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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20459
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FORM 10-Q
(Mark One)
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2000
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 1-83938
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ASSISTED LIVING CONCEPTS, INC.
(Exact name of registrant as specified in its charter)
Nevada 93-1148702
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
11835 NE Glenn Widing Drive, Bldg. E Portland, OR 97220
(Address of principal executive offices)
(503) 252-6233
(Registrant's telephone number, including area code)
----------------
Indicate by check mark whether Registrant (1) has filed all reports to be
filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that Registrant was required
to file such reports), and (2) has been subject to such filing requirements
for the past 90 days. YES [X] NO [_]
The Registrant had 17,120,745 shares of common stock, $.01 par value,
outstanding at August 10, 2000.
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ASSISTED LIVING CONCEPTS, INC.
FORM 10-Q
June 30, 2000
INDEX
PART I--FINANCIAL INFORMATION
Page
----
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets, December 31, 1999 and June 30, 2000........ 3
Consolidated Statements of Operations and Consolidated Statements of
Comprehensive Loss, Three and Six Months Ended June 30, 1999 and 2000.. 4
Consolidated Statements of Cash Flows, Six Months Ended June 30, 1999
and 2000............................................................... 5
Notes to Consolidated Financial Statements.............................. 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS............................................. 8
RISK FACTORS.............................................................. 15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........ 21
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS................................................. 23
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.................................. 23
2
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements
ASSISTED LIVING CONCEPTS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
December 31, June 30,
1999 2000
------------ -----------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents........................... $ 7,606 $ 3,878
Restricted cash..................................... 7,555 8,496
Marketable securities, available for sale........... 1,680 --
Accounts receivable, net of allowance for doubtful
accounts of $1,062 and
$797, respectively................................. 4,069 4,045
Prepaid expenses.................................... 948 1,043
Other current assets................................ 3,419 3,045
-------- --------
Total current assets.............................. 25,277 20,507
-------- --------
Property and equipment................................ 321,622 322,507
Less accumulated depreciation....................... 15,974 20,579
-------- --------
Property and equipment, net......................... 305,648 301,928
-------- --------
Goodwill, net......................................... 5,077 4,931
Other assets, net..................................... 10,186 9,297
-------- --------
Total assets...................................... $346,188 $336,663
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................... $ 1,318 $ 856
Construction payable................................ 1,078 284
Accrued real estate taxes........................... 4,466 4,361
Accrued interest expense............................ 1,940 1,746
Accrued payroll expense............................. 2,773 2,809
Other accrued expenses.............................. 2,030 1,378
Other current liabilities........................... 2,586 2,826
Current portion of long-term debt................... 1,494 1,697
-------- --------
Total current liabilities......................... 17,685 15,957
-------- --------
Other liabilities..................................... 5,960 5,978
Long-term debt........................................ 71,949 71,418
Convertible subordinated debentures................... 161,250 161,250
-------- --------
Total liabilities................................. 256,844 254,603
-------- --------
Commitments and Contingencies
Shareholders' equity:
Preferred Stock, $.01 par value; 1,000,000 shares
authorized;
None issued and outstanding........................ -- --
Common Stock, $.01 par value; 80,000,000 shares
authorized; issued and outstanding 17,120,745
shares in 1999 and 2000............................ 171 171
Additional paid-in capital.......................... 144,443 144,451
Fair market value in excess of historical cost of
acquired net assets attributable to related party
transactions....................................... (239) (239)
Accumulated other comprehensive loss................ (320) --
Accumulated deficit................................. (54,711) (62,323)
-------- --------
Total shareholders' equity........................ 89,344 82,060
-------- --------
Total liabilities and shareholders' equity........ $346,188 $336,663
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
3
ASSISTED LIVING CONCEPTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
Three Months Six Months Ended
Ended June 30, June 30,
---------------- -----------------
1999 2000 1999 2000
------- ------- -------- -------
Revenue................................... $28,479 $34,146 $ 55,062 $67,278
Operating expenses:
Residence operating expenses............ 19,800 22,305 39,565 44,987
Corporate, general and administrative... 5,113 5,066 9,343 9,114
Building rentals........................ 3,827 3,685 6,919 7,330
Building rentals to related party....... 300 317 550 634
Depreciation and amortization........... 2,087 2,339 4,267 4,751
Site abandonment costs.................. 3,467 -- 4,776 --
------- ------- -------- -------
Total operating expenses.............. 34,594 33,712 65,420 66,816
------- ------- -------- -------
Operating income (loss)................... (6,115) 434 (10,358) 462
------- ------- -------- -------
Other income (expense):
Interest expense........................ (3,301) (4,090) (7,096) (8,118)
Interest income......................... 407 180 1,012 389
Gain (loss) on sale and disposal of
assets................................. -- 13 (127) 13
Loss on sale of marketable securities... -- (368) -- (368)
Other income (expense).................. 3 10 (97) 10
------- ------- -------- -------
Total other income (expense).......... (2,891) (4,255) (6,308) (8,074)
------- ------- -------- -------
Net loss.................................. $(9,006) $(3,821) $(16,666) $(7,612)
======= ======= ======== =======
Basic and diluted net loss per common
share.................................... $ (0.53) $ (0.22) $ (0.97) $ (0.44)
======= ======= ======== =======
Basic and diluted weighted average common
shares outstanding....................... 17,116 17,121 17,096 17,121
======= ======= ======== =======
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- -----------------
1999 2000 1999 2000
--------- --------- -------- -------
Net loss............................... $ (9,006) $ (3,821) $(16,666) $(7,612)
Other comprehensive loss:
Unrealized losses on investments..... (155) -- (200) --
--------- --------- -------- -------
Comprehensive loss..................... $ (9,161) $ (3,821) $(16,866) $(7,612)
========= ========= ======== =======
The accompanying notes are an integral part of these consolidated financial
statements.
4
ASSISTED LIVING CONCEPTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six Months Ended
June 30,
-----------------
1999 2000
-------- -------
Operating activities:
Net loss.................................................... $(16,666) $(7,612)
Adjustment to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 4,267 4,751
Provision for doubtful accounts........................... 58 291
Site abandonment costs.................................... 4,776 --
Loss on sale of marketable securities..................... -- 368
Compensation expense on restricted stock.................. 204 --
Compensation expense on issuance of consultant options.... -- 8
Changes in assets and liabilities:
Accounts receivable....................................... (1,891) (267)
Prepaid expenses.......................................... (42) (95)
Other current assets...................................... 480 374
Other assets.............................................. 1,894 889
Accounts payable.......................................... (217) (462)
Accrued expenses.......................................... 3,235 (915)
Other current liabilities................................. (2,841) 240
Other liabilities......................................... 1,536 18
-------- -------
Net cash used in operating activities....................... (8,162) (2,412)
-------- -------
Investing activities:
Purchase of marketable securities, available for sale..... (4,400) --
Restricted cash........................................... -- (941)
Sale of investment securities............................. -- 1,632
Proceeds from sale of land................................ 19 --
Purchases of property and equipment....................... (24,606) (1,679)
-------- -------
Net cash used in investing activities....................... (28,987) (988)
-------- -------
Financing activities:
Payments on long-term debt................................ (269) (328)
Proceeds from issuance of common stock.................... 154 --
Purchase of restricted stock.............................. (750) --
-------- -------
Net cash used in financing activities....................... (865) (328)
-------- -------
Net decrease in cash and cash equivalents................... (38,014) (3,728)
Cash and cash equivalents, beginning of period.............. 55,036 7,606
-------- -------
Cash and cash equivalents, end of period.................... $ 17,022 $ 3,878
======== =======
Supplemental disclosure of cash flow information:
Cash payments for interest................................ $ 8,271 $ 7,500
Unrealized loss on investment............................. $ (200) $ --
Amendment of leases and removal of related assets......... $ 29,492 $ --
Amendment of leases and removal of related debt........... $ 31,488 $ --
Retirement of restricted stock............................ $ 3,412 $ --
Increase (decrease) in construction payables and property
and equipment............................................ $ (3,238) $ (794)
The accompanying notes are an integral part of these consolidated financial
statements.
5
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Assisted Living Concepts, Inc. (the "Company") owns, operates and leases
assisted living residences which provide housing and services to older persons
who need help with the activities of daily living such as bathing and
dressing. The Company provides personal care and support services and makes
available routine health care services, which are designed to meet the needs
of its residents.
Basis of Presentation and Principles of Consolidation
These consolidated financial statements have been prepared without being
audited, as allowed by the rules and regulations of the Securities and
Exchange Commission. The accompanying consolidated financial statements
include the Company's accounts and its wholly owned subsidiaries that manage,
own, and lease assisted living residences. All significant intercompany
accounts and transactions have been eliminated in consolidation. Certain
information and footnote disclosures that are normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted as allowed by rules and regulations
of the Securities and Exchange Commission. These consolidated financial
statements should be read in conjunction with the audited consolidated
financial statements and notes included in the Company's annual report on Form
10-K for the year ended December 31, 1999.
The financial information included in these financial statements contain all
adjustments (which consist of normal recurring adjustments) which are, in the
opinion of management, necessary for a fair presentation of results for the
quarterly periods. The results of operations for the three and six month
periods ended June 30, 2000 do not necessarily indicate the results that are
expected for the full year.
2. RESTRICTED CASH
Restricted cash consists of: i) $6.2 million related to loan agreements with
U.S. Bank National Association ("U.S. Bank"), ii) $900,000 related to certain
lease agreements and iii) $1.4 million related to required workers
compensation insurance deposits.
3. MARKETABLE SECURITIES
Marketable securities consist of highly liquid marketable debt securities.
The aggregate market value of securities held at December 31, 1999 was $1.7
million. These investments, which have a historical cost of $2.0 million, had
been classified as available for sale in accordance with Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." As a result, unrealized investment losses of
$320,000 were included as a component of comprehensive loss and shareholders'
equity at December 31, 1999. These investments were sold and a realized loss
of $368,000 (which includes previous unrealized losses) was recognized during
the three month period ended June 30, 2000.
6
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
4. PROPERTY AND EQUIPMENT
The Company's property and equipment, stated at cost, consists of the
following (in thousands):
December 31, June 30,
1999 2000
------------ --------
Land.................................................. $ 21,329 $ 21,345
Buildings............................................. 286,347 286,862
Equipment............................................. 5,344 5,668
Furniture............................................. 8,602 8,632
-------- --------
Property and equipment................................ 321,622 322,507
Less accumulated depreciation....................... 15,974 20,579
-------- --------
Property and equipment, net........................... $305,648 $301,928
======== ========
During the three and six months ended June 30, 1999, the Company capitalized
interest costs of $620,000 and $1.6 million, respectively, relating to
financing of construction in process. In addition, the Company capitalized
payroll costs that were directly related to construction and development of
the residences of $167,000 and $413,000 for the three and six months ended
June 30, 1999, respectively. No such costs were capitalized during the three
and six months ended June 30, 2000.
5. LIQUIDITY
The Company had a total of $3.9 million in unrestricted cash and cash
equivalents on hand at June 30, 2000. On May 1, 2000, the Company made a semi-
annual interest payment on its convertible subordinated debentures of $4.7
million and will make a similar payment on November 1, 2000. The Company
believes its current cash on hand, cash available from operations and
potential loans on uncollateralized properties will be sufficient to meets its
operating needs through June 2001. However, many of the Company's properties
opened in the last two to three years, and the Company has had limited
experience in the capital expenditure requirements that are necessary to
maintain these properties in their current condition. The Company is currently
exploring various financing alternatives for both its encumbered and
unencumbered properties. No such future financing commitments are currently in
place.
6. SUBSEQUENT EVENT
The Company's credit agreements with U.S. Bank contain restrictive covenants
which include compliance with two financial ratios. On July 21, 2000, the
Company finalized an agreement with U.S. Bank whereby U.S. Bank agreed to
modify and waive certain financial covenants with which the Company would have
otherwise failed to comply as of June 30, 2000. In exchange for the
modification and waiver of financial covenants for the quarters ended June 30,
2000 and September 30, 2000, the Company provided three previously
unencumbered Washington state properties as additional collateral. The
agreement also provides for the release of $1.8 million of cash collateral
currently held by U.S. Bank (see Note 2) upon the satisfaction of certain
conditions, which the Company believes will be satisfied during August 2000.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
References in this section to "ALC," the "Company," "us" or "we" refer to
Assisted Living Concepts, Inc. and its subsidiaries.
Securityholder Litigation
In 1999, an amended consolidated complaint ("the Complaint") was filed
against us and certain of our past and present officers, directors and
indemnities. The Complaint alleges violations of the federal securities laws
and seeks unspecified damages. We filed an answer to the Complaint on December
7, 1999. See Part II, Item 1 (Legal Proceedings) for information regarding
this litigation.
Overview
We operate, own and lease 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. We also provide personal
care and support services, and make available routine health care services (as
permitted by applicable regulations) designed to meet the personal and health
care needs of our residences. As of June 30, 2000 we operated 185 assisted
living residences (7,148 units) in 16 states, of which we owned 115 residences
(4,515 units) and leased 70 residences (2,633 units).
We derive our revenues primarily from resident fees for rent and for the
delivery of assisted living services. Resident fees typically are paid monthly
by residents, their families, state Medicaid agencies or other third parties.
Resident fees include revenue derived from a multi-tiered rate structure,
which varies based on the level of care provided. Resident fees are recognized
as revenues when services are provided.
Our operating expenses include:
. residence operating expenses, such as staff payroll and benefits, food,
property taxes, utilities, insurance and other direct residence
operating costs;
. general and administrative expenses, consisting of corporate and support
functions which also include legal, accounting and other administrative
expenses;
. building rentals; and
. depreciation and amortization.
The following table sets forth, for the periods presented, the number of
residences and units operated, average occupancy rates and sources of revenue.
The portion of revenues received from state Medicaid agencies are labeled as
"Medicaid state portion" while the portion of our revenues that a Medicaid-
eligible resident must pay out of his or her own resources is labeled
"Medicaid resident portion."
Three
months
ended June
30,
------------
1999 2000
----- -----
Total Residences:
Residences operated (end of period).......................... 175 185
Units operated (end of period)............................... 6,741 7,148
Average occupancy rate (based on occupied units)............. 74.3% 79.8%
Sources of revenue:
Medicaid state portion....................................... 10.5% 10.6%
Medicaid resident portion.................................... 6.0% 5.9%
Private...................................................... 83.5% 83.5%
----- -----
Total...................................................... 100.0% 100.0%
===== =====
8
The following tables set forth, for the periods presented, the compilation
of operating results of the 165 Same Store Residences. Same Store Residences
are defined as those residences which were operating throughout comparable
reporting periods.
COMPILATION OF SAME STORE RESIDENCES
THREE AND SIX MONTHS ENDED JUNE 30, 2000
(in thousands except unit and average rent data)
Three Months Six Months
Ended June 30, Ended June 30,
---------------- ----------------
1999 2000 1999 2000
------- ------- ------- -------
Revenue................................. $28,077 $31,895 $54,309 $62,062
Residence operating expense............. 19,292 20,498 38,241 40,624
------- ------- ------- -------
Residence operating income............ 8,785 11,397 16,068 21,438
Building rentals........................ 4,118 3,993 7,453 7,945
Depreciation and amortization........... 1,860 1,874 3,691 3,579
------- ------- ------- -------
Total other operating expenses........ 5,978 5,867 11,144 11,524
------- ------- ------- -------
Operating income.................... $ 2,807 $ 5,530 $ 4,924 $ 9,914
======= ======= ======= =======
Residences operating.................... 169 169 165 165
Units operating......................... 6,496 6,496 6,350 6,350
Average occupancy rate (based on
occupied units)........................ 75.7% 82.3% 73.6% 82.6%
Weighted average rent................... $ 1,876 $ 1,965 $ 1,876 $ 1,953
Residence operating income margin....... 31.3% 35.7% 29.6% 34.5%
Results of Operations
Three months ended June 30, 2000 compared to three months ended June 30, 1999
We incurred a net loss of $3.8 million, or $0.22 per basic and diluted
common share, on revenue of $34.1 million for the three months ended June 30,
2000 (the "June 2000 Quarter") as compared to a net loss of $9.0 million, or
$0.53 per basic and diluted common share, on revenues of $28.5 million for the
three months ended June 30, 1999 (the "June 1999 Quarter").
We had certificates of occupancy for 185 residences, all of which were
included in our operating results as of the end of the June 2000 Quarter as
compared to 175 residences included in our operating results as of the end of
the June 1999 Quarter.
Of the residences included in our operating results at the end of the June
2000 Quarter, we owned 115 residences and leased 70 residences as compared to
105 owned residences and 70 leased residences as of the end of the June 1999
Quarter.
Revenues. Revenues were $34.1 million for the June 2000 Quarter as compared
to $28.5 million for the June 1999 Quarter, a net increase of $5.6 million.
Revenue increases consisted of:
. $3.8 million related to the 169 Same Store Residences (6,496 units); and
. $1.8 million related to the 16 residences (652 units) which commenced
operations during or subsequent to the June 1999 Quarter.
9
The increase in revenue from Same Store Residences resulted from a
combination of:
. An increase in occupancy to 82.3% for the June 2000 Quarter as compared
to 75.7% for the June 1999 Quarter; and
. An increase in average monthly rental rate to $1,965 for the June 2000
Quarter as compared to $1,876 for the June 1999 Quarter.
Residence Operating Expenses. Residence operating expenses were $22.3
million for the June 2000 Quarter as compared to $19.8 million for the June
1999 Quarter, a net increase of $2.5 million.
Residence operating expense increases consisted of:
. $1.2 million related to the 169 Same Store Residences (6,496 units); and
. $1.3 million related to the 16 residences (652 units) which commenced
operations during or subsequent to the June 1999 Quarter.
Residence operating expenses for the Same Store Residences were $20.5
million for the June 2000 Quarter as compared to $19.3 million for the June
1999 Quarter, an increase of $1.2 million. The increase in operating expenses
from Same Store Residences was attributable to additional expenses associated
with the increase in occupancy at the Same Store Residences subsequent to the
June 1999 Quarter.
Corporate, General and Administrative. Corporate, general and administrative
expenses were $5.1 million for the June 2000 Quarter compared to $5.1 million
for the June 1999 Quarter. Our corporate general and administrative expenses
before capitalized payroll costs were $5.1 million for the June 2000 Quarter
as compared to $5.3 million for the June 1999 Quarter, a decrease of
approximately $200,000. The decrease was due to the following:
. $292,000 as a result of decreased payroll and related expenses. Payroll
expenses in the June 1999 Quarter included $420,000 of separation costs
related to certain terminated corporate employees as compared to
$350,000 of such costs for the June 2000 Quarter;
. $200,000 as a result of decreased professional fees. Higher professional
fees in the June 1999 Quarter were associated with higher legal,
financial advisory and accounting costs due to the restatement of our
earnings for fiscal 1996 and 1997 periods and the interim 1998 periods;
and
. $30,000 as a result of decreases in travel and related costs.
The decrease was offset by increases in corporate, general and
administrative expenses of:
. $250,000 as a result of increased long distance telephone usage
associated with the development of our communication infrastructure,
including dial-up and intranet access for our remote locations; and
. $75,000 as a result of increases in insurance costs, including increases
in coverage and rates.
As a result of the completion of our development projects, we did not
capitalize payroll costs during the June 2000 Quarter. We capitalized $167,000
of payroll costs for the June 1999 Quarter.
Building Rentals. Building rentals were $4.0 million for the June 2000
Quarter as compared to $4.1 million for the June 1999 Quarter, a decrease of
$100,000. This decrease was due to an increase in the amortization of the
deferred gain on the sale and leaseback of certain properties.
Depreciation and Amortization. Depreciation and amortization expense was
$2.3 million in the June 2000 Quarter as compared to $2.1 million in the June
1999 Quarter, an increase of $200,000. The increase is due to depreciation
expense related to the 16 residences that commenced operations during or
subsequent to June 1999 Quarter.
10
Site Abandonment Costs. As the result of our decision to terminate new
construction we recorded site abandonment costs of $3.5 million in the June
1999 Quarter with respect to certain sites which we determined we would not
develop.
Interest Expense. Interest expense was $4.1 million for the June 2000
Quarter compared to $3.3 million for the June 1999 Quarter. Gross interest
expense for the June 2000 Quarter was $4.1 million compared to $3.9 million
for the June 1999 Quarter, an increase of approximately $200,000. The increase
was primarily due to the following:
. $60,000 due to increases in interest rates on variable rate debt; and
. $120,000 due to financing fees related to annual letters of credit.
As a result of the completion of our development projects, we did not
capitalize interest costs in the June 2000 Quarter. In the June 1999 Quarter,
we capitalized $620,000 of interest directly related to financing development
activities.
Interest Income. Interest income was $180,000 for the June 2000 Quarter
compared to $407,000 for the June 1999 Quarter, a decrease of $227,000. This
decrease was the result of decreased balances in cash and cash equivalents and
marketable securities.
Net Loss. As a result of the above, we incurred a net loss of $3.8 million
or $0.22 per basic and diluted common share for the June 2000 Quarter,
compared to a net loss of $9.0 million, or $0.53 per basic and diluted common
share, for the June 1999 Quarter.
Six months ended June 30, 2000 compared to six months ended June 30, 1999
We incurred a net loss of $7.6 million, or $0.44 per basic and diluted
share, on revenue of $67.3 million for the six months ended June 30, 2000 (the
"June 2000 YTD Period"), as compared to a net loss of $16.7 million, or $0.97
per basic and diluted share, on revenue of $55.1 million for the six months
ended June 30, 1998 (the "June 1999 YTD Period").
Revenues. Revenues were $67.3 million for the June 2000 YTD Period as
compared to $55.1 million for the June 1999 YTD Period, a net increase of
$12.2 million.
Of this increase:
. $7.8 million related to the 165 Same Store Residences (6,350 units); and
. $4.4 million related to the 20 residences (798 units) which commenced
operations during or subsequent to the June 1999 YTD Period.
Revenues from Same Store residences were $62.1 million for the June 2000 YTD
Period as compared to $54.3 million for the June 1999 YTD Period, an increase
of $7.8 million. The increase in revenue from Same Store Residences was a
combination of:
. An increase in occupancy to 82.6% for the June 2000 YTD Period as
compared to 73.6% for the June 1999 YTD Period; and
. An increase in average monthly rental rate to $1,953 for the June 2000
YTD Period as compared to $1,876 for the June 1999 YTD Period.
Residence Operating Expenses. Residence operating expenses were $45.0
million for the June 2000 YTD Period compared to $39.6 million for the June
1999 YTD Period, a net increase of $5.4 million.
11
Of this increase:
. $2.4 million related to 165 Same Store Residences (6,350 units); and
. $3.0 million related to the 20 residences (798 units) which commenced
operations during or subsequent to the June 1999 YTD Period.
Residence operating expenses for the Same Store Residences were $40.6
million for the June 2000 YTD Period as compared to $38.2 million for the June
1999 YTD Period, an increase of $2.4 million. The increase in operating
expenses from Same Store Residences was primarily attributable to additional
expenses associated with the increase in occupancy at the Same Store
Residences subsequent to the June 1999 YTD Period.
Corporate, General and Administrative. Corporate, general and administrative
expenses were $9.1 million for the June 2000 YTD Period compared to $9.3
million in the June 1999 YTD Period. Our corporate, general and administrative
expenses before capitalized payroll costs were $9.1 million for the June 2000
YTD Period as compared to $9.7 million for the June 1999 YTD Period, a
decrease of $600,000. The decrease was due to the following:
. $650,000 as a result of decreased payroll and related expenses. Payroll
expenses in the June 1999 YTD Period included $950,000 of separation
costs related to certain terminated corporate employees as compared to
$350,000 of such costs for the June 2000 YTD Period; and
. $464,000 as a result of decreased professional fees. Higher professional
fees in the June 1999 YTD Period were associated with higher legal,
financial advisory and accounting costs due to regulatory issues,
securityholder litigation and the restatement of our earnings for fiscal
1996 and 1997 periods and the interim 1998 periods; and
. $130,000 as a result of a decrease in travel related expenses.
The decrease was offset by an increases in corporate, general and
administrative expenses of:
. $400,000 as a result of increased long distance telephone usage
associated with increased usage of Company wide email which requires
remote connections via access to a central telephone number; and
. $220,000 as a result of increases in insurance costs, including
increases in coverage and rates.
As a result of the completion of our development projects, we did not
capitalize payroll costs during the June 2000 YTD Period. We capitalized
$413,000 of payroll costs for the June 1999 YTD Period.
Building Rentals. Building rentals were $8.0 million for the June 2000 YTD
Period as compared to $7.5 million for the June 1999 YTD Period, an increase
of $500,000. This increase was primarily due to the following:
. $840,000 due to the March 1999 amendment of 16 of our operating leases
which were previously accounted for as financings. The amendment
eliminated our continuing involvement in the residences in the form of a
fair value purchase option. As a result, the leases were accounted for
as operating leases, effective March 31, 1999. Accordingly, rent expense
related to such leases after the date of the amendment, has been
classified as building rentals, rather than interest expense as
previously recorded.
The increase was offset by a decrease in building rentals of:
. $130,000 due primarily to the amendment of other operating leases,
effective December 31, 1998, to contain escalating rent payments that
are considered contingent. Prior to such amendment, the leases contained
rent escalation clauses that were not deemed contingent, resulting in
the recognition of lease expense on a straight line basis over the term
instead of on a cash basis; and
. $200,000 in amortization of gain on sale leaseback transactions during
the June 2000 YTD period as compared to the June 1999 YTD period. The
increase is due primarily to the amortization of the gain associated
with the amended operating leases previously accounted for as financings
as discussed above.
12
Depreciation and Amortization. Depreciation and amortization expense was
$4.8 million for the June 2000 YTD Period compared to $4.3 million for the
June 1999 YTD Period, a net increase of $500,000. The increase in depreciation
and amortization was due primarily to the depreciation expense related to the
20 new residences that opened during fiscal 1999.
Site Abandonment Costs. As the result of our decision to terminate new
construction we recorded site abandonment costs of $4.8 million during the
June 1999 YTD Period with respect to certain sites which we determined we
would not develop. We do not anticipate incurring similar write-offs in the
future.
Interest Expense. Interest expense was $8.1 million for the June 2000 YTD
Period as compared to $7.1 million for the June 1999 YTD Period. Gross
interest expense for the June 2000 YTD Period was $8.1 million as compared to
$8.7 million for the June 1999 YTD Period, a net decrease of $600,000. This
decrease was due to the following:
. $840,000 due to the March 1999 amendment of 16 of our operating leases
which were previously accounted for as financings, as discussed above.
Accordingly, interest expense related to such leases after the date of
the amendment, has been classified as building rentals, rather than
interest expense as previously recorded; and
. $95,000 due to interest expense associated with the repayment of joint
venture advances in February 1999.
The decrease was offset by increases in interest expense of:
. $140,000 due to increases in interest rates on variable rate debt; and
. $200,000 due to financing fees related to letters of credit.
As a result of the completion of our development projects, we did not
capitalize interest costs in the June 2000 YTD Period. In the June 1999 YTD
Period, we capitalized $1.6 million of interest directly related to financing
development activities.
Liquidity and Capital Resources
At June 30, 2000, we had working capital of $4.6 million, including
unrestricted cash and marketable securities of $3.9 million.
Net cash used in operating activities was $2.4 million during the six months
ended June 30, 2000. The primary use of cash in operations was to fund the
cash component of the net loss of $7.6 million.
Net cash used in investing activities totaled $988,000 during the six months
ended June 30, 2000. The primary source of cash was $1.6 million related to
the sale of marketable securities. The use of cash in investing activities
included $1.7 million of capital expenditures and an increase of $941,000 of
restricted cash in accordance with deposits required for certain lease
agreements.
Net cash used in financing activities totaled $328,000 during the six months
ended June 30, 2000. The use of cash in financing activities was due to
payments on long term debt.
During the third quarter of 1999, we amended certain loan agreements with
U.S. Bank National Association ("U.S. Bank"). Pursuant to the amendment, we
agreed to provide $8.3 million of additional cash collateral in exchange for
the waiver of certain possible defaults related to the delivery of financial
statements and compliance with financial covenants, including an amendment to
certain financial covenants. The amendment also provides for the release of
the additional collateral upon the achievement of specified performance
targets, provided that we are in compliance with the other terms of the loan
agreements. We achieved certain of these specified targets during the fourth
quarter of fiscal 1999 and the first quarter of fiscal 2000 resulting in the
release of $1.2 million and $1.1 million of the restricted cash, respectively.
13
On July 21, 2000, we finalized an agreement with U.S. Bank whereby U.S. Bank
agreed to modify and waive certain financial covenants with which we would
have otherwise failed to comply as of June 30, 2000. In exchange for the
modification and waiver of financial covenants through the quarters ended June
30, 2000 and September 30, 2000, we provided three previously unencumbered
Washington state properties as additional collateral. The agreement also
provides for the release of $1.8 million of cash collateral currently held by
U.S. Bank (see Note 2 of the financial statements included in Part I) upon the
satisfaction of certain conditions, which we believe will be satisfied in
August 2000. We cannot assure you that we will satisfy these conditions and
performance targets, or that we will comply in the future with the modified
financial covenants included in the agreement.
Our ability to satisfy our obligations, including payments with respect to
our outstanding indebtedness and lease obligations, will depend on future
performance, which is subject to our ability to stabilize our operations, and
to a certain extent, to general economic, financial, competitive, legislative,
regulatory and other factors that are beyond our control. We had a total of
$3.9 million of unrestricted cash and cash equivalents on hand as of June 30,
2000. On May 1, 2000, we made a semi-annual interest payment on our
convertible subordinated debentures of $4.7 million and will make a similar
payment on November 1, 2000. Although we believe that our current cash on
hand, cash available from operations and potential loans on uncollateralized
properties are sufficient to meet our operating needs through June 2001, there
can be no assurance that cash available from operations will be sufficient to
fund our operations beyond such time. In addition, our 6.0% convertible
subordinated debentures and our 5.625% convertible subordinated debentures
mature on November 1, 2002 and May 1, 2003, respectively, which will require
substantial replacement financing. We are currently exploring various
financing alternatives for both our encumbered and unencumbered properties. No
such future financing commitments are currently in place. As a result of the
securityholder litigation and other factors, there can be no assurance that
financing from any source will be available in the future, or, if available,
that such financing will be available on terms acceptable to us.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities." In June 2000, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities, an amendment of FASB Statement No. 133". We do not
expect the adoption of these statements to have a significant impact on our
financial condition or results of operations.
In March 2000, the Financial Accounting Standards Board, or FASB, issued
Interpretation No. 44, Accounting for Certain Transactions involving Stock
Compensation--an interpretation of APB Opinion No. 25, (FIN 44). We do not
expect the adoption of this statement to have a significant impact on our
financial condition or results of operations.
14
RISK FACTORS
Set forth below are certain risks that we believe are material. This report
on Form 10-Q, including the risks discussed below, contains forward-looking
statements made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. These forward-looking statements may
be affected by risks and uncertainties, including without limitation (i) our
ability to control costs and improve operating margins (ii) the degree to
which our future operating results and financial condition will be affected by
the securityholder or other litigation described in this report, (iii) the
possibility that we may incur start-up costs in excess of our present
expectations, (iv) the possibility that we will experience slower fill-up of
our start-up residences and/or declining occupancy in our stabilized
residences, either of which would adversely affect residence operating
margins, and (v) the possibility that we will not be able to obtain financing
needed to fund our operations through June 2001. In light of such risks and
uncertainties, our actual results could differ materially from such forward-
looking statements. Except as may be required by law, we do not undertake any
obligation to publicly release any revisions to any forward-looking statements
contained herein to reflect events and circumstances occurring after the date
hereof or to reflect the occurrence of unanticipated events.
We are highly leveraged; our loan and lease agreements contain financial
covenants.
We had total indebtedness, including short term portion, of $234.4 million
as of June 30, 2000. In addition, we had shareholders' equity of $82.1 million
as of June 30, 2000. The degree to which we are leveraged could have important
consequences, including:
. making it more difficult to satisfy our debt or lease obligations;
. increasing our vulnerability to general adverse economic and industry
conditions;
. limiting our ability to obtain additional financing;
. requiring dedication of a substantial portion of our cash flow from
operations to the payment of principal of, and interest on, our debt or
leases, thereby reducing the availability of such cash flow to fund
working capital, capital expenditures or other general corporate
purposes;
. limiting our flexibility in planning for, or reacting to, changes in our
business or industry; and
. placing us at a competitive disadvantage to less leveraged competitors.
Several of our debt instruments and leases contain financial covenants,
including debt to cash flow and net worth tests. Our credit agreements with
U.S. Bank require us to comply with two financial ratios that became more
restrictive commencing in the second quarter of 2000. On July 21, 2000, we
finalized an agreement with U.S. Bank whereby U.S. Bank agreed to modify and
waive these financial covenants which we would have otherwise failed to comply
as of June 30, 2000. In exchange for the modification and waiver of these
financial covenants for the quarters ended June 30, 2000 and September 30,
2000, we provided three previously unencumbered Washington state properties as
additional collateral. We cannot assure that we will comply in the future with
the modified financial covenants included in the agreement, or with the
financial covenants set forth in our other debt instruments and leases. If we
fail to comply with one or more of the U.S. Bank covenants or any other debt
or lease covenants (after giving effect to any applicable cure period), the
lender or lessor may declare us in default of the underlying obligation and
exercise any available remedies, which may include:
. in the case of debt, declaring the entire amount of the debt immediately
due and payable;
. foreclosing on any residences or other collateral securing the
obligation;
. in the case of a lease, terminating the lease and suing for damages.
In addition, many of our debt instruments and leases contain "cross-default"
provisions pursuant to which
a default under one obligation can cause a default under one or more other
obligations. Accordingly, it could have a material adverse effect on our
financial condition if any lender or lessor notifies us that we are in default
under any debt instrument or lease.
15
We will require additional financing.
Our ability to satisfy our obligations, including payments with respect to
our outstanding indebtedness and lease obligations, will depend on future
performance, which is subject to our ability to stabilize our operations, and
to a certain extent, to general economic, financial, competitive, legislative,
regulatory and other factors that are beyond our control. We had a total of
$3.9 million of unrestricted cash and cash equivalents on hand as of June 30,
2000. On May 1, 2000, we made a semi-annual interest payment on our
convertible subordinated debentures of $4.7 million and will make a similar
payment on November 1, 2000. Although we believe that our current cash on
hand, cash available from operations and potential loans on uncollateralized
properties will be sufficient to meet our operating needs through June 2001,
there can be no assurance that cash available from operations will be
sufficient to fund our operations beyond such time. In addition, our 6.0%
convertible subordinated debentures and our 5.625% convertible subordinated
debentures mature on November 1, 2002 and May 1, 2003, respectively, which
will require substantial replacement financing. We are currently exploring
various financing alternatives for both our encumbered and unencumbered
properties. No such future financing commitments are currently in place. As a
result of the securityholder litigation and other factors, there can be no
assurance that financing from any source will be available in the future, or,
if available, that such financing will be available in amounts necessary to
meet maturing obligations or on terms acceptable to us.
Approximately $28.1 million of our indebtedness was secured by letters of
credit as of June 30, 2000 which in some cases have termination dates prior to
the maturity of the underlying debt. As such letters of credit expire,
beginning in 2003, we will need to obtain replacement letters of credit, post
cash collateral or refinance the underlying debt. There can be no assurance
that we will be able to procure replacement letters of credit from the same or
other lending institutions on terms that are acceptable to us. In the event
that we are unable to obtain a replacement letter of credit or provide
alternate collateral prior to the expiration of any of these letters of
credit, we would be in default on the underlying debt.
We may incur significant costs and liability as a result of our securityholder
or other litigation.
Since February 1, 1999, 12 separate complaints were filed in the United
States District Court for the District of Oregon against us and certain of our
past and present officers and directors. Pursuant to Order signed on June 1,
1999, those complaints were consolidated for all purposes. On July 23, 1999, a
consolidated complaint was filed, and on October 20, 1999, an amended
consolidated complaint (the "Complaint") was filed. The Complaint alleges
violations of the federal securities laws and seeks unspecified damages. We
filed an answer to the Complaint on December 7, 1999. See Part II, Item 1 for
a discussion of this litigation.
On June 1, 2000, we were served with a complaint, filed May 30, 2000 in the
Marion (Indiana) Superior Court on behalf of the Commissioner of the Indiana
State Department of Health. The complaint alleges that our facility in
Logansport, Indiana, one of our 21 facilities in Indiana, is being operated as
an unlicensed "health facility". It seeks to enjoin us from operating the
Logansport facility as a "health facility" until we are in compliance with
Indiana law, including obtaining an appropriate license, and paying a fine of
$25,000 per day for each day of unlicensed operation. We are working with the
state of Indiana to find a satisfactory resolution to this matter.
We cannot predict the outcome of the foregoing litigation and currently are
unable to evaluate the likelihood of success or the range of possible loss.
However, if the foregoing litigation were determined adversely to us, such a
determination could have a material adverse effect on our financial condition,
results of operations, cash flow and liquidity.
We face difficulties in stabilizing our operations following our rapid growth.
We experienced rapid growth from 1994 through the middle of 1999, which has
placed significant demands on our management resources. If we are unable to
stabilize our operations effectively, our business, financial condition and
results of operations could be adversely affected. Our ability to stabilize
operations and manage our business efficiently has been, and for the
foreseeable future will continue to be, adversely affected by the
16
diversion of management's time and attention to the pending securityholder
litigation. See, "--We may incur significant costs and liability as a result
of our securityholder litigation."
We face significant competition.
The long-term care industry is a highly competitive industry. We expect that
the assisted living business, in particular, will become even more competitive
in the future given the relatively low barriers to entry and continuing health
care cost containment pressures. We compete with numerous other companies
providing similar long-term care alternatives. We operate in 16 states and
each community in which we operate provides a unique market. Overall, a
limited number of our markets include an assisted living competitor offering
assisted living facilities that are similar in size, price and range of
service. In markets where we have competition, our competitors include other
companies that provide adult day care in the home, higher priced assisted
living centers (typically larger facilities with more amenities), congregate
care facilities where tenants elect the services to be provided, and
continuing care retirement centers on campus like settings.
We expect to face increased competition from new market entrants as assisted
living receives increased attention and the number of states, which include
assisted living in their Medicaid waiver programs increases. These new market
entrants will include publicly and privately held companies, including not for
profit corporations, focusing primarily on assisted living, as well as
hospitals and nursing homes that offer assisted living as a segment of their
overall businesses. We also compete with nursing facilities that provide long-
term care services. Some of our present and potential competitors are
significantly larger and have, or may obtain, greater financial resources than
we do. Consequently, we cannot guarantee that we will not encounter increased
competition in the future, which could limit our ability to attract residents
or expand our business and could have a material adverse effect on our
financial condition and results of operations and prospects.
Overbuilding in the assisted living industry.
We believe that many assisted living markets have become or are on the verge
of becoming overbuilt. Regulation and other barriers to entry into the
assisted living industry are not substantial. In addition, because the segment
of the population that can afford to pay our daily resident fee is finite, the
development of new assisted living facilities could outpace demand. The short
term effects of overbuilding include (a) significantly longer fill-up periods
(2-3 years as compared to 12-18 months previously experienced), (b) pressure
to lower or refrain from increasing rates and (c) competition for workers in
already tight labor markets. Long-term effects include lower margins for an
estimated 3-5 years until excess units are absorbed. We believe that each
local market is different, and we are and will continue to react in a variety
of ways, including selective price discounting, to the specific competitive
environment that exists in each market. There can be no assurance that we will
be able to compete effectively in those markets where overbuilding exists, or
that future overbuilding in other markets where we have opened or plan to open
residences will not adversely affect our operations.
Our properties are geographically concentrated and we depend on the economies
and Medicaid waiver programs of the specific areas in which we operate our
properties.
We depend significantly on the economies of Texas, Indiana, Oregon, Ohio and
Washington and, to some extent, on the continued funding of state Medicaid
waiver programs in some of those states. As of June 30, 2000, 21.6% of our
properties were in Texas, 11.4% in Indiana, 10.3% in Oregon, 9.7% in Ohio and
8.6% in Washington. Adverse changes in general economic factors affecting the
respective health care industries or laws and regulatory environment in each
of these states, including Medicaid reimbursement rates, could have a material
adverse effect on our financial condition and results of operations.
We depend on reimbursements by third-party payors.
Although revenues at a majority of our residences come primarily from
private pay sources, a portion of our revenues depend upon reimbursement from
third-party payors, including state Medicaid waiver programs and
17
private insurers. For the years ended December 31, 1997, 1998 and 1999 and the
six months ended June 30, 2000, direct payments received from Medicaid funded
programs accounted for approximately 11.1%, 10.7%, 10.4% and 10.6%
respectively, of our revenue. Also, our tenant-paid portion of Medicaid
residents accounted for approximately 5.9%, 5.8%, 5.9% and 5.9% respectively,
of our revenue during the years ended December 31, 1997, 1998, 1999 and the
six months ended June 30, 2000. We expect that state Medicaid waiver programs
will constitute a significant source of our revenue in the future.
Furthermore, we cannot guarantee that our proportionate percentage of revenue
received from Medicaid waiver programs will not increase. There are continuing
efforts by governmental and private third-party payors to contain or reduce
the costs of health care by lowering reimbursement rates, increasing case
management review of services and negotiating reduced contract pricing. Our
revenues and profitability will be affected if these efforts are successful.
Also, there has been, and our management expects that there will continue to
be, a number of proposals attempting to reduce the federal and some state
budget deficits by limiting Medicaid reimbursement in general. Adoption of any
of these proposals at either the federal or the state level could have a
material adverse effect on our business, financial condition, results of
operations and prospects.
We anticipate that revenues at a majority of our residences will continue to
come from private pay sources. However, we believe 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 our
private pay residents with alternative sources of income if their private
funds are depleted and they become Medicaid eligible. Although we will seek to
manage the mix of private paying tenants and Medicaid paying tenants residing
in our facilities, any shift to a high Medicaid population could have an
adverse affect on our financial position, results of operations or cash flows,
particularly if third-party payors such as Medicaid continue to seek limits on
reimbursement rates.
We are subject to significant government regulation.
The operation of our residences is subject to federal and state laws
prohibiting fraud by health care providers, including criminal provisions,
which prohibit filing false claims or making false statements to receive
payment or certification under Medicaid, or failing to refund overpayments or
improper payments. Violation of these provisions is a felony punishable by up
to five years imprisonment and/or $25,000 fines. Civil provisions prohibit the
knowing filing of a false claim or the knowing use of false statements to
obtain payment. The penalties for such a violation are fines of not less than
$5,000 or more than $10,000, plus treble damages, for each claim filed.
State and federal governments are devoting increasing attention and
resources to anti-fraud initiatives against health care providers. The Health
Insurance Portability and Accountability Act of 1996 ("HIPAA") and the BBA
expand the penalties for health care fraud, including broader provisions for
the exclusion of providers from the Medicaid program. We have established
policies and procedures that we believe are sufficient to ensure that our
facilities will operate in substantial compliance with these anti-fraud and
abuse requirements. While we believe that our business practices are
consistent with Medicaid criteria, those criteria are often vague and subject
to change and interpretation. Aggressive anti-fraud actions, however, could
have an adverse effect on our financial position, results of operations or
cash flows.
The development and operation of assisted living facilities and the
provision of health care services are subject to federal laws, and state and
local licensure, certification and inspection laws that regulate, among other
matters:
. the number of licensed residences;
. the provision of services;
. equipment;
. staffing, including professional licensing and criminal background
checks;
18
. operating policies and procedures;
. fire prevention measures;
. environmental matters;
. resident characteristics; and
. physical design and compliance with building and safety codes.
In the ordinary course of our business, we receive and have received notices
of deficiencies for failure to comply with various regulatory requirements. We
review such notices and, in most cases, we will agree with the regulator upon
the steps to be taken to bring the facility into compliance with regulatory
requirements. From time to time we may dispute the matter and sometimes will
seek a hearing if we do not agree with the regulator. In some cases or upon
repeat violations, the regulator may take one or more adverse actions against
a facility. These adverse actions can include:
. the imposition of fines;
. temporary stop placement of admission of new residents, or imposition of
other conditions to admission of new residents to the facility;
. termination of a facility's Medicaid contract; and
. conversion of license to provisional status, suspension or revocation of
a facility's license.
During 1998, 1999 and the first six months of 2000, these adverse actions
resulted in minimal fines and temporary suspension of admissions at certain
residences. Because regulations vary from one jurisdiction to another and
because determinations regarding whether to make a license provisional,
suspend or revoke a license, or to impose a fine, are subject to
administrative discretion, it is difficult for us to predict whether a
particular remedy will be sought or obtained in any given case. These types of
regulatory enforcement actions may adversely affect facility occupancy levels,
revenues and costs of operation. We cannot guarantee that federal, state, or
local governments will not impose additional restrictions on our activities
that could materially adversely affect us.
See "We may incur significant costs and liability as a result of our
securityholder or other litigation."
We are also subject to various laws and regulations, both federal and state,
due to the size and nature of our business, including laws and regulations
relating to:
. confidentiality of medical information;
. safe working conditions;
. family leave; and
. disposal of medical waste.
Our cost to comply with these regulations is significant. In addition, it
could adversely affect our financial condition or results of operations if a
court or regulatory tribunal were to determine that we had failed to comply
with any of these laws or regulations. Because these laws and regulations are
amended from time to time we cannot predict when and to what extent liability
may arise. In addition, because these laws vary from state to state, expansion
of our operations to states where we do not currently operate may subject us
to additional restrictions on the manner in which we operate our facilities.
See "Confidentiality of Medical Information," "Restrictions imposed by laws
benefiting disabled persons" and "Medical waste."
Federal and state fraud and abuse laws, such as "anti-kickback" laws and
"self-referral" laws, govern the financial arrangements among health care
providers and others who may be in a position to refer or recommend
19
patients to these providers. We have established policies and procedures that
we believe are sufficient to ensure that our facilities will operate in
substantial compliance with applicable regulatory requirements. However, we
cannot guarantee that these fraud and abuse laws will be interpreted in a
manner consistent with our practices or that our facilities will always be
compliant with our own practices.
Restrictions imposed by laws benefiting disabled persons.
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 us to modify existing and planned
residences to allow disabled persons to access the residences. We believe that
our residences are either substantially in compliance with present
requirements or are exempt from them, and we attempt to check for compliance
in all facilities we consider acquiring. However, if required changes cost
more than anticipated, or must be made sooner than anticipated, we would incur
additional costs. Further legislation may impose additional burdens or
restrictions related to access by disabled persons, and the costs of
compliance could be substantial.
Medical waste
Our facilities generate potentially infectious waste due to the illness or
physical condition of the residents, including, for example, blood-soaked
bandages, swabs and other medical waste products and incontinence products of
those residents diagnosed with infectious diseases. The management of
potentially infectious medical waste, including handling, storage,
transportation, treatment and disposal, is subject to regulation under various
laws, both federal and state. These laws and regulations set forth the
management requirements, as well as permit, record keeping, notice and
reporting obligations. Any finding that we are not in compliance with these
laws and regulations could adversely affect our business operations and
financial condition. Because these laws and regulations are amended from time
to time, we cannot predict when and to what extent liability may arise. In
addition, because these environmental laws vary from state to state, expansion
of our operations to states where we do not currently operate may subject us
to additional restrictions on the manner in which we operate our facilities.
We may be liable for losses not covered by or in excess of our insurance.
The provision of health care services entails an inherent risk of liability.
In recent years, participants in the long-term care industry have been subject
to an increasing number of lawsuits alleging malpractice or related legal
theories. Many of these lawsuits involve large claims and significant defense
costs. In addition, we may be subject to claims alleging violations of federal
or state laws relating to safe working conditions, environmental matters and
the use and disposal of hazardous or potentially hazardous substances such as
medical waste. We currently maintain liability insurance intended to cover
such claims. We believe our insurance is in keeping with industry standards.
We cannot guarantee, however, that claims in excess of our insurance coverage
or claims not covered by our insurance coverage will not arise. A successful
claim against us not covered by, or in excess of, our insurance coverage could
have a material adverse effect upon our financial condition or results of
operations. Claims against us, regardless of their merit or eventual outcome,
may also have a material adverse effect upon our ability to attract residents
or expand our business and would require management to devote time to matters
unrelated to the operation of our business. In addition, we must renew our
insurance policies annually. We cannot guarantee that we 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.
We could incur significant costs related to environmental remediation or
compliance.
We are subject to various federal, state and local environmental laws,
ordinances and regulations. Some of these laws, ordinances and regulations
hold a current or previous owner, lessee or operator of real property liable
for the cost of removal or remediation of some hazardous or toxic substances,
including, without limitation, asbestos-containing materials, that could be
located on, in or under such property. These laws and regulations
20
often impose liability whether or not we knew of, or were responsible for, the
presence of the hazardous or toxic substances. The costs of any required
remediation or removal of these substances could be substantial. Furthermore,
there is no limit to our liability under such laws and regulations. As a
result, our liability could exceed our property's value and aggregate assets.
The presence of these substances or failure to remediate these substances
properly may also adversely affect our ability to sell or lease the property,
or to borrow using our property as collateral.
We may be liable under some laws and regulations as 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. In that event, we may 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 our properties, we could be liable for these costs, as well as
some other costs, including governmental fines and injuries to persons or
properties. As a result, any hazardous or toxic substances which are present,
with or without our knowledge, at any property we hold or operate, or which we
acquire or operate in the future, could have an adverse effect on our
business, financial condition or results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of changes in value of a financial
instrument, derivative or non-derivative, caused by fluctuations in interest
rates, foreign exchange rates and equity prices. Changes in these factors
could cause fluctuations in our earnings and cash flows.
For fixed rate debt, changes in interest rates generally affect the fair
market value of the debt instrument, but not our earnings or cash flows. We do
not have an obligation to prepay any of our fixed rate debt prior to maturity,
and therefore, interest rate risk and changes in the fair market value of our
fixed rate debt will not have an impact on our earnings or cash flows until we
decide, or are required, to refinance such debt.
For variable rate debt, changes in interest rates generally do not impact
the fair market value of the debt instrument, but do affect our future
earnings and cash flows. We had variable rate debt of $28.1 million
outstanding at June 30, 2000 with a weighted average interest rate of 4.55%.
Assuming that our balance of variable rate debt remains constant at $28.1
million, each one-percent increase in interest rates would result in an annual
increase in interest expense, and a corresponding decrease in cash flows, of
$281,000. Conversely, each one-percent decrease in interest rates would result
in an annual decrease in interest expense, and a corresponding increase in
cash flows, of $281,000.
21
The table below presents principal cash flows and related weighted average
interest rates by expected maturity dates (in thousands).
December 31, Expected Maturity Date December 31, June 30,
------------------------------------------------------------- 1999 2000
2000 2001 2002 2003 2004 Thereafter Total Fair Value Fair Value
------ ------ ------- ------- ------ ---------- -------- ------------ ----------
Long-term Debt
Fixed rate............. $ 920 $ 980 $ 1,025 $ 1,080 $1,140 $39,545 $ 44,690 $ 44,690 $ 44,975
Average interest rate.. 7.93% 7.93% 7.93% 7.93% 7.93% 7.93% 7.93%
Variable rate.......... $ 574 $ 620 $ 670 $ 724 $ 781 $25,384 $ 28,753 $ 28,753 $ 28,140
Average interest rate.. 4.55% 4.55% 4.55% 4.55% 4.55% 4.55% 4.55%
------ ------ ------- ------- ------ ------- -------- -------- --------
Total long-term debt... $1,494 $1,600 $ 1,695 $ 1,804 $1,921 $64,929 $ 73,443 $ 73,443 $ 73,115
Convertible debentures
6.0% Debentures........ $ -- $ -- $86,250 $ -- $ -- $ -- $ 86,250 $ 50,888 $ 41,400
Average interest rate.. 6% 6% 6% 6% 6% 6% 6%
5.625% Debentures...... $ -- $ -- $ -- $75,000 $ -- $ -- $ 75,000 $ 43,500 $ 41,250
Average interest rate.. 5.625% 5.625% 5.625% 5.625% 5.625% 5.625% 5.625%
------ ------ ------- ------- ------ ------- -------- -------- --------
Total convertible
debentures.......... $ -- $ -- $86,250 $75,000 $ -- $ -- $161,250 $ 94,388 $ 82,650
------ ------ ------- ------- ------ ------- -------- -------- --------
Total long-term debt
and convertible
debentures.......... $1,494 $1,600 $87,945 $76,804 $1,921 $64,929 $234,693 $167,831 $155,767
====== ====== ======= ======= ====== ======= ======== ======== ========
We are also exposed to market risks from fluctuations in interest rates and
the effects of those fluctuations on market values of our cash equivalents and
short-term investments. These investments generally consist of overnight
investments that are not significantly exposed to interest rate risk, except
to the extent that changes in interest rates will ultimately affect the amount
of interest income earned and cash flow from these investments.
We do not have any derivative financial instruments in place to manage
interest costs, but that does not mean we will not use them as a means to
manage interest rate risk in the future.
We do not use foreign currency exchange forward contracts or commodity
contracts and do not have foreign currency exposure.
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PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Since February 1, 1999, 12 separate complaints were filed in the United
States District Court for the District of Oregon against us and certain of our
past and present officers and directors. Pursuant to Order signed on June 1,
1999, those complaints were consolidated for all purposes. On July 23, 1999, a
consolidated complaint was filed, and on October 20, 1999, an amended
consolidated complaint (the "Complaint") was filed.
The Complaint purports to be brought on behalf of a class of purchasers of:
(a) our common stock from February 6, 1997 through March 31, 1999, inclusive;
(b) our 6.0% Debentures from October 21, 1997 through March 31, 1999,
inclusive; and (c) our 5.625% Debentures from July 22, 1998 through March 31,
1999, inclusive.
The Complaint also names as defendants Schroder & Co., Inc., Morgan Stanley
Dean Witter and Smith Barney, Inc. (soley as underwriters in connection with
the 6.0% Debentures) and KPMG LLP, our independent auditors (in connection
with our offerings of common stock, the 6.0% Debentures and the 5.625%
Debentures).
The Complaint alleges violations of the federal securities laws and seeks
unspecified damages. We filed an answer to the Complaint on December 7, 1999.
Pursuant to our by-laws, we are obligated to indemnify our officers and
directors to the maximun extent allowed by law for any liability incurred by
them as a result of the litigation. In addition, we previously entered into
indemnity agreements with certain of the individual defendants and the
underwriters.
On June 1, 2000, we were served with a complaint, filed May 30, 2000 in the
Marion (Indiana) Superior Court on behalf of the Commissioner of the Indiana
State Department of Health. The complaint alleges that our facility in
Logansport, Indiana, one of our 21 facilities in Indiana, is being operated as
an unlicensed "health facility." It seeks to enjoin us from operating the
Logansport facility as a "health facility" until we are in compliance with
Indiana law, including obtaining an appropriate license, and paying a fine of
$25,000 per day for each day of unlicensed operation. We are working with the
state of Indiana to find a satisfactory resolution to this matter.
We cannot predict the outcome of the foregoing litigation and currently are
unable to evaluate the likelihood of success or the range of possible loss.
However, if the foregoing consolidated action were determined adversely to us
and/or to those to whom our indemnity obligations exist, such a determination
could have a material adverse effect on our financial condition, results of
operations, cash flow and liquidity.
In addition to the matters referred to in the immediately preceding
paragraphs, we are involved in various lawsuits and claims arising in the
normal course of business. Although the outcomes of these other suits and
claims are uncertain and because of the early stages of these matters,
management cannot estimate the losses or range of losses, should the outcomes
be unfavorable. In the aggregate, such other suits and claims should not have
a material adverse effect on our financial condition, results of operations,
cash flow or liquidity.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
Exhibit
Number
-------
10.24 U.S. Bank Agreement
12 Ratio of Earnings to Fixed Charges
27 Financial Data Schedule
(b) Reports on Form 8-K. We filed a report on Form 8-K on June 1, 2000
pursuant to Item 5 of Form 8-K stating the Company was served with a
complaint, filed May 30, 2000 in the Marion (Indiana) Superior Court on behalf
of the Commissioner of the Indiana State Department of Health.
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SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) the Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
ASSISTED LIVING CONCEPTS, INC.
Registrant
/s/ Drew Q. Miller
August 11, 2000 By: _________________________________
Name: Drew Miller
Title: Chief Financial Officer
/s/ M. Catherine Maloney
August 11, 2000 By: _________________________________
Name: M. Catherine Maloney
Title: Vice President and Chief
Accounting Officer
24