-----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, Wcpqrfu5eoEMdlwpb++ltgM3f968RuVh8kS7vEGK5YeOnJ2wImCXoQUMoT6hToBE mLqsmNU14Kob5wdpiqCT7A== 0000898430-99-004291.txt : 19991117 0000898430-99-004291.hdr.sgml : 19991117 ACCESSION NUMBER: 0000898430-99-004291 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 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 SEC ACT: SEC FILE NUMBER: 001-13498 FILM NUMBER: 99756378 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 1 FORM 10-Q - QUARTERLY REPORT - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20459 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1999 OR [_] TRANSITION REPORT PURSUANT TO SECTION 12 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition period from to Commission file number 1-83938 ASSISTED LIVING CONCEPTS, INC. (Exact name of registrant as specified in its charter) Nevada 93-1148702 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.)
11835 NE Glenn Widing Drive, Building E Portland, Oregon 97220 (Address of principle executive offices) (503) 252-6233 (Registrant's telephone number, including area code) Indicate by check mark whether Registrant (1) has filed all reports to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that Registrants was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Shares of Registrant's common stock, $.01 par value, outstanding at Ocotber 29, 1999 is 17,120,745. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ASSISTED LIVING CONCEPTS, INC. FORM 10-Q September 30, 1999 INDEX
Page ----- PART I -- FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets, December 31, 1998 and September 30, 1999................................................................ 3 Consolidated Statements of Operations and Consolidated Statements of Comprehensive Income (Loss), Three and Nine Months Ended September 30, 1998 and 1999................................................... 4 Consolidated Statements of Cash Flows, Nine Months Ended September 30, 1998 and 1999................................................... 5 Notes to Consolidated Financial Statements........................... 6-9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................. 10-21 PART II -- OTHER INFORMATION Item 1. Legal Proceedings.............................................. 23 Item 6. Exhibits and Reports on Form 8-K............................... 23
2 PART I -- FINANCIAL INFORMATION Item 1 Financial Statements ASSISTED LIVING CONCEPTS, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share amounts)
September 30, December 31, 1999 1998 (unaudited) ASSETS ------------ ------------- Current assets: Cash and cash equivalents......................... $ 55,036 $ 13,452 Restricted cash................................... -- 8,718 Marketable securities, available for sale......... 4,000 1,750 Accounts receivable, net of allowance for doubtful accounts of $179 at 1998 and $340 at 1999........ 5,127 6,720 Prepaid expenses.................................. 992 967 Other current assets.............................. 4,472 4,935 -------- -------- Total current assets............................. 69,627 36,542 -------- -------- Property and equipment.............................. 284,754 310,419 Construction in process............................. 51,304 11,370 -------- -------- Total property and equipment...................... 336,058 321,789 Less accumulated depreciation..................... 9,133 14,615 -------- -------- Property and equipment -- net..................... 326,925 307,174 -------- -------- Goodwill............................................ 5,371 5,133 Other assets........................................ 12,746 9,944 -------- -------- Total assets..................................... $414,669 $358,793 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable.................................. $ 1,622 $ 1,591 Construction payable.............................. 6,942 2,397 Accrued real estate taxes......................... 4,837 5,488 Other accrued expenses............................ 6,127 11,220 Other current liabilities......................... 4,857 2,343 Current portion of long-term debt................. 1,386 1,474 -------- -------- Total current liabilities......................... 25,771 24,513 -------- -------- Other non-current liabilities....................... 3,415 4,942 Long term debt...................................... 105,036 72,455 Convertible subordinated debentures................. 161,250 161,250 -------- -------- Total liabilities................................ 295,472 263,160 -------- -------- Commitments and contingencies Shareholders' equity: Preferred Stock, $.01 par value; 1,000,000 shares authorized; none issued and outstanding.......... -- -- Common Stock, $.01 par value; 80,000,000 shares authorized; issued and outstanding 17,344,143 shares and 17,120,745 in 1998 and 1999........... 173 171 Unearned compensation expense on restricted stock............................................ (3,492) -- Additional paid-in capital........................ 148,533 144,651 Fair market value in excess of historical cost of acquired net assets attributable to related party transactions..................................... (239) (239) Accumulated other comprehensive income (loss)..... -- (250) Accumulated deficit............................... (25,778) (48,700) -------- -------- Total shareholders' equity........................ 119,197 95,633 -------- -------- Total liabilities and shareholders' equity....... $414,669 $358,793 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 3 ASSISTED LIVING CONCEPTS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) (unaudited)
Three Months Ended Nine Months Ended September 30, September 30, -------------------- ------------------ 1998 1999 1998 1999 --------- --------- -------- -------- Revenues............................. $ 24,012 $ 30,398 $ 63,938 $ 85,460 Operating expenses: Residence operating expenses....... 15,002 20,453 39,558 60,018 Corporate general and administrative.................... 2,436 6,057 6,049 15,400 Building rentals................... 2,857 3,807 8,459 10,726 Building rentals to related party.. 366 300 1,146 850 Depreciation and amortization...... 1,694 2,285 4,394 6,552 Site abandonment costs............. -- 57 1,001 4,833 Write off of impaired assets and related expenses.................. -- -- 8,874 -- --------- --------- -------- -------- Total operating expenses......... 22,355 32,959 69,481 98,379 --------- --------- -------- -------- Operating income (loss).............. 1,657 (2,561) (5,543) (12,919) --------- --------- -------- -------- Other income (expense): Interest expense................... (3,351) (3,962) (7,358) (11,058) Interest income.................... 1,287 308 2,887 1,320 Loss on sale or disposal of assets............................ (8) -- (428) (127) Other income (expense)............. (305) (41) (1,370) (138) --------- --------- -------- -------- Total other income (expense)..... (2,377) (3,695) (6,269) (10,003) --------- --------- -------- -------- Net loss before cumulative effect of change in accounting principle...... (720) (6,256) (11,812) (22,922) Cumulative effect of change in accounting principle................ -- -- (1,523) -- --------- --------- -------- -------- Net loss............................. $ (720) $ (6,256) $(13,335) $(22,922) ========= ========= ======== ======== Basic and diluted net loss per common share before cumulative effect of change in accounting principle...... $ (0.04) $ (0.37) $ (0.74) $ (1.34) Cumulative effect of change in accounting principle................ -- -- (0.10) -- --------- --------- -------- -------- Basic and diluted net loss per common share............................... $ (0.04) $ (0.37) $ (0.84) $ (1.34) ========= ========= ======== ======== Basic and diluted weighted average common shares outstanding........... 16,604 17,121 15,994 17,119 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (in thousands) (unaudited) Three Months Ended Nine Months Ended September 30, September 30, -------------------- ------------------ 1998 1999 1998 1999 --------- --------- -------- -------- Net loss............................. $ (720) $ (6,256) $(13,335) $(22,922) Other comprehensive income (loss): Unrealized losses on investments... -- (50) -- (250) --------- --------- -------- -------- Comprehensive loss................... $ (720) $ (6,306) $(13,335) $(23,172) ========= ========= ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 4 ASSISTED LIVING CONCEPTS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)
Nine Months Ended September 30, ------------------ 1998 1999 -------- -------- Operating activities: Net loss.................................................. $(13,335) $(22,922) Adjustment to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization........................... 4,394 6,552 Provision for doubtful accounts......................... -- 161 Site abandonment cost................................... 1,001 4,833 Write-off of impaired assets and related expenses....... 8,874 -- Loss on sale or disposal of assets...................... 428 127 Cumulative effect of change in accounting principle..... 1,523 -- Compensation expense earned on restricted stock......... 456 204 Changes in assets and liabilities, excluding effects of acquisitions: Accounts receivable..................................... (2,911) (1,754) Prepaid expenses........................................ -- 25 Other current assets.................................... (4,115) (463) Other assets............................................ 10 2,247 Accounts payable and accrued expenses................... 9,543 3,199 Non-current liabilities................................. 730 1,527 -------- -------- Net cash provided by (used in) operating activities....... 6,598 (6,264) -------- -------- Investing activities: Sale (purchase) of marketable securities, available for sale..................................................... -- 2,000 Restricted cash........................................... -- (8,718) Funds held in trust....................................... 1,956 -- Acquisitions, net of cash and debt acquired............... (8,373) -- Proceeds from sale of land and residences................. 8,293 19 Purchases of property and equipment....................... (97,706) (27,020) -------- -------- Net cash used in investing activities..................... (95,830) (33,719) -------- -------- Financing activities: Debt issuance costs....................................... (3,161) -- Proceeds from long-term debt.............................. 40,306 -- Payments on long-term debt................................ (150) (1,005) Proceeds from issuance of common stock.................... 641 154 Proceeds from issuance of convertible subordinated debentures............................................... 75,000 -- Purchase of common stock.................................. (7,062) -- Retirement of restricted stock............................ -- (750) -------- -------- Net cash provided by (used in) financing activities....... 105,574 (1,601) -------- -------- Net increase (decrease) in cash and cash equivalents...... 16,342 (41,584) Cash and cash equivalents, beginning of period............ 63,269 55,036 -------- -------- Cash and cash equivalents, end of period.................. $ 79,611 $ 13,452 ======== ======== Supplemental disclosure of cash flow information: Cash payments for interest.............................. $ 5,527 $ 8,141 Cash payments for income taxes.......................... $ 1,438 $ -- Unrealized loss on marketable securities................ $ -- $ (250) Conversion of construction financing to sale-leaseback.. $ 2,150 $ -- Extinguishment of long term debt from lease amendments.. $ -- $ 31,488 Disposal of property, plant and equipment from lease amendments............................................. $ -- $ 30,933 Increase (decrease) in construction payable and property and equipment.......................................... $(12,043) $ (4,545) Retirement of restricted stock.......................... $ -- $ 4,038
The accompanying notes are an integral part of these consolidated financial statements. 5 ASSISTED LIVING CONCEPTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Nature of Business and Summary of Significant Accounting Policies Assisted Living Concepts, Inc. (the "Company") owns, operates and develops assisted living residences which provide housing and services to older persons who need help with the activities of daily living such as bathing and dressing. The Company provides personal care and support services and makes available routine health care services, which are designed to meet the needs of our residents. Basis of Presentation and Principles of Consolidation These consolidated financial statements have been prepared without being audited, as allowed by the rules and regulations of the Securities and Exchange Commission. The accompanying consolidated financial statements include our accounts and accounts of our wholly owned subsidiaries that manage, own, and develop assisted living residences. All significant intercompany accounts and transactions have been eliminated in the consolidation. Certain information and footnote disclosures that are normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted as allowed by rules and regulations of the Securities and Exchange Commission. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in the Company's annual report on Form 10-K for the year ended December 31, 1998. The financial information included in these financial statements contain all adjustments (which consist of normal recurring adjustments, with the exception in 1999 of site abandonment costs, purchase of restricted stock and severance costs associated with the termination of certain employment agreements and in 1998 of site abandonment costs and the write-off of impaired assets and related expenses) which are, in the opinion of our management, necessary for a fair presentation of results for the quarterly periods. The results of operations for the three and nine month periods ended September 30, 1999 do not necessarily indicate the results that are expected for the full year. 2. Restricted Cash During the three months ended September 30, 1999, the Company restricted $8.7 million of cash balances in accordance with certain loan and lease agreements (see Notes 5 and 6). 3. Marketable Securities Marketable securities consist of U.S. Treasury securities and other highly liquid marketable debt securities. The aggregate market value of securities held at September 30, 1999 was $1.8 million. These investments which have a historical cost of $2.0 million have been classified as available for sale in accordance with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." As a result, unrealized investment losses of $250,000 are included as a component of comprehensive income and shareholders' equity at September 30, 1999. 6 ASSISTED LIVING CONCEPTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 4. Property and Equipment The Company's property and equipment, stated at cost, consists of the following (in thousands):
December 31, September 30, 1998 1999 ------------ ------------- Land............................................ $ 18,217 $ 20,550 Buildings and improvements...................... 256,904 275,818 Equipment....................................... 2,865 5,752 Furniture....................................... 6,768 8,299 -------- -------- Sub-total..................................... 284,754 310,419 Construction in process......................... 51,304 11,370 -------- -------- Total property and equipment.................... 336,058 321,789 Less accumulated depreciation................... 9,133 14,615 -------- -------- Property and equipment, net..................... $326,925 $307,174 ======== ========
During the three and nine months ended September 30, 1999, the Company capitalized interest costs of $258,000 and $1.9 million, respectively, relating to financing of construction in process. In addition, the Company capitalized payroll costs that are directly related to the construction and development of the residences of $156,000 and $569,000 for the three and nine months ended September 30, 1999, respectively. As a result of the continued reduction in the Company's development activities, the Company wrote-off $4.8 million of capitalized costs during the nine months ended September 30, 1999 relating to the abandonment of certain development sites and other related development costs. As of September 30, 1999, construction in process included only costs related to four residences. Construction in process includes 2 residences (78 units) ($6.0 million) that have received a certificate of occupancy, but are pending licensure, and 2 residences (78 units) ($5.4 million) that are under construction. The Company had certificates of occupancy for 183 residences, 181 of which are included in the Company's operating results for the nine months ended September 30, 1999 as compared to 170 residences with certificates of occupancy, 154 of which were in operating results as of September 30, 1998. During 1996 and 1997 the Company entered into 16 sale and leaseback transactions which contained purchase options entitling the Company to purchase the residences at fair market value at the end of the initial lease terms ranging from 14 to 15 years. As a result of the purchase options, the Company accounted for these sale and leaseback transactions using the finance method in Statement of Accounting Standards No. 98, Accounting for Leases. In March 1999, the Company amended these leases. The amendments eliminated the Company's purchase option; therefore the leases are accounted for as operating leases. As a result, the Company recorded (i) the disposal of net property, plant and equipment in the amount of $30.9 million, (ii) the extinguishment of long-term debt in the amount of $31.5 million, and (iii) a deferred gain of $1.5 million. The deferred gain is included in other liabilities and is being amortized over the remaining initial lease term as an offset to future reported rent expense. 7 ASSISTED LIVING CONCEPTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 5. Leases A summary of leases that the Company has entered into since its inception is as follows:
Number of Sale Units Number of and Leaseback Number of Sale Under Leased Residences Total and Leaseback Units Leases Residences Accounted for Number of Residences Under Accounted ("Oregon as Operating Operating Accounted for Operating for as Leases") Leases Leases as Financings Leases Financings ---------- -------------- --------- -------------- --------- ---------- Leases at December 31, 1994................... 4 -- 4 -- 114 -- Leases entered into during 1995............ -- 5 5 -- 150 -- ---- ----- ---- ----- ----- ----- Leases at December 31, 1995................... 4 5 9 -- 264 -- Leases entered into during 1996............ 1 19 20 9 763 316 Residences repurchased during 1996............ -- (4) (4) -- (146) -- ---- ----- ---- ----- ----- ----- Leases at December 31, 1996................... 5 20 25 9 881 316 Leases entered into during 1997............ 2 24 26 7 1,025 247 ---- ----- ---- ----- ----- ----- Leases at December 31, 1997................... 7 44 51 16 1,906 563 Leases entered into during 1998............ -- 4 4 -- 139 -- Lease unit expansion during 1998............ -- -- -- -- 47 10 Leases terminated during 1998................... (1) -- (1) -- (45) -- ---- ----- ---- ----- ----- ----- Leases at December 31, 1998................... 6 48 54 16 2,047 573 Lease unit expansion during 1999............ -- -- -- -- 13 -- Leases with changed terms during 1999...... -- 16 16 (16) 573 (573) ---- ----- ---- ----- ----- ----- Leases at September 30, 1999................... 6 64 70 -- 2,633 -- ==== ===== ==== ===== ===== =====
In March 1999, the Company amended 16 leases, resulting in the reclassification of such leases from financings to operating leases (see Note 4). In June 1999, the Company amended all of its 37 leases with LTC Properties, Inc. ("LTC"). These amendments included provisions to eliminate future minimum annual rent increases, or "rent escalators," that were not deemed to be contingent rents. Because of the rent escalators, prior to the amendments, the Company accounted for rent expense related to such leases on a straight-line basis. From the date of the amendment forward, the Company will account for the amended leases on a contractual cash payment basis and amortize the deferred rent balance as of the date of the amendment over the remaining initial term of the lease. Those amendments also redefined the lease renewal option with respect to certain leases and provided the lessor with the option to declare an event of default in the event of a change of control under certain circumstances. In addition, the amendments also provide the Company with the ability, subject to certain conditions, to sublease or assign its leases with respect to two Washington residences. During the third quarter of 1999, the Company agreed to provide $418,000 of additional cash collateral pursuant to certain lease agreements with one of its lessors. The Company restricted $418,000 of cash balances as a result of such action (see Note 2). 8 ASSISTED LIVING CONCEPTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 6. Loan Amendments During the third quarter of 1999, the Company amended certain loan agreements with one of its creditors. Pursuant to the amendment, the Company agreed to provide $8.3 million of additional cash collateral in exchange for the waiver of certain possible defaults, including an amendment to certain financial covenants. In August 1999, the Company restricted $8.3 million of cash balances as a result of such amendment. The amendment also provides for the release of the additional collateral upon the achievement of specified performance targets, provided the Company is in compliance with other terms of the loan agreements (see Note 2). 7. Securityholder Litigation In early 1999, 12 complaints were filed against us and certain of our officers and directors in the United States District Court for the District of Oregon. On July 23, 1999, a consolidated complaint was filed in connection with this litigation and an amendment was subsequently filed on October 20, 1999. The amended consolidated complaint purports to be brought on behalf of a class of purchasers of our common stock from February 6, 1997 through March 31, 1999 and on behalf of a class of purchasers of our 6.0% Convertible Subordinated Debentures (the "6.0% Debentures") and 5.625% Convertible Subordinated Debentures (the "5.625% Debentures" and, together with the 6.0% Debentures, the "Debentures") from the dates of issuance through March 31, 1999, the alleged Class Period. The amended consolidated complaint alleges violations of the federal securities laws and seeks unspecified damages. It names as additional defendants our independent auditors in connection with our common stock and Debentures offerings during the alleged Class Period and our underwriters in connection with the Company's 1997 offering of the 6.0% Debentures. We cannot predict the outcome of the foregoing litigation and currently are unable to evaluate the likelihood of success or the range of possible loss. 9 Item 2 -- Management's Discussion and Analysis of Financial Condition and Results of Operations References in this section to "ALC," the "Company," "us" or "we" refer to Assisted Living Concepts, Inc. and its subsidiaries. This Report on Form 10-Q, as well as the Risk Factors included in our Report on Form 10-K for the fiscal year ended December 31, 1998, contain forward- looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may be affected by risks and uncertainties, including without limitation (i) our ability to control costs and improve operating margins (ii) the degree to which our future operating results and financial condition will be affected by the securityholder litigation and the resulting distraction of management's time and attention, (iii) the possibility that we may incur start-up costs in excess of our present expectations, (iv) the effect that the restatement of our financial statements for certain prior reporting periods may have on our compliance with lease and loan covenants, (v) our ability to develop an appropriate strategy to maximize shareholder value and (vi) other risks described in our filings with the Securities and Exchange Commission. In light of such risks and uncertainties, our actual results could differ materially from such forward-looking statements. We do not undertake any obligation to publicly release any revisions to any forward-looking statements contained herein to reflect events and circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events. Restatement On February 1, 1999, we announced that after consultation with our independent auditors we would restate our financial statements for the fiscal quarter ended June 30, 1997, the fiscal quarter ended September 30, 1997, the fiscal year ended December 31, 1997, the fiscal quarter ended March 31, 1998, the fiscal quarter ended June 30, 1998, and the fiscal quarter ended September 30, 1998. On March 31, 1999, we announced that the restatement would be more extensive than we had previously believed, and might include periods prior to the second quarter of 1997, including the fiscal year ended December 31, 1996. After further consultation with our independent auditors, the Company determined to restate its financial statements for the fiscal year ended December 31, 1996, the fiscal year ended December 31, 1997 and the first three fiscal quarters of the fiscal year ended December 31, 1998. The restatement reduced our net income for the fiscal years ended December 31, 1996 and 1997 and for the nine months ended September 30, 1998 by $2.1 million, $6.7 million and $11.0 million, respectively. The cumulative effect of the restatement reduced shareholders' equity by $19.7 million through September 30, 1998. As a result of the restatement, we reported net losses of $1.9 million, $2.5 million and $13.3 million for the fiscal years ended 1996 and 1997, and the nine months ended September 30, 1998, respectively, as compared to previously reported net income of $149,000 and $4.2 million, and the net loss of $2.4 million, respectively. As a result of the restatement, we reported net loss per diluted share of $0.23, $0.21 and $0.84 for the fiscal years 1996, 1997 and the nine months ended September 30, 1998, respectively, compared to previously reported net income of $0.03 and $0.34 and net loss of $0.14 per diluted share, respectively. As a result of the restatement the Company's cash position on a restated basis as of December 31, 1996, 1997 and as of September 30, 1998 was $2.1 million, $63.3 million and $79.6 million, respectively, as compared to $2.1 million, $63.4 million and $79.8 million respectively, as previously reported. After the restatement, our working capital positions on a restated basis as of December 31, 1996 and 1997 and as of September 30, 1998 were negative $27.1 million, positive $40.1 million and positive $63.0 million, respectively, as compared to previously reported working capital of negative $26.4 million and positive $41.0 million and positive $64.1 million, respectively. The restatement resulted primarily from: (i) the earlier recognition of certain expenses which were previously capitalized in association with our development and financing activities; (ii) a modification in how we accounted for certain of our lease arrangements; (iii) a modification in how we accounted for certain of our acquisitions and joint venture arrangements; (iv) the capitalization of fees we received during 1997 and 1998 that we previously recognized as either a reduction of expenses or as other income; (v) the elimination of an impairment write-down that we had previously recorded on three of our residences; (vi) elimination of certain 10 accrued expenses previously recorded pursuant to a change in accounting principle; and (vii) an increase in the amount of goodwill that we wrote off in the second quarter of 1998 relating to exiting our home health operations. Securityholder Litigation In early 1999, 12 complaints were filed in the United States District Court for the District of Oregon. On July 23, 1999, a consolidated complaint was filed in connection with this litigation, and an amendment was subsequently filed on October 20, 1999. The amended consolidated complaint purports to be brought on behalf of purchasers of our common stock and Debentures between February 6, 1997 and March 31, 1999, the alleged Class Period. The amended consolidated complaint alleges violations of various federal securities laws, names us and certain of our officers and directors as defendants as well as our independent auditors, in connection with our common stock and Debentures offerings during the alleged Class Period, and our underwriters (solely in connection with the 6.0% Debentures offering), and seeks unspecified damages. See Part II, Item 1 (Legal Proceedings) and Note 7 of the unaudited consolidated financial statements included in Item 1 of this report for information regarding this litigation. Development Cost Write-Off As a result of a continued reduction in our new residence development activities, we wrote-off an additional $4.8 million of previously capitalized development costs during the nine months ended September 30, 1999. We wrote- off $2.4 million during the fiscal year 1998 relating to the reduction in development activities. In the event that in the future we do not complete and open residences planned for development, we may incur similar write-offs. However, we have no present intention of commencing further development activity beyond the four residences currently included in construction in process as of September 30, 1999. Regulatory Matters During 1998, a license revocation action was commenced at one of our residences in the State of Washington. During the third quarter of 1999, we settled an administrative proceeding in Washington involving this license revocation. The proceeding was dismissed and the license remains intact. We also have been subject to other regulatory proceedings. Overview We operate, own, lease and develop free-standing assisted living residences, primarily in small middle-market rural and suburban communities with a population typically ranging from 10,000 to 40,000. As of September 30, 1999 we have operations or development activities in 16 states. We also provide personal care and support services, and make available routine health care services (as permitted by applicable regulations) designed to meet the personal and health care needs of our residences. As of September 30, 1999, we had 183 assisted living residences with a certificate of occupancy, 181 of which, representing 6,986 units, were included in our operating results. Our residences typically receive a certificate of occupancy upon the completion of construction. Our residences are included in our operating results when they receive a license or its equivalent from the state in which they are located. It may take several months to receive a license after receiving a certificate of occupancy. Of the residences included in our operating results, we owned 111 residences (4,353 units) and leased 70 residences (2,633 units). We derive our revenues primarily from resident fees for rent and for the delivery of assisted living services. Resident fees typically are paid monthly by residents, their families, state Medicaid agencies or other responsible parties. Resident fees include revenue derived from a multi-tiered rate structure, which varies based on the level of care required. Resident fees are recognized as revenues when services are provided. 11 Operating expenses include: . residence operating expenses, such as staff payroll, food, property taxes, utilities, insurance and other direct residence operating costs; . general and administrative expenses, consisting of corporate and support functions such as legal, accounting and other administrative expenses; . building rentals; and . depreciation and amortization. Our operating results for the three and nine months ended September 30, 1999 were adversely affected by increased competition for both labor and residents, increased corporate, general and administrative expenses, development site write-offs and by the diversion of management's time and attention to: . the proposed merger with American Retirement Corporation, Inc. ("ARC") and its subsequent termination during the three months ended March 31, 1999; . certain regulatory matters in the States of Washington and Oregon; . the financial statement restatement; and . the securityholder litigation. Certain of these factors led to a decline in occupancy rates at our Stabilized Residences (as defined below) and to slower fill-up of our Start-Up Residences (as defined below). In addition, food, labor and certain other operating costs at many of our residences have increased, primarily due to the diversion of management's time and attention. As a result, we expect our residence operating margins at our Stabilized and Same Store Residences to be substantially lower in each fiscal quarter of 1999 than in 1998 due to the decline in occupancy rates and increase in operating costs as described above. The following table sets forth, for the periods presented, the number of residences and units operated, average occupancy rates and sources of revenue for our Company. The portion of revenues received from state Medicaid agencies are labeled as "Medicaid state portion" while the portion of the Company's revenues that a Medicaid-eligible resident must pay out of his or her own resources is labeled "Medicaid resident portion".
Three Months Ended September 30, --------- 1998 1999 ----- ----- Total Residences Residences operated (end of period)........................ 154 181 Units operated (end of period)............................. 5,867 6,986 Average occupancy rate..................................... 75.9% 76.0% Sources of revenue: Medicaid state portion..................................... 11.0% 10.5% Medicaid resident portion.................................. 6.0% 6.0% Private.................................................... 83.0% 83.5% ----- ----- Total........................................................ 100.0% 100.0% ===== =====
12 The following tables set forth, for the periods presented the compilation of operating results of stabilized, start-up and other corporate activities including ancillary services. Stabilized Residences are defined as those residences which were operating for more than twelve months prior to the beginning of the period or had achieved a 95% occupancy rate as of the beginning of the reporting period. Start-Up Residences are defined as those residences which were operating for less than twelve months prior to the beginning of the period or had not achieved a 95% occupancy rate as of the beginning of the reporting period. In June 1998 we announced that we would exit from a home health care operation acquired in October 1997. The results of operations of the home health care operation are included under the heading "Corporate" in the tables below. Compilation of Stabilized and Start-up Residences Three Months Ended September 30, 1999 (in thousands except unit and average rent data)
Stabilized Start-up Combined Residences Residences Corporate Total ---------- ---------- --------- -------- Revenue............................... $26,486 $3,912 -- 30,398 Residence Operating Expense........... 17,035 3,418 -- 20,453 ------- ------ ------- ------- Residence Operating Income.......... 9,451 494 -- 9,945 Corporate Overhead.................... -- -- 6,057 6,057 Building Rentals...................... 4,107 -- -- 4,107 Depreciation and Amortization......... 1,452 690 143 2,285 Site abandonment costs................ -- -- 57 57 ------- ------ ------- ------- Total Other Operating Expenses.... 5,559 690 6,257 12,506 ------- ------ ------- ------- Operating Income (loss)........... $ 3,892 $ (196) $(6,257) $(2,561) ======= ====== ======= ======= Residences Operated................... 145 36 -- 181 Units Operated........................ 5,558 1,428 -- 6,986 Average Occupancy Rate................ 83.0% 45.4% -- 76.0% Weighted-Average Rent................. $ 1,893 $1,981 -- $ 1,903 Residence Operating Income Margin..... 35.7% 12.6% -- 32.7%
Compilation of Stabilized and Start-up Residences Three Months Ended September 30, 1998 (in thousands except unit and average rent data)
Stabilized Start-up Combined Residences Residences Corporate Total ---------- ---------- --------- -------- Revenue............................... $15,858 $7,587 $ 567 $24,012 Residence Operating Expense........... 9,291 5,550 161 15,002 ------- ------ ------- ------- Residence Operating Income.......... 6,567 2,037 406 9,010 Corporate Overhead.................... -- -- 2,436 2,436 Building Rentals...................... 2,327 896 -- 3,223 Depreciation and Amortization......... 733 797 164 1,694 ------- ------ ------- ------- Total Other Operating Expenses.... 3,060 1,693 2,600 7,353 ------- ------ ------- ------- Operating Income (Loss)........... $ 3,507 $ 344 $(2,194) $ 1,657 ======= ====== ======= ======= Residences Operated................... 88 66 -- 154 Units Operated........................ 3,238 2,629 -- 5,867 Average Occupancy Rate................ 89.8% 58.2% -- 75.9% Weighted Average Rent................. $ 1,808 $1,685 -- $ 1,767 Residence Operating Income Margin..... 41.4% 26.0% -- 37.5%
13 The following tables set forth, for the periods presented, the compilation of Same Store residences. Same Store residences are defined as those residences which were operating throughout comparable reporting periods. Compilation of Same Store Residences
Three Months Ended September 30, ---------------- 1998 1999 ------- ------- Revenue....................................................... $22,616 $25,823 Residence Operating Expense................................... 14,133 16,674 ------- ------- Residence Operating Income.................................. 8,483 9,149 Building Rentals.............................................. 3,168 4,104 Depreciation and Amortization................................. 1,449 1,319 ------- ------- Total Other Operating Expenses............................ 4,617 5,423 ------- ------- Operating Income.......................................... $ 3,866 $ 3,726 ======= ======= Residences Operated........................................... 142 142 Units Operated................................................ 5,387 5,439 Average Occupancy Rate........................................ 77.8% 82.6% Weighted Average Rent......................................... $ 1,780 $ 1,894 Residence Operating Income Margin............................. 37.5% 35.4%
Compilation of Same Store Residences
Nine Months Ended September 30, ---------------- 1998 1999 ------- ------- Revenue....................................................... $52,233 $57,707 Residence Operating Expense................................... 31,328 38,892 ------- ------- Residence Operating Income.................................. 20,905 18,815 Building Rentals.............................................. 9,239 11,968 Depreciation and Amortization................................. 2,578 2,156 ------- ------- Total Other Operating Expenses............................ 11,817 14,124 ------- ------- Operating Income.......................................... $ 9,088 $ 4,691 ======= ======= Residences Operated........................................... 108 108 Units Operated................................................ 3,995 4,047 Average Occupancy Rate........................................ 79.6% 84.0% Weighted Average Rent......................................... $ 1,812 $ 1,867 Residence Operating Income Margin............................. 40.0% 32.6%
Results of Operations Three months ended September 30, 1999 compared to three months ended September 30, 1998 We incurred a net loss of $6.3 million, or $0.37 per basic and diluted share, on revenue of $30.4 million for the three months ended September 30, 1999 (the "September 1999 Quarter") as compared to a net loss of $720,000 or $0.04 per basic and diluted share, on revenues of $24.0 million for the three months ended September 30, 1998 (the "September 1998 Quarter"). We had certificates of occupancy for 183 residences, 181 of which were included in our operating results for the September 1999 Quarter as compared to 170 residences with certificates of occupancy, 154 of which were included in our operating results as of the end of the September 1998 Quarter. Of the residences included in our 14 operating results at the end of the September 1999 Quarter, we owned 111 residences and leased 70 residences (all of which were operating leases) as compared to 83 owned residences and 71 leased residences (55 of which were operating leases and 16 of which were accounted for as financings) as of the end of the September 1998 Quarter. Revenues. Revenues were $30.4 million for the September 1999 Quarter as compared to $24.0 million for the September 1998 Quarter, a net increase of $6.4 million. Revenue increases consisted of: . $3.2 million related to the 142 Same Store Residences (5,439 units); and . $3.8 million related to the 39 residences (1,547 units) which commenced operations during or subsequent to the September 1998 Quarter. This increase in revenue was offset by a $567,000 reduction in revenue from ancillary services. As a result of the shut down of our home health care operations, we had no revenue from ancillary services during the September 1999 Quarter as compared to $567,000 of revenue from ancillary services for the September 1998 Quarter. Revenue from Same Store residences was $25.8 million for the September 1999 Quarter as compared to $22.6 million for the September 1998 Quarter, an increase of $3.2 million. The increase in revenue from Same Store Residences was a combination of: . An increase in occupancy to 82.6% for the September 1999 Quarter as compared to 77.8% for the September 1998 Quarter; and . An increase in average monthly rental rate to $1,894 for the September 1999 Quarter as compared to $1,780 for the September 1998 Quarter. Of the $30.4 million in revenue reported for the September 1999 Quarter: . $26.5 million or 87.2 % was attributable to Stabilized Residences. As of the end of the September 1999 Quarter, we had 145 Stabilized Residences (5,558 units) with an average occupancy of 83.0% and average monthly rental rate of $1,893; and . $3.9 million or 12.8% was attributable to Start-Up Residences. As of the end of the September 1999 Quarter, we had 36 Start-up Residences (1,428 units) with an average occupancy of 45.4% and average monthly rental rate of $1,981. Residence Operating Expenses. Residence operating expenses were $20.5 million for the September 1999 Quarter compared to $15.0 million for the September 1998 Quarter, a net increase of $5.5 million or 36.7%. Of this increase: . $2.5 million related to the 142 Same Store Residences (5,439 units); and . $3.2 million related to the 39 residences (1,547 units) which commenced operations during or subsequent to the September 1998 Quarter. This increase in residence operating expense was offset by a $161,000 reduction in operating expenses associated with ancillary services. As a result of the shut down of our home health care operations, we had no operating expenses from ancillary services during the September 1999 Quarter as compared to $161,000 of expenses from ancillary services for the September 1998 Quarter. Residence operating expenses for the Same Store Residences were $16.7 million for the September 1999 Quarter as compared to $14.1 million for the September 1998 Quarter, an increase of $2.6 million. The increase in operating expenses from Same Store Residences was primarily attributable to additional expenses associated with the increase in occupancy and increase in payroll expense at the Same Store Residences subsequent to the September 1998 Quarter. 15 Of the $20.5 million in residence operating expenses reported for the September 1999 Quarter: . $17.0 million or 83.3% was attributable to Stabilized Residences; . $3.4 million or 16.7% was attributable to Start-Up Residences; and Corporate, General and Administrative. Corporate, general and administrative expenses were $6.1 million for the September 1999 Quarter compared to $2.4 million in the September 1998 Quarter. Our corporate, general and administrative expenses before capitalized payroll costs were $6.3 million for the September 1999 Quarter as compared to $2.9 million for the September 1998 Quarter, and increase of $3.4 million. Corporate, general and administrative expenses increased due to the following: . $2.5 million of the increase is due to additional professional fees associated with increased legal ($350,000), advisory ($1.0 million), accounting ($700,000) and other professional service costs ($400,000) due primarily to regulatory issues, shareholder litigation and the restatement of our earnings for the years ended December 31, 1996, 1997 and the interim 1998 periods. . $513,000 is a result of increased payroll costs for corporate and regional staff. . $366,000 as a result of expansion of the corporate offices, the expansion of regional-level management and increased activity due to the number of operating residences. This includes increased travel and communications costs. We capitalized $156,000 of payroll costs for the September 1999 Quarter as compared to $445,000 for the September 1998 Quarter. The decrease is a result of a decrease in development activities. We expect a further reduction in future periods. Included in additional general and administrative expenses were certain costs associated with exiting our home health operations, including transitioning certain employees to corporate and regional functions. We have completely exited the home health care operations. Building Rentals. Building rentals increased to $4.1 million in the September 1999 Quarter from $3.2 million in the corresponding 1998 period, an increase of $900,000. This increase was due to the following: . the March 1999 amendment of 16 of our leases, as discussed above, which were previously accounted for as financings. As a result of the amendment, the leases have been reclassified as operating leases for the September 1999 Quarter; . rate increases on our operating leases; and . the above increases were offset by one operating lease terminated subsequent to the September 1998 Quarter. As of the end of the September 1999 Quarter we had 70 operating leases as compared to 55 as of the end of the September 1998 Quarter. Depreciation and Amortization. Depreciation and amortization expense was $2.3 million for the September 1999 Quarter compared to $1.7 million in the September 1998 Quarter, a net increase of $600,000. This net increase is primarily a result of increased depreciation expense related to the 27 new residences that opened subsequent to September 30, 1998. This was offset by $180,000 reduction in depreciation as a result of the March 1999 amendment to 16 of our leases, as discussed above, which were previously accounted for as financings. As a result of the amendment, the leases were accounted for as operating leases in the September 1999 Quarter. Site Abandonment Costs. As a result of the reduction in our development activities, we recorded site abandonment costs of $57,000 during the September 1999 Quarter with respect to certain sites which we will not develop. We wrote-off $2.4 million during the fiscal year 1998 and $4.8 million of such costs during the first two quarters of 1999 relating to the reduction in development activities. We do not anticipate incurring similar write-offs in the future. 16 Interest Expense. Interest expense was $4.0 million for the September 1999 Quarter compared to $3.4 million for the September 1998 Quarter. Gross interest expense for the September 1999 Quarter was $4.2 million compared to $4.6 million for the September 1998 Quarter, a net decrease of $400,000. Interest expense decreased by: . $840,000 as a result of the amendment to 16 of our leases, as discussed above. As a result of the amendment, effective March 31, 1999, we will no longer record interest expense with respect to these residences; and . $80,000 as a result of the August 1998 redemption of the 7.0% Convertible Subordinated Debentures. The decrease was offset by increases in interest expense of: . $500,000 relating to the full quarter impact of mortgage financing completed during fiscal year 1998. We capitalized $258,000 of interest expense for the September 1999 Quarter as compared to $1.2 million for the September 1998 Quarter. The decrease is a result of decrease in development activities. We expect a further reduction in future periods. Interest Income. Interest income was $308,000 for the September 1999 Quarter compared to $1.3 million for the September 1998 Quarter, a decrease of $979,000. The decrease in interest income is due to lower average cash balances available for investment during the September 1999 Quarter. Net Income (Loss). As a result of the above, we incurred a net loss of $6.3 million or $0.37 per share for the September 1999 Quarter, compared to a net loss of $720,000, or $0.04 per share for the September 1998 Quarter. Nine Months ended September 30, 1999 compared to Nine Months ended September 30, 1998 We incurred a net loss of $22.9 million, or $1.34 per basic and diluted share, on revenue of $85.5 million for the nine months ended September 30, 1999 (the "September 1999 YTD Period"), as compared to a net loss of $13.3 million or $0.84 per basic and diluted share, on revenues of $63.9 million for the nine months ended September 30, 1998 (the "September 1998 YTD Period"). Revenues. Revenues were $85.5 million for the September 1999 YTD Period as compared to $63.9 million for the September 1998 YTD Period, a net increase of $21.6 million. Of this increase: . $5.5 million related to the 108 Same Store Residences (4,047 units); and . $19.2 million related to the 73 residences (2,939 units) which commenced operations during or subsequent to the September 1998 YTD Period. This increase in revenue was offset by a $3.1 million reduction in revenue from ancillary services. As a result of the shut down of our home health care operations, we had no revenue from ancillary services during the September 1999 YTD Period as compared to $3.1 million of revenue from ancillary services for the September 1998 YTD Period. Revenue from Same Store Residences were $57.7 million for the September 1999 YTD Period as compared to $52.2 million for the September 1998 YTD Period, an increase of $5.5 million. The increase in revenue from Same Store Residences was a combination of: . An increase in occupancy to 84.0% for the September 1999 YTD Period as compared to 79.6% for the September 1998 YTD Period; and . An increase in average monthly rental rate to $1,867 for the September 1999 YTD Period as compared to $1,812 for the September 1998 YTD Period. 17 Residence Operating Expenses. Residence operating expenses were $60.0 million for the September 1999 YTD Period compared to $39.6 million for the September 1998 YTD Period, a net increase of $20.4 million. Of this increase: . $7.6 million related to the 108 Same Store Residences (4,047 units); and . $15.1 million related to the 73 residences (2,939 units) which commenced operations during or subsequent to the September 1998 YTD Period. This increase in residence operating expense was offset by a $2.3 million reduction in operating expenses associated with ancillary services. As a result of the discontinued operations of our home health care operations, we had no expenses from ancillary services during the September 1999 YTD Period as compared to $2.3 million of expenses from ancillary services for the September 1998 YTD Period. Residence operating expenses for the Same Store Residences were $38.9 million for the September 1999 YTD Period as compared to $31.3 million for the September 1998 YTD Period, an increase of $7.6 million. The increase in operating expenses from Same Store Residences was partly attributable to additional expenses associated with the increase in occupancy at the Same Store Residences subsequent to the September 1998 and partly due to inefficiencies resulting from the diversion of management's attention as discussed above. Corporate, General and Administrative. Corporate, general and administrative expenses were $15.4 million for the September 1999 YTD Period compared to $6.0 million in the September 1998 YTD Period. Our corporate, general and administrative expenses before capitalized payroll costs were $16.0 million for the September 1999 YTD Period as compared to $7.5 million for the September 1998 YTD Period, an increase of $8.5 million. Corporate, general and administrative expenses increased due to the following: . $4.2 million of the increase is due to additional professional fees associated with increased legal, financial advisory and accounting costs due to regulatory issues, securityholder litigation and the restatement of our earnings for the years ended December 31, 1996, 1997 and the interim 1998 periods; . $1.5 million as a result of expansion of the corporate offices, the expansion of regional-level management and increased activity due to the number of operating residences. This includes increased travel and communications costs; . $1.8 million is a result of increased payroll costs for corporate and regional staff; and . $960,000 of the increase is due to separation costs for certain terminated corporate employees including costs associated with severance and consulting agreements between us and our former chief executive officer. We capitalized $569,000 of payroll costs for the September 1999 YTD Period as compared to $1.5 million for the September 1998 YTD Period. The decrease is a result of a decrease in development activities. Included in additional general and administrative expenses are certain costs associated with the shut down of our home health operations, including transitioning certain employees to corporate and regional functions. Building Rentals. Building rentals increased to $11.6 million in the September 1999 Quarter from $9.6 million in the corresponding 1998 period, an increase of $2.0 million. This increase was due to the following: . the March 1999 amendment of 16 of our leases, as discussed above, which were previously accounted for as financings. As a result of the amendment, the leases have been reclassified as operating leases for the last six months of the September 1999 YTD Period; . rate increases on our operating leases; and . the above increases were offset by one operating lease terminated subsequent to the September 1998 Quarter. 18 Depreciation and Amortization. Depreciation and amortization expense was $6.6 million for the September 1999 YTD Period compared to $4.4 million for the September 1998 YTD Period, an increase of $2.2 million. This increase in depreciation and amortization was due primarily to the depreciation expense related to the 27 new residences that opened subsequent to September 30, 1998. The increase in depreciation and amortization was offset by: . $180,000 reduction in depreciation as a result of the amendment to 16 of our operating leases, as discussed above, which were previously accounted for as financings; and . $140,000 reduction of goodwill amortization as a result of the write-off of $7.5 million of goodwill in the September 1998 YTD Period. Site Abandonment Costs. As a result of the continued reduction in our development activities, we recorded site abandonment costs of $4.8 million during the September 1999 YTD Period with respect to certain sites which we will not develop. We wrote-off $2.4 million during the fiscal year 1998 relating to the reduction in development activities with respect to such sites. We do not anticipate incurring similar write-offs in the future. Interest Expense. Interest expense was $11.1 million for the September 1999 YTD Period compared to $7.4 million for the September 1998 YTD Period. Gross interest expense for the September 1999 YTD Period was $13.0 million compared to $12.1 million for the September 1998 YTD Period, a net increase of $900,000. Interest expense increased by: . $1.7 million relating to the full period impact of mortgage financing completed during fiscal year 1998; and . $1.6 million due to the full period impact of the 5.625% Convertible Subordinated Debentures issued in April 1998. The increase was offset by decreases in interest expense of: . $1.7 million as a result of the amendment to 16 of our leases, as discussed above. As a result of the amendment, effective March 31, 1999, we will no longer record interest expense with respect to these residences; and . $530,000 as a result of the August 1998 redemption of the 7.0% Convertible Subordinated Debentures; and . $240,000 as a result of the February 1999 repayment of loans receivable from our joint venture partner. We capitalized $1.9 million of interest expense for the September 1999 YTD Period as compared to $4.7 million for the September 1998 YTD Period. The decrease is a result of lower development activities. We expect a further reduction in future periods. Interest Income. Interest income was $1.3 million for the September 1999 YTD Period compared to $2.9 million for the September 1998 YTD Period, a decrease of $1.6 million. The decrease in interest income is due to lower average cash balances available for investment during the September 1999 YTD Period. Loss on sale or disposal of assets. Loss on sale or disposal of assets was $127,000 for the September 1999 YTD Period compared to $428,000 for the September 1998 YTD Period. The loss for the September 1999 YTD Period related to the write off of leasehold improvements related to corporate office space vacated in February 1999 when we relocated our corporate headquarters. The loss for the September 1998 YTD Period resulted from losses incurred in connection with one sale and leaseback transaction entered into during the period and from losses resulting primarily from additional capital costs incurred during the period on sale and transactions completed during fiscal year 1997. 19 Other income/expenses. Other expense was $138,000 for the September 1999 YTD Period as compared to other expense of $1.4 million for the September 1998 YTD Period. Other expense during the September 1999 YTD Period primarily related to the repurchase of the operations of 17 residences formerly operated pursuant to our joint venture agreements. Other expenses during the September 1998 YTD Period primarily related to a $1.2 million liability, $1.0 million of which was included in other expense, we recorded in connection with our determination to not enter into sale and leaseback arrangements with one our lessors to the full extent of certain outstanding commitments. In December 1998, we agreed with the lessor to terminate the above referenced commitments at no cost to us, other than approximately $200,000 of professional fees. As such, we reversed the $1.0 million liability included in other expense during the fourth quarter of 1998. Cumulative Effect of Change in Accounting Principle. We adopted Statement of Position 98-5, Reporting on the Costs of Start-Up Activities ("SOP 98-5") effective January 1, 1998. We recognized a charge of $1.5 million during fiscal year 1998 associated with adopting such provision. Net Income (Loss). As a result of the above, we incurred a net loss of $22.9 million or $1.34 per share for the September 1999 YTD Period, compared to a net loss of $13.3 million, or $0.84 per share for the September 1998 YTD Period. Liquidity and Capital Resources At September 30, 1999, the Company had working capital of approximately of $12.0 million including cash and marketable securities of $15.2 million. Net cash used by operating activities was approximately $6.3 million during the nine-month period ended September 30, 1999. The primary use of cash was to fund the cash component of the net loss of $22.9 million. Net cash used for investing activities totaled $33.7 million during the nine-month period ended September 30, 1999. The primary use of cash was $27.0 million related to the development of new assisted living residences in Florida, Michigan, Georgia, Indiana, Iowa, New Jersey, and South Carolina. Additionally, during the September 1999 YTD Period $8.7 million of our cash balances were restricted in accordance with certain loan and lease agreements. Several of our leases and loan agreements contain restrictive covenants that generally relate to the use, operation and disposition of the residences that are leased or, in the case of loan agreements, serve as collateral for the subject indebtedness. In addition, certain of our leases and loan agreements contain cross-default provisions such that a default on one of those instruments could cause us to be in default on one or more other instruments. The Company was not in compliance with certain lease and loan covenants and has obtained necessary waivers as a result of such non-compliance. During the third quarter of 1999, we amended certain loan agreements with one of our creditors. Pursuant to the amendment, we agreed to provide $8.3 million of additional cash collateral in exchange for the forbearance or waiver of certain possible defaults, including an amendment to certain financial covenants. In August 1999, we restricted $8.3 million of cash balances as a result of such amendment. The amendment also provides for the release of the additional collateral upon the achievement of specified performance targets, provided that we are in compliance with other terms of the loan agreements. During the third quarter of 1999, the Company agreed to provide $418,000 of additional cash collateral pursuant to certain lease agreements with one of its lessors, the Company restricted $418,000 of cash balances as a result of such action. Net cash used by financing activities totaled $1.6 million during the nine- month period ended September 30, 1999. The Company made principal payments on existing debt in the amount of $1.0 million and paid $750,000 to retire restricted stock. This was offset by the proceeds from the issuance of common stock of $154,000. In addition to the 181 residences (6,986 units) in operation as of September 30, 1999, we intend to commence operation on an additional 4 residences (approximately 156 units) through 1999. We have incurred 20 approximately $27.5 million in capital expenditures on our development activities through the nine months ended September 30, 1999. We expect to incur up to an additional $2.5 million in capital expenditures to complete the residences under construction. We have no present intention of commencing further development activity beyond the four residences currently included in construction in process as of September 30, 1999. We expect that Start-Up Residences will incur significant start-up losses during the fill-up period and will adversely affect our operating results. We intend to utilize our cash on hand and current working capital resources to complete the four residences that we had under construction at September 30, 1999 and to fund any operating losses until the residences under construction and any other Start-Up Residences achieve positive cash flows. In addition, we estimate we will spend approximately $350,000 to develop the information technology needed to effectively operate our residences. We do not anticipate any significant capital expenditure within the foreseeable future with respect to the residences currently operating or those pending licensure as of September 30, 1999. We believe our current cash on hand and our working capital resources will be sufficient to meet our capital needs for the next 12 to 18 months. However, to provide us with additional capital, we are exploring various financing alternatives and/or commitments to engage in sale and leaseback transactions. We currently do not have in place any such loan or lease commitments. As a result of the class action suits, the restatement and other factors, there can be no assurances that financing from any source will be available in the future, or, if available, that such financing will be on terms acceptable to us. As of September 30, 1999, we had invested excess cash balances in short-term certificates of deposit, U.S. Treasury securities and highly liquid marketable debt securities. Year 2000 Matters The Year 2000 issue refers to a computer system's potential failure to recognize date on or beyond January 1, 2000 due to reading two digits, rather than four, to define the applicable year. As a result, computer programs and systems may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations. Our year 2000 readiness plan consists of: . identify and assess year 2000 issues in our information and non- information technology systems including inquiring of third parties with whom we do significant business, such as vendors and suppliers, as to the state of their 2000 readiness; . repair or replace non-compliant information and non-information technology systems; and . test and verify year 2000 readiness for previously non-compliant systems; and . compliance with state requirements related to disaster plan amendments. We have identified year 2000 risks in the following areas: . Our information technology systems might not be year 2000 compliant. We have assessed our readiness in regard to year 2000 issues and believe that all material hardware and software utilized in our operations and, specifically, in our accounting systems, is year 2000 compliant. Despite our efforts to identify and resolve year 2000 issues, we cannot guarantee that all of our systems will be year 2000 compliant. . Our non-information technology systems might not be year 2000 compliant. Our non-information technology systems are our building management and life/safety systems, which include our emergency call systems, electrical locking systems, fire alarm systems and fire alarm monitoring systems. We have assessed our readiness of these systems and in regard to year 2000 issues. We are using four salaried employees, as part of their normal course of business, to contact all manufacturers and vendors and request that they verify in writing that each of their systems is year 2000 compliant. Any systems identified as not in compliance will be upgraded or replaced. 21 . We may have year 2000 issues with significant third parties. We are in the process of obtaining year 2000 compliance letters and reports from supplier, banks, and other third party payors, including the federal government, are in the process of evaluating and updating their internal systems and cannot yet assure us that their systems are year 2000 compliant. We also face the risk that vendors from which we purchase goods and services, such as utility providers and our payroll providers, may have systems that are not year 2000 compliant. We plan to monitor the progress of our major vendors in achieving year 2000 compliance. We do not anticipate any major interruption in our business as a result of year 2000 issues. Accordingly, we do not expect that year 2000 issues will have a material adverse effect upon our operations or prospects or that we will incur any material expense associated with year 2000 compliance. However, despite our efforts to identify and resolve year 2000 compliance problems, we cannot guarantee that all of our systems or that of third parties on which we rely will be year 2000 compliant. As a result our operations could be interrupted or adversely affected. In the worst case scenario, if our non-information technology systems suffered year 2000 issues, we would implement our standard emergency operation plan. This plan primarily includes incurring additional staffing. If we needed to sustain this additional staffing for an extended period of time, it could have a material adverse effect of our business and operations. We have not established a contingency plan to address potential year 2000 non-compliance with respect to our information systems or those of our major vendors. We are currently considering the extent to which such a plan in necessary. Because we depend on systems outside our control, such as telecommunications and power supplies, and because third party payors, including the federal government, with whom we have relationships with may not have adequately addressed year 2000 issues, we cannot guarantee that we will not face the unexpected problems associated with year 2000 issues that may affect our operations, business, and financial condition. We anticipate that our future year 2000 compliance expenditures will be less than $25,000. 22 PART II. -- OTHER INFORMATION ITEM 1. Legal Proceedings Securityholder Litigation In early 1999, 12 complaints were filed against us and certain of our officers and directors in the United States District Court for the District of Oregon. On July 23, 1999, a consolidated complaint was filed in connection with this litigation and an amendment was subsequently filed on October 20, 1999. The amended consolidated complaint purports to be brought on behalf of a class of purchasers of our common stock from February 6, 1997 through March 31, 1999 and on behalf of a class of purchasers of our 6.0% Convertible Subordinated Debentures (the "6.0% Debentures") and 5.625% Convertible Subordinated Debentures (the "5.625% Debentures" and, together with the 6.0% Debentures, the "Debentures") from the dates of issuance through March 31, 1999, the alleged Class Period. The amended consolidated complaint alleges violations of the federal securities laws and seeks unspecified damages. It names as additional defendants our independent auditors, in connection with the Company's stock and Debentures offerings during the alleged Class Period, and our underwriters in connection with our 1997 offering of the 6.0% Debentures. We cannot predict the outcome of the foregoing litigation and currently are unable to evaluate the likelihood of success or the range of possible loss. However, if the foregoing litigation were determined adversely to us, such a determination could have a material adverse effect on our financial condition, results of operations, cash flow and liquidity. Other Litigation We are involved in various lawsuits and claims arising in the ordinary course of business. In the opinion of our management, although the outcomes of these suits and claims are uncertain, in the aggregate they should not, except as noted in the immediate preceding paragraph, have a material adverse effect on our financial condition, results of operations, cash flow or liquidity. ITEM 6. Exhibits and Reports on Form 8-K (a) The following documents are filed as part of this report:
Exhibit Number ------- 12 Ratio of Earnings to Fixed Charges 27 Financial Data Schedule
(b) Reports on Form 8-K. We filed a report on Form 8-K on September 30, 1999 announcing the following: i) the filing of our restated financial statements, ii) that we will continue to explore alternatives to maximize shareholder value, iii) the annual shareholders meeting on November 16, 1999, and iv) our press release dated September 29, 1999. 23 SIGNATURES Pursuant to the requirements of Sections 13 or 15(d) the Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ASSISTED LIVING CONCEPTS, INC. Registrant November 15, 1999 /s/James W. Cruckshank By: _________________________________ Name: James W. Cruckshank Title: Vice President and Chief Financial Officer November 15, 1999 /s/M. Catherine Maloney By: _________________________________ Name: M. Catherine Maloney Title: Vice President and Chief Accounting Officer 24 EX-12 2 RATIO OF EARNINGS EXHIBIT 12 Ratio of Earnings to Fixed Charges:
Three Months Ended Nine Months Ended ------------------- ------------------ September 30, September 30, 1998 1999 1998 1999 --------- --------- -------- -------- (in thousands) Income (loss) before provision for income taxes and cumulative effect of change in accounting principle........................... $ (720) $ (6,256) $(11,812) $(22,922) Add fixed charges: Interest costs including amortization of debt issuance cost............................ 3,351 3,962 7,358 11,058 -------- --------- -------- -------- Earnings (loss)...................... $ 2,631 $ (2,294) $ (4,454) $(11,864) ======== ========= ======== ======== Fixed Charges Interest expense including amortization of debt.............. $ 3,351 $ 3,962 $ 7,358 $ 11,058 Capitalized interest............... 1,291 258 4,783 1,858 -------- --------- -------- -------- Total Fixed Charges.................. $ 4,642 $ 4,220 $ 12,141 $ 12,916 ======== ========= ======== ======== Ratio of Earnings to Fixed Charges... .57 -- -- -- Deficiency of Earnings to Cover Fixed Charges............................. $ 2,011 $ 6,514 $ 16,595 $ 24,780
EX-27 3 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS 9-MOS DEC-31-1999 DEC-31-1999 JUL-01-1999 JAN-01-1999 SEP-30-1999 SEP-30-1999 0 13,452 0 1,750 0 7,060 0 340 0 0 0 36,542 0 321,789 0 14,615 0 358,793 0 24,513 0 233,705 0 0 0 0 0 171 0 95,462 0 358,793 30,398 85,460 30,398 85,460 20,453 60,018 32,959 98,379 41 138 103 161 3,962 11,058 (6,256) (22,922) 0 0 (6,256) (22,922) 0 0 0 0 0 0 (6,256) (22,922) (.37) (1.34) (.37) (1.34)
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