-----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, A4u/mZv0xlDfEXDM1m78veYtgC2FgmM8yruyfhdha8zTR0RmY8o0aFUvyAioLNqW 7oG9FWWZ1W9k31qTvSsagw== 0000898430-97-003484.txt : 19970815 0000898430-97-003484.hdr.sgml : 19970815 ACCESSION NUMBER: 0000898430-97-003484 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970814 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: 97662418 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 FORM 10-Q ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20459 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 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 1-13498 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 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 July 31, - 11,043,512. ================================================================================ Page 1 of 20 ASSISTED LIVING CONCEPTS, INC. FORM 10-Q June 30, 1997 INDEX -----
PART I - FINANCIAL INFORMATION Page Item 1. Financial Statements Consolidated Balance Sheets of Assisted Living Concepts, Inc. and Subsidiary as of June 30, 1997 and December 31, 1996.......................... 3 Consolidated Statements of Operations of Assisted Living Concepts, Inc.and Subsidiary for the three and six months ended June 30, 1997 and June 30, 1996................ 4 Consolidated Statements of Cash Flows of Assisted Living Concepts, Inc. and Subsidiary for the three and six months ended June 30, 1997 and June 30, 1996................ 5 Notes to Consolidated Financial Statements.......................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.............. 8
Page 2 of 20 PART 1 ITEM 1 - FINANCIAL INFORMATION ASSISTED LIVING CONCEPTS, INC. CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS) (UNAUDITED) June 30, December 31, ASSETS 1997 1996 ----------- ------------ Current assets: Cash and cash equivalents $ 8,828 $ 2,105 Investments 8,688 8,515 Accounts receivable 1,083 730 Other current assets 2,164 1,043 -------- -------- Total current assets 20,763 12,393 -------- -------- Property and equipment 77,246 59,574 Construction in process (Note 2) 61,333 53,458 -------- -------- Total property and equipment 138,579 113,032 Less accumulated depreciation 1,331 674 -------- -------- Property and equipment - net 137,248 112,358 Goodwill 348 362 Other assets 6,431 5,394 -------- -------- Total assets $164,790 $130,507 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses $ 5,297 $ 3,803 Construction payables 14,082 16,002 Construction financing (Note 2) 51,910 18,850 Current portion of long-term debt 113 110 -------- -------- Total current liabilities 71,402 38,765 Mortgages payable 18,710 18,768 Convertible subordinated debt 13,915 13,915 -------- -------- Total liabilities 104,027 71,448 -------- -------- Shareholders' equity: Preferred Stock, $.01 par value; 1,000,000 shares authorized; none issued and outstanding Common Stock, $.005 par value; 40,000,000 shares authorized; 11,043,512 and 11,030,500 shares issued and outstanding 55 55 Additional paid-in capital 59,806 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) 1,141 (490) -------- -------- Shareholders' equity 60,763 59,059 -------- -------- Total liabilities and shareholders' equity $164,790 $130,507 ======== ========
The accompanying notes are in integral part of these Financial Statements. Page 3 of 20 ASSISTED LIVING CONCEPTS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED) THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, June 30, 1997 1996 1997 1996 -------- ------- -------- ------- Revenues $10,848 $3,742 $20,092 $6,492 ------- ------ ------- ------ Operating expenses: Residence operating expenses 6,557 2,340 12,249 4,276 Corporate general and administrative 676 393 1,317 608 Building rentals 1,654 687 2,870 1,051 Building rentals - related party 355 248 699 444 Depreciation and amortization 702 167 1,208 384 ------- ------ ------- ------ Total operating expenses 9,944 3,835 18,343 6,763 ------- ------ ------- ------ Operating income (loss) 904 (93) 1,749 (271) ------- ------ ------- ------ Interest expense (245) (20) (408) (51) Interest income 153 47 276 69 Other income 482 82 482 82 ------- ------ ------- ------ Other income - net 390 109 350 100 ------- ------ ------- ------ Pre-tax income (loss) $ 1,294 $ 16 $ 2,099 $(171) ------- ------ ------- ------ Provision for income tax 327 - 468 - ------- ------ ------- ------ Net income (loss) $ 967 $ 16 $ 1,631 $ (171) ======= ====== ======= ====== Basic income (loss) per common share $ .09 $ .01 $ .15 $ (.06) ======= ====== ======= ====== Diluted income (loss) per common share $ .09 $ .01 $ .15 $ (.06) ======= ====== ======= ====== Basic common shares outstanding 11,044 6,027 11,044 6,027 Diluted common shares outstanding 13,280 8,933 13,281 8,927
The accompanying notes are an integral part of these Financial Statements. Page 4 of 20 ASSISTED LIVING CONCEPTS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
(UNAUDITED) Three Months Ended Six Months Ended JUNE 30, JUNE 30, 1997 1996 1997 1996 ---- ---- ---- ---- Operating activities: Net income (loss) $ 967 $ 16 $ 1,631 $ (171) Adjustment to reconcile net income (loss) to net cash provided by operating activities: Gain on sale of asset (36) (82) (36) (82) Depreciation and amortization 702 167 1,208 384 Changes in other non-cash items: Accounts receivable (58) (235) (353) (316) Other current assets 522 (142) (1,121) (235) Other assets 24 328 (168) (1,283) Accounts payable and accrued expenses 1,819 (259) 1,495 (2,068) ------- ------ ------- ------- Net cash provided by (used for) operating activities 3,940 (207) 2,656 (3,771) ------- ------ ------- ------- INVESTING ACTIVITIES: Funds held in trust (5) - (173) - Proceeds from sale of land and residences 32,978 23,910 35,568 38,290 Purchases of property and equipment (33,507) (25,799) (61,410) (45,665) ------- ------- ------- ------- Net cash used for investing activities (534) (1,889) (26,015) (7,375) ------- ------- ------- ------- FINANCING ACTIVITIES: Proceeds from short-term construction borrowings expected to be refinanced 6,860 - 43,210 - Payoff of construction financing (7,600) - (10,150) - Construction payables 3,249 - (1,919) - Proceeds from long-term debt - - - 5,865 Payments on long-term debt (28) (20) (55) (46) Proceeds from issuance of common stock 55 - 73 - Debt issuance costs (434) 77 (1,077) 123 ------- ------- ------- ------- Net cash provided by financing activities 2,102 57 30,082 5,942 ------- ------- ------- ------- Net increase (decrease) in cash and cash equivalents 5,508 (2,039) 6,723 (5,204) Cash and cash equivalents, beginning of period 3,320 4,170 2,105 7,335 ------- ------- ------- ------- Cash and cash equivalents, end of period $ 8,828 $ 2,131 $ 8,828 2,131 ======= ======= ======= ======= Supplemental disclosure of cash flow information: Cash payments for interest $ 1,561 $ 221 $ 3,267 $ 1,005 ======= ======= ======= =======
The accompanying notes are an integral part of these Financial Statements. Page 5 of 20 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. As of June 30, 1997, the Company had received certificates of occupancy for 93 residences of which 79 had commenced operations. 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 subsidiary. 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 and six-month periods ended June 30, 1997 and 1996 are not necessarily indicative of the results to be expected for the full year. 2. PROPERTY AND EQUIPMENT Construction In Process As of June 30, 1997 the Company had begun construction or had purchased land to begin construction on 35 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, 25 additional sites. Page 6 of 20 ASSISTED LIVING CONCEPTS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. PROPERTY AND EQUIPMENT (CONTINUED) As of June 30, 1997 the Company had 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 $ 7,995 Construction costs and architectural fees 42,400 Other costs, including legal fees, building permits and other development costs 10,938 ------- $61,333 =======
During the quarter ended June 30, 1997, the Company capitalized $1,606,000 of interest cost relative to financing of construction in process. Of the 93 residences the Company had opened or had received certificates of occupancy, 46 were leased (15 in the Northwest, 29 in the Southwest and 2 in the East) and 47 were owned (23 in the Northwest, 10 in the Southwest and 14 in the East). 3. LEASES During the quarter ended June 30, 1997, the Company completed the sale of 13 residences (4 in the Northwest, one in the East and 8 in the Southwest) under sale and leaseback arrangements. In addition, the Company sold one residence in the East and is operating the residence under a six month management agreement and also has entered into a agreement to lease the property after the management agreement expires. The Company sold the residences for approximately $32,978,000 which approximates cost, and leased them back over initial terms ranging from 12 to 15 years. The residences were leased back at an initial annual lease rate of approximately $3,313,000. 4. STOCK SPLIT AND ADOPTION OF STOCKHOLDERS RIGHTS PLAN The Company's Board of Directors declared a two for one stock split on the Company's Common Stock and dividend distribution of one Preferred Share Purchase Right on each outstanding share of the Company's Common Stock. The record date for the stock split and the Preferred Share Purchase Right distribution is June 30, 1997 and the stock split occurred immediately prior to the Preferred Share Purchase right distributions. 5. SUBSEQUENT EVENTS The Company has agreed, in principle, to acquire Carriage House Assisted Living Inc., a privately held developer and operator of assisted living facilities. It is contemplated that the transaction will be completed by September 30, 1997 for approximately $6 million in the Company's stock. Completion of the transaction is subject to negotiation of a satisfactory definitive agreement and receipt of normal regulatory and third party consents and approvals. Currently Carriage House operates 4 facilities with 156 units and has an additional 6 facilities with 198 units under construction. All units are located in Nebraska. Page 7 of 20 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW THE COMPANY The Company reported net income of $967,000 or $.09 per share, on revenue of $10,848,000 for the three months ended June 30, 1997. Operating results for the three and six month periods ended June 30, 1997 include the operating results of 79 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 June 30, 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 June 30, 1997 Stabilized Start-up Residences (1) Residences (2) Total (3) --------------- -------------- --------- Residences operated (end of period) 42 37 79 Units operated 1,459 1,397 2,856 Average occupancy rate 93.8% 56.3% 75.4% Sources of revenue: Private 81.5% 86.5% 83.3% Medicaid Resident Portion 6.7% 4.4% 5.9% Medicaid State Portion 11.8% 9.1% 10.8% ----- ----- ----- 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 93 residences, of which 84 had received licensure and 79 were fully operational. Page 8 of 20 Compilation of Stabilized and Start-up Residences Three Months Ended June 30, 1997
Stabilized Start-up Combined Residences Residences Corporate Total ---------- ---------- --------- --------- Revenue $7,079 $3,769 $ - $10,848 Residence Operating Expense 3,921 2,636 - 6,557 ------ ------ ------ ------- Residence Operating Income 3,158 1,133 - 4,291 Corporate Overhead - - 676 676 Building Rentals 1,462 547 - 2,009 Depreciation and Amortization 212 468 22 702 ------ ------ ------ ------- Total Other Operating Expenses 1,674 1,015 698 3,387 ------ ------ ------ ------- Operating Income (Loss) 1,484 118 (698) 904 Interest Expense (403) (882) 1,040 (245) Interest Income - - 153 153 Other Income (Expense) - 357 125 482 ------ ------ ------ ------- Pre-Tax Income (Loss) $1,081 $ (407) $ 620 $ 1,294 ====== ====== ====== ======= Residences Operated 42 37 79 Units Operated 1,459 1,397 2,856 Average Occupancy Rate 93.8% 56.3% 75.4%
Results of Same Residences Three and Six Months Ended June 30, 1997 and June 30, 1996
Three Three Six Six Months Ended Months Ended Months Ended Months Ended June 30, 1997 June 30, 1996 June 30, 1997 June 30, 1996 ------------- ------------- ------------- ------------- Revenue $4,142 $3,525 $6,118 $5,067 Residence Operating Expense 2,319 2,217 3,405 3,141 ------ ------ ------ ------ Residence Operating Income 1,823 1,308 2,713 1,926 Building Rentals 741 852 1,116 1,100 Depreciation and Amortization 167 147 222 229 ------ ------ ------ ------ Other Operating Expenses 908 999 1,338 1,329 ------ ------ ------ ------ Operating Income 915 309 1,375 597 Interest Expense (332) (221) (398) (322) ------ ------ ------ ------ Pre-tax Income $ 583 $ 88 $ 977 $ 275 ====== ====== ====== ====== Residences Operating 26 26 19 19 Units Operating 830 823 605 595 Average Occupancy Rate 94.1% 83.6% 95.0% 83.8%
Page 9 of 20 THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO THREE MONTHS ENDED JUNE 30, 1996 Revenues. For the three months ended June 30, 1997, revenues were $10,848,000 compared to $3,742,000 in the three months ended June 30, 1996, an increase of $7,106,000 or 190%. The Company had opened or received certificates of occupancy on 93 residences as of June 30, 1997, of which 79 had operating results for the quarter period compared to 31 in the corresponding 1996 period. For the 26 residences which had operated for the entire quarter for both June 30, 1997 and June 30, 1996, revenue increased by $617,000, or 17% from the $3,525,000 in the second quarter of 1996. This increase was primarily attributable to average occupancy throughout the two periods. Average occupancy increased 12.5% to 94.1% from the corresponding period in 1996 of 83.6%. The remaining $6,489,000 of the increase was due to the new residences which began operating subsequent to July 1, 1996. Residence Operating Expenses. Residence operating expenses were $6,557,000 in the three months ended June 30, 1997 compared to $2,340,000 in the corresponding 1996 period, an increase of $4,217,000, or 180%. For the 26 residences that operated the entire second quarter of 1997 and 1996, residence operating expenses were $2,319,000, an increase of $102,000, or 4.6%, from the $2,217,000 of residence operating expenses in the second quarter of 1996. The increase in expenses for these 26 residences is due the increase in staffing to accommodate the level of care due to higher occupancy percentages. The remaining $4,115,000 of the increase was due to the new residences which began operating subsequent to July 1, 1996. Corporate, General and Administrative. Corporate, general and administrative expenses were $676,000 in the three months ended June 30, 1997 compared to $393,000 in the corresponding 1996 period, an increase of $283,000, or 72%. 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 $2,009,000 in the three months ended June 30, 1997 from $935,000 during the corresponding 1996 period. This increase was due to the increased number of sale and leaseback transactions completed by the Company from July of 1996 through June of 1997. The Company had 46 operating leases as of June 30, 1997 compared to 29 at June 30, 1996. Building rentals for the 26 residences that were operating for the entire second quarter of 1997 and 1996 declined slightly because the Company repurchased four residences which were previously leased. Depreciation and Amortization. Depreciation and amortization expense was $702,000 in the three month period ended June 30, 1997 compared to $167,000 in 1996, an increase of $535,000, or 320%. This increase in depreciation and amortization was directly related to the new residences that opened subsequent to July 1, 1996. Depreciation and amortization expense for the 26 residences which operated for the entire second quarter of 1997 and 1996 increased slightly because the Company purchased four residences which were previously leased. Interest expense. Interest expense net of capitalized interest was $245,000 for the three month period ended June 30, 1997 compared to $20,000 in the corresponding 1996 period, an increase of $225,000. The Company's gross interest expense was $1,851,000 for the three month period ended June 30, 1997 compared to $603,000 in the corresponding 1996 period, an increase of $1,248,000. The increase in interest expense is due to temporary construction financing obtained for the expansion of assisted living Page 10 of 20 residences through development activity. Capitalized interest for the three month period ended June 30, 1997 was $1,606,000 compared to $583,000 in the corresponding 1996 period, a change of $1,023,000. Interest Income. Interest income was $153,000 for the three month period ended June 30, 1997 compared to $47,000 in the corresponding 1996 period, an increase of $106,000. The increase in interest income is directly related to the cash management of financing transactions and the time opportunity for investment of idle funds. Other Income: Other income was $482,000 for the three month period ended June 30, 1997 compared to $82,000 in the corresponding 1996 period, an increase of $400,000. Approximately $357,000 of the $482,000 in other income for the three months ended June 30, 1997 relates to a participation agreement on 5 residences with an entity that has agreed to bear the economic risk for the first six months that the residences are open in exchange for the right to participate in future operating results. The remaining $125,000 related to development fees received by the Company from outside developers to assist them in developing similar assisted living residences. The $82,000 for the three month period ended June 30, 1996 was from a gain on the sale of real property. Pre-Tax Income: Pre-tax income for the three months ended June 30, 1997 was $1,294,000 compared to $16,000 during the corresponding period in 1996, an increase of $1,278,000. The Company's pre-tax income has continued to increase as the number of operating residences increases. As the Company has matured in certain of its regions and occupancy has increased, the operating income of the residences has been able to cover general corporate overhead plus provide additional income. Provision for Income Tax: The Company's provision for income tax for the three months ended June 30, 1997 was $327,000 compared to $0 for the corresponding period in 1996. The Company has been utilizing its operating loss carryforwards from previous periods to offset current income tax provisions. As of June 30, 1997, the Company had extinguished its carryforwards and will be experiencing a tax rate of approximately 38%. Net Income: Net income for the three months ended June 30, 1997 was $967,000 compared to $16,000 during the corresponding period in 1996. The Company has continued to increase income due to the number of residences operating as compared to the corresponding period in 1996. This has been partially offset by the increase in corporate overhead, including additional staffing, necessary to accommodate the Company's expansion plans. SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996. Revenues. For the six months ended June 30, 1997, revenues were $20,092,000 compared to $6,492,000 in the six months ended June 30, 1996, an increase of $13,600,000 or 209%. The Company operated 79 residences in the 1997 period compared to 31 in the corresponding 1996 period. The additional residences increased revenue by $12,549,000. The 19 residences in operation in both the 1997 and 1996 periods reported an aggregate increase in revenues of $1,051,000 or 20.7%. This increase was primarily attributable to increases in both average occupancy and yearly rent increases. Residence Operating Expenses. Residence operating expenses were $12,249,000 in the six months ended June 30, 1997 compared to $4,276,000 in the corresponding 1996 period, an increase of $7,973,000, or 186%. The Company operated 79 residences in the 1997 period compared to 31 in the corresponding 1996 period. For the 19 residences that operated for 1997 and 1996, residence operating expenses were $3,405,000, a increase of $264,000, or 7.7% from the $3,141,000 of residence operating expenses in the Page 11 of 20 corresponding period in 1996. The increase in expenses for these 19 residences is due to the increase in staffing to accommodate the level of care due to higher occupancy percentages The remaining $7,709,000 of the increase was due to the new residences that opened subsequent to January 1, 1996. Building Rentals. Building rentals increased to $3,569,000 in the six months ended June 30, 1997 from $1,495,000 in 1996. The increase in building rentals is directly related to the increase in the number of leases entered into by the Company between January 1, 1996 and June 30, 1997. The Company had 47 operating leases at June 30, 1997 compared to 29 at June 30, 1996. Building rentals for the 19 residences which operated for the entire period of 1997 and 1996 stayed relatively unchanged. Depreciation and Amortization. Depreciation and amortization expense was $1,208,000 in the six month period ended June 30, 1997 compared to $384,000 in 1996, an increase of $824,000, or 215%. The increase in depreciation and amortization is directly related to the 48 new residences that opened subsequent to July 1, 1996. Depreciation and amortization expense for the 19 residences which operated for the entire six month period in 1996 and 1996, stayed relatively unchanged. Interest expense. Interest expense net of capitalized interest was $408,000 for the six month period ended June 30, 1997 compared to $51,000 in the corresponding 1996 period, a change of $357,000. The Company's gross interest expense was $3,352,000 for the six month period ended June 30, 1997 compared to $1,081,000 in the corresponding 1996 period, a change of $2,271,000. The increase in interest expense is due to temporary construction financing obtained for the expansion of our assisted living residences through development activity. Capitalized interest for the six month period ended June 30, 1997 was $2,944,000 compared to $1,031,000 in the corresponding 1996 period, a change of $1,913,000. Interest Income. Interest income was $276,000 for the six month period ended June 30, 1997 compared to $69,000 in the corresponding 1996 period, a change of $207,000. The increase in interest income is directly related the fluctuation in the amounts invested. Other Income: Other income was $482,000 for the six month period ended June 30, 1997 compared to $82,000 in the corresponding 1996 period, a change of $400,000. Approximately $357,000 of the $482,000 in other income for the six months ended June 30, 1997 relates to a participation agreement on 5 residences with an investment company that has agreed to bear the economic risk for the first six months that the residences are open in exchange for the right to participate in future operating results. The remaining $125,000 related to development fees received by the Company from outside developers to assist them in developing similar assisted living residences. The $82,000 for the six month period ended June 30, 1996 was from a gain on the sale of real property. Pre-Tax Income (Loss): Pre-tax income for the six months ended June 30, 1997 was $2,099,000 compared to a pre-tax loss of $171,000 during the corresponding period in 1996, an increase of $2,270,000. The Company's pre-tax income has continued to increase as the number of operating residences increases. As the Company has matured in certain of its regions and occupancy has increased, the operating income of the residences has been able to cover general corporate overhead plus provide additional income. Provision for Income Tax: The Company's provision for income tax for the six months ended June 30, 1997 was $468,000 compared to $0 for the corresponding period in 1996. The Company has been utilizing its operating loss carryforwards from previous periods to offset current income tax provisions. As of June 30, 1997, the Company had extinguished its carryforwards and will be experiencing a tax rate of approximately 38%. Page 12 of 20 Net Income (Loss): Net income for the six months ended June 30, 1997 was $1,631,000 compared to net loss of $171,000 during the corresponding period in 1996. The Company has generated income due to the increased number of residences operating as compared to the corresponding period in 1996. This has been partially offset by the increase in corporate overhead, including additional staffing, necessary to accommodate the Company's expansion plans. LIQUIDITY AND CAPITAL RESOURCES At June 30, 1997, the Company had negative working capital of approximately of $50.6 million. Included in this amount was approximately $14 million of construction draws that the Company received for the June development activity which was not payable until July 10. The Company completed the sale and leaseback of two properties for $5.1 million and closed on five permanent mortgage financings with the State of Idaho and Washington for $9.1 million subsequent to June 30, 1997. In addition, the temporary construction financing of $51.9 million is classified as current liabilities because it will be converted into sale-leaseback or other permanent financing within one year. Excluding the construction draws payable and temporary construction financing, the Company has positive working capital of $15.4 million. Net cash provided by operating activities was approximately $2.7 million during the six month period ended June 30, 1997. The primary source of funds was from net income of $1.6 million and the add back of depreciation and amortization of $1.2 million. Other operating type items netted to a use of cash of $100,000. Net cash used in investing activities totaled $26 million during the six month period ended June 30, 1997. The primary use of cash was $61.4 million related to the development of new assisted living residences in Oregon, Washington, Texas, New Jersey, Idaho, Ohio and Arizona. This was offset by proceeds of $35.6 million related to the sale of 15 residences of which 13 were leased backed. Two of the residences sold entered into six month management agreements and have also entered into a agreement to lease the property after the management agreement expires. Net cash provided by financing activities totaled $30.1 million during the six month period ended June 30, 1997. The Company entered into 19 additional construction financing loans which netted the Company $43.2 million, paid off four construction loans for $10.2 million, experienced a decline in construction draws of $1.9 million and incurred approximately $1.1 million in debt issuance costs related to temporary construction financing and bond issuance costs. The Company intends to utilize current working capital resources to develop additional residences in 1997 and 1998. The Company intends to seek additional long-term financing through low-cost bond financing and sale and leaseback transactions in Washington, Oregon, Idaho, New Jersey and Ohio. As of June 30, 1997, the Company has started construction or had purchased land for development on 35 parcels of land in Oregon, Washington, Texas, Ohio, Idaho, New Jersey, and other states. The Company has also entered into agreements pursuant to which, it may purchase, subject to completion of due diligence and various other conditions, 25 undeveloped sites. The Company expects these developments to open through the third and fourth quarter of 1997 and the first quarter of 1998. Capital expenditures for 1997 are estimated to approximate $140 million to $168 million, related primarily to the development of additional residences, of which approximately $61 million had been spent through June 30, 1997. The Company has outstanding $46.5 million in commitments from several health care REITs to finance 18 residences through sale and leaseback transactions. The Company anticipates being able to continue to utilize tax-exempt bond financing for approximately $22.8 million from the States of Ohio, Idaho and Washington. The Company has agreed in principle subject to written confirmation for the Page 13 of 20 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, 1996 and those currently operating or those pending licensure as of June 30, 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 June 30, 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. 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 $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, the aggregate loss may increase by up to an additional $120,000. The Company currently plans to open 50 to 60 residences in 1997, of which 26 were opened during the first six months of 1997. The Company estimates that the losses to be incurred during 1997 due to start-up residences could range from $1.7 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 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 Page 14 of 20 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 $16.4 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. GEOGRAPHIC CONCENTRATION; DEPENDENCE ON STATE MEDICAID WAIVER PROGRAMS As of June 30, 1997, approximately 39.8% of the Company's properties are located in the State of Texas, approximately 21.5% are located in the State of Oregon, 13.9% are located in the State of Ohio and 11.8% are located in the State of Washington; therefore, the Company is dependent on the economies of Texas, Oregon, Ohio and Washington 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 and six months ended June 30, 1997 and years ended 1996 and 1995, direct payments received from state Medicaid agencies accounted for approximately 10.8%, 11.1% 11.4%, 13.8% and 21.4%, respectively of the Company's revenue while the tenant-paid portion of Medicaid residents accounted for approximately 5.9%, 6.0%, 6%, 8% and 10% of the Company's revenue during these Page 15 of 20 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 and six months ended June 30, 1997, and the years ended December 31, 1996, 1995, the Company received, as a percentage of total revenue, under Medicaid programs 10.8%, 11.1%, 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. 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 provider 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 Page 16 of 20 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 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 Page 17 of 20 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. PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K Page 18 of 20 (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. On July 16, 1997, the Company filed a report on Form 8-K dated July 16, 1997 reporting a two-for-one Stock Split on the Company's common stock. The record date for the stock split was June 30, 1997. Reporting the adoption by the Company's Board of Directors of a Stockholders Plan. For each common share outstanding as of June 30, 1997 one dividend of one preferred share will be payable. Page 19 of 20 SIGNATURES Pursuant to the requirements of Sections 13 or 15(d) the Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ASSISTED LIVING CONCEPTS, INC. Registrant August 14, 1997 By: /s/ STEPHEN GORDON --------------------- Name: Stephen Gordon Title: Chief Administrative Officer and CFO August 14, 1997 By: /s/ RHONDA S. MARSH ---------------------- Name: Rhonda S. Marsh Title: Chief Accounting Officer and Controller Page 20 of 20 EX-12 2 COMPUTATION OF FIXED CHARGES TO EARNINGS EXHIBIT 12 RATIO OF EARNINGS TO FIXED CHARGE:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------- -------- 1997 1996 1997 1996 ---- ---- ---- ---- Income (Loss) before provision for income taxes $ 967 $ 16 $ 1,631 ($ 171) Add fixed charges Interest costs including amortization of debt issuance cost 245 20 408 51 ------ ------ ------- ------- Earnings $1,212 $ 36 $ 2,039 $ (120) ======= ====== ======= ======= Fixed Charges Interest expense including amortization of debt issuance cost 245 20 408 51 Capitalized interest 1,606 583 2,944 1,031 ------ ------ ------- ------- Total Fixed Charges 1,851 603 3,352 1,082 ======= ====== ======= ======= Ratio of Earnings to Fixed Charges .65 .06 .61 (.11) Surplus/(Deficiency) of Earnings to $ (639) $ (567) $(1,313) $(1,202) Cover Fixed Charges
EX-27 3 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS 6-MOS DEC-31-1997 DEC-31-1997 APR-01-1997 JAN-01-1997 JUN-30-1997 JUN-30-1997 8,888 8,888 8,688 8,688 1,083 1,083 0 0 0 0 20,763 20,763 138,579 138,579 1,331 1,331 164,790 164,790 71,402 71,402 32,625 32,625 0 0 0 0 55 55 60,708 60,708 164,790 164,790 10,848 20,092 10,848 20,092 6,557 12,249 6,557 12,249 3,387 6,094 0 0 245 408 1,294 2,099 327 468 967 1,631 0 0 0 0 0 0 967 1,631 .09 .15 .09 .15
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