-----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, StkwRbXoNP0hmzVr2bxnsYi1JkrBe6dMTzKxObJSaevc96hacIu+WILkcdgJyXsW p4PsK1OStMdhL8wnigHTSw== 0000898430-98-001995.txt : 19980518 0000898430-98-001995.hdr.sgml : 19980518 ACCESSION NUMBER: 0000898430-98-001995 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980515 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: ASSISTED LIVING CONCEPTS INC CENTRAL INDEX KEY: 0000929994 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-NURSING & PERSONAL CARE FACILITIES [8050] IRS NUMBER: 931148702 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-13498 FILM NUMBER: 98624202 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 PERIOD ENDED MARCH 31, 1998 - ------------------------------------------------------------------------------- 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, 1998 OR [_] TRANSITION REPORT PURSUANT TO SECTION 12 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition period from ___ to___ Commission file number 1-83938 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 301 Portland, Oregon 97216 (Address of principal executive offices) (503) 252-6233 (Registrant's telephone number, including area code) Indicated by check mark whether Registrant (1) has filed all reports to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that Registrants was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Shares of Registrant's common stock, $.01 par value, outstanding at May 1, 1998 is 15,747,558. - ------------------------------------------------------------------------------- Page 1 of 21 ASSISTED LIVING CONCEPTS, INC. FORM 10-Q March 31, 1998 INDEX -----
Page ---- PART I - FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets, December 31, 1997 and March 31, 1998............ 3 Condensed Consolidated Statements of Operations, Three Months Ended March 31, 1997 and 1998............................................. 4 Condensed Consolidated Statements of Cash Flows, Three Months Ended March 31, 1997 and 1998............................................. 5 Notes to Condensed Consolidated Financial Statements................................... 6-7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................... 8-18 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K................................................ 19 Computation of Earnings to Fixed Charges........................................ 21
Page 2 of 21 PART 1 ITEM 1 - FINANCIAL INFORMATION ASSISTED LIVING CONCEPTS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
MARCH 31, DECEMBER 31, 1998 1997 (UNAUDITED) ------------ ---------- ASSETS Current assets: Cash and cash equivalents $ 63,394 $ 29,885 Funds held in trust 1,956 188 Accounts receivable 2,185 3,139 Other current assets 4,504 5,211 -------- -------- Total current assets 72,039 38,423 -------- -------- Property and equipment 100,751 154,118 Construction in progress 103,795 79,402 -------- -------- Total property and equipment 204,546 233,520 Less accumulated depreciation 2,477 3,206 -------- -------- Property and equipment - net 202,069 230,314 -------- -------- Goodwill 13,397 13,684 Other assets 10,800 11,966 -------- -------- Total assets $298,305 $294,387 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses $ 9,873 $ 11,690 Construction payable 18,883 12,595 Construction financing 2,150 - Current portion of long-term debt 172 268 -------- -------- Total current liabilities 31,078 24,553 Convertible subordinated debentures 100,165 100,165 Long-term debt 26,047 26,033 -------- -------- Total liabilities 157,290 150,751 -------- -------- Stockholders' equity: Preferred stock, $.01 par value; 1,000,000 shares authorized; none issued and outstanding - - Common stock, $.01 par value; 80,000,000 shares authorized; issued and and outstanding 15,646,478 shares and 15,742,062 in 1997 and 1998 156 157 Additional paid-in capital 137,379 138,092 Fair market value in excess of historical cost of acquired net assets attributable to related party transactions (239) (239) Retained earnings 3,719 5,625 -------- -------- Stockholders' equity 141,015 143,635 -------- -------- Total liabilities and stockholders' equity $298,305 $294,387 ======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements. Page 3 of 21 ASSISTED LIVING CONCEPTS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (Unaudited)
THREE MONTHS ENDED MARCH 31, 1997 1998 Revenues $ 9,244 $18,648 ------- ------- Operating expenses: General operating expenses 5,692 11,366 Corporate general and administrative 641 1,068 Building rentals 1,216 3,537 Building rentals to related party 344 365 Depreciation and amortization 506 1,045 ------- ------- Total operating expenses 8,399 17,381 ------- ------- Operating income 845 1,267 ------- ------- Other income (expense): Interest expense (163) (268) Interest income 123 700 Other income - 1,375 ------- ------- (40) 1,807 ------- ------- Income before income taxes 805 3,074 Provision for income taxes 141 1,168 ------- ------- Net income $ 664 $ 1,906 ======= ======= Net income per common share (basic) $ .06 $ .12 Net income per common share (diluted) $ .06 $ .12 Weighted average common shares outstanding (basic) 11,044 15,688 Weighted average common shares outstanding (diluted) 13,144 17,982
The accompanying notes are an integral part of these condensed consolidated financial statements. Page 4 of 21 ASSISTED LIVING CONCEPTS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (Unaudited)
THREE MONTHS ENDED MARCH 31, 1997 1998 --------- -------- OPERATING ACTIVITIES: Net income $ 664 $ 1,906 Adjustment to reconcile net income to net cash provided by operating activities: Depreciation and amortization 506 1,045 Changes in assets and liabilities: Accounts receivable, net (295) (954) Other current assets (1,643) (707) Other assets (192) (1,166) Accounts payable and accrued expenses (324) 1,817 -------- -------- Net cash (used in) provided by operating activities (1,284) 1,941 -------- -------- INVESTING ACTIVITIES: Sale (purchase) of funds held in trust (168) 1,768 Acquisitions, net of cash and debt acquired -- (98) Proceeds from sale and leaseback transactions 2,590 -- Purchases of property and equipment (27,903) (31,291) -------- -------- Net cash used in investing activities (25,481) (29,621) -------- -------- FINANCING ACTIVITIES: Proceeds from short-term construction borrowings expected to be refinanced 36,350 -- Construction draws (5,168) (6,288) Repayments of construction financing (2,550) -- Payments on long-term debt (27) (77) Debt issuance costs of long-term debt (643) -- Proceeds from issuance of common stock 18 536 -------- -------- Net cash (used in) provided by financing activities 27,980 (5,829) -------- -------- Net increase (decrease) in cash and cash equivalents 1,215 (33,509) Cash and cash equivalents, beginning of period 2,105 63,394 -------- -------- Cash and cash equivalents, end of period $ 3,320 $ 29,885 ======== ======== Supplemental disclosure of cash flow information: Cash payments for interest $ 1,706 $ 2,100 Cash payments for income taxes -- 116 Extinguishment of construction loan payable from sale-leaseback -- 2,150
The accompanying notes are an integral part of these condensed consolidated financial statements. Page 5 of 21 ASSISTED LIVING CONCEPTS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Assisted Living Concepts, Inc. and Subsidiaries ("Company") owns, operates and develops assisted living residences which provide housing to senior citizens who need help with the activities of daily living such as bathing and dressing. The Company provides personal care and support services and makes available routine nursing services designed to meet the needs of its residents. BASIS OF PRESENTATION These condensed consolidated financial statements have been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries that manage, own and develop assisted living residences and provide ancillary services such as home health, hospice and durable medical equipment. The condensed consolidated financial statements also include residences the Company owns or leases but are operated through joint venture agreements. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 1997. The financial information included herein reflects all adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the results for interim periods. The results of operations for the three month period ended March 31, 1998 are not necessarily indicative of the results to be expected for the full year. 2. PROPERTY AND EQUIPMENT The Company's property and equipment are stated at cost and consist of the following at March 31, 1998 (in thousands): Land $ 9,729 Buildings and improvements 138,453 Equipment 1,795 Furniture 4,141 -------- Sub-total 154,118 Construction in progress 79,402 -------- Total property and equipment 233,520 Less accumulated depreciation (3,206) -------- Property and equipment, net $230,314 ========
As of March 31, 1998, the Company had begun construction on 26 residences (1,033 units) ($31.5 million). Construction in progress also includes 17 residences (650 units) ($42.5 million) that have received a certificate of occupancy, but are pending licensure. As of March 31, 1998, the Company had also entered into agreements pursuant to which it may purchase, subject to completion of due diligence and various other conditions, 31 additional sites. The Company has capitalized $1.7 million of direct costs in conjunction with Page 6 of 21 the due diligence associated with these 31 sites (1,218 units). The remaining $3.7 million relates to costs associated with the site selection and pre- acquisition costs. 3. SUBSEQUENT EVENTS On April 1, 1998, the Company entered into $14.6 million of mortgage financing for seven residences in Texas under a $50 million credit facility. The term of this financing is 10 years at a 7.73% fixed interest rate non-recourse to the Company. The debt is secured by buildings, land, furniture and fixtures. On April 7, 1998, the Company completed the private placement offering of $75,000,000 of 5.625% Convertible Subordinated Debentures ("Debentures") due May 1, 2003. The Debentures are convertible at any time at or prior to maturity, unless previously redeemed, at a conversion price of $26.184 per common share, which equates to an aggregate of approximately 2.86 million shares. Interest is payable semiannually on May 1 and November 1 of each year, commencing November 1, 1998. The Debentures are unsecured and subordinated to all senior indebtedness of the Company. The Debentures are redeemable at par, as a whole or in part, at any time on or after May 15, 2001 at the Company's option. On April 30, 1998, the Company completed the acquisition of two assisted living residences in Plano and McKinney, Texas, having units of 66 and 50 units, respectively. The residences were acquired for a purchase price of approximately $5.2 million. 4. NET INCOME PER COMMON SHARE The Company adopted Statement of Financial Accounting Standards No. 128 Earnings Per Share (FAS 128) in the fourth quarter of 1997 and has restated all previously reported amounts. Basic earnings per share (EPS) and diluted EPS replace primary EPS and fully diluted EPS. Basic EPS is calculated using income attributable to common shares divided by the weighted average number of common shares outstanding for the period. Diluted EPS is calculated using income attributable to common shares (after considering the effects of dilutive potential common shares) divided by the weighted average number of common shares and dilutive potential common shares outstanding for the period.
Three Three Months Ended Months Ended March 31, March 31, 1997 1998 ------------ ------------ Numerator for basic net income per share $ 664 $ 1,906 Effect of conversion of convertible debentures - 163 ------- ------- Number for diluted net income per share $ 664 $ 2,069 ======= ======= Denominator Denominator for basic net income per common share weighted average shares 11,004 15,688 7% Convertible Debentures 1,855 1,855 Stock Option Dilution 285 439 ------- ------- Denominator for diluted net income per common share weighted average shares 13,144 17,982 ======= ======= Basic net income per common share $ .06 $ .12 ======= ======= Diluted net income per common share $ .06 $ .12 ======= =======
Page 7 of 21 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company reported net income of $1.9 million or $.12 per diluted share, on revenue of $18.6 million for the three months ended March 31, 1998. Operating results for the three month period ended March 31, 1998 include the operating results of 116 residences and are not necessarily indicative of future operating financial performance, as the Company intends to significantly expand its operating base of residences in 1998 and 1999. RESULTS OF OPERATIONS Revenues consist of rentals of units in assisted living residences and fees associated with the provision of services to residents pursuant to contracts with the residents. Operating expenses include (i) residence operating expenses, such as staff payroll, food, property taxes, utilities, insurance and other direct residence operating expenses, (ii) general and administrative expenses consisting of corporate and support functions such as legal, accounting and other administrative expenses, (iii) building rentals and (iv) depreciation and amortization. The following tables sets forth, for the periods presented, the number of residences and units operated, average occupancy rates and sources of revenue for the Company. 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 Total Residences Residences Residences Total --------------- ------------- ---------- Residences operated (end of period) 35 31 66 Units operated (end of period) 1,163 1,190 2,353 Average occupancy rate 91.9% 68.5% 80.1% Sources of revenue: Medicaid state portion 13.6% 8.1% 11.4% Medicaid resident portion 7.6% 4.2% 6.3% Private 78.8% 87.7% 82.3% ------- ------- ------- Total 100.0% 100.0% 100.0% ====================================================== THREE MONTHS ENDED MARCH 31, 1998 =================================================================================================== Stabilized Start-up Total Residences Residences Residences Total ------------- ------------- --------- Residences operated (end of period) 64 52 116 Units operated (end of period) 2,286 2,029 4,315 Average occupancy rate 93.7% 51.4% 74.6% Sources of revenue: Medicaid state portion 13.7% 7.8% 11.8% Medicaid resident portion 7.9% 3.5% 6.5% Private 78.4% 88.7% 81.7% ------- ------- ------- Total 100.0% 100.0% 100.0% =====================================================
Page 8 of 21 The following tables set forth, for the periods presented, the compilation of results from stabilized and start-up and from other ancillary services, including corporate activities. Stabilized residences are defined as those residences which were operating for more than twelve months prior to the beginning of the period or had achieved a 95% occupancy rate as of the beginning of the reporting period. Start-up residences are defined as those residences which were operating for less than twelve months prior to the beginning of the period or had not achieved a 95% occupancy rate as of the beginning of the reporting period.
COMPILATION OF STABILIZED AND START-UP RESIDENCES THREE MONTHS ENDED MARCH 31, 1997 ====================================================================================================================== Stabilized Start-up Corporate & Residences Residences Ancillary Services Total ------------------------------------------------------------------------ C> 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%
COMPILATION OF STABILIZED AND START-UP RESIDENCES THREE MONTHS ENDED MARCH 31, 1998 ====================================================================================================================== Stabilized Start-up Corporate & Residences Residences Ancillary Services Total ------------------------------------------------------------------------ Revenue $11,271 $5,637 $1,740 $18,648 Residence operating expense 6,311 3,755 1,300 11,366 ------------------------------------------------------------------------ Residence operating income 4,960 1,882 440 7,282 Corporate overhead - - 1,068 1,068 Building rentals 2,531 1,321 50 3,902 Depreciation and amortization 269 645 131 1,045 ------------------------------------------------------------------------ Total other operating expenses 2,800 1,966 1,249 6,015 ------------------------------------------------------------------------ Operating income (loss) 2,160 (84) (809) 1,267 Interest expense (214) (948) 894 (268) Interest income 1 3 696 700 Other income 1 1,374 - 1,375 ------------------------------------------------------------------------ Pre-tax income (loss) 1,948 345 781 3,074 Provision for income taxes - - 1,168 1,168 ------------------------------------------------------------------------ Net income (loss) $ 1,948 $ 345 $ (387) $ 1,906 ======================================================================== Residences operated 64 52 116 Units operated 2,286 2,029 4,315 Average occupancy rate 93.7% 51.4% 74.6%
Page 9 of 21 The following table sets forth, for the periods presented, the results of operations for the 51 residences which were operating for both periods in their entirety (in thousands). COMPILATION OF SAME STORE RESIDENCES THREE MONTHS ENDED MARCH 31, 1997 AND MARCH 31, 1998
================================================================================================= Three Three Months Ended Months Ended March 31, March 31, 1997 1998 -------------------------------------- Revenue $8,058 $8,836 Residence operating expense 4,785 4,964 ------------------------------------ Residence operating income 3,273 3,872 Building rentals 1,485 1,999 Depreciation and amortization 295 181 ------------------------------------ Total other operating expenses 1,780 2,180 ------------------------------------ Operating income 1,493 1,692 Interest expense (542) (214) Interest income 2 1 Other income - 1 ------------------------------------ Pre-tax income $ 953 $1,480 ==================================== Residences operating 51 51 Units operating 1,778 1,778 Average occupancy rate 88.1% 95.6%
RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997 REVENUE. For the three months ended March 31, 1998, revenues were $18.6 million compared to $9.2 million in the three months ended March 31, 1997, an increase of $9.4 million or 102%. Of this increase, $5.6 million or 60% related to the opening of an additional 50 operating residences (1,962 units) since March 31, 1997. The remaining $3.8 million or 40% of the increase was attributable to the 66 residences that had operating results as of March 31, 1997 and $1.7 million from ancillary services. For the three months ended March 31, 1998, revenues for the 51 Same Store Residences were $8.8 million as compared to $8.1 million for the three months ended March 31, 1997, an increase of $700,000 of 8.7%. This increase for the 51 Same Store Residences was primarily attributable to increases in average monthly rents to $1,727 and an average occupancy rate of 95.6% for the three months ended March 31, 1998 from average monthly rents of $1,700 and an average occupancy rate of 88.1% for the three months ended March 31, 1997. Of the $18.6 million in revenue reported for the three months ended March 31, 1998, $11.3 million or 60.8% was attributable to Stabilized Residences, $5.6 million or 30.1% was attributable to Start-up Residences and the remaining $1.7 million was mainly due to ancillary revenues. RESIDENCE OPERATING EXPENSES. For the three months ended March 31, 1998, general operating expenses were $11.4 million as compared to $5.7 million for the three months ended March 31, 1997, an increase of $5.7 million. Of this increase, $3.7 million or 64.9% related to the opening of an additional 50 operating Page 10 of 21 residences (1,962 units) since March 31, 1997. The remaining $2 million or 35.1% of the increase was attributable to the 66 residences that had operating results as of March 31, 1997 and $1.3 million from ancillary services. For the three months ended March 31, 1998, residence operating expenses for the 51 Same Store Residences were $5.0 million as compared to $4.8 million for the three months ended March 31, 1997. This increase is due to the increase in staffing and food costs to accommodate the increase in occupancy. Of the $11.4 million in residence operating expenses reported for the three months ended March 31, 1998, $6.3 million or 55.3% was attributable to Stabilized Residences, $3.8 million or 33.3% was attributable to Start-up Residences and approximately $1.3 million was attributable to ancillary services. CORPORATE, GENERAL AND ADMINISTRATIVE. Corporate, general and administrative expenses for the three months ended March 31, 1998 were $1.1 million compared to $641,000 for the 1997 period. Corporate, general and administrative expenses increased due to the expansion of the corporate offices, increased personnel at both corporate and regional offices and increased activity due to the number of operating residences. BUILDING RENTALS. Building rentals for the three months ended March 31, 1998 were $3.9 million compared to $1.6 million for the 1997 period, which represents an increase of $2.3 million or 144%. This increase was directly related to the 27 operating leases entered into from March 31, 1997 to March 31, 1998. The Company had 68 operating leases as of March 31, 1998 compared to 33 at March 31, 1997. DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense was $1.0 million in the three month period ended March 31, 1998 compared to $506,000 for the three months ended 1997, which represents an increase of $494,000, or 97.6%. This increase is the result of the additional facilities developed and owned by the Company during the three months ended March 31, 1998. INTEREST EXPENSE. Interest expense, net of capitalized interest, was $268,000 for the three months ended March 31, 1998 compared to $163,000 for the three months ended March 31, 1997. The Company' s gross interest expense was $2.1 million for the three months ended March 31, 1998 compared to $1.1 million for the three months ended March 31, 1997. The increase in interest expense is due to mortgage and bond financing to fund development activity. Capitalized interest for the three months ended March 31, 1998 was $1.8 million compared to $946,000 for the three months ended March 31, 1997. INTEREST INCOME. Interest income was $700,000 for the three month period ended March 31, 1998 compared to $123,000 in the corresponding 1997 period, an increase of $577,000. The increase in interest income is directly related to the offerings completed in October 1997 from which the Company received approximately $155 million net of offering expense of $8.4 million. OTHER INCOME. Other income for the three months ended March 31, 1998 was $1.4 million compared to $0 for the period in 1997. The $1.4 million represents that portion of the net operating losses of a joint venture (including management fees paid to the Company) attributable to the Company's joint venture partner. INCOME BEFORE INCOME TAXES. Income before income taxes for the three months ended March 31, 1998, was $3.1 million compared to $805,000 for the period in 1997. The Company's income before income taxes 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 in such regions has been able to cover general corporate overhead plus provide additional income. Page 11 of 21 PROVISION FOR INCOME TAXES. The Company's provision for income taxes for the three months ended March 31, 1998 was $1.2 million or 38% compared to $141,000 or 17.5% for the same period in 1997. The Company utilized all its operating loss carryforwards from previous periods to offset taxes otherwise payable through 1996. NET INCOME. The Company achieved net income for the three months ended March 31, 1998 of $1.9 million or $.12 per diluted share compared to $664,000 or $.06 per diluted share for the same period in 1997. This increase is due to the number of residences opened in 1997 and the stabilization of the residences throughout 1997. LIQUIDITY AND CAPITAL RESOURCES At March 31, 1998, the Company had positive working capital of approximately of $13.9 million including liabilities for construction payables and construction financing. Exclusive of construction related activities, working capital was $26.5 million. As of March 31, 1998, the Company had $26.3 million of mortgage financing on 15 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. Net cash provided by operating activities was approximately $1.9 million during the three month period ended March 31, 1998, and the primary source of funds was from net income. Net cash used for investing activities totaled $29.6 million during the three month period ended March 31, 1998. The primary use of cash was $31.3 million related to the development of new assisted living residences. Net cash used in financing activities totaled $5.8 million during the three month period ended March 31, 1998. The Company incurred a temporary decline in construction draws during the first quarter resulting in a $6.3 million decrease in those payables. Capital expenditures for 1998 are estimated to approximate $160 million to $190 million, related primarily to the development of additional residences, of which approximately $31.3 million had been spent through March 31, 1998. On April 13, 1998, the Company completed the issuance of $75 million in Convertible Subordinated Debentures and intends to use these funds in conjunction with current working capital resources to develop additional residences. In addition, as of March 31, 1998, the Company had outstanding $138 million in commitments from several health care REITs to finance additional residences through sale and leaseback transactions and $50 million in mortgage financing ($14.6 million of which was utilized during April, 1998). The Company also anticipates being able to continue to utilize tax-exempt bond financing for approximately $28 million from the states of Ohio, Oregon and Washington. The Company does not anticipate any significant capital expenditures within the foreseeable future with respect to the residences developed since 1994 and those currently operating or those pending licensure as of March 31, 1998. The Company expects that its cash on hand, together with cash flow from operations and available REIT and mortgage financing, will be sufficient to meet is operating requirements and to fund its anticipated growth for at least the next 12 months. The Company expects to use a wide variety of financing sources to fund its future growth, including public and private debt and equity, conventional mortgage financing, unsecured bank financing, among other sources. There can be no assurance that financing from such sources will be available in the future, or if available that such financing will be available on terms acceptable to the Company. Page 12 of 21 As of March 31, 1998, the Company had invested excess cash balances in short- term certificates of deposit and U.S. Treasury securities. RECENT ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive Income", which established requirements for disclosure of comprehensive income. The objective of SFAS No. 130 is to report all changes in equity that result from transactions and economic events other than transactions with owners. Comprehensive income is the total of net income and all other non-owner changes in equity. The Company will comply with the provisions of SFAS No. 130 as they become applicable. In June 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which changes the way segment information is reported for public companies and requires those companies to report selected segment information in interim financial reports to stockholders. The Statement is effective for financial statements for fiscal years beginning after December 15, 1997. The Company plans to adopt SFAS No. 131 for the fiscal year ended December 31, 1998. RISK FACTORS Except for the historical information contained herein, the matters discussed herein are foreword looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. The following discussion highlights some of these risks and others are discussed elsewhere herein or in other documents filed by the Company with the Securities and Exchange Commission. ANTICIPATED OPERATING LOSSES OF NEW RESIDENCES. The Company anticipates that each residence will have an operating loss (prior to depreciation, rent or interest, if any) of $20,000 during the first three to four months of operation. To the extent the Company sells a residence and leases it back or otherwise finances it, the aggregate loss may increase by up to an additional $100,000. The Company currently plans to open 60 to 70 residences in 1998. The Company estimates that the losses to be incurred during 1998 due to start-up residences could range from $1.0 million to $3.2 million. The success of the Company's future operations is directly tied to the expansion of its operational base. There can be no assurance that the Company will not experience unforeseen expenses, difficulties, complications and delays in connection with the expansion of its operational base which could have a material adverse effect on the Company's financial condition and results of operations. In April 1997, in order to mitigate the impact of start-up losses associated with the opening of newly constructed residences, the Company entered into a joint venture agreement with a third party investor to operate certain new assisted living residences owned and developed by the Company. Pursuant to the joint venture agreement, the Company has acquired a 10% interest for $300,000 and the joint venture partner has acquired a 90% interest for $2.0 million in the joint venture. The joint venture concurrently entered into a non-cancelable management agreement with the Company pursuant to which the Company will manage the properties operated by the joint venture for an amount equal to the greater of 8% of gross revenues or $2,000 per month per property. As of March 31, 1998, 24 residences owned or leased by the Company were being operated by the joint venture. The Company anticipates 5 to 10 new residences will enter the joint venture per quarter. The revenues and expenses of the joint venture are consolidated with those of the Company. In addition, the Company will recognize 10% of the losses or profits, if any, of the joint venture, net of the effect of management fees paid to the Company. The Company may seek to acquire the joint venture partner's 90% interest in the future, but has no contractual right to purchase such interest. While the use of such joint venture agreements is intended to mitigate the impact on the Company of start-up losses associated the opening of new residences or otherwise, the Company may, to the extent it does not acquire the partner's interest, forgo a portion of future operating profits, if any, from the residences operated by the joint venture. The Company expects it will, from time to time, enter into additional partnering Page 13 of 21 arrangements, which may be similar to the current structure, for some of its future development projects. There can be no assurance that the Company will be able to enter into any such future arrangements or, if entered into, that such arrangements will achieve the desired results. Due to the successful completion of recent debt and equity financing, the Company expects to retain a higher percentage of its residences. Historically, the Company has relied extensively on sale/leaseback financings from REITs to finance its development efforts. The Company expects to make additional investments in its management infrastructure to further support its growth strategy. While the Company believes that the resulting effects of the recent completed offerings, the increased focus on asset ownership, its accelerated development program and anticipated additions to its corporate infrastructure will negatively impact its earnings prospects over the next 12 to 18 months, it believes that these measures will positively affect its long-term prospects. NO ASSURANCE AS TO ABILITY TO DEVELOP OR ACQUIRE ADDITIONAL ASSISTED LIVING RESIDENCES. The Company's prospects for growth are directly affected by its ability to develop and, to a lesser extent, acquire additional assisted living residences. While the Company currently plans to open 60 to 70 residences in 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 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 new facilities that will be developed during 1998 is between $160 million and $190 million; accordingly, the Company's future growth will depend on its ability to obtain additional financing on Page 14 of 21 acceptable terms. The Company will, from time to time, seek additional funding through public and/or private financing sources, including equity and/or debt financing. If additional funds are raised by issuing equity securities, the Company's stockholders may experience dilution. There can be no assurance that adequate funding will be available as needed or on terms acceptable to the Company. A lack of available funds may require the Company to delay or eliminate all or some of its development projects and acquisition plans. The Company's aggregate annual fixed debt and lease payment obligations as of March 31, 1998 totaled approximately $27.5 million (adjusted to give effect to the issuance of the 5.625% Debentures closed in April of 1998.). 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 March 31, 1998, 24.5% of the Company's properties are in Texas, 13.2% are in Oregon, 11.9% in Ohio, 9.9% are in Indiana and 9.3% in Washington; therefore, the Company is dependent on the economies of Texas, Oregon, Ohio, Indiana and Washington and, to a certain extent, on the continued funding of state Medicaid waiver programs. During the years ended December 31, 1995, 1996, 1997 and the three months ended March 31, 1998, direct payments received from state Medicaid agencies accounted for approximately 21.4%, 13.8%, 11.3% and 11.8%, respectively of the Company's revenue while the tenant-paid portion of Medicaid residents accounted for approximately 9.6%, 7.6%, 6.0% and 6.5%, respectively, of the Company's revenue during these periods. The Company expects that state Medicaid reimbursement programs will constitute a significant source of revenue for the Company in the future. The Company intends to continue developing and operating assisted living residences in other states. Adverse changes in general economic factors affecting these states' respective health care industries or in these states' laws and regulatory environment, including Medicaid reimbursement rates, could have a material adverse effect on the Company's financial condition and results of operations. DEPENDENCE ON REIMBURSEMENT BY THIRD-PARTY PAYORS. A portion of the Company's revenues will be dependent upon reimbursement from third-party payors, including state Medicaid programs and private insurers. For the years ended December 31, 1995, 1996, 1997 and the three months ended March 31, 1998, the Company received, as a percentage of total revenue, under Medicaid programs 21.4%, 13.8%, 11.3% and 11.8%, 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 15 of 21 GOVERNMENT REGULATION. Federal and state governments regulate various aspects of the Company's business. The development and operation of assisted living facilities and the provision of health care services are subject to federal, state and local licensure, certification and inspection laws that regulate, among other matters, the number of licensed beds, the provision of services, equipment, staffing (including professional licensing), operating policies and procedures, fire prevention measures, environmental matters, resident characteristics, physical design and compliance with building and safety codes. Failure to comply with these laws and regulations could result in the denial of reimbursement, the imposition of fines, suspension or decertification from the Medicare and Medicaid program and, in extreme cases, the revocation of a facility's license or closure of a facility. There can be no assurance that federal, state, or local governments will not impose additional restrictions on the Company's activities that could materially adversely affect the Company. State and local laws regulating the Company's operations vary significantly from one jurisdiction to another. In certain states in which the Company is currently developing assisted living facilities, a certificate of need ("CON") or other similar approval may be required for the acquisition or construction of new facilities, the expansion of the number of licensed units or beds or services, or the opening of a home health care agency or hospice. The Company could be adversely affected by the failure or inability to obtain such approval, changes in the standards applicable for such approval and possible delays and expenses associated with obtaining such approval. Federal and state fraud and abuse laws, such as "anti-kickback" laws and "self-referral" laws, govern certain financial arrangements among health care providers and others who may be in a position to refer or recommend patients to such providers. Although the Company has established policies and procedures that it believes are sufficient to ensure that its facilities will operate in substantial compliance with applicable regulatory requirements, there can be no assurance that such fraud and abuse laws will be interpreted in a manner consistent with the practices of the Company. PRICING PRESSURES. The health care services industry is currently experiencing market-driven reforms from forces within and outside the industry that are exerting pressure on health care and related companies to reduce health care costs. These market-driven reforms are resulting in industry-wide consolidation that is expected to increase the downward pressure on health care service providers' margins, as larger buyer and supplier groups exert pricing pressure on health care providers. The ultimate timing or effect of market- driven reforms cannot be predicted. No assurance can be given that any such reforms will not have a material adverse effect on the Company's business, results of operations, financial condition and prospects. HEALTH CARE REFORM. Health care and related services is an area of extensive and dynamic regulatory change. Changes in the law, new interpretations of existing laws, or changes in payment methodology, may have a dramatic effect on the definition of permissible or impermissible activities, the relative costs associated with doing business and the amount of reimbursement by both government and other third-party payors and may be applied retroactively. In addition, to the reforms enacted and considered by Congress from time to time, state legislatures periodically consider various health care reform proposals. Congress and state legislatures can be expected to continue to review and assess alternative health care delivery systems and payment methodologies and public debate of these issues can be expected to continue in the future. The ultimate timing or effect of legislative efforts cannot be predicted and may impact the Company in different ways. There can be no assurances that either the states or the federal government will not impose additional regulations upon the activities of the Company or HCI which might adversely affect their businesses, the financial condition, results of operations and prospects. Page 16 of 21 STAFFING AND LABOR COSTS. The Company will compete with other providers of long-term care with respect to attracting and retaining qualified personnel. The Company will also be dependent upon the available labor pool of low-wage employees. A shortage of nurses and/or trained personnel may require the Company to enhance its wage and benefits package in order to compete. No assurance can be given that the Company's labor costs will not increase, or that, if they do increase, they can be matched by corresponding increases in revenues. COMPETITION. The long-term care industry is highly competitive and the Company expects that the assisted living business, in particular, will become more competitive in the future. The Company will be competing with numerous other companies providing similar long-term care alternatives, such as home health agencies, life care at home, community-based service programs, retirement communities and convalescent centers. The Company expects that as assisted living receives increased attention and the number of states which include assisted living in their Medicaid waiver programs increases, competition will grow from new markets entrants, including publicly and privately held companies focusing primarily on assisted living. Nursing facilities that provide long-term care services are also a source of competition to the Company. Moreover, in the implementation of the Company's expansion program, the Company expects to face competition for development and acquisitions of assisted living residences. Some of the Company's present and potential competitors are significantly larger and have, or may obtain, greater financial resources than those of the Company. Consequently, there can be no assurance that the Company will not encounter increased competition in the future which could limit its ability to attract residents or expand its business and could have a material adverse effect on the Company's financial condition, results of operations and prospects. DIFFICULTIES OF MANAGING RAPID GROWTH. The Company expects that the number of residences which it owns, leases or otherwise operates will increase substantially as it pursues its growth strategy. This rapid growth will place significant demands on the Company's management resources. The Company's ability to manage its growth effectively will require it to continue to expand its operational, financial and management information systems and to continue to attract, train, motivate, manage and retain key employees. To the extent such growth is attributable to acquisitions of existing facilities or businesses, the Company's success will depend partly on its ability to integrate effectively such facilities and businesses into the Company's management, information and operating systems. If the Company is unable to manage its growth effectively, its business, financial condition and results of operations could be adversely affected. DEPENDENCE ON SENIOR MANAGEMENT AND SKILLED PERSONNEL. The Company depends, and will continue to depend, upon the services of Mr. McBride, its Chief Executive Officer, Dr. Wilson, its Chief Operating Officer and President, Ms. Marsh, its Vice President/Controller and Chief Accounting Officer, Mrs. Baldwin, its Director of Operations, Mr. Gordon, its Vice President/Treasurer, Ms. Haile, its Vice President/Financial Operations, Ms. Campbell, its Senior Vice President/General Counsel and Ms. Gorshe, its Vice President/Community Relations. The Company has entered into employment agreements with Mr. McBride and Dr. Wilson and its senior executive officers and has obtained a $500,000 key employee insurance policy covering Dr. Wilson's life. The Company is also dependent upon its ability to attract and retain management personnel who will be responsible for the day-to-day operations of each residence. The loss of the services of any or all of such officers or the Company's inability to attract additional management personnel in the future could have a material adverse effect on the Company's financial condition or results of operations. LIABILITY AND INSURANCE. The provision of health care services entails an inherent risk of liability. In recent years, participants in the long-term care industry have become subject to an increasing number of Page 17 of 21 lawsuits alleging malpractice or related legal theories, many of which involve large claims and significant defense costs. The Company currently maintains liability insurance intended to cover such claims and the Company believes that its insurance is in keeping with industry standards. There can be no assurance, however, that claims in excess of the Company's insurance coverage or claims not covered by the Company's insurance coverage (e.g., claims for punitive damages) will not arise. A successful claim against the Company not covered by, or in excess of, the Company's insurance coverage could have a material adverse effect upon the Company's financial condition and results of operations. Claims against the Company regardless of their merit or eventual outcome, may also have a material adverse effect upon the Company's ability to attract residents or expand its business and would require management to devote time to matters unrelated to the operation of the Company's business. In addition, the Company's insurance policies must be renewed annually. There can be no assurance that the Company will be able to obtain liability insurance coverage in the future or that, if such coverage is available, it will be available on acceptable terms. ENVIRONMENTAL RISKS. Under various federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real property may be held liable for the cost of removal or remediation of certain hazardous or toxic substances, including, without limitation, asbestos- containing materials, that could be located on, in or under such property. Such laws and regulations often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of the hazardous or toxic substances. The costs of any required remediation or removal of these substances could be substantial and the liability of an owner or operator as to any property is generally not limited under such laws and regulations and could exceed the property's value and the aggregate assets of the owner or operator. The presence of these substances or failure to remediate such substances properly may also adversely affect the owner's ability to sell or rent the property, or to borrow using the property as collateral. Under these laws and regulations, an owner, operator or an entity that arranges for the disposal of hazardous or toxic substances, such as asbestos-containing materials, at a disposal site may also be liable for the costs of any required remediation or removal of the hazardous or toxic substances at the disposal site. In connection with the ownership or operation of its properties, the Company could be liable for these costs, as well as certain other costs, including governmental fines and injuries to persons or properties. As a result, the presence, with or without the Company's knowledge, of hazardous or toxic substances at any property held or operated by the Company, or acquired or operated by the Company in the future, could have an adverse effect on the Company's business, financial condition and results of operations. Environmental audits performed on the Company's properties have not revealed any significant environmental liability that management believes would have a material adverse effect on the Company's business, financial condition or results of operations. No assurance can be given that existing environmental audits with respect to any other Company's properties reveal all environmental liabilities. POSSIBLE VOLATILITY OF STOCK PRICE. The market price of the Common Stock could be subject to significant fluctuations in response to various factors and events, including the liquidity of the market for the Common Stock, variations in the Company's operating results, new statutes or regulations or changes in the interpretation of existing statutes or regulations affecting the health care industry generally or assisted living residence businesses in particular. In addition, the stock market in recent years has experienced broad price and volume fluctuations that often have been unrelated to the operating performance of particular companies. These market fluctuation also may adversely affect the market price of the Common Stock. Page 18 of 21 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 12.1 Computation of Fixed Charge to Earnings Exhibit Number 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, 1998. Page 19 of 21 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 14, 1998 By: /s/ RHONDA S. MARSH ---------------------- Name: Rhonda S. Marsh Title: Vice President/Controller Chief Accounting Officer Page 20 of 21 EX-12.1 2 COMPUTATION OF FIXED CHARGES EXHIBIT 12.1 RATIO OF EARNINGS TO FIXED CHARGE:
THREE MONTHS ENDED THREE MONTHS ENDED MARCH 31, 1998 MARCH 31, 1997 ------------------ ------------------- Income (Loss) before provision for income taxes $3,074 $ 825 Add fixed charges Interest costs including amortization of debt issuance cost 268 162 ------ ------ Earnings $3,342 $ 987 ====== ====== Fixed Charges Interest expense including amortization of debt issuance cost 268 162 Capitalized interest 946 1,338 ------ ------ Total Fixed Charges 1,214 1,500 ====== ====== Ratio of Earnings to Fixed Charges 2.75 .66 Excess (Deficiency) of Earnings to Cover Fixed Charges $2,128 $ (513)
Page 21 of 21 EX-27 3 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS 3-MOS MAR-31-1997 MAR-31-1998 JAN-01-1997 JAN-01-1998 MAR-31-1997 MAR-31-1998 3,320 29,885 8,668 188 1,025 3,139 0 0 0 0 15,699 38,423 138,345 233,520 1,105 3,206 159,473 294,387 67,076 24,553 32,655 126,198 0 0 0 0 55 157 59,687 143,478 159,473 294,387 9,244 18,648 9,244 18,648 8,399 17,381 8,399 17,381 (123) (2,075) 0 0 163 268 805 3,074 141 1,168 664 1,906 0 0 0 0 0 0 664 1,906 .06 .12 .06 .12
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