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
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission file number 1-13498
ASSISTED LIVING CONCEPTS INC.
(Exact name of registrant as specified in its charter)
NEVADA 93-1148702
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
9955 S.E. WASHINGTON, SUITE 300
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 SUBORDINATED DEBENTURES DUE AUGUST 2005 AMERICAN STOCK EXCHANGE
6% CONVERTIBLE SUBORDINATED DEBENTURES DUE NOVEMBER 2002 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, 1998, 15,683,864 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 $292,111,967.
------------
Part III incorporates by reference the Company's definitive proxy statement
for the Annual Meeting of Stockholders to be held on May 20, 1998
PART I
ITEM 1. BUSINESS
OVERVIEW
Assisted Living Concepts Inc. and its subsidiaries ("ALC" or the "Company")
operates, owns, leases and develops free-standing assisted living residences,
primarily in small middle-market rural and suburban communities with a
population typically ranging from 10,000 to 40,000. Currently the Company has
operations in Oregon, Idaho, Iowa, Nebraska, Washington, Arizona, Texas,
Indiana, New Jersey, Ohio, Pennsylvania and South Carolina. The Company also
provides personal care and support services and makes available routine nursing
services (as permitted by applicable regulations) designed to meet the health
care needs of its residents. The Company believes that this combination of
residential, personal care, support and health care services provides a cost-
efficient alternative and affords 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 has experienced significant growth since the completion of its
initial public offering in November 1994, growing from a base of five residences
(137 units) primarily through the development of assisted living residences. As
of February 28, 1998, the Company owned, leased or managed a total of 139
operating assisted living residences representing an aggregate of 5,235 units.
Of these residences, the Company owned 71 residences (2,727 units) and leased 68
residences (2,508 units). For the three months ended December 31, 1997, the
Company's 54 Stabilized Residences (those residences that had been operating for
twelve months prior to the beginning of the period or had achieved 95.0%
occupancy within the first twelve months of operations) had an average occupancy
rate of approximately 94.5% and an average monthly rental rate of approximately
$1,753 per unit. The Company's 105 residences (3,875 units) in operation during
the three months ended December 31, 1997 had an average occupancy rate of
approximately 73.8% and an average monthly rental rate of approximately $1,790
per unit.
The Company is currently developing and, to a lesser extent, seeking to
acquire additional assisted living residences in Washington, Arizona, Indiana,
Iowa, New Jersey, South Carolina and three other states with regulatory and
reimbursement climates which the Company believes are favorable. As of February
28, 1998, the Company had commenced construction on 26 residences (1,006 units).
In addition, at such date, the Company had optioned or had entered into land
purchase agreements for the development of 24 residences (959 units). For the
twelve months ended December 31, 1997, the Company opened 63 residences (2,494
units) and intends to open approximately 60 to 70 residences in 1998. The
Company generally does not acquire sites for development until it has completed
its feasibility analysis and appropriate zoning has been obtained. Capital
expenditures and related start-up costs for 1998, which relate primarily to the
development of new residences, are estimated to total approximately $160 million
to $190 million. Capital expenditures for the twelve months ended December 31,
1997 for the residences completed and under development was $160.8 million.
Pursuant to its development program, the Company has obtained approximately $138
million in financing commitments from health care real estate investment trusts,
$50 million in mortgage financing from a bank and $28 million in tax-exempt bond
financing.
The principal elements of the Company's operating growth strategy are to: (i)
expand market penetration, (ii) service higher acuity residents, (iii)
selectively acquire or develop complementary businesses and (iv) pursue
strategic alliance/joint venture relationships. The Company anticipates that a
majority of its residences 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.
Pursuant to its growth strategy, the Company acquired Home and Community Care,
Inc. ("HCI"), a privately held provider of home health care, hospice care and
durable medical equipment and developer of assisted living residences which had
39 assisted living residences (1,567 units) either under construction or
identified for possible development in five states. In addition, the Company
also acquired Carriage House Assisted Living Inc. ("Carriage House"), a
privately held developer and operator of assisted living residences in Nebraska
which operates four assisted living residences (156 units) and has an additional
six residences (198 units) under construction.
2
The Company is a Nevada corporation and its principal executive offices are
located at 9955 S.E. Washington, Suite 300, Portland, Oregon 97216, telephone
number (503) 252-6233.
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 has established an infrastructure that includes regional
operational managers who oversee the overall performance and finances of each
region, operational managers who oversee the day to day operations of up to ten
to fifteen residences, and team leaders who provide peer support for up to three
to four residences. Financial oversight is managed at the corporate office.
Presently residence personnel are supported by 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.
3
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
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. 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
currently 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 years ended December 31, 1995, 1996 and 1997, direct payments
received from state Medicaid agencies accounted for approximately 21.4%, 13.8%
and 11.3%, respectively, of the Company's revenue while the tenant-paid portion
received from Medicaid residents accounted for approximately 9.6%, 7.6% and
6.0%, respectively, of the Company's revenue during these periods. The Company
expects in the future that state Medicaid reimbursement programs will constitute
a significant source of revenue for the Company.
4
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, 1998, the Company has obtained licenses in
Oregon, Washington, Idaho, Nebraska, Texas, Arizona, Nebraska, Ohio, New Jersey
Pennsylvania and South Carolina 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 laws, which prohibit 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 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 or 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.
Under the Americans with Disabilities Act of 1990, all places of public
accommodation are required to meet certain federal requirements related to
access and use by disabled persons. A number of additional federal, state and
local laws exist that also may require modifications to planned facilities to
create access to the properties by disabled persons. Although the Company
believes that its facilities currently under development are substantially in
compliance with present requirements or are exempt therefrom, if required
changes involve a greater expenditure than anticipated or must be made on a more
accelerated basis than anticipated, additional costs would be incurred by the
Company. Further legislation may impose additional burdens or restrictions with
respect to access by disabled persons, the costs of compliance with which could
be substantial.
The Company's completed acquisition of HCI on October 23, 1997 includes HCI's
home health care and hospice operations. In addition to federal and state
regulation of health care providers, generally, home health care and hospice
operations are subject to federal and state laws covering the nursing services,
therapy services, medical equipment and certain types of home health agency and
hospice activities. Certain of HCI's employees are subject to state laws and
regulations governing the ethics and professional practice of, among others,
medicine, respiratory therapy, physical therapy and nursing. Home health care
and hospice operations are
5
subject to periodic survey by governmental and private accrediting entities to
assure compliance with applicable state licensing, Medicare and Medicaid
certification and accreditation standards, as the case may be. From time to time
in the ordinary course of business, HCI, like other health care companies, has
received survey reports containing deficiencies for alleged failure to comply
with applicable requirements. HCI reviews such reports and attempts to take
appropriate corrective action. The failure to effect such action or to obtain,
renew or maintain any of the required regulatory approvals, certifications or
licenses could adversely affect HCI's business, results of operations or
financial condition and could prevent the programs involved from offering
products and services to patients.
The Balanced Budget Act of 1997 signed by President Clinton on August 5, 1997
(the "Act"), enacted significant changes to the Medicare and Medicaid programs
designed to modernize payment and health care delivery systems while achieving
substantial budgetary savings. In seeking to limit Medicare reimbursement for
home health services, Congress has established a prospective payment system to
replace the current cost-based reimbursement system. The cost based system
reimburses providers for reasonable direct and indirect allowable costs and
ancillary costs. Cost based reimbursement has been subject to limits fixed for
the particular geographic area served by a provider. The prospective payment
system will be implemented beginning in September 1999. An interim payment
system was implemented October 1, 1997 as a temporary measure while the
operational specifics of the prospective system are finalized. This interim
system establishes a limit on the dollar amount that will be paid for the care
of one patient for an entire year, applied in the aggregate to each agency's
patients as a whole. In addition, the limit on allowable charges per visit has
been reduced by 15%. These changes in the reimbursement to home health agencies
participating in the Medicare program are expected to have a significant impact
on the number of visits agencies will provide to each patient, reducing the
number by half or more in many states, such as Texas, where HCI has home health
agencies.
Under provisions of the Act, states will be provided additional flexibility in
managing their Medicaid programs while achieving in excess of $13 billion in
federal budgetary savings over five years. Among other things, the Act repealed
the Boren Amendment payment standard, which had required states to pay
"reasonable and adequate" payments to cover the costs of efficiently and
economically operated hospitals, nursing facilities and certain intermediate
care facilities. States, however, will be required to use a public notice and
comment process in determining rates for such facilities. States also will be
required to take into account during rate-setting procedures the situation of
facilities that serve a disproportionate number of low-income patients with
special needs. The Department of Health and Human Services is required to study
and report to Congress within four years concerning the effect of state rate-
setting methodologies on access to and the quality of services provided to
medicaid beneficiaries.
The Act also provides the federal government with expanded enforcement powers
to combat waste, fraud and abuse in health care. In this regard, provisions of
the Act significantly expand the scope and coverage of civil monetary penalties
for violations of Medicare rules. Specific to home health services, the Act
established guidelines for the frequency and duration of home health services;
clarifying the definition of part-time or intermittent nursing care in order to
clarify the scope of the Medicare benefit and make it easier to identify
inappropriate services. The Act also requires home health agencies to bill for
services based on the location of service delivered rather than the location of
the agency, in an effort to limit high urban reimbursement rates for care
delivered in low-cost areas.
HOME HEALTH MEDICARE CERTIFICATION AND SPECIFIC PROGRAM REFORM. The
General Accounting Office ("GAO") reported to Congress in July 1997, that
federal regulators are failing to adequately police home health agencies,
resulting in extensive and expensive problems in Medicare's home-health program.
In response to the GAO report, the federal government announced on September 15,
1997, that home health care providers will be targeted in a growing federal
crackdown. The announced federal compliance program was launched in an effort to
prevent unscrupulous operators from becoming Medicare providers and
significantly increase the level of scrutiny to which existing companies in the
program are subjected. Under this program, HCFA will double the number of
audits of home health agencies it performs each year, and will increase
substantially the number of claims reviewed.
Also as a result of the compliance initiative, HCFA is currently finalizing
strict new conditions of participation for providers who participate in the
Medicare home health program. These requirements will focus on the expected
patient-centered outcomes of Medicare services. HCFA has developed a core set of
requirements encompassing patient rights, comprehensive assessment, and patient
care planning and coordination, tied together in quality assessment and
performance improvement. As a way of achieving their objective, HCFA is
proposing the incorporation of the OASIS standard assessment data set. Their
goals are to improve outcomes of care and satisfaction for patients, reduce the
burden on providers while increasing flexibility and expectations for continuous
improvement, and increase the amount and quality of information available on
which to base health care choices and efforts to improve quality. There will be
a new emphasis placed on interdisciplinary care for each patient. The financial
impact of these new conditions of participation is unknown, but the
implementation of OASIS can be expected to increase the costs of data collection
and assessment.
Under the new home health regulations, HCFA will require periodic
recertification of home health agencies to determine if they meet the beefed-up
conditions of participation. As part of the re-certification process, agencies
will have to submit an independent audit of their records and practices. If the
provider does not meet the strict new enrollment requirements, they will not be
renewed as providers in Medicare. In addition, home health agencies will be
required to post surety bonds of at least $50,000 before they can enroll or re-
enroll in Medicare. A related rule will require new agencies to have enough
funds on hand to operate for the first three to six months.
The Office of the Inspector General of the U.S.Department of Health and Human
Services (the "OIG"), and GOA concerns about fraud and abuse in the home health
industry have resulted in extensive audits of home health agencies, with large
amounts of money being identified as incorrectly paid to home health agencies,
and subsequently returned to HCFA by the agencies. Intermediaries are performing
"wedge audits" of agencies, from which they arrive at an error rating reflecting
the number of incorrectly paid claims. This error percentage is then applied to
all the invoices submitted by the home health agency for a period of time, and
that percentage of money returned to HCFA. Newly-developed compliance programs
are being instituted in home health agencies to help them stay within the strict
new payment guidelines and avoid issues of fraud and abuse.
6
To the extent the Company expands into home health care, the new home health
regulations by HCFA may require the restructuring of the home health operations
to conform to the new Medicare conditions of participation ultimately adopted.
In addition, the Medicare requirements for new home health care agencies may
require expansion to be achieved through acquisitions rather than through the
development of new agencies.
OPERATION RESTORE TRUST. Under Operation Restore Trust ("ORT"), a two year
demonstration project, the OIG, in cooperation with other federal and state
agencies, has focused on the activities of home health agencies, hospices,
durable medical equipment suppliers and nursing homes in certain states,
including Texas, in which HCI currently operates. Because of the success of ORT,
the next phase of ORT has been expanded to numerous other states and to
additional health care providers including ancillary nursing home services. The
legislation adopted in 1996 expanding ORT also created a stable source of
funding for fraud control activities.
As part of ORT, hospice and home health programs have been audited. According
to public reports, the OIG audits have focused on the hospice eligibility of
long stay patients (those who are in a hospice program for longer than 210
days). In home health, the OIG is concerned with agencies that have high
utilization rates per patient (visits per patient in excess of national or
regional norms). The ultimate disposition of an OIG review and its possible
impact on HCI cannot currently be predicted and there can be no assurance that
an OIG review will not have a material adverse effect on the Company's business,
results of operations or financial condition.
EMPLOYEES
As of February 28, 1998, the Company had approximately 2,100 employees, of
which approximately 770 were full-time employees and approximately 1,330 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, 1998, the location,
number of units, date of licensure, ownership status and occupancy rates for the
Company's residences.
Average
Date Occupancy Occupancy
Residence Units Licensed Ownership(1) 12/31/97 2/28/98
--------- ----- -------- ------------ --------- ---------
Western Region
- --------------
Idaho
Burley 35 08/97 Leased 36.4% 54.3%
Caldwell 35 08/97 Leased(3) 34.6 42.9
Garden City 48 04/97 Owned(2)(3) 18.9 33.3
Hayden 39 11/96 Leased 33.0 48.7
Idaho Falls 39 01/97 Owned(2)(3) 40.3 61.5
Moscow 39 04/97 Owned(2) 34.8 77.1
Nampa 39 02/97 Leased(3) 46.5 74.4
Rexburg 35 08/97 Owned(2)(3) 13.5 20.0
Twin Falls 39 09/97 Owned 12.7 23.1
Oregon
Astoria 28 08/96 Owned 88.7 85.7
Bend 46 11/95 Owned(2) 95.2 97.8
Brookings 36 07/96 Owned 84.2 94.4
Canby 25 12/90 Leased 99.6 96.0
Estacada 30 01/97 Owned 69.2 90.0
Eugene 47 08/97 Leased 58.8 66.0
Grants Pass 45 11/96 Leased 64.0 68.9
Hood River 30 10/95 Owned(2) 98.2 100.0
Klamath Falls 35 10/96 Leased 73.7 62.9
Lincoln City 33 10/94 Owned(2) 91.6 78.8
Madras 27 03/91 Owned(2) 98.5 100.0
Myrtle Creek 34 03/96 Leased 78.7 97.1
Newberg 26 10/92 Leased 99.5 100.0
Newport 36 06/96 Leased 94.3 94.4
Pendleton 26 04/91 Leased 99.2 100.0
Prineville 30 10/95 Owned(2) 95.9 93.3
Redmond 37 03/95 Leased 92.6 100.0
Silverton 30 07/95 Owned(2) 97.0 100.0
Sutherlin 30 01/97 Leased 62.2 100.0
Talent 36 10/96 Owned 83.2 100.0
Washington
Battleground 40 11/96 Leased 77.5 100.0
Bremerton 39 05/97 Owned(2) 41.8 71.8
Camas 36 03/96 Leased 91.0 100.0
Enumclaw 40 04/97 Owned(2) 54.0 67.5
Grandview 36 02/96 Leased 83.0 86.1
Hoquiam 40 07/97 Leased 35.8 60.0
Kelso 40 08/96 Leased 95.5 100.0
Kennewick 36 12/95 Leased 89.0 94.4
Port Orchard 39 06/97 Owned(2) 63.2 82.1
Port Townsend 39 01/97 Owned(2) -- 66.7
Spokane 39 09/97 Owned(2) 25.1 46.2
Sumner 48 Pending Owned -- --
8
Average
Date Occupancy Occupancy
Residence Units Licensed Ownership(1) 12/31/97 2/28/98
--------- ----- -------- ------------ --------- ---------
Western Region Continued (Washington)
- ------------------------------------
Vancouver 44 06/96 Leased 91.1% 95.5%
Walla Walla 36 02/96 Leased 97.1 97.2
Central Region
- --------------
Iowa
Denison 35 Pending Owned -- --
Nebraska
Beatrice 39 10/97 Leased 38.4 51.3
Norfolk 39 10/97 Leased 26.0 28.2
Wahoo 39 10/97 Leased 42.6 41.0
York 39 10/97 Leased 49.6 59.0
Texas
Abilene 38 10/96 Leased 58.6 100.0
Amarillo 50 03/96 Leased 99.4 98.0
Athens 30 11/95 Leased 96.4 100.0
Beaumont 50 04/96 Leased 76.5 92.0
Big Springs 38 05/96 Leased 48.3 57.9
Bryan 30 06/96 Leased 87.4 100.0
Canyon 30 06/96 Leased 95.9 100.0
Carthage 30 10/95 Leased 96.2 83.3
Cleburne 36 01/96 Owned 99.5 100.0
College Station 39 10/96 Leased 66.6 84.6
Conroe 38 07/96 Leased 97.7 100.0
Denison 30 01/96 Owned 89.9 100.0
Gainsville 30 01/96 Leased 97.9 100.0
Greenville 30 11/95 Leased 97.4 100.0
GunBarrel City 30 10/95 Leased 98.7 93.3
Henderson 30 09/96 Leased 98.8 100.0
Jacksonville 39 12/95 Leased 93.5 94.8
Levelland 30 01/96 Leased 89.3 100.0
Longview 30 09/95 Leased 97.1 100.0
Lubbock 50 07/96 Leased 93.6 98.0
Lufkin 39 05/96 Leased 91.5 100.0
Marshall 40 07/95 Leased 98.2 100.0
McKinney 39 01/97 Owned 77.7 92.3
Mesquite 50 07/96 Leased 86.3 98.0
Midland 50 12/96 Owned 61.9 80.0
Mineral Wells 30 07/96 Leased 73.5 86.7
Nagadoches 30 06/96 Leased 96.7 100.0
Orange 36 03/96 Leased 95.5 100.0
Pampa 36 08/96 Leased 96.7 100.0
Plainview 36 07/96 Leased 99.4 100.0
Port Arthur 50 05/96 Owned 96.6 100.0
Rowlett 36 10/96 Owned 86.4 91.7
9
Average
Date Occupancy Occupancy
Residence Units Licensed Ownership(1) 12/31/97 2/28/98
--------- ----- -------- ------------ --------- ---------
Central Region Continued (Texas)
- -------------------------------
Sherman 30 10/95 Leased 97.2% 100.0%
Sulphur Springs 30 01/96 Owned 81.8 100.0
Sweetwater 30 03/96 Leased 92.4 100.0
Temple 40 01/97 Leased 55.0 70.0
Wichita Falls 50 10/96 Leased 41.2 66.0
Arizona
Apache Junction 48 Pending Owned -- --
Bullhead City 40 08/97 Leased 45.4 67.5
Lake Havasu 36 04/97 Leased 40.6 80.1
Mesa 50 01/97 Owned -- 14.0
Yuma 48 Pending Owned -- --
Eastern Region
- --------------
Indiana
Bedford 39 Pending Owned -- --
Bloomington 39 Pending Owned -- 23.1
Elkhart 39 9/97 Leased 22.9 28.2
Huntington 39 Pending Owned -- --
Kendalville 39 Pending Owned -- --
Logansport 39 Pending Owned -- 20.5
Madison 39 10/97 Leased 20.5 35.9
Marion 39 Pending Owned -- --
Muncie 39 Pending Owned -- 10.3
New Albany 39 Pending Owned -- --
New Castle 39 Pending Owned -- --
Seymour 39 Pending Owned -- --
Warsaw 39 10/97 Owned 32.5 48.7
New Jersey
Bridgeton 39 Pending Owned -- --
Burlington 39 11/97 Owned -- 46.2
Glassboro 39 03/97 Leased 80.7 100.0
Millville 39 05/97 Leased 55.9 92.3
Pennsville 39 11/97 Owned -- 53.9
Rio Grande 39 11/97 Owned 45.1 87.2
Vineland 39 01/97 Leased 89.0 97.4
Ohio
Bellefountaine 35 03/97 Owned(3) 45.5 91.4
Bucyrus 35 01/97 Owned(3) 58.4 74.3
Cambridge 39 10/97 Owned -- --
Celina 39 04/97 Owned 50.2 74.4
Defiance 35 02/97 Owned(3) 44.0 65.7
Findlay 39 03/97 Owned(3) 8.6 7.7
Fremont 39 07/97 Leased(3) 41.7 48.7
10
Average
Date Occupancy Occupancy
Residence Units Licensed Ownership(1) 12/31/97 2/28/98
--------- ----- -------- ------------ --------- ---------
Eastern Region Continued (Ohio)
- ------------------------------
Greenville 39 02/97 Owned(3) 37.5% 64.1%
Hillsboro 39 Pending Owned -- --
Kenton 35 03/97 Owned(3) 16.6 37.1
Lima 39 06/97 Owned(3) 49.8 92.3
Marion 39 04/97 Owned(3) 40.2 48.7
Newark 39 10/97 Leased(3) 31.0 56.4
Tiffin 39 06/97 Leased(3) 35.4 41.0
Troy 39 03/97 Leased 27.5 69.2
Wheelersburg 39 09/97 Leased(3) 13.5 18.0
Zainesville 39 12/97 Owned -- 33.3
Pennsylvania
Butler 39 12/97 Owned -- 25.6
Hermitage 39 Pending Owned -- --
Indiana 39 Pending Owned -- --
Latrobe 39 12/97 Owned -- 18.0
Lower Burrel 39 01/97 Owned -- 25.6
New Castle 39 Pending Owned -- --
Pennshills 39 Pending Owned -- --
Uniontown 39 Pending Owned -- --
South Carolina
Aiken 39 Pending Owned -- 23.1
Clinton 39 11/97 Owned -- 25.6
Greenwood 39 Pending Owned -- --
Summerville 39 Pending Owned -- 25.6
_____________
(1) The initial lease terms range from 10 to 20 years. The Company is
responsible for all costs including repairs to the residences, property
taxes, and other direct operating costs of the residences. Building rent
is recorded on a straight-line basis for those residences which have a
specified rent increase. Building rent is recorded as incurred for those
residences which have annual increases based on an increase in the consumer
price index or other contingency. (See "Liquidity and Capital Resources"
for future commitments regarding lease financing.)
(2) As of February 28, 1997, the Company owned 15 residences which were subject
to permanent mortgage financing with the remaining properties being
unencumbered. (See "Liquidity and Capital Resources" for future commitments
regarding mortgage financing.)
(3) The Company has entered into a noncancelable management agreement with a
joint venture in which the Company owns a 10% interest. The Company manages
the residences for an amount equal to the greater of 8% of gross revenue or
$2,000 per month per residence. The revenues and expenses of the joint
venture are consolidated with those of the Company. (See "Risk Factors -
Anticpated Operating Losses of New Residences")
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.
11
CONSTRUCTION AND DEVELOPMENT ACTIVITIES
The Company is developing additional residences in Washington, Arizona,
Indiana, Iowa, New Jersey, South Carolina and three other states. As of
February 28, 1998, the Company had commenced construction on 26 residences with
a total of 1,006 units. See "Risk Factors - No Assurances as to Ability to
Develop or Acquire Additional Living Residences."
As of February 28, 1998, the Company had optioned or had entered into land
purchase agreements for the development of 24 sites (959 units). The Company has
made option payments or earest money 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 and one bedroom units comprising an average of
320 square feet and 450 square feet, respectively, 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 twelve
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 $20,000 during the first
four months of operation. To the extent the Company sells and leases back or
otherwise finances a residence, the aggregate loss for the first four months of
operation may increase up to $100,000.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various lawsuits and claims arising in the normal
course of business. In the opinion of management of the Company, although the
outcomes of these suits and claims are uncertain, in the aggregate they should
not have a material adverse effect on the Company's business, financial
condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
12
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 ("AMEX") 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 1997
HIGH LOW HIGH LOW
----------- ----------- ---------- ----------
Years ended December 31:
1st Quarter $10.68 $ 7.13 $10.06 $6.63
2nd Quarter 14.50 9.88 11.13 8.88
3rd Quarter 19.75 13.25 10.25 8.25
4th Quarter 22.38 15.75 9.94 7.19
As of February 27, 1998, the Company had approximately 81 holders of record of
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.
13
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected historical condensed consolidated
financial data for the Company. The selected financial data below should be
read in conjunction with the consolidated financial statements of the Company,
including the notes thereto, and the information in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" on pages 15 to 24.
Years ended December 31,
(in thousands, except per share data)
1995 1996 1997
-------- -------- --------
CONSOLIDATED STATEMENTS OF OPERATIONS:
Revenue............................................... $ 4,067 $ 18,949 $ 48,673
Operating expenses:
General operating expenses.......................... 2,779 12,116 30,271
Corporate general and administrative................ 1,252 1,649 2,780
Building rentals.................................... 798 4,152 9,828
Depreciation and amortization....................... 296 990 3,021
------- -------- --------
Total operating expenses.......... 5,125 18,907 45,900
------- -------- --------
Operating income (loss)............................... (1,058) 42 2,773
Other income, net..................................... 483 107 3,563
------- -------- --------
Income (loss) before income taxes (575) 149 6,336
Provision for income taxes -- -- 2,127
------- -------- --------
Net income (loss)..................................... $ (575) $ 149 $ 4,209
======= ======== ========
Net income (loss) per share (basic)................... $ (.10) $ .02 $ 35
Net income (loss) per share (diluted)................. $ (.10) $ .01 $ .34
Weighted average common shares outstanding (basic).... 6,000 8,802 11,871
Weighted average common shares outstanding (diluted).. 6,000 11,292 14,190
CONSOLIDATED BALANCE SHEET DATA:
Working capital....................................... $(5,320) $(26,372) $ 40,961
Total assets.......................................... 53,546 130,507 298,305
Long-term debt, excluding current portion............. 24,553 32,683 126,212
Stockholders' equity.................................. 15,644 59,059 141,015
14
QUARTERLY FINANCIAL DATA (UNAUDITED)
(in thousands except per share data)
1996 Quarterly Financial Data 1997 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 Date
------ ------ ------- ------- ------- ------- ------- ------- ------- -------
Revenue $2,750 $3,742 $ 5,171 $ 7,286 $18,949 $ 9,244 $10,848 $12,505 $16,076 $48,673
Operating income (loss) (178) (93) (41) 354 42 845 904 421 603 2,773
Net income (loss) (187) 16 (238) 558 149 664 967 996 1,582 4,209
Weighted average
Basic shares outstanding 6,000 6,003 10,530 11,004 8,802 11,004 11,044 11,084 14,429 11,871
Diluted shares outstanding 6,000 6,003 10,530 13,025 11,292 13,144 13,280 13,517 16,721 14,190
Basic EPS(1) $ (.03) $ .01 $ (.02) $ .04 $ .02 $ .06 $ .09 $ .09 $ .11 $ .35
Diluted EPS(1) $ (.03) $ .01 $ (.02) $ .01 $ .01 $ .06 $ .08 $ .09 $ .11 $ .34
(1) Quarter net income (loss) per share amounts may 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
The Company operates, owns, leases and develops free-standing assisted living
residences, primarily in small middle-market rural and suburban communities with
a population typically ranging from 10,000 to 40,000. Currently the Company has
operations in 13 states. The Company also provides personal care and support
services, and makes available routine nursing services (as permitted by
applicable regulations) designed to meet the personal and health care needs of
its residents.
The Company has experienced significant growth since the completion of its
initial public offering in November 1994, growing from a base of five residences
(137 units) primarily through the development of assisted living residences. As
of February 28, 1998, the Company owned or leased a total of 139 residences
(5,235 units). Of these the Company owned 71 residences (2,727 units) and
leased 68 residences (2,508 units).
The Company derives its revenues primarily from resident fees for the delivery
of assisted living services. Resident fees typically are paid monthly by
residents, their families, state Medicaid agencies or other responsible parties.
Resident fees include revenue derived from a multi-tiered rate structure which
varies based on the level of care required. Resident fees are recognized as
revenues when services are provided. 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 function such as
legal, accounting and other administrative expenses, (iii) building rentals and
(iv) depreciation and amortization.
15
As of December 31, 1997, the Company was operating or had received a
Certificate of Occupancy on 130 residences (4,888 units) of which 105 residences
(3,875 units) had operating results.
Operating results for the year ended December 31, 1997, including the
operating results of 105 residences (3,875 units) 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 1998 and 1999. Based on the Company's
development schedule, the number of residences planned to open in 1998 ranges
from 60 to 70. 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 four months of operation. To the extent the Company sells and
leases back or otherwise finances a residence, the aggregate loss for the first
four months of operation may increase up to $100,000. The Company estimates the
aggregate losses to be incurred during 1998 due to the opening of buildings will
range from $1.0 million to $3.2 million.
The estimated cost to complete construction and fund start up losses for the
new residences that are currently planned to be developed during the 12 months
ended December 31, 1998 is between $160 million and $190 million. The Company
anticipates that it will use a combination of the proceeds received from the
common stock offering and convertible debentures completed in October of 1997,
construction lines of credit, sale and leaseback transactions and cash generated
from operations to fund this development activity. The total capitalized cost to
develop, construct and open a new residence, including land acquisition and
construction costs currently ranges from approximately $1.6 million to $3.5
million. These costs vary considerably based on a variety of site-specific
factors. See "Liquidity and Capital Resources" and "Risk Factors - Need for
Additional Financing to Fund Future Development and Acquisitions; Leverage."
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 manages 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 December 31, 1997,
17 residences owned or leased by the Company were being operated by the joint
venture. The revenues and expenses of the joint venture are consolidated with
those of the Company. In addition, the Company recognizes 10% of the losses or
profits, if any, of the joint venture, net of management fees paid to the
Company. The Company may seek to acquire the joint venture partner's 90%
interest in the future, but currently has no contractual right to purchase such
interest. While the use of such joint venture agreements is intended to mitigate
the impact on the Company of start-up losses associated with the opening of new
residences 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 up to five to ten additional partnering arrangements per
quarter, 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.
16
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. 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".
Year ended December 31,
Total Residences 1995 1996 1997
- ---------------------------------------------------------------- ---------------- ---------------- ----------------
Residences operated (end of period) 19 51 105
Units operated (end of period) 595 1,768 3,875
Average occupancy rate 82.3% 80.4% 74.4%
Sources of revenue
Medicaid state portion 21.4% 13.8% 11.3%
Medicaid resident portion 9.6% 7.6% 6.0%
Private 69.0% 78.6% 82.7%
---------------- ---------------- ----------------
Total 100.0% 100.0% 100.0%
================ ================ ================
The following table sets 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. 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.
Year ended December 31,
Stabilized Residences 1995 1996 1997
- ---------------------------------------------------------------- ---------------- ---------------- ----------------
Residences operated (end of period) 5 7 27
Units operated (end of period) 137 204 905
Average occupancy rate 99.1% 96.5% 95.8%
Sources of revenue:
Medicaid state portion 23.9% 19.9% 13.1%
Medicaid resident portion 11.3% 11.5% 7.5%
Private 64.8% 68.6% 79.4%
---------------- ---------------- ----------------
Total 100.0% 100.0% 100.0%
================ ================ ================
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. 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.
Year ended December 31,
Start-up Residences 1995 1996 1997
- ---------------------------------------------------------------- ---------------- ---------------- ----------------
Residences operated (end of period) 14 44 78
Units operated (end of period) 458 1,564 2,970
Average occupancy rate 77.3% 76.9% 66.0%
Sources of revenue:
Medicaid state portion 16.4% 11.2% 10.6%
Medicaid resident portion 6.3% 6.0% 5.3%
Private 77.3% 82.8% 84.1%
---------------- ---------------- ----------------
Total 100.0% 100.0% 100.0%
================ ================ ================
17
The following table sets forth, for the periods presented for Same Store
Residences, the total number of residences and units operated, average occupancy
rates and the sources of revenue for the Company. Same Store Residences are
defined as those residences which were operating throughout comparable periods.
Year ended December 31,
Same Store Residences 1995 1996 1997
- ---------------------------------------------------------------- ---------------- ---------------- ----------------
Residences operated (end of period) 5 19 51
Units operated (end of period) 137 595 1,768
Average occupancy rate 99.1% 82.3% 80.4%
Sources of revenue:
Medicaid state portion 23.9% 21.4% 13.8%
Medicaid resident portion 11.3% 9.6% 7.6%
Private 64.8% 69.0% 78.6%
---------------- ---------------- ----------------
Total 100.0% 100.0% 100.0%
================ ================ ================
The following tables relating to Stabilized Residences, Start-up Residences
and Same Store Residences exclude the effects of corporate level expenses,
including general and administrative expenses and corporate level interest
expense. In addition, the following tables exclude the effect of the
capitalization of corporate and property level interest expense.
The following table sets forth, for the periods presented, the results of
operations for Stabilized Residences (in thousands).
Year ended December 31,
Stabilized Residences 1995 1996 1997
- ---------------------------------------------------------------- ---------------- ---------------- ----------------
Revenue $2,699 $4,084 $18,453
Residence operating expenses 1,667 2,412 10,437
---------------- ---------------- ----------------
Residence operating income 1,032 1,672 8,016
Building rentals 500 780 3,517
Depreciation and amortization 116 120 543
---------------- ---------------- ----------------
Total other operating expenses 616 900 4,060
---------------- ---------------- ----------------
Operating income 416 772 3,956
Other interest expense, net 147 217 1,107
---------------- ---------------- ----------------
Income before taxes $ 269 $ 555 $ 2,849
================ ================ ================
The following tables sets forth, for the periods presented, the results of
operations for Start-up Residences (in thousands).
Year ended December 31,
Start-up Residences 1995 1996 1997
- ---------------------------------------------------------------- ---------------- ---------------- ----------------
Revenue $ 1,368 $14,865 $29,024
Residence operating expenses 1,112 9,704 19,017
---------------- ---------------- ----------------
Residence operating income 256 5,161 10,007
Building rentals 298 3,372 6,277
Depreciation and amortization 180 809 2,256
---------------- ---------------- ----------------
Total other operating expenses 478 4,181 8,533
---------------- ---------------- ----------------
Operating income (loss) (222) 980 1,474
Other interest expense, net 4 603 1,525
---------------- ---------------- ----------------
Income (loss) before taxes $ (226) $ 377 $ (51)
================ ================ ================
18
The following table sets forth, for the periods presented, the results of
operations for the 19 residences which were operating for both periods in their
entirety (in thousands).
Year ended December 31,
Same Store Residences 1996 1997
- ---------------------------------------------------------------- ---------------- ----------------
Revenue $10,877 $12,397
Residence operating expenses 6,565 7,056
---------------- ----------------
Residence operating income 4,312 5,341
Building rentals 2,170 2,270
Depreciation and amortization 473 449
---------------- ----------------
Total other operating expenses 2,643 2,719
---------------- ----------------
Operating income 1,669 2,622
Other expense, net 722 782
---------------- ----------------
Income before taxes $ 947 $ 1,840
================ ================
RESULTS OF OPERATIONS
Year ended December 31, 1997 to year ended December 31, 1996
The Company had net income of $4.2 million or $.34 per diluted share, on
revenue of $48.7 million for the year ended December 31, 1997, compared to net
income of $149,000 or $.01 per diluted share, on revenues of $18.9 million for
the year ended December 31, 1996.
Revenue. For the year ended December 31, 1997, revenues were $48.7 million as
compared to $18.9 million for the year ended December 31, 1996, an increase of
$29.8 million. Of this increase, $15.1 million or 50.7% related to the opening
of an additional 54 operating residences (2,107 units) since December 31, 1996.
The remaining $14.7 million or 49.3% of the increase was attributable to the 51
residences that had operating results as of December 31, 1997. For the year
ended December 31, 1997, revenues for the 19 Same Store Residences were $12.4
million as compared to $10.9 million for the year ended December 31, 1996, an
increase of $1.5 million or 13.8%. This increase for the 19 Same Store
Residences was primarily attributable to increases in average monthly rents to
$1,772 from $1,670 during 1997. Of the $48.7 million in revenues reported
for the year ended December 31, 1997, $18.5 million or 38.0% was attributable to
Stabilized Residences, $29.0 million or 59.6% was attributable to Start-up
Residences and the remaining $1.2 million was mainly due to the ancillary
revenues in connection with the acquisition of HCI.
General Operating Expenses. For the year ended December 31, 1997, general
operating expenses were $30.3 million as compared to $12.1 million for the year
ended December 31, 1996, an increase of $18.2 million. Of this increase, $10.5
million or 57.7% related to the opening of an additional 54 operating residences
(2,107 units) since December 31, 1996. The remaining $7.7 million or 42.3% of
the increase was attributable to the 51 residences that had operating results as
of December 31, 1997. For the year ended December 31, 1997, residence operating
expenses for the 19 Same Store Residences were $7.1 million as compared to $6.6
million for the year ended December 31, 1996, an increase of $500,000 on these
19 residences. This increase is due to the increase in staffing and food costs
to accommodate the increase in occupancy. Occupancy at these 19 residences
increased to 96.1% from 89.8% during the period. Of the $30.3 million in
residence operation expenses reported for the year ended December 31, 1997,
$10.4 million or 34.3% was attributable to Stabilized Residences, $19.0 million
or 62.7% was attributable to Start-Up Residences and approximately $900,000 was
attributable to the ancillary services provided by HCI.
Corporate General and Administrative. Corporate general and administrative
expenses for the year ended December 31, 1997 were $2.8 million compared to $1.6
million for 1996. This increase is a direct result of additional staffing to
19
cover the increase in corporate activity, travel associated with new residences
located in other states, and the establishment and on-going expenses of the
regional offices.
Building Rentals. Building rentals for the year ended December 31, 1997 were
$9.8 million, compared to the year ended December 31, 1996 of $4.2 million which
represents an increase of 133%. The increase in building rentals is directly
related to the 36 operating leases entered into during 1997, of which 30 were
sale lease back transactions. The Company ended the year with 67 leases compared
to the 31 leases at the end of 1996.
Depreciation and Amortization. Depreciation and amortization for the year
ended December 31, 1997 was $3.0 million, compared to the depreciation for the
year ended December 31, 1996 of $990,000 which represents an increase of 303%.
This increase is the result of additional facilities developed and owned by the
Company during 1997.
Other Income, Net. Interest expense, net of capitalized interest, was
$930,000 for the year ended December 31, 1997 compared to $0 for the year ended
December 31, 1996. The Company's gross interest expenses was $8.3 million for
the year ended December 31, 1997 compared to $2.2 million for the year ended
December 31, 1996, an increase of $6.1 million. The increase in interest
expense is due to temporary construction financing to fund development activity.
Capitalized interest for the year ended December 31, 1997 was $7.4 million
compared to $2.2 million for the year ended December 31, 1996.
Interest Income was $1.6 million for the year ended December 31, 1997 compared
to $455,000 for the year ended December 31, 1996, an increase of $1.2 million.
The increase in interest income is directly related to the offerings completed
in October of 1997 from which the Company received approximately $155 million
net of offering expense of approximately $8.4 million.
Other income (expense) was $2.9 million for the year ended December 31, 1997
compared to an expense of $348,000 for the year ended December 31, 1996, an
increase of $3.2 million. Approximately $2.3 million of other income for the
year ended December 31, 1997 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. The remaining $600,000 related to
development fees received by the Company from HCI prior to its acquisition by
the Company. The $348,000 expense for the year ended December 31, 1996 is a
combination of a one-time charge of $426,000 relating to the conversion of $6.1
million of its $20.0 million 7% Debentures and, a gain on sale of real property
of $82,000 for the year ended December 31, 1996.
Income (Loss) Before Income Taxes. Income before income taxes for the year
ended December 31, 1997 was $6.3 million compared to $149,000 for the year ended
December 31, 1996, an increase of $6.2 million. 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.
Provision for Income Taxes. The Company's provision for income taxes for the
year ended December 31, 1997 was $2.1 million compared to $0 for the year ended
December 31, 1996. The Company utilized all its operating loss carryforwards
from previous periods to offset taxes otherwise payable through 1996.
Net Income (Loss). The Company achieved net income of $4.2 million or $.34
per diluted share for the year ended December 31, 1997, compared to $149,000, or
$.01 per diluted share for the year ended December 31, 1996. This is due to the
number of residences opened in 1997 and the stabilization of those residences
opened in 1996.
Year ended December 31, 1996 to year ended December 31, 1995
The Company had net income of $149,000 or $.01 per diluted share on revenue of
$18.9 million for the year ended December 31, 1996, compared to a net loss of
$575,000 or $.10 per diluted 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
20
405,666 shares of Common Stock on $6.1 million of 7% convertible debentures. The
Company's net income prior to this one-time charge was $574,000 or $.07 per
diluted share.
Revenue. For the year ended December 31, 1996, revenues were $18.9 million as
compared to $4.1 million for the year ended December 31, 1995, an increase of
$14.8 million. Of this increase $14.7 million or 99.0% related to the opening
of an additional 32 operating residences (1,173 units) since December 31, 1995.
For the year ended December 31, 1996, revenues for the Same Store Residences
were $2.8 million as compared to $2.7 million for the year ended December 31,
1995, an increase of $154,000 or 5.8% This increase for the Same Store
Residences was primarily attributable to increases in average monthly rents to
$1,756 from $1,704 during the period. Of the $18.9 million in revenues reported
for the year ended December 31, 1996, $4.1 million or 21.7% was attributable to
Stabilized Residences and $14.8 million or 78.3% was attributable to Start-Up
Residences.
General Operating Expenses. For the year ended December 31, 1996, general
operating expenses were $12.1 million as compared to $2.8 million for the year
ended December 31, 1995, an increase of $9.3 million. Substantially all of this
increase was attributable to the addition of 32 operating residences (1,173
units) since December 31, 1995. For the year ended December 31, 1996, residence
operating expenses for the Same Store Residences were relatively unchanged at
approximately $1.6 million. Of the $12.1 million in general operating expenses
reported for the year ended December 31, 1996, $2.4 million or 19.8% was
attributable to Stabilized Residences and $9.7 million or 80.2% was attributable
to Start-Up Residences.
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 and on going expenses of the
regional offices.
Building Rentals. Building rentals for the year ended December 31, 1996 was
$4.2 million, compared to $798,000 for the year ended December 31, 1995 which
represents an increase of 426%. The increase in building rentals is directly
related to the additional 22 sale leaseback transactions completed
during 1996. The Company ended the year with 31 leases compared to the
nine leases at the end of 1995.
Depreciation and Amortization. Depreciation 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 14 residences that were developed
by the Company in 1996 and were still owned as of December 31, 1996.
Other income, net. For the year ended December 31, 1996, net interest
expense was $0 compared to $96,000 for the year ended December 31, 1995. Gross
interest expense for 1996 was $2.2 million as compared to $673,000 for 1995, an
increase of $1.5 million. Of the increase, $1.4 million or 93.3% was
attributable to the full year effect of interest expense associated with the 7%
Debentures and the balance of $100,000 and 6.7% was attributable to mortgage
bond financing. The Company capitalized $2.2 million of interest expense for
1996 compare to $577,000 for the comparable period in 1995. Interest income for
the year ended December 31, 1996 was $455,000 as compared to $579,000 in 1995.
In addition, in September 1996, the Company incurred a one-time charge of
$426,000 relating to the conversion of $6.1 million of its $20.0 million 7%
Debentures.
Net Income (Loss). The Company achieved net income of $149,000 or $.01 per
diluted share for the year ended December 31, 1996, compared to a net loss of
$575,000, or $.10 per diluted 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.
21
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1997, the Company had positive working capital of $41.0
million. The Company had $63.4 million in cash and cash equivalents as of
December 31, 1997, compared to $2.1 million as of December 31, 1996. The
increase is attributed primarily to the underwritten public offering of 4.1
million shares of Common Stock and $86.3 million in principal amount of
Convertible Subordinated Debentures due 2002 completed in October of 1997 which
netted the Company approximately $155 million after deducting underwriters
discounts and offering expenses.
22
Net cash provided by operating activities was approximately $6.9 million for
the year ended December 31, 1997. The primary source of funds was from net
income of $4.2 adjusted for noncash changes in depreciation and amortization of
$3.0 million. Other operating type items netted to a use of cash of $300,000. As
of December 31, 1997, restricted cash balances were $1.9 million.
Net cash used in investing activities totaled approximately $85.0 million for
the year ended December 31, 1997. The primary use of cash was $160.8 million
related to the development of new assisted living residences in Idaho, Oregon,
Washington, Arizona, Texas, Indiana, Ohio, New Jersey, Pennsylvania and South
Carolina. This was offset by proceeds of $74.1 million related to the sale
lease back of 30 residences. In addition, the Company completed the acquisitions
of Carriage House and HCI using $4.9 million. The Company received $6.6 million
from restricted funds that were released by the Washington Housing Finance
Commission.
Net cash provided by financing activities totaled $139.4 million during the
year ended December 31, 1997. The Company entered into an additional 19
construction financing loans which netted the Company $43.4 million. As of
December 31, 1997, the Company had repaid $63.5 million of construction
financing with $2.2 million in construction financing remaining. The Company
completed mortgage financing with Idaho Housing and Finance Association on four
Idaho Properties for $7.4 million.
Capital expenditures for 1998 are estimated to approximate $160 million to
$190 million, related primarily to the development of additional residences. As
of February 28, 1998, the Company had started construction on 26 residences
(1,006 units) in Washington, Indiana, Pennsylvania, Arizona, Ohio, Iowa,
Nebraska, New Jersey, South Carolina and Louisiana. The Company had also entered
into agreements pursuant to which it may purchase, subject to completion of due
diligence and various other conditions, 24 (959 units) undeveloped sites. The
Company intends to utilize current working capital resources to develop
additional residences. In addition, as of February 28, 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. 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 February 28, 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 its 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 assurances that financing from such sources will be available in
the future, or if available that such financing will be available, on terms
acceptable to the Company.
As of December 31, 1997, the Company had invested excess cash balances in
short-term certificates of deposit.
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.
23
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 in 1998.
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 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
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 December 31,
1997, 17 residences owned or leased by the Company were being operated by the
joint venture. 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
24
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 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 completion of the common stock and convertible subordinated
debenture offerings in October of 1997 and the completion of the acquisitions of
Carriage House and HCI, the Company expects to retain ownership of a greater
number of its assisted living residences as well as to accelerate its
development program. Historically, the Company has relied extensively on
sale leaseback financings from REITs to finance its development efforts. The
Company also 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 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.
25
The Company's aggregate annual fixed debt and lease payment obligations as of
February 28, 1998 totaled approximately $16.7 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, 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 December 31, 1997, 28.5% of the Company's properties are in Texas, 15.4% are
in Oregon, 13.1% in Ohio and 10.8% in Washington; therefore, the Company is
dependent on the economies of Texas, Oregon, Ohio and Washington and, to a
certain extent, on the continued funding of state Medicaid waiver programs.
During the year ended December 31, 1995, 1996 and 1997, direct payments received
from state Medicaid agencies accounted for approximately 21.4%, 13.8%, and
11.3%, respectively of the Company's revenue while the tenant-paid portion of
Medicaid residents accounted for approximately 9.6%, 7.6%, and 6.0%,
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 and 1997, the Company received, as a percentage of total revenue,
under Medicaid programs 21.4%, 13.8%, and 11.3%, 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. 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 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.
26
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.