<PAGE>
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20459
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 12 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition period from ___ to___
Commission file number 1-13498
ASSISTED LIVING CONCEPTS, INC.
(Exact name of registrant as specified in its charter)
NEVADA 93-1148702
(State or other jurisdiction of IRS Employer
incorporation or organization) Identification No.)
9955 SE Washington, Suite 300
Portland, Oregon 97216
(Address of principal executive offices)
(503) 252-6233
(Registrant's telephone number, including area code)
Indicated by check mark whether Registrant (1) has filed all reports
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 Registrants was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Shares of Registrant's common stock, $.01 par value, outstanding at July 31,
1998- 16,767,317.
- --------------------------------------------------------------------------------
Page 1 of 23
<PAGE>
ASSISTED LIVING CONCEPTS, INC.
FORM 10-Q
June 30, 1998
INDEX
-----
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION Page
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of December 31, 1997 and June 30, 1998................. 3
Condensed Consolidated Statements of Operations for the three and six months ended
June 30, 1997 and June 30, 1998.................................................................. 4
Condensed Consolidated Statements of Cash Flows for the three and six months ended
June 30, 1997 and June 30, 1998.................................................................. 5
Notes to Condensed Consolidated Financial Statements............................................. 6 - 9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................................... 10 - 22
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders..................................... 22
Item 6. Exhibits and Reports on Form 8-K........................................................ 22
</TABLE>
Page 2 of 23
<PAGE>
PART 1
ITEM 1 - FINANCIAL INFORMATION
ASSISTED LIVING CONCEPTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30,
DECEMBER 31, 1998
1997 (UNAUDITED)
-------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 63,394 $ 76,468
Funds held in trust 1,956 1,149
Accounts receivable 2,185 3,056
Other current assets 4,504 4,516
--------- ---------
Total current assets 72,039 85,189
--------- ---------
Property and equipment 100,751 208,248
Construction in process 103,795 60,685
--------- ---------
Total property and equipment 204,546 268,933
Less accumulated depreciation 2,477 4,352
--------- ---------
Property and equipment - net 202,069 264,581
Goodwill 13,397 9,884
Other assets 10,800 14,858
--------- ---------
Total assets $ 298,305 $ 374,512
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 9,873 $ 14,590
Construction payables 18,883 11,265
Construction financing 2,150 -
Current portion of long-term debt 172 388
--------- ---------
Total current liabilities 31,078 26,243
Convertible subordinated debentures 100,165 175,165
Long-term debt 26,047 39,073
--------- ---------
Total liabilities 157,290 240,481
--------- ---------
Stockholders' equity:
Preferred Stock, $.01 par value; 1,000,000 shares authorized; - -
none issued and outstanding
Common Stock, $.01 par value; 40,000,000 shares authorized; issued and
outstanding 15,646,478 and 15,754,822 shares in 1997 and 1998 156 158
Additional paid-in capital 137,379 135,476
Fair market value in excess of historical cost of acquired net assets
attributable to related party transactions (239) (239)
Retained earnings (accumulated deficit) 3,719 (1,364)
--------- ---------
Stockholders' equity $ 141,015 $ 134,031
--------- ---------
Total liabilities and stockholders' equity $ 298,305 $ 374,512
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 3 of 23
<PAGE>
ASSISTED LIVING CONCEPTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1997 1998 1997 1998
<S> <C> <C> <C> <C>
Revenues $ 10,848 $ 21,353 $ 20,092 $ 40,296
Operating expenses:
General operating expenses 6,557 13,139 12,249 24,725
Corporate general and administrative 676 1,389 1,317 2,448
Building rentals 1,654 3,573 2,870 7,111
Building rentals to related party 355 364 699 728
Depreciation and amortization 702 1,224 1,208 2,089
Non-recurring charge - 8,495 - 8,495
-------- -------- -------- --------
Total operating expenses 9,944 28,184 18,343 45,596
-------- -------- -------- --------
Operating income (loss) 904 (6,831) 1,749 (5,300)
-------- -------- -------- --------
Interest expense (245) (380) (408) (653)
Interest income 153 946 276 1,645
Other income 482 1,429 482 2,804
-------- -------- -------- --------
Income (loss) before income taxes $ 1,294 $ (4,836) $ 2,099 $ (1,504)
Provision (benefit) for income taxes 327 (458) 468 809
-------- -------- -------- --------
Net income (loss) before cumulative effect $ 967 $ (4,378) $ 1,631 $ (2,313)
Cumulative effect of change in accounting principle (net
of tax benefit of $1,187) - - - (2,770)
Net income (loss) $ 967 $ (4,378) $ 1,631 $ (5,083)
======== ======== ======== ========
Basic net income (loss) per common share before cumulative
effect of change in accounting principle $ .09 $ (.28) $ .15 $ (.15)
Cumulative effect of change in accounting
principle - - - (.17)
======== ======== ======== ========
Basic net income (loss) per common share $ .09 $ (.28) $ .15 $ (.32)
======== ======== ======== ========
Diluted net income (loss) per common share before
cumulative effect of change in accounting principle $ .09 $ (.28) $ 15 $ (.15)
Cumulative effect of change in accounting principle - - - (.17)
======== ======== ======== ========
Diluted net income (loss) per common share $ .09 $ (.28) $ .15 $ (.32)
======== ======== ======== ========
Basic weighted average common shares outstanding 11,044 15,749 11,044 15,717
Diluted weighted average common shares outstanding 13,280 15,749 13,281 15,717
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 4 of 23
<PAGE>
ASSISTED LIVING CONCEPTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1997 1998 1997 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 967 $ (4,378) $ 1,631 $ (5,083)
Adjustment to reconcile net income (loss) to net
cash provided by operating activities:
Gain on sale of asset (36) - (36) -
Depreciation and amortization 702 1,224 1,208 2,089
Non-recurring charge - 8,495 - 8,495
Cumulative effect of change in accounting principle - - - 2,770
Changes in asset and liabilities:
Accounts receivable, net (58) 83 (353) (871)
Other current assets 522 2,679 (1,121) 1,972
Other assets 24 (29) (168) (1,195)
Accounts payable and accrued expenses 1,819 (683) 1,495 1,155
--------- --------- --------- ---------
Net cash provided by operating activities 3,940 7,391 2,656 9,332
--------- --------- --------- ---------
INVESTING ACTIVITIES: 7 7 7 7
Sale (purchase) of funds held in trust (5) (961) (173) 807
Acquisitions, net of cash acquired - (8,007) - (8,105)
Proceeds from sale and leaseback transactions 32,978 2,775 35,568 2,775
Purchases of property and equipment (33,507) (36,400) (61,410) (67,691)
--------- --------- --------- ---------
Net cash used in investing activities (534) (42,593) (26,015) (72,214)
--------- --------- --------- ---------
FINANCING ACTIVITIES: 7 7 7 7
Proceeds from short-term construction borrowings 6,860 - 43,210 -
expected to be refinanced
Repayments of construction financing (7,600) - (10,150) -
Construction draws 3,249 (1,330) (1,919) (7,618)
Proceeds from long-term debt - 14,600 - 14,600
Payments on long-term debt (28) (1,281) (55) (1,358)
Proceeds from issuance of common stock 55 316 73 852
Proceeds from issuance of convertible subordinated
debentures - 75,000 - 75,000
Purchase of common stock - (2,753) - (2,753)
Debt issuance costs of long-term debt (434) (2,767) (1,077) (2,767)
--------- --------- --------- ---------
Net cash provided by financing activities 2,102 81,785 30,082 75,956
--------- --------- --------- ---------
Net increase in cash and cash equivalents 5,508 46,583 6,723 13,074
Cash and cash equivalents, beginning of period 3,320 29,885 2,105 63,394
--------- --------- --------- ---------
Cash and cash equivalents, end of period $ 8,828 $ 76,468 $ 8,828 $ 76,468
========= ========= ========= =========
Supplemental disclosure of cash flow information: 7 7
Cash payments for interest $ 1,561 $ 626 $ 3,267 $ 2,726
Cash payments for income taxes $ - $ 474 - $ 590
Extinguishment of construction loan payable
from sale-leaseback - $ 2,150 - $ 2,150
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 5 of 23
<PAGE>
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
Assisted Living Concepts, Inc. and Subsidiaries ("the Company") owns, operates
and develops assisted living residences which provide housing to senior citizens
who need help with the activities of daily living such as bathing and dressing.
The Company provides personal care and support services and makes available
routine nursing services designed to meet the needs of its residents.
Basis of Presentation
These condensed consolidated financial statements have been prepared without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission. The accompanying condensed consolidated financial statements
include the accounts of the Company and its wholly owned subsidiaries that
manage, own and develop assisted living residences and provide ancillary
services such as home health, hospice and durable medical equipment. The
condensed consolidated financial statements also include residences the Company
owns or leases but are operated through joint venture agreements. All
significant intercompany accounts and transactions have been eliminated in
consolidation. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. These condensed consolidated financial statements should be read
in conjunction with the audited consolidated financial statements and notes
thereto included in the Company's annual report on Form 10-K for the year ended
December 31, 1997.
The financial information included herein reflects all adjustments (consisting
of normal recurring adjustments) which are, in the opinion of management,
necessary for a fair presentation of the results for interim periods. The
result of operations for the three and six-month periods ended June 30, 1997 and
1998 are not necessarily indicative of the results to be expected for the full
year.
Change in Accounting Principle
On April 3, 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5, Reporting on the Costs of Start-up Activities (SOP
98-5). The Company adopted SOP 98-5 effective as of January 1, 1998. The
impact of this change in accounting principle on the Company relates to the
treatment of pre-opening costs associated with newly developed residences. SOP
98-5 requires that these costs be expensed as incurred as compared to the
Company's previous policy to capitalize these costs prior to commencement of
residence operations, amortizing them over a twelve month period. The $2.8
million cumulative effect change on prior year (after reduction for income taxes
of $1.2 million) is included in income for the six months ended June 30, 1998.
The effect of the change on the three months ended June 30, 1998 was to increase
net income $114,000 or $.01 per diluted share. The effect of the change on the
six months ended June 30, 1998 was to increase income before cumulative effect
of a change in accounting principle by $247,000 or $.02 per diluted share.
Page 6 of 23
<PAGE>
The effect of the change on the first quarter of 1998 is as follows (in
thousands):
<TABLE>
<CAPTION>
Three
Months Ended
March 31, 1998
--------------
<S> <C>
Net income as originally reported $ 1,906
Effect of change in pre-opening costs 133
-------
Income before cumulative effect of change in accounting
principle 2,039
Cumulative effect of change in accounting principle (2,565)
-------
Net income as restated (526)
=======
Per basic and diluted share amounts:
Net income per share as originally reported $ .12
Effect of change in pre-opening costs .01
--------
Income before cumulative effect of change in accounting
principle .13
Cumulative effect of change in accounting principle (.14)
--------
Net income per share as restated $ (.01)
========
</TABLE>
2. PROPERTY AND EQUIPMENT
The Company's property and equipment are stated at cost and consist of the
following at June 30, 1998 (in thousands):
<TABLE>
<S> <C>
Land $ 13,093
Buildings and improvements 186,838
Equipment 2,141
Furniture 6,176
---------
Subtotal 208,248
Construction in progress 60,685
---------
Total property and equipment 268,933
Less accumulated depreciation (4,352)
---------
Property and equipment, net $ 264,581
=========
</TABLE>
As of June 30, 1998, the Company had begun construction on 33 residences (1,332
units) ($58.7 million), which includes 11 residences (438 units) ($26.5 million)
that have received a certificate of occupancy, but are pending licensure. As of
June 30, 1998, the Company had also entered into agreements pursuant to which it
may purchase, subject to completion of due diligence and various other
conditions, 34 additional sites. The Company has capitalized $1.7 million of
direct costs in conjunction with the due diligence associated with these 34
sites (1,349 units). The remaining $285,000 relates to costs associated with
site selection and pre-acquisition costs.
In addition, the Company purchased three residences (164 units), two in Texas
and one in Louisiana, for a total purchase price (net of cash acquired) of
approximately $8.0 million during the three month period ended June 30, 1998.
3. CONVERTIBLE SUBORDINATED DEBENTURES
The Company completed a private placement of $75,000,000 of 5.625% Convertible
Subordinated Debentures due May 1, 2003 on April 7, 1998. The Debentures are
convertible at any time at or prior to maturity, unless
Page 7 of 23
<PAGE>
previously redeemed, at a conversion price of $26.184 per common share, which
equates to an aggregate of approximately 2.86 million shares. Interest is
payable semiannually on May 1 and November 1 of each year, commencing November
1, 1998. The Debentures are unsecured and subordinated to all senior
indebtedness of the Company. The Debentures are redeemable at par, as a whole or
in part, at any time on or after May 15, 2001 at the Company's option.
Effective August 3, 1998, the Company called for redemption all of its 7.0%
Convertible Subordinated Debentures Due 2005 ($13,915,000 outstanding at June
30, 1998). As of August 3, 1998, all debentures were converted at a price of
$7.50 per share, resulting in the issuance of approximately 1,855,000 shares of
common stock.
4. SUBSEQUENT EVENTS
During July, 1998, the Company closed on a $13.2 million tax exempt bond
financing, secured by seven residences in the state of Ohio, at an all inclusive
variable rate of approximately 5%. In addition, the Company obtained mortgage
financing for three Oregon properties in the amount of $6.6 million at a fixed
rate of 7.6%.
During August, 1998, the Company repurchased 101,900 shares of common stock at
prices ranging from $13.375 to $13.875 in accordance with a stock repurchase
plan initiated in May, 1998. The Company is authorized to repurchase 500,000
shares, of which 301,900 have been repurchased as of August 9, 1998.
Page 8 of 23
<PAGE>
5. NET INCOME PER COMMON SHARE
Basic earnings per share (EPS) is calculated using income attributable to common
shares divided by the weighted average number of common shares outstanding for
the period. Diluted EPS is calculated using income attributable to common
shares (after considering the effects of dilutive potential common shares)
divided by the weighted average number of common shares and dilutive potential
common shares outstanding for the period.
<TABLE>
<CAPTION>
Three Three Six Six
Months Ended Months Ended Months Ended Months Ended
June 30, June 30, June 30, June 30,
1997 1998 1997 1998
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Numerator for basic net income (loss) per
share before cumulative effect of change in
accounting principle $ 967 $ (4,378) $ 1,631 $ (2,313)
Effect of conversion of convertible
Debentures 168 (a) 318 (a)
--------------------------------------------------------------------
Numerator for diluted net income (loss)
per share before cumulative effect of
change in accounting principle $ 1,135 $ (4,378) $ 1,949 $ (2,313)
====================================================================
Numerator for basic net income (loss) per
share $ 967 $ (4,378) $ 1,631 $ (5,083)
Effect of conversion of convertible
Debentures 168 (a) 318 (a)
--------------------------------------------------------------------
Numerator for diluted net income (loss) per
share $ 1,135 $ (4,378) $ 1,949 $ (5,083)
====================================================================
Denominator
Denominator for basic net income (loss) per
weighted average common shares 11,044 15,749 11,044 15,717
7% Convertible Debentures 1,855 (a) 1,855 (a)
Stock Option Dilution 381 (a) 382 (a)
--------------------------------------------------------------------
Denominator for diluted net income (loss) per
weighted average common shares 13,280 15,749 13,281 15,717
====================================================================
Basic net income (loss) per common share
before cumulative effect of change in
accounting principle $ .09 $ (.28) $ .15 $ (.15)
Diluted net income (loss) per common share
before cumulative effect of change in
accounting principle $ .09 $ (.28) $ .15 $ (.15)
Basic net income (loss) per common share $ .09 $ (.28) $ .15 $ (.32)
Diluted net income (loss) per common share $ .09 $ (.28) $ .15 $ (.32)
</TABLE>
(a) In accordance with Statement of Financial Accounting Standards No. 128,
"Earnings per share", diluted earnings per share equates basic earnings per
share when a net loss has been incurred.
Page 9 of 23
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
THE COMPANY
The Company reported net loss of $4.4 million or $.28 per diluted share, on
revenue of $21.4 million for the three months ended June 30, 1998.
Operating results for the six month period ended June 30, 1998 include the
operating results of 143 residences and the Company's corporate overhead, and
are not necessarily indicative of future operating financial performance, as the
Company intends to expand its operating base of residences in 1998 and 1999.
RESULTS OF OPERATIONS
Revenues consist of rentals of units in assisted living residences and fees
associated with the provision of services to residents pursuant to contracts
with the residents. Operating expenses include (i) residence operating
expenses, such as staff payroll, food, property taxes, utilities, insurance and
other direct residence operating expenses, (ii) general and administrative
expenses consisting of corporate and support functions such as legal, accounting
and other administrative expenses, (iii) building rentals and (iv) depreciation
and amortization expense.
The following table sets forth, for the periods presented, the number of
residences and units operated, and the average occupancy rates and sources of
revenue for the three months ended June 30, 1997 and 1998. The portion of
revenues received from state Medicaid agencies are labeled as "Medicaid state
portion" while the portion of the Company's revenues that a Medicaid-eligible
resident must pay out of his or her own resources is labeled "Medicaid resident
portion".
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 1997
==============================================================================================================================
Stabilized Start-up
Total Residences Residences Residences Total
---------------------------------------------------------------
<S> <C> <C> <C>
Residences operated (end of period) 42 37 79
Units operated (end of period) 1,459 1,397 2,856
Average occupancy rate 93.8% 56.3% 75.4%
Sources of revenue:
Medicaid state portion 11.8% 9.1% 10.8%
Medicaid resident portion 6.7% 4.4% 5.9%
Private 81.5% 86.5% 83.3%
-------------- -------------- -------------
Total 100.0% 100.0% 100.0%
============== ============== =============
<CAPTION>
THREE MONTHS ENDED JUNE 30, 1998
==============================================================================================================================
Stabilized Start-up
Total Residences Residences Residences Total
---------------------------------------------------------------
<S> <C> <C> <C>
Residences operated (end of period) 72 71 143
Units operated (end of period) 2,603 2,814 5,417
Average occupancy rate 93.2% 51.26% 72.5%
Sources of revenue:
Medicaid state portion 14.6% 6.4% 11.0%
Medicaid resident portion 8.1% 2.9% 5.8%
Private 77.3% 90.7% 83.2%
-------------- -------------- -------------
Total 100.0% 100.0% 100.0%
============== ============== =============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 10 of 23
<PAGE>
The following tables set forth, for the periods presented, the compilation of
results from stabilized and start-up and from other ancillary services,
including corporate activities. Stabilized residences are defined as those
residences which were operating for more than twelve months prior to the
beginning of the period or had achieved a 95% occupancy rate as of the beginning
of the reporting period. Start-up residences are defined as those residences
which were operating for less than twelve months prior to the beginning of the
period or had not achieved a 95% occupancy rate as of the beginning of the
reporting period.
<TABLE>
<CAPTION>
COMPILATION OF STABILIZED AND START-UP RESIDENCES
THREE MONTHS ENDED JUNE 30, 1997
================================================================================================================
Stabilized Start-up Corporate &
Residences Residences Ancillary Services Total
------------------------------ ---------------------- ------------
<S> <C> <C> <C> <C>
Revenue $ 7,079 $ 3,769 - $ 10,848
Residence operating expense 3,921 2,636 - 6,557
-------- -------- -------- ---------
Residence operating Income 3,158 1,133 - 4,291
Corporate overhead - - 676 676
Building rentals 1,462 547 - 2,009
Depreciation and amortization 212 468 22 702
-------- -------- -------- ---------
Total other operating expenses 1,674 1,015 698 3,387
-------- -------- -------- ---------
Operating income 1,484 118 (698) 904
Interest expense (403) (882) 1,040 (245)
Interest income - - 153 153
Other expense - - - -
Other income - 357 125 482
-------- -------- -------- ---------
Net income (loss) before income taxes $ 1,081 $ (407) $ 620 $ 1,294
======== ======== ======== =========
Residences operated 42 37 79
Units operated 1,459 1,397 2,856
Average occupancy rate 93.8% 56.3% 75.4%
<CAPTION>
COMPILATION OF STABILIZED AND START-UP RESIDENCES
THREE MONTHS ENDED JUNE 30, 1998
================================================================================================================
Stabilized Start-up Corporate &
Residences Residences Ancillary Services Total
------------------------------ ---------------------- ------------
<S> <C> <C> <C> <C>
Revenue $ 12,830 $ 7,427 $ 1,096 $ 21,353
Residence operating expense 7,278 5,045 816 13,139
-------- -------- -------- --------
Residence operating income 5,552 2,382 280 8,214
Corporate overhead - - 1,389 1,389
Building rentals 2,672 1,211 54 3,937
Depreciation and amortization 350 865 9 1,224
Non-recurring charge - - 8,495 8,495
-------- -------- -------- --------
Total other operating expenses 3,022 2,076 9,947 15,045
-------- -------- -------- --------
Operating income (loss) 2,530 306 (9,667) (6,831)
Interest expense (496) (852) 968 (380)
Interest income 2 1 943 946
Other income - - 1,429 1,429
-------- -------- -------- --------
Net income (loss) before income taxes $ 2,036 $ (545) $ (6,327) $ (4,836)
======== ======== ======== ========
Residences operated 72 71 143
Units operated 2,603 2,814 5,417
Average occupancy rate 93.2% 51.26% 72.48%
</TABLE>
Page 11 of 23
<PAGE>
The following table sets forth, for the periods presented, the results of
operations for the 66 and 51 residences which were operating for three and six
month periods ended July 30, 1997 and 1998, respectively, in their entirety (in
thousands).
RESULTS OF SAME RESIDENCES
THREE AND SIX MONTHS ENDED
JUNE 30, 1997 AND JUNE 30, 1998
<TABLE>
<CAPTION>
Three Three Six Six
Months Ended Months Ended Months Ended Months Ended
June 30, 1997 June 30, 1998 June 30, 1997 June 30, 1998
<S> <C> <C> <C> <C>
Revenue $ 10,324 $ 11,686 $ 16,355 $ 17,755
General operating expense 6,023 6,656 9,453 10,027
-------- -------- -------- --------
Residence operating income 4,301 5,029 6,902 7,728
Building rentals 1,967 2,537 3,159 4,020
Depreciation and Amortization 534 291 578 360
-------- -------- -------- --------
Other Operating Expenses 2,501 2,828 3,738 4,380
-------- -------- -------- --------
Operating Income 1,800 2,201 3,164 3,348
Interest Expense (949) (496) (1,106) (567)
Interest Income 2 2 3 2
Other Income (Expense) (1) - (1) 1
-------- -------- -------- --------
Income before income taxes 852 1,707 $ 2,060 $ 2,784
======== ======== ======== ========
Residences Operating $ 66 $ 66 $ 51 $ 51
Units Operating 2,362 2,362 1,778 1,778
Average Occupancy Rate 83.5% 93.9% 89.0% 95.8%
</TABLE>
THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998.
Revenues. For the three months ended June 30, 1998, revenues were $21.4
million compared to $10.8 million in the three months ended June 30, 1997, an
increase of $10.6 million or 97%. The Company had opened or received
certificates of occupancy on 161 residences as of June 30, 1998, of which 143
had operating results for the quarter period compared to 79 in the corresponding
1997 period. For the 66 residences which had operated for the entire quarter
for both June 30, 1998 and June 30, 1997, revenue increased by $1.4 million or
13.2% from the $10.3 million in the second quarter of 1997. This increase was
primarily attributable to average occupancy throughout the two periods. Average
occupancy increased 10.4% to 93.9% from the corresponding period in 1997 of
83.5%. The remaining $289,000 of the increase was due to the new residences
which began operating subsequent to July 1, 1997.
General operating expenses. General operating expenses were $13.1 million in
the three months ended June 30, 1998 compared to $6.6 million in the
corresponding 1997 period, an increase of $6.5 million, or 100%. For the 66
residences that operated the entire second quarter of 1998 and 1997, general
operating expenses were $6.6 million in the six months ended June 30, 1998, an
increase of $633,000, or 10.5%, from the $6.0 million of general operating
expenses in the second quarter of 1997. The increase in expenses for these 66
residences is due the increase in staffing to accommodate the level of care due
to higher occupancy percentages. The remaining $6.0 million of the increase
was due to the new residences which began operating subsequent to July 1, 1997.
Page 12 of 23
<PAGE>
Corporate, general and administrative. Corporate, general and administrative
expenses were $1.4 million in the three months ended June 30, 1998 compared to
$676,000 in the corresponding 1997 period, an increase of $713,000, or 106%.
Corporate, general and administrative expenses increased due to the expansion of
regional operations as well as corporate staffing to accommodate the increase in
operating residences.
Building rentals. Building rentals increased to $3.9 million in the three months
ended June 30, 1998 from $2.0 million during the corresponding 1997 period. This
increase was due to the increased number of sale and leaseback transactions
completed by the Company from July of 1997 through June of 1998. The Company had
69 operating leases as of June 30, 1998 compared to 46 at June 30, 1997.
Depreciation and amortization. Depreciation and amortization expense was $1.2
million in the three month period ended June 30, 1998 compared to $702,000 in
1997, an increase of $522,000, or 74%. This increase in depreciation and
amortization was directly related to the new residences that opened subsequent
to July 1, 1997. Depreciation and amortization expense for the 66 residences
which operated for the entire second quarter of 1997 and 1998 decreased due to
the Company entering into nine additional same store sale leaseback transactions
subsequent to June 30, 1997.
Non-recurring charge. The Company recorded a $8.5 million non-recurring charge
during the three months ended June 30, 1998. This non-recurring charge reduces
goodwill related to the Company's 1997 acquisition of a home health agency whose
operations are being scaled back in light of the current legislative and
reimbursement environment; establishes reserves for exit costs relating to the
home health agency; reduces the carrying amount of certain acquired development
sites included in construction in progress which are not being developed due to
competitive and market conditions; establishes reserves for certain operating
properties that are listed for sale; and, establishes a liability for certain
REIT commitment fees related to acquired sites which will not be used in light
of favorable financing alternatives.
Interest expense. Interest expense net of capitalized interest was $380,000
for the three month period ended June 30, 1998 compared to $245,000 in the
corresponding 1997 period, an increase of $135,000. The Company's gross
interest expense was $1,945,000 for the three month period ended June 30, 1998
compared to $1,851,000 in the corresponding 1997 period, an increase of
$94,000. The increase in interest expense is due to increased long-term debt.
Capitalized interest for the three month period ended June 30, 1998 was
$1,565,000 compared to $1,606,000 in the corresponding 1997 period, a change of
$41,000.
Interest income. Interest income was $946,000 for the three month period
ended June 30, 1998 compared to $153,000 in the corresponding 1997 period, an
increase of $793,000. The increase in interest income is directly related to
the increase in available funds as a result of issuance of convertible
subordinated debentures in April, 1998.
Other income: Other income was $1.4 million for the three month period ended
June 30, 1998 compared to $482,000 in the corresponding 1997 period, an
increase of $947,000. The $1.4 million in other income for the three months
ended June 30, 1998 relates primarily to a joint venture agreement on 22
residences with an entity that has agreed to bear the economic risk for the
first six months that the residences are open in exchange for the right to
participate in future operating results. The $482,000 for the three month period
ended June 30, 1997 was from a gain on the sale of real property.
Income (loss) before income taxes: Income (loss) before income taxes for the
three months ended June 30, 1998 was $(4.8) million compared to $1.3 million
during the corresponding period in 1997, a decrease of $6.1 million. The
decrease in net income before taxes was due primarily to non-recurring charges
of approximately $8.5 million.
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Provision (benefit) for income taxes: The Company's provision (benefit) for
income tax for the three months ended June 30, 1998 was $(458,000) compared to
$327,000 for the corresponding period in 1997. The benefit is the result of the
tax impact of the non-recurring charges.
Net income (loss): Net income (loss) for the three months ended June 30, 1998
was $(4.4) million compared to $967,000 during the corresponding period in 1997.
The decrease in net income is primarily the result of the combination of
positive operating results and non-recurring charges of $8.5 million.
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998.
Revenues. For the six months ended June 30, 1998, revenues were $40.3 million
compared to $20.1 million in the six months ended June 30, 1997, an increase of
$20.2 million or 101%. The Company operated 143 residences in the 1998 period
compared to 79 in the corresponding 1997 period. The additional residences
increased revenue by approximately $8.4 million. The 51 residences in operation
in both the 1998 and 1997 periods reported an aggregate increase in revenues of
$ 1.4 million or 8.6%. This increase was primarily attributable to increases in
both average occupancy and yearly rent increases.
General operating expenses. General operating expenses were $24.7 million in
the six months ended June 30, 1998 compared to $12.3 in the corresponding 1997
period, an increase of $12.5 million or 102%. The Company operated 143
residences in the 1998 period compared to 79 in the corresponding 1997 period.
For the 51 residences that operated for 1997 and 1998, general operating
expenses were $10.0 million in the six months ended June 30, 1998, an increase
of $574,000, or 6.1% from the $9.5 million of residence operating expenses in
the corresponding period in 1997. The increase in expenses for these 51
residences is due to the increase in staffing to accommodate the level of care
due to higher occupancy percentages. The remaining $11.9 million of the increase
was due to the new residences that opened subsequent to January 1, 1997.
Corporate, general and administrative. Corporate, general and administrative
expenses were $2.5 million in the six months ended June 30, 1998 compared to
$1.3 million in the corresponding 1997 period, an increase of $1.1 million, or
85.9%. Corporate, general and administrative expenses increased due to the
expansion of regional operations as well as corporate staffing to accommodate
the increase in operating residences.
Building rentals. Building rentals increased to $7.8 million in the six months
ended June 30, 1998 from $3.6 million in 1997. The increase in building rentals
is directly related to the increase in the number of leases entered into by the
Company between January 1, 1997 and June 30, 1998. The Company had 69 operating
leases at June 30, 1998 compared to 47 at June 30, 1997. Building rentals for
the 51 residences which operated for the entire period of 1998 and 1997
increased due to the nine additional same store operating leases entered into
subsequent to June 30, 1997.
Depreciation and amortization. Depreciation and amortization expense was $2.1
million in the six month period ended June 30, 1998 compared to $1.2 million in
1997, an increase of $881,000, or 72.9%. The increase in depreciation and
amortization is directly related to the additional 64 residences opening
subsequent to July 1, 1997. Depreciation and amortization expense for the 51
residences which operated for the entire six month period in 1997 and 1998,
decreased due to nine same store sale leaseback transactions entered into
subsequent to June 30, 1997.
Non-recurring charge. The Company recorded a $8.5 million non-recurring charge
during the six months ended June 30, 1998. This non-recurring charge reduces
goodwill related to the Company's 1997 acquisition of a home health agency whose
operations are being scaled back in light of the current legislative and
reimbursement environment; establishes reserves for exit costs relating to the
home health agency; reduces the carrying amount of certain acquired development
sites included in construction in progress which are not being developed due to
competitive and market conditions; establishes reserves for certain operating
properties that are listed for sale; and, establishes a liability for certain
REIT commitment fees related to acquired sites which will not be used in light
of favorable financing alternatives.
Interest expense. Interest expense net of capitalized interest was $653,000 for
the six month period ended June 30, 1998 compared to $408,000 in the
corresponding 1997 period, a change of $245,000. The Company's gross interest
expense was $4,159,000 for the six month period ended June 30, 1998 compared
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to $3,352,000 in the corresponding 1997 period, a change of $807,000. The
increase in interest expense is due to increase in long-term financing.
Capitalized interest for the six month period ended June 30, 1998 was $3.5
million compared to $2.9 million in the corresponding 1997 period, a change of
approximately $600,000.
Interest income. Interest income was $1.6 million for the six month period
ended June 30, 1998 compared to $276,000 in the corresponding 1997 period, a
change of $1.4 million. The increase in interest income is directly related
to the increase in available funds.
Other Income: Other income was $2.8 million for the six month period ended June
30, 1998 compared to $482,000 in the corresponding 1997 period, a change of
$2.3 million. The $2.8 million in other income for the six months ended June
30, 1998 relates to a joint venture agreement on 29 residences during the six
month period, of which there are 22 residences under agreement at June 30, 1998,
with an investment company that has agreed to bear the economic risk for the
first six months that the residences are open in exchange for the right to
participate in future operating results. The $482,000 for the six month period
ended June 30, 1997 was from a gain on the sale of real property.
Income (loss) before income taxes: Income (loss) before income taxes for the six
months ended June 30, 1998 was $(1.5) million compared to income (loss) before
income taxes of $2.1 million during the corresponding period in 1997, an
decrease of $3.6 million. The decrease was a direct result of non-recurring
charges of $8.5 million for the six month period ended June 30, 1998.
Provision (benefit) for income taxes: The Company's provision for income taxes
for the six months ended June 30, 1998 was $809,000 compared to $468,000 for the
corresponding period in 1997.
Net income (loss): Net income (loss) for the six months ended June 30, 1998
was $ (5.1) million compared to $1.6 million during the corresponding period in
1997. The decrease in income for the six months ended June 30, 1998, was the
result of positive operating results combined with the effects of non-recurring
charges of $8.5 million and a change in accounting principle which resulted in a
charge of $2.8 million for the six months ended June 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998, the Company had positive working capital of approximately of
$60 million including liabilities for construction payables and construction
financing. Exclusive of construction related activities, working capital was
$70.2 million.
Net cash provided by operating activities was approximately $9.3 million during
the six month period ended June 30, 1998, and the primary source of funds was
from net income, exclusive of non-recurring charges.
Net cash used for investing activities totaled $72.2 million during the six
month period ended June 30, 1998. The primary use of cash was $67.7 million
related to the development of new assisted living residences.
Net cash provided by financing activities totaled $76.0 million during the six
month period ended June 30, 1998. The primary source of funds was from the
issuance of $75 million of convertible subordinated debentures in April, 1998.
Capital expenditures for 1998 are estimated to approximate $160 million to $190
million, related primarily to the development of additional residences, of which
approximately $67.7 million had been spent through
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<PAGE>
June 30, 1998. The Company intends to use the funds from the issuance of the $75
million of convertible subordinated debentures in conjunction with future
working capital resources to develop additional residences. In addition, as of
June 30, 1998, the Company had approximately $210 million in outstanding
commitments from several health care REITs to finance additional residences
through sale and leaseback transactions and approximately $75 million in
mortgage financing. The Company does not anticipate any significant
capital expenditures within the foreseeable future with respect to the
residences developed since 1994 and those currently operating or those pending
licensure as of June 30, 1998.
The Company expects that its cash on hand, together with cash flow from
operations and available REIT and mortgage financing, will be sufficient to meet
is operating requirements and to fund its anticipated growth for at least the
next twelve months. In addition, the Company has a number of unencumbered
residences that are currently operating or under development that may be
leveraged in order to obtain additional funds. The Company expects to use a wide
variety of financing sources to fund its future growth, including public and
private debt and equity, conventional mortgage financing, unsecured bank
financing, among other sources. There can be no assurance that financing from
such sources will be available in the future, or if available that such
financing will be available on terms acceptable to the Company.
As of June 30, 1998, the Company had invested excess cash balances in short-
term certificates of deposit and U.S. Treasury securities.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income", which established requirements for disclosure
of comprehensive income. The objective of SFAS No. 130 is to report all changes
in equity that result from transactions and economic events other than
transactions with owners. Comprehensive income is the total of net income and
all other non-owner changes in equity. The Company will comply with the
provisions of SFAS No. 130 as they become applicable.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information," which
changes the way segment information is reported for public companies and
requires those companies to report selected segment information in interim
financial reports to stockholders. The Statement is effective for financial
statements for fiscal years beginning after December 15, 1997. The Company
plans to adopt SFAS No. 131 for the fiscal year ended December 31, 1998.
RISK FACTORS
Except for the historical information contained herein, the matters discussed
herein are foreword looking statements. Such forward-looking statements involve
known and unknown risks, uncertainties and other factors that may cause the
actual results, performance or achievements of the Company to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. The following discussion highlights
some of these risks and others are discussed elsewhere herein or in other
documents filed by the Company with the Securities and Exchange Commission.
ANTICIPATED OPERATING LOSSES OF NEW RESIDENCES. The Company anticipates that
each residence will have an operating loss (prior to depreciation, rent or
interest, if any) of $20,000 during the first three to four months of operation.
To the extent the Company sells a residence and leases it back or otherwise
finances it, the aggregate loss may increase by up to an additional $100,000.
The Company currently plans to open
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50 to 60 residences during the next twelve months. The Company estimates that
the losses to be incurred during the next twelve months due to start-up
residences could range from $85,000 to $1.0 million. The success of the
Company's future operations is directly tied to the expansion of its operational
base. There can be no assurance that the Company will not experience unforeseen
expenses, difficulties, complications and delays in connection with the
expansion of its operational base which could have a material adverse effect on
the Company's financial condition and results of operations.
In April 1997, in order to mitigate the impact of start-up losses associated
with the opening of newly constructed residences, the Company entered into a
joint venture agreement with a third party investor to operate certain new
assisted living residences owned and developed by the Company. Pursuant to the
joint venture agreement, the Company has acquired a 10% interest for $300,000
and the joint venture partner has acquired a 90% interest for $2.0 million in
the joint venture. The joint venture concurrently entered into a non-cancelable
management agreement with the Company pursuant to which the Company will manage
the properties operated by the joint venture for an amount equal to the greater
of 8% of gross revenues or $2,000 per month per property. As of June 30, 1998,
22 residences owned or leased by the Company were being operated by the joint
venture, of which the Company acquired the joint venture's interest in 3
residences during July, 1998. Seven additional residences operated by the joint
venture during the six months ended June 30, 1998 were acquired by the Company
during the three months ended June 30, 1998. The Company anticipates 5 to 10
new residences will enter the joint venture per quarter. The revenues and
expenses of the joint venture are consolidated with those of the Company. In
addition, the Company will recognize 10% of the losses or profits, if any, of
the joint venture, net of the effect of management fees paid to the Company.
The Company may seek to acquire the joint venture partner's 90% interest in the
future, but has no contractual right to purchase such interest. While the use
of such joint venture agreements is intended to mitigate the impact on the
Company of start-up losses associated the opening of new residences or
otherwise, the Company may, to the extent it does not acquire the partner's
interest, forego a portion of future operating profits, if any, from the
residences operated by the joint venture. The Company expects it will, from
time to time, enter into additional partnering arrangements, which may be
similar to the current structure, for some of its future development projects.
There can be no assurance that the Company will be able to enter into any such
future arrangements or, if entered into, that such arrangements will achieve the
desired results.
Due to the completion of debt and equity financings, the Company expects to own
a higher percentage of its residences. Historically, the Company has relied
extensively on sale/leaseback financings from REITs to finance its development
efforts. The Company expects to make additional investments in its management
infrastructure to further support its growth strategy. While the Company
believes that the resulting effects of the recent completed offerings, the
increased focus on asset ownership, its accelerated development program and
anticipated additions to its corporate infrastructure will negatively impact its
earnings prospects over the next 12 to 18 months, it believes that these
measures will positively affect its long-term prospects.
NO ASSURANCE AS TO ABILITY TO DEVELOP OR ACQUIRE ADDITIONAL ASSISTED LIVING
RESIDENCES. The Company's prospects for growth are directly affected by its
ability to develop and acquire additional assisted living residences. While the
Company currently plans to open 50 to 60 residences during the next twelve
months, there can be no assurance that such residences will be completed. The
success of the Company's growth strategy will also depend upon, among other
factors, the Company's ability to obtain government licenses and approvals, the
Company's ability to obtain financing and the competitive environment for
development and acquisitions. The nature of such licenses and approvals and the
timing and likelihood of obtaining them vary widely from state to state,
depending upon the residence, or its operation, and the type of services to be
provided. The successful development of additional assisted living residences
will involve a number of risks, including the possibility that the Company may
be
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unable to locate suitable sites at acceptable prices or may be unable to obtain,
or may experience delays in obtaining, necessary zoning, land use, building,
occupancy, and other required governmental permits and authorizations. The
Company is dependent upon these permits and authorizations to construct and
operate its residences and any delay or inability to obtain such permits could
adversely affect the results of operations. The Company may also incur
construction costs that exceed original estimates, may not complete construction
projects on schedule and may experience competition in the search for suitable
development sites. The Company relies on third-party general contractors to
construct its new assisted living facilities. There can be no assurance that the
Company will not experience difficulties in working with general contractors and
subcontractors, which could result in increased construction costs and delays.
Further, facility development is subject to a number of contingencies over which
the Company will have little control and that may adversely affect project cost
and completion time, including shortages of, or the inability to obtain, labor
or materials, the inability of the general contractor or subcontractors to
perform under their contracts, strikes, adverse weather conditions and changes
in applicable laws or regulations or in the method of applying such laws and
regulations. Accordingly, if the Company is unable to achieve its development
plans, its business, financial condition and results of operations could be
adversely affected. There can be no assurance that the Company will be
successful in developing or acquiring any particular residence, that the
Company's rapid expansion will not adversely affect its operations or that any
residence developed or acquired by the Company will be successful. The various
risks associated with the Company's development or acquisition of assisted
living residences and uncertainties regarding the profitability of such
operations could have a material adverse effect on the Company's financial
condition and results of operations.
NEED FOR ADDITIONAL FINANCING TO FUND FUTURE DEVELOPMENT AND ACQUISITIONS. To
achieve its growth objectives, the Company will need to obtain sufficient
financial resources to fund its development, construction and, to a lesser
extent, its acquisition activities. The estimated cost to complete and fund
start-up losses for new facilities that will be developed during the next twelve
months is between $130 million and $160 million; accordingly, the Company's
future growth will depend on its ability to obtain additional financing on
acceptable terms. The Company will, from time to time, seek additional funding
through public and/or private financing sources, including equity and/or debt
financing. If additional funds are raised by issuing equity securities, the
Company's stockholders may experience dilution. There can be no assurance that
adequate funding will be available as needed or on terms acceptable to the
Company. A lack of available funds may require the Company to delay or eliminate
all or some of its development projects and acquisition plans.
The Company's aggregate annual fixed debt and lease payment obligations as of
June 30, 1998 totaled approximately $29.4 million. These fixed payment
obligations will significantly increase as the Company pursues its development
and acquisition plan. Failure to meet these obligations may results in the
Company being in default of its financing agreements and, as a consequence, the
Company may lose its ability to operate any individual residence or other
residences which may be cross-defaulted. There can no assurance that the Company
will generate sufficient cash flow to meet its current or future obligations.
The Company has not historically covered its fixed charges with earnings. In
addition, there is a risk that, upon completion of construction, permanent
financing for newly developed residences may not be available or may be
available only on terms that are unfavorable or unacceptable to the Company.
Geographic Concentration; Dependence on State Medicaid Waiver Programs. As of
June 30, 1998, 28% of the Company's properties are in Texas, 14% are in Oregon,
12% in Ohio, 9.1% are in Indiana and 10% in Washington; therefore, the Company
is dependent on the economies of Texas, Oregon, Ohio, Indiana and Washington
and, to a certain extent, on the continued funding of state Medicaid waiver
programs. During the years ended December 31, 1995, 1996, 1997 and the three and
six
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months ended June 30, 1998, direct payments received from state Medicaid
agencies accounted for approximately 21.4%, 13.8%, 11.3% , 11.0% and 10.7%,
respectively of the Company's revenue while the tenant-paid portion of Medicaid
residents accounted for approximately 9.6%, 7.6%, 6.0%, 5.8% and 5.8%,
respectively, of the Company's revenue during these periods. The Company
expects that state Medicaid reimbursement programs will constitute a significant
source of revenue for the Company in the future. The Company intends to
continue developing and operating assisted living residences in other states.
Adverse changes in general economic factors affecting these states' respective
health care industries or in these states' laws and regulatory environment,
including Medicaid reimbursement rates, could have a material adverse effect on
the Company's financial condition and results of operations.
DEPENDENCE ON REIMBURSEMENT BY THIRD-PARTY PAYORS. A portion of the Company's
revenues will be dependent upon reimbursement from third-party payors, including
state Medicaid programs and private insurers. For the years ended December 31,
1995, 1996, 1997 and the three and six months ended June 30, 1998, the Company
received, as a percentage of total revenue, under Medicaid programs 21.4%,
13.8%, 11.3%, 11.0% and 10.7%, respectively. Furthermore, there can be no
assurance the Company's proportionate percentage of revenue received from
Medicaid programs will not increase. The revenues and profitability of the
Company will be affected by the continuing efforts of governmental and private
third-party payors to contain or reduce the costs of health care by attempting
to lower reimbursement rates, increasing case management review of services and
negotiating reduced contract pricing. In an attempt to reduce the federal and
certain state budget deficits, there have been, and management expects that
there will continue to be, a number of proposals to limit Medicaid reimbursement
in general. Adoption of any such proposals at either the federal or the state
level could have a material adverse effect on the Company's business, financial
condition, results of operations and prospects.
GOVERNMENT REGULATION. Federal and state governments regulate various aspects
of the Company's business. The development and operation of assisted living
facilities and the provision of health care services are subject to federal,
state and local licensure, certification and inspection laws that regulate,
among other matters, the number of licensed beds, the provision of services,
equipment, staffing (including professional licensing), operating policies and
procedures, fire prevention measures, environmental matters, resident
characteristics, physical design and compliance with building and safety codes.
Failure to comply with these laws and regulations could result in the denial of
reimbursement, the imposition of fines, suspension or decertification from the
Medicare and Medicaid program and, in extreme cases, the revocation of a
facility's license or closure of a facility. There can be no assurance that
federal, state, or local governments will not impose additional restrictions on
the Company's activities that could materially adversely affect the Company.
State and local laws regulating the Company's operations vary significantly from
one jurisdiction to another. In certain states in which the Company is
currently developing assisted living facilities, a certificate of need ("CON")
or other similar approval may be required for the acquisition or construction of
new facilities, the expansion of the number of licensed units or beds or
services, or the opening of a home health care agency or hospice. The Company
could be adversely affected by the failure or inability to obtain such approval,
changes in the standards applicable for such approval and possible delays and
expenses associated with obtaining such approval.
Federal and state fraud and abuse laws, such as "anti-kickback" laws and "self-
referral" laws, govern certain financial arrangements among health care
providers and others who may be in a position to refer or recommend patients to
such providers. Although the Company has established policies and procedures
that it believes are sufficient to ensure that its facilities will operate in
substantial compliance with applicable regulatory requirements, there can be no
assurance that such fraud and abuse laws will be interpreted in a manner
consistent with the practices of the Company.
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PRICING PRESSURES. The health care services industry is currently experiencing
market-driven reforms from forces within and outside the industry that are
exerting pressure on health care and related companies to reduce health care
costs. These market-driven reforms are resulting in industry-wide consolidation
that is expected to increase the downward pressure on health care service
providers' margins, as larger buyer and supplier groups exert pricing pressure
on health care providers. The ultimate timing or effect of market-driven reforms
cannot be predicted. No assurance can be given that any such reforms will not
have a material adverse effect on the Company's business, results of operations,
financial condition and prospects.
HEALTH CARE REFORM. Health care and related services is an area of extensive
and dynamic regulatory change. Changes in the law, new interpretations of
existing laws, or changes in payment methodology, may have a dramatic effect on
the definition of permissible or impermissible activities, the relative costs
associated with doing business and the amount of reimbursement by both
government and other third-party payors and may be applied retroactively.
In addition, to the reforms enacted and considered by Congress from time to
time, state legislatures periodically consider various health care reform
proposals. Congress and state legislatures can be expected to continue to
review and assess alternative health care delivery systems and payment
methodologies and public debate of these issues can be expected to continue in
the future. The ultimate timing or effect of legislative efforts cannot be
predicted and may impact the Company in different ways. There can be no
assurances that either the states or the federal government will not impose
additional regulations upon the activities of the Company which might adversely
affect their businesses, the financial condition, results of operations and
prospects.
STAFFING AND LABOR COSTS. The Company will compete with other providers of
long-term care with respect to attracting and retaining qualified personnel.
The Company will also be dependent upon the available labor pool of low-wage
employees. A shortage of nurses and/or trained personnel may require the
Company to enhance its wage and benefits package in order to compete. No
assurance can be given that the Company's labor costs will not increase, or
that, if they do increase, they can be matched by corresponding increases in
revenues.
COMPETITION. The long-term care industry is highly competitive and the Company
expects that the assisted living business, in particular, will become more
competitive in the future. The Company will be competing with numerous other
companies providing similar long-term care alternatives, such as home health
agencies, life care at home, community-based service programs, retirement
communities and convalescent centers. The Company expects that as assisted
living receives increased attention and the number of states which include
assisted living in their Medicaid waiver programs increases, competition will
grow from new markets entrants, including publicly and privately held companies
focusing primarily on assisted living. Nursing facilities that provide long-
term care services are also a source of competition to the Company. Moreover,
in the implementation of the Company's expansion program, the Company expects to
face competition for development and acquisitions of assisted living residences.
Some of the Company's present and potential competitors are significantly larger
and have, or may obtain, greater financial resources than those of the Company.
Consequently, there can be no assurance that the Company will not encounter
increased competition in the future which could limit its ability to attract
residents or expand its business and could have a material adverse effect on the
Company's financial condition, results of operations and prospects.
DIFFICULTIES OF MANAGING RAPID GROWTH. The Company expects that the number of
residences which it owns, leases or otherwise operates will increase
substantially as it pursues its growth strategy. This rapid
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growth will place significant demands on the Company's management resources. The
Company's ability to manage its growth effectively will require it to continue
to expand its operational, financial and management information systems and to
continue to attract, train, motivate, manage and retain key employees. To the
extent such growth is attributable to acquisitions of existing facilities or
businesses, the Company's success will depend partly on its ability to integrate
effectively such facilities and businesses into the Company's management,
information and operating systems. If the Company is unable to manage its growth
effectively, its business, financial condition and results of operations could
be adversely affected.
DEPENDENCE ON SENIOR MANAGEMENT AND SKILLED PERSONNEL. The Company depends,
and will continue to depend, upon the services of Mr. McBride, its Chief
Executive Officer, Dr. Wilson, its Chief Operating Officer and President, Ms.
Marsh, its Vice President/Treasurer and Chief Accounting Officer, Mrs. Baldwin,
its Director of Operations, Ms. Haile, its Vice President/Financial Operations,
Ms. Campbell, its Senior Vice President/General Counsel and Ms. Gorshe, its Vice
President/Community Relations. The Company has entered into employment
agreements with Mr. McBride and Dr. Wilson and all of its executive officers and
has obtained a $500,000 key employee insurance policy covering Dr. Wilson's
life. The Company is also dependent upon its ability to attract and retain
management personnel who will be responsible for the day-to-day operations of
each residence. The loss of the services of any or all of such officers or the
Company's inability to attract additional management personnel in the future
could have a material adverse effect on the Company's financial condition or
results of operations.
LIABILITY AND INSURANCE. The provision of health care services entails an
inherent risk of liability. In recent years, participants in the long-term care
industry have become subject to an increasing number of lawsuits alleging
malpractice or related legal theories, many of which involve large claims and
significant defense costs. The Company currently maintains liability insurance
intended to cover such claims and the Company believes that its insurance is in
keeping with industry standards. There can be no assurance, however, that
claims in excess of the Company's insurance coverage or claims not covered by
the Company's insurance coverage (e.g., claims for punitive damages) will not
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 upon the
Company's financial condition and results of operations. Claims against the
Company regardless of their merit or eventual outcome, may also have a material
adverse effect upon the Company's ability to attract residents or expand its
business and would require management to devote time to matters unrelated to the
operation of the Company's business. In addition, the Company's insurance
policies must be renewed annually. There can be no assurance that the Company
will be able to obtain liability insurance coverage in the future or that, if
such coverage is available, it will be available on acceptable terms.
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, including, without limitation, asbestos-
containing materials, that could be located on, in or under such property. Such
laws and regulations often impose liability whether or not the owner or operator
knew of, or was responsible for, the presence of the hazardous or toxic
substances. The costs of any required remediation or removal of these
substances could be substantial and the liability of an owner or operator as to
any property is generally not limited under such laws and regulations and could
exceed the property's value and the aggregate assets of the owner or operator.
The presence of these substances or failure to remediate such substances
properly may also adversely affect the owner's ability to sell or rent the
property, or to borrow using the property as collateral. Under these laws and
regulations, an owner, operator or an entity that arranges for the disposal of
hazardous or toxic substances, such as asbestos-containing materials, at a
disposal site
Page 21 of 23
<PAGE>
may also be liable for the costs of any required remediation or removal of the
hazardous or toxic substances at the disposal site. In connection with the
ownership or operation of its properties, the Company could be liable for these
costs, as well as certain other costs, including governmental fines and injuries
to persons or properties. As a result, the presence, with or without the
Company's knowledge, of hazardous or toxic substances at any property held or
operated by the Company, or acquired or operated by the Company in the future,
could have an adverse effect on the Company's business, financial condition and
results of operations. Environmental audits performed on the Company's
properties have not revealed any significant environmental liability that
management believes would have a material adverse effect on the Company's
business, financial condition or results of operations. No assurance can be
given that existing environmental audits with respect to any other Company's
properties reveal all environmental liabilities.
POSSIBLE VOLATILITY OF STOCK PRICE. The market price of the Common Stock could
be subject to significant fluctuations in response to various factors and
events, including the liquidity of the market for the Common Stock, variations
in the Company's operating results, new statutes or regulations or changes in
the interpretation of existing statutes or regulations affecting the health care
industry generally or assisted living residence businesses in particular. In
addition, the stock market in recent years has experienced broad price and
volume fluctuations that often have been unrelated to the operating performance
of particular companies. These market fluctuation also may adversely affect the
market price of the Common Stock.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The annual meeting of shareholders was held on May 20, 1998.
(b) The meeting involved the election of directors.
(c) The matters voted upon and the results of the voting were as
follows:
(1) The shareholders voted 13,034,254 shares in the affirmative,
1,284,608 shares were withheld, for the election of the
following directors: William McBride III, Keren Brown
Wilson, Gloria Cavanaugh, Bradley Razook and Richard Ladd.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The following documents are filed as part of this report:
(a) Exhibits
12.1 Computation of Fixed Charge to Earnings
27 Financial Data Schedule
(b) Reports on Form 8-K
On July 30, 1998, the Company filed a report on Form 8-K dated
July 30, 1998 reporting its results of operations for the three
and six months ended June 30, 1998.
Page 22 of 23
<PAGE>
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) the Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ASSISTED LIVING CONCEPTS, INC.
Registrant
August 14, 1998 By: /s/ RHONDA S. MARSH
----------------------
Name: Rhonda S. Marsh
Title: Vice President/Treasurer
Chief Accounting Officer
Page 23 of 23
<PAGE>
EXHIBIT 12.1
RATIO OF EARNINGS TO FIXED CHARGE:
<TABLE>
<CAPTION>
Three Three Six Six
Months Ended Months Ended Months Ended Months Ended
June 30, 1997 June 30, 1998 June 30, 1997 June 30, 1998
<S> <C> <C> <C> <C>
Income (loss) before provision for
income taxes $ 967 $(4,836) $ 1,631 $(1,504)
Add fixed charges
Interest costs including amortization 245 380 408 653
of debt issuance cost ----------- ----------- ----------- -----------
Earnings $1,212 $(4,456) $ 2,039 $ (851)
Fixed charges:
Interest expense including
amortization of debt issuance costs 245 380 408 653
Capitalized interest 1,606 1,570 2,944 2,516
----------- ----------- ----------- -----------
Total fixed charges $1,851 $ 1,950 $ 3,352 $ 3,169
----------- ----------- ----------- -----------
Ratio of earnings to fixed charges .65 N/A .61 N/A
Deficiency of earnings to cover fixed
charges $ (639) $(6,406) $(1,313) $(4,020)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> APR-01-1998 JAN-01-1998
<PERIOD-END> JUN-30-1998 JUN-30-1998
<CASH> 76,468 0
<SECURITIES> 1,149 0
<RECEIVABLES> 3,056 0
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 85,189 85,189
<PP&E> 264,581 264,581
<DEPRECIATION> 4,352 4,352
<TOTAL-ASSETS> 374,512 374,512
<CURRENT-LIABILITIES> 26,243 26,243
<BONDS> 175,165 175,165
0 0
0 0
<COMMON> 158 158
<OTHER-SE> 133,873 133,873
<TOTAL-LIABILITY-AND-EQUITY> 374,512 374,512
<SALES> 21,353 40,296
<TOTAL-REVENUES> 21,353 40,296
<CGS> 28,184<F1> 45,596<F1>
<TOTAL-COSTS> 28,184<F1> 45,596<F1>
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 380 653
<INCOME-PRETAX> (4,836) (1,504)
<INCOME-TAX> (458) 809
<INCOME-CONTINUING> (4,378) (5,083)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 2,770<F2>
<NET-INCOME> 0 0
<EPS-PRIMARY> (.28) (.32)
<EPS-DILUTED> (.28) (.32)
<FN>
<F1>INCLUDES NON-RECURRING CHARGE OF $8,495.
<F2>ADOPTION OF AICPA SOP 98-5.
</FN>
</TABLE>
