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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20459
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 12 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition period from to
Commission file number 1-83938
ASSISTED LIVING CONCEPTS, INC.
(Exact name of registrant as specified in its charter)
Nevada 93-1148702
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
11835 NE Glenn Widing Drive, Building E
Portland, Oregon 97220
(Address of principle 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 Registrants was required
to file such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes [X] No [_]
Shares of Registrant's common stock, $.01 par value, outstanding at Ocotber
29, 1999 is 17,120,745.
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ASSISTED LIVING CONCEPTS, INC.
FORM 10-Q
September 30, 1999
INDEX
Page
-----
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets, December 31, 1998 and September 30,
1999................................................................ 3
Consolidated Statements of Operations and Consolidated Statements of
Comprehensive Income (Loss), Three and Nine Months Ended September
30, 1998 and 1999................................................... 4
Consolidated Statements of Cash Flows, Nine Months Ended September
30, 1998 and 1999................................................... 5
Notes to Consolidated Financial Statements........................... 6-9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................. 10-21
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)
September 30,
December 31, 1999
1998 (unaudited)
ASSETS ------------ -------------
Current assets:
Cash and cash equivalents......................... $ 55,036 $ 13,452
Restricted cash................................... -- 8,718
Marketable securities, available for sale......... 4,000 1,750
Accounts receivable, net of allowance for doubtful
accounts of $179 at 1998 and $340 at 1999........ 5,127 6,720
Prepaid expenses.................................. 992 967
Other current assets.............................. 4,472 4,935
-------- --------
Total current assets............................. 69,627 36,542
-------- --------
Property and equipment.............................. 284,754 310,419
Construction in process............................. 51,304 11,370
-------- --------
Total property and equipment...................... 336,058 321,789
Less accumulated depreciation..................... 9,133 14,615
-------- --------
Property and equipment -- net..................... 326,925 307,174
-------- --------
Goodwill............................................ 5,371 5,133
Other assets........................................ 12,746 9,944
-------- --------
Total assets..................................... $414,669 $358,793
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................. $ 1,622 $ 1,591
Construction payable.............................. 6,942 2,397
Accrued real estate taxes......................... 4,837 5,488
Other accrued expenses............................ 6,127 11,220
Other current liabilities......................... 4,857 2,343
Current portion of long-term debt................. 1,386 1,474
-------- --------
Total current liabilities......................... 25,771 24,513
-------- --------
Other non-current liabilities....................... 3,415 4,942
Long term debt...................................... 105,036 72,455
Convertible subordinated debentures................. 161,250 161,250
-------- --------
Total liabilities................................ 295,472 263,160
-------- --------
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 17,344,143
shares and 17,120,745 in 1998 and 1999........... 173 171
Unearned compensation expense on restricted
stock............................................ (3,492) --
Additional paid-in capital........................ 148,533 144,651
Fair market value in excess of historical cost of
acquired net assets attributable to related party
transactions..................................... (239) (239)
Accumulated other comprehensive income (loss)..... -- (250)
Accumulated deficit............................... (25,778) (48,700)
-------- --------
Total shareholders' equity........................ 119,197 95,633
-------- --------
Total liabilities and shareholders' equity....... $414,669 $358,793
======== ========
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 Ended Nine Months Ended
September 30, September 30,
-------------------- ------------------
1998 1999 1998 1999
--------- --------- -------- --------
Revenues............................. $ 24,012 $ 30,398 $ 63,938 $ 85,460
Operating expenses:
Residence operating expenses....... 15,002 20,453 39,558 60,018
Corporate general and
administrative.................... 2,436 6,057 6,049 15,400
Building rentals................... 2,857 3,807 8,459 10,726
Building rentals to related party.. 366 300 1,146 850
Depreciation and amortization...... 1,694 2,285 4,394 6,552
Site abandonment costs............. -- 57 1,001 4,833
Write off of impaired assets and
related expenses.................. -- -- 8,874 --
--------- --------- -------- --------
Total operating expenses......... 22,355 32,959 69,481 98,379
--------- --------- -------- --------
Operating income (loss).............. 1,657 (2,561) (5,543) (12,919)
--------- --------- -------- --------
Other income (expense):
Interest expense................... (3,351) (3,962) (7,358) (11,058)
Interest income.................... 1,287 308 2,887 1,320
Loss on sale or disposal of
assets............................ (8) -- (428) (127)
Other income (expense)............. (305) (41) (1,370) (138)
--------- --------- -------- --------
Total other income (expense)..... (2,377) (3,695) (6,269) (10,003)
--------- --------- -------- --------
Net loss before cumulative effect of
change in accounting principle...... (720) (6,256) (11,812) (22,922)
Cumulative effect of change in
accounting principle................ -- -- (1,523) --
--------- --------- -------- --------
Net loss............................. $ (720) $ (6,256) $(13,335) $(22,922)
========= ========= ======== ========
Basic and diluted net loss per common
share before cumulative effect of
change in accounting principle...... $ (0.04) $ (0.37) $ (0.74) $ (1.34)
Cumulative effect of change in
accounting principle................ -- -- (0.10) --
--------- --------- -------- --------
Basic and diluted net loss per common
share............................... $ (0.04) $ (0.37) $ (0.84) $ (1.34)
========= ========= ======== ========
Basic and diluted weighted average
common shares outstanding........... 16,604 17,121 15,994 17,119
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- ------------------
1998 1999 1998 1999
--------- --------- -------- --------
Net loss............................. $ (720) $ (6,256) $(13,335) $(22,922)
Other comprehensive income (loss):
Unrealized losses on investments... -- (50) -- (250)
--------- --------- -------- --------
Comprehensive loss................... $ (720) $ (6,306) $(13,335) $(23,172)
========= ========= ======== ========
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)
Nine Months Ended
September 30,
------------------
1998 1999
-------- --------
Operating activities:
Net loss.................................................. $(13,335) $(22,922)
Adjustment to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization........................... 4,394 6,552
Provision for doubtful accounts......................... -- 161
Site abandonment cost................................... 1,001 4,833
Write-off of impaired assets and related expenses....... 8,874 --
Loss on sale or disposal of assets...................... 428 127
Cumulative effect of change in accounting principle..... 1,523 --
Compensation expense earned on restricted stock......... 456 204
Changes in assets and liabilities, excluding effects of
acquisitions:
Accounts receivable..................................... (2,911) (1,754)
Prepaid expenses........................................ -- 25
Other current assets.................................... (4,115) (463)
Other assets............................................ 10 2,247
Accounts payable and accrued expenses................... 9,543 3,199
Non-current liabilities................................. 730 1,527
-------- --------
Net cash provided by (used in) operating activities....... 6,598 (6,264)
-------- --------
Investing activities:
Sale (purchase) of marketable securities, available for
sale..................................................... -- 2,000
Restricted cash........................................... -- (8,718)
Funds held in trust....................................... 1,956 --
Acquisitions, net of cash and debt acquired............... (8,373) --
Proceeds from sale of land and residences................. 8,293 19
Purchases of property and equipment....................... (97,706) (27,020)
-------- --------
Net cash used in investing activities..................... (95,830) (33,719)
-------- --------
Financing activities:
Debt issuance costs....................................... (3,161) --
Proceeds from long-term debt.............................. 40,306 --
Payments on long-term debt................................ (150) (1,005)
Proceeds from issuance of common stock.................... 641 154
Proceeds from issuance of convertible subordinated
debentures............................................... 75,000 --
Purchase of common stock.................................. (7,062) --
Retirement of restricted stock............................ -- (750)
-------- --------
Net cash provided by (used in) financing activities....... 105,574 (1,601)
-------- --------
Net increase (decrease) in cash and cash equivalents...... 16,342 (41,584)
Cash and cash equivalents, beginning of period............ 63,269 55,036
-------- --------
Cash and cash equivalents, end of period.................. $ 79,611 $ 13,452
======== ========
Supplemental disclosure of cash flow information:
Cash payments for interest.............................. $ 5,527 $ 8,141
Cash payments for income taxes.......................... $ 1,438 $ --
Unrealized loss on marketable securities................ $ -- $ (250)
Conversion of construction financing to sale-leaseback.. $ 2,150 $ --
Extinguishment of long term debt from lease amendments.. $ -- $ 31,488
Disposal of property, plant and equipment from lease
amendments............................................. $ -- $ 30,933
Increase (decrease) in construction payable and property
and equipment.......................................... $(12,043) $ (4,545)
Retirement of restricted stock.......................... $ -- $ 4,038
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 develops
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 our 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 our accounts and accounts of our wholly owned subsidiaries that
manage, own, and develop assisted living residences. All significant
intercompany accounts and transactions have been eliminated in the
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, 1998.
The financial information included in these financial statements contain all
adjustments (which consist of normal recurring adjustments, with the exception
in 1999 of site abandonment costs, purchase of restricted stock and severance
costs associated with the termination of certain employment agreements and in
1998 of site abandonment costs and the write-off of impaired assets and
related expenses) which are, in the opinion of our management, necessary for a
fair presentation of results for the quarterly periods. The results of
operations for the three and nine month periods ended September 30, 1999 do
not necessarily indicate the results that are expected for the full year.
2. Restricted Cash
During the three months ended September 30, 1999, the Company restricted
$8.7 million of cash balances in accordance with certain loan and lease
agreements (see Notes 5 and 6).
3. Marketable Securities
Marketable securities consist of U.S. Treasury securities and other highly
liquid marketable debt securities. The aggregate market value of securities
held at September 30, 1999 was $1.8 million. These investments which have a
historical cost of $2.0 million have 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 $250,000 are included as a component
of comprehensive income and shareholders' equity at September 30, 1999.
6
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Property and Equipment
The Company's property and equipment, stated at cost, consists of the
following (in thousands):
December 31, September 30,
1998 1999
------------ -------------
Land............................................ $ 18,217 $ 20,550
Buildings and improvements...................... 256,904 275,818
Equipment....................................... 2,865 5,752
Furniture....................................... 6,768 8,299
-------- --------
Sub-total..................................... 284,754 310,419
Construction in process......................... 51,304 11,370
-------- --------
Total property and equipment.................... 336,058 321,789
Less accumulated depreciation................... 9,133 14,615
-------- --------
Property and equipment, net..................... $326,925 $307,174
======== ========
During the three and nine months ended September 30, 1999, the Company
capitalized interest costs of $258,000 and $1.9 million, respectively,
relating to financing of construction in process. In addition, the Company
capitalized payroll costs that are directly related to the construction and
development of the residences of $156,000 and $569,000 for the three and nine
months ended September 30, 1999, respectively.
As a result of the continued reduction in the Company's development
activities, the Company wrote-off $4.8 million of capitalized costs during the
nine months ended September 30, 1999 relating to the abandonment of certain
development sites and other related development costs. As of September 30,
1999, construction in process included only costs related to four residences.
Construction in process includes 2 residences (78 units) ($6.0 million) that
have received a certificate of occupancy, but are pending licensure, and 2
residences (78 units) ($5.4 million) that are under construction.
The Company had certificates of occupancy for 183 residences, 181 of which
are included in the Company's operating results for the nine months ended
September 30, 1999 as compared to 170 residences with certificates of
occupancy, 154 of which were in operating results as of September 30, 1998.
During 1996 and 1997 the Company entered into 16 sale and leaseback
transactions which contained purchase options entitling the Company to
purchase the residences at fair market value at the end of the initial lease
terms ranging from 14 to 15 years. As a result of the purchase options, the
Company accounted for these sale and leaseback transactions using the finance
method in Statement of Accounting Standards No. 98, Accounting for Leases. In
March 1999, the Company amended these leases. The amendments eliminated the
Company's purchase option; therefore the leases are accounted for as operating
leases. As a result, the Company recorded (i) the disposal of net property,
plant and equipment in the amount of $30.9 million, (ii) the extinguishment of
long-term debt in the amount of $31.5 million, and (iii) a deferred gain of
$1.5 million. The deferred gain is included in other liabilities and is being
amortized over the remaining initial lease term as an offset to future
reported rent expense.
7
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Leases
A summary of leases that the Company has entered into since its inception is
as follows:
Number of Sale Units
Number of and Leaseback Number of Sale Under
Leased Residences Total and Leaseback Units Leases
Residences Accounted for Number of Residences Under Accounted
("Oregon as Operating Operating Accounted for Operating for as
Leases") Leases Leases as Financings Leases Financings
---------- -------------- --------- -------------- --------- ----------
Leases at December 31,
1994................... 4 -- 4 -- 114 --
Leases entered into
during 1995............ -- 5 5 -- 150 --
---- ----- ---- ----- ----- -----
Leases at December 31,
1995................... 4 5 9 -- 264 --
Leases entered into
during 1996............ 1 19 20 9 763 316
Residences repurchased
during 1996............ -- (4) (4) -- (146) --
---- ----- ---- ----- ----- -----
Leases at December 31,
1996................... 5 20 25 9 881 316
Leases entered into
during 1997............ 2 24 26 7 1,025 247
---- ----- ---- ----- ----- -----
Leases at December 31,
1997................... 7 44 51 16 1,906 563
Leases entered into
during 1998............ -- 4 4 -- 139 --
Lease unit expansion
during 1998............ -- -- -- -- 47 10
Leases terminated during
1998................... (1) -- (1) -- (45) --
---- ----- ---- ----- ----- -----
Leases at December 31,
1998................... 6 48 54 16 2,047 573
Lease unit expansion
during 1999............ -- -- -- -- 13 --
Leases with changed
terms during 1999...... -- 16 16 (16) 573 (573)
---- ----- ---- ----- ----- -----
Leases at September 30,
1999................... 6 64 70 -- 2,633 --
==== ===== ==== ===== ===== =====
In March 1999, the Company amended 16 leases, resulting in the
reclassification of such leases from financings to operating leases (see Note
4).
In June 1999, the Company amended all of its 37 leases with LTC Properties,
Inc. ("LTC"). These amendments included provisions to eliminate future minimum
annual rent increases, or "rent escalators," that were not deemed to be
contingent rents. Because of the rent escalators, prior to the amendments, the
Company accounted for rent expense related to such leases on a straight-line
basis. From the date of the amendment forward, the Company will account for
the amended leases on a contractual cash payment basis and amortize the
deferred rent balance as of the date of the amendment over the remaining
initial term of the lease. Those amendments also redefined the lease renewal
option with respect to certain leases and provided the lessor with the option
to declare an event of default in the event of a change of control under
certain circumstances. In addition, the amendments also provide the Company
with the ability, subject to certain conditions, to sublease or assign its
leases with respect to two Washington residences.
During the third quarter of 1999, the Company agreed to provide $418,000 of
additional cash collateral pursuant to certain lease agreements with one of
its lessors. The Company restricted $418,000 of cash balances as a result of
such action (see Note 2).
8
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Loan Amendments
During the third quarter of 1999, the Company amended certain loan
agreements with one of its creditors. Pursuant to the amendment, the Company
agreed to provide $8.3 million of additional cash collateral in exchange for
the waiver of certain possible defaults, including an amendment to certain
financial covenants. In August 1999, the Company restricted $8.3 million of
cash balances as a result of such amendment. The amendment also provides for
the release of the additional collateral upon the achievement of specified
performance targets, provided the Company is in compliance with other terms of
the loan agreements (see Note 2).
7. Securityholder Litigation
In early 1999, 12 complaints were filed against us and certain of our
officers and directors in the United States District Court for the District of
Oregon. On July 23, 1999, a consolidated complaint was filed in connection
with this litigation and an amendment was subsequently filed on October 20,
1999. The amended consolidated complaint purports to be brought on behalf of a
class of purchasers of our common stock from February 6, 1997 through March
31, 1999 and on behalf of a class of purchasers of our 6.0% Convertible
Subordinated Debentures (the "6.0% Debentures") and 5.625% Convertible
Subordinated Debentures (the "5.625% Debentures" and, together with the 6.0%
Debentures, the "Debentures") from the dates of issuance through March 31,
1999, the alleged Class Period. The amended consolidated complaint alleges
violations of the federal securities laws and seeks unspecified damages. It
names as additional defendants our independent auditors in connection with our
common stock and Debentures offerings during the alleged Class Period and our
underwriters in connection with the Company's 1997 offering of the 6.0%
Debentures. 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.
9
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.
This Report on Form 10-Q, as well as the Risk Factors included in our Report
on Form 10-K for the fiscal year ended December 31, 1998, contain 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 litigation and the resulting distraction of management's
time and attention, (iii) the possibility that we may incur start-up costs in
excess of our present expectations, (iv) the effect that the restatement of
our financial statements for certain prior reporting periods may have on our
compliance with lease and loan covenants, (v) our ability to develop an
appropriate strategy to maximize shareholder value and (vi) other risks
described in our filings with the Securities and Exchange Commission. In light
of such risks and uncertainties, our actual results could differ materially
from such forward-looking statements. 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.
Restatement
On February 1, 1999, we announced that after consultation with our
independent auditors we would restate our financial statements for the fiscal
quarter ended June 30, 1997, the fiscal quarter ended September 30, 1997, the
fiscal year ended December 31, 1997, the fiscal quarter ended March 31, 1998,
the fiscal quarter ended June 30, 1998, and the fiscal quarter ended September
30, 1998. On March 31, 1999, we announced that the restatement would be more
extensive than we had previously believed, and might include periods prior to
the second quarter of 1997, including the fiscal year ended December 31, 1996.
After further consultation with our independent auditors, the Company
determined to restate its financial statements for the fiscal year ended
December 31, 1996, the fiscal year ended December 31, 1997 and the first three
fiscal quarters of the fiscal year ended December 31, 1998.
The restatement reduced our net income for the fiscal years ended December
31, 1996 and 1997 and for the nine months ended September 30, 1998 by $2.1
million, $6.7 million and $11.0 million, respectively. The cumulative effect
of the restatement reduced shareholders' equity by $19.7 million through
September 30, 1998. As a result of the restatement, we reported net losses of
$1.9 million, $2.5 million and $13.3 million for the fiscal years ended 1996
and 1997, and the nine months ended September 30, 1998, respectively, as
compared to previously reported net income of $149,000 and $4.2 million, and
the net loss of $2.4 million, respectively. As a result of the restatement, we
reported net loss per diluted share of $0.23, $0.21 and $0.84 for the fiscal
years 1996, 1997 and the nine months ended September 30, 1998, respectively,
compared to previously reported net income of $0.03 and $0.34 and net loss of
$0.14 per diluted share, respectively. As a result of the restatement the
Company's cash position on a restated basis as of December 31, 1996, 1997 and
as of September 30, 1998 was $2.1 million, $63.3 million and $79.6 million,
respectively, as compared to $2.1 million, $63.4 million and $79.8 million
respectively, as previously reported. After the restatement, our working
capital positions on a restated basis as of December 31, 1996 and 1997 and as
of September 30, 1998 were negative $27.1 million, positive $40.1 million and
positive $63.0 million, respectively, as compared to previously reported
working capital of negative $26.4 million and positive $41.0 million and
positive $64.1 million, respectively.
The restatement resulted primarily from: (i) the earlier recognition of
certain expenses which were previously capitalized in association with our
development and financing activities; (ii) a modification in how we accounted
for certain of our lease arrangements; (iii) a modification in how we
accounted for certain of our acquisitions and joint venture arrangements; (iv)
the capitalization of fees we received during 1997 and 1998 that we previously
recognized as either a reduction of expenses or as other income; (v) the
elimination of an impairment write-down that we had previously recorded on
three of our residences; (vi) elimination of certain
10
accrued expenses previously recorded pursuant to a change in accounting
principle; and (vii) an increase in the amount of goodwill that we wrote off
in the second quarter of 1998 relating to exiting our home health operations.
Securityholder Litigation
In early 1999, 12 complaints were filed in the United States District Court
for the District of Oregon. On July 23, 1999, a consolidated complaint was
filed in connection with this litigation, and an amendment was subsequently
filed on October 20, 1999. The amended consolidated complaint purports to be
brought on behalf of purchasers of our common stock and Debentures between
February 6, 1997 and March 31, 1999, the alleged Class Period. The amended
consolidated complaint alleges violations of various federal securities laws,
names us and certain of our officers and directors as defendants as well as
our independent auditors, in connection with our common stock and Debentures
offerings during the alleged Class Period, and our underwriters (solely in
connection with the 6.0% Debentures offering), and seeks unspecified damages.
See Part II, Item 1 (Legal Proceedings) and Note 7 of the unaudited
consolidated financial statements included in Item 1 of this report for
information regarding this litigation.
Development Cost Write-Off
As a result of a continued reduction in our new residence development
activities, we wrote-off an additional $4.8 million of previously capitalized
development costs during the nine months ended September 30, 1999. We wrote-
off $2.4 million during the fiscal year 1998 relating to the reduction in
development activities. In the event that in the future we do not complete and
open residences planned for development, we may incur similar write-offs.
However, we have no present intention of commencing further development
activity beyond the four residences currently included in construction in
process as of September 30, 1999.
Regulatory Matters
During 1998, a license revocation action was commenced at one of our
residences in the State of Washington. During the third quarter of 1999, we
settled an administrative proceeding in Washington involving this license
revocation. The proceeding was dismissed and the license remains intact. We
also have been subject to other regulatory proceedings.
Overview
We operate, own, lease and develop 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. As of September 30, 1999
we have operations or development activities in 16 states. 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 September 30, 1999, we had 183 assisted living residences with a
certificate of occupancy, 181 of which, representing 6,986 units, were
included in our operating results. Our residences typically receive a
certificate of occupancy upon the completion of construction. Our residences
are included in our operating results when they receive a license or its
equivalent from the state in which they are located. It may take several
months to receive a license after receiving a certificate of occupancy. Of the
residences included in our operating results, we owned 111 residences (4,353
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 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.
11
Operating expenses include:
. residence operating expenses, such as staff payroll, food, property
taxes, utilities, insurance and other direct residence operating costs;
. general and administrative expenses, consisting of corporate and support
functions such as legal, accounting and other administrative expenses;
. building rentals; and
. depreciation and amortization.
Our operating results for the three and nine months ended September 30, 1999
were adversely affected by increased competition for both labor and residents,
increased corporate, general and administrative expenses, development site
write-offs and by the diversion of management's time and attention to:
. the proposed merger with American Retirement Corporation, Inc. ("ARC")
and its subsequent termination during the three months ended March 31,
1999;
. certain regulatory matters in the States of Washington and Oregon;
. the financial statement restatement; and
. the securityholder litigation.
Certain of these factors led to a decline in occupancy rates at our
Stabilized Residences (as defined below) and to slower fill-up of our Start-Up
Residences (as defined below). In addition, food, labor and certain other
operating costs at many of our residences have increased, primarily due to the
diversion of management's time and attention. As a result, we expect our
residence operating margins at our Stabilized and Same Store Residences to be
substantially lower in each fiscal quarter of 1999 than in 1998 due to the
decline in occupancy rates and increase in operating costs as described above.
The following table sets forth, for the periods presented, the number of
residences and units operated, average occupancy rates and sources of revenue
for our Company. The portion of revenues received from state Medicaid agencies
are labeled as "Medicaid state portion" while the portion of the Company's
revenues that a Medicaid-eligible resident must pay out of his or her own
resources is labeled "Medicaid resident portion".
Three
Months
Ended
September
30,
---------
1998 1999
----- -----
Total Residences
Residences operated (end of period)........................ 154 181
Units operated (end of period)............................. 5,867 6,986
Average occupancy rate..................................... 75.9% 76.0%
Sources of revenue:
Medicaid state portion..................................... 11.0% 10.5%
Medicaid resident portion.................................. 6.0% 6.0%
Private.................................................... 83.0% 83.5%
----- -----
Total........................................................ 100.0% 100.0%
===== =====
12
The following tables set forth, for the periods presented the compilation of
operating results of stabilized, start-up and other corporate activities
including ancillary services. Stabilized Residences are defined as those
residences which were operating for more than twelve months prior to the
beginning of the period or had achieved a 95% occupancy rate as of the
beginning of the reporting period. Start-Up Residences are defined as those
residences which were operating for less than twelve months prior to the
beginning of the period or had not achieved a 95% occupancy rate as of the
beginning of the reporting period.
In June 1998 we announced that we would exit from a home health care
operation acquired in October 1997. The results of operations of the home
health care operation are included under the heading "Corporate" in the tables
below.
Compilation of Stabilized and Start-up Residences
Three Months Ended September 30, 1999
(in thousands except unit and average rent data)
Stabilized Start-up Combined
Residences Residences Corporate Total
---------- ---------- --------- --------
Revenue............................... $26,486 $3,912 -- 30,398
Residence Operating Expense........... 17,035 3,418 -- 20,453
------- ------ ------- -------
Residence Operating Income.......... 9,451 494 -- 9,945
Corporate Overhead.................... -- -- 6,057 6,057
Building Rentals...................... 4,107 -- -- 4,107
Depreciation and Amortization......... 1,452 690 143 2,285
Site abandonment costs................ -- -- 57 57
------- ------ ------- -------
Total Other Operating Expenses.... 5,559 690 6,257 12,506
------- ------ ------- -------
Operating Income (loss)........... $ 3,892 $ (196) $(6,257) $(2,561)
======= ====== ======= =======
Residences Operated................... 145 36 -- 181
Units Operated........................ 5,558 1,428 -- 6,986
Average Occupancy Rate................ 83.0% 45.4% -- 76.0%
Weighted-Average Rent................. $ 1,893 $1,981 -- $ 1,903
Residence Operating Income Margin..... 35.7% 12.6% -- 32.7%
Compilation of Stabilized and Start-up Residences
Three Months Ended September 30, 1998
(in thousands except unit and average rent data)
Stabilized Start-up Combined
Residences Residences Corporate Total
---------- ---------- --------- --------
Revenue............................... $15,858 $7,587 $ 567 $24,012
Residence Operating Expense........... 9,291 5,550 161 15,002
------- ------ ------- -------
Residence Operating Income.......... 6,567 2,037 406 9,010
Corporate Overhead.................... -- -- 2,436 2,436
Building Rentals...................... 2,327 896 -- 3,223
Depreciation and Amortization......... 733 797 164 1,694
------- ------ ------- -------
Total Other Operating Expenses.... 3,060 1,693 2,600 7,353
------- ------ ------- -------
Operating Income (Loss)........... $ 3,507 $ 344 $(2,194) $ 1,657
======= ====== ======= =======
Residences Operated................... 88 66 -- 154
Units Operated........................ 3,238 2,629 -- 5,867
Average Occupancy Rate................ 89.8% 58.2% -- 75.9%
Weighted Average Rent................. $ 1,808 $1,685 -- $ 1,767
Residence Operating Income Margin..... 41.4% 26.0% -- 37.5%
13
The following tables set forth, for the periods presented, the compilation
of Same Store residences. Same Store residences are defined as those
residences which were operating throughout comparable reporting periods.
Compilation of Same Store Residences
Three Months
Ended September
30,
----------------
1998 1999
------- -------
Revenue....................................................... $22,616 $25,823
Residence Operating Expense................................... 14,133 16,674
------- -------
Residence Operating Income.................................. 8,483 9,149
Building Rentals.............................................. 3,168 4,104
Depreciation and Amortization................................. 1,449 1,319
------- -------
Total Other Operating Expenses............................ 4,617 5,423
------- -------
Operating Income.......................................... $ 3,866 $ 3,726
======= =======
Residences Operated........................................... 142 142
Units Operated................................................ 5,387 5,439
Average Occupancy Rate........................................ 77.8% 82.6%
Weighted Average Rent......................................... $ 1,780 $ 1,894
Residence Operating Income Margin............................. 37.5% 35.4%
Compilation of Same Store Residences
Nine Months
Ended September
30,
----------------
1998 1999
------- -------
Revenue....................................................... $52,233 $57,707
Residence Operating Expense................................... 31,328 38,892
------- -------
Residence Operating Income.................................. 20,905 18,815
Building Rentals.............................................. 9,239 11,968
Depreciation and Amortization................................. 2,578 2,156
------- -------
Total Other Operating Expenses............................ 11,817 14,124
------- -------
Operating Income.......................................... $ 9,088 $ 4,691
======= =======
Residences Operated........................................... 108 108
Units Operated................................................ 3,995 4,047
Average Occupancy Rate........................................ 79.6% 84.0%
Weighted Average Rent......................................... $ 1,812 $ 1,867
Residence Operating Income Margin............................. 40.0% 32.6%
Results of Operations
Three months ended September 30, 1999 compared to three months ended September
30, 1998
We incurred a net loss of $6.3 million, or $0.37 per basic and diluted
share, on revenue of $30.4 million for the three months ended September 30,
1999 (the "September 1999 Quarter") as compared to a net loss of $720,000 or
$0.04 per basic and diluted share, on revenues of $24.0 million for the three
months ended September 30, 1998 (the "September 1998 Quarter").
We had certificates of occupancy for 183 residences, 181 of which were
included in our operating results for the September 1999 Quarter as compared
to 170 residences with certificates of occupancy, 154 of which were included
in our operating results as of the end of the September 1998 Quarter. Of the
residences included in our
14
operating results at the end of the September 1999 Quarter, we owned 111
residences and leased 70 residences (all of which were operating leases) as
compared to 83 owned residences and 71 leased residences (55 of which were
operating leases and 16 of which were accounted for as financings) as of the
end of the September 1998 Quarter.
Revenues. Revenues were $30.4 million for the September 1999 Quarter as
compared to $24.0 million for the September 1998 Quarter, a net increase of
$6.4 million.
Revenue increases consisted of:
. $3.2 million related to the 142 Same Store Residences (5,439 units); and
. $3.8 million related to the 39 residences (1,547 units) which commenced
operations during or subsequent to the September 1998 Quarter.
This increase in revenue was offset by a $567,000 reduction in revenue from
ancillary services. As a result of the shut down of our home health care
operations, we had no revenue from ancillary services during the September
1999 Quarter as compared to $567,000 of revenue from ancillary services for
the September 1998 Quarter.
Revenue from Same Store residences was $25.8 million for the September 1999
Quarter as compared to $22.6 million for the September 1998 Quarter, an
increase of $3.2 million. The increase in revenue from Same Store Residences
was a combination of:
. An increase in occupancy to 82.6% for the September 1999 Quarter as
compared to 77.8% for the September 1998 Quarter; and
. An increase in average monthly rental rate to $1,894 for the September
1999 Quarter as compared to $1,780 for the September 1998 Quarter.
Of the $30.4 million in revenue reported for the September 1999 Quarter:
. $26.5 million or 87.2 % was attributable to Stabilized Residences. As of
the end of the September 1999 Quarter, we had 145 Stabilized Residences
(5,558 units) with an average occupancy of 83.0% and average monthly
rental rate of $1,893; and
. $3.9 million or 12.8% was attributable to Start-Up Residences. As of the
end of the September 1999 Quarter, we had 36 Start-up Residences (1,428
units) with an average occupancy of 45.4% and average monthly rental
rate of $1,981.
Residence Operating Expenses. Residence operating expenses were $20.5
million for the September 1999 Quarter compared to $15.0 million for the
September 1998 Quarter, a net increase of $5.5 million or 36.7%.
Of this increase:
. $2.5 million related to the 142 Same Store Residences (5,439 units); and
. $3.2 million related to the 39 residences (1,547 units) which commenced
operations during or subsequent to the September 1998 Quarter.
This increase in residence operating expense was offset by a $161,000
reduction in operating expenses associated with ancillary services. As a
result of the shut down of our home health care operations, we had no
operating expenses from ancillary services during the September 1999 Quarter
as compared to $161,000 of expenses from ancillary services for the September
1998 Quarter.
Residence operating expenses for the Same Store Residences were $16.7
million for the September 1999 Quarter as compared to $14.1 million for the
September 1998 Quarter, an increase of $2.6 million. The increase in operating
expenses from Same Store Residences was primarily attributable to additional
expenses associated with the increase in occupancy and increase in payroll
expense at the Same Store Residences subsequent to the September 1998 Quarter.
15
Of the $20.5 million in residence operating expenses reported for the
September 1999 Quarter:
. $17.0 million or 83.3% was attributable to Stabilized Residences;
. $3.4 million or 16.7% was attributable to Start-Up Residences; and
Corporate, General and Administrative. Corporate, general and administrative
expenses were $6.1 million for the September 1999 Quarter compared to $2.4
million in the September 1998 Quarter. Our corporate, general and
administrative expenses before capitalized payroll costs were $6.3 million for
the September 1999 Quarter as compared to $2.9 million for the September 1998
Quarter, and increase of $3.4 million. Corporate, general and administrative
expenses increased due to the following:
. $2.5 million of the increase is due to additional professional fees
associated with increased legal ($350,000), advisory ($1.0 million),
accounting ($700,000) and other professional service costs ($400,000)
due primarily to regulatory issues, shareholder litigation and the
restatement of our earnings for the years ended December 31, 1996, 1997
and the interim 1998 periods.
. $513,000 is a result of increased payroll costs for corporate and
regional staff.
. $366,000 as a result of expansion of the corporate offices, the
expansion of regional-level management and increased activity due to the
number of operating residences. This includes increased travel and
communications costs.
We capitalized $156,000 of payroll costs for the September 1999 Quarter as
compared to $445,000 for the September 1998 Quarter. The decrease is a result
of a decrease in development activities. We expect a further reduction in
future periods.
Included in additional general and administrative expenses were certain
costs associated with exiting our home health operations, including
transitioning certain employees to corporate and regional functions. We have
completely exited the home health care operations.
Building Rentals. Building rentals increased to $4.1 million in the
September 1999 Quarter from $3.2 million in the corresponding 1998 period, an
increase of $900,000. This increase was due to the following:
. the March 1999 amendment of 16 of our leases, as discussed above, which
were previously accounted for as financings. As a result of the
amendment, the leases have been reclassified as operating leases for the
September 1999 Quarter;
. rate increases on our operating leases; and
. the above increases were offset by one operating lease terminated
subsequent to the September 1998 Quarter.
As of the end of the September 1999 Quarter we had 70 operating leases as
compared to 55 as of the end of the September 1998 Quarter.
Depreciation and Amortization. Depreciation and amortization expense was
$2.3 million for the September 1999 Quarter compared to $1.7 million in the
September 1998 Quarter, a net increase of $600,000. This net increase is
primarily a result of increased depreciation expense related to the 27 new
residences that opened subsequent to September 30, 1998. This was offset by
$180,000 reduction in depreciation as a result of the March 1999 amendment to
16 of our leases, as discussed above, which were previously accounted for as
financings. As a result of the amendment, the leases were accounted for as
operating leases in the September 1999 Quarter.
Site Abandonment Costs. As a result of the reduction in our development
activities, we recorded site abandonment costs of $57,000 during the September
1999 Quarter with respect to certain sites which we will not develop. We
wrote-off $2.4 million during the fiscal year 1998 and $4.8 million of such
costs during the first two quarters of 1999 relating to the reduction in
development activities. We do not anticipate incurring similar write-offs in
the future.
16
Interest Expense. Interest expense was $4.0 million for the September 1999
Quarter compared to $3.4 million for the September 1998 Quarter. Gross
interest expense for the September 1999 Quarter was $4.2 million compared to
$4.6 million for the September 1998 Quarter, a net decrease of $400,000.
Interest expense decreased by:
. $840,000 as a result of the amendment to 16 of our leases, as discussed
above. As a result of the amendment, effective March 31, 1999, we will
no longer record interest expense with respect to these residences; and
. $80,000 as a result of the August 1998 redemption of the 7.0%
Convertible Subordinated Debentures.
The decrease was offset by increases in interest expense of:
. $500,000 relating to the full quarter impact of mortgage financing
completed during fiscal year 1998.
We capitalized $258,000 of interest expense for the September 1999 Quarter
as compared to $1.2 million for the September 1998 Quarter. The decrease is a
result of decrease in development activities. We expect a further reduction in
future periods.
Interest Income. Interest income was $308,000 for the September 1999 Quarter
compared to $1.3 million for the September 1998 Quarter, a decrease of
$979,000. The decrease in interest income is due to lower average cash
balances available for investment during the September 1999 Quarter.
Net Income (Loss). As a result of the above, we incurred a net loss of $6.3
million or $0.37 per share for the September 1999 Quarter, compared to a net
loss of $720,000, or $0.04 per share for the September 1998 Quarter.
Nine Months ended September 30, 1999 compared to Nine Months ended September
30, 1998
We incurred a net loss of $22.9 million, or $1.34 per basic and diluted
share, on revenue of $85.5 million for the nine months ended September 30,
1999 (the "September 1999 YTD Period"), as compared to a net loss of $13.3
million or $0.84 per basic and diluted share, on revenues of $63.9 million for
the nine months ended September 30, 1998 (the "September 1998 YTD Period").
Revenues. Revenues were $85.5 million for the September 1999 YTD Period as
compared to $63.9 million for the September 1998 YTD Period, a net increase of
$21.6 million.
Of this increase:
. $5.5 million related to the 108 Same Store Residences (4,047 units); and
. $19.2 million related to the 73 residences (2,939 units) which commenced
operations during or subsequent to the September 1998 YTD Period.
This increase in revenue was offset by a $3.1 million reduction in revenue
from ancillary services. As a result of the shut down of our home health care
operations, we had no revenue from ancillary services during the September
1999 YTD Period as compared to $3.1 million of revenue from ancillary services
for the September 1998 YTD Period.
Revenue from Same Store Residences were $57.7 million for the September 1999
YTD Period as compared to $52.2 million for the September 1998 YTD Period, an
increase of $5.5 million. The increase in revenue from Same Store Residences
was a combination of:
. An increase in occupancy to 84.0% for the September 1999 YTD Period as
compared to 79.6% for the September 1998 YTD Period; and
. An increase in average monthly rental rate to $1,867 for the September
1999 YTD Period as compared to $1,812 for the September 1998 YTD Period.
17
Residence Operating Expenses. Residence operating expenses were $60.0
million for the September 1999 YTD Period compared to $39.6 million for the
September 1998 YTD Period, a net increase of $20.4 million.
Of this increase:
. $7.6 million related to the 108 Same Store Residences (4,047 units); and
. $15.1 million related to the 73 residences (2,939 units) which commenced
operations during or subsequent to the September 1998 YTD Period.
This increase in residence operating expense was offset by a $2.3 million
reduction in operating expenses associated with ancillary services. As a
result of the discontinued operations of our home health care operations, we
had no expenses from ancillary services during the September 1999 YTD Period
as compared to $2.3 million of expenses from ancillary services for the
September 1998 YTD Period.
Residence operating expenses for the Same Store Residences were $38.9
million for the September 1999 YTD Period as compared to $31.3 million for the
September 1998 YTD Period, an increase of $7.6 million. The increase in
operating expenses from Same Store Residences was partly attributable to
additional expenses associated with the increase in occupancy at the Same
Store Residences subsequent to the September 1998 and partly due to
inefficiencies resulting from the diversion of management's attention as
discussed above.
Corporate, General and Administrative. Corporate, general and administrative
expenses were $15.4 million for the September 1999 YTD Period compared to $6.0
million in the September 1998 YTD Period. Our corporate, general and
administrative expenses before capitalized payroll costs were $16.0 million
for the September 1999 YTD Period as compared to $7.5 million for the
September 1998 YTD Period, an increase of $8.5 million. Corporate, general and
administrative expenses increased due to the following:
. $4.2 million of the increase is due to additional professional fees
associated with increased legal, financial advisory and accounting costs
due to regulatory issues, securityholder litigation and the restatement
of our earnings for the years ended December 31, 1996, 1997 and the
interim 1998 periods;
. $1.5 million as a result of expansion of the corporate offices, the
expansion of regional-level management and increased activity due to the
number of operating residences. This includes increased travel and
communications costs;
. $1.8 million is a result of increased payroll costs for corporate and
regional staff; and
. $960,000 of the increase is due to separation costs for certain
terminated corporate employees including costs associated with severance
and consulting agreements between us and our former chief executive
officer.
We capitalized $569,000 of payroll costs for the September 1999 YTD Period
as compared to $1.5 million for the September 1998 YTD Period. The decrease is
a result of a decrease in development activities.
Included in additional general and administrative expenses are certain costs
associated with the shut down of our home health operations, including
transitioning certain employees to corporate and regional functions.
Building Rentals. Building rentals increased to $11.6 million in the
September 1999 Quarter from $9.6 million in the corresponding 1998 period, an
increase of $2.0 million. This increase was due to the following:
. the March 1999 amendment of 16 of our leases, as discussed above, which
were previously accounted for as financings. As a result of the
amendment, the leases have been reclassified as operating leases for the
last six months of the September 1999 YTD Period;
. rate increases on our operating leases; and
. the above increases were offset by one operating lease terminated
subsequent to the September 1998 Quarter.
18
Depreciation and Amortization. Depreciation and amortization expense was
$6.6 million for the September 1999 YTD Period compared to $4.4 million for
the September 1998 YTD Period, an increase of $2.2 million. This increase in
depreciation and amortization was due primarily to the depreciation expense
related to the 27 new residences that opened subsequent to September 30, 1998.
The increase in depreciation and amortization was offset by:
. $180,000 reduction in depreciation as a result of the amendment to 16 of
our operating leases, as discussed above, which were previously
accounted for as financings; and
. $140,000 reduction of goodwill amortization as a result of the write-off
of $7.5 million of goodwill in the September 1998 YTD Period.
Site Abandonment Costs. As a result of the continued reduction in our
development activities, we recorded site abandonment costs of $4.8 million
during the September 1999 YTD Period with respect to certain sites which we
will not develop. We wrote-off $2.4 million during the fiscal year 1998
relating to the reduction in development activities with respect to such
sites. We do not anticipate incurring similar write-offs in the future.
Interest Expense. Interest expense was $11.1 million for the September 1999
YTD Period compared to $7.4 million for the September 1998 YTD Period. Gross
interest expense for the September 1999 YTD Period was $13.0 million compared
to $12.1 million for the September 1998 YTD Period, a net increase of
$900,000.
Interest expense increased by:
. $1.7 million relating to the full period impact of mortgage financing
completed during fiscal year 1998; and
. $1.6 million due to the full period impact of the 5.625% Convertible
Subordinated Debentures issued in April 1998.
The increase was offset by decreases in interest expense of:
. $1.7 million as a result of the amendment to 16 of our leases, as
discussed above. As a result of the amendment, effective March 31, 1999,
we will no longer record interest expense with respect to these
residences; and
. $530,000 as a result of the August 1998 redemption of the 7.0%
Convertible Subordinated Debentures; and
. $240,000 as a result of the February 1999 repayment of loans receivable
from our joint venture partner.
We capitalized $1.9 million of interest expense for the September 1999 YTD
Period as compared to $4.7 million for the September 1998 YTD Period. The
decrease is a result of lower development activities. We expect a further
reduction in future periods.
Interest Income. Interest income was $1.3 million for the September 1999 YTD
Period compared to $2.9 million for the September 1998 YTD Period, a decrease
of $1.6 million. The decrease in interest income is due to lower average cash
balances available for investment during the September 1999 YTD Period.
Loss on sale or disposal of assets. Loss on sale or disposal of assets was
$127,000 for the September 1999 YTD Period compared to $428,000 for the
September 1998 YTD Period. The loss for the September 1999 YTD Period related
to the write off of leasehold improvements related to corporate office space
vacated in February 1999 when we relocated our corporate headquarters. The
loss for the September 1998 YTD Period resulted from losses incurred in
connection with one sale and leaseback transaction entered into during the
period and from losses resulting primarily from additional capital costs
incurred during the period on sale and transactions completed during fiscal
year 1997.
19
Other income/expenses. Other expense was $138,000 for the September 1999 YTD
Period as compared to other expense of $1.4 million for the September 1998 YTD
Period. Other expense during the September 1999 YTD Period primarily related
to the repurchase of the operations of 17 residences formerly operated
pursuant to our joint venture agreements. Other expenses during the September
1998 YTD Period primarily related to a $1.2 million liability, $1.0 million of
which was included in other expense, we recorded in connection with our
determination to not enter into sale and leaseback arrangements with one our
lessors to the full extent of certain outstanding commitments. In December
1998, we agreed with the lessor to terminate the above referenced commitments
at no cost to us, other than approximately $200,000 of professional fees. As
such, we reversed the $1.0 million liability included in other expense during
the fourth quarter of 1998.
Cumulative Effect of Change in Accounting Principle. We adopted Statement of
Position 98-5, Reporting on the Costs of Start-Up Activities ("SOP 98-5")
effective January 1, 1998. We recognized a charge of $1.5 million during
fiscal year 1998 associated with adopting such provision.
Net Income (Loss). As a result of the above, we incurred a net loss of $22.9
million or $1.34 per share for the September 1999 YTD Period, compared to a
net loss of $13.3 million, or $0.84 per share for the September 1998 YTD
Period.
Liquidity and Capital Resources
At September 30, 1999, the Company had working capital of approximately of
$12.0 million including cash and marketable securities of $15.2 million.
Net cash used by operating activities was approximately $6.3 million during
the nine-month period ended September 30, 1999. The primary use of cash was to
fund the cash component of the net loss of $22.9 million.
Net cash used for investing activities totaled $33.7 million during the
nine-month period ended September 30, 1999. The primary use of cash was $27.0
million related to the development of new assisted living residences in
Florida, Michigan, Georgia, Indiana, Iowa, New Jersey, and South Carolina.
Additionally, during the September 1999 YTD Period $8.7 million of our cash
balances were restricted in accordance with certain loan and lease agreements.
Several of our leases and loan agreements contain restrictive covenants that
generally relate to the use, operation and disposition of the residences that
are leased or, in the case of loan agreements, serve as collateral for the
subject indebtedness. In addition, certain of our leases and loan agreements
contain cross-default provisions such that a default on one of those
instruments could cause us to be in default on one or more other instruments.
The Company was not in compliance with certain lease and loan covenants and
has obtained necessary waivers as a result of such non-compliance.
During the third quarter of 1999, we amended certain loan agreements with
one of our creditors. Pursuant to the amendment, we agreed to provide $8.3
million of additional cash collateral in exchange for the forbearance or
waiver of certain possible defaults, including an amendment to certain
financial covenants. In August 1999, we restricted $8.3 million of cash
balances as a result of such amendment. 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 other terms of
the loan agreements. During the third quarter of 1999, the Company agreed to
provide $418,000 of additional cash collateral pursuant to certain lease
agreements with one of its lessors, the Company restricted $418,000 of cash
balances as a result of such action.
Net cash used by financing activities totaled $1.6 million during the nine-
month period ended September 30, 1999. The Company made principal payments on
existing debt in the amount of $1.0 million and paid $750,000 to retire
restricted stock. This was offset by the proceeds from the issuance of common
stock of $154,000.
In addition to the 181 residences (6,986 units) in operation as of September
30, 1999, we intend to commence operation on an additional 4 residences
(approximately 156 units) through 1999. We have incurred
20
approximately $27.5 million in capital expenditures on our development
activities through the nine months ended September 30, 1999. We expect to
incur up to an additional $2.5 million in capital expenditures to complete the
residences under construction. We have no present intention of commencing
further development activity beyond the four residences currently included in
construction in process as of September 30, 1999. We expect that Start-Up
Residences will incur significant start-up losses during the fill-up period
and will adversely affect our operating results. We intend to utilize our cash
on hand and current working capital resources to complete the four residences
that we had under construction at September 30, 1999 and to fund any operating
losses until the residences under construction and any other Start-Up
Residences achieve positive cash flows. In addition, we estimate we will spend
approximately $350,000 to develop the information technology needed to
effectively operate our residences. We do not anticipate any significant
capital expenditure within the foreseeable future with respect to the
residences currently operating or those pending licensure as of September 30,
1999.
We believe our current cash on hand and our working capital resources will
be sufficient to meet our capital needs for the next 12 to 18 months. However,
to provide us with additional capital, we are exploring various financing
alternatives and/or commitments to engage in sale and leaseback transactions.
We currently do not have in place any such loan or lease commitments. As a
result of the class action suits, the restatement and other factors, there can
be no assurances that financing from any source will be available in the
future, or, if available, that such financing will be on terms acceptable to
us.
As of September 30, 1999, we had invested excess cash balances in short-term
certificates of deposit, U.S. Treasury securities and highly liquid marketable
debt securities.
Year 2000 Matters
The Year 2000 issue refers to a computer system's potential failure to
recognize date on or beyond January 1, 2000 due to reading two digits, rather
than four, to define the applicable year. As a result, computer programs and
systems may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations causing
disruptions of operations. Our year 2000 readiness plan consists of:
. identify and assess year 2000 issues in our information and non-
information technology systems including inquiring of third parties with
whom we do significant business, such as vendors and suppliers, as to
the state of their 2000 readiness;
. repair or replace non-compliant information and non-information
technology systems; and
. test and verify year 2000 readiness for previously non-compliant
systems; and
. compliance with state requirements related to disaster plan amendments.
We have identified year 2000 risks in the following areas:
. Our information technology systems might not be year 2000 compliant. We
have assessed our readiness in regard to year 2000 issues and believe
that all material hardware and software utilized in our operations and,
specifically, in our accounting systems, is year 2000 compliant. Despite
our efforts to identify and resolve year 2000 issues, we cannot
guarantee that all of our systems will be year 2000 compliant.
. Our non-information technology systems might not be year 2000
compliant. Our non-information technology systems are our building
management and life/safety systems, which include our emergency call
systems, electrical locking systems, fire alarm systems and fire alarm
monitoring systems. We have assessed our readiness of these systems and
in regard to year 2000 issues. We are using four salaried employees, as
part of their normal course of business, to contact all manufacturers
and vendors and request that they verify in writing that each of their
systems is year 2000 compliant. Any systems identified as not in
compliance will be upgraded or replaced.
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. We may have year 2000 issues with significant third parties. We are in
the process of obtaining year 2000 compliance letters and reports from
supplier, banks, and other third party payors, including the federal
government, are in the process of evaluating and updating their internal
systems and cannot yet assure us that their systems are year 2000
compliant. We also face the risk that vendors from which we purchase
goods and services, such as utility providers and our payroll providers,
may have systems that are not year 2000 compliant. We plan to monitor
the progress of our major vendors in achieving year 2000 compliance.
We do not anticipate any major interruption in our business as a result of
year 2000 issues. Accordingly, we do not expect that year 2000 issues will
have a material adverse effect upon our operations or prospects or that we
will incur any material expense associated with year 2000 compliance. However,
despite our efforts to identify and resolve year 2000 compliance problems, we
cannot guarantee that all of our systems or that of third parties on which we
rely will be year 2000 compliant. As a result our operations could be
interrupted or adversely affected.
In the worst case scenario, if our non-information technology systems
suffered year 2000 issues, we would implement our standard emergency operation
plan. This plan primarily includes incurring additional staffing. If we needed
to sustain this additional staffing for an extended period of time, it could
have a material adverse effect of our business and operations.
We have not established a contingency plan to address potential year 2000
non-compliance with respect to our information systems or those of our major
vendors. We are currently considering the extent to which such a plan in
necessary. Because we depend on systems outside our control, such as
telecommunications and power supplies, and because third party payors,
including the federal government, with whom we have relationships with may not
have adequately addressed year 2000 issues, we cannot guarantee that we will
not face the unexpected problems associated with year 2000 issues that may
affect our operations, business, and financial condition.
We anticipate that our future year 2000 compliance expenditures will be less
than $25,000.
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PART II. -- OTHER INFORMATION
ITEM 1. Legal Proceedings
Securityholder Litigation
In early 1999, 12 complaints were filed against us and certain of our
officers and directors in the United States District Court for the District of
Oregon. On July 23, 1999, a consolidated complaint was filed in connection
with this litigation and an amendment was subsequently filed on October 20,
1999. The amended consolidated complaint purports to be brought on behalf of a
class of purchasers of our common stock from February 6, 1997 through March
31, 1999 and on behalf of a class of purchasers of our 6.0% Convertible
Subordinated Debentures (the "6.0% Debentures") and 5.625% Convertible
Subordinated Debentures (the "5.625% Debentures" and, together with the 6.0%
Debentures, the "Debentures") from the dates of issuance through March 31,
1999, the alleged Class Period. The amended consolidated complaint alleges
violations of the federal securities laws and seeks unspecified damages. It
names as additional defendants our independent auditors, in connection with
the Company's stock and Debentures offerings during the alleged Class Period,
and our underwriters in connection with our 1997 offering of the 6.0%
Debentures. 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.
Other Litigation
We are involved in various lawsuits and claims arising in the ordinary
course of business. In the opinion of our management, although the outcomes of
these suits and claims are uncertain, in the aggregate they should not, except
as noted in the immediate preceding paragraph, 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
-------
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 September 30, 1999
announcing the following: i) the filing of our restated financial
statements, ii) that we will continue to explore alternatives to
maximize shareholder value, iii) the annual shareholders meeting on
November 16, 1999, and iv) our press release dated September 29, 1999.
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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
November 15, 1999 /s/James W. Cruckshank
By: _________________________________
Name: James W. Cruckshank
Title: Vice President and Chief
Financial Officer
November 15, 1999 /s/M. Catherine Maloney
By: _________________________________
Name: M. Catherine Maloney
Title: Vice President and Chief
Accounting Officer
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