<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended March 31, 1998
( ) 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: 1-13845
BALANCED CARE CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 25-1761898
(State of other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5021 LOUISE DRIVE, SUITE 200, MECHANICSBURG, PA 17055
(Address of principal executive offices) (Zip Code)
(717) 796-6100
(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/ No / /
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT MAY 11, 1998
Common Stock, $.001 par value 16,695,343
<PAGE> 2
BALANCED CARE CORPORATION
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
ITEM 1:
FINANCIAL STATEMENTS Page
Consolidated Balance Sheets as of March 31, 1998 and 3
June 30, 1997
Consolidated Statements of Operations for the three months ended 4
March 31, 1998 and 1997
Consolidated Statements of Operations for the nine months ended 5
March 31, 1998 and 1997
Consolidated Statement of Stockholders' Equity for the nine months 6
Ended March 31, 1998
Consolidated Statements of Cash Flows for the nine months ended 7
March 31, 1998 and 1997
Notes to Consolidated Financial Statements 8
ITEM 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 11
CONDITION AND RESULTS OF OPERATIONS
PART II - OTHER INFORMATION
ITEM 2:
CHANGES IN SECURITIES AND USE OF PROCEEDS 26
ITEM 6:
EXHIBITS AND REPORTS ON FORM 8-K 26
(A)Exhibits
(B)Reports on Form 8-K
2
<PAGE> 3
ITEM 1: FINANCIAL STATEMENTS
BALANCED CARE CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
March 31 June 30
1998 1997
(unaudited)
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 20,311 $ 7,908
Accounts receivable (net of allowance for doubtful
accounts of $930 and $330, respectively) 7,579 6,679
Deferred costs 5,090 2,062
Prepaid expenses and other current assets 5,362 945
Assets held for sale 2,800 4,801
-------- --------
Total current assets 41,142 22,395
Restricted investments 1,875 1,825
Property and equipment, net 26,679 4,115
Goodwill, net 13,147 2,219
Other assets 1,658 2,463
-------- --------
Total assets $ 84,501 $ 33,017
======== ========
LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt $ 285 $ 97
Accounts payable 5,651 5,929
Accrued payroll 2,009 1,818
Accrued expenses and other liabilities 4,157 1,251
-------- --------
Total current liabilities 12,102 9,095
Deferred tax liabilities 274 --
Long-term debt, net of current portion 8,290 8,177
Straight-line lease liability 3,090 3,133
Other liabilities 1,045 807
-------- --------
Total liabilities 24,801 21,212
-------- --------
Redeemable preferred stock:
Series B authorized - 5,009,750 shares, issued and outstanding - 0 and
5,009,750 shares at March 31, 1998 and June 30, 1997, respectively,
at redemption value which includes accretion of $1,267
at June 30, 1997 -- 13,249
-------- --------
Stockholders' equity (deficit):
Preferred stock, $.001 par value; 5,000,000 shares
authorized; none issued and outstanding -- --
Preferred stock, Series A authorized - 1,150,958 shares; issued and
outstanding - 0 and 1,150,958 shares at March 31, 1998 and
June 30, 1997, respectively -- 1
Common stock, $.001 par value - authorized - 50,000,000
shares; issued and outstanding - 16,695,343 and 4,024,812
shares at March 31, 1998 and June 30, 1997, respectively 17 5
Additional paid-in capital 63,555 3,961
Accumulated deficit (3,872) (5,411)
-------- --------
Total stockholders' equity (deficit) 59,700 (1,444)
-------- --------
Total liabilities and stockholders' equity $ 84,501 $ 33,017
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
BALANCED CARE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three months ended March 31
---------------------------
1998 1997
(unaudited) (unaudited)
-------- --------
<S> <C> <C>
Revenues:
Patient services $ 14,848 $ 12,683
Resident services 5,202 1,926
Development and management fees 5,039 321
Other revenues 197 23
-------- --------
Total revenues 25,286 14,953
-------- --------
Operating expenses:
Facility operating expenses:
Salaries, wages and benefits 8,753 5,716
Other operating expenses 8,584 6,221
General and administrative expense 3,042 1,517
Lease expense 2,258 1,691
Depreciation and amortization expense 538 190
-------- --------
Total operating expenses 23,175 15,335
-------- --------
Income (loss) from operations 2,111 (382)
Other income (expense):
Interest and other income 235 68
Interest expense (727) (233)
-------- --------
Income (loss) before income taxes 1,619 (547)
Provision for income taxes 272 4
-------- --------
Net income (loss) $ 1,347 $ (551)
======== ========
Pro Forma Basic EPS $ 0.11 $ (0.07)
======== ========
Pro Forma Diluted EPS $ 0.10 $ (0.07)
======== ========
Weighted average shares - Basic 12,554 7,351
======== ========
Weighted average shares - Diluted 13,897 7,351
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
BALANCED CARE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Nine months ended March 31
--------------------------
1998 1997
(unaudited) (unaudited)
-------- --------
<S> <C> <C>
Revenues:
Patient services $ 43,999 $ 27,143
Resident services 12,769 4,151
Development and management fees 8,622 606
Other revenues 289 46
-------- --------
Total revenues 65,679 31,946
-------- --------
Operating expenses:
Facility operating expenses:
Salaries, wages and benefits 23,438 12,339
Other operating expenses 24,713 13,465
General and administrative expense 8,664 3,578
Lease expense 7,162 3,458
Depreciation and amortization expense 1,543 439
-------- --------
Total operating expenses 65,520 33,279
-------- --------
Income (loss) from operations 159 (1,333)
Other income (expense):
Interest and other income 410 145
Interest expense (1,579) (665)
Gain on sale of assets 2,858 --
-------- --------
Income (loss) before income taxes 1,848 (1,853)
Provision for income taxes 309 10
-------- --------
Net income (loss) $ 1,539 $ (1,863)
======== ========
Pro Forma Basic EPS $ 0.16 $ (0.30)
======== ========
Pro Forma Diluted EPS $ 0.14 $ (0.30)
======== ========
Weighted average shares - Basic 9,929 6,135
======== ========
Weighted average shares - Diluted 11,187 6,135
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
BALANCED CARE CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
FOR THE NINE MONTHS ENDED MARCH 31, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PREFERRED A STOCK COMMON STOCK
PAR ISSUED PAR PAID-IN ACCUM.
SHARES VALUE SHARES VALUE CAPITAL DEFICIT TOTAL
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1997 1,151 1 4,025 $ 5 3,961 (5,411) (1,444)
Issuance of common stock -- -- 8,050 7 46,349 -- 46,356
Conversion of Preferred Stock (1,151) (1) 863 1 -- -- --
Accretion of redemption value attributable to Preferred B Stock -- -- -- -- (1,253) -- (1,253)
Conversion of Preferred B Stock -- -- 3,757 4 14,498 -- 14,502
Net Income -- -- -- -- -- 1,539 1,539
------- ------- ------- ------- ------- ------- -------
Balance at March 31, 1998 -- -- 16,695 $ 17 63,555 (3,872) 59,700
======= ======= ======= ======= ======= ======= =======
</TABLE>
6
<PAGE> 7
BALANCED CARE CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended March 31
--------------------------
1998 1997
(unaudited) (unaudited)
-------- --------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) $ 1,539 $ (1,863)
Adjustments to reconcile net income (loss) to net cash used for operating
activities:
Depreciation and amortization 1,543 439
Deferred income taxes 274 --
Gain on sale of assets (2,858) --
Changes in operating assets and liabilities:
Increase in accounts receivable (959) (2,243)
Decrease (increase) in deferred costs (3,028) 33
Decrease (increase) in prepaid expenses and other current assets (4,558) 102
Increase in accounts payable, accrued payroll and
accrued expenses 858 2,286
-------- --------
Net cash used for operating activities (7,189) (1,246)
-------- --------
Cash Flows from Investing Activities:
Proceeds from sale of assets 7,029 --
Purchases of property and equipment (2,402) (956)
Increase in restricted investments (50) (1,272)
Increase in deferred financing costs (1,108) (3,608)
Decrease (increase) in other assets 686 (1,571)
Acquisitions, net of cash acquired (30,678) (5,305)
-------- --------
Net cash used for investing activities (26,523) (12,712)
-------- --------
Cash Flows from Financing Activities:
Proceeds from issuance of long-term debt 174 3,226
Payments on long-term debt (111) (49)
Proceeds from issuance of common stock 46,356 --
Proceeds from issuance of Series A preferred stock -- 451
Proceeds from issuance of Series B preferred stock -- 11,982
Issuance of notes payable 29,675 1,476
Payments on notes payable (29,675) (1,476)
Increase (decrease) in other liabilities (304) 3,576
-------- --------
Net cash provided by financing activities 46,115 19,186
-------- --------
Increase in cash and equivalents 12,403 5,228
Cash and cash equivalents at beginning of period 7,908 567
-------- --------
Cash and cash equivalents at end of period $ 20,311 $ 5,795
======== ========
Supplemental Cash Flow Information:
Cash paid during the period for interest $ 1,576 $ 675
======== ========
Cash paid during the period for income taxes $ 85 $ --
======== ========
Supplemental Non-cash Investing and Financing Activities:
Assets and lease obligations capitalized $ 238 $ --
======== ========
Fair value of stock purchase warrants granted to a lender $ -- $ 898
======== ========
Accretion of preferred B stock $ 1,253 $ 641
======== ========
Acquisitions:
Fair value of assets acquired $(30,821) $(10,028)
Liabilities assumed 143 2,658
Fair value of stock issued -- 2,065
-------- --------
Consideration paid for acquisitions $(30,678) $ (5,305)
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE> 8
BALANCED CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Organization and Background
Balanced Care Corporation ("BAL" or "the Company") was incorporated in
April 1995 and is engaged in the development and acquisition of assisted living
facilities and selective acquisitions of other operations which facilitate
implementation of the Company's balanced care continuum strategy, such as
medical rehabilitation, home health care and skilled nursing. As of March 31,
1998, the Company operated 38 assisted and independent living communities (of
which nine were managed) and 13 skilled nursing facilities. Also at March 31,
1998 the Company had 19 assisted living communities under construction, all of
which were being developed for other operator/lessees and will be managed by the
Company upon completion.
(b) Basis of Presentation
The accompanying consolidated financial statements include the accounts
of the Company and its wholly-owned subsidiaries from their respective
acquisition dates. All significant intercompany accounts and transactions have
been eliminated in the consolidated financial statements.
The financial statements as of, and for the three and nine month
periods ended, March 31, 1998 and 1997, are unaudited, but, in the opinion of
management, have been prepared on the same basis as the audited financial
statements and reflect all adjustments, consisting of normal recurring accruals,
necessary for a fair presentation of the information set forth therein. The
results of operations for the three and nine month periods ended March 31, 1998
are not necessarily indicative of the operating results to be expected for the
full year or any other period. These financial statements and notes should be
read in conjunction with the financial statements and notes included in the
audited consolidated financial statements of the Company for the year ended June
30, 1997 as contained in the Company's registration statement on Form S-1 (1933
Act File #333-37833).
2. INITIAL PUBLIC OFFERING
On February 18, 1998, the Company closed its initial public offering
for 7,000,000 shares of its common stock, par value $.001 par share ("Common
Stock") at a price of $6.50 per share (the "Offering"). Concurrent with the
Offering, the 5,009,750 shares of Series B Preferred Stock and the 1,150,958
shares of Series A Preferred Stock were converted into 4,620,532 shares of
Common Stock (reflective of the three-for-four Common Stock split effective
October 14, 1997).
In connection with the Offering, the Company granted the underwriters
an option to purchase 1,050,000 additional shares of Common Stock at $6.50 per
share. The closing for this option was on March 17, 1998. After the consummation
of the Offering, the conversion of the preferred stock and the exercise of the
underwriters option, the Company had 16,695,343 shares of Common Stock
outstanding.
8
<PAGE> 9
3. PRO FORMA RESULTS OF OPERATIONS
The following unaudited summary, prepared on a pro forma basis,
combines the results of operations of the acquired businesses with those of the
Company as if the acquisitions and leases had been consummated as of the
beginning of the respective periods. The acquired businesses and their
respective acquisition dates were Foster Health Care Affiliates in August 1996,
Keystone Affiliates in January 1997, Heavenly Health Care, Inc. d/b/a Joe Clark
Residential Care Homes in May and August 1997, Feltrop's Personal Care Home and
Butler Senior Care in October 1997, Triangle Retirement Services, Inc. d/b/a
Northridge Retirement Center in December 1997 and Gethsemane Affiliates in
January 1998. The pro forma results include the impact of certain adjustments
such as: amortization of goodwill, depreciation of assets acquired, interest on
acquisition financing and lease payments on the leased facility (in thousands,
except for per share amounts):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31
1998 1997
-------- --------
<S> <C> <C>
Revenue ........................................ $ 70,055 $ 53,531
Expense ........................................ (68,730) (56,123)
-------- --------
Net income (loss) .............................. $ 1,325 $ (2,592)
======== ========
Net income (loss) per common share - diluted ... $ 0.12 $ (0.42)
======== ========
</TABLE>
The unaudited pro forma results are not necessarily indicative of what actually
might have occurred if the acquisitions had been completed as of July 1, 1997
and 1996, respectively. In addition, they are not intended to be a projection of
future results of operations. These unaudited pro forma results of operations
should be read in conjunction with the pro forma financial statements and notes
thereto included in the Registration Statement on Form S-1 relating to the
Offering.
4. ASSET SALES
In October 1997, the Company sold the inventory, furniture and
equipment, certain prepaid assets and the operations of an institutional
pharmacy in Missouri for approximately $4,700,000, net of transaction costs.
This resulted in a non-recurring gain of $2,858,000. The Company is continuing
to market the Wisconsin assisted living facilities.
Effective January 1, 1998, the Company sold certain assets and assigned
the leasehold interests of ten of its operating subsidiaries to Operator/Lessees
for an aggregate price of approximately $2,645,000, net of transaction costs.
The Company has entered into management agreements with the Operator/Lessees and
has the option to purchase the stock or assets of the Operator/Lessees for fair
market value at any time during the term of the management agreements.
5. PRO FORMA EARNINGS PER SHARE
Pro forma earnings (loss) per share is computed using the weighted
average number of common shares and common equivalent shares outstanding (using
the treasury stock method) assuming the pro forma conversion of preferred shares
into common. For the period ended March 31, 1997, common equivalent shares from
stock options and warrants are excluded from the computation as their effect is
antidilutive.
9
<PAGE> 10
A reconciliation of the weighted average shares used in the computation
of pro forma earnings per share follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Weighted average common shares outstanding ... 11,014 3,983 6,335 3,669
Pro forma conversion of preferred shares ..... 1,540 3,368 3,594 2,466
------ ------ ------ ------
Shares used for pro forma basic EPS .......... 12,554 7,351 9,929 6,135
Stock options and warrants converted using the
treasury stock method ...................... 1,343 -- 1,258 --
------ ------ ------ ------
Shares used for pro forma diluted EPS ........ 13,897 7,351 11,187 6,135
====== ====== ====== ======
</TABLE>
6. RETIREMENT PLAN
Effective January 1, 1998 the Company formed a 401(k) savings plan
which covers substantially all employees with one year and more than 1,000 hours
of annual service, The plan allows employees to make tax deferred contributions
to the plan. The Company makes matching contributions based on the amount of
employee contributions; but in an amount that does not exceed 2% of wages.
Matching contributions totaled approximately $30,000 for the three and nine
month periods ended March 31, 1998.
10
<PAGE> 11
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis addresses (i) the Company's
results of operations on a historical basis for the three and nine month periods
ended March 31, 1998 and 1997, and (ii) liquidity and capital resources of the
Company. This information should be read in conjunction with the Company's
condensed consolidated financial statements contained elsewhere in this
report.This report contains, in addition to historical information, forward
looking statements that involve risks and uncertainties. The Company's actual
results could differ materially. Factors that could cause or contribute to such
differences include, but are not limited to, those disclosed below in "Risk
Factors".
COMPANY OVERVIEW
The Company was formed in April 1995 to develop senior care continuums
that meet the needs of upper middle, middle and moderate income populations in
non-urban, secondary markets. The Company intends to utilize assisted living
facilities in selected markets as the primary entry point and service platform
to develop the balanced care continuums consisting of various health care and
hospitality services, including, where appropriate, rehabilitation therapies,
physical, occupational and speech therapy, home health care services on an
intermittent basis, dementia and Alzheimer's services and skilled/subacute care
delivered in a skilled nursing setting, enabling residents to age in place.
Since its inception, the Company has grown primarily through
acquisitions. As of March 31, 1998, the Company has also designed, developed and
opened ten of its signature assisted living facilities. As of this date, the
Company operated a total of 34 assisted living facilities, 13 skilled nursing
facilities and four independent living facilities in Pennsylvania, Missouri,
Arkansas, North Carolina, Ohio and Wisconsin, as well as a home health care
agency in Missouri and a rehabilitation therapy operation in Pennsylvania.
Assuming completion of the planned divestiture of the Company's assisted living
facilities in Wisconsin, at March 31, 1998 the Company owned nine, leased 26 and
managed nine senior living and health care facilities in Pennsylvania, Missouri,
Arkansas, North Carolina and Ohio with a capacity for 1,565 assisted living
residents, 1,294 skilled nursing patients and 154 independent living residents.
In addition to the ten signature assisted living facilities opened as of March
31, 1998, the Company has signed agreements to develop and manage 19 assisted
living facilities currently under construction, which are scheduled to open from
April 1998 through February 1999. Additionally the Company has signed agreements
to develop and manage an additional eight assisted living facilities that closed
on construction financing in March 1998, and are in the pre-construction phase.
These eight facilities are scheduled to open from January through May 1999.The
following table summarizes the Company's facilities:
<TABLE>
<CAPTION>
FACILITY COUNT
MARCH 31
1998 1997
---- ----
<S> <C> <C>
Developed Assisted Living Facilities ................... 10 0
Acquired Assisted Living Facilities .................... 24 14
Skilled Nursing Facilities ............................. 13 12
Independent Living Facilities .......................... 4 4
---- ----
51 30
==== ====
</TABLE>
Over the next three years, the Company plans to develop approximately
75 of its signature assisted living facilities in targeted secondary markets
creating additional capacity of approximately 6,000 residents. The Company
estimates that the cost to complete these signature assisted living facilities
will be between
11
<PAGE> 12
$500 and $600 million. In addition, the Company expects that its need for
financing to fund future acquisitions could be significant. The timing and size
of any future acquisitions cannot be predicted.
In order to achieve its growth plans, the Company will be required to
obtain substantial additional financing. The Company anticipates that it will
use a combination of the net proceeds to the Company from its recently completed
public offering, existing lease financing commitments and other arrangements
with health care real estate investment trusts ("REITs"), joint venture leasing
arrangements with third parties, a working capital line of credit, future equity
and debt financing and cash generated from operations to fund its development
and acquisition activities. The estimated costs over the next three years of the
Company's planned development and expansion are significantly in excess of
estimated future cash flows from operations, proceeds from its recently
completed public offering and existing REIT and other financing arrangements.
There can be no assurance that any additional financing needed to fund the
Company's growth plans will be available.
Management believes that its current data systems are adequate for
current operations and provide the flexibility to accommodate the planned growth
of its operations without disruption or significant modification to existing
systems through fiscal year 1999. The Company plans to begin upgrading the
existing financial system during fiscal year 1999 to accommodate future growth.
The system upgrade will involve expansion of the Company's systems staff and a
substantial financial commitment.
The Company uses high quality hardware and operating systems from
current and proven technologies to ensure reliability and optimum system
performance. All vendors of the Company's information systems have advised the
Company that such systems accommodate year 2000 calendar changes without
modification. As a result, the Company does not expect year 2000 issues to have
a material impact on financial position, results of operations or cash flows in
future periods.
Historically, the Company has generated revenues from three primary
sources: patient services, resident services and other revenues. Patient
services revenues include charges for room and board, rehabilitation therapies,
pharmacy, medical supplies, subacute care and other programs provided to
patients in skilled nursing facilities as well as rehabilitation services
provided to assisted living facility residents. Resident services include all
revenues earned from services provided to assisted living facility residents
except for therapies and home health care services provided by the Company's
licensed agencies which are included in patient services revenues. Other
revenues include development fees, management fees and miscellaneous other
revenues. Development fees and management fees are earned for developing and
managing assisted living facilities for REITs, and other owners or lessees. As
the Company implements its business plan, management believes that the mix of
the Company's revenues may change and that revenues from assisted living
resident services and development activities will increase as a percentage of
total revenues.
The Company classifies its operating expenses into the following
categories: (i) facility operating expenses which include labor, food,
marketing, rehabilitation therapy costs, and other direct facility expenses;
(ii) general and administrative expenses, which primarily include corporate
office expenses, regional office expenses, development and pre-opening expenses
and other overhead costs; (iii) lease expense, which includes rent for the
facilities operated by the Company as well as corporate office and other rent;
and (iv) depreciation and amortization. In anticipation of its planned growth,
the Company has made significant investments in its infrastructure during fiscal
1997 and 1998. These investments include attracting management and regional
personnel and installing information systems to support and manage growth.
12
<PAGE> 13
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain data
as a percentage of total revenue:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
--------- ---------
1998 1997 1998 1997
----- ----- ----- -----
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Facility operating expenses 68.6 79.8 73.3 80.8
General and administrative expense 12.0 10.1 13.2 11.2
Lease expense 8.9 11.4 10.9 10.8
Depreciation and amortization expense 2.2 1.3 2.4 1.4
----- ----- ----- -----
Income (loss) from operations 8.3 (2.6) 0.2 (4.2)
Other income (expense):
Interest and other income 0.9 0.4 0.6 0.5
Interest expense (2.8) (1.5) (2.4) (2.1)
Gain on sale of assets -- -- 4.4 --
----- ----- ----- -----
Income (loss) before income taxes 6.4 (3.7) 2.8 (5.8)
Provision for income taxes 1.1 -- 0.5 --
----- ----- ----- -----
Net income (loss) 5.3 (3.7) 2.3 (5.8)
===== ===== ===== =====
</TABLE>
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
Total Revenue. Total revenue for the three months ended March 31, 1998
increased by $10,333,000 to $25,286,000 compared to $14,953,000 for the three
months ended March 31, 1997. This increase was primarily the result of: (i)
revenues of $5,433,000 from facilities acquired or opened, during or subsequent
to the March 31, 1997 quarter; (ii) increased development fee revenues of
$3,845,000 due to the Company's expanded development efforts; and (iii)
additional patient services revenue of $1,004,000 from increased ancillary
charges.
Operating Expenses. Total operating expenses increased by $7,840,000 to
$23,175,000 for the three months ended March 31, 1998 from $15,335,000 for the
three months ended March 31, 1997. The increase in total operating expenses in
the 1998 period is attributable primarily to: (i) increases in facility
operating expenses as a result of new facilities which were developed and
acquired; (ii) increases in administrative expenditures related to building the
Company's infrastructure to support and manage its growth; and (iii) lease
expense and depreciation.
Facility operating expenses for the three months ended March 31, 1998
increased by $5,400,000 to $17,337,000 from $11,937,000 for the three months
ended March 31, 1997. The increase in the 1998 period results from the opening
of the Company's ten signature assisted living facilities and the acquisition of
15 assisted living facilities and three nursing homes during or after the March
31, 1997 quarter. As a percentage of total revenue, facility operating expenses
were 68.6% for the 1998 period and 79.8% for the 1997 period. The percentage
decreased due to the larger revenue base.
General and administrative expenses increased by $1,525,000 to
$3,042,000 for the three months ended March 31, 1998 from $1,517,000 for the
three months ended March 31, 1997. As a percentage of
13
<PAGE> 14
total revenue, these expenses increased to 12.0% for the 1998 period from 10.1%
for the 1997 period. Of the $1,525,000 increase in general and administrative
expenses in 1998, approximately $1,214,000 resulted from labor costs relating to
the addition of new corporate and regional office staff to plan and manage the
Company's actual and anticipated development and growth. The remaining $311,000
was attributable to other marketing, consulting, development, travel, accounting
and rent due to expansion of existing corporate office space and other general
expenses related to the Company's growth.
Lease expense increased to $2,258,000 for the three months ended March
31, 1998 from $1,691,000 for the three months ended March 31, 1997, an increase
of $567,000. This increase is the result of facility operating leases related to
the acquisitions made, and development projects opened, during and subsequent to
the March 31, 1997 quarter. As a percentage of total revenue, these expenses
totaled 8.9% for the 1998 period and 11.4% for the 1997 period.
Depreciation and amortization increased by $348,000 to $538,000 for the
three months ended March 31, 1998 from $190,000 for the three months ended March
31, 1997. This increase resulted from the additional depreciation and
amortization on assets acquired and goodwill recorded as a result of
acquisitions.
Other Income (Expense). Interest expense increased by $494,000 to
$727,000 for the three months ended March 31, 1998 from $233,000 for the three
months ended March 31, 1997. This was due to the $29,675,000 of bridge financing
borrowed for the purchase of six assisted living facilities and one nursing home
from October 1997 through January 1998. This bridge financing was repaid on
February 26, 1998 with proceeds from the Company's initial public offering of
common shares ("Offering").
Provision for Income Taxes. Income tax expense of $272,000 for the 1998
period is based on the Company's estimated effective tax rate of 16% for the
1998 fiscal year from increased profits. The effective rate is lower than the
statutory rate due to the reversal of a valuation allowance on deferred tax
assets from net operating losses. The effective tax rate after the June 30, 1998
fiscal year is expected to approximate 40%. Income tax expense of $4,000 for the
1997 period resulted from taxable income reported on individual state corporate
tax returns in states that do not permit consolidated filings.
Net Income (Loss). The Company's net income increased to $1,347,000 for
the three months ended March 31, 1998 from a net loss of $(551,000) for the
three months ended March 31, 1997, an increase of $1,898,000. This increase in
net income resulted primarily from the pretax contribution of the corporate
division of $2,600,000, related primarily to development activities. This was
partially offset by reduced profitability at the Company's Missouri nursing
homes of $500,000 due primarily to lower census in the 1998 quarter and the
$268,000 increase in income tax expense.
NINE MONTHS ENDED MARCH 31, 1998 COMPARED TO NINE MONTHS ENDED MARCH 31, 1997
Total Revenue. Total revenue for nine months ended March 31, 1998
increased by $33,733,000 to $65,679,000 from $31,946,000 for the nine months
ended March 31, 1997. This increase was primarily the result of additional
revenues of $13,710,000 from facilities opened or acquired, during or after, the
March 31, 1997 quarter, an additional $12,533,000 from the Company's Missouri
nursing homes as a result of nine versus seven months of operations and
increased ancillary charges, and increased development fee revenues of
$7,099,000 from the Company's expanded development efforts.
Operating Expenses. Total operating expenses for the nine months ended
March 31, 1998 increased by $32,241,000 to $65,520,000 from $33,279,000 for the
nine months ended March 31, 1997. As
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a percentage of total revenue, total operating expenses decreased to 99.8% in
the 1998 nine-month period from 104.2% in the 1997 nine-month period. The
increase in total operating expenses in the 1998 period is attributable
primarily to the increase in the number of facilities and the administrative
expenditures related to building the Company's infrastructure to support and
manage its development and growth.
Facility operating expenses for the nine months ended March 31, 1998
increased by $22,347,000 to $48,151,000 from $25,804,000 for the nine months
ended March 31, 1997. As a percentage of total revenue, facility operating
expenses decreased to 73.3% in 1998 from 80.8% in 1997. The increase in facility
operating expenses in 1998 is attributable primarily to the increase in the
number of facilities. The decline in the percentage of facility operating
expenses to total revenue is the result of the larger revenue base, and the mix
of the Company's owned or leased, versus managed facilities.
General and administrative expenses for the nine months ended March 31,
1998 increased by $5,086,000 to $8,664,000 from $3,578,000 for the nine months
ended March 31, 1997. As a percentage of total revenue, these expenses increased
to 13.2% in the 1998 nine-month period from 11.2% in the 1997 nine-month period.
Of the $5,086,000 increase in general and administrative expenses in 1998,
approximately $3,459,000 resulted from labor costs relating to the addition of
new corporate and regional office staff to plan and manage the Company's actual
and anticipated development and growth. The remaining $1,627,000 was
attributable to other marketing, consulting, development, travel, accounting and
rent due to expansion of existing corporate office space and other general
expenses related to the Company's growth.
Lease expense for the 1998 nine-month period increased by $3,704,000 to
$7,162,000 from $3,458,000 in the 1997 nine-month period. As a percentage of
total revenue, these expenses increased to 10.9% in the 1998 nine-month period
from 10.8% in the 1997 nine-month period as a result of operating leases on
facilities developed and acquired during or since the 1997 period.
Depreciation and amortization expense for 1998 increased by $1,104,000
to $1,543,000 from $439,000 in 1997. This increase resulted from the additional
depreciation and amortization on assets acquired and goodwill recorded as a
result of acquisitions.
Other Income (Expense). Interest and other income for 1998 increased by
$265,000 to $410,000 from $145,000 in 1997. The increase is attributable to the
higher level of invested funds due to receipt of proceeds from the sale of
shares of Series B Convertible Preferred Stock in September 1996 and April 1997
and the Offering in February 1998. Interest expense for 1998 increased by
$914,000 to $1,579,000 from $665,000 in 1997. This was due to the $29,675,000 of
bridge financing borrowed for the purchase of six assisted living facilities and
one nursing home from October 1997 through January 1998, and to a full nine
months interest on a $3,115,000 mortgage from the acquisition of two Missouri
nursing homes on August 31, 1996. The acquisition bridge financing was repaid on
February 26, 1998 with proceeds of the Offering. The Company sold the inventory,
furniture and equipment, certain prepaid assets and the operations of a pharmacy
in October 1997 for approximately $4,700,000, net of transaction costs. This
resulted in a non-recurring gain of $2,858,000.
Provision for Income Taxes. Income tax expense in the 1998 nine-month
period increased by $299,000 to $309,000 from $10,000 in the 1997 nine-month
period. The increase resulted from the Company's profitability for the
nine-month period ended March 31, 1998.
Net Income (Loss). Net income for 1998 increased to $1,539,000 from a
net loss of $(1,863,000) in 1997, an increase of $3,402,000. This increase is
primarily attributable to the pharmacy gain of
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$2,858,000, the pretax contribution of the corporate division of $3,134,000,
related primarily to development activities, and increased profits of the eleven
assisted living and three nursing facilities acquired in Pennsylvania from May
1996 through January 1998 of $536,000. These amounts were partially offset by :
(i) start-up losses of $1,606,000 from the Company's signature assisted living
communities leased and operated in 1997, but managed effective January 1, 1998
upon the sale of the leasehold interests to an operator/lessee; (ii) reduced
profitability at the Company's Missouri nursing homes of $666,000 due primarily
to lower census in the 1998 third quarter; (iii) increased losses at the
Wisconsin assisted living facilities held for sale of $426,000; and (iv)
increased income tax expense of $299,000.
LIQUIDITY AND CAPITAL RESOURCES
General
On February 18, 1998, the Company closed its initial public offering
for 7,000,000 shares of its common stock at a price of $6.50 per share.
Concurrent with the Offering, the 5,009,750 shares of Series B Preferred Stock
and the 1,150,958 shares of Series A Preferred Stock were converted into
4,620,532 shares of Common Stock (reflective of the three-for-four Common Stock
split effective October 14, 1997). In connection with the Offering, the Company
granted the underwriters an option to purchase 1,050,000 additional shares of
Common Stock at $6.50 per share. The closing for this option was on March 17,
1998. After the Offering, the conversion of the preferred stock and the exercise
of the underwriters' option, the Company has 16,695,343 shares of Common Stock
outstanding. The Offering, including the exercise of underwriters' option,
generated proceeds to the Company of approximately $46,356,000, net of costs and
underwriting discounts and commissions. The proceeds were used to repay
indebtedness of approximately $29,675,000 incurred to fund the purchase of four
acquisitions completed from October 1997 through January 1998. The balance of
the Offering will be used for general corporate purposes, additional debt
retirement, and possible future acquisitions. In connection with the additional
debt retirement the Company may be required to pay certain fees.
The Company has entered into non-binding letters of intent aggregating
$365 million with four health care REITs and one other lender (combined the
"Owners"). These letters of intent represent arrangements whereby the Owners
will fund development projects or acquisitions and the Company will develop
assisted living facilities, or the Owners will acquire existing facilities
identified by the Company and lease them to the Company. Initial lease rates
under these arrangements are expected to range from 3.2% to 3.4% over the
10-year Treasury rate. Specific development projects and acquisitions require
approval of the Owners prior to the financing of a transaction. At March 31,
1998 approximately $236 million of the $365 million had not been utilized and
remained available to fund project development. The Company plans to utilize
approximately $61 million for new development project commitments during the
quarter ending June 30, 1998.
The Company's lease arrangements are generally for initial terms of 10
to 15 years with aggregate renewal option periods ranging from 15 to 25 years
and provide for contractually fixed rent plus additional rent, subject to
certain limits. The additional rent is capped at 2% or 3% of the prior year's
total rent depending on the REIT involved and is based on either the annual
increase in revenues of the facility or the increase in the consumer price
index. The Company's lease arrangements generally contain a purchase option at
the end of the initial lease term and each renewal term to purchase the facility
at its fair market value. Certain of the Company's lease arrangements limit the
Company's right to operate other senior care facilities within a ten mile radius
of the leased facility during the term of the lease and for a period of up to
five years thereafter.
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The Company's recent and future development projects involve or are
expected to involve entering into development agreements with third party
owners, which are, or are expected to be, health care REITs. An independent
third-party company (the "Operator/Lessee") will lease the assisted living
facility from the REIT when construction has been completed. The Company expects
to manage the assisted living facility pursuant to management agreements with
the Operator/Lessee generally for terms of two to nine years. Each management
agreement provides or is generally expected to provide for annual fees
approximating 6.0% of net revenue of the facility. In exchange for an option
payment the Company will have the option to purchase the stock or assets of the
Operator/Lessee for fair market value at any time during the term of the
management agreement. Effective January 1, 1998, the Company sold certain assets
and assigned the leasehold interests of ten of its operating subsidiaries to
Operator/Lessees for an aggregate price of approximately $2,645,000, net of
transaction costs.
The Company leases most of its facilities under long-term operating
leases. Lease obligations for the next 12 months are approximately $9,000,000.
The Company's financing documents contain financial covenants and other
restrictions which: (i) require the Company to meet certain financial tests and
maintain certain escrows of funds, (ii) limit, among other things, the ability
of the Company and certain of its subsidiaries to borrow additional funds,
dispose of assets and engage in mergers or other business combinations, (iii)
prohibit the Company from operating competing facilities within a ten mile
radius of the leased facilities.
The Company is currently negotiating with several lenders for a working
capital line of credit. Management estimates a line of approximately $20,000,000
will be put in place, secured by unencumbered real estate of the Company's owned
facilities.
The estimated cost to complete and achieve stabilized occupancy of the
approximately 75 new signature assisted living facilities targeted for
completion over the next three years, is between $500,000,000 and $600,000,000
which substantially exceeds the existing financing available to the Company. The
Company currently estimates that the net proceeds of the Offering, together with
its existing financing commitments, will be sufficient to fund its development
and acquisition programs for the next 12 to 18 months. There can be no assurance
that any additional financing needed to fund the Company's growth plans will be
available or that the Company will not require or seek additional financing.
Operating Activities
For the nine months ended March 31, 1998, operating activities used
cash of $7,189,000. This decrease in cash resulted from (i) the increase of
$959,000 in accounts receivable from patient services due to increased per diem
reimbursements and rehabilitation therapy volume; and (ii) the increase in
deferred costs and other current assets of $7,586,000 resulting from the
Company's substantial development activities. These decreases were partially
offset by an increase in accounts payable and other current liabilities of
$858,000, and the net income adjusted for depreciation and amortization,
deferred taxes and the gain on sale of assets of $498,000.
For the nine months ended March 31, 1997, operating activities used
cash of $1,246,000. This decrease resulted from: (i) the net loss adjusted for
depreciation and amortization of $1,424,000; and (ii) the increase of $2,243,000
in accounts receivable from patient services due to increased per diem
reimbursements and rehabilitation therapy volume. These decreases were partially
offset by an increase in accounts payable and other current liabilities of
$2,286,000 and decreases in deferred costs and other current assets of $135,000.
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Financing Activities
During the nine months ended March 31, 1998 the Company obtained bridge
financing in the amount of $29,675,000 to finance four acquisitions (seven
facilities) that took place between October 1997 and January 1998. This debt was
repaid from the $46,356,000 net proceeds of the Offering and the exercise of the
underwriters' option. During the nine months ended March 31, 1997 the Company
had net cash provided from financing activities of $19,186,000. This was
primarily comprised of proceeds from the issuance of Series B Preferred Stock in
the amount of $11,982,000, proceeds from long-term debt of $3,226,000 and the
increase in other liabilities of $3,576,000.
Investing Activities
For the nine months ended March 31, 1998, the Company's investing
activities used $26,523,000. This includes (i) asset purchases of $30,678,000,
including goodwill in connection with four acquisitions (seven facilities); (ii)
purchases of property and equipment of $2,402,000; and (iii) changes in deferred
financing costs and other assets of $422,000. These uses were partially offset
by the $7,029,000 received for the sale of the pharmacy and certain assets and
the assignment of leasehold interests of ten operating subsidiaries.
For the nine months ended March 31, 1997, the Company's investing
activities used $12,712,000 including (i) amounts paid for acquisitions and
goodwill of $5,305,000; (ii) purchases of property and equipment of $956,000;
(iii) deferred financing costs and deposits of restricted funds of $4,880,000;
and (iv) increases in other assets of $1,571,000.
COMPLETED ACQUISITIONS AND DIVESTITURE
In October 1997, the Company purchased the assets and business of
Feltrop's Personal Care Home, a 92-bed assisted living facility in Pennsylvania,
for approximately $5,842,000 including transaction costs. This acquisition has
been accounted for using the purchase method of accounting and the related
goodwill of approximately $1,550,000 is being amortized over 40 years. This
acquisition was financed through a bridge financing arrangement with a REIT that
was repaid with proceeds from the Offering.
The Company sold the inventory, furniture and equipment, certain
prepaid assets and the operations of the Pharmacy in October 1997 for
approximately $4,700,000, net of estimated transaction costs.
In October 1997, the Company purchased the assets and business of
Butler Senior Care which consists of three assisted living facilities located in
Pennsylvania with a capacity of 172 residents. The purchase price was
approximately $9,554,000, including transaction costs. This acquisition has been
accounted for using the purchase method of accounting and the related goodwill
of $3,250,000 is being amortized over 40 years. The asset purchase agreement
provides for additional purchase price payments of up to $4,100,000 contingent
upon achieving certain future targeted operating results. This acquisition was
financed through a bridge financing arrangement with a REIT, which was repaid
with proceeds from the Offering.
The Triangle Retirement Services, Inc. d/b/a Northridge Retirement
Center acquisition, which occurred on December 1, 1997, involved the purchase of
the assets and business of a 117-bed assisted living facility. The purchase
price was approximately $8,549,000, including transaction costs. This
acquisition has been accounted for using the purchase method of accounting and
the related goodwill of approximately
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$3,320,000 is being amortized over 40 years. This acquisition was financed with
bridge financing with a health care REIT that was repaid with proceeds from the
Offering.
The Gethsemane Affiliates acquisition, which occurred on January 2,
1998, involved the purchase of the assets of a 66-bed skilled nursing facility
and a 51-bed assisted living facility which were accounted for using the
purchase method of accounting. The purchase price was approximately $5,528,000
for the skilled nursing facility, including transaction costs. This acquisition
was financed with bridge financing with a REIT that was repaid with proceeds
from the Offering. The agreement for the assisted living facility provides for a
purchase price of up to $1,200,000 based upon a multiple (5.80 times) of the
Gethsemane assisted living facility's annualized net operating income for the
period from the closing date through June 30, 1998. This payment is expected to
be made during the quarter ending September 30, 1998. Goodwill of approximately
$1,750,000 was recorded for this acquisition and is being amortized over 40
years.
PLANNED DIVESTITURE
In June 1997, the Board of Directors of the Company approved a plan for
the disposal of its seven Wisconsin assisted living facilities.
RISK FACTORS
This report contains, in addition to historical information, forward
looking statements that involve risks and uncertainties. The Company's actual
results could differ materially. Factors that could cause or contribute to such
differences include, but are not limited to, those disclosed below.
LIMITED OPERATING HISTORY
The Company was formed in April 1995 and has a limited operating
history. Although the Company had net income of $1,539,000 for the nine months
ended March 31, 1998, the Company incurred losses of $10,000, $909,000 and
$4,492,000 for its fiscal years ended June 30, 1995 (from inception at April 17,
1995), 1996 and 1997, respectively. Accordingly, there can be no assurance that
the Company will continue to generate net income. Failure to achieve
profitability could have a material adverse effect on the Company's business,
results of operations and financial condition.
IMPLEMENTATION OF STRATEGIES
To date, the Company's growth has been primarily attributable to
acquisitions of assisted living and skilled nursing facilities. The Company's
first signature assisted living facility opened in May 1997. The Company has
opened ten additional signature assisted living facilities through March 1998.
The Company intends to develop a "Balanced Care Continuum" through the
development and selective acquisition of additional assisted living facilities
and, where appropriate, skilled nursing facilities, as well as the provision of
medical rehabilitation, home health care and skilled nursing services. The
Company expects that the number and types of facilities and business operations
that it owns, operates or manages will increase substantially if the Company is
successful in implementing its strategies. Implementation of the Company's
strategies will place a significant burden on the Company's management resources
and require the development, implementation and continual enhancement of
sufficient operational, resident care, financial and management information
systems. Successful implementation of the Company's strategies will also depend
on its ability to carry out its development plans and to effect acquisitions and
alliances and to attract, motivate and retain management,
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professional, marketing and other key personnel. There can be no assurance that
its strategies can be implemented successfully or that sufficient management
resources and operational, resident or patient care, financial and management
information systems will be available. If the Company is unable to effectively
implement its strategies or to manage its growth, its business, results of
operations and financial condition could be materially and adversely affected.
NEED FOR ADDITIONAL CAPITAL
The Company will need to obtain substantial additional capital
resources to fund its development and acquisition strategy as well as its
working capital needs to fund the growth in its operations. The estimated cost
to complete the facilities planned for development over the next three years is
estimated to range from $500 to $600 million, which substantially exceeds the
financial resources currently available to the Company. Accordingly, the
Company's future growth will depend on its ability to obtain additional
development, acquisition and working capital financing on acceptable terms. The
Company may seek additional financing through public or private financing
sources, including equity, debt or lease financing. There can be no assurance
that adequate funding will be available as needed or on terms acceptable to the
Company. Insufficient development, acquisition and working capital financial
resources could result in the Company delaying or eliminating all or some of its
development projects and acquisition plans or otherwise slowing the growth of
its operations, which could have a material adverse effect on the Company's
business, results of operations and financial condition.
ASSISTED LIVING FACILITY DEVELOPMENT, CONSTRUCTION AND OCCUPANCY RISKS
To date, the Company has developed, built and opened 10 of its
signature assisted living facilities. The Company plans to develop approximately
75 Company-designed assisted living facilities with an aggregate capacity of
approximately 6,000 residents over the next three years. Achievement of these
development goals will depend upon a number of factors, including the Company's
ability to acquire suitable development sites at acceptable prices, to obtain
adequate financing on acceptable terms, to obtain zoning, land use, building,
occupancy, licensing and other required governmental permits on a timely basis,
and to control construction costs and project completion schedules. In addition,
numerous factors outside the Company's control will impact the successful
implementation of its development plans, including competition for site
acquisitions, shortages of, or the inability to obtain, labor or materials,
changes in applicable laws or regulations or in the method of applying such laws
and regulations, the failure of general contractors or subcontractors to perform
under their contracts, strikes and adverse weather. There can be no assurance
that the Company will not encounter delays in its development program or that it
will be successful in developing and constructing planned or additional assisted
living facilities or that completed facilities will achieve targeted occupancy
rates or otherwise be economically successful. The Company's inability to
achieve its development plans or the delay of those plans could have a material
adverse effect on its business, results of operations and financial condition.
ACQUISITION RISKS; DIFFICULTIES OF INTEGRATION
To date, the Company's growth has been primarily attributable to
acquisitions. The Company plans to continue to expand its business through
acquisitions. Pursuit of an acquisition strategy entails the risks inherent in
assessing the value, strengths, weaknesses, contingent or other liabilities and
potential profitability of acquisition candidates and in integrating the
operations of acquired businesses. The Company's success in effecting
acquisitions will depend on numerous factors, including its ability to identify
suitable acquisition candidates and negotiate acceptable purchase terms, the
competition for acquisitions, the Company's ability to finance acquisitions, and
the availability of appropriate
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government licenses and approvals. Successful integration of acquired businesses
will depend on the Company's ability to effect any required changes in
operations or personnel, and may require renovation or other capital
expenditures or the funding of unforeseen liabilities. There can be no assurance
that the Company will consummate future acquisitions, that operations of
acquired facilities can be successfully integrated or that acquired operations
will be profitable.
SUBSTANTIAL FIXED CHARGES; PLEDGE OF ASSETS
The Company leases most of its facilities under long-term operating
leases. Leases generally provide for rent increases and require the Company to
pay taxes, utilities and insurance obligations. The Company intends to continue
to finance the development of its properties through a combination of operating
leases and mortgage financing and thus expects that the amount of its
lease-related and debt service obligations will increase as the Company pursues
its growth strategy. As a result, an increasing portion of the Company's cash
flow will be devoted to lease payments and debt service, which will reduce the
amount of cash flow otherwise available to support the Company's growth. Such
leases and mortgages also typically contain rent coverage and other financial
covenants. There can be no assurance that the Company will generate sufficient
cash flow from operations to cover required lease and debt service payments or
that the financial performance of the Company or of particular subsidiaries or
facilities will be adequate to meet applicable financial covenants. Any payment
or other default could cause a lender to foreclose upon any collateral securing
the indebtedness or, in the case of an operating lease, could terminate the
lease, resulting in a loss of revenue and asset value to the Company. In certain
cases, indebtedness secured by real estate of a facility is also secured by a
pledge of the Company's operating interest in the facility and, in certain other
cases, indebtedness and facility leases are secured by a pledge of stock of
certain of the Company's subsidiaries. Since most of the Company's leases and
financing agreements contain cross-default and cross-collateralization
provisions, a default by the Company on one of its payment obligations could
adversely affect a significant number of the Company's other obligations and
properties.
GOVERNMENT REGULATION
The health care industry is subject to extensive federal and state
regulation and frequent regulatory change. Federal, state and local laws
governing long-term care and other services provided to seniors address, among
other things, adequacy of medical care, distribution of pharmaceuticals,
operating policies and licensing and certificate of need requirements. Long-term
care facilities are also periodically inspected to assure continued compliance
with various standards and licensing requirements under state law. There are
currently no federal laws or regulations specifically defining or regulating
assisted living facilities. However, while many states have not yet enacted
specific assisted living laws or regulations, the Company's assisted living
facilities are subject to state regulation, licensing, approvals by state and
local health, welfare and social service agencies and other regulatory
authorities and compliance with building codes and environmental laws. In
addition, in several states, including Arkansas, Missouri, New Jersey and North
Carolina, certificate of need laws apply to assisted living facilities.
Certificate of need or similar laws require that a state agency approve certain
acquisitions and determine that a need exists for certain services, the addition
of beds and capital expenditures or other changes. North Carolina also recently
imposed a moratorium on the addition of adult care home beds, subject to certain
exceptions where binding commitments have been made to establish or expand an
adult care home facility. When the issuance or renewal of certificates of need
or other similar government approvals are required, changes in existing laws or
adoption of new laws could adversely affect the Company's development or
acquisition strategy and/or its operations if it is unable to obtain such
certificates of need approvals or renewals thereof. Also, health care providers
have been subjected to increasing scrutiny under anti-trust
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laws as the integration and consolidation of the health care industry increases
and affects competition. Regulation of the assisted living industry is evolving.
The Company cannot predict the content of new regulations and their effect on
its business. There can be no assurance that regulatory or other legal
developments will not affect adversely the Company's business, results of
operations and financial condition.
Federal and state anti-remuneration laws, such as the Medicare/Medicaid
anti-kickback law, govern certain financial arrangements (including employment
or service contracts) between health care providers and others who may be in a
position to refer or recommend patients or services to such providers. These
laws prohibit, among other things, certain direct and indirect payments that are
intended to induce the referral of patients to, the arranging for services by,
or the recommending of a particular provider of health care items or services.
The Medicare/Medicaid anti-kickback law has been broadly interpreted to apply to
certain contractual relationships between health care providers and sources of
patient referral. A number of similar state laws exist which often have not been
interpreted by courts or regulatory agencies. The Department of Health and Human
Services periodically issues "special fraud alerts" which address specific areas
of concern, including a June 1995 alert that related to fraudulent practices in
the provision of home health care. The alert identified fraudulent home health
care practices such as cost report fraud, billing for excessive services or
services not rendered, use of unlicensed or untrained staff and kickbacks.
Additionally, federal "Stark" legislation prohibits, with limited exceptions,
the referral of patients for certain services, including home health care
services, physical therapy and occupational therapy, by a physician to entities
in which they have an ownership or financial interest. Violation of these laws
can result in loss of licensure, civil and criminal penalties, and exclusion of
health care providers or suppliers from participating in the Medicare and
Medicaid programs. Additionally, the Balanced Budget Act of 1997 (the "Budget
Act"), signed into law on August 5, 1997, contains a number of anti-fraud
provisions designed to further fight abuse and enhance program integrity.
Furthermore, some states restrict certain business or fee relationships between
physicians and other providers of health care services. The Company believes
that its operations are in substantial compliance with the laws applicable to
Medicare and Medicaid providers, including anti-fraud and abuse provisions;
however, there can be no assurance that the administrative or judicial
interpretation of such laws or the regulations promulgated thereunder will not
in the future have a material adverse impact on the Company's operations or that
the Company will not be subject to an investigation which would require a
significant investment of time and manpower by the Company. Assisted living
facilities may be eligible to participate as Medicaid providers and receive
reimbursement through Medicaid waiver programs and managed care plans. If the
Company elects to become a Medicaid provider with respect to its assisted living
facilities, such entities would become subject to all of the requirements
applicable to Medicaid providers, including the anti-fraud and abuse
legislation. Although the Company believes that it complies with federal and
state anti-remuneration statutes at all times, there can be no assurance that
such laws will be interpreted in a manner consistent with the practices of the
Company.
The Americans with Disabilities Act of 1990 requires all places of
public accommodation to meet certain federal requirements related to access and
use by disabled persons. A number of additional federal, state and local laws
exist which also may require modifications to existing and planned properties to
create access to the properties by disabled persons. While the Company believes
that its properties comply with present requirements or are exempt therefrom, if
required changes involve a greater expenditure than anticipated or must be made
more quickly than anticipated, additional costs will be incurred by the Company.
Further legislation may impose additional burdens or restrictions relating to
access by disabled persons. The costs of complying with any new legislation
could be substantial.
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HEALTH CARE REFORM
In addition to extensive existing government health care regulation,
there are many initiatives on the federal and state levels for comprehensive
reforms affecting the payment for and availability of health care services. It
is not clear what proposals, if any, will be adopted, or what effect such
proposals would have on the Company's business. Various aspects of these health
care proposals, such as reductions in funding of the Medicare and Medicaid
programs, changes in reimbursement regulations by the Health Care Financing
Administration ("HCFA"), enhanced pressure to contain health care costs by
Medicare, Medicaid and other payors and permitting greater state flexibility in
the administration of Medicaid, could adversely affect the Company's business,
results of operations and financial condition. The Company's skilled nursing
facilities that participate in applicable state Medicaid programs are subject to
the risk of changes in Medicaid reimbursement and payment delays resulting from
budgetary shortfalls of state Medicaid programs. The Company's current
concentration of skilled nursing facilities in Missouri and Pennsylvania exposes
it to the risk of changes in Medicaid reimbursement programs in those states.
Medicare and Medicaid certification is a critical factor contributing to the
revenues and profitability of long-term care facilities. Changes in
certification and participation requirements of the Medicare and Medicaid
programs have restricted, and are likely to further restrict, eligibility for
reimbursement under those programs. Failure to obtain and maintain Medicare and
Medicaid certification at the Company's long-term care facilities could result
in a significant loss of revenue. In addition, private payors, including managed
care payors, increasingly are demanding that providers accept discounted fees or
assume all or a portion of the financial risk for delivery of health care
services, including capitated payments where the provider is responsible, for a
fixed fee, for providing all services needed by certain patients. Capitated
payments can result in significant losses when patients require expensive
treatments not adequately covered by the capitated rate. Efforts to impose
reduced payments, greater discounts and more stringent cost controls by
government and other payors are expected to continue. The Company cannot predict
what reform proposals or reimbursement limitations will be adopted in the future
or the effect any such changes will have on its operations. There can be no
assurance that currently proposed legislation, future health care legislation,
reforms or changes in the administration or interpretation of governmental
health care programs or regulations will not have a material adverse effect on
the Company's business, results of operations and financial condition. Concern
about the potential effect of various proposed health care reforms has
contributed to volatility of prices of securities of health care companies and
could similarly affect the price of the Common Stock in the future.
The Company continues to evaluate the impact of the Budget Act upon
future operating results. While the Budget Act was passed in August 1997
specifics relating to each business line will continue to be released until the
year 2000. The assumptions used by the Company to evaluate the Budget Act are
based upon the most accurate information available at each quarter end. At
present the Company believes it is reacting to all of the known changes created
by the Budget Act, however, it cannot predict the impact of unforeseen
reductions in anticipated rates issued by the government.
GEOGRAPHIC CONCENTRATION OF BUSINESS
Currently, a substantial portion of the Company's facilities, including
facilities under construction and development are located in Pennsylvania and
Missouri. As part of its strategy, the Company intends to continue to develop
and acquire facilities in Pennsylvania and Missouri, as well as other states.
Until the Company's operations become more geographically dispersed, the Company
will be more susceptible to downturns in local and regional economies and
changes in state or local regulation because such conditions and events could
affect a relatively high percentage of the total number of facilities currently
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in operation and under development. As a result of such factors, there can be no
assurance that such geographic concentration will not have a material adverse
effect on the Company's business, results of operations or financial condition.
LIABILITY AND INSURANCE
Providing health care services involves an inherent risk of liability.
Participants in the senior living and health care industry are subject to
lawsuits alleging negligence or related legal theories, many of which may
involve large claims and significant legal costs. The Company currently
maintains liability insurance intended to cover medical malpractice, wrongful
death and other claims which it believes is adequate and in keeping with
industry practice. However, claims in excess of the Company's insurance coverage
or claims not covered by the Company's insurance (e.g., claims for punitive
damages) may arise. A successful claim against the Company not covered by or in
excess of the Company's insurance coverage could have a material adverse effect
on the Company's business, results of operations and financial condition. Claims
against the Company, regardless of their merit or eventual outcome, may also
have a material adverse effect upon the Company's reputation and its ability to
attract residents or expand its business. The Company's insurance policies
generally must be renewed annually, and there can be no assurance that the
Company will be able to obtain liability insurance coverage in the future on
acceptable terms, if at all. COMPETITION
The senior living and health care industry is highly competitive and
the Company believes that competition in its current and targeted markets will
continue to increase. The Company faces current and prospective competition for
residents and patients and for employees from numerous local, regional and
national providers of facility-based assisted living and long-term care, as well
as rehabilitation therapy and home-based health care providers. Many of the
Company's current and potential competitors are significantly larger and have
greater financial and marketing resources than the Company. There are currently
few regulatory and other barriers to entry into the assisted living industry. If
the development of new assisted living facilities surpasses the demand for such
facilities in particular markets, such markets could become saturated. The
Company also expects to compete for acquisitions of additional assisted living
and long-term care facilities and other senior health care operations.
Competition could limit the Company's ability to attract residents and patients
and expand its business and could have a material adverse effect on the
Company's business, results of operations and financial condition.
ENVIRONMENTAL RISKS
Under various federal, state and local environmental laws, ordinances
and regulations, a current or previous owner or operator of real property may be
held liable for the cost of removal or remediation of certain hazardous or toxic
substances that may be located on, in or under the property. These laws and
regulations may impose liability regardless of whether the owner or operator was
responsible for, or knew of, the presence of the hazardous or toxic substances.
The liability of the owner or operator and the cost of any required remediation
or removal of hazardous or toxic substances could be substantial and is
generally not limited. The presence of hazardous or toxic substances in or under
such properties could also subject the Company to lawsuits by or liability to
adjacent property owners, residents of the facilities or employees who are
injured by contamination. The presence of hazardous or toxic substances at any
property held or operated by the Company in the future could have a material
adverse effect on the Company's business, results of operations and financial
condition. In addition, if contamination is found,
24
<PAGE> 25
it could adversely affect the Company's ability to continue to operate, to lease
or to sell the contaminated property or to use that property as collateral for
future loans.
DEPENDENCE ON KEY PERSONNEL
The Company's success to date has been significantly dependent on the
contributions of Brad E. Hollinger, the Company's Chairman of the Board,
President and Chief Executive Officer and one of its founders, and the loss of
his services could have a material adverse effect on the Company's business,
results of operations and financial condition. The Company's success also
depends to a significant extent upon a number of other key employees of the
Company. The Company is party to employment agreements with Mr. Hollinger and
several other key employees. The loss of the services of one or more other key
employees also could have a material adverse effect on the Company. In addition,
the Company believes that its future success will depend in part upon its
ability to attract and retain additional highly-skilled professional,
managerial, sales and marketing personnel. Competition for such personnel is
intense. There can be no assurance that the Company will be successful in
attracting and retaining the personnel that it requires for its business and
planned growth.
LABOR COSTS
The Company competes with various health care providers and other
employers for limited qualified and skilled personnel in the markets that it
serves. The Company expects that its labor costs will increase over time.
Currently, none of the Company's employees is represented by a labor union. If
employees of the Company were to unionize, the Company could incur labor costs
higher than those of competitors with non-union employees. The Company's
business, results of operations and financial condition could be adversely
affected if the Company is unable to control its labor costs.
25
<PAGE> 26
PART II - OTHER INFORMATION
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
(A) Not Applicable
(B) Not Applicable
(C) Not Applicable
(D) The Company's Registration Statement on Form S-1 (No. 333-37833)
(the "Registration Statement") relating to the offering of 7,000,000
shares of the Company's Common Stock, plus an additional 1,050,000
shares of Common Stock to cover an over-allotment option granted to the
underwriters, was declared effective on February 11, 1998. The offering
commenced on such date and has terminated after the sale of all
8,050,000 shares of Common Stock registered in the Registration
Statement, at a price of $6.50 per share or $52,325,000 in the
aggregate. Expenses for underwriting discounts and commissions totaled
$3,663,000 and other offering expenses are estimated at $2,306,000. Net
proceeds to the Company after deducting total expenses were
approximately $46,356,000. Net proceeds were used to repay indebtedness
of $29,675,000 incurred to fund the purchase of four completed
acquisitions and will be applied to repay outstanding long-term
indebtedness of $8,151,000. In connection with such repayment the
Company may be required to pay certain fees. The balance will be used
for general corporate purposes, including working capital, additional
debt repayments and possible future acquisitions. The managing
underwriters for the offering were BancAmerica Robertson Stephens, B T
Alex. Brown and Salomon Smith Barney.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
None
(B) Reports on Form 8-K
The Company filed one current report on Form 8-K during the
quarter ended March 31, 1998, as follows:
(1) February 18, 1998, reporting the completion of the
Offering and related press release.
26
<PAGE> 27
SIGNATURES
Pursuant to the requirements of Section 13 or Section 15(d) of the
Securities and Exchange Act of 1934, as amended, the Registrant has duly caused
this Report to be signed on its behalf by the undersigned, thereunto duly
authorized.
BALANCED CARE CORPORATION
Date: May 13, 1998 By: /s/ Paul Kruis
Paul Kruis
Chief Financial Officer
27
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