Back to GetFilings.com
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20459
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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 S.E. WASHINGTON, SUITE 201
PORTLAND, OR 97216
(503) 252-6233
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
COMMON STOCK, PAR VALUE $.01 AMERICAN STOCK EXCHANGE
7% CONVERTIBLE SUBORDINATE DEBENTURES DUE AUGUST 2005 AMERICAN STOCK EXCHANGE
Securities Registered Pursuant to Section 12(g) of the Act:
Indicate by check mark whether the registrant (1) have filed all reports
required 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 the
registrant was required to file such reports), and (2) have been subject to such
filing requirements for at least the past 90 days. YES [X] NO [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K: [ ]
As of February 28, 1997, 5,515,250 shares of the registrant's Common Stock, par
- - ----------------------------------
value $.01 per share, were outstanding. The aggregate market value of the
voting stock held by non-affiliates of the registrant on such date was
approximately $89.7 million.
--------------
Part III incorporates by reference the Company's definitive proxy
statement for the
Annual Meeting of Stockholders to be held on May 22, 1997
================================================================================
PART I
ITEM 1. BUSINESS
OVERVIEW
Assisted Living Concepts, Inc. (the "Company") develops, owns, leases and
operates assisted living residences, an increasingly popular form of housing for
senior citizens who, although generally ambulatory, need help with the
activities of daily living. In addition to housing, the Company provides
personal care and support services, and makes available routine nursing services
(as permitted by applicable government regulations) designed to meet the needs
of its residents. The Company believes that this combination of housing,
personal care and support services provides a cost-efficient alternative and
provides an independent lifestyle for individuals who do not require the broader
array of medical services that nursing facilities are required by law to
provide.
The Company was founded in July 1994 by Dr. Keren B. Wilson, the Company's
Chief Executive Officer and President, to develop, own, lease and operate
assisted living residences. The Company completed its initial public offering
in November 1994 and immediately began operating five assisted living residences
containing an aggregate of 137 units. As of December 31, 1996, the Company
licensed or had certificates of occupancy for sixty-seven assisted living
residences containing an aggregate of 2,382 units. As of February 28, 1997, the
Company had certificates of occupancy for seventy-nine assisted living
residences containing an aggregate of 2,845 units.
Currently, all the Company's residences are located in small communities in
Oregon, Washington, Texas, Idaho and New Jersey. Of the seventy-eight residences
that had certificates of occupancy as of February 28, 1997, 45 residences (1,653
units) were owned and 33 residences (1,153 units) were leased. The Company is
currently developing and, to a lesser extent, seeking to acquire additional
assisted living residences in small communities in Oregon, Washington, Texas,
Idaho, New Jersey, Ohio and other states with regulatory and reimbursement
climates that the Company believes are favorable. As of February 28, 1997, the
Company had purchased land or commenced construction on twenty-one residences
(approximately 820 units). In addition, the Company has entered into land
purchase option agreements for the development of thirty-one residences. The
Company generally does not acquire sites for development until it has completed
its feasibility analysis and appropriate zoning has been obtained. Capital
expenditures for 1996, which relate primarily to the development of new
residences, were $122 million.
The Company intends to add approximately 50 to 60 residences per year in each of
1997 and 1998. The principal elements of the Company's operating growth stage
are to: (i) develop additional residences thereby increasing its market
penetration in both existing and targeted markets, (ii) service higher acuity
residents and, (iii) pursue joint venture opportunities in ancillary services
and residence development. The Company anticipates that a majority of its
resident revenues will continue to come from private pay sources. However, the
Company believes that locating residences in states with favorable regulatory
and reimbursement climates should provide a stable source of residents eligible
for Medicaid reimbursement to the extent that private pay residents are not
available and, in addition, provide the Company's private pay residents with
alternative sources of income when their private funds are depleted and they
become Medicaid eligible.
The Company is a Nevada corporation and its principal executive
offices are located at 9955 S.E. Washington, Suite 201, Portland, Oregon 97216,
telephone number (503) 252-6233.
2
INDUSTRY BACKGROUND
The long-term care industry encompasses a continuum of accommodations
and health care services that are provided primarily to the elderly. For those
among the elderly requiring limited services, home-based care in the elderly
person's home or in a retirement center offers a viable option for assistance on
an "as required" basis. Services provided by congregate and retirement centers
are often limited to meals, housekeeping and laundry. As an elderly person's
needs for assistance increase, care in an assisted living residence, where
assistance with personal care (such as dressing and bathing), support services
(such as housekeeping and laundry), and routine nursing services (such as
assistance with taking medication and health monitoring), are available, is
often preferable to home-based care. For those elderly people in need of
specialized support, rehabilitative, nutritional, respiratory, and other skilled
treatments, care in a nursing facility may be required. Generally, assisted
living residents have higher acuity levels than residents of congregate and
retirement living centers but lower acuity levels than patients in skilled
nursing facilities.
Assisted living is designed to enhance both the physical and
psychological well-being of the frail elderly by promoting their independence in
a home-like setting. The services and supervision provided are intended to
optimize the residents' abilities and foster their autonomy. Residents are
typically individuals who do not require the 24-hour skilled medical care
provided in nursing care facilities, but who are unable, for various reasons, to
live alone. The Company believes that the assisted living industry is among the
most rapidly expanding sectors of the senior care marketplace.
DEVELOPMENT
The Company is developing additional residences in Oregon, Washington,
Texas, Idaho, New Jersey, Ohio and other states. As of February 28, 1997, the
Company had commenced construction or had purchased land to begin development on
twenty-one residences.
The Company has also entered into land purchase option agreements in
connection with the acquisition of thirty-one sites which it may develop into
additional residences. The Company has made initial deposits relating to these
sites and has completed or is in the process of completing its demographic
analysis and initial architectural plans for purposes of building assisted
living residences.
The Company generally locates its residences in well-established
residential neighborhoods in smaller rural and suburban communities, where the
population typically ranges from 10,000 to 40,000 with a higher than average
percentage of middle aged or elderly individuals. To provide the appropriate
level of personal care efficiently and economically, and to ensure that
residents are not intimidated by residence size, the Company develops residences
ranging in size from 30 to 50 residential units and containing approximately
16,000 to 32,000 total square feet, with studio units comprising an average of
320 square feet and one bedrooms 450 square feet of private living space.
The Company either retains outside developers to construct residences,
or acquires newly-constructed residences from developers under "turn-key"
agreements. The Company approves all aspects of development including, among
other things, market feasibility, site selection, plans and specifications, the
proposed construction budget and selection of the architect and general
contractor. The Company estimates the average construction time for a typical
residence to be approximately five to nine months, depending upon the number of
units. The Company estimates that, once licensed, it takes approximately nine
months for each residence to achieve a stabilized occupancy level of 95% or
higher. 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 and leases
it back or otherwise finances it within four months of the commencement of
operations, the aggregate loss may increase by up to an additional $40,000.
3
SERVICES
The Company's residences offer residents a supportive, "home-like"
setting and assistance with activities of daily living. Residents are
individuals who, for a variety of reasons, cannot live alone but do not
typically need the 24-hour skilled medical care provided in nursing facilities.
Services provided to these residents are designed to respond to their individual
needs and to improve their quality of life. This individualized assistance is
available 24 hours a day, to meet both anticipated and unanticipated needs.
General services in the Company's residences include the provision of three
meals per day, laundry, housekeeping and maintenance. Available support services
include personal care and routine nursing care, social and recreational
services, transportation and other special services needed by the resident.
Personal care includes services such as bathing, dressing, personal hygiene,
grooming, as well as eating and ambulating assistance. Routine nursing services,
which are made available and are provided according to the resident's individual
need and state regulatory requirements, include assistance with taking
medication, skin care and injections. Organized activities are available for
social interaction and entertainment. Special services available include
banking, grocery shopping and pet care. The Company also provides or arranges
access to additional services beyond its provision of basic housing and related
services, including physical therapy, pharmacy services and the sale or lease of
durable medical equipment.
Although a typical package of basic services provided to a resident
includes meals, housekeeping, laundry and personal care, the Company does not
have a standard service package for all residents. Instead, it is able to
accommodate the changing needs of its residents through the use of individual
service contracts and flexible staffing patterns. The Company's multi-tiered
rate structure for the services it provides is based upon the acuity of, or
level of services needed by, each resident. Supplemental and specialized health
care services for those residents requiring 24-hour supervision or more
extensive assistance with activities of daily living are provided by third-party
providers who are reimbursed directly by the resident or a third-party payor
(such as Medicaid or long term care insurance). The Company assesses the level
of need of each resident regularly.
OPERATIONS
The day-to-day operations of each residence are managed by an on-site
program director who is responsible for the overall operation of the residence,
including quality of care, marketing, social services and financial performance.
The program director is assisted by professional and non-professional personnel,
some of whom may be independent providers or part-time personnel, including
nurses, personal service assistants, maintenance and kitchen personnel. The
nursing hours vary depending on the residents' needs. The Company consults with
outside providers, such as registered nurses, pharmacists, and dietitians, for
purposes of medication review, menu planning and responding to any special
dietary needs of its residents. Personal care, dietary services, housekeeping
and laundry services are performed primarily by personal service assistants who
are full-time employees of the Company. Maintenance services are performed by
full and part-time employees, while landscaping services are typically performed
by third-party contractors.
The Company manages its residences, which includes the development of
operating standards and the provision of recruiting, training and accounting
services. The Company utilizes regional offices that include a team leader who
oversees four to six residences and works under the supervision of a regional
manager. The team leader is responsible for monitoring and supervising all
aspects of operations in the region, including reviewing and monitoring
compliance with corporate policies and procedures, and acting as a liaison
between the residences and corporate headquarters. The regional office team
leaders oversee the day-to-day operations of the residences. Financial
oversight, including all disbursements, are managed at the corporate office.
4
Presently, the residence personnel are supported by a corporate staff
based at the Company's headquarters and three regional offices. Corporate and
regional personnel work with the program directors to establish residence goals
and strategies, quality assurance oversight, development of Company policies and
procedures, development and implementation of new programs, cash management and
treasury functions and human resource management.
COMPETITION
The long-term care industry generally is highly competitive and the
Company expects that the assisted living business in particular will become more
competitive in the future. The Company competes 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 programs increases, competition will grow from new market
entrants, including publicly and privately held companies focusing primarily on
assisted living. Nursing facilities that provide long-term care services are
also a potential source of competition for the Company. Providers of assisted
living residences compete for residents primarily on the basis of quality of
care, price, reputation, physical appearance of the facilities, services
offered, family preferences, physician referrals, and location. Some of the
Company's competitors operate on a not-for-profit basis or as charitable
organizations. Some of the Company's competitors are significantly larger than
the Company and have, or may obtain, greater resources than those of the
Company. The Company believes that there is moderate competition for less
expensive segments of the private market and for Medicaid residents in small
communities. The Company's major competitors are other long-term care facilities
within the same geographic area as its' residences because management's
experience indicates that senior citizens who move into living communities
frequently choose communities near their homes.
FUNDING FOR ASSISTED LIVING CARE
Assisted living residents or their families generally pay the cost of
care from their own financial resources. Depending on the nature of an
individual's health insurance program or long-term care insurance policy, the
individual may receive reimbursement for costs of care under an "alternative
care benefit." Government payments for assisted living have been limited. Some
state and local governments offer subsidies for rent or services for low income
elders. Others may provide subsidies in the form of additional payments for
those who receive Supplemental Security Income (SSI). Medicaid provides
coverage for certain financially or medically needy persons, regardless of age,
and is funded jointly by federal, state and local governments. Medicaid
reimbursement varies from state to state. Although a majority of the Company's
revenues come from private payors, the cost structure of the residences has
historically been, and is expected to continue to be, sufficiently low so that
the residences are able to operate profitably if all of their revenues are
derived through Medicaid reimbursements.
In 1981, the federal government approved a Medicaid waiver program
called Home and Community Based Care which was designed to permit states to
develop programs specific to the healthcare and housing needs of the low-income
elderly eligible for nursing home placement (a "Medicaid Waiver Program"). In
1986, Oregon became the first state to use federal funding for licensed assisted
living services through a Medicaid Waiver Program authorized by the Health Care
Financing Administration ("HCFA"). Under a Medicaid Waiver Program, states
apply to HCFA for a waiver to use Medicaid funds to support community-based
options for the low-income elderly who need long-term care. These waivers
permit states to reallocate a portion of Medicaid funding for nursing facility
care to other forms of care such as assisted living. In 1994, the federal
government implemented new regulations which empowered states to further expand
their Medicaid Waiver Programs and eliminated restrictions on the amount of
Medicaid funding states could allocate to community-based care, such as assisted
living. A limited number of states including Oregon, New Jersey, Texas,
Washington and other states currently
5
have operating Medicaid Waiver Programs that allow them to pay for assisted
living care. Without a Medicaid Waiver Program, states can only use federal
Medicaid funds for long-term care in nursing facilities.
During the year ended December 31, 1996 and 1995, direct payments
received from state Medicaid agencies accounted for approximately 13.8% and
21.4%, respectively of the Company's revenue while the tenant-paid portion of
Medicaid residents accounted for approximately 7.6% and 9.6%, 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.
GOVERNMENT REGULATION
The Company's assisted living residences are subject to certain state
regulations and licensing requirements. In order to qualify as a state licensed
facility, the Company's residences must comply with regulations which address,
among other things, staffing, physical design, required services and resident
characteristics. As of February 28, 1997, the Company has obtained licenses in
Oregon, Washington, Texas, Idaho, Ohio and New Jersey and expects that it will
obtain licenses in other states as required. The Company's residences are also
subject to various local building codes and other ordinances, including fire
safety codes. These requirements vary from state to state and are monitored to
varying degrees by state agencies.
The Company believes that its residences are in substantial compliance
with all applicable regulatory requirements. However, in the ordinary course of
business, a residence can be cited for a deficiency. In such cases, the
appropriate corrective action is taken. No actions are currently pending on any
of the Company's residences.
As a provider of services under the Medicaid program in the United
States, the Company is subject to Medicaid fraud and abuse law, which prohibits
any bribe, kickback, rebate or remuneration of any kind in return for the
referral of Medicaid patients, or to induce the purchasing, leasing, ordering or
arranging of any goods or services to be paid for by Medicaid. Violations of
these laws may result in civil and criminal penalties and exclusions from
participation in the Medicaid program. The Inspector General of the Department
of Health and Human Services issued "safe harbor" regulations specifying certain
business practices which are exempt from sanctions under the fraud and abuse
law. Several states in which the Company operates or intends to operate have
laws that prohibit certain direct or indirect payments or fee-splitting
arrangements between health care providers if such arrangements are designed to
induce or encourage the referral of patients to a particular provider. The
Company at all times attempts to comply with all applicable fraud and abuse
laws. There can be no assurance that administrative or judicial interpretation
of existing laws or regulations or enactment's of new laws or regulations will
not have a material adverse effect on the Company's results of operations or
financial condition.
Currently, assisted living residences are not regulated as such by the
federal government. State standards required of assisted living providers are
less in comparison with those required of other licensed health care operators.
For instance, the states initially targeted for development/expansion by the
Company do not set staffing ratios. Current Medicaid regulations provide for
comparatively flexible state control over the licensure and regulation of
assisted living residences. There can be no assurance that federal regulations
governing the operation of assisted living residences will not be implemented in
the future or that existing state regulations will not be expanded.
6
EMPLOYEES
As of February 28, 1997 the Company had approximately 1,395 employees,
of which approximately 487 were whom were employed in full-time employees and
1,084 were part-time employees. None of the Company's employees are represented
by any labor union. The Company believes that its labor relations are good.
7
ITEM 2. PROPERTIES
The following chart sets forth, as of February 28, 1997, the location,
number of units and the date on which operations commenced for the Company's
owned and leased properties.
Licensure
Residence Location Ownership Units Date
--------- -------- --------- ----- ----------
OREGON
Rackleff Canby Leased (1) 25 December 1990
Aspen Madras Owned 27 March 1991
Juniper Pendleton Leased (1) 26 April 1991
Huffman Newberg Leased (1) 26 October 1992
Hillside Lincoln City Owned 33 October 1994
Brookside Redmond Leased (1) 37 March 1995
Davenport Silverton Owned 30 July 1995
Carriage Prineville Owned 30 October 1995
Parkhurst Hood River Owned 30 October 1995
Awbrey Bend Owned 46 November 1995
Adams Myrtle Creek Leased (1) 34 March 1996
Spencer Newport Owned 36 June 1996
Macklyn Brookings Owned 36 July 1996
Astor Astoria Owned 28 August 1996
Jackson Talent Owned 36 October 1996
Linkville Klamath Falls Owned 35 October 1996
Josephine Grants Pass Leased (1) 45 November 1996
Douglas Sutherlin Leased 30 January 1997
Grace Estacada Owned 30 January 1997
IDAHO
Mallory Idaho Falls Owned 39 January 1997
Clearwater Nampa Owned 39 February 1997
Rosewind Garden City Owned 48 (2)
WASHINGTON
Chenoweth Kennewick Leased (1) 36 December 1995
Orchard Grandview Leased (1) 36 February 1996
Pioneer Walla Walla Leased (1) 36 February 1996
Mountainview Camas Leased (1) 36 March 1996
Lexington Vancouver Leased (1) 44 June 1996
Crawford Kelso Owned 40 August 1996
Colonial Battleground Owned 40 November 1996
Cascade Enumclaw Owned 40 (2)
Syndey Port Orchard Owned 39 (2)
TEXAS
Oakwood Marshall Leased (1) 30 July 1995
Alpine Longview Leased (1) 30 September 1995
Preston Sherman Leased (1) 30 October 1995
Cedarview Gun Barrel City Leased (1) 30 October 1995
Winkler Carthage Leased (1) 30 October 1995
Lakeland Athens Leased (1) 30 November 1995
Harrison Greenville Leased (1) 30 November 1995
Angelina Jacksonville Leased (1) 39 December 1995
8
Wheeler Gainesville Leased (1) 30 January 1996
Hickory Levelland Leased (1) 30 January 1996
Hopkins Sulphur Springs Owned 30 January 1996
Katy Denison Owned 30 January 1996
Wren Cleburne Owned 36 January 1996
Hoyt Sweetwater Leased (1) 30 March 1996
Sabine Orange Leased (1) 36 March 1996
Potter Amarillo Leased (1) 50 March 1996
Lucas Beaumont Leased (1) 50 April 1996
Neches Lufkin Leased (1) 39 May 1996
Rose Port Arthur Owned 50 May 1996
Marcy Big Springs Owned 38 June 1996
Austin Nacogdoches Leased (1) 30 June 1996
Millican Bryan Leased (1) 30 June 1996
Mackenzie Lubbock Leased (1) 50 June 1996
Lakewell Mineral Wells Owned 30 June 1996
Bradfield Mesquite Leased (1) 50 June 1996
Strake Conroe Leased (1) 38 July 1996
Santa Fe Plainview Owned 36 July 1996
Conner Canyon Leased (1) 30 June 1996
Meredith Pampa Owned 36 August 1996
Azalea Hendersen Owned 30 6 September 199
Bluebonnet College Station Owned 39 October 1996
Arbor Wichita Falls Owned 50 October 1996
Chisolm Abilene Owned 38 October 1996
Mercer Rowlett Owned 36 October 1996
Cimarron Midland Owned 38 December 1996
Redbud McKinney Owned 39 January 1997
Wildflower Temple Owned 40 January 1997
OHIO
Carlisle Bucyrus Owned 35 January 1997
Kings Defiance Owned 39 February 1997
Oakley Greenville Owned 39 February 1997
Campbell Bellefontaine Owned 35 (2)
DeWolfe Marion Owned 39 (2)
Taylor Findlay Owned 39 (2)
Blanchard Kenton Owned 35 (2)
Amanda Lima Owned 39 (2)
ARIZONA
Jasmine Lake Havasa Owned 39 (2)
NEW JERSEY
Baker Vineland Owned 39 January 1997
(1) The leases range from ten to twenty year terms with annual rentals of
approximately $6.8 million. The Company is responsible for all costs
including repairs to the residence, property taxes, and other direct
operating costs of the residences. Building rent is recorded as incurred
for those residences which have annual increases in the consumer price
index.
(2) The Company has received a certificate of occupancy on these residences and
is pending licensure from the prospective states.
9
The Company also leases in total approximately 8,000 square feet of office space
for the Corporate and Regional offices in Portland, Oregon, Dallas, Texas and
Dublin, Ohio. The Company is developing additional residences in Oregon,
Washington, Texas, Idaho, New Jersey, Ohio and four other states. As of February
28, 1997, the Company had commenced construction on or had purchased land for
the development of twenty-one residences and entered into land purchase
agreements to develop thirty-one additional residences.
Due to the recent construction of the Company's owned and leased
residences, the Company believes such residences are suitable and adequate for
the conduct of its business and operations.
ITEM 3. LEGAL PROCEEDINGS
As of February 28, 1997, the Company was not a party to any legal
proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
10
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock, par value $0.01 (the "Common Stock"), is listed
and traded on the American Stock Exchange under the symbol "ALF." The following
table sets forth the high and low closing sales prices of the common stock, as
reported by the AMEX, for the periods indicated.
1996 PRICE RANGE 1995 PRICE RANGE OF
OF OF
COMMON STOCK COMMON STOCK
HIGH LOW HIGH LOW
------- ------ ------- ------
Fiscal year ended December 31:
1st Quarter $20.18 $13.25 $9.25 $7.50
2nd Quarter 22.25 17.75 11.88 8.00
3rd Quarter 20.25 17.25 16.50 10.00
4th Quarter 19.88 14.38 15.88 12.38
On February 28, 1997, the closing price for the common stock, as reported
by AMEX, was $18.625 per share. As of such date, the Company had approximately
44 holders of record of its common stock. The Company is unable to estimate the
number of additional stockholders whose shares are held for them in street name
or nominee accounts.
The Company's current policy is to retain any earnings to finance the
operations and expansion of the Company's business. In addition, certain
outstanding indebtedness and certain lease agreements restrict the payment of
cash dividends. It is anticipated that the terms of future debt financing may
do so as well. Therefore, the payment of any cash dividends on the Common Stock
is unlikely in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected historical condensed financial data
for the Company and the Predecessor as of the dates and for the periods
indicated. The Predecessor consisted of Assisted Living Facilities, Inc., an S-
corporation; Madras Elder Care, a partnership; and Lincoln City Partners, a
partnership, which, prior to December 1, 1994, collectively owned the five
residences operated by the Company in December 1994. The selected financial
data below should be read in conjunction with the financial statements of the
Predecessor and the Company, including the notes thereto, and the information in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" on pages 13 to 20.
11
The Company Predecessor
--------------------------------------------------------------------------------
Eleven
One Month Months
Year ended Ended Ended
December 31, December 31, December 31, Year ended December 31,
1996 1995 1994(3) 1994(1) 1993 1992
---------------------------------------------------------------------------------
(in thousands except per share data
STATEMENT OF OPERATIONS:
Revenues...................................... $ 18,949 $ 4,067 $ 212 $1,841 $1,884 $1,377
-------- ------- ------- ------ ------ ------
Operating expenses:
Residence operating expenses................. 12,116 2,779 125 1,127 1,090 908
Management fees.............................. - - - 93 92 69
Corporate general and administrative......... 1,649 1,252 152 - - -
Building rentals............................. 4,152 798 42 - - -
Depreciation and amortization................ 990 296 13 105 132 93
-------- ------- ------- ------ ------ -----
Total operating expenses.................. 18,907 5,125 332 1,325 1,314 1,070
-------- ------- ------- ------ ------ -----
Operating income (loss)....................... 42 (1,058) (120) 516 570 307
Interest and other expense (income), net...... (107) (483) (56) 285 309 242
-------- ------- ------- ------ ------ -----
Net income (loss)............................. $ 149 $ (575) $ (64) $ 231 $ 261 500
======== ======= ======= ====== ====== =====
UNAUDITED PRO FORMA DATA:
Net income (loss)............................. $ 231 $ 261 $60
Pro forma provision for income taxes (2)...... 85 67 -
------ ------ -----
Pro forma net income (loss)................... $ 146 $ 194 $60
====== ====== =====
Net income (loss) per share (primary)......... $.03 $ (0.19) $ (0.02)
Weighted average common shares outstanding
(primary)..................................... 4,500 3,000 3,000
Weighted average common shares outstanding
(fully-diluted0............................... 5,646
BALANCE SHEET DATA:
Working capital............................... $(26,372) $ (5,167) $13,122 $ 299 $ 351 $109
Total assets.................................. 130,507 53,546 17,903 5,699 4,110 3,965
Long-term debt, excluding current portion..... 32,683 24,553 1,101 5,266 3,700 3,703
Shareholders equity........................... 59,059 15,644 16,219 197 263 105
- - --------------------
(1) Includes approximately one month of operations for Hillside House, which
opened in October 1994.
(2) The Predecessor was exempt from U.S. federal and state income taxes as a
result of its partnership and subchapter S status. The financial data
reflects the income tax expenses that would have been recorded had the
Predecessor not been exempt from paying such income taxes. The pro forma
financial data includes the effect of the Company adopting Statement of
financial Accounting Standards (SFAS) No. 109.
(3) The Company commenced operating the residences on December 1, 1994.
12
QUARTERLY FINANCIAL DATA (UNAUDITED)
1996 QUARTERLY FINANCIAL DATA 1995 QUARTERLY FINANCIAL DATA
-----------------------------------------------------------------------------------------------------
RESULTS OF OPERATION 1ST 2ND 3RD 4TH YEAR TO 1ST 2ND 3RD 4TH YEAR TO
QTR QTR QTR QTR DATE QTR QTR QTR QTR TO DATE
------ ------- ------- ------ -------- ------ ------- ------- --------- -----------
Revenue $2,750 $3,742 $5,171 $7,286 $18,949 $ 682 $ 793 $ 977 $1,615 $ 4,067
Operating income (loss) (178) (93) (41) 354 42 (183) (149) (249) (477) (1,058)
Net income (loss) (187) 16 (238) 558 149 (27) (45) (160) (343) (575)
Weighted average
Common shares outstanding 3,005 3,013 5,265 5,585 4,500 3,000 3,000 3,000 3,000 3,000
Net income (loss) per share $(.06) $ .01 $(.05) $ .10 $.03 $(.01) $(.01) $(.05) $(.11) $(.19)
(1)
(1) Quarter net loss per share amounts do not add to the full year total due to
rounding.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Revenue consists 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) predecessor costs incurred under
management agreements whereby a management fee equal to 5% of revenue was
charged by Concepts in Community Living, Inc. ("CCL Sub Inc.") for residence
management and administrative support, (iii) general and administrative expenses
consisting of corporate and support functions such as legal, accounting and
other administrative expenses, (iv) building rentals, (v) depreciation and
amortization.
PREDECESSOR
The historical financial statements for the eleven months ended November
30, 1994 and years ended December 31, 1993 and 1992 represent the combined
historical results of operations and financial condition of the Predecessor. The
Predecessor consists of the entities which, prior to December 1, 1994, owned and
operated residences now operated by the Company.
THE COMPANY
At the closing of the initial public offering in November, 1994, the
Company began operating five assisted living residences located in Oregon. As of
December 31, 1996, the Company was operating or had received a Certificate of
Occupancy on sixty-seven residences of which fifty-one had operating results.
In addition, the Company had purchased or had begun construction on twenty-one
parcels of land to develop assisted living residences and had also entered into
agreements pursuant to which, it may purchase, subject to completion of due
diligence and various other conditions, thirty-one other sites for development.
As of February 28, 1997, the Company had seventy-eight residences with
Certificates of Occupancy.
Operating results for the year ended December 31, 1996, including the
operating results of fifty-one residences and the Company's corporate overhead,
are not necessarily indicative of the Company's future operating financial
performance as the Company intends to significantly expand its operating base of
residences in 1997 and 1998. Based on the Company's development schedule, the
number of
13
residences planned to open in 1997 ranges from 50 to 60. 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 and leases it back or
otherwise finances it within four months of the commencement of operations, the
aggregate loss may increase by up to an additional $40,000. The Company
estimates that the aggregate losses to be incurred during 1997 due to the
opening buildings will range from $.5 million to $2.4 million.
The following table sets forth, for periods presented, the number of total
residences and units operated, average occupancy rates and the sources of
revenue for the Company and the Predecessor. 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".
The Company Predecessor
-------------------------------------------------------- -------------------------------
One month Eleven months
Year ended Year ended ended ended Year ended
December 31, December 31, December 31, November 30, December 31,
1996 1995 1994 1994 1993
-------------- ----------------- ------------------ -------------- -------------
Residences operated
(end of period) 51 19 5 5 4
Units operated (End of period) 1,768 595 137 137 104
Average occupancy rate 80.4% 82.3% 97.0% 96.4% 94.8%
Source of Revenue
Medicaid State Portion 13.8% 21.4% 27.0% 29.0% 27.0%
Medicaid Resident Portion 7.6% 9.6% 11.9% 13.0% 12.0%
Private 78.6% 69.0% 61.1% 58.0% 61.0%
-------------- ------------------ ------------------ -------------- -------------
Total 100.0% 100.0% 100.0% 100.0% 100.0%
============== ================== ================== ============== =============
The following table set forth, for the periods presented for Stabilized
Residences, the total number of residences and units operated, average occupancy
rates and the sources of revenue for the Company and the Predecessor.
Stabilized Residences are defined as those residences which were operating for
more than nine months prior to the beginning of the period or had achieved a 95%
occupancy rate as of the beginning of the reporting period.
The Company Predecessor
--------------------------------------------------- -----------------------------
One month Eleven months
Year ended Year ended ended ended Year ended
December 31, December 31, December 31, November 30, December 31,
1996 1995 1994 1994 1993
--------------- ------------- --------------- ------------- -------------
Residences operated
(end of period) 7 5 4 4 4
Units operated (End of period) 204 137 104 104 104
Average occupancy rate 96.5% 99.1% 100.0% 99.2% 94.8%
Source of Revenue:
Medicaid State Portion 19.9% 23.9% 28.4% 28.9% 27.0%
Medicaid Resident Portion 11.5% 11.3% 12.1% 13.2% 12.0%
Private 68.6% 64.8% 59.5% 57.9% 61.0%
--------------- ------------ --------------- ------------- -------------
Total 100.0% 100.0% 100.0% 100.0% 100.0%
=============== ============ =============== ============= =============
14
The following table sets forth, for the periods presented for Start-up
Residences, the total number of residences and units operated, average occupancy
rates and the sources of revenue for the Company and the Predecessor. Start-up
Residences are defined as those residences which were operating for less than
nine months prior to the beginning of the period and had not achieved a 95%
occupancy rate as of the beginning of the reporting period.
The Company Predecessor
----------------------------------------------------- ---------------------------------
One month Eleven months
Year ended Year ended ended ended Year ended
December 31, December 31, December 31, November 30, December 31,
Start-up Residences 1996 1995 1994 1994 1993
- - ------------------------------ ------------- ------------- --------------- ---------------- --------------
Residences operated
(end of period) 44 2 1 1 -
Units operated (End of period) 1,564 70 33 33 -
Average occupancy rate 76.9% 85.5% 87.5% 87.5% -
Source of Revenue:
Medicaid State Portion 11.2% 27.8% 21.3% 36.4% -
Medicaid Resident Portion 6.0% 11.7% 10.6% - -
Private 82.8% 60.5% 68.1% 63.6% -
-------------- ------------- ---------------- ---------------- --------------
Total 100.0% 100.0% 100.0% 100.0% -
============== ============= ================ ================ ==============
The following table sets forth, for the periods presented, the results of
operations for Stabilized Residences (in thousands).
The Company Predecessor
------------------------------------------------- -------------------------------
One month Eleven months
Year ended Year ended ended ended Year ended
December 31, December 31, December 31, November 30, December 31,
Stabilized Residences 1996 1995 1994 1994 1993
- - ------------------------------ ------------ --------------- --------------- -------------- ------------
Revenue $4,084 $2,699 $165 $1,819 $1,884
Residence operating expenses 2,412 1,667 96 1,073 1,090
------------ --------------- --------------- ------------- ------------
Residence operating income 1,672 1,032 69 746 794
Management fees - - - 90 92
Building rentals 780 500 42 - -
Depreciation and amortization 120 116 4 100 132
------------ --------------- --------------- ------------- ------------
Total other operating expenses 900 616 46 190 224
------------ --------------- --------------- ------------- --------------
Operating income 772 416 23 556 570
Other interest/income expense net 217 147 7 285 309
------------ --------------- --------------- ------------- ------------
Income before taxes $ 555 $ 269 $ 16 $ 271 $ 261
============ =============== =============== ============= =============
The following tables sets forth, for the periods presented, the results of
operations for Start-up Residences (in thousands).
The Company Predecessor
------------------------------------------------- -------------------------------
One month Eleven months
Year ended Year ended ended ended Year ended
December 31, December 31, December 31, November 30, December 31,
Start-up Residences 1996 1995 1994 1994 1993
- - --------------------------------- ------------ --------------- --------------- -------------- ------------
Revenue $14,865 $1,368 $47 $22 $-
Residence operating expenses 9,704 1,112 29 54 -
------------ --------------- --------------- ------------- ------------
Residence operating income 5,161 256 18 (32) -
Management fees - - - 3 -
Building rentals 3,372 298 - - -
Depreciation and amortization 809 180 9 5 -
------------ --------------- --------------- ------------- ------------
Total other operating expenses 4,181 478 9 8 -
------------ --------------- --------------- ------------- --------------
Operating income 980 (222) 9 (40) -
Other interest/income expense net 603 4 1 23 -
------------ --------------- --------------- ------------- ------------
Income before taxes $ 377 $ 266 $ 8 $(63) $-
============ =============== =============== ============= =============
15
The following table sets forth, for the periods presented, the results of
operations for the five residences which were operating for both periods in
their entirety (in thousands).
Year ended Year ended
Same Store Residences December 31, 1996 December 31, 1995
- - ----------------------------------- --------------------------------------
Revenue $2,823 $2,669
Residence operating expenses 1,641 1,667
------ ------
Residence operating income 1,182 1,032
Management fees - -
Building rentals 533 500
Depreciation and amortization 115 116
------ ------
Total other operating expenses 648 616
------ ------
Operating income 534 416
Other interest/income expense net 217 147
------ ------
Income before taxes $ 317 $ 269
====== ======
RESULTS OF OPERATIONS
THE COMPANY
Year ended December 31, 1996 to year ended December 31, 1995
The Company had net income of $149,000 or $.03 per share, on revenue of
$18.9 million for the year ended December 31, 1996, compared to a net loss of
$575,000 or $.19 per share, on revenues of $4.1 million for the year ended
December 31, 1995. The Company incurred a one-time charge of $426,000 during
1996 for the exchange of 405,666 shares of common stock on $6,085,000 of 7%
convertible debentures. The Company's net income prior to this one-time charge
is $574,000 or $.13 per share.
Revenue Revenue was $18.9 million for the year ended December 31, 1996 compared
to $4.1 million for the year ended December 31, 1995. The average rate per
resident per month for the five facilities which were open through both 1996 and
1995 was $1,735 for the year ended December 31, 1996, compared to $1,631 for the
year ended December 31, 1995. The increase in revenue and the decline in the
average rent was due primarily to the additional 32 residences open during the
year ended 1996. The payments from Medicaid programs comprised approximately
13.8% of the Company's revenue for the year ended December 31, 1996.
Residence Operating Expense Residence operating expenses were $12.1 million for
the year ended December 31, 1996 compared to $2.8 million for the year ended
December 31, 1995 which represents an increase of 332%. The increase is due to
the growth in the number of residences as discussed above along with the start-
up costs relating to the 32 additional residences which commenced operations
during 1996. At December 31, 1996 the Company had received certificates of
occupancy on sixty-seven residences with fifty-one experiencing operating
results compared to the twenty-five residences opened as of December 31, 1995
with nineteen residences experiencing operating results.
Corporate General and Administrative Corporate general and administrative
expenses for the year ended December 31, 1996 was $1.6 million compared to $1.3
million for 1995. This increase is a direct result of additional staffing to
cover the increase in corporate activity, travel associated with new residences
located in other states, and the establishment of the regional offices.
16
BUILDING RENTALS Building rentals for the year ended December 1, 1996 was $4.2
million, compared to the year ended December 1, 1995 of $798,000 which
represents an increase of 426%. The increase in building rentals is directly
related to the additional twenty-two sale leaseback transactions completed
during 1996. The Company ended the year with thirty-one leases compared to the
nine leases at the end of 1995.
Depreciation and Amortization Deprecation and amortization for the year ended
December 31, 1996 was $990,000, compared to the depreciation for the year ended
December 31, 1995 of $296,000 which represents an increase of 234%. This
increase is the result of an additional fourteen facilities that were developed
by the Company in 1996 and were still owned as of December 31, 1996.
Interest and Other Expense (Income)-Net Interest cost incurred for the year
ended December 31, 1996 was $2.2 million compared to $673,000 for the year ended
December 31, 1995. The Company capitalized $2.2 million and $577,000 of
interest incurred during construction for the years ended December 31, 1996 and
1995, respectively. Interest income for the year ended December 31, 1996 was
$455,000 compared to $579,000 for the year ended December 31, 1995. In
September 1996, $6,085,000 of the $20,000,000 7% Convertible Subordinated
Debentures due August 15, 2005 were converted to 405,666 shares of the Company's
common stock. The Company incurred a one-time charge of $426,000 in connection
with the conversion. Interest and Other Expense (Income) - Net for the year
ended December 31, 1996 was ($107,000) compared to December 31, 1995 of
($483,000) which is mainly due to the one-time charge incurred in the conversion
of convertible subordinated debentures for common stock.
Net Income (Loss) The Company achieved net income of $149,000 or $.03 per share
for the year ended December 31, 1996, compared a net loss of $575,000, or $.19
per share for the year ended December 31, 1995. This is due to the number of
residences opened in 1996 and the stabilization of those residences opened in
1995.
Year ended December 31, 1995 to period ended December 31, 1994
The Company incurred a net loss of $575,000 or $.19 per share, on revenue
of $4,067,000 for the year ended December 31, 1995. These losses resulted
primarily from an increase in corporate overhead, including additional staffing
necessary to accommodate the Company's expansion plan to develop additional
residences in 1995 and 1996 and initial operating losses of residences which
commenced operations during the year. For the one month ended December 31,
1994, the Company incurred a net loss $64,000, or $(.02) per share, on revenues
of $212,000.
Revenue Revenue was $4,067,000 for the year ended December 31, 1995 compared to
$212,000 for the one month December 31, 1994 and $1,841,000 for the eleven
months ended November 31, 1994 for a combined total of $2,053,000, which
represents an increase of 98% which is the direct result of the additional
fourteen residences which commenced operations during 1995. The average rate
per month for the five facilities which were open for one year or more at
December 31, 1995 was $1,631, compared to $ 1,592 for the month ended December
31, 1994. The increase was due to a combination of increased service care
levels and approved rate increases. The average rate for all residences for the
year ended December 31, 1995 was $1,588, which reflects the effects of the
additional fourteen residences opened by the Company during 1995. The payments
from Medicaid programs comprised approximately 21.4% of the Company's
revenue for the year ended December 31, 1995.
17
Residence Operating Expense Residences operating expenses were $2,779,000 for
the year ended December 31, 1995 compared to $125,000 for the one month ended
December 31, 1994 and $1,127,000 for the eleven months ended November 31, 1994
for a combined total of $1,252,000 which represents an increase of 122%. The
increase is due to the increase in revenues as discussed above along with the
start-up costs relating to the fourteen additional residences which commenced
operations during 1995. At December 31, 1995 the Company operated twenty-five
residences with nineteen experiencing operating results compared to the five
operating residences at December 31, 1994.
Corporate General and Administrative Corporate general and administrative
expenses for the year ended December 31, 1995 was $1,252,000 compared to the one
month ended December 31, 1994 of $152,000. This increase is a direct result of
additional staffing to cover the increase in development activity, travel
associated with new residences located in other states, and the establishment of
the corporate office.
Building Rentals Building rentals were $798,000 for the year ended December 31,
1995 which represents rental on nine residences of which four were owned by the
Predecessor and now are leased by the Company. Five of the nine residences were
sold in sale and leaseback transactions during 1995.
Depreciation and Amortization Deprecation and amortization for the year ended
December 31, 1995 was $296,000, compared to the depreciation for the one month
ended December 31, 1994 of $13,000 and eleven months ended November 30, 1994 of
$105,000 for a combined total of $118,000 which represents an increase of 151%.
This increase is the result of an additional 16 facilities that were developed
by the Company in 1995 and were still owned as of December 31, 1995. In
addition, two residences which were leased in October of 1995 experienced two
months and one month of depreciation.
Interest Expense (Income)-Net Interest expense for the year ended December 31,
1995 was $96,000 which represents interest on the loans on two initial buildings
purchased from the Predecessor. Interest income of $579,000 was earned on
investment of corporate cash from the proceeds of the initial public offering in
1994 and the Company's private placement in August of 1995.
Net Income (Loss) The Company incurred a net loss of $575,000 or $.19 per share
for the year ended December 31, 1995. This is due to the number of residences
opened in 1995 and the level of development activity currently being experienced
by the Company. The Company anticipates an initial loss of $30,000 to $50,000
per residence to be incurred within the first three to four months of the
residence opening.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, the Company had negative working capital of $26.4
million. This is mainly due to construction draws of approximately $16 million
and interim construction financing of $18.9 million that the Company plans to
convert within six months to long-term financing.
Net cash used in investing activities for the year ended December 31, 1996,
totaled approximately $80 million which represents investments in new site
development in Oregon, Washington, Texas, Idaho, New Jersey and Ohio of
approximately $122 million. This amount is offset by $50 million received from
the sale of twenty-two residences in sale and leaseback transactions and funds
held in trust of $8.5 million pending licensure on five Washington residences.
18
Net cash provided by financing activities totaled $70.2 million during the
year ended December 31, 1996. The Company completed $14.4 million in mortgage
financing on eight residences, three with the State of Oregon and five with the
State of Washington. In addition, the Company completed mortgage financing on
eight residences totaling $18.9 million. The Company completed in July of 1996 a
$39.8 million common stock offering (netting the Company approximately $37.2
million).
The Company intends to utilize additional financing to develop additional
residences in 1997. The Company intends to seek additional long-term financing
through low-cost state bond financing, temporary mortgage financing and sale and
leaseback transactions on properties in Washington, Texas, Idaho, New Jersey and
Ohio. As of February 28, 1997, the Company had obtained $36.4 million in
mortgage financing on sixteen additional residences in Ohio, Idaho and Oregon.
As of February 28, 1997, the Company had started construction or had
purchased land for development on twenty-one parcels of land in Washington, New
Jersey, Ohio, Arizona, and Idaho for a total of 820 units. In addition, the
Company has also entered into agreements pursuant to which, it may purchase,
subject to completion of due diligence and various other conditions, thirty-one
undeveloped sites for an aggregate purchase price of $4.6 million. The Company
has paid initial deposits relating to these sites and has completed or is in the
process of completing the demographic analyses and initial architectural plans
for purposes of building assisted living residences. In addition, the Company
has entered into agreements to lease three residences in Oregon, which are
currently under development, as well as a management agreement for one
residence.
Capital expenditures for 1997 are estimated to total approximately $140
million to $168 million, related primarily to the development of additional
residences. The Company has received a $98.7 million commitments from several
health care REITs, to finance 40 residences through sale and leaseback
transactions. The Company anticipates being able to continue to utilize tax-
exempt bond financing for approximately $49 million from the States of Oregon,
Ohio, Idaho and Washington. The Company has agreed in principle subject to
written confirmation for the sale leaseback of an additional $25 million. The
Company does not anticipate any significant capital expenditures within the
foreseeable future with respect to the residences acquired in 1994, 1995 and
those currently operating or those pending licensure as of December 31, 1996.
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 December 31, 1996, the Company had invested excess cash balances in
short-term certificates of deposit. The Company intends to satisfy future
capital requirements for its development activities by various means, including
financing obtained from sale and leaseback transactions, construction financing
and long-term state bond financing with third parties and, to the extent
available, cash generated from operations.
INFLATION
Management believes that the Company's operations have not been materially
adversely affected by inflation. The Company expects salary and wage increases
for its skilled staff will continue to be higher than average salary and wage
increases, as is common in the health care industry. The Company expects that
it will be able to offset the effects of inflation on salaries and other
operating expenses by increases in rental and service rates, subject to
applicable restrictions with respect to services that are provided to residents
eligible for Medicaid reimbursement.
RISK FACTORS
Except for the historical information contained herein, the matters
discussed herein are forward-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 differenct from any future results, performance or achievements
expressed or implied by such forward-looking statements. The following
discussion highlights some of these risks and others are discussed elsewhere
herein or in other documents filed by the Company with the Securities and
Exchange Commission.
LIMITED OPERATING HISTORY; ANTICIPATED OPERATING LOSSES. The Company has a
limited operating history. The Company realized net income of $149,000 for the
year ended December 31, 1996, a loss of $575,000 for the year ended December 31,
1995 and a loss of $64,000 for the one month ended December 31, 1994. There
can be no assurance that losses will not be incurred in the future. The Company
19
anticipates that each residence will have an operating loss (prior to
depreciation, rent or interest, if any) of $10,000 during the first three to
four months of operation. To the extent the Company sells a residence and leases
it back or otherwise finances it within four months of the commencement of
operations, the aggregate loss may increase by up to an additional $40,000. The
Company currently plans to open 50 to 60 residences in 1997 of which eight had
received certificates of occupancy by February 28, 1997. The Company estimates
that the aggregate losses to be incurred during 1997 due to the of opening new
buildings will range from $.5 million to $2.4 million. The success of the
Company's future operations is directly tied to the expansion of its operational
base. There can be no assurance that the Company will not experience unforeseen
expenses, difficulties, complications and delays in connection with the
expansion of its operational base which could have a material adverse effect on
the Company's financial condition and results of operations.
NO ASSURANCE AS TO ABILITY TO DEVELOP OR ACQUIRE ADDITIONAL ASSISTED LIVING
RESIDENCES. The Company's prospects for growth are directly affected by its
ability to develop and, 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
during this time frame, or, that they will be successful once 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 facilities
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 compete 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 change 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 residences 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 or 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. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources".
21
The Company's aggregate annual fixed debt and lease payment obligations
currently total approximately $11.9 million. These fixed payment obligations
will significantly increase as the Company pursues its development plan.
Failure to meet these obligations may result 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 that future development of residences may be financed with
construction loans, and, therefore, 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. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources".
GEOGRAPHIC CONCENTRATION; DEPENDENCE ON STATE MEDICAID WAIVER PROGRAMS
As of February 28, 1997, approximately 46.8% of the Company's properties are
located in the State of Texas and approximately 24.1% are located in the State
of Oregon; therefore, the Company is dependent on the economies of Texas and
Oregon and, to a certain extent, on the continued funding of state Medicaid
waiver programs. The Company has operated residences in Oregon since December
1994. In addition, the Company began operating residences in Texas and
Washington in July 1995 and December 1995, respectively. During the years ended
1996 and 1995, direct payments received from state Medicaid agencies accounted
for approximately 13.8% and 21.4%, respectively of the Company's revenue while
the tenant-paid portion of Medicaid residents accounted for approximately 8% and
10% of the Company's revenue during these periods. The Company expects that
State Medicaid reimbursement programs will constitute a significant source of
revenue for the Company. The Company intends to continue developing and
operating assisted living residences in other states. Adverse changes in general
economic factors affecting these states' respective health care industries or in
these states' laws and regulatory environment, including Medicaid reimbursement
rates, could have a material adverse effect on the Company's financial condition
and results of operations.
POSSIBLE VOLATILITY OF STOCK PRICE The market price of the Common Stock
could be subject to significant fluctuations in response to various factors and
events, including the liquidity of the market for the Common Stock, variations
in the Company's operating results, new statutes or regulations or changes in
the interpretation of existing statutes or regulations affecting the health care
industry generally or assisted living residence businesses in particular. In
addition, the stock market in recent years has experienced broad price and
volume fluctuations that often have been unrelated to the operating performance
of particular companies. These market fluctuation also may adversely affect the
market price of the Common Stock.
DEPENDENCE ON SENIOR MANAGEMENT AND SKILLED PERSONNEL The Company depends,
and will continue to depend, upon the services of Dr. Wilson, its Chief
Executive Officer and President, Connie Baldwin, its Director of Operations and
Stephen Gordon, its Chief Administrative Officer and Chief Financial Officer.
The Company has entered into an employment agreement with Dr. Wilson and has
obtained a $500,000 key employee insurance policy covering her life. Company is
also dependent upon its ability to attract and retain management personnel who
will be responsible for the day-to-day operations of each residence. The loss of
the services of any or all of such officers or the Company's inability to
attract additional management personnel in the future could have a material
adverse effect on the Company's financial condition or results of operations.
22
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, 1996, 1995 and the one month ended December 31, 1994, the Company
received, as a percentage of total revenue, under Medicaid programs 14%, 21% and
29%, 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 provided of services under the Medicaid program in the United States, the
Company is subject to Medicaid fraud an abuse law, violations of which may
result in civil and criminal penalties and exclusions from participation in the
Medicaid program. The Company at all times attempts to comply with all
applicable fraud and abuse laws; however, there can be no assurance that
administrative or judicial interpretation of existing laws or regulations will
not have a material adverse effect on the Company's operations or financial
condition.
The success of the Company will be dependent in part upon its ability to
satisfy the applicable regulations and requirements and to procure and maintain
required licenses. The Company's operations could also be adversely affected
by, among other things, regulatory developments such as mandatory increases in
the scope and quality of care to be afford residents and revisions in licensing
and certification standards. Currently, no federal rules explicitly define or
regulate assisted living. In addition, federal and state laws currently exist
restricting health care providers from referring patients to affiliated
entities. The Company believes that its operations do not presently violate
these referral laws. However, there can be no assurance that federal, state or
local laws or regulatory procedures which might adversely affect the Company's
business, financial condition, results of operations or prospects will not be
expanded or imposed.
STAFFING AND LABOR COSTS The Company will compete with other
providers of long-term care with respect to attracting and retaining qualified
personnel. The Company will also be dependent upon the available labor pool of
low-wage employees. A shortage of nurses and/or trained personnel may require
the Company to enhance its wage and benefits package in order to compete. No
assurance can be given that the Company's labor costs will not increase, or
that, if they do increase, they can be matched by corresponding increases in
revenues.
COMPETITION The long-term care industry is highly competitive and the
Company expects that the assisted living business, in particular, will become
more competitive in the future. The Company will be competing with numerous
other companies providing similar long-term care alternatives, such as home
health agencies, life care at home, community-based service programs, retirement
communities and convalescent centers. The Company expects that as assisted
living receives increased attention and the number of states which include
assisted living in their Medicaid waiver programs increases, competition will
grow from new markets entrants, including publicly and privately held companies
focusing
23
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 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
24
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements and supplementary data required by this Item 8 are set
forth as indicated in Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Changes in Accountants as required by this Item 9 is set forth as indicated
in Item 14(b).
25
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated herein by reference from the Company's definitive proxy
statement for the Annual Meeting of Stockholders to be held May 22,1997, to
be filed pursuant to Regulation 14A.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference from the Company's definitive proxy
statement for the Annual Meeting of Stockholders to be held May 22,1997, to be
filed pursuant to Regulation 14A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference from the Company's definitive proxy
statement for the Annual Meeting of the Stockholders to be held May 22, 1997,
to be filed pursuant to Regulation 14A.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference from the Company's definitive proxy
statement for the Annual Meeting of the Stockholders to be held May 22, 1997,
to be filed pursuant to Regulation 14A.
26
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1 and 2. Financial Statements and Financial Statement Schedules.
The financial statements and financial statement schedules listed in the
accompanying index to financial statements and financial statement schedules are
filed as part of this Annual Report.
3. Exhibits
The exhibits listed in the accompanying index to exhibits are filed as part
of this Annual Report.
(b) Reports on Form 8-K
None
27
ASSISTED LIVING CONCEPTS, INC. ("THE COMPANY")
AND ASSISTED LIVING CONCEPTS GROUP ("PREDECESSOR")
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
(Item 14(a))
1. FINANCIAL STATEMENTS: PAGE
Reports of Independent Auditors. 29 - 31
Consolidated Balance Sheets of Assisted Living Concepts, Inc. as of
December 31, 1996 and 1995. 32
Consolidated Statements of Operations of Assisted Living Concepts Inc. for the
years ended December 31, 1996 and 1995, and the one month ended
December 31, 1994 and Assisted Living Concepts, Group (Predecessor)
for the eleven months ended November 30, 1994. 33
Consolidated Statements of Shareholders' Equity of Assisted Living Concepts, Inc.
for the period July 19, 1994 to December 31, 1996. 34
Statements of Changes in Partners' and Shareholders' Equity for Assisted Living
Concepts, Group (Predecessor) for the period December 31, 1993 to
November 30, 1994. 35
Consolidated Statements of Cash Flows of Assisted Living Concepts, Inc. for the
years ended December 31, 1996 and 1995, and the one month ended
December 31, 1994 and Assisted Living Concepts, Group (Predecessor) for the
eleven months ended November 30, 1994. 36
Notes to Financial Statements. 37 - 50
2. FINANCIAL STATEMENT SCHEDULES:
All schedules have been omitted since the required information is not
present or not present in amounts sufficient to require submission of the
schedules.
28
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders
of Assisted Living Concepts, Inc.
We have audited the accompanying consolidated balance sheets of Assisted Living
Concepts, Inc. as of December 31, 1996 and 1995, and the related statements of
operations, changes in shareholders' equity, and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Assisted Living
Concepts, Inc. as of December 31, 1996 and 1995, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Portland, Oregon
February 28, 1997,
except for note 12,
as to which the date is
March 14, 1997
29
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders
of Assisted Living Concepts, Inc.
In our opinion, the accompanying statements of operations, and of cash flows
present fairly, in all material respects, the results of operations and cash
flows of Assisted Living Concepts, Inc. (the "Company" (formerly Assisted Living
Concepts Group)) for the month ended December 31, 1994, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above. We have not audited the
financial statements of Assisted Living Concepts, Inc., for any period
subsequent to December 31, 1994.
PRICE WATERHOUSE LLP
Portland, Oregon
March 17, 1995
30
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders
of Assisted Living Concepts, Inc.
In our opinion, the accompanying combined statements of operations, and of cash
flows of Assisted Living Concepts Group (the "Predecessor"), which is comprised
of Assisted Living Facilities, Inc., a subchapter S corporation, Madras Elder
Care (dba Aspen Court), a general partnership, and Lincoln City Partners, a
general partnership, for the eleven month period ended November 30, 1994 in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Predecessor's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above. We have not audited the combined financial statements of Assisted Living
Concepts Group for any period subsequent to November 30, 1994.
PRICE WATERHOUSE LLP
Portland, Oregon
March 17, 1995
31
ASSISTED LIVING CONCEPTS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS DECEMBER 31, DECEMBER 31,
1996 1995
----------- ----------
Current assets:
Cash and cash equivalents $ 2,105 $ 7,335
Funds held in trust (Note 3) 8,515 -
Accounts receivable, net of allowance for doubtful accounts of
$ 33 at 1996 and $0 at 1995. 730 136
Other current assets (Note 6) 1,043 558
----------------- ------------------
Total current assets 12,393 8,029
----------------- ------------------
Property and equipment (Mptes 2, 5 and 7 59,574 28,446
Construction in progress 53,458 13,075
----------------- ------------------
Total property and equipment 113,032 41,521
Less accumulated depreciation 674 163
----------------- ------------------
Property and equipment - net 112,358 41,358
----------------- ------------------
Goodwill (Note 2) 362 393
Other assets (Note 6) 5,394 3,766
----------------- ------------------
Total assets $ 130,507 $ 53,546
================= ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,864 $ 998
Construction payable 16,002 7,250
Accrued expenses 1,395 4,706
Other current liabilities 544 348
Construction financing (Note 7) 18,850 -
Current portion of long-term debt (Note &) 110 47
----------------- ------------------
Total current liabilities 38,765 13,349
Long-term debt (Note 7) 18,768 4,553
Convertible subordinated debentures 13,915 20,000
----------------- ------------------
Total liabilities 71,448 37,902
----------------- ------------------
Commitments and contingencies
Shareholders' equity:
Preferred Stock, $.01 par value; 1,000,000 shares authorized;
none issued or outstanding
Common Stock, $.01 par value; 40,000,000 shares authorized;
5,515,250 and 3,000,000 shares issued and outstanding 55 30
Additional paid-in capital 59,733 16,492
Fair market value in excess of cost of acquired net assets
attributable to related party transactions (Note 2) (239) (239)
Accumulated deficit (490) (639)
----------------- ------------------
Total shareholders' equity 59,059 15,644
----------------- ------------------
Total liabilities and shareholers' equity $ 130,507 $ 53,546
================= ==================
The accompanying notes are an integral part of these consolidated financial
statements.
32
ASSISTED LIVING CONCEPTS, INC. ("THE COMPANY")
AND ASSISTED LIVING CONCEPTS GROUP ("Predecessor")
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share amounts)
The Company Predecessor
-----------------------------------------------------------------
One Eleven Months
Month ended ended
Years ended December 31, December 31, December 31
1996 1995 1994 1994
--------------------------------------------------------------------
Revenue $ 18,949 $ 4,067 $ 212 $ 1,841
------------ ------------ -------------- -------------
Operating expenses:
Residence operating expenses 12,116 2,779 125 1,127
Management fees from related party (Note 9) 93
Corporate general and administrative 1,649 1,252 152
Building rentals 3,240 64 5
Building rentals from related party (Note 9) 912 734 37
Depreciation and amortization (Notes 3 and 5) 990 296 13 105
------------ ------------ -------------- --------------
Total operating expenses 18,907 5,125 332 1,3