proceeds to all of our stockholders.
Impact of Inflation
Management believes that the Company’s operations have not been materially adversely affected by inflation. The Company expects that it will be able to offset the effects of inflation on salaries and other operating expenses by increases in rental rates, subject to applicable restrictions in North Dakota, where the Company receives subsidies.
Item 7.
Item 7. FINANCIAL STATEMENTS
AGEMARK CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders and
Board of Directors of
Agemark Corporation
We have audited the accompanying balance sheet of Agemark Corporation (a Nevada corporation) as of September 30, 2002, and the related statements of operations, stockholders’ equity, and cash flows for the years ended September 30, 2002 and 2001. We have also audited the financial statement Schedule XI. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Agemark Corporation as of September 30, 2002, and the results of its operations and its cash flows for the years ended September 30, 2002 and 2001 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement Schedule XI, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
TIMPSON GARCIA, LLP
Oakland, California
December 19, 2002
AGEMARK CORPORATION
BALANCE SHEET
September 30, 2002
(In thousands except share data)
See accompanying notes to financial statements.
AGEMARK CORPORATION
STATEMENTS OF OPERATIONS
Years Ended September 30, 2002 and 2001
(In thousands except share data)
See accompanying notes to financial statements.
AGEMARK CORPORATION
STATEMENTS OF STOCKHOLDERS’ EQUITY
Years Ended September 30, 2002 and 2001
(In thousands)
See accompanying notes to financial statements.
AGEMARK CORPORATION
STATEMENTS OF CASH FLOWS
Years Ended September 30, 2002 and 2001
(In thousands)
See accompanying notes to financial statements.
AGEMARK CORPORATION
NOTES TO FINANCIAL STATEMENTS
Note 1. Organization and Significant Accounting Policies
Williston, ND
January, 1998
Beatrice, NE
April, 1998
Chanute, KS
April, 1998
Cumberland, MD
April, 1998
Manitowoc, WI
April, 1998
Port Huron, MI
April, 1998
Fort Madison, IA
July, 1998
Hastings, NE
July, 1998
Dickinson, ND
July, 1998
Rock Island, IL
July, 1998
All of the above properties transferred and retained by the Company are renovated hotels that have been designated as “Certified Historic Structures,” except for the two facilities in North Dakota, which are modern buildings. All of the locations are operated as senior residential and assisted living facilities, except for the Manitowoc, WI property. These facilities provide an apartment style residence, three meals per day, housekeeping, transportation, activities and 24-hour non-medical assistance to elderly residents for a monthly fee. Revenues are received directly from residents, their family, or another responsible party. Services are generally not covered by government or private insurance programs, except in North Dakota, where the State government provides limited subsidies. Resident fee revenue is recognized when services are rendered.
(Continued)
NOTES TO FINANCIAL STATEMENTS
Note 1. Organization and Significant Accounting Policies (Continued)
Organization: (Continued)
The property located in Manitowoc, WI was operated as an apartment complex. Those units were generally rented on a month-to-month basis.
Management uses estimates and assumptions in preparing financial statements. Those estimates and assumptions affect the reported amounts of assets and liabilities, and the reported revenues and expenses. Actual results could differ from those estimates.
Property and Equipment:
Property and equipment transferred to the Company pursuant to the Plan is carried at amounts stated in the Plan. Additions to property and equipment are stated at cost. Depreciation of buildings is computed using the straight-line method over estimated useful lives of forty years. Personal property is depreciated using the straight-line method over useful lives of fifteen years.
In accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, these long-lived assets to be held and used by the Company are reviewed to determine whether any events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. For long-lived assets to be held and used, the Company bases its evaluation on such impairment indicators as the nature of the assets, the future economic benefit of the assets, any historical or future profitability measurements, as well as other external market conditions or factors that may be present. If such impairment indicators are present or other factors exist that indicate that the carrying amount of the asset may not be recoverable, the Company determines whether an impairment has occurred through the use of an undiscounted cash flows analysis of assets at the lowest level for which identifiable cash flow exists. If an impairment has occurred, the Company recognizes a loss for the difference between the carrying amount and the estimated value of the asset.
Investment in Joint Venture:
The Company has adopted the equity method of accounting for 20% or more owned investee companies. Under this method, the Company’s equity in the earnings or losses of these companies is reflected in the Company’s earnings.
(Continued)
NOTES TO FINANCIAL STATEMENTS
Note 1. Organization and Significant Accounting Policies (Continued)
Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes. Deferred taxes are recognized for differences between the basis of assets and liabilities for financial statement and income tax purposes. The differences relate primarily to the accrual of compensated absences that are not deductible for income tax purposes, stock options and differences between the carrying amounts of the property and equipment transferred to the Company pursuant to the Plan. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be deductible or taxable when the assets and liabilities are recovered or settled. Deferred taxes are also recognized for operating losses that are available to offset future taxable income.
Stock-Based Compensation:
The Company has elected to account for its stock option plan under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. Accordingly, no compensation expense has been recognized for the stock option grants.
Cash and Cash Equivalents:
For purposes of the statement of cash flows, the Company considers all money market funds purchased with a maturity of three months or less to be cash equivalents.
Note 2. Cash and Cash Equivalents
At September 30, 2002, cash and cash equivalents included approximately $306,000 invested in Vanguard Federal Money Market Fund. Vanguard Federal Money Market Fund invests in United States Treasury obligations, securities issued or guaranteed by agencies of the U.S. Government, and repurchase agreements collateralized by these obligations and securities.
(Continued)
NOTES TO FINANCIAL STATEMENTS
Note 3. Property and Equipment
Property and equipment (in thousands) consists of the following at September 30, 2002:
Plan values represent the assets transferred from the four publicly registered limited partnerships and two privately held limited partnerships pursuant to the Order of the U.S. Bankruptcy Court. The Partnerships were as follows:
Publicly registered limited partnerships:
Historic Housing for Seniors Limited Partnership (HHS I)
Historic Housing for Seniors II Limited Partnership (HHS II)
Historic Housing for Seniors III Limited Partnership (HHS III)
Housing for Seniors Participating Mortgage Fund Limited Partnership (PIF I)
Privately held limited partnerships:
Dickinson Associates Limited Partnership
Williston Associates Limited Partnership
Under the Plan, those facilities which were determined to have the strongest long-term potential for generating cash flow to support ongoing debt or which were needed to secure certain obligations from previous loans were transferred to the Company. The following is a summary (in thousands) of the properties the Company currently holds, net of transfers, and the adjustments made to historical values to arrive at Plan values pursuant to the Order of the U.S. Bankruptcy Court:
(Continued)
NOTES TO FINANCIAL STATEMENTS
Note 3. Property and Equipment (Continued)
In connection with the transfers of the facilities, the Company also assumed various notes payable. The following is a summary (in thousands) of the notes payable assumed by the Company:
Note 4. Accounts Payable and Accrued Liabilities
Note 5. Notes Payable
(Continued)
NOTES TO FINANCIAL STATEMENTS
Note 5. Notes Payable (Continued)
(Continued)
NOTES TO FINANCIAL STATEMENTS
Note 5. Notes Payable (Continued)
(Continued)
NOTES TO FINANCIAL STATEMENTS
Note 7. Lease Obligations
Note 8. Transactions With Affiliates
(Continued)
NOTES TO FINANCIAL STATEMENTS
Note 8. Transactions With Affiliates (Continued)
For the years ended September 30, 2002 and 2001, administrative expenses include rent for the Company’s headquarters in the amount of $24,000 paid pursuant to the above lease between the Company and the Waterford Company.
During 1999, the Company entered into a joint venture agreement with entities controlled by Richard J. Westin and Jesse A. Pittore, directors and officers of the Company (see Note 9).
During 2002, entities controlled by Richard J. Westin and Jesse A. Pittore, directors and officers of the Company, purchased the Company’s interests in the joint venture discussed above and in Note 9 and the Cumberland, MD facility (see Note 10).
Note 9. Investment in Joint Venture
During 1999, the Company entered into an agreement with entities controlled by Richard J. Westin and Jesse A. Pittore, directors and officers of the Company, to jointly develop, build and operate an Alzheimer’s facility in Cumberland, MD. The agreement provided, in part, for the Company to contribute land located adjacent to its Cumberland, MD facility upon which the Alzheimer’s facility was built. The Westin and Pittore entities funded all of the costs to build, furnish and operate the facility. For its contribution of land, the Company received a 25% ownership interest and 25% of all net income and proceeds from the operation of the facility. This facility began operations in August, 2000.
The following information (in thousands) summarizes the activity of the joint venture since its inception:
Note 10. Loss on Disposition of Property
(Continued)
NOTES TO FINANCIAL STATEMENTS
Note 10. Loss on Disposition of Property (Continued)
On August 31, 2002, the Company sold its facility located in Cumberland, MD to entities controlled by Richard J. Westin and Jesse A. Pittore, directors and officers of the Company, as follows:
Note 11. Loss from Write-down of Long-lived Assets
Note 12. Income Taxes
(Continued)
NOTES TO FINANCIAL STATEMENTS
Note 12. Income Taxes(Continued)
SFAS No. 109, Accounting for Income Taxes, requires a valuation allowance to be recorded when it is more likely than not that some or all of the deferred tax assets will not be realized. At September 30, 2001, a valuation allowance for the full amount of the net deferred tax asset was recorded because of the uncertainties as to the amount of taxable income that will be generated in future years.
At September 30, 2001, the Company has federal net operating loss carryforwards of approximately $7,410,000 that will expire as follows:
Note 13. 401(k) Savings Plan
(Continued)
NOTES TO FINANCIAL STATEMENTS
Note 14. Net Loss per Common Share
Note 15. Employee Stock Incentive Plan
(Continued)
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTES TO FINANCIAL STATEMENTS
Note 16. Subsequent Event
(Continued)
AGEMARK CORPORATION
SCHEDULE XI
REAL ESTATE AND ACCUMULATED DEPRECIATION
September 30, 2002
[Additional columns below]
[Continued from above table, first column(s) repeated]
Item 8.
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
Item 9.
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
As of September 30, 2002, the directors and executive officers and their respective ages of the Company are as follows:
Name
Age
Position
Richard J. Westin
Director, Co-Chairman of the Board, Chief Executive Officer and Secretary
Jesse A. Pittore
Director, Co-Chairman of the Board, President
Robert R. Herrick, M.D.
Director
James P. Tolley
Treasurer and Chief Financial Officer
The business experience of the Company’s directors and executive officers, including each such person’s principal occupations and employment during the last five years, is summarized below.
Richard J. Westin has been Director, Co-Chairman of the Board of Directors, Chief Executive Officer and Secretary of the Company since its incorporation in April 1997. From 1986 until 1998, Mr. Westin served as President of The Westor Financial Group, Inc., now, Opus X Inc. (“Opus”), a company specializing in financing the development of assisted living facilities across the county. Mr. Westin received his B.A. degree from the University of North Carolina at Chapel Hill and his Juris Doctor degree from the University of California’s Hastings College of the Law.
Jesse A. Pittore has been Director, Co-Chairman of the Board of Directors, President and Chief Operating Officer of the Company since its incorporation in April 1997. From 1986 until 1998, Mr. Pittore was Chairman of the Board of Opus. Mr. Pittore holds a Bachelor of Science degree in Industrial Engineering and Business Management from the University of California, Berkeley.
Robert R. Herrick, M.D. has been a Director of the Company since January 1998. Dr. Herrick has been in private practice in neurology in Northern California since 1971. In 1997, he served as Chief of Staff to Doctors’ Medical Center in San Pablo, California and currently serves as President of the Board of Governors of that hospital. Dr. Herrick received his bachelor’s degree from Oberlin College in Ohio and his medical degree from the University of Chicago Medical School.
James P. Tolley has been Treasurer and Chief Financial Officer of the Company since its incorporation in April 1997. From 1988 to present, he has served as Controller of Opus.
Mr. Tolley is a Certified Public Accountant and holds a Bachelor of Science degree from California State University, San Francisco.
Section 16(a) Beneficial Ownership Reporting Compliance. Under the securities laws of the United States, the Company’s directors, executive officers and any persons holding more than 10% of the Company’s Common Stock are required to report their initial ownership of the Company’s Common Stock and any subsequent changes in that ownership to the Securities and Exchange Commission. Specific due dates for these reports have been established and the Company is required to identify in this Annual Report on Form 10-KSB those persons who failed to timely file these reports. Based on a review of the Company’s records, all of the filing requirements were satisfied for the fiscal year ended September 30, 2002.
Item 10.
Item 10. EXECUTIVE COMPENSATION
Pursuant to the Plan of Reorganization, for two years after the effective date of the Plan of Reorganization, which period ended on September 30, 2000, Messrs. Westin and Pittore have agreed not to accept more than $1,000 per month in salary for their services as officers of the Company. The Plan also provides that neither of Messrs. Westin nor Pittore may receive compensation for his services as director of the Company except for stock options and other perquisites as set forth in each of their employment agreements. See “-Employment Agreements” below. Dr. Herrick, who is a nonemployee director received a payment of $25,000 for his services from June 1, 2002 to May 31, 2003 which was paid in October, 2002.
Summary Compensation Table
Employment Agreements
Each of Messrs. Pittore and Westin have entered into employment agreements with the Company dated as of September 30, 1998. The employment agreements provide that from October 1, 1998 through September 30, 2000, each shall be paid a salary at the annual rate of $12,000. Thereafter, the salary to be paid to each shall be at the discretion of the board of
directors, but in no case shall such salary be less than $240,000 per year. The agreements also provide that each of Messrs. Pittore and Westin is eligible for an annual incentive bonus to be granted in the discretion of the board of directors with such bonus to be up to 100% of base salary. The agreements provide further that the Company shall grant to each of Messrs. Pittore and Westin options to purchase up to 83,333 shares of the Company’s Common Stock, pursuant to the Company’s 1997 Employee Stock Incentive Plan. Pursuant to the agreements, each of Messrs. Pittore and Westin are eligible for loans from the Company up to $720,000 subject to certain terms and conditions provided in the employment agreements.
Item 11.
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table shows as of December 15, 2002 (i) the beneficial owners of more than 5% of the outstanding Common Stock of the Company and their holdings and (ii) the number of shares held by each director and each executive officer listed in the table under the section titled “Executive Compensation” below and all directors and executive officers as group, as reported by each person. Except as noted, each person has sole voting and investment power over shares indicated in the table.
Stock Incentive Plan
In December 1998, the stockholders of the Company approved the adoption of the 1997 Employee Stock Incentive Plan, a stock option plan for certain employees and directors. The total number of shares that may be issued upon the exercise of options under this plan is 250,000. Also under this plan, no participant may be granted more than 100,000 shares and no awards may be granted after November 21, 2007.
Options to purchase up to a total of 237,164 shares of common stock have been granted at exercise prices ranging from $1.00 to $1.10 per share to the officers, directors and employees of the Company. On June 1, 2002 the officers and directors exercised their vested options and acquired 187,749 shares of the Company’s common stock by executing promissory notes and pledge agreements totaling $204,415. The notes have a term of four years and bear interest at 5%. Details of the options are:
Item 12.
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Evergreen, which is jointly owned by Messrs. Westin and Pittore, managed all of the Company’s properties under management agreements that were substantially amended pursuant to the Plan of Reorganization through the month of May, 2001. The Company and Evergreen entered into individual contracts for each of the facilities owned by the Company. Each management contract’s initial term is three years, and Evergreen has the option to extend each management contract for an additional three year term. The management fee paid pursuant to each management contract is based on a percentage of gross revenues of the property, with the contract management fee being 4.5% prior to October 1, 2001 and 3.75% thereafter. The existing contracts were assigned to Opus X, Inc., also an affiliate of Westin and Pittore on June 1, 2001. The following table sets forth the management fees earned by Evergreen and Opus for each property for the years ended September 30, 2002 and 2001.
The Company leases its headquarters in Berkeley, California from The Waterford Company, which is owned by members of Mr. Westin’s family, for $24,000 per year and on terms and conditions that the Company’s believes are at or more favorable than prevailing market rates. See Item 2 - “Description of Property.”
In July, 2002 the Company disposed of its interest in CountryHouse, LLC. This entity was organized in conjunction with entities controlled by Richard J. Westin and Jesse A. Pittore, directors and officers of the Company, to jointly develop, build and operate an Alzheimer’s facility in Cumberland, Maryland. The Company contributed land located adjacent to its Cumberland, Maryland facility upon which the Alzheimer’s facility has been built. The Westin and Pittore entities have funded or guaranteed financing of all costs to build, furnish and operate the facility. For its contribution of land, the Company received a 25% ownership interest and 25% of all net income and proceeds from the operation of the facility. The Company received $200,000 for its interest which was sold to the joint venturers.
On August 30, 2002, Agemark Corporation (the “Company”) completed the sale of certain assets and liabilities related to the ownership and operation of its 85-bed assisted living facility located in Cumberland, MD (the “Kensington Algonquin”). Title to the Kensington Algonquin facility was transferred to Kensington Algonquin, LLC, a Nevada single member limited liability company, wholly owned by the Company in calendar year 2000 in anticipation of a financing transaction that was never consummated. Since that transfer the entity has been 100% owned by the Company. The form of the August 30, 2002 transaction was the sale of the Company’s member interest to Richard J. Westin and Jesse A. Pittore for a price of $3,300,000 less a credit for repairs of $200,000.
As indicated above, the purchasers in these two transactions are affiliates of the Company. Both Richard J. Westin and Jesse A. Pittore are officers and directors of the Company. Their offers for these property interests of $200,000 and $3,300,000 were tested in an auction process that took place during the month of May, 2002. The auction was advertised in the national edition of the Wall Street Journal and the Baltimore Sun. These advertisements produced approximately 30 responses for additional information. Each of the respondents to the advertisements was sent additional information regarding the property and the auction process.
No further interest in the property was expressed by any of these respondents. None of the respondents pursued the auction further by visiting the property or bidding on the property. The auction was held on June 5, 2002. The only bids made on the property were those by Messrs Westin and Pittore.
Item 13.
Item 13. FINANCIAL STATEMENTS AND EXHIBITS
Item 14.
Item 14. CONTROLS AND PROCEDURES
(a) Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-14(c) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), within 90 days of the filing date of this report. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective.
(b) There have been no significant changes (including corrective actions with regard to significant deficiencies or material weaknesses) in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation referenced in paragraph (a) above.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Richard J. Westin and James P. Tolley, and each of them, his true and lawful attorneys-in-fact, each with full power of substitution, for him in any and all capacities, to sign any amendments to this report on Form 10-KSB and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact or their substitute or substitutes may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dated indicated.
Supplemental Information to be Furnished With Reports Filed Pursuant to Section 15(d) of the Exchange Act by Non-reporting Issuers.
No such annual report or proxy material has been sent to security holders.
CERTIFICATIONS
Certification of Chief Executive Officer
I, Richard J. Westin, certify that:
1. I have reviewed this annual report on Form 10-KSB of Agemark Corporation;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the period presented in this annual report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
(b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and
(c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
(a) all significant deficiencies in the design or operation of internal controls which could aversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6. The registrant’s other certifying officer and I have indicated in this annual report whether there are significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Dated: December 27, 2002
/s/ Richard J. Westin
Richard J. Westin
Chief Executive Officer
Certification of Chief Financial Officer
I, James Tolley, certify that:
1. I have reviewed this annual report on Form 10-KSB of Agemark Corporation;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the period presented in this annual report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
(b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and
(c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
(a) all significant deficiencies in the design or operation of internal controls which could aversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6. The registrant’s other certifying officer and I have indicated in this annual report whether there are significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Dated: December 27, 2002
/s/ James Tolley
James Tolley
Chief Financial Officer
Supplemental Information to be Furnished With Reports Filed Pursuant to Section 15(d) of the Exchange Act by Non-reporting Issuers.
No such annual report or proxy material has been sent to security holders.
EXHIBIT INDEX TO
ANNUAL REPORT ON FORM 10-KSB
FOR AGEMARK CORPORATION