<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 December 31, 1997
( ) 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: 001-13845
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 NO X
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
CLASS OUTSTANDING AT MARCH 25, 1998
----- -----------------------------
<S> <C>
Common Stock, $.001 par value 16,695,343
</TABLE>
<PAGE> 2
BALANCED CARE CORPORATION
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
ITEM 1:
<TABLE>
<CAPTION>
Page
----
<S> <C>
FINANCIAL STATEMENTS
Consolidated Balance Sheets as of December 31, 1997 3
and June 30, 1997
Consolidated Statements of Operations for the three months ended 4
December 31, 1997 and 1996
Consolidated Statements of Operations for the six months ended 5
December 31, 1997 and 1996
Consolidated Statements of Cash Flows for the six months ended 6
December 31, 1997 and 1996
Notes to Consolidated Financial Statements 7
ITEM 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF 9
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PART II - OTHER INFORMATION
ITEM 2:
CHANGES IN SECURITIES AND USE OF PROCEEDS 21
ITEM 6:
EXHIBITS AND REPORTS ON FORM 8-K 21
(A) Exhibits
(B) Reports on Form 8-K
</TABLE>
2
<PAGE> 3
ITEM 1: FINANCIAL STATEMENTS
BALANCED CARE CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
December 31 June 30
1997 1997
(unaudited)
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,010 $ 7,908
Accounts receivable (net of allowance for doubtful
accounts of $560 and $330, respectively) 8,772 6,679
Deferred costs 2,991 2,062
Prepaid expenses and other current assets 3,679 945
Assets held for sale 2,800 4,801
-------- --------
Total current assets 23,252 22,395
-------- --------
Restricted investments 2,594 1,825
Property and equipment, net 21,326 4,115
Goodwill, net 10,006 2,219
Other assets 3,014 2,463
-------- --------
Total assets $ 60,192 $ 33,017
======== ========
LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt $ 189 $ 97
Accounts payable 7,259 5,929
Accrued payroll 1,442 1,818
Accrued expenses 3,225 1,251
-------- --------
Total current liabilities 12,115 9,095
-------- --------
Deferred tax liabilities 16 --
Long-term debt, net of current portion 31,995 8,177
Straight-line lease liability 3,128 3,133
Other liabilities 940 807
-------- --------
Total liabilities 48,194 21,212
-------- --------
Redeemable preferred stock:
Series B authorized, issued and outstanding - 5,009,750
shares at December 31 and June 30, 1997 at redemption
value which includes accretion of $2,520 and $1,267
at December 31 and June 30, 1997, respectively 14,502 13,249
-------- --------
Stockholders' equity (deficit):
Preferred stock, $.001 par value; 5,000,000 shares
authorized; none outstanding -- --
Preferred stock, Series A authorized, issued and
outstanding 1,150,958 shares at December 31 and June 30, 1997 1 1
Common stock, $.001 par value - authorized - 50,000,000 shares;
issued and outstanding - 4,024,812 shares at December 31 and
June 30, 1997 5 5
Additional paid-in capital 2,709 3,961
Accumulated deficit (5,219) (5,411)
-------- --------
Total stockholders' equity (deficit) (2,504) (1,444)
-------- --------
Total liabilities and stockholders' equity $ 60,192 $ 33,017
======== ========
</TABLE>
3
<PAGE> 4
BALANCED CARE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three months ended December 31
------------------------------
1997 1996
(unaudited) (unaudited)
------------- -------------
<S> <C> <C>
Revenues:
Patient services $ 14,655 $ 11,156
Resident services 4,569 1,232
Development and management fees 1,957 217
Other revenues 74 16
-------- --------
Total revenues 21,255 12,621
-------- --------
Operating expenses:
Facility operating expenses:
Salaries, wages and benefits 7,841 4,772
Other operating expenses 8,481 5,479
General and administrative expense 2,943 1,314
Lease expense 2,692 1,292
Depreciation and amortization expense 724 159
-------- --------
Total operating expenses 22,681 13,016
-------- --------
Loss from operations (1,426) (395)
Other income (expense):
Interest income 62 66
Interest expense (615) (251)
Gain on sale of assets 2,858 --
-------- --------
Income (loss) before income taxes 879 (580)
Provision for income taxes 30 3
-------- --------
Net income (loss) $ 849 $ (583)
======== ========
Pro Forma Basic EPS $ 0.10 $ (0.09)
======== ========
Pro Forma Diluted EPS $ 0.09 $ (0.09)
======== ========
Weighted average shares - Basic 8,645 6,525
======== ========
Weighted average shares - Diluted 9,885 6,525
======== ========
</TABLE>
4
<PAGE> 5
BALANCED CARE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Six months ended December 31
-------------------------------
1997 1996
(unaudited) (unaudited)
------------- -------------
<S> <C> <C>
Revenues:
Patient services $ 29,151 $ 14,460
Resident services 7,567 2,225
Development and management fees 3,583 285
Other revenues 92 23
-------- --------
Total revenues 40,393 16,993
-------- --------
Operating expenses:
Facility operating expenses:
Salaries, wages and benefits 14,685 6,623
Other operating expenses 16,129 7,244
General and administrative expense 5,622 2,061
Lease expense 4,904 1,767
Depreciation and amortization expense 1,005 249
-------- --------
Total operating expenses 42,345 17,944
-------- --------
Loss from operations (1,952) (951)
Other income (expense):
Interest income 175 79
Interest expense (852) (434)
Gain on sale of assets 2,858 --
-------- --------
Income (loss) before income taxes 229 (1,306)
Provision for income taxes 37 6
-------- --------
Net income (loss) $ 192 $ (1,312)
======== ========
Pro Forma Basic EPS $ 0.02 $ (0.24)
======== ========
Pro Forma Diluted EPS $ 0.02 $ (0.24)
======== ========
Weighted average shares - Basic 8,645 5,527
======== ========
Weighted average shares - Diluted 9,877 5,527
======== ========
</TABLE>
5
<PAGE> 6
BALANCED CARE CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended December 31
----------------------------
1997 1996
(unaudited) (unaudited)
-------- -------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) $ 192 $(1,312)
Adjustments to reconcile net income (loss) to net cash used for
operating activities:
Depreciation and amortization 1,005 249
Deferred income taxes 16 --
Gain on sale of assets (2,858) --
Changes in operating assets and liabilities:
Increase in accounts receivable (1,682) (1,463)
Increase in deferred costs (929) (1,304)
Increase in prepaid expenses and other current assets (2,939) (311)
Increase in accounts payable, accrued payroll and
accrued expenses 3,228 3,818
-------- -------
Net cash used for operating activities (3,967) (323)
-------- -------
Cash Flows from Investing Activities:
Proceeds from sale of assets 4,249 --
Purchases of property and equipment (1,543) (523)
Increase in restricted investments (769) (189)
Increase in other assets (720) (958)
Acquisitions, net of cash acquired (23,527) (845)
-------- -------
Net cash used for investing activities (22,310) (2,515)
-------- -------
Cash Flows from Financing Activities:
Proceeds from issuance of long-term debt 23,716 264
Payments on long-term debt (44) (30)
Proceeds from issuance of Series A preferred stock -- --
Proceeds from issuance of Series B preferred stock -- 6,833
Issuance of notes payable -- 1,476
Payments on notes payable -- (1,221)
Increase in other liabilities (293) --
-------- -------
Net cash provided by financing activities 23,379 7,322
-------- -------
Increase (decrease) in cash and equivalents (2,898) 4,484
Cash and cash equivalents at beginning of period 7,908 567
-------- -------
Cash and cash equivalents at end of period $ 5,010 $ 5,051
======== =======
Supplemental Cash Flow Information:
Cash paid during the period for interest $ 515 $ 453
======== =======
Cash paid during the period for income taxes $ -- $ --
======== =======
Supplemental Non-cash Investing and Financing Activities:
Assets and lease obligations capitalized $ 238 $ --
======== =======
Fair value of stock purchase warrants granted to a lender $ -- $ 679
======== =======
Accretion of preferred B stock $ 1,253 $ 328
======== =======
Acquisitions:
Fair value of assets acquired $(23,610) $(8,172)
Liabilities assumed 83 5,512
Fair value of stock issued -- 1,815
-------- -------
Consideration paid for acquisitions $(23,527) $ (845)
======== =======
</TABLE>
6
<PAGE> 7
BALANCED CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Organization and Background
Balanced Care Corporation (BCC 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 December 31,
1997, the Company operated 35 assisted and independent living communities, 12
skilled nursing facilities, and had 17 assisted living communities under
construction.
(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 six month periods
ended, December 31, 1997 and 1996, 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 six month periods ended December 31,
1997 are not necessarily indicative of the operating results to be expected for
the full year or any other period.
2. INITIAL PUBLIC OFFERING
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 (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 common shares (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 common shares 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 common shares outstanding.
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 and Triangle Retirement Services, Inc. d/b/a
Northridge Retirement Center in December 1997. 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 net loss per common share):
7
<PAGE> 8
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31
-------------------------
1997 1996
-------- --------
<S> <C> <C>
Revenue $ 43,063 $ 33,414
Expense
(43,116) (35,123)
-------- --------
Net Loss $ (53) $ (1,709)
======== ========
Net Loss per common share $ (0.01) $ (0.31)
======== ========
</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. ASSETS HELD FOR SALE
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.
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 the preferred
shares into common. In 1996, common equivalent shares from stock options and
warrants are excluded from the computation as their effect is antidilutive.
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 SIX MONTHS ENDED
------------------ ------------------
DECEMBER 31, DECEMBER 31,
------------------ ------------------
1997 1996 1997 1996
----- ----- ----- -----
<S> <C> <C> <C> <C>
Weighted average common shares outstanding 4,025 3,783 4,025 3,512
Pro forma conversion of preferred shares 4,620 2,742 4,620 2,015
----- ----- ----- -----
Shares used for pro forma basic EPS 8,645 6,525 8,645 5,527
Stock options and warrants converted using the
treasury stock method 1,240 -- 1,232 --
----- ----- ----- -----
Shares used for pro forma diluted EPS 9,885 6,525 9,877 5,527
===== ===== ===== =====
</TABLE>
6. SUBSEQUENT EVENT
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 $2,500,000. 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.
8
<PAGE> 9
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 six months ended
December 31, 1997 and 1996, 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 December 31, 1997, the Company has also designed, developed
and opened eight of its signature assisted living facilities. As of this date
the Company operated a total of 31 assisted living facilities, 12 skilled
nursing facilities and four independent living facilities in Pennsylvania,
Missouri, Arkansas, North Carolina 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 December 31, 1997 the Company owned 7 and leased 33
senior living and health care facilities in Pennsylvania, Missouri, Arkansas and
North Carolina with a capacity for 1,390 assisted living residents, 1,228
skilled nursing patients and 154 independent living residents. In addition to
the eight signature assisted living facilities opened as of December 31, 1997,
the Company opened two additional assisted living facilities by February 1998,
which were under construction at December 31, 1997. The Company also acquired a
skilled nursing facility and an assisted living community on January 2, 1998
with a total capacity for 66 and 51 residents, respectively. The following table
summarizes the Company's operations:
<TABLE>
<CAPTION>
FACILITY COUNT
DECEMBER 31
--------------
1997 1996
---- ----
<S> <C> <C>
Developed Assisted Living Facilities ............... 8 0
Acquired Assisted Living Facilities ................ 23 9
Skilled Nursing Facilities ......................... 12 10
Independent Living Facilities ...................... 4 4
-- --
47 23
== ==
</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 $500 and $600 million. In addition, the Company expects that its
need for financing to fund future acquisitions will be significant, although 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 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
9
<PAGE> 10
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.
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.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain data
as a percentage of total revenue:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
------------------- -------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Facility operating expenses 76.8 81.2 76.3 81.6
General and administrative expense 13.8 10.4 13.9 12.1
Lease expense 12.7 10.2 12.1 10.4
Depreciation and amortization expense 3.4 1.3 2.5 1.5
----- ----- ----- -----
Loss from operations (6.7) (3.1) (4.8) (5.6)
Other income (expense):
Interest income 0.3 0.5 0.4 0.5
Interest expense (2.9) (2.0) (2.1) (2.6)
Gain on sale 13.4 -- 7.1 --
----- ----- ----- -----
Income (loss) before income taxes 4.1 (4.6) 0.6 (7.7)
Provision for income taxes 0.1 -- (0.1) --
----- ----- ----- -----
Net income (loss) 4.0 (4.6) 0.5 (7.7)
===== ===== ===== =====
</TABLE>
THREE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
1996
Total Revenue. Total revenue for the three months ended December 31,
1997 increased by $8,634,000 to $21,255,000 compared to $12,621,000 for the
three months ended December 31, 1996. This increase was primarily the result of:
(i) revenues of $4,344,000 from facilities acquired subsequent to December 31,
1996; (ii) increased development and management fee revenues of $1,740,000 due
to the Company's expanded development efforts; (iii) additional patient services
revenue of $1,934,000 from increased ancillary charges at the Company's Missouri
skilled nursing facilities; and
10
<PAGE> 11
(iv) revenues from the Company's eight signature assisted living facilities
which opened between May and December of 1997.
Operating Expenses. Total operating expenses increased by $9,665,000 to
$22,681,000 for the three months ended December 31, 1997 from $13,016,000 for
the three months ended December 31, 1996. The increase in total operating
expenses in the 1997 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 1997 period increased by $6,071,000
to $16,322,000 from $10,251,000 for the 1996 period. The increase in the 1997
period results from the opening of the Company's eight signature assisted living
facilities and the acquisition of 14 assisted living facilities and two nursing
homes in 1997. As a percentage of total revenue, facility operating expenses
were 76.8% for the 1997 period and 82.7% for the 1996 period.
General and administrative expenses increased by $1,629,000 to
$2,943,000 for the three months ended December 31, 1997 from $1,314,000 for the
three months ended December 31, 1996. As a percentage of total revenue, these
expenses increased to 13.8% for the 1997 period from 10.4% for the 1996 period.
Of the $1,629,000 increase in general and administrative expenses in 1997,
approximately $1,043,000 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 growth. The remaining $586,000 increase was attributable to
increased marketing, consulting, 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 $2,692,000 for the three months ended
December 31, 1997 from $1,292,000 for the three months ended December 31, 1996,
an increase of $1,400,000. This increase is the result of facility operating
leases related to the acquisitions made, and development projects opened,
subsequent to December 31, 1996. As a percentage of total revenue, these
expenses totaled to 12.7% for the 1997 period and 10.2% for the 1996 period.
Depreciation and amortization increased by $565,000 to $724,000 for the
three months ended December 31, 1997 from $159,000 for the three months ended
December 30, 1996. 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 $364,000 to
$615,000 for the three months ended December 31, 1997 from $251,000 for the
three months ended December 31, 1996. This was due to the $23,625,000 of bridge
financing incurred for the purchase of five assisted living facilities during
the quarter ended December 31, 1997. 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 of $30,000 for the 1997
period and $3,000 for the 1996 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 $849,000 for
the three months ended December 31, 1997 from a net loss of $(583,000) for the
three months ended December 31, 1996, an increase of $1,432,000. This increase
in net income resulted primarily from the aggregate effects of: (i) the pharmacy
gain of $2,858,000; (ii) income from acquisitions completed subsequent to
December 31, 1996 of $93,000; (iii) start up losses of $1,350,000 from the
Company's eight signature assisted living facilities opened subsequent to
December 31, 1996; and (iv) increased losses of the Wisconsin facilities
totaling $288,000.
SIX MONTHS ENDED DECEMBER 31, 1997 COMPARED TO SIX MONTHS ENDED DECEMBER 31,
1996
Total Revenue. Total revenue for six months ended December 31, 1997
increased by $23,400,000 to $40,393,000 from $16,993,000 for the six months
ended December 31, 1996. This increase was primarily the result of additional
11
<PAGE> 12
revenues of $19,277,000 from facilities acquired during, or after, the 1996
period and increased development and management fee revenues of $3,298,000 from
the Company's expanded development efforts.
Operating Expenses. Total operating expenses for the six months ended
December 31, 1997 increased by $24,401,000 to $42,345,000 from $17,944,000 for
the six months ended December 31, 1996. As a percentage of total revenue, total
operating expenses decreased to 104.8% in the 1997 six-month period from 105.6%
in the 1996 six-month period. The increase in total operating expenses in the
1997 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 growth.
Facility operating expenses for the six months ended December 31, 1997
increased by $16,947,000 to $30,814,000 from $13,867,000 for the six months
ended December 31, 1996. As a percentage of total revenue, facility operating
expenses decreased to 76.3% in 1997 from 81.6% in 1996. The increase in facility
operating expenses in 1997 is attributable primarily to the increase in the
number of facilities.
General and administrative expenses for the six months ended December
31, 1997 increased by $3,561,000 to $5,622,000 from $2,061,000 for the six
months ended December 31, 1996. As a percentage of total revenue, these expenses
decreased to 13.9% in the 1997 six-month period from 12.1% in the 1996 six-month
period. Of the $3,561,000 increase in general and administrative expenses in
1997, approximately $2,245,000 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 growth. The remaining $1,316,000 was
attributable to marketing, consulting, development, travel, preopening,
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 1997 six-month period increased by $3,137,000 to
$4,904,000 from $1,767,000 in the 1996 six-month period. As a percentage of
total revenue, these expenses increased to 12.1% in the 1997 six-month period
from 10.4% in the 1996 six-month period as a result of the facility operating
leases related to the facilities developed and acquired in 1997.
Depreciation and amortization expense for 1997 increased by $756,000 to
$1,005,000 from $249,000 in 1996. This increase resulted from the additional
depreciation and amortization on assets acquired and goodwill recorded as a
result of acquisitions.
Other Income (Expense). Interest income for 1997 increased by $96,000
to $175,000 from $79,000 in 1996. 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. Interest
expense for 1997 increased by $418,000 to $852,000 from $434,000 in 1996. This
was due to the $23,625,000 of bridge financing incurred for the purchase of five
assisted living facilities during the quarter ended December 31, 1997, and to a
full six months interest on a $3,115,000 mortgage from the acquisition of two
Missouri nursing homes on August 31, 1996. 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 1997 increased by
$31,000 to $37,000 from $6,000 in 1996. The increase resulted from an increase
in taxable income reported on individual state corporate tax returns in states
that do not permit consolidated filings.
Net Income (Loss). Net income for 1997 increased to $192,000 from a net
loss of $(1,312,000) in 1996, an increase of $1,504,000. This increase is
primarily attributable to: (i) the pharmacy gain of $2,858,000; (ii) income from
acquisitions completed subsequent to December 31, 1997 of $380,000; (iii)
start-up losses of $1,663,000 from the Company's eight signature assisted living
facilities opened subsequent to December 31, 1996; and (iv) increased losses of
the Wisconsin facilities totaling $262,000.
12
<PAGE> 13
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 (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 common shares (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
common shares 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 underwriter's option the Company has 16,695,343 common shares
outstanding. These transactions generated net proceeds to the Company of
approximately $46,362,000 net of costs and underwriting discounts and
commissions. The proceeds were used to repay indebtedness of approximately
$29,473,000 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 completed the sale of the assets of the Pharmacy for net
proceeds of approximately $4,700,000 in October 1997. Due to the Company's NOL
carryforwards and other book/tax timing differences, no federal taxes are
expected to be paid on the gain realized.
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 December 31,
1997 approximately $295 million of the $365 million had not been utilized and
remained available to fund project development. The Company plans to utilize
approximately $60 million for new development project commitments during the
quarter ended March 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.
To date, the Company has developed assisted living facilities for
health care REITs. The Company has leased the facilities from the REITs when
construction has been completed. 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 a management
agreement with the Operator/Lessee. 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. On 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 $2,515,000.
The Company leases most of its facilities under longterm operating
leases. Lease obligations for fiscal 1998 are approximately $8,300,000. 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
13
<PAGE> 14
or other business combinations, (iii) prohibit the Company from operating
competing facilities within a ten mile radius of the leased or mortgaged
facilities.
The Company has obtained a commitment from a bank for a $10,000,000
line of credit to be secured by the accounts receivable of its skilled nursing
operations. The line of credit will be for a term of three years and outstanding
borrowings will bear interest at the lessor of LIBOR plus 2.75% or prime rate
plus 0.5%. The Company will be able to draw on this line of credit to the extent
of its eligible receivables, which were approximately $3,500,000 at December 31,
1997. The Company is currently evaluating its financing options before entering
into this line of credit facility and may choose to pursue other banking
arrangements.
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 six months ended December 31, 1997, operating activities used
cash of $3,967,000. This decrease resulted from (i) the net income adjusted for
depreciation and amortization, deferred taxes and the gain on sale of assets of
$1,645,000; (ii) the increase of $1,682,000 in accounts receivable from patient
services due to increased per diem reimbursements and rehabilitation therapy
volume; and (iii) the increase in deferred costs and other current assets of
$3,868,000 resulting from the Company's substantial development activities.
These decreases were partially offset by an increase in accounts payable and
other current liabilities of $3,228,000.
For the six months ended December 31, 1996, operating activities used
cash of $323,000. This decrease resulted from: (i) the net loss adjusted for
depreciation and amortization of $1,063,000; (ii) the increase of $1,463,000 in
accounts receivable from patient services due to increased per diem
reimbursements and rehabilitation therapy volume; and (iii) the increase in
deferred costs and other current assets of $1,615,000 resulting from the
Company's substantial development activities. These decreases were partially
offset by an increase in accounts payable and other current liabilities of
$3,818,000.
Financing Activities
During the six months ended December 31, 1997 the Company obtained
bridge financing in the amount of $23,625,000 to finance three acquisitions
(five facilities) that took place between October and December 1997. This debt
was repaid from the proceeds of the offering and therefore, has been classified
as long-term on the balance sheet in accordance with Statement of Financial
Accounting Standards No. 6, Classification of Short-Term Obligations Expected to
Be Refinanced. During the six months ended December 31, 1996 the Company had net
cash provided from financing activities of $7,322,000. This was primarily
comprised of proceeds from the issuance of Series B Preferred Stock in the
amount of $6,833,000.
In connection with the lease or debt financing of the Company's
acquisitions, the REIT lease and debt financings included required lease
deposits or debt service reserves that range from three to six months' rent or
debt service. These lease deposits or debt service reserves are recorded as
restricted investments. For leasing transactions, the Company owns the
restricted investment, pays rent on funds advanced by the REIT and amortizes the
lease liability as a corresponding reduction of rent expense in the period when
the related rent is expensed.
Investing Activities
For the six months ended December 31, 1997, the Company's investing
activities used $22,310,000. This includes (i) asset purchases of $23,527,000
including goodwill of the three acquisitions (five facilities); (ii) purchases
of property and
14
<PAGE> 15
equipment of $1,543,000; (iii) deposits of restricted funds of $769,000; and
(iv) increases in other assets of $720,000. These uses were partially offset by
the initial payment for the sale of the pharmacy in the amount of $4,249,000.
For the six months ended December 31, 1996, the Company's investing
activities used $2,515,000 including (i) amounts paid for acquisitions of
$845,000; (ii) purchases of property and equipment of $523,000; (iii) deposits
of restricted funds of $189,000; and (iv) increases in other assets of $958,000.
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 and the 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 that is comprised 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 and the 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 and the goodwill of
approximately $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 as purchases. 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 and will be recorded as additional goodwill. Goodwill of
approximately $550,000 (excluding any contingent payments) will be recorded for
the skilled nursing facility acquisition and amortized over 40 years.
PLANNED DIVESTITURE
In June 1997, the Company committed to 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.
15
<PAGE> 16
LIMITED OPERATING HISTORY
The Company was formed in April 1995 and has a limited operating
history. Although the Company had net income of $192,000 for the six months
ended December 31, 1997, the Company incurred losses of $10,000, $909,000,
$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 not continue to incur losses. 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 nine additional signature assisted living facilities through February
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, 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
16
<PAGE> 17
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 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,
17
<PAGE> 18
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 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.
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, potential 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
18
<PAGE> 19
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.
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
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
19
<PAGE> 20
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, 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.
20
<PAGE> 21
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, par
value $.001 per share ("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 $2,300,000. Net
proceeds to the Company after deducting total expenses were
approximately $46,362,000. Net proceeds were used to repay
indebtedness of $29,473,000 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 did not file any reports on Form 8-K
during the quarterly period ended December 31, 1997
21
<PAGE> 22
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: March 27, 1998 By: /s/ Paul Kruis
Paul Kruis
Chief Financial Officer
22
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 5,010
<SECURITIES> 0
<RECEIVABLES> 8,772
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 23,252
<PP&E> 21,326
<DEPRECIATION> 0
<TOTAL-ASSETS> 60,192
<CURRENT-LIABILITIES> 12,115
<BONDS> 0
14,502
1
<COMMON> 5
<OTHER-SE> (2,510)
<TOTAL-LIABILITY-AND-EQUITY> 60,192
<SALES> 21,255
<TOTAL-REVENUES> 21,255
<CGS> 0
<TOTAL-COSTS> 22,681
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 615
<INCOME-PRETAX> 879
<INCOME-TAX> 30
<INCOME-CONTINUING> 849
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 849
<EPS-PRIMARY> .10
<EPS-DILUTED> .09
</TABLE>
