-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AWt839GSr4AakkIK0/o0oYoyoVXr4Z0EiY8ZSHRhLKn6i9uL1bnOexPH8t+2yPTI Plv2lQM9WvKGKFO1PD5iFQ== 0000898430-99-003747.txt : 20000211 0000898430-99-003747.hdr.sgml : 20000211 ACCESSION NUMBER: 0000898430-99-003747 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19990929 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ASSISTED LIVING CONCEPTS INC CENTRAL INDEX KEY: 0000929994 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-NURSING & PERSONAL CARE FACILITIES [8050] IRS NUMBER: 931148702 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: SEC FILE NUMBER: 001-13498 FILM NUMBER: 99719843 BUSINESS ADDRESS: STREET 1: 11835 NE GLENN WIDING DRIVE STREET 2: BLDG E CITY: PORTLAND STATE: OR ZIP: 97220-9057 BUSINESS PHONE: 5032526233 MAIL ADDRESS: STREET 1: 11835 NE GLENN WIDING DRIVE STREET 2: BLDG E CITY: PORTLAND STATE: OR ZIP: 97220-9057 10-Q/A 1 FORM 10-Q/A - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20459 FORM 10-Q/A (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1998 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 1-13498 ASSISTED LIVING CONCEPTS, INC. (Exact name of registrant as specified in its charter) Nevada 93-1148702 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 11835 N.E. Glenn Widing Drive, Building E Portland, Oregon 97220-9057 (Address of principal executive offices) (503) 252-6233 (Registrant's telephone number, including area code) Indicate by check mark whether Registrant (1) has filed all reports to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that Registrants was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [_] The Registrant had 16,767,317 shares of common stock, $.01 par value, outstanding at July 31, 1998. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Explanatory Note On February 1, 1999, Assisted Living Concepts, Inc. (the "Company") announced that after consultation with its independent auditors the Company would restate its consolidated 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, the Company announced that the restatement would be more extensive than the Company 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 its independent auditors, the Company determined to restate its consolidated 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. This amendment includes in Item 1 such restated consolidated financial statements for the three- and six-month periods ended June 30, 1998 and other information relating to such restated consolidated financial statements, including Management's Discussion and Analysis of Financial Condition and Results of Operations (Item 2). Information regarding the effect of the restatement on the Company's results of operations for the three- and six- months ended June 30, 1998 is included in Item 2 of this amendment and in Note 10 to the consolidated financial statements included in Item 1 of this amendment. Since February 1, 1999 12 separate complaints, which have since been consolidated into one action, have been filed against the Company and certain of its 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. The consolidated complaint purports to be brought on behalf of a class of purchasers of the Company's common stock from July 28, 1997 through March 31, 1999 and on behalf of a class of purchasers of its 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 date of issuance through March 31, 1999. The consolidated complaint alleges violations of the federal securities laws and seeks unspecified damages. It also names as additional defendants certain of the Company's directors that were not named previously, as well as the Company's independent auditors (solely in connection with the Company's 1998 offering of 5.625% Debentures) and the underwriters in connection with the Company's 1997 offering of 6.0% Debentures. Except for Items 1, 2 and 6, no other information included in the original report on Form 10-Q is amended by this amendment. For additional information regarding the restatement, please see the Company's reports on Form 8-K filed on February 1, 1999 and March 31, 1999. For additional information regarding the litigation described in the preceding paragraph, please see the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998. For current information regarding risks, uncertainties and other factors that may affect the Company's future performance, please see the "Risk Factors" included in Item 7 of the Company's Annual Report on Form 10-K for the year ended December 31, 1998. 2 ASSISTED LIVING CONCEPTS, INC. FORM 10-Q/A June 30, 1998 INDEX
Page ----- PART I--FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets as of December 31, 1997 and June 30, 1998................................................................ 4 Consolidated Statements of Operations for the three and six months ended June 30, 1997 and June 30, 1998............................... 5 Consolidated Statements of Cash Flows for the six months ended June 30, 1997 and June 30, 1998.......................................... 6 Notes to Consolidated Financial Statements........................... 7-17 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................. 18-23 PART II--OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K............................... 24
3 PART 1 Item 1-- Financial Information ASSISTED LIVING CONCEPTS, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share amounts)
June 30, 1998 As Restated December 31, (Note 10) 1997 (Unaudited) ------------ ----------- ASSETS Current assets: Cash and cash equivalents........................... $ 63,269 $ 76,306 Funds held in trust................................. 1,956 -- Accounts receivable................................. 2,185 3,056 Other current assets................................ 4,483 5,531 -------- -------- Total current assets.............................. 71,893 84,893 -------- -------- Property and equipment................................ 131,623 240,120 Construction in process............................... 102,025 57,636 -------- -------- Total property and equipment...................... 233,648 297,756 Less accumulated depreciation..................... 3,370 5,718 -------- -------- Property and equipment net........................ 230,278 292,038 Goodwill.............................................. 12,447 5,228 Other assets.......................................... 9,749 12,760 -------- -------- Total assets...................................... $324,367 $394,919 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses............... $ 8,258 $ 13,576 Construction payables............................... 18,883 11,265 Other current liabilities........................... 2,368 2,229 Construction financing.............................. 2,150 -- Current portion of long-term debt................... 172 388 -------- -------- Total current liabilities......................... 31,831 27,458 -------- -------- Other liabilities..................................... 2,592 2,737 Long-term debt........................................ 57,535 71,896 Convertible subordinated debentures................... 100,165 175,165 -------- -------- Total liabilities................................. 192,123 277,256 -------- -------- 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 15,646,478 and 15,754,822 shares in 1997 and 1998................... 156 158 Additional paid-in capital............................ 141,460 139,189 Unearned compensation expense......................... (4,100) (3,796) Fair market value in excess of historical cost of acquired net assets attributable to related party transactions......................................... (239) (239) Accumulated deficit................................... (5,033) (17,649) -------- -------- Total shareholders' equity........................ 132,244 117,663 -------- -------- Total liabilities and shareholders' equity........ $324,367 $394,919 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 4 ASSISTED LIVING CONCEPTS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) (unaudited)
Three Months Ended Six Months Ended June 30, June 30, ----------------- ----------------- 1998 As 1998 As Restated Restated (Note (Note 1997 10) 1997 10) ------- -------- ------- -------- Revenues................................. $11,108 $ 21,153 $20,587 $ 39,926 Operating expenses: Residence operating expenses........... 6,838 13,139 12,756 24,556 Corporate general and administrative... 782 2,045 1,575 3,613 Building rentals....................... 1,138 2,811 1,969 5,603 Building rentals to related party...... 488 389 968 779 Depreciation and amortization.......... 852 1,503 1,504 2,700 Site abandonment costs................. -- 1,001 -- 1,001 Write-off of impaired assets and related expenses...................... -- 8,874 -- 8,874 ------- -------- ------- -------- Total operating expenses............. 10,098 29,762 18,772 47,126 ------- -------- ------- -------- Operating income (loss).................. 1,010 (8,609) 1,815 (7,200) ------- -------- ------- -------- Other (income) expense: Interest expense....................... 1,141 2,945 1,835 4,007 Interest income........................ (153) (1,006) (276) (1,600) Loss on sale of assets................. 221 211 424 420 Other (income) expense................. (125) 1,072 (125) 1,065 ------- -------- ------- -------- Total other (income) expense......... 1,084 3,222 1,858 3,892 ------- -------- ------- -------- Net income (loss) before cumulative effect of change in accounting principle............................... $ (74) $(11,831) $ (43) $(11,092) Cumulative effect of change in accounting principle............................... -- -- -- (1,523) ------- -------- ------- -------- Net income (loss)........................ $ (74) $(11,831) $ (43) $(12,615) ======= ======== ======= ======== Basic and diluted net income (loss) per common share before cumulative effect of change in accounting principle.......... $ (0.01) $ (0.75) $ 0.00 $ (0.71) Cumulative effect of change in accounting principle............................... -- -- -- (0.10) ------- -------- ------- -------- Basic and diluted net income (loss) per common share............................ $ (0.01) $ (0.75) $ 0.00 $ (0.81) ======= ======== ======= ======== Basic and diluted weighted average common shares outstanding...................... 11,044 15,679 11,044 15,682
The accompanying notes are an integral part of these consolidated financial statements. 5 ASSISTED LIVING CONCEPTS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)
Six Months Ended June 30, ----------------- 1998 Restated (Note 1997 10) ------- -------- Operating activities: Net loss................................................... $ (43) $(12,615) Adjustment to reconcile net loss to net cash provided by operating activities: Depreciation and amortization............................ 1,504 2,700 Site abandonment cost.................................... -- 1,001 Write-off of impaired assets and related expenses........ -- 8,874 Loss on sale of asset.................................... 424 420 Cumulative effect of change in accounting principle...... -- 1,523 Compensation expense earned on restricted stock.......... -- 304 Changes in operating assets and liabilities, excluding effects of acquisitions: Accounts receivable, net................................. (353) (871) Other current assets..................................... (569) (1,064) Other assets............................................. (250) (366) Accounts payable and accrued expenses.................... 1,235 3,592 Other liabilities........................................ 104 6 ------- -------- Net cash provided by operating activities.................. 2,052 3,504 ------- -------- Investing activities: Funds held in trust........................................ (173) 1,956 Acquisitions, net of cash acquired......................... -- (8,564) Proceeds from sale of land and residences.................. 10,618 2,813 Purchases of property and equipment........................ (52,283) (70,813) ------- -------- Net cash used in investing activities...................... (41,838) (74,608) ------- -------- Financing activities: Proceeds from short-term construction borrowings expected to be refinanced.......................................... 43,210 -- Repayments of construction financing....................... (10,150) -- Proceeds from long-term debt............................... 14,508 14,742 Payments on long-term debt................................. (55) (165) Proceeds from issuance of common stock..................... 73 483 Proceeds from issuance of convertible subordinated debentures................................................ -- 75,000 Purchase of common stock................................... -- (2,753) Debt issuance costs of long-term debt...................... (1,077) (3,166) ------- -------- Net cash provided by financing activities.................. 46,509 84,141 ------- -------- Net increase in cash and cash equivalents.................. 6,723 13,037 Cash and cash equivalents, beginning of period............. 2,105 63,269 ------- -------- Cash and cash equivalents, end of period................... $ 8,828 $ 76,306 ======= ======== Supplemental disclosure of cash flow information: Cash payments for interest............................... $ 3,783 $ 5,472 Cash payments for income taxes........................... -- 590 Extinguishment of construction financing with sale leaseback transaction................................... -- 2,150 Decrease in construction loan payable.................... $(1,920) $ (7,618)
The accompanying notes are an integral part of these consolidated financial statements. 6 ASSISTED LIVING CONCEPTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Nature of Business and Summary of Significant Accounting Policies The Company Assisted Living Concepts, Inc. ("the Company") owns, operates and develops assisted living residences which provide housing 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 designed to meet the needs of its residents. As of June 30, 1998, the Company had received certificates of occupancy for 161 residences of which 143 were included in operating results. Basis of Presentation These consolidated financial statements have been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries that manage, own and develop assisted living residences and provide ancillary services such as home health, hospice and durable medical equipment. The consolidated financial statements also include residences the Company owns or leases but are operated through joint venture agreements. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. These 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/A for the year ended December 31, 1997. The financial information included herein reflects all adjustments (consisting of normal recurring adjustments with the exception of the cumulative effect of the change in accounting principle, site abandonment costs, and the write-off of impaired assets and related expenses) which are, in the opinion of management, necessary for a fair presentation of the results for interim periods. The result of operations for the three and six-month periods ended June 30, 1997 and 1998 (as restated) are not necessarily indicative of the results to be expected for the full year. 2. Property and Equipment The Company's property and equipment are stated at cost and consist of the following (in thousands):
December 31, June 30, 1997 1998 ------------ -------- Land..................................................... $ 7,924 $ 14,708 Buildings and improvements............................... 119,649 217,095 Equipment................................................ 1,419 2,141 Furniture................................................ 2,631 6,176 -------- -------- Property and Equipment................................... 131,623 240,120 Construction in progress................................. 102,025 57,636 -------- -------- Total property and equipment......................... 233,648 297,756 Less accumulated depreciation............................ 3,370 5,718 -------- -------- Property and equipment, net.............................. $230,278 $292,038 ======== ========
As a result of the Company's decision to reduce the number of new residence openings during the year ended December 31, 1999 and beyond, the Company wrote-off $1.0 million of capitalized costs during the three months ended June 30, 1998 relating to the abandonment of 11 development sites and other miscellaneous development costs. 7 During the three and six months ended June 30, 1998, the Company capitalized interest costs of $1.4 million and $3.5 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 $442,000 and $1.0 million for three and six months ended June 30, 1998, respectively. As of June 30, 1998, the Company had begun construction on 22 residences (894 units) ($30.5 million). Construction in process also includes 11 residences (438 units) ($25.2 million) that have received a certificate of occupancy, but are pending licensure. As of June 30, 1998, the Company had also entered into agreements pursuant to which it may purchase, subject to completion of due diligence and various other conditions, 34 additional sites. The Company has capitalized $1.7 million of direct costs in conjunction with the due diligence associated with these 34 sites (1,349 units). The remaining costs are associated with site selection and pre-acquisition costs. In addition, during the three month period ended June 30, 1998 the Company purchased three residences (164 units), two in Texas and one in Louisiana, for a total purchase price of approximately $8.2 million and accounted for such acquisitions as a purchase. 3. Leases A summary of leases that the Company has entered into since its inception is as follows:
Number of Sale and Number of Leaseback Sale and Units Number of Residences Leaseback under Leased Accounted Total Residences Units Leases Residences for as Number of Accounted under Accounted ("Oregon Operating Operating for as Operating for as Leases") Leases Leases Financings Leases Financings ---------- ---------- --------- ---------- --------- ---------- Leases at December 31, 1994.... 4 -- 4 -- 114 -- Leases entered into in 1995.... -- 5 5 -- 150 -- --- ---- --- ---- ----- ---- Leases at December 31, 1995.... 4 5 9 -- 264 -- Leases entered into in 1996.... 1 19 20 9 763 316 Residences repurchased in 1996. -- (4) (4) -- (146) -- --- ---- --- ---- ----- ---- Leases at December 31, 1996.... 5 20 25 9 881 316 Leases entered into in 1997.... 2 24 26 7 1,015 247 Lease unit expansion in 1997... -- -- -- -- 10 -- --- ---- --- ---- ----- ---- Leases at December 31, 1997.... 7 44 51 16 1,906 563 Leases entered into in First Quarter 1998.................. -- 1 1 -- 36 -- --- ---- --- ---- ----- ---- Leases at March 31, 1998....... 7 45 52 16 1,942 563 Leases entered into in Second Quarter 1998.................. -- 1 1 -- 35 -- --- ---- --- ---- ----- ---- Leases at June 30, 1998........ 7 46 53 16 1,977 563 === ==== === ==== ===== ====
During the three months ended June 30, 1998, the Company completed the sale of one residence under sale and leaseback arrangements. The Company sold the residence for approximately $2.8 million and leased it back over initial terms of 12 years. The residence was leased back at an initial annual lease rate of approximately $442,000. The above transaction was completed with LTC Properties, Inc. The Company recognized a gain of approximately $40,000 on the above transaction for the three months ended June 30, 1998 which has been recorded as deferred income and will be amortized over the initial term of the lease. The Company recognized losses of $211,000 during the three months ended June 30, 1998, primarily as a result of additional capital costs incurred during the current period on sale and leaseback transactions completed in prior periods. 8 During the second quarter ended June 30, 1998, the Company determined that it would not enter into sale and leaseback arrangements to the full extent of sale and leaseback commitments the Company had outstanding. The Company recorded a $1.2 million liability for expenses expected to be incurred in connection with this determination. Of such amount, $200,000 was recorded as corporate general and administrative expense and $1.0 million as other expense. 4. Long Term Debt On April 1, 1998 the Company entered into $14.6 million of mortgage debt for purposes of financing seven residences in Texas. The debt is secured by buildings, land, furniture and fixtures in connection with the seven residences. Installments are due monthly, for a period of 10 years, including annual interest of 7.73%. 5. Convertible Subordinated Debentures On April 7, 1998, the Company completed a private placement of $75.0 million of 5.625% convertible subordinated debentures due May 1, 2003 (the "5.625% Debentures"). The 5.625% Debentures are convertible at any time at or prior to maturity, unless previously redeemed, at a conversion price of $26.184 per common share, which equates to an aggregate of 2,864,345 shares. Interest is payable semiannually on May 1 and November 1 of each year, commencing November 1, 1998. The 5.625% Debentures are unsecured and subordinated to all senior indebtedness of the Company. The 5.625% Debentures are redeemable at par, as a whole or in part, at any time on or after May 15, 2001 at the Company's option. 6. Interest Rate Swap During the fourth quarter of fiscal year 1997, the Company entered into a $50.0 million floating rate mortgage loan commitment with a commercial lender. During the quarter ended March 31, 1998, the Company entered into a $25.0 million interest rate swap in order to reduce its exposure with respect to such floating rate loan commitment. The swap can be settled in cash on or before its effective date of September 30, 1998. 7. Write-off of Impaired Assets and Related Expenses In June 1998, the Company announced a plan to exit all home health business operations being conducted by Pacesetter Home Health Care, Inc. ("Pacesetter"). The decision to exit Pacesetter's operations was a result of certain laws becoming effective that adversely affect the prospective payment system for home health care services. The Company recorded a $8.9 million charge to earnings in the second quarter of 1998. Such charge consisted of (i) a $7.5 million write-off of all unamortized goodwill incurred in connection with the purchase of Home and Community Care, Inc. ("HCI") in 1997 and (ii) a $1.4 million provision for estimated exit costs expected to be incurred during the phase out period. Of this $1.4 million provision, $560,000 related to severance, salaries and benefits incremental to the shut down effort; $720,000 related to leases, equipment and related costs of closing offices; and $150,000 related to travel and moving costs. The Company expects the phase out period to conclude during 1999. 8. Change in Accounting Principle On April 3, 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-5, Reporting on the Costs of Start-up Activities (SOP 98-5). The Company adopted SOP 98-5 effective as of January 1, 1998. The impact of this change in accounting principle on the Company relates to the treatment of pre-opening costs associated with newly-developed residences. SOP 98-5 requires that these costs be expensed as incurred compared to the Company's previous policy to capitalize these costs prior to the commencement of residence operations, amortizing them over a twelve-month period. 9. Subsequent Events During July, 1998, the Company completed a $12.7 million tax exempt financing and a $530,000 taxable bond financing, secured by seven residences in the state of Ohio, at a weighted average interest rate of 9 approximately 5%. In addition, the Company obtained mortgage financing for three Oregon properties in the amount of $6.6 million at a fixed rate of 7.6%. Effective August 3, 1998, the Company called for redemption all of the $13.9 million of its 7.0% convertible subordinated debentures Due 2005 outstanding as of such date. As of August 3, 1998, all debentures were converted at a price of $7.50 per share, resulting in the issuance of 1,855,334 shares of common stock. During August, 1998, the Company repurchased 101,900 shares of common stock at prices ranging from $13.375 to $13.875 in accordance with a stock repurchase plan initiated in May, 1998. The Company is authorized to repurchase 500,000 shares, of which 301,900 have been repurchased as of August 9, 1998. 10. Restatement On February 1, 1999, the Company announced that after consultation with its independent auditors the Company would restate its 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, 1998, the Company announced that the restatement would be more extensive than the Company 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 its 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 the net income for the fiscal years ended December 31, 1996 and 1997 and the six months ended June 30, 1998 by $2.1 million, $6.7 million, and $7.5 million, respectively. The cumulative effect of the restatement reduced shareholders' equity by $16.4 million through June 30, 1998. As a result of the restatement, the Company reported net losses of $1.9 million, $2.5 million, and $12.6 million for the fiscal years 1996 and 1997, and the six months ended June 30, 1998 respectively, as compared to previously reported net income of $149,000, $4.2 million, and a net loss of $5.1 million, respectively. As a result of the restatement the Company reported net loss per diluted share of $0.23, $0.21 and $0.81 for the fiscal years 1996 and 1997 and the six months ended June 30, 1998, respectively, compared to previously reported net income of $0.03 and $0.34, and net loss of $0.32, per diluted share, respectively. After the restatement, the Company's cash position as of December 31, 1996 and 1997 and as of June 30, 1998 was $2.1 million, $63.3 million and $76.3 million, respectively, as compared to $2.1 million, $63.4 million and $76.5 million, respectively, as previously reported. In addition, the Company's working capital position on a restated basis as of December 31, 1996 and 1997 and as of June 30, 1998 was negative $27.1 million, positive $40.1 million and positive $57.4 million, respectively, as compared to previously reported working capital of negative $26.4 million, positive $41.0 million and positive $58.9 million, respectively. The restatement of the financial data included in this report resulted primarily from: (i) the earlier recognition of certain expenses which were previously capitalized in association with the Company's development and financing activities; (ii) a modification in how the Company accounted for certain lease arrangements; (iii) a modification in how the Company accounted for certain of its acquisitions and its joint venture arrangements; (iv) the capitalization of fees received by the Company previously recognized as either a reduction of expenses or as other income; (v) the elimination of an impairment write-down that the Company had previously recorded on three of its residences; (vi) elimination of certain accrued expenses previously recorded pursuant to a change in accounting principle; and (vii) the increase in goodwill written-off in the second quarter of 1998 relating to exiting the Company's home health operation. 10 The following table sets forth statement of operations and balance sheet data, as originally reported and as restated, as of and for the three and six months ended June 30, 1998. The table also sets forth the adjustments to the originally reported data resulting from the restatement, which adjustments are described in the related footnotes. As restated, the Company's June 30, 1998 balance sheet is affected by changes that resulted from the restatement of fiscal year 1996 and 1997 financial statements (which cumulative adjustments are set forth in the balance sheet under the heading "Cumulative Adjustments resulting from Prior Restatements") and by adjustments in the quarter ended June 30, 1998 (which adjustments are set forth in the balance sheet under the heading "Adjustments for Six Months Ended June 30, 1998"). STATEMENT OF OPERATIONS DATA
Three Months Ended June 30, 1998 Six Months Ended June 30, 1998 --------------------------------- --------------------------------- As As Previously As Previously As Reported Adjustment Restated Reported Adjustment Restated ---------- ---------- -------- ---------- ---------- -------- (in thousands except per share data) Revenues................ $21,353 $ (200)(H) $ 21,153 $40,296 $ (370)(H) $ 39,926 Operating Expenses: Residence operating expenses.............. 13,139 -- 13,139 24,725 (169)(K) 24,556 Corporate general and administrative........ 1,389 204 (B) 2,045 2,448 415 (B) 3,613 152 (J) 304 (J) 100 (H) 100 (H) 200 (O) 146 (A) 200 (O) Building rentals....... 3,573 (843)(C) 2,811 7,111 (1,686)(C) 5,603 118 (D) 240 (D) (37)(E) (62)(E) Building rentals to related party......... 364 25 (D) 389 728 51 (D) 779 Depreciation and amortization.......... 1,224 70 (A) 1,503 2,089 107 (A) 2,700 189 (C) 378 (C) 20 (O) 126 (O) Site abandonment costs................. -- 1,001 (O) 1,001 -- 1,001 (O) 1,001 Write-off of impaired assets................ 8,495 379 (O) 8,874 8,495 379 (O) 8,874 ------- ------- -------- ------- ------- -------- Total operating expenses............ 28,184 1,578 29,762 45,596 1,530 47,126 ------- ------- -------- ------- ------- -------- Operating income (loss). (6,831) (1,778) (8,609) (5,300) (1,900) (7,200) ------- ------- -------- ------- ------- -------- Other (income) expense: Interest expense....... 380 843 (C) 2,945 653 1,686 (C) 4,007 1,607 (F) 20 (E) 115 (G) 1,440 (F) 208 (G) Interest income........ (946) (60)(L) (1,006) (1,645) 45 (L) (1,600) Loss on sale of assets................ -- 211 (E) 211 -- 420 (E) 420 Other (income) expense............... (1,429) 1,501 (G) 1,072 (2,804) 2,869 (G) 1,065 1,000 (O) 1,000 (O) ------- ------- -------- ------- ------- -------- Total Other (income) expense............. (1,995) 5,217 3,222 (3,796) 7,688 3,892 ------- ------- -------- ------- ------- -------- Loss before income taxes ....................... (4,836) (6,995) (11,831) (1,504) (9,588) (11,092) Provision for income taxes.................. (458) 458 (I) -- (809) 809 (I) -- ------- ------- -------- ------- ------- -------- Net loss before cumulative effect of change in accounting principle.............. (4,378) (7,453) (11,831) (2,313) (8,779) (11,092) Cumulative effect of change in accounting principle.............. -- -- -- (2,770) 1,247 (A) (1,523) ------- ------- -------- ------- ------- -------- Net loss................ $(4,378) $(7,453)(Q) $(11,831) $(5,083) $(7,532)(Q) $(12,615) ======= ======= ======== ======= ======= ======== Basic and diluted net loss per common share: Net loss before cumulative effect of change in accounting principle............. $ (0.28) $ (0.75) $ (0.15) $ (0.71) Cumulative effect of change in accounting principle............. -- -- (0.17) (0.10) ------- -------- ------- -------- Basic and diluted net loss per share........ $ (0.28) $ (0.75) $ (0.32) $ (0.81) ======= ======== ======= ======== Basic and diluted weighted average common shares outstanding........... 15,749 15,679(1) 15,717 15,682(1)
- -------- (1) Reflects a recalculation of weighted average common shares outstanding. 11 BALANCE SHEET DATA
As of June 30, 1998 ---------------------------------------------- Cumulative Adjustments Adjustments for Six- Resulting Months As from Prior Ended Previously Restatements June 30, As Reported (P) 1998 Restated ---------- ------------ ----------- -------- (in thousands) ASSETS Current Assets: Cash and cash equivalents..... $ 76,468 $ (125) $ (162)(A) $ 76,306 125 (L) Funds held in trust........... 1,149 -- (1,149)(M) -- Accounts receivable........... 3,056 -- -- 3,056 Other current assets.......... 4,516 (21) 505 (A) 5,531 (281)(G) 169 (K) (336)(I) 1,149 (M) (170)(L) -------- ------- ------- -------- Total Current Assets........ 85,189 (146) (150) 84,893 -------- ------- ------- -------- Property and Equipment......... 208,248 30,872 1,000 (O) 240,120 Construction in process........ 60,685 (1,770) 1,046 (A) 57,636 (415)(B) (1,440)(F) (470)(H) -------- ------- ------- -------- Total property and equipment.................. 268,933 29,102 (279) 297,756 Less accumulated depreciation............... 4,352 893 107 (A) 5,718 366 (C) -------- ------- ------- -------- Property and equipment--net. 264,581 28,209 (752) 292,038 -------- ------- ------- -------- Goodwill....................... 9,884 (950) (3,706)(O) 5,228 Other assets................... 14,858 (1,051) (521)(A) 12,760 (12)(C) (378)(E) (1,471)(G) 1,335 (M) -------- ------- ------- -------- Total assets................ $374,512 $26,062 $(5,655) $394,919 ======== ======= ======= ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable and accrued liabilities.................. $ 14,590 $ 52 $ 208 (G) $ 13,576 (1,274)(A) Construction payables......... 11,265 -- -- 11,265 Other current liabilities..... -- 1,112 1,117 (G) 2,229 Accrued income taxes.......... -- (411) 411 (I) -- Current portion of long-term debt......................... 388 -- -- 388 -------- ------- ------- -------- Total current liabilities... 26,243 753 462 27,458 -------- ------- ------- -------- Other Liabilities.............. -- 2,592 291 (D) 2,737 (146)(A) Long-term debt................. 39,073 31,488 1,335 (M) 71,896 Convertible subordinated debentures.................... 175,165 -- -- 175,165 -------- ------- ------- -------- Total liabilities........... 240,481 34,833 1,942 277,256 -------- ------- ------- -------- Shareholder's equity: Preferred Stock............... -- -- -- -- Common Stock.................. 158 -- -- 158 Additional paid-in capital.... 135,476 4,081 (368)(I) 139,189 Unearned compensation expense...................... -- (4,100) 304 (J) (3,796) Fair market value in excess of historical cost of acquired net assets attributed to related party transactions................. (239) -- -- (239) Accumulated deficit........... (1,364) (8,752) (7,533)(Q) (17,649) -------- ------- ------- -------- Shareholders' equity........ 134,031 (8,771) (7,597) 117,663 -------- ------- ------- -------- Total liabilities and shareholders' equity....... $374,512 $26,062 $(5,655) $394,919 ======== ======= ======= ========
12 (A) During the second quarter 1998, the Company adopted Statement of Position 98-5, Reporting on the Costs of Start-up Activities ("SOP 98-5") effective January 1, 1998. Under SOP 98-5, start-up costs associated with the opening of new residences are expensed as incurred. The Company recognized a charge of $2.8 million associated with adopting SOP 98-5. Prior to the adoption of SOP 98-5, the Company capitalized pre-opening costs on its balance sheet and amortized such costs over a 12-month period. As a result of (i) the cumulative effect of balance sheet adjustments from prior restatements and (ii) a change in the accrual related to the adoption, the charge was reduced by $1.2 million to $1.5 million. Statement of Operations. Reflects changes resulting from the adoption of SOP 98-5. Balance Sheet. Reflects changes resulting from the adoption of SOP 98-5 as described above. (B) The Company's policy is to capitalize payroll costs related to operations employees and certain corporate and regional employees directly associated with the development of new residences. As a result of the restatement, certain previously capitalized payroll costs, primarily those related to corporate and regional employees, are being reported as expenses during the period in which they were incurred rather than capitalized as part of the cost of the residences and depreciated over the lives of the related assets. Statement of Operations. Reflects an increase in general and administrative expenses during the period resulting from expensing payroll costs, which were previously capitalized in connection with the Company's development activities. Balance Sheet. Reflects a decrease in construction in process resulting from expensing previously capitalized payroll costs associated with the Company's development activities. (C) The Company has changed the accounting treatment of 16 sale and leaseback transactions entered into during fiscal years 1996 and 1997, which had previously been accounted for as operating leases rather than as financings. These agreements contained a purchase option, entitling the Company to purchase the residences at fair market value at the end of initial lease terms ranging from 14 to 15 years. As a result of the restatement, these agreements are being accounted for using the finance method in Statement of Financial Accounting Standard No. 98, Accounting for Leases (SFAS No. 98). Accordingly, for periods between April 1, 1996 and March 30, 1999, the Company has recorded on its balance sheet the property and equipment and financing obligation associated with these agreements. During this same time period, the Company has recorded (i) all rent payments as interest expense and (ii) depreciation expense resulting from depreciating the property and equipment over periods ranging from seven to 40 years. The Company has amended these agreements effective March 30, 1999 to eliminate the purchase option, resulting in a reclassification of these leases as operating leases from the date of the amendment forward. Effective March 30, 1999, in accordance with SFAS No. 98 the Company has removed both the property and equipment and financing obligation from the Company's balance sheet resulting in a deferred gain that will be included in other liabilities and amortized over the remaining initial lease term as an offset to future rent expense. Statement of Operations. Reflects an increase in depreciation expense and interest expense and a decrease in rent expense during the period resulting from the change described above. Balance Sheet. Reflects an increase in accumulated depreciation and a decrease in other assets resulting from the change described above. (D) All of the Company's operating leases contain various provisions for annual increases in rent, or rent escalators. Certain of these leases contain rent escalators with future minimum annual rent increases that are not deemed to be contingent rents. As a result of the restatement, the Company is accounting for rental 13 expense related to such operating leases with non-contingent rent escalators on a straight-line basis over the initial term of the leases ranging from 10 to 20 years, rather than on a contractual cash payment basis. The Company is recording a deferred liability representing the difference between reported rent under the straight-line method and the actual cash rent expense paid. During fiscal years 1997 and 1998 and during the second quarter of 1999, substantially all of these leases were amended to restructure such rent escalators. From the date of the amendment forward, the Company has accounted for the amended leases on a contractual cash payment basis. The deferred liability is amortized from the date of the applicable amendment over the remaining initial lease terms as an offset to future rent expense. Statement of Operations. Reflects an increase in rent expense during the period resulting from changing the accounting treatment associated with the rent escalators. Balance Sheet. Reflects a deferred liability resulting from the difference between the lease expense reported under the straight-line method compared to the actual cash payment. (E) The Company incurred losses from certain sale and leaseback transactions because the Company's cost basis in the residences (which included the capital costs associated with the development and construction of the residences) together with capitalized costs associated with opening such residences, exceeded the sale proceeds to the Company. Such losses were recorded as deferred assets and amortized over the initial term of the leases, which ranged from 15 to 20 years. The Company has determined to eliminate the deferred assets from its consolidated balance sheet and to recognize such losses in the period in which they were incurred. Gains resulting from sale and leaseback transactions continue to be recorded as deferred liabilities and amortized over the initial lease term as an offset to future reported rent expense. Unamortized deferred financing costs related to construction financing were previously included in the basis of the residence for purposes of calculating gain or loss on sale and leaseback transactions. The Company has recorded unamortized deferred financing costs as interest expense at the time the construction financing is repaid. Statement of Operations. Reflects an increase in loss on sale of assets and interest expense, and a reduction in rent expense, resulting from the changes described above. Balance Sheet. Reflects a decrease in other assets resulting from the elimination of deferred losses, in conjunction with sale and leaseback transactions. (F) The Company capitalizes a portion of gross interest expense based upon (i) the amount of average construction in process during the period and (ii) the average cost of its financing. Capitalized interest is included on the Company's balance sheet as construction in process and property and equipment. The amount of interest capitalized is impacted by changes to the average construction in process and changes in the costs of the Company's financing as a result of the cumulative impact of the adjustments in Notes (A), (B) and (C). During fiscal year 1997 and for the nine months ended September 30, 1998, the Company also included in its effective cost of financing a cost of capital related to the Company's convertible debentures. As part of the restatement, the Company has eliminated such incremental costs from its effective financing cost calculation during this time period. Statement of Operations. Reflects a change in interest expense resulting from recalculating capitalized interest. Balance Sheet. Reflects a change in construction in process resulting from recalculating capitalized interest. (G) During fiscal years 1997 and 1998, the Company entered into joint venture agreements with respect to the operation of certain start-up residences pursuant to which 90% of the operating risks and rewards related to such residences were allocated to the joint venture partner, in which the Company had an interest. The 14 Company consolidated 100% of the revenues and expenses attributable to these residences with the revenues and expenses of the Company. The joint venture partner reimbursed the Company for 90% of the start-up losses of the joint venture residences incurred in the second quarter of 1997 and through the third quarter of 1998, and the Company recognized such reimbursements as other income in its financial statements during such quarters. The Company has determined to restate such loss reimbursements as loans, rather than other income. The Company has also reflected amounts paid to repurchase the joint venture partner's interest in the operations of joint venture residences as a reduction of the loan balance for the amount of reimbursed losses on those residences, with the excess recorded as interest and other expense. Interest was calculated based on the average loan balance using an imputed 20% interest rate, and other expense was calculated based on a $10,000 administrative fee per residence. During the first quarter of 1999, the Company negotiated with the joint venture partner to acquire, for $3.8 million, all of such partner's remaining interests in the operations of the remaining 17 residences entered into under joint venture agreements through the third quarter of 1998. The Company was not reimbursed for any start-up losses, nor has the Company entered into any new joint venture agreements with respect to the operation of start-up residences, subsequent to the third quarter of 1998. Statement of Operations. Reflects a decrease in other income and an increase in interest and other expenses resulting from the treatment of loss reimbursements as loans rather than other income. Balance Sheet. Reflects an increase in accrued liabilities to reflect cash received as loss reimbursements as loans rather than other income. Other current assets decreased as a result of eliminating an account receivable from the joint venture partner for unfunded losses. Other assets decreased to reflect the elimination of an asset which, prior to the restatement, was recorded in connection with the repurchase of the joint venture partner's interest in the operations of the joint venture. (H) Commencing in the fourth quarter of 1997, the Company contracted with Supportive Housing Services, Inc. ("SHS") to provide services to the Company for market feasibility analysis, site pre-acquisition services and construction management oversight in conjunction with the Company's development activities. The Company paid $480,000 and $2.7 million during the fourth quarter of 1997 and for the nine months ended September 30, 1998, respectively, for such development services. The Company capitalized such payments as construction in process. In addition, the Company and SHS entered into a consulting agreement whereby the Company agreed to provide SHS consulting services in the assisted living industry, including providing data on the Company's facility prototypes, facilitating the introduction to other potential customers and providing market analysis on the assisted living industry. The Company received fees from SHS of $195,000 during the fourth quarter of 1997 and $906,000 during the year ended December 31, 1998. The Company recorded a portion of these fees as a reduction of residence operating expenses or corporate, general and administrative expenses, and recognized a portion of these fees as revenues or other income. As a result of the restatement, the Company has recorded the fees received from SHS as a reduction of construction in process. Statement of Operations. Reflects a reduction in revenue and an increase in corporate general and administrative expenses resulting from the change in the accounting treatment for fees received from SHS as described above. Balance Sheet. Reflects a decrease in construction in process resulting from the change in the accounting treatment for fees received from SHS as described above. (I) As a result of the restatement, the Company has reversed previously reported tax expense, accrued taxes, certain tax benefits for stock options exercised, and has recorded a receivable for taxes paid, which taxes are refundable. Statement of Operations. Reflects a reduction of income tax expense resulting from the changes described above. Balance Sheet. Reflects changes in accrued taxes, additional paid in capital and other current assets. The decrease in additional paid in capital reflects the reversal of the tax benefit for exercise of stock options. 15 (J) In the fourth quarter of 1997, the Company granted 250,000 shares of restricted common stock to certain key officers, the terms of which provided for vesting during the fourth year through the seventh year following the grant date. At the time of the grant, the Company's common stock had a fair market value of $17.00 per share. No cash consideration was paid for such shares by the recipients. The Company recorded no compensation expense with respect to the restricted stock during the period prior to vesting. As a result of the restatement, the Company has recorded the restricted stock as of the date of the grant as unearned compensation expense in the amount of $17.00 per share, or approximately $4.3 million. This unearned compensation expense has been reported as a separate component of shareholders' equity to be amortized as compensation expense over the seven year vesting period. The Company has reported this compensation expense at a rate of $152,000 per quarter during the periods in which the restricted stock was outstanding, and reported total compensation expense of $912,000 from the fourth quarter of 1997 through the first quarter of 1999. During the first and second quarters of 1999 the Company repurchased the restricted stock from the key officers for an aggregate cost of $938,000. As a result of the repurchase, the Company has reported additional compensation expense in the first quarter of 1999 in the amount of $26,000 (the excess of the purchase price over previously amortized unearned compensation expense) and thereafter will record no compensation expense for the restricted stock and the restricted stock will be eliminated from the Company's balance sheet. Statement of Operations. Reflects an increase in corporate general and administrative expense for the compensation expense recognized as a result of the issuance of the restricted stock. Balance Sheet. Reflects an increase in common stock resulting from the fourth quarter 1997 grant of approximately $4.3 million of restricted stock, as well as the creation of unearned compensation expense in the same amount, which is amortized over subsequent periods. (K) During 1997, the Company recorded a vendor invoice as part of other current assets. In the first quarter of 1998, the Company charged such vendor invoice to residence operating expense. As a result of the restatement, the Company has charged this invoice to residence operating expense in the period in which it was incurred in 1997, and reversed the charge to residence operating expense previously recorded in 1998. Statement of Operations. Reflects the change described above. Balance Sheet. Reflects the change described above. (L) During the fourth quarter of 1997, the Company overstated cash equivalents by $125,000 (which was realized in cash in the first quarter of 1998), and understated accrued interest receivable (included in other current assets on its balance sheet) by $50,000. As a result, the Company overstated interest income by $75,000 on its 1997 statement of operations. During the first quarter of 1998, the Company adjusted accrued interest receivable on its balance sheet and reduced interest income by the amount of such adjustment. Additionally, during the first quarter of 1998, the Company accrued $180,000 of interest receivable. The Company recognized this amount as a reduction in interest income over the remaining three quarters of 1998. As a result of the restatement, the Company has reduced cash and cash equivalents and eliminated the excess portion of interest income recorded during the fourth quarter of 1997. The Company also eliminated the excess interest receivable in the first quarter of 1998 and reversed the reduction of interest income previously recorded. As such, the reported net loss during fiscal year 1997 will increase by $75,000 and the reported net loss for fiscal year 1998 will decrease by the same amount. Statement of Operations. Reflects the changes as discussed above. Balance Sheet. Reflects the changes as discussed above. (M) Certain reclassifications have been made to conform to the current period's presentation. (N) Not Used. 16 (O) In the second quarter 1998, the Company recorded an $8.5 million charge consisting of: (i) a $3.9 million write-off of goodwill resulting from the Company's exit from a home health care operation acquired in October 1997 (the Company had recorded total goodwill of $7.7 million in connection with its home health operations); (ii) a $1.4 million reserve for exit costs associated with closing the home health care operation acquired in October 1997; (iii) a $1.2 million liability for expenses expected to be incurred in connection with sale and leaseback commitments (the "Financing Commitment Accrual") which the Company did not intend to utilize; (iv) a $1.0 million write-off relating to development sites (the "Development Site Write-off") that the Company had determined not to develop; and (v) a $1.0 million write-down of three impaired residences as required by Financial Accounting Standard No. 121, Accounting for the Impairment of Long Lived Assets and for Long Lived Assets to be Disposed of. As a result of the restatement, the Company has written-off all of the $7.5 million of unamortized goodwill associated with the home health care operation and has eliminated the $1.0 million write-down relating to three residences previously accounted for as impaired. In addition, the Company has reclassified the Development Site Write-off to site abandonment expense and the Financing Commitment Accrual to other expense and general and administrative expense on the statement of operations. Amortization expenses increased to reflect a 20 year useful life on goodwill. Statement of Operations. Reflects a reduction in amortization expense and an increase in write-off of impaired assets resulting in the write-off of additional goodwill associated with exiting the home health care operation as described above. In addition, site abandonment expense, other expense and general and administrative expense increased as a result of the reclassification of a portion of the charges as described above. Balance sheet. Reflects a reduction in goodwill resulting in the write-off of additional goodwill associated with exiting the home health care operation as described above. (P) These adjustments reflect the cumulative impact of the restatement of prior periods on the balance sheet amounts. (Q) This adjustment is the net effect on net income and accumulated deficit as a result of the adjustments described in Notes (A) through (O). 17 ITEM 2--Management's Discussion and Analysis of Financial Condition and Results of Operations Restatement On February 1, 1999, the Company announced that after consultation with its independent auditors the Company would restate its 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, 1998, the Company announced that the restatement would be more extensive than the Company 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 its 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 the net income for the fiscal years ended December 31, 1996 and 1997 and the six months ended June 30, 1998 by $2.1 million, $6.7 million, and $7.5 million, respectively. The cumulative effect of the restatement reduced shareholders' equity by $16.4 million through June 30, 1998. As a result of the restatement, the Company reported net losses of $1.9 million, $2.5 million, and $12.6 million for the fiscal years 1996 and 1997, and the six months ended June 30, 1998 respectively, as compared to previously reported net income of $149,000, $4.2 million, and a net loss of $5.1 million, respectively. As a result of the restatement, the Company reported net loss per diluted share of $0.23, $0.21 and $0.81 for the fiscal years 1996 and 1997 and for the six months ended June 30, 1998, respectively, compared to previously reported net income of $0.03 and $0.34, and net loss of $0.32, per diluted share, respectively. After the restatement, the Company's cash position as of December 31, 1996 and 1997 and as of June 30, 1998 was $2.1 million, $63.3 million and $76.3 million, respectively, as compared to $2.1 million, $63.4 million and $76.5 million, respectively, as previously reported. In addition, the Company's working capital position on a restated basis as of December 31, 1996 and 1997 and as of June 30, 1998 was negative $27.1 million, positive $40.1 million and positive $57.4 million, respectively, as compared to previously reported working capital of negative $26.4 million, positive $41.0 million and positive $58.9 million, respectively. The restatement of the financial data included in this report resulted primarily from: (i) the earlier recognition of certain expenses which were previously capitalized in association with the Company's development and financing activities; (ii) a modification in how the Company accounted for certain of its lease arrangements; (iii) a modification in how the Company accounted for certain of its acquisitions and its joint venture arrangements; (iv) the capitalization of fees received by the Company previously recognized as either a reduction of expenses or as other income; (v) the elimination of an impairment write-down that the Company had previously recorded on three of its residences; (vi) elimination of certain accrued expenses previously recorded pursuant to a change in accounting principle; and (vii) the increase in goodwill written-off in the second quarter of 1998 relating to exiting the Company's home health operation. For statement of operations and balance sheet data, as originally reported and as restated as of and for the three months ended June 30, 1998, as well as a description of the adjustments to the originally reported data resulting from the restatement, see Note 10 to the unaudited consolidated financial statements included in Item 1 of this report. Overview At the closing of the initial public offering in November, 1994, the Company began operating five assisted living residences located in Oregon. As of June 30, 1998, the Company had received a Certificate of Occupancy on 161 residences (6,137 units) of which 143 residences (5,414 units) were included in the Company's operating results. The Company derives its revenues primarily from resident fees for the delivery of assisted living services. Resident fees typically are paid monthly by residents, their families, state Medicaid agencies or other responsible parties. Resident fees include revenue derived from a multi-tiered rate structure, which varies based on the level of care required. Resident fees are recognized as revenues when services are provided. Operating expenses 18 include (i) residence operating expenses, such as staff payroll, food, property taxes, utilities, insurance and other direct residence operating expenses, (ii) general and administrative expenses consisting of corporate and support function such as legal, accounting and other administrative expenses, (iii) building rentals and (iv) depreciation and amortization. The Company previously capitalized the operating results of certain start- up residences for approximately the first two months of operations. As a result of the restatement, residences are included in operating results as of the first day of the month following licensure. Accordingly, the number of Stabilized and Start-up Residences (as defined below) at the beginning of each period, and the operating results of Stabilized and Start-up Residences in each period, have been restated. See footnote (A) to Note 10 of the consolidated financial statements included in Item 1. The following table sets forth, for the periods presented the number of residences and units included in operating results, and the average occupancy rates and sources of revenue for the Company. The portion of revenues received from state Medicaid agencies are labeled as "Medicaid State Portion" while the portion of the Company's revenues that a Medicaid-eligible resident must pay out of his or her own resources is labeled "Medicaid Resident Portion". 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.
Three Months Ended June 30, 1998 --------------------------- Stabilized Start-up Residences Residences Total ---------- ---------- ----- Total Residences ---------------- Residences operated (end of period)........ 73 70 143 Units operated (end of period)............. 2,642 2,772 5,414 Average occupancy rate..................... 92.1% 48.0% 70.4% Sources of revenue: Medicaid state portion................... 14.3% 6.6% 11.6% Medicaid resident portion................ 7.9% 3.0% 6.2% Private.................................. 77.8% 90.4% 82.2% ----- ----- ----- Total.................................. 100.0% 100.0% 100.0% ===== ===== =====
Results of Operations Three months ended June 30, 1998 compared to three months ended June 30, 1997 The Company had a net loss of $11.8 million, or $0.75 per basic and diluted share, on revenue of $21.2 million for the three months ended June 30, 1998 as compared to a net loss of $74,000, or $0.01 per basic and diluted share, on revenues of $11.1 million for the three months ended June 30, 1997. The Company had certificates of occupancy for 161 residences, 143 of which were included in the operating results as of June 30, 1998 as compared to 93 residences with certificates of occupancy, 83 of which were included in the operating results as of June 30, 1997. Of the residences included in the operating results as of June 30, 1998, the Company owned 74 residences and leased 69 residences (53 of which were operating leases and 16 of which were accounted for as financings) as compared to 34 owned residences and 49 leased residences (33 of which were operating leases and 16 of which were accounted for as financings) as of June 30, 1997. Revenue. Revenue was $21.2 million for the three months ended June 30, 1998 as compared to $11.1 million for the three months ended June 30, 1997, an increase of $10.1 million. This increase is due primarily to the opening of 39 residences (1,524 units) which opened between June 30, 1997 and March 31, 1998 and the opening of an additional 21 residences (874 units) during the three months ended June 30, 1998. 19 Residence Operating Expenses. Residence operating expenses were $13.1 million for the three months ended June 30, 1998 as compared to $6.8 million for the three months ended June 30, 1997, an increase of $6.3 million. This increase is due primarily to the 39 residences (1,524 units) which opened between June 30, 1997 and March 31, 1998, and the opening of an additional 21 residences (874 units) during the three months ended June 30, 1998. Corporate General and Administrative. Corporate general and administrative expenses were $2.0 million for the three months ended June 30, 1998 as compared to $782,000 for the three months ended June 30, 1997. The Company's corporate general and administrative expenses before capitalized payroll costs were $2.5 million for the three months ended June 30, 1998 as compared to $1.2 million for the three months ended June 30, 1997, an increase of $1.3 million. This increase results from an additional investment in the Company's corporate and regional infrastructure to support the development and operation of new residences including the expansion into new states. The Company capitalized $442,000 of payroll costs for the three months ended June 30, 1998 as compared to $400,000 for the three months ended June 30, 1997 resulting from the Company's on-going development activities. Building Rentals. Building rentals were $3.2 million for the three months ended June 30, 1998 as compared to $1.6 million for the three months ended June 30, 1997, an increase of $1.6 million. This increase is due primarily to the one lease entered into during the three months ended June 30, 1998, and the 19 leases entered into between June 30, 1997 and March 31, 1998. As of June 30, 1998 the Company had 53 operating leases as compared to 33 operating leases as of June 30, 1997. Depreciation and Amortization. Depreciation and amortization was $1.5 million for the three months ended June 30, 1998 as compared to $852,000 for the three months ended June 30, 1997, an increase of $651,000. The increase in depreciation is the result of additional owned residences due to the Company's increased emphasis on asset ownership. As of June 30, 1998, the Company owned 74 residences as compared to 34 residences as of June 30, 1997. Depreciation expense also included depreciation associated with sale and leaseback transactions completed during fiscal years 1996 and 1997, which were accounted for as financings. Amortization expense decreased as a result of the adoption of SOP 98-5 as of January 1, 1998 which requires the Company to expense start- up costs as they are incurred. Prior to the adoption of SOP 98-5, the Company's policy was to defer certain start-up costs associated with opening new residences and amortize them over the first twelve months of the residence's operations. Site Abandonment Costs. As a result of the Company's decision to reduce the number of new residence openings during fiscal year 1999 and beyond, the Company wrote-off $1.0 million of capitalized costs during the three months ended June 30, 1998 relating to the abandonment of 11 development sites and other miscellaneous development costs. The Company had not written-off any such costs prior to the quarter ended June 30, 1998. Write-off of Impaired Assets and Related Expenses. The Company recorded a $8.9 million charge for the three months ended June 30, 1998 consisting of (i) a $7.5 million write-off of unamortized goodwill resulting from the exit from its home health care operation acquired in October 1997 and (ii) a $1.4 million provision for exit costs associated with closing such home health care operation. Interest Expense. Interest expense was $3.0 million for the three months ended June 30, 1998 as compared to $1.2 million for the three months ended June 30, 1997. Gross interest expense for the three months ended June 30, 1998 was $4.4 million compared to $2.7 million for the three months ended June 30, 1997, an increase of $1.7 million. The increase is due to interest expense incurred during the three months ended June 30, 1998 of $1.5 million on 6.0% Debentures issued in October, 1997, $1.0 million of interest incurred on 5.625% Debentures issued in April, 1998, an increase of $366,000 of interest on 16 sale and leaseback transactions accounted for as financings, seven of which were entered into subsequent to June 30, 1997, $115,000 of interest incurred on loans pursuant to the Company's joint venture agreements, an increase of $288,000 on mortgage financings entered into subsequent to June 30, 1997, an increase of $78,000 on State of Idaho Housing and Finance Association loans completed subsequent to June 30, 1997, combined with a decrease of interest incurred on construction bridge loans of $1.6 million. The Company capitalized $1.4 million and $1.5 million of interest expense for the three months ended June 30, 1998 and 1997, respectively. 20 Interest Income. Interest income was $1.0 million for the three months ended June 30, 1998 as compared to $153,000 for the three months ended June 30, 1997, an increase of $853,000. The increase is due to higher cash balances available to invest. Loss on Sale of Assets. Loss on sale of assets was $211,000 for the three months ended June 30, 1998 as compared to $221,000 for the three months ended June 30, 1997. The loss recorded for the three months ended June 30, 1998, resulted primarily from additional capital costs incurred during the three months ended June 30, 1998 on sale and leaseback transactions completed prior to March 31, 1998. The Company entered into one sale and leaseback transaction during the three months ended June 30, 1998 as compared to five during the three months ended June 30, 1997. Other Income and Expense. Other expense was $1.1 million for the three months ended June 30, 1998 as compared to other income of $125,000 for the three months ended June 30, 1997. During the three months ended June 30, 1998, the Company determined that it would not enter into sale and leaseback arrangements to the full extent of sale and leaseback commitments the Company had outstanding. The Company recorded a $1.2 million charge in connection with this determination, including $1.0 million as other expense for three months ended June 30, 1998. Net Loss. As a result of the above, net loss was $11.8 million or $0.75 per basic and diluted share for the three months ended June 30, 1998, compared to a net loss of $74,000, or $0.01 per basic and diluted share for the three months ended June 30, 1997. Six months ended June 30, 1998 compared to six months ended June 30, 1997 The Company had a net loss of $12.6 million, or $0.81 per basic and diluted share, on revenue of $39.9 million for the six months ended June 30, 1998 as compared to a net loss of $43,000, or $0.00 per basic and diluted share, on revenues of $20.6 million for the six months ended June 30, 1997. The Company had certificates of occupancy for 161 residences, 143 of which were included in the operating results as of June 30, 1998 as compared to 93 residences with certificates of occupancy, 83 of which were included in the operating results as of June 30, 1997. Of the residences included in the operating results, as of June 30, 1998, the Company owned 74 residences and leased 69 residences (53 of which were operating leases and 16 of which were accounted for as financings) as compared to 34 owned residences and 49 leased residences (33 of which were operating leases and 16 of which were accounted for as financings) as of June 30, 1997. Revenue. Revenue was $39.9 million for the six months ended June 30, 1998 as compared to $20.6 million for the six months ended June 30, 1997, an increase of $19.3 million. This increase is due primarily to the full six months impact of the 23 residences (877 units) which opened during the six months ended June 30, 1997 and to the opening of an additional 60 residences (2,398 units) since June 30, 1997. Residence Operating Expenses. Residence operating expenses were $24.6 million for the six months ended June 30, 1998 as compared to $12.8 million for the six months ended June 30, 1997, an increase of $11.8 million. This increase is due to the full six months impact of the 23 residences (887 units) which opened during the six months ended June 30, 1997, and to the opening of an additional 60 residences (2,398 units) since June 30, 1997. Corporate General and Administrative. Corporate general and administrative expenses were $3.6 million for the six months ended June 30, 1998 as compared to $1.6 million for the six months ended June 30, 1997. The Company's corporate general and administrative expenses before capitalized payroll costs were $4.6 million for the six months ended June 30, 1998 as compared to $2.5 million for the six months ended June 30, 1997, an increase of $2.1 million. This increase results from an additional investment in the Company's corporate and regional infrastructure to support the development and operation of new residences including the expansion into new states. The Company capitalized $1.0 million of payroll costs for the six months ended June 30, 1998 as compared to $892,000 for the six months ended June 30, 1997 resulting from an increase in development activities. 21 Building Rentals. Building rentals were $6.4 million for the six months ended June 30, 1998 as compared to $2.9 million for the six months ended June 30, 1997, an increase of $3.5 million. This increase is due to the one lease entered into during the six months ended June 30, 1998, and the 20 leases entered into between June 30, 1997 and December 31, 1997. As of June 30, 1998 the Company had 53 operating leases as compared to 33 operating leases as of June 30, 1997. Depreciation and Amortization. Depreciation and amortization was $2.7 million for the six months ended June 30, 1998 as compared to $1.5 million for the six months ended June 30, 1997, an increase of $1.2 million. The increase in depreciation is the result of additional owned residences due to the Company's increased emphasis on asset ownership. As of June 30, 1998, the Company owned 74 residences as compared to 34 residences as of June 30, 1997. Depreciation expense also included depreciation associated with sale and leaseback transactions completed during fiscal years 1996 and 1997, which were accounted for as financings. Amortization expense decreased as a result of the adoption of SOP 98-5 as of January 1, 1998 which requires the Company to expense start-up costs as they are incurred. Prior to the adoption of SOP 98- 5, the Company's policy was to defer certain start-up costs associated with opening new residences and amortize them over the first twelve months of the residence's operations. Site Abandonment Costs. As a result of the Company's decision to reduce the number of new residence openings during fiscal year 1999 and beyond, the Company wrote-off $1.0 million of capitalized costs during the six months ended June 30, 1998 relating to the abandonment of 11 development sites and other miscellaneous development costs. The Company had not written-off any such costs prior to the quarter ended June 30, 1998. Write-off of Impaired Assets and Related Expenses. The Company recorded a $8.9 million charge for the six months ended June 30, 1998 consisting of (i) a $7.5 million write-off of goodwill resulting from the exit from its home health care operation acquired in October 1997 and (ii) a $1.4 million provision for exit costs associated with closing such home health care operation. Interest Expense. Interest expense was $4.0 million for the six months ended June 30, 1998 as compared to $1.8 million for the six months ended June 30, 1997. Gross interest expense for the six months ended June 30, 1998 was $7.5 million compared to $4.7 million for the six months ended June 30, 1997, an increase of $2.8 million. The increase is due to interest expense incurred during the six months ended June 30, 1998 of $2.9 million on 6.0% Debentures issued in October, 1997, $1.0 million of interest incurred on 5.625% Debentures issued in April, 1998, an increase of $746,000 of interest on 16 sale and leaseback transactions accounted for as financings, seven of which were entered into subsequent to June 30, 1997, $259,000 of interest incurred on loans pursuant to the Company's joint venture agreements, an increase of $288,000 on mortgage financings entered into subsequent to June 30, 1997, an increase of $143,000 on State of Idaho Housing and Finance Association loans completed subsequent to June 30, 1997, combined with a decrease of interest incurred on bridge loans of $2.6 million. The Company capitalized $3.5 million and $2.9 million of interest expense for the six months ended June 30, 1998 and 1997, respectively. Interest Income. Interest income was $1.6 million for the six months ended June 30, 1998 as compared to $276,000 for the six months ended June 30, 1997, an increase of $1.3 million. The increase is due to higher cash balances available to invest. Loss on Sale of Assets. Loss on sale of assets was $420,000 for the six months ended June 30, 1998 as compared to $424,000 for the six months ended June 30, 1997. The loss resulted from losses incurred in connection with one sale and leaseback transaction entered into during the six months ended June 30, 1998 and from losses resulting primarily from additional capital costs incurred during the six months ended June 30, 1998 on sale and leaseback transactions completed during fiscal year 1997. The Company entered into two sale and leaseback transactions during the six months ended June 30, 1998 as compared to 11 during the six months ended June 30, 1997. Other Income and Expense. Other expense was $1.1 million for the six months ended June 30, 1998 as compared to other income of $125,000 for the six months ended June 30, 1997. During the three months ended June 30, 1998, the Company determined that it would not enter into sale and leaseback arrangements to the full 22 extent of sale and leaseback commitments the Company had outstanding. The Company recorded a $1.2 million liability for expenses expected to be incurred in connection with this determination, including $1.0 million as other expense for six months ended June 30, 1998. Net Loss. As a result of the above, net loss was $12.6 million or $0.81 per basic and diluted share for the six months ended June 30, 1998, compared to a net loss of $43,000, or $0.00 per basic and diluted share for the six months ended June 30, 1997. Liquidity and Capital Resources The following table sets forth certain data from the statement of cash flows as reported and as restated as a result of the adjustments discussed in Note 10 to the financial statements for the six months ended June 30, 1998 (in thousands).
As Previously Reported(1) As Restated ------------- ----------- Net cash provided by operating activities....... $ 9,332 $ 3,504 Net cash used in investing activities........... (72,214) (74,608) Net cash provided by financing activities....... 75,956 84,141 ------- ------- Net increase in cash and cash equivalents..... $13,074 $13,037 ======= =======
- -------- (1) Reflects certain reclassifications to conform to the presentation in the current year's consolidated statement of cash flows. Amounts as previously reported do not reflect the adoption of SOP 98-5, which is reflected in amounts as restated. SOP 98-5 was adopted during the second quarter of 1998 effective as of January 1, 1998. As a result of the restatement, the Company's cash position as of December 31, 1996 and 1997 and as of June 30, 1998 was $2.1 million, $63.3 million and $76.3 million, respectively, compared to $2.1 million, $63.4 million and $76.5 million, respectively, as previously reported. In addition, the Company's working capital position on a restated basis as of December 31, 1996 and 1997 and as of June 30, 1998 was negative $27.1 million, positive $40.1 million and positive $57.4 million, respectively, compared to previously reported working capital of negative $26.4 million, positive $41.0 million and positive $58.9 million, respectively. As a result of the restatement, net cash provided by operating activities decreased $5.8 million. Net cash used in investing activities increased by $2.4 million and net cash provided by financing activities increased by $8.2 million, primarily as a result of the change in construction payable balance being classified as a non-cash transaction. The Company had $76.3 million in cash and cash equivalents at June 30, 1998, compared to $63.4 million at December 31, 1997. The increase is primarily attributable to the issuance of $75.0 million of 5.625% Debentures in April, 1998. Net cash provided by operating activities was approximately $3.5 million during the six month period ended June 30, 1998. Net cash used in investing activities totaled $74.6 million during the six month period ended June 30, 1998. The primary use of cash was $70.8 million related to the development of new assisted living residences and $8.6 million related primarily to the acquisition of two Texas and one Louisiana facilities. This was offset by proceeds of $2.8 million related to the sale and leaseback of one residence and the release of $2.0 million of funds previously held in trust. In addition, during the first quarter of 1998, the Company converted $2.2 million of construction financing to a sale and leaseback with respect to one residence. Net cash provided by financing activities totaled $84.1 million during the six month period ended June 30, 1998. The Company completed the issuance of $75.0 million of 5.625% Debentures in April, 1998, realizing net proceeds of $72.2 million. In addition, the Company completed fixed rate mortgage loans on seven properties, realizing proceeds of $14.7 million. As of June 30, 1998, the Company had invested excess cash balances in short-term certificates of deposit and U.S. Treasury securities. 23 PART II. OTHER INFORMATION ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibits. 12.1 Ratio of Earnings to Fixed Charges 27 Financial Data Schedule
(b) Reports on Form 8-K. On July 30, 1998, the Company filed a report on Form 8-K dated July 30, 1998 reporting its results of operations for the three and six months ended June 30, 1998. 24 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 By: James W. Cruckshank ---------------------------------- Name: James W. Cruckshank Title: Vice President Chief Financial Officer September 23, 1999 By: M. Catherine Maloney ---------------------------------- Name: M. Catherine Maloney Title: Vice President/Controller Chief Accounting Officer September 23, 1999 25 EX-12.1 2 RATIO OF EARNINGS TO FIXED CHARGES EXHIBIT 12.1 RATIO OF EARNINGS TO FIXED CHARGE:
Three Months Six Months Three Months Ended June 30, Six Months Ended June 30, Ended June 30, 1998 Ended June 30, 1998 1997 (As Restated) 1997 (As Restated) -------------- -------------- -------------- -------------- (in thousands) Loss before cumulative effect of change in accounting principle... $ (74) $(11,831) $ (43) $(11,092) Add fixed charges: Interest costs including amortization of debt issuance cost.......... 1,141 2,945 1,835 $ 4,007 ------ -------- ------ -------- Earnings (loss)......... $1,067 $ (8,886) $1,792 $ (7,085) ====== ======== ====== ======== Fixed Charges: Interest expense including amortization of debt issuance cost.. $1,141 $ 2,945 $1,835 $ 4,007 Capitalized interest.... 1,512 1,432 2,846 3,492 ------ -------- ------ -------- Total Fixed Charges. $2,653 $ 4,377 $4,681 $ 7,499 ====== ======== ====== ======== Ratio of Earnings to Fixed Charges.......... .40 -- .38 -- ====== ======== ====== ======== Deficiency of Earnings to Cover Fixed Charges. $1,586 $ 13,263 $2,889 $ 14,584 ====== ======== ====== ========
EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q/A AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS 6-MOS DEC-31-1998 DEC-31-1998 MAR-01-1998 JAN-01-1998 JUN-30-1998 JUN-30-1998 76,306 76,306 0 0 3,135 3,135 79 79 0 0 84,893 84,893 297,756 297,756 5,718 5,718 394,919 394,919 27,458 27,458 247,061 247,061 0 0 0 0 158 158 117,505 117,505 394,919 394,919 21,153 39,926 21,153 39,926 13,139 24,556 29,762 47,126 1,072 1,065 0 0 2,945 4,007 (11,831) (11,092) 0 0 (11,831) (11,092) 0 0 0 0 0 (1,523) (11,831) (12,615) (.75) (.81) (.75) (.81)
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