<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 September 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 principle 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 October 31,
1998 - 17,388,695.
- --------------------------------------------------------------------------------
Page 1 of 22
<PAGE>
ASSISTED LIVING CONCEPTS, INC.
FORM 10-Q
SEPTEMBER 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 September 30, 1998................ 3
Condensed Consolidated Statements of Operations for the three and nine months ended
September 30, 1997 and September 30, 1998............................................................ 4
Condensed Consolidated Statements of Cash Flows for the nine months ended
September 30, 1997 and September 30, 1998............................................................ 5
Notes to Condensed Consolidated Financial Statements................................................. 6 - 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................................................ 9 - 21
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 22
<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>
SEPTEMBER 30,
DECEMBER 31, 1998
ASSETS 1997 (UNAUDITED)
------------ ---------------------
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 63,394 $ 79,773
Funds held in trust 1,956 238
Accounts receivable 2,185 5,096
Other current assets 4,504 7,182
--------- ---------
Total current assets 72,039 92,289
--------- ---------
Property and equipment 100,751 216,112
Construction in process 103,795 72,011
--------- ---------
Total property and equipment 204,546 288,123
Less accumulated depreciation 2,477 5,741
--------- ---------
Property and equipment - net 202,069 282,382
Goodwill 13,397 9,597
Other assets 10,800 16,421
--------- ---------
Total assets $298,305 $400,689
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 9,873 $ 20,216
Construction payables 18,883 6,840
Construction financing 2,150 --
Current portion of long-term debt 172 1,127
--------- ---------
Total current liabilities 31,078 28,183
Convertible subordinated debentures 100,165 161,250
Long-term debt 26,047 65,248
--------- ---------
Total liabilities 157,290 254,681
--------- ---------
Stockholders' equity:
Preferred Stock, $.01 par value; 1,000,000 shares authorized; - -
none issued and outstanding
Common Stock, $.01 par value; 80,000,000 shares authorized; 15,646,478
and 17,346,312 issued and outstanding in 1997 and 1998, respectively 156 173
Additional paid-in capital 137,379 144,716
Fair market value in excess of historical cost of acquired net assets
attributable to related party transactions (239) (239)
Retained earnings 3,719 1,358
--------- ---------
Stockholders' equity 141,015 146,008
--------- --------
Total liabilities and stockholders' equity $298,305 $400,689
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 3 of 22
<PAGE>
ASSISTED LIVING CONCEPTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1998 1997 1998
------ ------- ------ ------
<S> <C> <C> <C> <C>
Revenues 12,505 24,162 32,597 64,458
Operating expenses:
General operating expenses 7,897 15,002 20,146 39,727
Corporate general and administrative 691 1,629 2,008 4,077
Building rentals 2,342 3,628 5,212 10,688
Building rentals to related party 353 341 1,052 1,120
Depreciation and amortization 801 1,557 2,009 3,646
Non-recurring charge -- -- -- 8,495
------ ------- ------ ------
Total operating expenses 12,084 22,157 30,427 67,753
------ ------- ------ ------
Operating income (loss) 421 2,005 2,170 (3,295)
Interest expense (245) (723) (653) (1,376)
Interest income 138 1,227 414 2,872
Other income 1,293 1,881 1,775 4,685
------ ------- ------ ------
Income before income taxes 1,607 4,390 3,706 2,886
Provision for income taxes 611 1,668 1,079 2,477
------ ------- ------ ------
Net income before cumulative effect 996 2,722 2,627 409
Cumulative effect of change in accounting principle (net of -- -- -- (2,770)
tax benefit of $1,187)
------ ------- ------ ------
Net income (loss) 996 2,722 2,627 (2,361)
====== ======= ====== ======
Basic net income (loss) per common share before cumulative .09 .16 .24 .02
effect of change in accounting principle
Cumulative effect of change in accounting principle -- -- -- (.16)
------ ------- ------ ------
Basic net income (loss) per common share .09 .16 .24 (.14)
====== ======= ====== ======
Diluted net income (loss) per common share before cumulative .09 .16 .23 .02
effect of change in accounting principle
Cumulative effect of change in accounting principle -- -- -- (.16)
------ ------- ------ ------
Diluted net income (loss) per common share .09 .16 .23 (.14)
====== ======= ====== ======
Weighted average common shares outstanding - basic 11,084 17,274 11,018 17,435
Weighted average common shares outstanding - diluted 13,517 17,555 13,492 17,435
- --------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 4 of 22
<PAGE>
ASSISTED LIVING CONCEPTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1997 1998
------------------- -----------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) 2,627 (2,361)
Adjustment to reconcile net income (loss) to net
cash provided by operating activities:
Gain on sale of asset (36) --
Depreciation and amortization 2,009 3,646
Non-recurring charge -- 8,495
Cumulative effect of change in accounting principle -- 2,770
Changes in assets and liabilities:
Accounts receivable, net (1,352) (2,911)
Other current assets (1,189) (4,663)
Other assets (22) (2,854)
Accounts payable and accrued expenses 2,293 6,673
------------------- -----------------
Net cash provided by operating activities 4,330 8,795
------------------- -----------------
INVESTING ACTIVITIES:
Sale of funds held in trust 6,675 1,718
Acquisitions, net of cash acquired (8,305)
Proceeds from sale and leaseback transactions 64,133 8,112
Purchases of property and equipment (110,227) (87,726)
------------------- -----------------
Net cash used in investing activities (39,419) (86,201)
------------------- -----------------
FINANCING ACTIVITIES:
Proceeds from short-term construction borrowings 43,210 --
expected to be refinanced
Repayments of construction financing (15,370) --
Construction draw 4,749 (12,043)
Proceeds from long-term debt 7,350 40,306
Payments on long-term debt (83) (150)
Proceeds from issuance of common stock 267 469
Proceeds from issuance of convertible subordinated debentures 75,000
Purchase of common stock (7,030)
Debt issuance costs of long-term debt (1,702) (2,767)
------------------- -----------------
Net cash provided by financing activities 38,421 93,785
------------------- -----------------
Net increase in cash and cash equivalents 3,332 16,379
Cash and cash equivalents, beginning of period 2,105 63,394
------------------- -----------------
Cash and cash equivalents, end of period 5,437 79,773
=================== =================
Supplemental disclosure of cash flow information:
Cash payments for interest 1,823 5,527
Cash payments for income taxes -- 1,438
Extinguishment of construction loan payable with sale -- 2,150
leaseback transaction
Convertible debentures converted into common stock -- 13,915
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 5 of 22
<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
results of operations for the nine month period ended September 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 ($2,770,000, net of tax) 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.
Page 6 of 22
<PAGE>
2. PROPERTY AND EQUIPMENT
The Company's property and equipment are stated at cost and consist of the
following at September 30, 1998 (in thousands):
Land $ 14,146
Buildings and improvements 193,528
Equipment 2,449
Furniture 5,989
-----------
Subtotal 216,112
Construction in progress 72,011
-----------
Total property and equipment 288,123
Less accumulated depreciation 5,741
-----------
Property and equipment, net $282,382
===========
As of September 30, 1998, the Company had begun construction on 28 residences
(1,110 units) ($69.0 million), which includes 16 residences (633 units) ($30.2
million) that have received a certificate of occupancy, but are pending
licensure. As of September 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, 22 additional sites. The Company has
capitalized $2.4 million of direct costs in conjunction with the due diligence
associated with these 22 sites (776 units). The remaining costs are associated
with site selection and pre-acquisition activity.
3. CONVERTIBLE SUBORDINATED DEBENTURES
Effective August 3, 1998, the Company called for redemption all of its 7.0%
Convertible Subordinated Debentures Due 2005. 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.
Page 7 of 22
<PAGE>
4. NET INCOME (LOSS) 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 Nine Nine
Months Ended Months Ended Months Ended Months Ended
September 30, September 30, September 30, September 30,
1997 1998 1997 1998
========================================================================
<S> <C> <C> <C> <C>
Numerator for basic net income (loss) per
share
$ 996 $ 2,722 $ 2,627 $(2,361)
Effect of conversion of convertible
Debentures 166 57 443 (a)
------------------------------------------------------------------------
Numerator for diluted net income (loss) per
share $ 1,162 $ 2,779 $ 3,070 $(2,361)
========================================================================
Denominator for basic net income (loss) per
weighted average common shares 11,084 17,274 11,018 17,435
7% Convertible Debentures 1,855 11 1,855 (a)
Stock Option Dilution 578 270 619 (a)
------------------------------------------------------------------------
Denominator for diluted net income (loss) per
weighted average common shares 13,517 17,555 13,492 17,435
========================================================================
Basic net income (loss) per common share $ .09 $ .16 $ .24 $ (.14)
Diluted net income (loss) per common share $ .09 $ .16 $ .23 $ (.14)
</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.
5. STOCK BUYBACK
During the nine months ended September 30, 1998, the Company purchased
529,900 shares of its common stock for a total purchase price of approximately
$7.0 million in accordance with a stock repurchase plan initiated in May, 1998.
As of November 12, 1998 all shares purchased by the Company have been reissued
in accordance with such plan.
6. LONG-TERM DEBT
During the third quarter, the Company closed on $13.2 million of tax exempt bond
financing, secured by seven residences in the state of Ohio, at an all inclusive
variable rate of approximately 5% and obtained mortgage financing for three
Oregon properties in the amount of $6.6 million at a fixed rate of 7.6%. In
addition, in September, 1998 the Company closed on $5.8 million of mortgage
financing for one property in South Carolina and one property in Pennsylvania at
an interest rate of approximately 8.5% and on $5.3 million financing received
through sale leaseback transactions on two South Carolina properties.
7. SUBSEQUENT EVENT
During October, 1998, the Company received a commitment for a $25 million
secured revolving credit facility, subject to certain conditions and expected to
close in December, 1998, with PNC Bank, N.A. as agent and Sun Trust Bank,
Central Florida, N.A. as a syndicate member.
Page 8 of 22
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OVERVIEW
THE COMPANY
The Company reported net income of $2.7 million or $.16 per diluted share, on
revenue of $24.2 million for the three months ended September 30, 1998.
Operating results for the nine month period ended September 30, 1998 include the
operating results of 154 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 September 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".
THREE MONTHS ENDED SEPTEMBER 30, 1997
================================================================================
<TABLE>
<CAPTION>
Stabilized Start-up
Total Residences Residences Residences Total
-----------------------------------------
<S> <C> <C> <C>
Residences operated (end of period) 49 39 88
Units operated (end of period) 1,690 1,526 3,216
Average occupancy rate 94% 51% 74%
Sources of revenue:
Medicaid state portion 11.5 10.4 11.1
Medicaid resident portion 6.5 4.9 5.9
Private 82.0 84.7 83.0
------------ ----------- ----------
Total 100.0% 100.0% 100.0%
============ =========== ==========
</TABLE>
Page 9 of 22
<PAGE>
THREE MONTHS ENDED SEPTEMBER 30, 1998
================================================================================
<TABLE>
<CAPTION>
Stabilized Start-up
Total Residences Residences Residences Total
------------------------------------
<S> <C> <C> <C>
Residences operated (end of period) 86 68 154
Units operated (end of period) 3,138 2,726 5,864
Average occupancy rate 92% 50% 73%
Sources of revenue:
Medicaid state portion 14.1 4.3 10.7
Medicaid resident portion 7.8 2.3 5.8
Private 78.1 93.4 83.5
------------ ---------- ---------
Total 100.0% 100.0% 100.0%
============ ========== =========
</TABLE>
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 and exclude three properties held for sale and one
property whose operating lease terminated effective September 30, 1998 for the
three month period ended September 30, 1998. 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.
COMPILATION OF STABILIZED AND START-UP RESIDENCES
THREE MONTHS Ended SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
===================================================================================================================
Stabilized Start-up Corporate &
Residences Residences Ancillary Services Total
------------- -------------- ------------------ -----------
<S> <C> <C> <C> <C>
Revenue 8,254 4,251 - 12,505
Residence operating expense 4,785 3,112 - 7,897
------------- -------------- ------------------ -----------
Residence operating Income 3,469 1,139 - 4,608
Corporate overhead - - 691 691
Building rentals 1,786 908 1 2,695
Depreciation and amortization 256 514 31 801
------------- -------------- ------------------ -----------
Total other operating expenses 2,042 1,422 723 4,187
------------- -------------- ------------------ -----------
Operating income (loss) 1,427 (283) (723) 421
Interest expense (552) (916) 1,223 (245)
Interest income 1 2 135 138
Other expense - - - -
Other income - 790 503 1,293
------------- -------------- ------------------ -----------
Net income (loss) before income
taxes 876 (407) 1,138 1,607
============= ============== ================== ===========
Residences operated 49 39 88
Units operated 1,690 1,526 3,216
Average occupancy rate 94% 51% 74%
</TABLE>
Page 10 of 22
<PAGE>
COMPILATION OF STABILIZED AND START-UP RESIDENCES
THREE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
=================================================================================================================================
Corporate &
Stabilized Start-up Ancillary Total
Residences Residences Services
------------------ ----------------- -------------------- ---------------
<S> <C> <C> <C> <C>
Revenue 15,891 7,554 717 24,162
Residence operating expense 9,204 5,637 161 15,002
------------------ ----------------- -------------------- ---------------
Residence operating income 6,687 1,917 556 9,160
Corporate overhead - - 1,629 1,629
Building rentals 2,810 1,153 6 3,969
Depreciation and amortization 578 815 164 1,557
------------------ ----------------- -------------------- ---------------
Total other operating expenses 3,388 1,968 1,799 7,155
------------------ ----------------- -------------------- ---------------
Operating income (loss) 3,299 (51) (1,243) 2,005
Interest expense (853) (843) 973 (723)
Interest income - 3 1,224 1,227
Other income - - 1,881 1,881
------------------- ----------------- -------------------- ---------------
Net income (loss) before income taxes 2,446 (891) 2,835 4,390
================== ================= ==================== ===============
Residences operated 86 68 154
Units operated 3,138 2,726 5,864
Average occupancy rate 92% 50% 73%
</TABLE>
The following table sets forth, for the periods presented, the results of
operations for the 51 and 77 residences which were operating for three and nine
month periods ended September 30, 1997 and 1998, respectively, in their
entirety (in thousands).
RESULTS OF SAME RESIDENCES
THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
==================================================================================================================================
Three Three Nine Nine
Months Ended Months Ended Months Ended Months Ended
Sept. 30, 1997 Sept. 30, 1998 Sept. 30, 1997 Sept. 30, 1998
---------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
Revenue 11,879 13,744 25,101 27,002
General operating expense 7,320 8,036 14,559 15,483
---------------- ---------------- --------------- ----------------
Residence operating income 4,559 5,708 10,542 11,519
Building rentals 2,334 2,603 4,998 6,041
Depreciation and Amortization 702 480 862 540
---------------- ---------------- --------------- ----------------
Other Operating Expenses 3,036 3,083 5,860 6,581
---------------- ---------------- --------------- ----------------
Operating Income 1,523 2,625 4,682 4,938
Interest Expense (1,406) (821) (1,790) (987)
Interest Income 3 1 4 3
Other Income (Expense) 626 (2) (1) (1)
---------------- ---------------- --------------- ----------------
Income before income taxes 746 1,803 2,895 3,953
================ ================ =============== ================
Residences Operating 77 77 51 51
Units Operating 2,776 2,776 1,778 1,778
Average Occupancy Rate 80% 91% 90% 95%
</TABLE>
Page 11 of 22
<PAGE>
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1998.
Revenues. For the three months ended September 30, 1998, revenues were $24.2
million compared to $12.5 million in the three months ended September 30, 1997,
an increase of $11.7 million or 93.2%. The Company had opened or received
certificates of occupancy on 170 residences as of September 30, 1998, of which
154 had operating results for the quarter period compared to 88 in the
corresponding 1997 period. For the 77 residences which had operated for the
entire quarter for both September 30, 1998 and September 30, 1997, revenue
increased by $1.9 million or 15.7% from the $11.9 million in the third quarter
of 1997. This increase was primarily attributable to average occupancy
throughout the two periods. Average occupancy increased 11% to 91% from the
corresponding period in 1997 of 80%. The remaining $9.8 million of the increase
was due to the new residences which began operating subsequent to September 30,
1997.
General operating expenses. General operating expenses were $15.0 million in
the three months ended September 30, 1998 compared to $7.9 million in the
corresponding 1997 period, an increase of $7.1 million, or 90%. For the 77
residences that operated the entire third quarter of 1997 and 1998, general
operating expenses were $8.0 million in the three months ended September 30,
1998, an increase of $716,000, or 9.8%, from the $7.3 million of general
operating expenses in the third quarter of 1997.
Corporate, general and administrative. Corporate, general and administrative
expenses were $1.6 million in the three months ended September 30, 1998 compared
to $691,000 in the corresponding 1997 period, an increase of $938,000, or
136%. Corporate, general and administrative expenses increased due to the
expansion of the Company's quality assurance and corporate staffing to
accommodate the increase in operating residences.
Building rentals. Building rentals increased to $4.0 million in the three months
ended September 30, 1998 from $2.7 million during the corresponding 1997 period.
This increase was due to the increased number of sale and leaseback transactions
completed by the Company from September of 1997 through September of 1998. The
Company had 71 operating leases as of September 30, 1998 compared to 58 at
September 30, 1997.
Depreciation and amortization. Depreciation and amortization expense was $1.6
million in the three month period ended September 30, 1998 compared to $801,000
in 1997, an increase of $756,000, or 94.4%. This increase in depreciation and
amortization was directly related to the new residences that opened subsequent
to September 30, 1997. Depreciation and amortization expense for the 77
residences which operated for the entire third quarter of 1997 and 1998
decreased due to the Company entering into 13 additional same store sale
leaseback transactions subsequent to September 30, 1997.
Interest expense. Interest expense net of capitalized interest was $723,000
for the three month period ended September 30, 1998 compared to $245,000 in
the corresponding 1997 period, an increase of $478,000. The Company's gross
interest expense was $3.3 million for the three month period ended September 30,
1998 compared to $1.8 million in the corresponding 1997 period, an increase of
$1.5 million. The increase in interest expense is due primarily to the issuance
of $86.2 million and $75 million of convertible debentures in October, 1997 and
April, 1998, respectively. Capitalized interest for the three month period ended
September 30, 1998 was $2.54 million compared to $1.62 million in the
corresponding 1997 period, a change of $920,000.
Interest income. Interest income was $1.2 million for the three month period
ended September 30, 1998 compared to $138,000 in the corresponding 1997 period,
an increase of approximately $1.1 million. 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.
Page 12 0f 22
<PAGE>
Other income. Other income was $1.9 million for the three month period ended
September 30, 1998 compared to $1.3 million in the corresponding 1997 period, an
increase of $588,000. The increase in other income for the three months ended
September 30, 1998 relates primarily to an increase in properties covered in a
joint venture agreement with an entity that has agreed to bear the economic risk
for the residences in exchange for the right to participate in future operating
results.
Income before income taxes. Income before income taxes for the three months
ended September 30, 1998 was $4.4 million compared to $1.6 million during the
corresponding period in 1997, an increase of $2.8 million. The increase in net
income before taxes is due primarily to a $1.1 million increase in same store
results and the remainder due to increased properties.
Provision for income taxes. The Company's provision for income tax for the three
months ended September 30, 1998 was $1.7 million compared to $611,000 for the
corresponding period in 1997.
Net income. Net income for the three months ended September 30, 1998 was $2.7
million compared to $996,000 during the corresponding period in 1997. The
increase in net income is due to the increase of operating properties for the
three months ended September 30, 1998 as compared to the same period last year.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998.
Revenues. For the nine months ended September 30, 1998, revenues were $64.5
million compared to $32.6 million in the nine months ended September 30, 1997,
an increase of $31.9 million or 97.7%. The Company operated 154 residences in
the 1998 period compared to 88 in the corresponding 1997 period. The additional
residences increased revenue by approximately $19 million. The 51 residences in
operation in both the 1998 and 1997 periods reported an aggregate increase in
revenues of $1.9 million or 7.6% This increase was primarily attributable to
increases in both average occupancy and yearly rent increases.
General operating expenses. General operating expenses were $39.7 million in the
nine months ended September 30, 1998 compared to $20.1 million in the
corresponding 1997 period, an increase of $19.6 million or 97.2%. The Company
operated 154 residences in the 1998 period compared to 88 in the corresponding
1997 period. For the 51 residences that operated for 1997 and 1998, general
operating expenses were $15.5 million in the nine months ended September 30,
1998, an increase of $924,000, or 6.4% from the $14.6 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 $18.7 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 $4.1 million in the nine months ended September 30, 1998 compared
to $2.0 million in the corresponding 1997 period, an increase of $2.1 million,
or 103%. 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 $11.8 million in the nine months
ended September 30, 1998 from $6.3 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 October 1, 1997 and September 30, 1998. The Company had
71 operating leases at September 30, 1998 compared to 58 at September 30, 1997.
Building rentals for
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the 51 residences which operated for the entire period of
1998 and 1997 increased due to the one additional same store operating lease
entered into subsequent to September 30, 1997.
Depreciation and amortization. Depreciation and amortization expense was $3.6
million in the nine month period ended September 30, 1998 compared to $2.0
million in 1997, an increase of $1.6 million, or 81.5%. The increase in
depreciation and amortization is directly related to the additional 66
residences opening subsequent to September 30, 1997. Depreciation and
amortization expense for the 51 residences which operated for the entire nine
month period in 1997 and 1998, decreased due to 5 same store sale leaseback
transactions entered into subsequent to June, 1997.
Non-recurring charge. The Company recorded a $8.5 million non-recurring charge
during the nine months ended September 30, 1998. This non-recurring charge
reduced the 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 $1.4 million
for the nine month period ended September 30, 1998 compared to $653,000 in the
corresponding 1997 period, a change of $723,000. The Company's gross interest
expense was $8.2 million for the nine month period ended September 30, 1998
compared to $5.2 million in the corresponding 1997 period, a change of $3.0
million. The increase in interest expense is due primarily to the issuance of
$86.2 million and $75 million of convertible debentures in October, 1997 and
April, 1998, respectively. Capitalized interest for the nine month period ended
September 30, 1998 was $6.8 million compared to $4.6 million in the
corresponding 1997 period, a change of approximately $2.2 million.
Interest income. Interest income was $2.9 million for the nine month period
ended September 30, 1998 compared to $414,000 in the corresponding 1997 period,
a change of $2.5 million. The increase in interest income is directly related to
the increase in available funds.
Other Income. Other income was $4.7 million for the nine month period ended
September 30, 1998 compared to $1.8 million in the corresponding 1997 period, a
change of $2.9 million. The $4.7 million in other income for the nine months
ended September 30, 1998 relates to properties held under a joint venture
agreement with an investment company that has agreed to bear the economic risk
for the residences in exchange for the right to participate in future operating
results. As of November 5, 1998, there are 17 properties operating under the
joint venture agreement.
Income before income taxes. Income before income taxes for the nine months ended
September 30, 1998 was $2.9 million compared to income before income taxes of
$3.7 million during the corresponding period in 1997, an decrease of $820,000.
The decrease was a direct result of non-recurring charges of $8.5 million for
the nine month period ended September 30, 1998. Excluding the non-recurring
charge, income before income taxes increased $7.7 million or 207% as a result of
66 residences added since September 30, 1997.
Provision for income taxes. The Company's provision for income taxes
for the nine months ended September 30, 1998 was $2.5 million compared to $1.1
million for the corresponding period in 1997.
Net income (loss). Net income (loss) for the nine months ended September 30,
1998 was $(2.4) million compared to $2.6 million during the corresponding period
in 1997. The decrease in income for the nine
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months ended September 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 $2.7 million for the nine
months ended September 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Company had positive working capital of approximately
$64.1 million including liabilities for construction payables and construction
financing. Exclusive of construction related activities, working capital was
$70.9 million.
Net cash provided by operating activities was approximately $8.8 million during
the nine month period ended September 30, 1998, and related primarily to the
positive results of residence operations.
Net cash used for investing activities totaled $86.2 million during the nine
month period ended September 30, 1998. The primary use of cash was $87.7
million related to the development of new assisted living residences.
Net cash provided by financing activities totaled $93.8 million during the nine
month period ended September 30, 1998. The primary source of funds was from the
issuance of $75 million of convertible subordinated debentures in April, 1998
and $40.3 million in mortgage financing received during the third quarter.
Capital expenditures for the next twelve months are estimated to approximate
$104 million to $130 million, related primarily to the development of additional
residences. 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
November 14, 1998, the Company had approximately $60 million in outstanding
commitments in REIT and mortgage financing available to finance additional
residences. 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 September
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 September 30, 1998, the Company had invested excess cash balances in
short-term certificates of deposit and U.S. Treasury securities.
RECENT ACCOUNTING PRONOUNCEMENTS
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In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities. This Statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities and is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. The adoption of this Statement will not have a
material impact on the Company's consolidated financial statements.
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 40 to 50 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 $850,000 to $2.75
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. 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 November 5, 1998, seventeen residences
owned or leased by the Company were being operated by the joint venture. During
the three months ended September 30, 1998, the Company operated twenty-eight
properties under the joint venture, of which the Company bought out the joint
venture partner's interest in eleven properties subsequent to September 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
with 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,
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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 financings, the
increased focus on asset ownership, its development program and anticipated
additions to its corporate infrastructure may 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 40 to 50 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 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 $104 million and $130 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
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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
September 30, 1998 totaled approximately $29.9 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;
DEPENDENCE ON REIMBURSEMENT BY THIRD PARTY PAYORS. As of September 30, 1998,
22.9% of the Company's properties are in Texas, 11.8% are in Oregon, 10.6% in
Ohio, 10.6% are in Indiana and 9.4% 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 three and nine months ended September 30, 1998, direct payments
received from state Medicaid agencies accounted for approximately 10.7% of the
Company's revenue while the tenant-paid portion of Medicaid residents accounted
for approximately 5.8% 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, 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. 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.
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
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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 which in the ordinary course could result in the imposition of
fines, restrictions on new resident admissions, the denial of reimbursement,
and, in extreme cases, the decertification from the medicare and medicaid
program or the revocation of a facility's license or closure of a facility. On
October 15, 1998, the Washington Department of Social and Health Services
summarily suspended the license of, imposed a stop admissions order on and
commenced a license revocation action against a residence located in the state
of Washington. On November 5, 1998, the summary suspension of the facility's
license was revoked, and the Company continues to contest the stop admissions
order and the license revocation action. There can be no assurance that federal,
state, or local governments will not impose additional restrictions on the
Company's activities that could have a material adverse affect on 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.
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.
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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 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, Ms. Maloney,
its Vice President/Controller, 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. 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
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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 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.
YEAR 2000 COMPLIANCE
The Company has assessed its readiness in regard to Year 2000 issues. The
Company believes that all material hardware and software utilized in its
operations and, specifically, in its accounting systems, is Year 2000 compliant.
The Company is in the process of obtaining Year 2000 compliance letters and
reports from third party payors, including the federal government. To date, no
such payor has indicated an inability to continue remittances in the normal
course of business, however, most such payors, including the federal government,
are in the process of evaluating and updating their internal systems and cannot
yet assure the Company that their systems are year 2000 compliant.
The Company also faces the risk that vendors from which the Company purchases
goods and services, such as utility providers and the Company's payroll
provider, may have systems that are not Year 2000 compliant. The Company plans
to monitor the progress of its major vendors in achieving Year 2000 compliance.
However, the Company presently does not anticipate the occurrence of major
interruption in its business due to Year 2000 issues. Accordingly, the Company
does not expect that Year 2000 issues will have a material adverse effect upon
the Company's operations or prospects.
The Company has not established a contingency plan to address potential Year
2000 noncompliance with respect to the Company's systems or those of its major
vendors and is currently considering the extent to which such a plan is
necessary. Due to the Company's dependence on systems outside its control, such
as telecommunications and power supplies, there can be no assurance that the
Company will not face unexpected problems associated with the Year 2000 issue
that may affect its operations, business, and financial condition. The Company
does not expect to incur any material expense associated with Year 2000
compliance.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
12.1 Computation of Fixed Charge to Earnings
27 Financial Data Schedule
(b) Reports on Form 8-K. There were no reports on Form 8-K filed during
the quarter ended September 30, 1998.
Page 22 of 22
<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
November 16, 1998 By: /s/ RHONDA S. MARSH
-------------------------
Name: Rhonda S. Marsh
Title: Vice President/Treasurer
Chief Accounting Officer
<PAGE>
EXHIBIT 12.1
RATIO OF EARNINGS TO FIXED CHARGE:
<TABLE>
<CAPTION>
Three Three Nine Nine
Months Ended Months Ended Months Ended Months Ended
September 30, September 30, September 30, September 30,
1997 1998 1997 1998
---------------- ------------- -------------- ---------------
<S> <C> <C> <C> <C>
Income before provision for $1,607 $4,390 $ 3,706 $2,477
income taxes
Add fixed charges
Interest costs including amortization
of debt issuance cost 245 723 653 1,376
------ ------ ------- -------
Earnings $1,852 $5,113 $ 4,359 $3,853
Fixed charges:
Interest expense including
amortization of debt issuance costs 245 723 653 1,376
Capitalized interest 1,620 2,540 4,600 6,800
------ ------ ------- -------
Total fixed charges $1,865 $3,986 $5,253 $8,176
------ ------ ------- -------
Ratio of earnings to fixed charges - - N/A
Excess (deficiency) of earnings to
cover fixed charges $ (13) $1,127 $ (894) $(4,323)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> JUL-01-1998 JAN-01-1998
<PERIOD-END> SEP-30-1998 SEP-30-1998
<CASH> 79,773 79,773
<SECURITIES> 0 0
<RECEIVABLES> 5,096 5,096
<ALLOWANCES> 0 0
<INVENTORY> 79 79
<CURRENT-ASSETS> 92,289 92,289
<PP&E> 288,123 288,123
<DEPRECIATION> 5,741 5,741
<TOTAL-ASSETS> 400,689 400,689
<CURRENT-LIABILITIES> 28,183 28,183
<BONDS> 161,250 161,250
0 0
0 0
<COMMON> 173 173
<OTHER-SE> 145,835 145,835
<TOTAL-LIABILITY-AND-EQUITY> 400,689 400,689
<SALES> 24,162 64,458
<TOTAL-REVENUES> 24,162 64,458
<CGS> 15,002 39,727
<TOTAL-COSTS> 22,157 67,753
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 723 1,376
<INCOME-PRETAX> 4,390 2,886
<INCOME-TAX> 1,668 2,477
<INCOME-CONTINUING> 2,722 409
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 2,770
<NET-INCOME> 2,722 (2,361)
<EPS-PRIMARY> .16 (.14)
<EPS-DILUTED> .16 (.14)
</TABLE>
