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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-11999
ALTERNATIVE LIVING SERVICES, INC.
DELAWARE 39-1771281
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
450 N. SUNNYSLOPE ROAD, SUITE 300
BROOKFIELD, WI
53005
(Address of principal executive offices)
(Zip Code)
(414)641-5100
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
AS OF MAY 12, 1999, THERE WERE 22,068,303 SHARES OF THE REGISTRANT'S COMMON
STOCK, PAR VALUE $0.01, OUTSTANDING.
(Number of shares outstanding of each class of the issuer's classes of common
stock, as of the latest practical date.)
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ALTERNATIVE LIVING SERVICES, INC.
INDEX
Part I. Financial Information
PAGE NO.
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Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of March 31, 1999 (unaudited) 1
and December 31, 1998................................................................
Unaudited Condensed Consolidated Statements of Operations for the 2
Three Months Ended March 31, 1999 and 1998...........................................
Unaudited Condensed Consolidated Statements of Cash Flows for the 3
Three Months Ended March 31, 1999 and 1998...........................................
Notes to Condensed Consolidated Financial Statements.................................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................................ 5 - 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk.............................. 9
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K........................................................ 10 - 11
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PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ALTERNATIVE LIVING SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
MARCH 31, DECEMBER 31,
1999 1998
-------------- -----------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents..................................... $ 41,395 $ 49,934
Accounts receivable........................................... 5,882 4,045
Pre-opening costs, net of amortization........................ -- 7,856
Note receivable............................................... 24,083 10,986
Other current assets.......................................... 19,533 18,031
-------------- -----------------
Total current assets...................................... 90,893 90,852
-------------- -----------------
Property and equipment, net....................................... 709,424 640,211
Long-term investments............................................. 6,069 4,504
Goodwill, net..................................................... 5,207 5,243
Other assets...................................................... 42,256 37,000
============== =================
Total assets.............................................. $853,849 $777,810
============== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term obligations................. $4,392 $4,376
Short-term notes payable...................................... 14,058 8,363
Accounts payable.............................................. 17,595 28,666
Accrued expenses.............................................. 17,348 15,723
Deferred rent and refundable deposits......................... 7,115 5,419
-------------- -----------------
Total current liabilities................................. 60,508 62,547
-------------- -----------------
Long-term obligations, less current installments.................. 370,645 286,984
Convertible debt.................................................. 228,600 228,600
Deferred gain on sale and other................................... 12,941 18,347
Minority interest................................................. 1,510 4,220
Stockholders' equity:
Common stock.................................................. 221 219
Additional paid-in capital.................................... 178,967 177,864
Retained earnings (accumulated deficit)....................... 457 (971)
-------------- -----------------
Total stockholders' equity................................ 179,645 177,112
============== =================
Total liabilities and stockholders' equity................ $853,849 $777,810
============== =================
See accompanying notes to condensed consolidated financial statements.
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ALTERNATIVE LIVING SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS
ENDED MARCH 31,
------------------------------
1999 1998
-------------- -----------
Revenue:
Resident service fees................................................................. $77,122 $45,651
Other................................................................................. 5,769 833
-------------- -----------
Operating revenue................................................................. 82,891 46,484
Operating expenses:
Residence operations.................................................................. 47,099 29,444
Lease expense......................................................................... 14,459 8,989
General and administrative............................................................ 9,618 4,802
Depreciation and amortization......................................................... 4,025 3,397
-------------- -----------
Total operating expense............................................................... 75,201 46,632
Operating income (loss)........................................................... 7,690 (148)
Other income (expense):
Interest expense, net................................................................. (6,464) (729)
Lease income.......................................................................... 4,889 --
Other, net............................................................................ -- (27)
Equity in income (losses) of unconsolidated affiliates................................ 82 (12)
Minority interest in losses of consolidated subsidiaries.............................. 2,295 4,499
-------------- -----------
Total other income, net........................................................... 802 3,731
Income before income taxes and the cumulative effect of a change in accounting 8,492 3,583
principle.............................................................................
Income taxes.......................................................................... 3,227 --
-------------- -----------
Income after taxes................................................................ 5,265 3,583
Cumulative effect of a change in accounting principle, net of tax benefit of $2,409
(see Note 3) ........................................................................ (3,837) --
-------------- -----------
Net income............................................................................ $ 1,428 $ 3,583
============== ===========
Earnings per common share - basic and diluted:
Income before cumulative effect of a change in accounting principle................... $ 0.24 $ 0.16
Cumulative effect on prior periods (to December 31, 1998) of changing to a different
method .......................................................................... (0.18) --
-------------- -----------
Net income per common share - basic and diluted....................................... $ 0.06 $ 0.16
============== ===========
Weighted average common and common equivalent shares outstanding:
Basic................................................................................. 22,068 21,761
============== ===========
Diluted............................................................................... 22,551 22,344
============== ===========
See accompanying notes to condensed consolidated financial statements.
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ALTERNATIVE LIVING SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
-------------------------------
1999 1998
------------- -------------
Cash flows from operating activities:
Net income.................................................................... $1,428 $ 3,583
Adjustment to reconcile net income to net cash provided by (used in) operating
activities:
Depreciation and amortization................................................. 4,025 3,397
Deferred income taxes......................................................... (1,015) --
Equity in net (income) loss from investments in unconsolidated affiliates..... (82) 12
Minority interest in losses of consolidated subsidiaries...................... (2,295) (4,499)
Tax effect of stock options exercised......................................... 460 --
Increase in net resident receivable........................................... (2,136) (1,881)
Decrease (increase) in capitalized pre-opening costs (see Note 3)............ 7,856 (3,811)
Decrease (increase) in other current assets................................... (1,502) 2,107
Increase (decrease) in accounts payable....................................... (3,544) 5,149
Increase in accrued expenses.................................................. 3,393 60
Decrease in accrued merger charges............................................ (72) (2,448)
Changes in other assets and liabilities, net.................................. 1,742 (1,346)
------------- -------------
Net cash provided by operating activities....................................... 8,258 323
------------- -------------
Cash flows from investing activities:
Payments for property, equipment and project development costs ............... (79,282) (82,206)
Increase in notes receivable.................................................. (13,097) --
Acquisitions of facilities, net of cash...................................... -- (8,477)
Changes in investments in and advances to unconsolidated affiliates........... (500) (7,017)
Purchase of joint venture interest............................................ (15,235) (1,826)
Increase in long-term investments............................................. (1,565) --
Decrease in short-term investments............................................ -- 40,000
------------- -------------
Net cash used in investing activities........................................... (109,679) (59,526)
------------- -------------
Cash flows from financing activities:
Repayments of short term borrowings........................................... -- (13,314)
Repayments of long-term obligations........................................... (45,122) (10,932)
Proceeds from issuance of debt................................................ 128,863 30,926
Proceeds from issuance of convertible debt.................................... -- 18,750
Payments for financing costs.................................................. (3,905) (1,900)
Proceeds from sale/leaseback transactions..................................... 8,401 12,320
Issuance of common stock and other capital contributions...................... 645 9,442
Contributions by minority partners and minority stockholders.................. 4,000 2,493
------------- -------------
Net cash provided by financing activities....................................... 92,882 47,785
------------- -------------
Net decrease in cash and cash equivalents....................................... (8,539) (11,418)
------------- -------------
Cash and cash equivalents:
Beginning of period.......................................................... 49,934 79,838
------------- -------------
End of period................................................................ $41,395 $ 68,420
============= =============
Supplemental disclosure of cash flow information:
Cash paid for interest, including amounts capitalized......................... $6,130 $ 1,627
============= =============
Cash paid for income taxes.................................................... $2,499 $ 1,256
============= =============
See accompanying notes to condensed consolidated financial statements.
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ALTERNATIVE LIVING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION
The condensed consolidated balance sheets as of March 31, 1999 and
December 31, 1998, the condensed consolidated statements of operations for the
three months ended March 31, 1999 and 1998 and the condensed consolidated
statements of cash flows for the three months ended March 31, 1999 and 1998
contained herein include the accounts of Alternative Living Services, Inc. (the
"Company") and its affiliates which are under the common financial control of
the Company. All significant intercompany accounts have been eliminated in
consolidation. In the opinion of management, all adjustments (consisting only of
normal recurring items) necessary for a fair presentation of such condensed
consolidated financial statements have been included. The results of operations
for the three months ended March 31, 1999, are not necessarily indicative of the
results to be expected for the full fiscal year.
The condensed consolidated financial statements do not include all
information and footnotes necessary for a complete presentation of financial
position, results of operations, and cash flows in conformity with generally
accepted accounting principles. The accompanying condensed consolidated
financial statements should be read in conjunction with the audited consolidated
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the year ended December 31, 1998.
(2) FINANCING
The Company obtained $128.9 million in mortgage financing during the
first quarter of 1999. The terms for these financings range from three to
twenty-five years, currently bear floating interest rates ranging from 7.2% to
7.6% and are secured by 32 residences.
The Company obtained $8.4 million in sale/leaseback financing from a
real estate investment trust ("REIT") during the first quarter of 1999. The
initial lease term for this arrangement is 12 years, and the weighted average
effective lease rate is 9.5%. Any gain or loss arising from the sale of
residences to the REIT has been deferred and will be amortized into income in
proportion to rental expense over the initial term of the lease.
(3) CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE
In the first quarter of 1999, the Company adopted the Statement of
Position No. 98-5, "Reporting on the Costs of Start-up Activities." This
Statement provides guidance on the financial reporting of start-up activities
and organization costs. It requires costs of start-up activities and
organization costs to be expensed when incurred. The Company's prior practice
was to capitalize such costs and amortize them over a one year period after
residence opening in the case of start-up costs and five years in the case of
organizational costs. This Statement is required to be adopted for fiscal years
beginning after December 15, 1998 and accordingly, was adopted by the Company
effective January 1, 1999. The cumulative effect of the accounting change
reflected in the condensed consolidated statement of operations for the three
months ended March 31, 1999 was $3.8 million, net of tax.
(4) RECLASSIFICATIONS
Certain reclassifications have been made in the 1998 financial
statements to conform with the 1999 financial statement presentation.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company's continued growth has had a significant impact on its
results of operations and accounts for most of the changes in its results
between the first three months of 1999 and 1998. As of March 31, 1999 and 1998,
the Company operated or managed 369 and 253 residences with aggregate capacity
of 15,841 and 10,717 residents, respectively. The Company is constructing or
developing approximately 132 residences with aggregate capacity of 7,042 as of
March 31, 1999. For the three months ended March 31, 1999, the Company generated
operating revenue of $82.9 million and realized operating income of $7.7 million
and net income of $5.3 million prior to the cumulative effect of a change in
accounting.
Since 1993, the Company has grown as a result of its development and
acquisition activities, which have focused on purposeful built, free-standing
assisted living residences. The Company intends to continue its development
strategy and, at March 31, 1999, was constructing 61 residences and developing
an additional 71 residences.
On December 31, 1998, the Company entered into a strategic alliance
with HCR Manor Care. The alliance includes four principal arrangements:
- - The Company will acquire from HCR Manor Care up to 29 Alzheimer's/dementia
care and assisted living residences with a capacity for 2,611 residents
located in 12 states for $200 million in cash. The Company completed the
acquisition of certain of these residences in April 1999 and expects to
complete the acquisition of the remaining residences in the second quarter
of 1999.
- - HCR Manor Care and the Company will establish and capitalize a joint
venture to develop $500 million of ALS-branded Alzheimer's/dementia care
and assisted living residences in HCR's core markets over the next three to
five years. The Company expects to begin joint development under this
arrangement in the second quarter of 1999 and to continue joint development
activities over a three to five year period.
- - HCR Manor Care has the right to license from ALS the use of ALS' Clare
Bridge(R) service mark, to share various best practices, and to engage in
joint marketing activities relating to HCR's remaining Alzheimer's/dementia
care residences. The Company and HCR Manor Care executed definitive
agreements with respect to this arrangement in April 1999.
- - HCR Manor Care and ALS have agreed to form a new company to provide a
variety of ancillary services to ALS' resident population, including
rehabilitation therapy and hospice care. The Company and HCR Manor Care
executed definitive agreements with respect to this arrangement in April
1999.
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
1998
Residence Service Fees. Residence service fees for the three months ended March
31, 1999 were $77.1 million representing an increase of $31.4 million, or 69%,
from the $45.7 million for the comparable 1998 period. Substantially all of this
increase resulted from the addition of newly constructed residences and other
residences acquired by the Company. The Company operated or managed 369 and 253
residences at March 31, 1999 and 1998, respectively.
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Other Revenues. Other revenues for the three months ended March 31, 1999 were
$5.8 million, an increase of $5.0 million over the $800,000 of other revenue for
the three months ended March 31, 1998. The increase is attributable to
management fees on a greater number of residences which were either managed for
third parties or for entities in which the Company held a minority ownership
position in the 1999 period versus the 1998 period. As of March 31, 1999, the
Company had 64 residences under these structures compared to 40 such residences
as of March 31, 1998. The increase in other revenue was also impacted by $2.2
million of development fees recognized in the first quarter of 1999 in
connection with development activities conducted by the Company on behalf of
third parties.
Residence Operating Expenses. Residence operating expenses for the three months
ended March 31, 1999 increased to $47.1 million from $29.4 million in the
comparable period in 1998 due to the increased number of residences operated
during the 1999 period. Operating expenses as a percentage of residence service
fee revenue for the three months ended March 31, 1999 and 1998 were 61.1% and
64.5%, respectively.
Lease Expense. Lease expense for the three months ended March 31, 1999 was $14.5
million, compared to $9.0 million in the comparable 1998 period. Such increase
was primarily attributable to the utilization of additional sale/leaseback
financing totaling $146 million during 1998.
General and Administrative Expense. For the three months ended March 31, 1999,
general and administrative expenses before costs related to the $1.8 million
write-off of existing signage and other expenses associated with the name change
from Alternative Living Services to Alterra were $7.8 million, compared to $4.8
million for the comparable 1998 period, representing a decrease as a percentage
of operating revenue to 9.4% in the 1999 period from 10% in the 1998 period. The
increase in expenses was primarily attributable to salaries, related payroll
taxes and employee benefits for additional corporate personnel retained to
support the Company's actual and anticipated growth.
Depreciation and Amortization. Depreciation and amortization for the three
months ended March 31, 1999 was $4.0 million, representing an increase of
$600,000, or 18.5%, from the $3.4 million of depreciation and amortization for
the comparable 1998 period. This increase resulted primarily from depreciation
of fixed assets on the larger number of new residences that were operated by the
Company during the three months ended March 31, 1999, versus the comparable
period in 1998. This increase was offset by the elimination of amortization on
pre-opening costs which are now expensed when they are incurred.
Interest Expense, Net. Interest expense, net of interest income, was $6.5
million for the three months ended March 31, 1999, compared to $729,000 for the
comparable period in 1998. Gross interest expense (before interest
capitalization and interest income) for the 1999 period was $9.8 million
compared to $5.7 million for the 1998 period, an increase of $4.1 million. This
increase is primarily attributable to an increase in the amount of mortgage
financing used in the 1999 period as compared to the 1998 period. The Company
capitalized $2.5 million of interest expense in the 1999 period compared to $3.1
million in the comparable 1998 period due primarily to a decrease in assets
under construction financed using general corporate funds in 1999 compared to
1998. Interest income for the 1999 period was $791,000 as compared to $1.8
million for the 1998 period. This decrease was primarily due to a reduction in
average cash and investment balances from 1998 to 1999. The large 1998 balance
was due to proceeds from the Company's concurrent offering of common stock and
5.25% convertible subordinated debentures in December 1997.
Lease Income. The Company recorded $4.9 million of lease income on real estate
owned by the Company and leased to unconsolidated minority-owned joint ventures
for the three months ended March 31, 1999. The lease income received from these
unconsolidated minority-owned joint venture entities is generally equal to the
debt service amounts payable by the Company in respect of the leased real
estate. These leasing arrangements permit the Company to finance the leased real
estate as owned assets in the ordinary course of the Company's financing
activities. The Company had no such arrangements for the same period in 1998.
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Minority Interest in Losses of Consolidated Subsidiaries. Minority interest in
losses of consolidated subsidiaries for the three months ended March 31, 1999
was $2.3 million, representing a decrease of $2.2 million from $4.5 million for
the comparable 1998 period. The decrease was primarily attributable to the
decrease in the number of residences in various stages of lease-up that were
owned by the Company in consolidated joint venture arrangements during the 1999
period. During the first quarter of 1999, the Company had an average of 21
residences held in these joint venture arrangements compared to an average of 42
residences held in similar joint venture arrangements during the comparable 1998
period.
Income Taxes. For the three months ended March 31, 1999, the Company recorded a
current income tax provision of $2.8 million and recognized a $400,000 deferred
tax liability resulting in a current income tax expense of $3.2 million before
the effect of a cumulative change in accounting. No income tax provision was
recorded for the same period in 1998 due to the utilization of net operating
loss carryforwards.
Cumulative Effect of Change in Accounting Principle. During the three months
ended March 31, 1999, the Company incurred a cumulative effect of a change in
accounting principle of $3.8 million relating to the adoption of SOP 98-5, which
requires that costs of start-up activities and organization costs be expensed as
incurred.
Net Income. As a result of the foregoing, the net income for the three months
ended March 31, 1999 was $1.4 million compared to $3.6 million for the
comparable 1998 period.
LIQUIDITY AND CAPITAL RESOURCES
For the three months ended March 31, 1999 and 1998 cash flow from
operations was $8.3 million and $323,000, respectively. Cash flows provided by
operations in the 1999 and 1998 periods were partially offset by cash flow
deficits resulting from the Company's development of new residences, which
typically incur cash flow deficits during the lease-up period. A significant
number of these new residences were owned in consolidated joint venture
arrangements. Consistent with the terms of these arrangements, operating
deficits included in cash flow from operations of $2.3 million and $4.5 million
for the three months ended March 31, 1999 and 1998, respectively, were charged
against equity contributions of minority partners.
During the three months ended March 31, 1999, the Company closed on
approximately $92.9 million of new financing on newly developed assets, which
included approximately $55 million of debt used to refinance properties having
prior debt balances of $45.1 million. Financing was provided through $8.4
million of sale/leaseback financing and $4.0 million of minority partner
contributions.
This new financing along with approximately $8.5 million in available
cash and investments and cash from operations was used to fund $79.3 million in
construction and development activity, $15.2 million in joint venture buy-outs,
and $13.0 million of construction bridge financing under third party development
arrangements.
In March 1999, the Company had working capital of $30.4 million
compared to working capital of $90.5 million at March 31, 1998. The decrease was
due to the utilization of $77 million in cash and investments generated by the
December 1997 equity and convertible debt offerings subsequently used to fund
additional construction and development activities during 1998.
To achieve its growth objectives, the Company will need to obtain
sufficient financing to fund its development, construction and acquisition
activities. The Company has plans to develop or acquire approximately $525
million of residences (inclusive of the $200 million purchase from HCR Manor
Care) for the 12-month period ending March 31, 2000. Historically, the Company
has financed its development program and acquisitions through a combination of
various forms of real estate financing (mortgage and sale/leaseback financing),
capital contributions from joint venture partners and the sale of its
securities. The Company has executed non-binding letters of intent with various
healthcare REITs with approximately $114 million of remaining commitments at
March 31, 1999. The Company also had available $264 million of remaining
financing commitments from conventional lenders
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, as of March 31, 1999 which financing is accessible by the Company upon
satisfying the respective lender property underwriting. In addition, the Company
will require approximately $200 million to acquire the 29 residences it has
agreed to purchase from HCR Manor Care. The Company expects to finance this
transaction through a separate financing arrangement. In addition to financing
construction and development costs, the Company will require capital resources
to meet its operating and working capital needs incurred primarily in connection
with the start-up and lease-up phases of new residences. The Company believes
that its cash on hand, financing under these commitments, other debt and equity
financing that the Company expects to be able to access and equity contributions
from its joint venture development partners will be sufficient to fund its
growth strategy for the next 12 months.
A lack of funds may require the Company to delay or eliminate all or
some of its development projects and acquisition plans. In addition, the Company
may require additional financing to enable it to acquire additional residences,
to respond to changing economic conditions, to expand the Company's development
program or to account for changes in assumptions related to its development
program. There can be no assurance that any newly constructed residences will
achieve a stabilized occupancy level and attain a resident mix that meet the
Company's expectations or generate sufficient positive cash flow to cover
operating and financing costs associated with such residences. There can be no
assurance that the Company will be successful in securing additional financing
or that adequate funding will be available and, if available, will be on terms
that are acceptable to the Company.
The Company is obligated under certain of its joint venture
arrangements to purchase the equity interests of its joint venture partners at
fair market value upon the election of such partners. Within the next twelve
months, the Company will become subject to such contingent purchase obligations
with respect to equity interests held by joint venture partners, exercisable at
their election, related to certain of the Company's residences. At such times,
or earlier, as such contingent purchase obligations are exercisable, the Company
may also elect to exercise its rights to purchase such interests. Based on a
number of assumptions, including assumptions as to the number of residences to
be developed with joint venture partners, the timing of such development, the
time at which such options may be exercised and the fair market value of such
residences at the date such options are exercised, the Company estimates that it
may require approximately $35 million to $40 million to satisfy these purchase
obligations during the 12 month period ended March 31, 2000.
IMPACT OF INFLATION
To date, inflation has not had a significant impact on the Company.
Inflation could, however, affect the Company's results of operations due to the
Company's dependence on its senior resident population who rely on liquid assets
and relatively fixed incomes to pay for the Company's services. As a result, the
Company may not be able to increase residence service fees to account fully for
increased operating expenses. In structuring its fees, the Company attempts to
anticipate inflation levels, but there can be no assurance that the Company will
be able to anticipate fully or otherwise respond to any future inflationary
pressures. In addition, given the significant amount of construction and
development activity which the Company anticipates, inflationary pressures could
affect the Company's cost of new product deployment and financing. There can be
no assurances that financing will be available on terms acceptable to the
Company.
YEAR 2000 ISSUE
As a result of certain computer programs being written using two digits
rather than four to define the applicable year, computer systems that have date
sensitive software may recognize a date using "00" as the year 1900 rather than
the year 2000 (the so-called "Year 2000 Issue"). This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices or
engage in normal business activities.
The Company has evaluated its computer systems to determine what
modification (if any) are necessary
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to make such systems compatible with the year 2000 requirements. However,
because many of the Company's computer systems have been put into service within
the last several years, or are currently being replaced with year 2000 compliant
systems, the Company does not expect any such modifications to have a material
adverse effect on the Company's consolidated financial position or results of
operations. There can be no assurance, however, that the computer systems of
other companies on which the Company's systems rely will be timely modified, or
that a failure to modify such systems by another company, or modifications that
are incompatible with the Company's systems, would not have a material adverse
effect on the Company.
FORWARD-LOOKING STATEMENTS
The statements in this quarterly report relating to matters that are
not historical facts are forward-looking statements based on management's belief
and assumptions using currently available information. Although the Company
believes that the expectations reflected in such forward-looking statements are
reasonable, it cannot give any assurances that these expectations will prove to
be correct. Such statements involve a number of risks and uncertainties,
including, but not limited to, substantial debt and operating lease payment
obligations, operating losses associated with new residences, the ability to
manage rapid growth and business diversification, the need for additional
financing, development and construction risks, risks associated with
acquisitions, competition, governmental regulation and other risks and
uncertainties detailed in the reports filed by the Company with the Securities
and Exchange Commission. Should one or more of these risks materialize (or the
consequences of such a development worsen), or should the underlying assumptions
prove incorrect, actual results could differ materially from those forecasted or
expected. The Company assumes no duty to publicly update such statements.
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 cause
fluctuations in the Company's earnings and cash flows.
The Company performed a sensitivity analysis which presents the
hypothetical change in fair value of those financial instruments held by the
Company at March 31, 1999 which are sensitive to changes in interest rates.
Market risk is estimated as the potential change in fair value resulting from an
immediate hypothetical one percentage point parallel shift in the yield curve.
The fair value of the debt included in the analysis is $195.1 million. Although
not expected, a one percentage point change in the interest rates would have
caused the Company's annual interest expense to change by approximately $2.0
million. Accordingly, a significant increase in LIBOR based interest rates could
have a material adverse effect on the Company's earnings.
Although a majority of the debt and lease payment obligations of the
Company as of or during the three months ended, March 31, 1999 are not subject
to floating interest rates, indebtedness that the Company may incur in the
future may bear interest at a floating rate. Debt and annual operating lease
payment obligations will continue to increase as the Company pursues its growth
strategy.
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The Company does not presently use financial derivative instruments to
manage its interest costs. The Company does not use foreign currency exchange
rate forward contracts or commodity contracts and does not have foreign currency
exposure as of March 31, 1999.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.1 Master Loan Agreement between ALS West, Inc., the Company and
Guaranty Federal Bank, F.S.B., as agent, and the Lenders
named therein, dated as of January 8, 1999
10.2 Amended and Restated Financing and Security Agreement (Master
Agreement) between ALS Holdings, Inc., et al, as Borrower,
and Bank United, as agent, dated as of February 12, 1999
10.3 Amended Schedule of Additional Bank United Mortgage,
Assignment and Security Agreements which are substantially
similar to the Form of Mortgage attached as Exhibit 10.53 to
the Company's 10-K for the period ending December 31, 1998
10.4 Loan Agreement between ALS Financing II, Inc. and GMAC
Commercial Mortgage Corporation dated as of March 23, 1999
10.5 Lease and Security Agreement between the Company and SELCO
Service Corporation dated as of February 10, 1999
10.6 Amended Schedule of Additional NHI Leases which are
substantially similar to the Form of Lease attached as
Exhibit 10.57 to the Company's 10-K for the period ending
December 31, 1998
10.7 Employment Agreement dated as of January 1, 1999 by and
between the Company and William F. Lasky
10.8 Bridge Loan Agreement between the Company and Third Party
Investors I, L.L.C. dated as of December 31, 1998
10.9 Management Fee Loan Agreement between the Company and Third
Party Investors I, L.L.C. dated as of December 31, 1998
10.10 Working Capital Loan Agreement between the Company and Third
Party Investors I, L.L.C. dated as of December 31, 1998
10.11 Phase II Bridge Loan Agreement between the Company and Third
Party Investors I, L.L.C. dated as of March 31, 1999
10.12 Phase II Management Fee Loan Agreement between the Company
and Third Party Investors I, L.L.C. dated as of March 31,
1999
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10.13 Phase II Working Capital Loan Agreement between the Company
and Third Party Investors I, L.L.C. dated as of March 31,
1999
10.14 Form of Development Agreement ("Development Agreement") by
and between the Company and Third Party Investors I, L.L.C.
dated as of March 31, 1999
10.15 Schedule of additional Development Agreements which are
substantially in the form of Development Agreement attached
as Exhibit 10.14
10.16 Form of Assisted Living Consultant and Management Services
Agreement ("Management Agreement") by and between the Company
and Third Party Investors I, L.L.C. dated as of March 31,
1999
10.17 Schedule of additional Assisted Living Consultant and
Management Services Agreements which are substantially in the
form of Management Agreement attached as Exhibit 10.16
11.1 Statement Regarding Computation of Net Income (Loss) Per
Share.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K: The Registrant filed the following report with the
Securities and Exchange Commission on Form 8-K during the quarter ended
March 31, 1999:
On January 4, 1999, the Company filed a Current Report on
Form 8-K dated January 4, 1999 reporting under Item 5 thereof
the following:
On January 4, 1999, the Registrant issued a press
release announcing that it had entered into a strategic
business alliance with HCR Manor Care, Inc., a copy of
which is filed as an exhibit thereto.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Brookfield, State of
Wisconsin, on the 13th day of May, 1999.
ALTERNATIVE LIVING SERVICES, INC.
Date: May 13, 1999 By: /s/ Thomas E. Komula
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Thomas E. Komula
Senior Vice President, Treasurer, Chief
Financial Officer and Secretary
(Principal Financial Officer)
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