<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20459
FORM 10-Q
(Mark One)
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-83938
ASSISTED LIVING CONCEPTS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Nevada 93-1148702
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
</TABLE>
11835 NE Glenn Widing Drive, Bldg. E
Portland, OR 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 [_]
The Registrant had 17,171,077 shares of common stock, $.01 par value,
outstanding at May 31, 1999.
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<PAGE>
ASSISTED LIVING CONCEPTS, INC.
FORM 10-Q
March 31, 1999
INDEX
<TABLE>
<CAPTION>
Page
-----
PART I -- FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets, December 31, 1998 and March 31, 1999.... 3
Consolidated Statements of Operations and Consolidated Statements of
Comprehensive Income (Loss), Three Months Ended March 31, 1998 and
1999................................................................ 4
Consolidated Statements of Cash Flows, Three Months Ended March 31,
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................................................. 10-20
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 20
Item 6. Exhibits and Reports on Form 8-K............................... 20
</TABLE>
2
<PAGE>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
ASSISTED LIVING CONCEPTS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
March 31,
December 31, 1999
1998 (unaudited)
ASSETS ------------ ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents........................... $ 55,036 $ 29,957
Marketable securities, available for sale........... 4,000 8,355
Accounts receivable, net of allowance for doubtful
accounts of $179 at 1998
and $237 at 1999................................... 5,127 6,244
Prepaid expenses.................................... 992 1,208
Other current assets................................ 4,472 4,509
-------- --------
Total current assets.............................. 69,627 50,273
-------- --------
Property and equipment................................ 284,754 269,230
Construction in process............................... 51,304 49,736
-------- --------
Total property and equipment........................ 336,058 318,966
Less accumulated depreciation....................... 9,133 10,245
-------- --------
Property and equipment net.......................... 326,925 308,721
-------- --------
Goodwill.............................................. 5,371 5,278
Other assets.......................................... 12,746 11,045
-------- --------
Total assets...................................... $414,669 $375,317
======== ========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Accounts payable.................................... $ 1,622 $ 1,041
Construction payable................................ 6,942 5,997
Accrued real estate taxes........................... 4,837 4,818
Other accrued expenses.............................. 6,127 9,381
Other current liabilities........................... 4,857 2,016
Current portion of long-term debt................... 1,386 1,400
-------- --------
Total current liabilities........................... 25,771 24,653
-------- --------
Other non-current liabilities......................... 3,415 4,951
Long-term debt........................................ 105,036 73,393
Convertible subordinated debentures................... 161,250 161,250
-------- --------
Total liabilities................................. 295,472 264,247
-------- --------
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 17,171,077 in 1998 and 1999............. 173 174
Additional paid-in capital.......................... 148,533 145,286
Unearned compensation expense on restricted stock... (3,492) (668)
Fair market value in excess of historical cost of
acquired net assets
Attributable to related party transactions......... (239) (239)
Accumulated other comprehensive income (loss)....... -- (45)
Accumulated deficit................................. (25,778) (33,438)
-------- --------
Total shareholders' equity.......................... 119,197 111,070
-------- --------
Total liabilities and shareholders' equity........ $414,669 $375,317
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
ASSISTED LIVING CONCEPTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
1998 1999
--------- ---------
<S> <C> <C>
Revenues..................................................... $ 18,773 $ 26,583
Operating expenses:
Residence operating expenses............................... 11,418 19,765
Corporate general and administrative....................... 1,568 4,230
Building rentals........................................... 2,791 3,092
Building rentals to related party.......................... 391 250
Depreciation and amortization.............................. 1,197 2,180
Site abandonment costs..................................... -- 1,309
--------- ---------
Total operating expenses................................. 17,365 30,826
--------- ---------
Operating income (loss)...................................... 1,408 (4,243)
--------- ---------
Other income (expense):
Interest expense........................................... (1,062) (3,795)
Interest income............................................ 595 605
Loss on sale and disposal of assets........................ (209) (127)
Other income (expense)..................................... 7 (100)
--------- ---------
Total other income (expense)............................. (669) (3,417)
--------- ---------
Net income (loss) before cumulative effect of change in
accounting principle........................................ 739 (7,660)
Cumulative effect of change in accounting principle.......... (1,523) --
--------- ---------
Net loss..................................................... $ (784) $ (7,660)
========= =========
Basic and diluted net income (loss) per common share before
cumulative effect of change in accounting principle......... $ 0.05 $ (0.45)
Cumulative effect of change in accounting principle.......... (0.10) --
--------- ---------
Basic and diluted loss per common share...................... $ (0.05) $ (0.45)
========= =========
Basic and diluted weighted average common shares
outstanding.................................................. 15,688 17,116
========= =========
</TABLE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
1998 1999
--------- ----------
<S> <C> <C>
Net loss................................................. $ (784) $ (7,660)
Other comprehensive income (loss):
Unrealized losses on investments....................... -- (45)
-------- ----------
Comprehensive loss....................................... $ (784) $ (7,705)
======== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
ASSISTED LIVING CONCEPTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
1998 1999
--------- ---------
<S> <C> <C>
Operating activities:
Net loss................................................ $ (784) $ (7,660)
Adjustment to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization......................... 1,197 2,180
Provision for doubtful accounts....................... -- 58
Site abandonment costs................................ -- 1,309
Loss on sale of assets................................ 209 127
Compensation expense on restricted stock.............. 152 174
Cumulative effect of change in accounting principle... 1,523 --
Changes in assets and liabilities, excluding effects of
acquisitions:
Accounts receivable................................... (954) (1,175)
Other current assets.................................. (2,081) (253)
Other assets.......................................... (518) 1,146
Accounts payable and accrued expenses................. 3,699 2,654
Other liabilities..................................... (104) (1,305)
--------- ---------
Net cash provided by (used in) operating activities..... 2,339 (2,745)
--------- ---------
Investing activities:
Purchase of marketable securities, available for sale... -- (4,400)
Acquisitions, net of cash and debt acquired............. (354) --
Funds held in trust..................................... 1,956 --
Proceeds from sale of land.............................. -- 19
Purchases of property and equipment..................... (37,620) (17,216)
--------- ---------
Net cash used in investing activities................... (36,018) (21,597)
--------- ---------
Financing activities:
Payments on long-term debt.............................. (88) (141)
Proceeds from long-term debt............................ 170 --
Debt issuance costs..................................... (437) --
Proceeds from issuance of common stock.................. 488 154
Purchase of restricted stock............................ -- (750)
--------- ---------
Net cash provided by (used in) financing activities..... 133 (737)
--------- ---------
Net decrease in cash and cash equivalents............... (33,546) (25,079)
Cash and cash equivalents, beginning of period.......... 63,269 55,036
--------- ---------
Cash and cash equivalents, end of period................ $ 29,723 $ 29,957
========= =========
Supplemental disclosure of cash flow information:
Cash payments for interest............................ $ 2,943 $ 2,415
Unrealized loss on marketable securities.............. $ -- $ (45)
Extinguishment of construction loan payable from sale-
leaseback............................................ $ 2,150 $ --
Extinguishment of long-term debt resulting from lease
amendments........................................... $ -- $ 31,488
Disposal of property, plant and equipment resulting
from lease amendments................................ $ -- $ 30,933
Decrease in construction payables and plant and
equipment............................................ $ (6,288) $ (945)
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
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 its residents.
Basis of Presentation and Principles of Consolidation
These consolidated financial statements have been prepared without being
audited, as allowed by the rules and regulations of the Securities and
Exchange Commission. The accompanying consolidated financial statements
include the Company's accounts and its wholly owned subsidiaries that manage,
own, and develop assisted living residences. All significant intercompany
accounts and transactions have been eliminated in consolidation. Certain
information and footnote disclosures that are normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted as allowed by rules and regulations
of the Securities and Exchange Commission. These consolidated financial
statements should be read in conjunction with the audited consolidated
financial statements and notes included in the Company's annual report on Form
10-K for the year ended December 31, 1998.
The financial information included in these financial statements contain all
adjustments (which consist of normal recurring adjustments, with the exception
in the three-month period ended March 31, 1999 of site abandonment costs,
purchase of restricted stock and severance costs associated with the
termination of certain employment agreements and in the three-month period
ended March 31, 1998 of a change in accounting principle to adopt SOP 98-5)
which are, in the opinion of management, necessary for a fair presentation of
results for the quarterly periods. The results of operations for the three-
month periods ended March 31, 1999 do not necessarily indicate the results
that are expected for the full year.
2. 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 March 31, 1999 was $8.3 million. These investments which have a
historical cost of $8.4 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 $45,000 are included as a component of
comprehensive income and shareholders' equity at March 31, 1999.
3. Property and Equipment
The Company's property and equipment, stated at cost, consists of the
following (in thousands):
<TABLE>
<CAPTION>
December 31, March
1998 31, 1999
------------ --------
<S> <C> <C>
Land............................................... $ 18,217 $ 17,194
Buildings ......................................... 256,904 240,110
Equipment.......................................... 2,865 4,715
Furniture.......................................... 6,768 7,211
-------- --------
Property and equipment............................. 284,754 269,230
Construction in progress........................... 51,304 49,736
-------- --------
Total property and equipment....................... 336,058 318,966
Less accumulated depreciation...................... 9,133 10,245
-------- --------
Property and equipment, net........................ $326,925 $308,721
======== ========
</TABLE>
6
<PAGE>
During the three months ended March 31, 1999, the Company capitalized
interest costs of $1.0 million 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 $246,000 for
the three months ended March 31, 1999.
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 $1.3 million of capitalized costs during the three months ended
March 31, 1999 relating to the abandonment of development sites and other
development costs.
As of March 31, 1999, the Company had begun construction on four residences
(167 units) ($7.3 million). Construction in process also includes 12
residences (490 units) ($38.0 million) that have received a certificate of
occupancy, but are pending licensure. As of March 31, 1999, the Company had
either purchased the land or had entered into agreements pursuant to which it
may purchase, subject to completion of due diligence and various other
conditions, 20 additional sites. The Company has capitalized $2.9 million in
conjunction with the due diligence associated with these 20 sites (700 units).
The remaining amounts relate to costs associated with the site selection and
pre-acquisition costs.
The Company had certificates of occupancy for 181 residences, 169 of which
were included in the Company's operating results for the three months ended
March 31, 1999 as compared to 145 residences with certificates of occupancy,
122 of which were in the Company's operating results as of March 31, 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 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 of the amendments, the Company recorded (i) the
disposal of net property 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 will be amortized over the remaining initial lease term as an
offset to future reported rent expense.
7
<PAGE>
4. Leases
A summary of leases that the Company has entered into since its inception is
as follows:
<TABLE>
<CAPTION>
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
---------- -------------- --------- -------------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
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
Lease unit expansion in
1998................... -- -- -- -- 47 10
Leases entered into
during 1998............ -- 4 4 -- 139 --
Leases terminated during
1998................... (1) -- (1) -- (45) --
------- ------- ------- ------- ------- -------
Leases at December 31,
1998................... 6 48 54 16 2,047 573
Lease unit expansion in
First Quarter 1999..... -- -- -- -- 13 --
Leases amended during
First Quarter 1999..... -- 16 16 (16) 573 (573)
------- ------- ------- ------- ------- -------
Leases at March 31,
1999................... 6 64 70 -- 2,633 --
======= ======= ======= ======= ======= =======
</TABLE>
In March 1999, the Company amended 16 leases, resulting in the
reclassification of such leases from financings to operating leases (See Note
3).
5. Subsequent Events
Amendments to Certain Loan and Lease Agreements
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 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 that the Company is in compliance with the other
terms of the loan agreements.
8
<PAGE>
Securityholder Litigation
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. The Company cannot predict the outcome of the foregoing litigation
and currently is unable to evaluate the likelihood of success or the range of
possible loss.
Write-off Related to Development Activity
During the second quarter of 1999, as a result of a continued reduction in
the Company's new residence development activities, the Company will incur
write-offs of $3.5 million relating to previously capitalized development
costs. The Company does not anticipate incurring similar write-offs in future
periods.
9
<PAGE>
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, we determined to
restate our 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 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 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 and
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, our cash position
on a restated basis as of December 31, 1996 and 1997 and as of September 31,
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 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,
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 our joint venture arrangements;
(iv) the capitalization of fees received by us previously
10
<PAGE>
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) the elimination of certain 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 related to the shutdown of our home health operations.
Terminated Merger Agreement
On February 1, 1999, we mutually agreed with American Retirement Corporation
("ARC") to terminate our previously announced merger agreement, which had been
entered into during November 1998. We recorded charges of approximately $1.1
million and $200,000 in the fourth quarter 1998 and the first quarter of 1999,
respectively, to cover costs relating to the terminated merger agreement.
Securityholder Litigation
Since February 1, 1999 12 separate complaints, which have since been
consolidated into one action, have been 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 naming as additional defendants
certain of our directors that were not named previously, as well as our
independent auditors (solely in connection with our 1998 offering of 5.625%
Debentures) and the underwriters in connection with our October 1997 offering
of 6.0% Debentures. See Part II, Item 1 (Legal Proceedings) and Note 5 of the
unaudited consolidated financial statements included in Item 1 of this report
for information regarding this litigation.
Termination of Joint Venture Agreements
On February 10, 1999, we announced with respect to certain joint venture
agreements that we had negotiated with our joint venture partner to purchase,
for approximately $3.8 million, all of our joint venture partner's interests
in the remaining 17 residences subject to the joint venture agreements. We
have no current intention of entering into similar arrangements in the future.
Management Changes
On March 16, 1999, our Board of Directors announced the appointment of Dr.
Keren Brown Wilson, a co-founder of the Company, as President and Chief
Executive Officer. The board also announced the appointment of Leslie J. Mahon
as Vice President and Chief Operating Officer and James W. Cruckshank as Vice
President and Chief Financial Officer. Pursuant to an agreement (the
"Consulting Agreement") between Mr. McBride and us, Mr. McBride agreed to
provide consulting services to us and to resign from his position as our Chief
Executive Officer.
The Consulting Agreement provided for the payment to Mr. McBride of a lump
sum cash termination payment of $490,000, which was reduced to $390,000 to
reflect repayment of a $100,000 bonus paid to Mr. McBride in 1998. In
addition, we agreed to pay Mr. McBride a lump sum cash payment of $750,000 in
consideration for Mr. McBride's agreement to forfeit his interest in 200,000
shares of restricted stock held by him and to terminate the agreement related
thereto. In addition, pursuant to the Consulting Agreement, Mr. McBride agreed
to forfeit a $4.0 million termination payment he would be entitled to receive
under certain circumstances, including upon a change of control. We recorded a
charge of approximately $525,000 included in corporate general and
administrative expenses in the first quarter of 1999 in connection with such
payments. We also agreed to pay Mr. McBride a consulting fee of $15,000 per
month for a period of one year.
In March 1999, we entered into an amendment with Dr. Wilson to her
employment agreement to provide that we will employ Dr. Wilson as President
and Chief Executive Officer. In addition, we agreed to pay Dr. Wilson a lump
sum cash payment of $187,500 (which was reduced to $87,500 to reflect
repayment of a $100,000 bonus paid in 1998) in consideration for Dr. Wilson's
agreement to forfeit her interest in 50,000 shares of restricted stock held by
her and to terminate the restricted stock agreement related to those shares.
We made the cash payment and cancelled the restricted stock in June 1999.
11
<PAGE>
On March 31, 1999, we announced that Mr. McBride had resigned as Chairman of
the Board of Directors and had decided not to seek reelection to the Board of
Directors at the next annual meeting of shareholders. We also announced the
election of Richard Ladd as interim Chairman.
In April 1999, we announced the increase in the number of board members from
five to six and the election by the board of Jill M. Krueger to serve as a
director and as chairman of our Audit Committee.
Development Cost Write-Off
As a result of a continued reduction in our new residence development
activities, we wrote-off $1.3 million relating to previously capitalized
development costs during the first quarter of 1999. We will incur a similar
charge of $3.5 million during the second quarter 1999. 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 10 residences currently
included in construction in process as of June 30, 1999.
Regulatory Matters
During 1998, a license revocation action was commenced at one of our
residences in the State of Washington. In July 1999 following discussions with
the licensing agency we settled this action without the revocation becoming
effective. We also were involved in regulatory proceedings with respect to
certain of our residences in Oregon during the three months ended March 31,
1999.
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 June 30, 1999 we had
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 March 31, 1999, we had 181 assisted living residences with a
certificate of occupancy, 169 of which (6,496 units), were included in our
operating results. Our residences typically receive a certificate of occupancy
upon 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 99 residences (3,863 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 provided. Resident fees are
recognized as revenues when services are provided.
Our 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.
12
<PAGE>
Our operating results for the three months ended March 31, 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 ARC and its subsequent termination;
. the 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, operating costs at many of our
residences have increased, primarily due to the diversion of management's time
and attention. As a result, our residence operating income was lower in the
three months ended March 31, 1999 compared to the three months ended March 31,
1998. We expect operating margins at our Stablized and Same Store Residences
to be substantially lower in each of the fiscal quarters of 1999 than in 1998
due to the decline in occupancy rates and increase in operating costs
described above.
The following table sets forth, for the period presented, the number of
residences and units operated, average occupancy rates and sources of revenue
for us. The portion of revenues received from state Medicaid agencies are
labeled as "Medicaid state portion" while the portion of our revenues that a
Medicaid-eligible resident must pay out of his or her own resources is labeled
"Medicaid resident portion."
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
1998 1999
--------- ---------
<S> <C> <C>
Total Residences:
Residences operated (end of period)............... 122 169
Units operated (end of period).................... 4,540 6,496
Average occupancy rate............................ 71.7% 72.9%
Sources of revenue:
Medicaid state portion............................ 10.6% 10.5%
Medicaid resident portion......................... 5.9% 5.8%
Private........................................... 83.5% 83.7%
--------- ---------
Total............................................... 100.0% 100.0%
========= =========
</TABLE>
13
<PAGE>
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 operations are included in Corporate in the
tables below.
Compilation of Stabilized and Start-up Residences
Three Months Ended March 31, 1999
(in thousands except unit and average rent data)
<TABLE>
<CAPTION>
Stabilized Start-up
Residences Residences Corporate Total
---------- ---------- --------- --------
<S> <C> <C> <C> <C>
Revenue............................. $ 20,415 $ 6,168 $ -- $ 26,583
Residence operating expense......... 14,102 5,438 225 19,765
-------- ------- ------- --------
Residence operating income........ 6,313 730 (225) 6,818
Corporate, general and
administrative..................... -- -- 4,230 4,230
Building rentals.................... 3,204 138 -- 3,342
Depreciation and amortization....... 1,021 948 211 2,180
Site abandonment costs.............. -- -- 1,309 1,309
-------- ------- ------- --------
Total other operating expenses.. 4,225 1,086 5,750 11,061
-------- ------- ------- --------
Operating income (loss)......... 2,088 (356) (5,975) (4,243)
======== ======= ======= ========
Residences operated................. 115 54 -- 169
Units operated...................... 4,372 2,124 -- 6,496
Average occupancy rate.............. 83.6% 50.3% -- 72.9%
Weighted-average rent............... $ 1,851 $ 1,944 -- $ 1,871
Residence operating income margin... 30.9% 11.8% -- 25.6%
Compilation of Stabilized and Start-up Residences
Three Months Ended March 31, 1998
(in thousands except unit and average rent data)
<CAPTION>
Stabilized Start-up
Residences Residences Corporate Total
---------- ---------- --------- --------
<S> <C> <C> <C> <C>
Revenue............................. $ 11,069 $ 6,134 $ 1,570 $ 18,773
Residence operating expense......... 6,235 3,883 1,300 11,418
-------- ------- ------- --------
Residence operating income........ 4,834 2,251 270 7,355
Corporate, general and
administrative..................... -- -- 1,568 1,568
Building rentals.................... 1,807 1,375 -- 3,182
Depreciation and amortization....... 429 555 213 1,197
-------- ------- ------- --------
Total other operating expenses.. 2,236 1,930 1,781 5,947
-------- ------- ------- --------
Operating income (Loss)............. $ 2,598 $ 321 $(1,511) $ 1,408
======== ======= ======= ========
Residences operated................. 63 59 -- 122
Units operated...................... 2,264 2,276 -- 4,540
Average occupancy rate.............. 92.9% 47.7% -- 71.7%
Weighted average rent............... $ 1,745 $ 1,931 -- $ 1,805
Residence operating income margin... 43.7% 36.7% -- 39.2%
</TABLE>
14
<PAGE>
The following tables set forth, for the periods presented, the compilation
of operating results 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 March 31, 1999
(in thousands except unit and average rent data)
<TABLE>
<CAPTION>
March 31, March 31,
1998 1999
--------- ---------
<S> <C> <C>
Revenue............................................. $ 16,461 $ 18,731
Residence operating expense......................... 9,877 12,928
-------- --------
Residence operating income........................ 6,584 5,803
Building rentals.................................... 3,101 3,203
Depreciation and amortization....................... 852 892
-------- --------
Total other operating expenses.................... 3,953 4,095
-------- --------
Operating income................................ $ 2,631 $ 1,708
======== ========
Residences operating................................ 108 108
Units operating..................................... 4,047 4,047
Average occupancy rate.............................. 75.4% 82.5%
Weighted average rent............................... $ 1,801 $ 1,860
Residence operating income margin................... 40.0% 31.0%
</TABLE>
Results of Operations
Three months ended March 31, 1999 compared to three months ended March 31,
1998
We incurred a net loss of $7.7 million, or $0.45 per basic and diluted
share, on revenue of $26.6 million for the three months ended March 31, 1999
(the "March 1999 Quarter") as compared to a net loss of $784,000 or $0.05 per
basic and diluted share, on revenues of $18.8 million for the three months
ended March 31, 1998 (the "March 1998 Quarter").
We had certificates of occupancy for 181 residences, 169 of which were
included in our operating results for the March 1999 Quarter as compared to
145 residences with certificates of occupancy, 122 of which were included in
our operating results as of the end of the March 1998 Quarter.
Of the residences included in our operating results at the end of the March
1999 Quarter, we owned 99 residences and we leased 70 residences (all of which
were operating leases) as compared to 54 owned residences and 68 leased
residences (52 of which were operating leases and 16 of which were accounted
for as financings) as of the end of the March 1998 Quarter.
Revenues. Revenues were $26.6 million for the March 1999 Quarter as compared
to $18.8 million for the March 1998 Quarter, a net increase of $7.8 million.
Revenue increases consisted of:
. $2.3 million related to the 108 Same Store Residences (4,047 units); and
. $7.1 million related to the 47 residences (1,956 units) which commenced
operations subsequent to the March 1998 Quarter.
This increase in revenue was offset by a $1.6 million reduction in revenue
from ancillary services. As a result of discontinuing our home health care
operations, we had no revenue from ancillary services during the March 1999
Quarter as compared to $1.6 million of revenue from ancillary services for the
March 1998 Quarter.
15
<PAGE>
Revenue from Same Store Residences was $18.7 million for the March 1999
Quarter as compared to $16.5 million for the March 1998 Quarter, an increase
of $2.2 million. The increase in revenue from Same Store Residences was a
combination of:
. An increase in occupancy to 82.5% for the March 1999 Quarter as compared
to 75.4% for the March 1998 Quarter; and
. An increase in average monthly rental rate to $1,860 for the March 1999
Quarter as compared to $1,801 for the March 1998 Quarter.
Of the $26.6 million in revenue reported for the March 1999 Quarter:
. $20.4 million or 76.7% was attributable to Stabilized Residences. As of
the end of the March 1999 Quarter, we had 115 Stabilized Residences
(4,372 units) with an average occupancy of 83.6% and average monthly
rental rate of $1,851; and
. $6.2 million or 23.3% was attributable to Start-Up Residences. As of the
end of the March 1999 Quarter, we had 54 Start-Up Residences (2,124
units) with an average occupancy of 50.3% and average monthly rental
rate of $1,944.
Residence Operating Expenses. Residence operating expenses were $19.8
million for the March 1999 Quarter as compared to $11.4 million for the March
1998 Quarter, a net increase of $8.4 million.
Residence operating expense increases consisted of:
. $3.1 million related to the 108 Same Store Residences (4,047 units); and
. $6.4 million related to the 47 residences (1,956 units) which commenced
operations subsequent to the March 1998 Quarter.
This increase in residence operating expense was offset by a $1.1 million
reduction in operating expenses associated with ancillary services. As a
result of the shutdown of our home health care operations, we had $225,000 of
final operating expenses from ancillary services during the March 1999 Quarter
as compared to $1.3 million of expenses from ancillary services for the March
1998 Quarter.
Residence operating expenses for the Same Store Residences were $12.9
million for the March 1999 Quarter as compared to $9.9 million for the March
1998 Quarter, an increase of $3.0 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 March 1998 Quarter and partly due to operating
inefficiencies resulting from the diversion of management's attention as
discussed above .
Of the $19.7 million in residence operating expenses reported for the March
1999 Quarter:
. $14.1 million or 71.6% was attributable to Stabilized Residences;
. $5.4 million or 27.4% was attributable to Start-Up Residences; and
. $225,000 or 1.0% was attributable to ancillary services.
Corporate, General and Administrative. Corporate, general and administrative
expenses were $4.2 million for the March 1999 Quarter compared to $1.6 million
in the March 1998 Quarter. Our corporate general and administrative expenses
before capitalized payroll costs were $4.5 million for the March 1999 Quarter
as compared to $2.2 million for the March 1998 Quarter, an increase of $2.3
million. Corporate, general and administrative expenses increased due to the
following:
. $700,000 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.
16
<PAGE>
. $530,000 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.
. $530,000 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.
. $390,000 is a result of increased payroll costs for corporate and
regional staff.
. $200,000 of costs incurred in connection with the terminated merger in
January of 1999.
We capitalized $246,000 of payroll costs for the March 1999 Quarter as
compared to $576,000 for the March 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 are certain costs
associated with exiting our home health operations, including transitioning
certain employees to corporate and regional functions. We anticipate that we
will have completely exited the home health care operations by September 30,
1999.
Building Rentals. Building rentals increased to $3.3 million in the March
1999 Quarter from $3.2 million in the March 1998 Quarter, an increase of
$100,000. This increase was due to rate increases on our operating leases.
Prior to amending lease terms on 16 residences, effective March 31, 1999, we
had 54 operating in the March 1999 Quarter compared to 52 operating leases in
the March 1998 Quarter. In March 1999, we amended lease terms on the 16 leases
accounted for as financings. The amendments eliminated our continuing
involvement in the residences in the form of a fair value purchase option. As
a result, the leases are now accounted for as operating leases as of March 31,
1999. Accordingly, rent expense related to such leases after the date of the
amendment will be classified as building rentals, rather than interest expense
as previously recorded. As a result of the amendments, we had 70 operating
leases as of March 31, 1999.
Depreciation and Amortization. Depreciation and amortization expense was
$2.2 million in the March 1999 Quarter compared to $1.2 million in 1998, an
increase of $1.0 million. The increase is due to:
. Depreciation expense related to the 45 new residences that opened
subsequent to March 31, 1998;
. Depreciation expense related to the 12 residences that commenced
operations in the March 1998 Quarter;
. $104,000 in additional depreciation expense for corporate overhead; and
. $95,000 less amortization of goodwill as a result of the write off $7.5
million of goodwill in the three months ended June 30, 1998.
With the amendment to 16 of our leases, as discussed above, we will no
longer record depreciation expense with respect to these 16 residences.
Site Abandonment Costs. As the result of our decision to reduce the number
of new residences openings in the future we recorded site abandonment costs of
$1.3 million with respect to 15 sites which we will not develop. We incurred
additional write-offs of $3.5 million during the quarter ended June 30, 1999.
Interest Expense. Interest expense was $3.8 million for the March 1999
Quarter compared to $1.1 million for the March 1998 Quarter. Gross interest
expense for the March 1999 Quarter was $4.8 million compared to $3.1 million
for the March 1998 Quarter, a net increase of $1.7 million.
17
<PAGE>
Interest expense increased by:
. $1.2 million due to the issuance of 5.625% Debentures due 2003 in April
1998;
. $675,000 due to the full quarter impact of mortgage financing done
subsequent to March 31, 1998; and
. $95,000 due to interest expense associated with payments received from
our joint venture partner (accounted for as loans).
This increase was offset by a $270,000 reduction in interest expense as a
result of the redemption of the 7.0% Convertible Subordinated Debentures due
2005 in August 1998.
We capitalized $1.0 million of interest expense for the March 1999 Quarter
compared to $2.0 million for the March 1998 Quarter. The decrease is a result
of lower development activity. We expect a further reduction in future
periods.
With the amendment to 16 of our leases, as discussed above, we will no
longer record interest expense with respect to these 16 residences.
Interest Income. Interest income was $605,000 for the March 1999 Quarter
compared to $595,000 for the March 1998 Quarter, an increase of $10,000.
Loss on Sale and Disposal of Assets. Loss on sale or disposal of assets was
$127,000 for the March 1999 Quarter as compared to $209,000 for the March 1998
Quarter. The loss in the March 1999 Quarter primarily related to the write-off
of leasehold improvements associated with relocating our corporate office. The
loss for the March 1998 quarter primarily resulted from losses incurred in
connection with one sale and leaseback transaction completed during the period
and from losses resulting from additional capital costs incurred during the
period on sale and leaseback transactions completed during fiscal year 1997.
Other Expenses. Other expense was $100,000 for the March 1999 Quarter as
compared to other income of $7,000 for the March 1998 Quarter. Other expenses
during the March 1999 Quarter primarily related to the repurchase of the
operations of 17 residences formerly operated pursuant to our joint venture
agreements.
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. Under SOP 98-5, start-up costs associated with the
opening of new residences are expensed as incurred. We recognized a charge of
$1.5 million during fiscal year 1998 associated with adopting such provision.
Prior to the adoption of SOP 98-5, we capitalized pre-opening costs on our
balance sheet and amortized such costs over a 12-month period.
Net Loss. As a result of the above, we incurred a net loss of $7.7 million
or $0.45 per share for the March 1999 Quarter, compared to a net loss of
$784,000, or $0.05 per basic and diluted share, for the March 1998 Quarter.
Liquidity and Capital Resources
At March 31, 1999, we had working capital of $25.6 million, including cash
and marketable securities of $38.3 million.
Net cash used in operating activities was $2.7 million during the March 1999
Quarter. The primary use of cash in operations was to fund the cash component
of the net loss of $7.7 million.
Net cash used in investing activities totaled $21.6 million during the March
1999 Quarter. The primary use of cash was $17.2 million related to the
development of new assisted living residences in Florida, Michigan, Georgia,
Indiana, Iowa, New Jersey, and South Carolina. In addition, we used $4.4
million to purchase highly liquid marketable debt securities.
18
<PAGE>
Net cash used by financing activities totaled $737,000 million during the
March 1999 Quarter.
During the March 1999 Quarter, we made cash payments of approximately $1.2
million related to severance arrangements and repurchases of restricted stock.
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 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 the other terms of the loan
agreements.
In addition to the 169 residences (6,496) units in operation as of March 31,
1999, we intend to commence operation on an additional 16 residences
(approximately 635 units) during 1999. We expect to incur up to $30.0 million
in capital expenditures and related start-up costs with respect to our
development activities for fiscal year 1999, approximately $25.0 million of
which had been incurred as of June 30, 1999. We expect that Start-Up
Residences will incur significant operating losses during the fill-up period.
As a result, our operating income will be adversely affected by operating
losses at certain residences, primarily Start-Up Residences, which we expect
will range from $3.5 million to $5.0 million during 1999. We intend to utilize
our cash on hand and current working capital resources to complete the 16
residences that we had under construction at March 31, 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 expenditures within the foreseeable future with respect to the
residences currently operating or those pending licensure as of March 31,
1999.
We believe that our current cash on hand and our working capital resources
are sufficient to meet our capital needs for the next 12 to 18 months.
However, to provide us with additional capital, we may explore various
financing alternatives and/or commitments to engage in sale and leaseback
transactions. We currently do not have in place any of 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 March 31, 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 dates 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 noncompliant information and non-information
technology systems;
19
<PAGE>
. 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 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.
. We may have year 2000 issues with significant third parties. We are in
the process of obtaining year 2000 compliance letters and reports from
suppliers, banks, and other third party payors, including the federal
government. To date, no such payor has indicated an inability to
continue remittances in the normal course of business. However, most
such 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 on our business and operations.
We have not established a contingency plan to address potential year 2000
noncompliance with respect to our information systems or those of our major
vendors. We are currently considering the extent to which such a plan is
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 may not have
adequately addressed year 2000 issues, we cannot guarantee that we will not
face 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.
20
<PAGE>
PART II. -- OTHER INFORMATION
Item 1. Legal Proceedings
Securityholder Litigation
Since February 1, 1999 12 separate complaints, which have since been
consolidated into one action, have been 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. The consolidated complaint purports to be brought on
behalf of a class of purchasers of our common stock from July 28, 1997 through
March 31, 1999 and on behalf of a class of purchasers of our 6.0% Debentures
and 5.625% 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
our directors that were not named previously, as well as our independent
auditors (solely in connection with our 1998 offering of 5.625% Debentures)
and the underwriters in connection with our 1997 offering of 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 or 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 immediately 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:
<TABLE>
<CAPTION>
Exhibit
Number
-------
<C> <S>
12 Ratio of Earnings to Fixed Charges
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K. There were no reports on Form 8-K filed during the
quarter ended March 31, 1999.
21
<PAGE>
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
September 23, 1999 /s/ James Cruckshank
By: _________________________________
Name: James Cruckshank
Title: Vice President and Chief
Financial Officer
September 23, 1999 /s/ M. Catherine Maloney
By: _________________________________
Name: M. Catherine Maloney
Title: Vice President and Chief
Accounting Officer
<PAGE>
EXHIBIT 12
Ratio of Earnings to Fixed Charges:
<TABLE>
<CAPTION>
Three Months Ended
-------------------
March 31, March 31,
1998 1999
--------- ---------
(in thousands)
<S> <C> <C>
Income (loss) before provision for income taxes and
cumulative effect of change in accounting principle....... $ 739 $(7,660)
Add fixed charges:
Interest expense including amortization of debt
issuance cost......................................... 1,062 3,795
------ -------
Earnings (loss)............................................ $1,801 $(3,865)
------ -------
Fixed Charges
Interest expense including amortization of debt issuance
cost.................................................... $1,062 $ 3,795
Capitalized interest..................................... 2,060 1,027
------ -------
Total Fixed Charges........................................ $3,122 $ 4,822
====== =======
Ratio of Earnings to Fixed Charges......................... .58 --
====== =======
Deficiency of Earnings to Cover Fixed Charges.............. $1,321 $ 8,687
====== =======
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 29,957
<SECURITIES> 8,355
<RECEIVABLES> 6,481
<ALLOWANCES> 237
<INVENTORY> 0
<CURRENT-ASSETS> 50,273
<PP&E> 318,966
<DEPRECIATION> 10,245
<TOTAL-ASSETS> 375,317
<CURRENT-LIABILITIES> 24,653
<BONDS> 234,643
0
0
<COMMON> 174
<OTHER-SE> 110,896
<TOTAL-LIABILITY-AND-EQUITY> 375,317
<SALES> 26,583
<TOTAL-REVENUES> 26,583
<CGS> 19,765
<TOTAL-COSTS> 30,826
<OTHER-EXPENSES> 100
<LOSS-PROVISION> 58
<INTEREST-EXPENSE> 3,795
<INCOME-PRETAX> (7,660)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,660)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,660)
<EPS-BASIC> (0.45)
<EPS-DILUTED> (0.45)
</TABLE>
