-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AiwFHhT+lvl3L6e3BuZYyXR3OomQmOKYeb6hBroAA5V4ik+JrBXCGOvv5ftPNuCD 0xqhmKbL46Tj96sx/klNtA== 0000898430-97-002092.txt : 19970515 0000898430-97-002092.hdr.sgml : 19970515 ACCESSION NUMBER: 0000898430-97-002092 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970514 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: ASSISTED LIVING CONCEPTS INC CENTRAL INDEX KEY: 0000929994 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-SOCIAL SERVICES [8300] IRS NUMBER: 931148702 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-13498 FILM NUMBER: 97604683 BUSINESS ADDRESS: STREET 1: 10570 SE WASHINGTON STREET 2: STE 213 CITY: PORTLAND STATE: OR ZIP: 97216 BUSINESS PHONE: 5032526233 MAIL ADDRESS: STREET 1: 9955 SE WASHINGTON, SUITE 201 CITY: PORTLAND STATE: OR ZIP: 97216 10-Q 1 QUARTERLY REPORT FOR THE PERIOD ENDED 3/31/97 =============================================================================== 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 March 31, 1997 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 1-83938 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 201 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 May 13, 1997 is 5,517,503. =============================================================================== Page 1 of 18 ASSISTED LIVING CONCEPTS, INC. FORM 10-Q MARCH 31, 1997 INDEX -----
PART I - FINANCIAL INFORMATION Page Item 1. Financial Statements Consolidated Balance Sheets of Assisted Living Concepts, Inc. and Subsidiary as of March 31, 1997 and December 31, 1996................................................. 3 Consolidated Statements of Operations of Assisted Living Concepts, Inc. and Subsidiary for the three months ended March 31, 1997 and March 31, 1996............................... 4 Consolidated Statements of Cash Flows of Assisted Living Concepts, Inc. and Subsidiary for the three months ended March 31, 1997 and March 31, 1996............................... 5 Notes to Consolidated Financial Statements................................................. 6-7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................. 8-16 Exhibits: Exhibit Computation of Earnings to Fixed Charges.................................................. 12
Page 2 of 18 PART 1 ITEM 1 - FINANCIAL INFORMATION ASSISTED LIVING CONCEPTS, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
(UNAUDITED) MARCH 31, DECEMBER 31, ASSETS 1997 1996 ----------- ----------- Current assets: Cash and cash equivalents $ 3,320 $ 2,105 Investments 8,668 8,515 Accounts receivable 1,025 730 Other current assets 2,686 1,043 ---------- ---------- Total current assets 15,699 12,393 ---------- ---------- Property and equipment 72,546 59,574 Construction in progress (Note 2) 65,799 53,458 Total property and equipment 138,345 113,032 Less accumulated depreciation 1,105 674 ---------- ---------- Property and equipment - net 137,240 112,358 ---------- ---------- Goodwill 356 362 Other assets 6,178 5,394 ---------- ---------- Total assets $159,473 $130,507 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses $ 3,479 $ 3,803 Construction payables 10,834 16,002 Construction financing (Note 3) 52,652 18,850 Current portion of long-term debt 111 110 ----------- ---------- Total current liabilities 67,076 38,765 Mortgages payable 18,740 18,768 Convertible subordinated debt 13,915 13,915 ----------- ---------- Total liabilities 99,731 71,448 ----------- ---------- Shareholders' 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; 5,517,503 and 5,515,250 shares issued and outstanding 55 55 Additional paid-in capital 59,751 59,733 Fair market value in excess of historical cost of acquired net assets attributable to related party transactions (239) (239) Retained earnings (accumulated deficit) 175 (490) ---------- ---------- Shareholders' equity 59,742 59,059 Total liabilities and shareholders' equity $ 159,473 $ 130,507 =========== ==========
The accompanying notes are an integral part of these Financial Statements. Page 3 of 18 ASSISTED LIVING CONCEPTS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED) THREE MONTHS ENDED MARCH 31, 1997 1996 ------ ------ Revenues $9,244 $2,750 ------ ------ Operating expenses: Residence operating expenses 5,692 1,936 Corporate general and administrative 641 215 Building rentals 1,216 364 Building rentals - related party 344 196 Depreciation and amortization 506 217 ------ ------ Total operating expenses 8,399 2,928 ------ ------ Operating income (loss) 845 (178) ------ ------ Interest expense 163 29 Interest income (123) (20) Other income - - ------ ------ Interest expense and other interest (income) - net 40 9 ------ ------ Pre-tax income (loss) 805 (187) Provision for income taxes 141 - Net income (loss) $ 664 $ (187) ====== ====== Net income (loss) per common share $ .12 $ (.06) ====== ====== Weighted average common shares outstanding 6,572 3,005
The accompanying notes are an integral part of these Financial Statements. Page 4 of 18 ASSISTED LIVING CONCEPTS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
(UNAUDITED) THREE MONTHS ENDED MARCH 31, 1997 1996 -------- -------- OPERATING ACTIVITIES: Net income (loss) $ 664 $ (187) Adjustment to reconcile net income (loss) to net cash provided by operating activities: Gain on sale of asset - - Depreciation and amortization 506 217 Changes in other non-cash items: Accounts receivable (295) (81) Other current assets (1,643) (93) Other assets (192) (906) Accounts payable and accrued expenses (324) (621) -------- -------- Net cash used for operating activities (1,284) (1,671) -------- -------- INVESTING ACTIVITIES: Funds held in trust (168) - Proceeds from sale of land and residences 2,590 14,380 Purchases of property and equipment (27,903) (20,541) -------- -------- Net cash used for investing activities (25,481) (6,161) -------- -------- FINANCING ACTIVITIES: Proceeds from construction financing 36,350 - Construction payables (5,168) (1,188) Proceeds from long-term debt - 5,865 Payments on long-term debt (27) (26) Payment of construction financing (2,550) - Debt issuance costs (643) (30) Proceeds from issuance of common stock 18 46 -------- -------- Net cash provided by financing activities 27,980 4,667 -------- -------- Net increase (decrease) in cash and cash equivalents 1,215 (3,165) Cash and cash equivalents, beginning of period 2,105 7,335 -------- -------- Cash and cash equivalents, end of period $ 3,320 $ 4,170 ======== ======== Supplemental disclosure of cash flow information: Cash payments for interest $ 1,706 $ 784 ======== ========
The accompanying notes are an integral part of these Financial Statements. Page 5 of 18 ASSISTED LIVING CONCEPTS, INC. NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Company Assisted Living Concepts, Inc. ("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. The Company was organized in July 1994, and was initially capitalized through the sale of 500,000 shares of $0.01 par value common stock for $100,000. From July 19, 1994 to November 30, 1994, the date of its initial public offering, the Company began to put into place the management organization to commence operations and execute its strategy to expand the Company's business. On November 22, 1994, the Company sold 2,000,000 shares of common stock at $9.25 per share in a public offering realizing net proceeds of $16,422,000. On December 1, 1994, the Company purchased two and leased four assisted living residences from Assisted Living Concepts Group ("the Predecessor") and commenced operations. As of March 31, 1997, the Company had received certificates of occupancy for 85 residences of which 66 had commenced operations. On July 3, 1996, the Company sold 2,096,250 shares of common stock at $19.00 per share in an underwritten public offering realizing net proceeds of $37,341,000 after underwriter discounts, commissions and other offering expenses. Basis of Presentation These financial statements have been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. 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 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, 1996. 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 month periods ended March 31, 1997 and 1996 are not necessarily indicative of the results to be expected for the full year. Page 6 of 18 ASSISTED LIVING CONCEPTS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. PROPERTY AND EQUIPMENT Construction In Process As of March 31, 1997 the Company had begun development on 40 parcels of land. The Company has also entered into agreements pursuant to which it may purchase, subject to completion of due diligence and various other conditions, 12 additional sites. The Company has capitalized all costs incurred in connection with the development of these properties, and accordingly, construction in process consisted of the following (in thousands):
Land purchased $ 5,839 Construction costs and architectural fees 51,827 Other costs, including legal fees, building permits and other development costs 8,133 ----------- $ 65,799 ===========
Leased and Owned Properties During the quarter ended March 31, 1997, the Company capitalized $1,338,000 in interest cost relating to the financing of construction in progress. Of the 85 residences the Company had opened or had received certificates of occupancy, 33 were leased (21 in Texas, 7 in Oregon and 5 in Washington) and 52 were owned (16 in Texas, 12 in Oregon, 5 in Washington, 10 in Ohio, 6 in Idaho, 2 in New Jersey and one in Arizona). During the quarter ended March 31, 1997, the Company entered into $36.4 million of mortgage financing on 16 fully licensed residences. As of March 31, 1997, the Company had $52.7 million of mortgage financing on 23 residences. This mortgage financing will be repaid with the proceeds from sale leaseback transactions that will be completed when additional residences that are currently under construction are completed. Interest is paid on a monthly basis ranging from 9.9% to 10.4% annum with all principal and interest due by September 30, 1997. Page 7 of 18 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW THE COMPANY The Company reported net income of $664,000 or $.12 per share, on revenue of $9,244,000 for the three months ended March 31, 1997. Operating results for the three month period ended March 31, 1997 include the operating results of 66 residences and the Company's corporate overhead, and are not necessarily indicative of future operating financial performance, as the Company intends to significantly expand its operating base of residences in 1997 and 1998. 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 March 31, 1997. 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 March 31, 1997 Stabilized Start-up Residences /(1)/ Residences /(2)/ Total ------------------ ------------------ ------- Residences operated (end of period) Units operated Average occupancy rate 91.9% 68.5% 80.1% Sources of revenue: Private 78.8% 87.7% 85.3% Medicaid Resident Portion 7.6% 4.2% 6.3% Medicaid State Portion 13.6% 8.1% 11.4% ----------------- ------------------- ------- Total 100.0% 100.0% 100.0% ================= =================== =======
- ----------------------------- (1) Stabilized residences are those residences that have been operating for nine months or have achieved a stabilized occupancy of 95% or more as of the beginning of the quarter. (2) Start-up residences are those residences that have not been operating for nine months and have not achieved a stabilized occupancy of 95% or more as of the beginning of the quarter. (3) The Company had received certificates of occupancy on 85 residences, of which 73 had received licensure and 66 were fully operational. Page 8 of 18 COMPILATION OF STABILIZED AND START-UP RESIDENCES THREE MONTHS ENDED MARCH 31, 1997
Stabilized Start-up Combined Residences Residences Corporate Total ---------- ---------- --------- -------- Revenue $ 5,599 $ 3,645 $ $ 9,244 Residence Operating Expense 3,235 2,457 - 5,692 --------- --------- -------- -------- Residence Operating Income 2,364 1,188 - 3,552 Corporate Overhead - - 641 641 Building Rentals 1,076 484 - 1,560 Depreciation and Amortization 172 313 21 506 --------- --------- -------- -------- Total Other Operating Expenses 1,248 797 662 2,707 --------- --------- -------- -------- Operating Income 1,116 391 (662) 845 Interest Expense (342) (476) 655 (163) Interest Income - - 123 123 --------- --------- -------- -------- Pre-tax Income (Loss) 774 (85) 116 805 Provision for Income Taxes - - 141 141 --------- --------- -------- -------- Net Income (Loss) $ 774 $ (85) $ (25) $ 664 ========= ========= ======== ======== Residences Operated 35 31 66 Units Operated 1,163 1,190 2,353 Average Occupancy Rate 91.9% 68.5% 80.1%
RESULTS OF SAME RESIDENCES THREE MONTHS ENDED MARCH 31, 1997 AND MARCH 31, 1996
Three Three Months Ended Months Ended March 31, March 31, 1997 1996 ------------ ------------ Revenue $ 3,021 $ 2,330 Residence Operating Expense 1,710 1,503 Residence Operating Income 1,311 827 ---------- ---------- Building Rentals 552 518 Depreciation and Amortization 111 121 ---------- ---------- Total Other Operating Expenses 663 639 ---------- ---------- Operating Income 648 188 Interest Expense (195) (102) ---------- ---------- Pre-Tax Income $ 453 $ 86 Residences Operating 19 19 Units Operating 597 595 Average Occupancy Rate 95.5% 77.0%
Page 9 of 18 THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1996 Revenues. For the three months ended March 31, 1997, revenues were $9.2 million compared to $2.7 million in the three months ended March 31, 1996, an increase of $6.5 million or 241%. The Company had opened or received certificates of occupancy on 85 residences as of March 31, 1997, of which 66 had operating results. For the 19 residences which had operated for the entire quarter for both March 31, 1997 and March 31, 1996, revenue increased by $691,000, or 29.6% from the $2.3 million in the first quarter of 1996. The increase in revenue for these 19 residences is directly related to the increase in the average occupancy from 77.0% to 95.5% for March 31, 1997 and March 31, 1996, respectively. The remaining $5.8 million of the increase was due to the 47 new residences which began operating subsequent to March 31, 1996. Residence Operating Expenses. Residence operating expenses were $5.7 million in the three months ended March 31, 1997 compared to $1.9 million in the corresponding 1996 period, an increase of $3.8 million or 200%. For the 19 residences that operated the entire first quarter of 1997 and 1996, residence operating expenses were $1.7 million, an increase of $207,000, or 13.7%, from the $1.5 million of residence operating expenses in the first quarter of 1996. The increase in the operating expenses for these 19 residences is directly related to the increase in the average occupancy from 77.0% to 95.5% for the same corresponding period and other inflationary type items. The remaining $3.6 million of the increase was due to the 47 new residences which began operating subsequent to March 31, 1996. Corporate, General and Administrative. Corporate, general and administrative expenses were $641,000 for the three months ended March 31, 1997 compared to $215,000 in the corresponding 1996 period, an increase of $426,000, or 198%. Corporate, general and administrative expenses increased due to the expansion of the corporate offices, the creation of regional-level management and increased activity due to the number of operating residences. Building Rentals. Building rentals increased to $1.6 million in the three months ended March 31, 1997 from $560,000 in the corresponding 1996 period, an increase of $1.0 million or 178.5%. This increase was due to the increased number of sale and leaseback transactions completed by the Company from March 31, 1996 through March 31, 1997. The Company had 33 operating leases as of March 31, 1997 compared to 18 at March 31, 1996. For the 19 residences that operated the entire first quarter of 1997 and 1996, building rentals were $552,000, an increase of $34,000, or 6.5%, from the $518,000 of building rentals in the first quarter of 1996. The following schedule presents the timing of leases entered into by the Company.
Number of Net Leases Completed Date - ------------------------------- ----------------------- 3 Fourth Quarter, 1994 1 First Quarter, 1995 5 Fourth Quarter, 1995 9 First Quarter, 1996 11 Second Quarter, 1996 2 Third Quarter, 1996 2 First Quarter, 1997 -- 33
Page 10 of 18 Depreciation and Amortization. Depreciation and amortization expense was $506,000 in the three month period ended March 31, 1997 compared to $217,000 in 1996, an increase of $289,000, or 133%. This increase in depreciation and amortization was directly related to the 47 new residences that opened subsequent to March 31, 1996. Depreciation and amortization expense for the 19 residences, (7 of which were owned) which operated for the entire first quarter of 1997 and 1996, was essentially flat. Interest Expense. Interest Gross expense increase to $1.5 million in 1997 from $478,000 in the corresponding 1996 period, an increase of $1.0 million or 214%. The increase in directly related to the construction financing obtained by the Company during the fourth quarter of 1996 and the first quarter of 1997. The Company capitalized $1.3 million and $448,000 of interest for the three months ended March 31, 1997 and 1996, respectively. Interest Income. Interest income was $122,000 for the three month period ended March 31, 1997 compared to $22,000 in the corresponding 1996 period, an increase of $100,000. The increase in interest income is due to interest earned on the proceeds of restricted cash which originated as a result of bond financing. Net Income (Loss). The net income during the first quarter of 1997 was $664,000 compared to a net loss of $187,000 during the corresponding period in 1996. LIQUIDITY AND CAPITAL RESOURCES At March 31, 1997, the Company had negative working capital of approximately $52 million including liabilities for construction payables and construction financing. Exclusive of these, working capital was $12 million. As of March 31, 1997, the Company had $52.7 million of mortgage financing on 23 residences. This mortgage financing will repaid with the proceeds from sale leaseback transactions that will be completed when additional residences that are currently under construction are completed. Net cash used for operating activities was approximately $1.3 million during the three month period ended March 31, 1997. The primary use of cash was $1.6 due to an increase in other current assets related to the prepayment of April's lease and loan payments. Net cash used for investing activities totaled $25.5 million during the three month period ended March 31, 1997. The primary use of cash was $27.9 million related to the development of new assisted living residences in Oregon, Washington, Texas, Ohio, Idaho and New Jersey. This was offset by the Company selling one facility for $2.6 million. Net cash provided by financing activities totaled $28 million during the three month period ended March 31, 1997. The Company entered into 16 additional construction financing loans netting the Company $35.7 million, paid off one construction loan for $2.6 million and incurred a change in construction draws of $5.2 million. The Company intends to utilize current working capital, proceeds from sale leasebacks and mortgage financing to develop additional residences in 1997 and 1998. The Company intends to seek additional long-term financing through the Oregon Housing and Community Services Department (the "OHCS") and to the extent available, additional low-cost bond financing and sale and leaseback transactions in Washington, Texas, Idaho, New Jersey and Ohio. As of March 31, 1997, the Company had begun development on 40 parcels of land in Oregon, Washington, Texas, Idaho, New Jersey and Ohio. The Company has also entered into agreements pursuant to which, it may purchase, subject to completion of due diligence and various other conditions, 12 undeveloped sites. Page 11 of 18 Capital expenditures for 1997 are estimated to approximate $140 million to $168 million, related primarily to the development of additional residences, of which approximately $27.9 million had been spent through March 31, 1997. The Company has received $98.7 million in commitments from several health care REITs, to finance 40 residences through sale and leaseback transactions. The Company anticipates being able to continue to utilize tax-exempt bond financing for approximately $41 million from the States of Oregon, Ohio, Idaho and Washington. The Company has agreed in principle subject to written confirmation for the sale and leaseback of an additional $25 million. The Company does not anticipate any significant capital expenditures within the foreseeable future with respect to the residences acquired in 1994, 1995 and those currently operating or those pending licensure as of March 31, 1997. It is expected that cash generated from operations will be sufficient to fund any expenditures the Company may be required to make with respect to these residences. As of March 31, 1997, the Company had invested excess cash balances in short- term certificates of deposit and U.S. Treasury securities. The Company intends to satisfy future capital requirements for its development activities by various means, including financing obtained from sale/leaseback transactions, permanent mortgage financing and long-term state bond financing and to the extent available, cash generated from operations. 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. LIMITED OPERATING HISTORY; ANTICIPATED OPERATING LOSSES The Company has a limited operating history. The Company realized net income of $644,000 for the three months ended March 31, 1997, $149,000 for the year ended December 31, 1996 and a net loss of $575,000 for the year ended December 31, 1995. There can be no assurance that losses will not occur in the future. The Company anticipates that each residence will have an operating loss (prior to depreciation, rent or interest, if any) of $10,000 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 within four months of the commencement of operations, the aggregate loss may increase by up to an additional $40,000. The Company currently plans to open 50 to 60 residences in 1997, of which 18 were opened during the first quarter of 1997. The Company estimates that the losses to be incurred during 1997 due to opening residences could range from $.5 million to $2.4 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. 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, to a lesser extent, acquire additional assisted living residences. While the Company currently plans to open 50 to 60 residences in 1997 and 1998, 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 Page 12 of 18 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 acquisition activities. The estimated cost to complete and fund start-up losses for the new facilities that will be developed by December 31, 1998 is between $280 million and $336 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 currently total approximately $11.9 million. These fixed payment obligations will significantly increase as the Company pursues its development 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, the Company anticipates, 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. Page 13 of 18 GEOGRAPHIC CONCENTRATION; DEPENDENCE ON STATE MEDICAID WAIVER PROGRAMS As of March 31, 1997, approximately 44% of the Company's properties are located in the State of Texas and approximately 22% are located in the State of Oregon; therefore, the Company is dependent on the economies of Texas and Oregon and, to a certain extent, on the continued funding of state Medicaid waiver programs. The Company has operated residences in Oregon since December 1994. In addition, the Company began operating residences in Texas and Washington in July 1995 and December 1995, respectively. During the three months ended March 31, 1997 and years ended 1996 and 1995, direct payments received from state Medicaid agencies accounted for approximately 11.4%, 13.8% and 21.4%, respectively of the Company's revenue while the tenant-paid portion of Medicaid residents accounted for approximately 6%, 8% and 10% 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. 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. 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. DEPENDENCE ON SENIOR MANAGEMENT AND SKILLED PERSONNEL The Company depends, and will continue to depend, upon the services of Dr. Wilson, its Chief Executive Officer and President, Connie Baldwin, its Director of Operations and Stephen Gordon, its Chief Administrative Officer and Chief Financial Officer. The Company has entered into an employment agreement with Dr. Wilson and has obtained a $500,000 key employee insurance policy covering her life. 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. 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 three months ended March 31, 1997 and the years ended December 31, 1996, 1995, the Company received, as a percentage of total revenue, under Medicaid programs 11.4%, 13.8% and 21.4%, 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. Page 14 of 18 GOVERNMENT REGULATION. Health care is an area of extensive and frequent regulatory change. Changes in the laws or new interpretations of existing laws can have a significant effect on methods of doing business, cost of doing business and amounts of reimbursement from governmental and other payors. The Company is and will continue to be subject to varying degrees of regulation and licensing by health or social service agencies and other regulatory authorities in the various states and localities in which it operates or intends to operate. As a provided of services under the Medicaid program in the United States, the Company is subject to Medicaid fraud an abuse law, violations of which may result in civil and criminal penalties and exclusions from participation in the Medicaid program. The Company at all times attempts to comply with all applicable fraud and abuse laws; however, there can be no assurance that administrative or judicial interpretation of existing laws or regulations will not have a material adverse effect on the Company's operations or financial condition. The success of the Company will be dependent in part upon its ability to satisfy the applicable regulations and requirements and to procure and maintain required licenses. The Company's operations could also be adversely affected by, among other things, regulatory developments such as mandatory increases in the scope and quality of care to be afford residents and revisions in licensing and certification standards. Currently, no federal rules explicitly define or regulate assisted living. In addition, federal and state laws currently exist restricting health care providers from referring patients to affiliated entities. The Company believes that its operations do not presently violate these referral laws. However, there can be no assurance that federal, state or local laws or regulatory procedures which might adversely affect the Company's business, financial condition, results of operations or prospects will not be expanded or imposed. 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 Page 15 of 18 management information systems and to continue to attract, train, motivate, manage and retain key employees. If the Company is unable to manage its growth effectively, its business, financial condition and results of operations could be adversely affected. 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 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 the 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. Page 16 of 18 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report: Exhibit Number ------ 12 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 March 31, 1997. Page 17 of 18 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 May 13, 1997 By: /s/ STEPHEN GORDON ------------------- Name: Stephen Gordon Title: Chief Administrative Officer and CFO May 13, 1997 By: /s/ RHONDA S. MARSH -------------------- Name: Rhonda S. Marsh Title: Chief Accounting Officer and Controller Page 18 of 18 EX-12 2 COMPUTATION OF FIXED CHARGE TO EARNINGS EXHIBIT 12 RATIO OF EARNINGS TO FIXED CHARGE:
THREE MONTHS ENDED THREE MONTHS ENDED MARCH 31, 1997 MARCH 31, 1996 ------------------ ------------------- Income (Loss) before provision for income taxes $ 825 $ (187) Add fixed charges Interest costs including amortization of debt issuance cost 162 30 ------ ------- Earnings (Loss) $ 987 $ (157) ====== ======= Fixed Charges Interest expense including amortization of debt issuance cost 162 30 Capitalized interest 1,338 448 ------ ------- Total Fixed Charges 1,500 478 ====== ======= Ratio of Earnings to Fixed Charges .66 (.33) Deficiency of Earnings to Cover Fixed Charges $ (513) $ (635)
Page 19 of 18 EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MARCH 31, 1997 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 3,320 8,668 1,025 0 0 15,699 138,345 1,105 159,473 67,076 32,655 0 0 55 59,687 159,473 9,244 9,244 5,692 5,692 2,707 0 40 805 141 664 0 0 0 664 .12 .12
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