<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20459
FORM 10-Q/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 12 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____to _____
Commission file number 1-83938
ASSISTED LIVING CONCEPTS, INC.
(Exact name of registrant as specified in its charter)
Nevada 93-1148702
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
11835 N.E. Glenn Widing Drive, Building E
Portland, Oregon 97220-9057
(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 15,747,558 shares of common stock, $.01 par value,
outstanding at May 1, 1998.
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<PAGE>
Explanatory Note
On February 1, 1999, Assisted Living Concepts, Inc. (the "Company")
announced that after consultation with its independent auditors the Company
would restate its consolidated financial statements for the fiscal quarter
ended June 30, 1997, the fiscal quarter ended September 30, 1997, the fiscal
year ended December 31, 1997, the fiscal quarter ended March 31, 1998, the
fiscal quarter ended June 30, 1998 and the fiscal quarter ended September 30,
1998. On March 31, 1999, the Company announced that the restatement would be
more extensive than the Company had previously believed, and might include
periods prior to the second quarter of 1997, including the fiscal year ended
December 31, 1996. After further consultation with its independent auditors,
the Company determined to restate its consolidated financial statements for
the fiscal year ended December 31, 1996, the fiscal year ended December 31,
1997 and the first three fiscal quarters in the fiscal year ended December 31,
1998. This amendment includes in Item 1 such restated consolidated financial
statements for the three month period ended March 31, 1998 and other
information relating to such restated consolidated financial statements,
including Management's Discussion and Analysis of Financial Condition and
Results of Operations (Item 2). Information regarding the effect of the
restatement on the Company's results of operations for the three months ended
March 31, 1998 is included in Item 2 of this amendment and in Note 7 to the
consolidated financial statements included in Item 1 of this amendment.
Since February 1, 1999 12 separate complaints, which have since been
consolidated into one action, have been filed against the Company and certain
of its officers and directors in the United States District Court for the
District of Oregon. On July 23, 1999, a consolidated complaint was filed in
connection with this litigation. The consolidated complaint purports to be
brought on behalf of a class of purchasers of the Company's common stock from
July 28, 1997 through March 31, 1999 and on behalf of a class of purchasers of
its 6.0% Convertible Subordinated Debentures (the "6.0% Debentures") and
5.625% Convertible Subordinated Debentures (the "5.625% Debentures" and,
together with the 6.0% Debentures, the "Debentures") from the date of issuance
through March 31, 1999. The consolidated complaint alleges violations of the
federal securities laws and seeks unspecified damages. It also names as
additional defendants certain of the Company's directors that were not named
previously, as well as the Company's independent auditors (solely in
connection with the Company's 1998 offering of 5.625% Debentures) and the
underwriters in connection with the Company's 1997 offering of 6.0%
Debentures.
Except for Items 1, 2 and 6, no other information included in the original
report on Form 10-Q is amended by this amendment. For additional information
regarding the restatement, please see the Company's reports on Form 8-K filed
on February 1, 1999 and March 31, 1999. For additional information regarding
the litigation described in the preceding paragraph, please see the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1998. For
current information regarding risks, uncertainties and other factors that may
affect the Company's future performance, please see the "Risk Factors"
included in Item 7 of the Company's Annual Report on Form 10-K for the year
ended December 31, 1998.
2
<PAGE>
ASSISTED LIVING CONCEPTS, INC.
FORM 10-Q/A
March 31, 1998
INDEX
<TABLE>
<CAPTION>
Page
-----
<S> <C>
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of December 31, 1997 and March 31,
1998................................................................. 4
Consolidated Statements of Operations for the three months ended March
31, 1997 and 1998.................................................... 5
Consolidated Statements of Cash Flows for the three months ended March
31, 1997 and 1998.................................................... 6
Notes to Consolidated Financial Statements............................ 7-16
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................. 17-20
PART II--OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................ 21
</TABLE>
3
<PAGE>
PART 1
ITEM 1. Financial Information
ASSISTED LIVING CONCEPTS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
March 31, 1998
As Restated
December 31, (Note 7)
1997 (Unaudited)
------------ --------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents........................ $ 63,269 $ 29,723
Funds held in trust.............................. 1,956 --
Accounts receivable.............................. 2,185 3,139
Prepaid expenses................................. 904 --
Other current assets............................. 3,579 6,548
-------- --------
Total current assets........................... 71,893 39,410
-------- --------
Property and equipment............................. 131,623 184,990
Construction in process............................ 102,025 76,732
-------- --------
Total property and equipment..................... 233,648 261,722
Less accumulated depreciation.................... 3,370 4,319
-------- --------
Property and equipment--net...................... 230,278 257,403
-------- --------
Goodwill........................................... 12,447 12,628
Other assets....................................... 9,749 10,183
-------- --------
Total assets................................... $324,367 $319,624
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses............ $ 8,258 $ 12,119
Construction payable............................. 18,883 12,595
Other current liabilities........................ 2,368 2,262
Construction financing........................... 2,150 --
Current portion of long-term debt................ 172 268
-------- --------
Total current liabilities...................... 31,831 27,244
-------- --------
Other liabilities.................................. 2,592 2,594
Long-term debt..................................... 57,535 57,521
Convertible subordinated debentures................ 100,165 100,165
-------- --------
Total liabilities.............................. 192,123 187,524
-------- --------
Commitments and contingencies
Shareholders' equity:
Preferred Stock, $.01 par value; 1,000,000 shares
authorized; none issued and outstanding......... -- --
Common Stock, $.01 par value; 80,000,000 shares
authorized; issued and outstanding 15,646,478
shares and 15,742,062 in 1997 and 1998.......... 156 157
Additional paid-in capital....................... 141,460 141,947
Unearned compensation expense.................... (4,100) (3,948)
Fair market value in excess of historical cost of
acquired net assets attributable to related
party transactions.............................. (239) (239)
Accumulated deficit.............................. (5,033) (5,817)
-------- --------
Total shareholders' equity..................... 132,244 132,100
-------- --------
Total liabilities and shareholders' equity..... $324,367 $319,624
======== ========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
4
<PAGE>
ASSISTED LIVING CONCEPTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
1998
As Restated
1997 (Note 7)
------ -----------
<S> <C> <C>
Revenues.................................................. $9,479 $18,773
Operating expenses:
Residence operating expenses............................ 5,918 11,418
Corporate general and administrative.................... 793 1,568
Building rentals........................................ 831 2,791
Building rentals to related party....................... 480 391
Depreciation and amortization........................... 652 1,197
------ -------
Total operating expenses.............................. 8,674 17,365
------ -------
Operating income.......................................... 805 1,408
------ -------
Other (income) expense:
Interest expense........................................ 694 1,062
Interest income......................................... (123) (595)
Loss on sale of assets.................................. 203 209
Other (income).......................................... -- (7)
------ -------
Total other (income) expense.......................... 774 669
------ -------
Net income before cumulative effect of change in
accounting principle...................................... 31 739
Cumulative effect of change in accounting principle....... -- (1,523)
------ -------
Net income (loss)......................................... $ 31 $ (784)
====== =======
Basic and diluted net income per common share before
cumulative effect of change in accounting principle...... $ 0.00 $ 0.05
Cumulative effect of change in accounting principle....... -- (0.10)
------ -------
Basic and diluted net income (loss) per common share...... $ 0.00 $ (0.05)
====== =======
Basic and diluted weighted average common shares
outstanding.............................................. 11,004 15,688
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
5
<PAGE>
ASSISTED LIVING CONCEPTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------
1998
As Restated
1997 (Note 7)
-------- -----------
<S> <C> <C>
Operating activities:
Net income (loss)....................................... $ 31 $ (784)
Adjustment to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization......................... 652 1,197
Loss on sale of assets................................ 203 209
Compensation expense earned on restricted stock....... -- 152
Cumulative effect of change in accounting principle... -- 1,523
Changes in operating assets and liabilities:
Accounts receivable................................... (295) (954)
Other current assets.................................. (1,508) (2,081)
Other assets.......................................... (93) (518)
Accounts payable and accrued expenses................. (582) 3,699
Other liabilities..................................... 298 (104)
-------- --------
Net cash (used in) provided by operating activities..... (1,294) 2,339
-------- --------
Investing activities:
Funds held in trust..................................... (153) 1,956
Acquisitions, net of cash and debt acquired............. -- (354)
Purchases of property and equipment..................... (30,488) (37,620)
-------- --------
Net cash used in investing activities................... (30,641) (36,018)
-------- --------
Financing activities:
Proceeds from financing construction.................... 36,350 --
Payment of construction financing....................... (2,548) --
Proceeds from long-term debt............................ -- 170
Payments on long-term debt.............................. (27) (88)
Debt issuance costs..................................... (643) (437)
Proceeds from issuance of common stock.................. 18 488
-------- --------
Net cash provided by financing activities............... 33,150 133
-------- --------
Net increase (decrease) in cash and cash equivalents.... 1,215 (33,546)
Cash and cash equivalents, beginning of period.......... 2,105 63,269
-------- --------
Cash and cash equivalents, end of period................ $ 3,320 $ 29,723
======== ========
Supplemental disclosure of cash flow information:
Cash payments for interest.............................. $ 2,166 $ 2,943
Extinguishment of construction loan payable from sale
leaseback arrangement.................................. -- 2,150
Increase (decrease) in construction payable and property
and equipment.......................................... $ (5,168) $ (6,288)
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
6
<PAGE>
ASSISTED LIVING CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Nature of Business and Summary of Significant Accounting Policies
The Company
Assisted Living Concepts, Inc. ("the Company") owns, operates and develops
assisted living residences which provide housing to older persons who need
help with the activities of daily living such as bathing and dressing. The
Company provides personal care and support services and makes available
routine health care services designed to meet the needs of its residents. As
of March 31, 1998, the Company had received certificates of occupancy for 145
residences of which 122 were included in operating results.
Basis of Presentation
These consolidated financial statements have been prepared without audit,
pursuant to the rules and regulations of the Securities and Exchange
Commission (SEC). The accompanying consolidated financial statements include
the accounts of the Company and its wholly owned subsidiaries that manage, own
and develop assisted living residences and provide ancillary services such as
home health, hospice and durable medical equipment. The consolidated financial
statements also include residences the Company owns or leases but are operated
through joint venture agreements. All significant intercompany accounts and
transactions have been eliminated in consolidation. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed
or omitted pursuant to such rules and regulations. These consolidated
financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto included in the Company's
annual report on Form 10-K/A for the year ended December 31, 1997.
The financial information included herein reflects all adjustments
(consisting of normal recurring adjustments with the exception of the
cumulative effect of the change in accounting principle) which are, in the
opinion of management, necessary for a fair presentation of the results for
interim periods. The result of operations for the three month periods ended
March 31, 1997 and 1998 (as restated) are not necessarily indicative of the
results to be expected for the full year.
2. Property and Equipment
The Company's property and equipment are stated at cost and consist of the
following (in thousands):
<TABLE>
<CAPTION>
December 31, March 31,
1997 1998
------------ ---------
<S> <C> <C>
Land..................................................... $ 7,924 11,344
Buildings and improvements............................... 119,649 167,710
Equipment................................................ 1,419 1,795
Furniture................................................ 2,631 4,141
-------- --------
Property and equipment................................... 131,623 184,990
Construction in process.................................. 102,025 76,732
-------- --------
Total property and equipment........................... 233,648 261,722
Less accumulated depreciation............................ 3,370 4,319
-------- --------
Property and equipment, net............................ $230,278 $257,403
======== ========
</TABLE>
During the three months ended March 31, 1998, the Company capitalized
interest costs of $2.0 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 $576,000 for
the three months ended March 31, 1998.
7
<PAGE>
As of March 31, 1998, the Company had begun construction on 26 residences
(1,033 units) ($30.4 million). Construction in process also includes 17
residences (650 units) ($41.0 million) that have received a certificate of
occupancy, but are pending licensure. As of March 31, 1998, the Company had
also entered into agreements pursuant to which it may purchase, subject to
completion of due diligence and various other conditions, 25 additional sites.
The Company has capitalized $1.7 million of direct costs in conjunction with
the due diligence associated with these 25 sites (984 units). The remaining
costs are associated with the site selection and pre-acquisition costs.
3. Leases
A summary of leases that the Company has entered into since its inception is
as follows:
<TABLE>
<CAPTION>
Number of
Sale and Number of
Number of Leaseback Sale and Units under
Leased Residences Total Leaseback Leases
Residences Accounted for Number of Residences Units 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 in
1995................... -- 5 5 -- 150 --
--- --- --- --- ----- ---
Leases at December 31,
1995................... 4 5 9 -- 264 --
Leases entered into in
1996................... 1 19 20 9 763 316
Residences repurchased
in 1996................ -- (4) (4) -- (146) --
--- --- --- --- ----- ---
Leases at December 31,
1996................... 5 20 25 9 881 316
Lease unit expansion in
1997................... -- -- -- -- 10 --
Leases entered into in
1997................... 2 24 26 7 1,015 247
--- --- --- --- ----- ---
Leases at December 31,
1997................... 7 44 51 16 1,906 563
Leases entered into in
First Quarter 1998..... -- 1 1 -- 36 --
--- --- --- --- ----- ---
Leases at March 31,
1998................... 7 45 52 16 1,942 563
=== === === === ===== ===
</TABLE>
During the three months ended March 31, 1998, the Company converted
construction financing on one residence of approximately $2.2 million into an
operating lease (initial term of 12 years) through the completion of a sale
and leaseback transaction. The residence was leased back at an initial annual
lease rate of approximately $195,000. The above transaction was completed with
LTC Properties, Inc.
The Company recognized a loss of $9,000 on the above sale and leaseback
transaction for the three months ended March 31, 1998. In addition, the
Company recognized losses of $200,000 resulting primarily from additional
capital costs incurred during the three months ended March 31, 1998 on sale
and leaseback transactions completed in 1997.
4. Interest Rate Swap
During the fourth quarter of fiscal year 1997, the Company entered into a
$50.0 million floating rate mortgage loan commitment with a commercial lender.
During the quarter ended March 31, 1998, the Company entered into a $25.0
million interest rate swap in order to reduce its exposure with respect to
such floating rate loan commitment. The swap can be settled in cash on or
before its effective date of September 30, 1998.
5. Change in Accounting Principle
On April 3, 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, Reporting on the Costs of Start-up
Activities (SOP 98-5). The Company adopted SOP 98-5 effective January 1, 1998.
The impact of this change in accounting principle on the Company relates to
the treatment of pre-opening costs associated with newly developed residences.
SOP 98-5 requires that these costs be expensed as incurred as compared to the
Company's previous policy to capitalize these costs prior to commencement of
residence operations, amortizing them over a twelve-month period.
8
<PAGE>
6. Subsequent Events
On April 1, 1998, the Company entered into $14.6 million of mortgage debt
for purposes of financing seven residences in Texas. The debt is secured by
buildings, land, furniture and fixtures in connection with the seven
residences. Installments are due monthly, for a period of 10 years, including
annual interest of 7.73%.
On April 7, 1998, the Company completed the private placement offering of
$75.0 million of 5.625% convertible subordinated debentures ("5.625%
Debentures") due May 1, 2003. The 5.625% Debentures are convertible at any
time at or prior to maturity, unless previously redeemed, at a conversion
price of $26.184 per common share, which equates to an aggregate of 2,864,345
shares. Interest is payable semiannually on May 1 and November 1 of each year,
commencing November 1, 1998. The 5.625% Debentures are secured and
subordinated to all senior indebtedness of the Company as defined in the
private placement memorandum. The 5.625% Debentures are subject to redemption,
as a whole or in part, at any time on or after May 15, 2001 at the Company's
option.
On April 30, 1998, the Company completed the acquisition of two assisted
living residences in Plano and McKinney, Texas, having units of 66 and 50
respectively. The residences were acquired for $5.4 million and accounted for
as a purchase.
7. Restatement
On February 1, 1999, the Company announced that after consultation with its
independent auditors the Company would restate its financial statements for
the fiscal quarter ended June 30, 1997, the fiscal quarter ended September 30,
1997, the fiscal year ended December 31, 1997, the fiscal quarter ended March
31, 1998, the fiscal quarter ended June 30, 1998 and the fiscal quarter ended
September 30, 1998. On March 31, 1999, the Company announced that the
restatement would be more extensive than the Company had previously believed,
and might include periods prior to the second quarter of 1997, including the
fiscal year ended December 31, 1996. After further consultation with its
independent auditors the Company determined to restate its financial
statements for the fiscal year ended December 31, 1996, the fiscal year ended
December 31, 1997 and the first three fiscal quarters of the fiscal year ended
December 31, 1998.
The restatement reduced the net income for the fiscal years ended December
31, 1996 and 1997 and for the three months ended March 31, 1998 by $2.1
million, $6.7 million and $2.7 million, respectively. The cumulative effect of
the restatement reduced shareholders' equity by $11.5 million through March
31, 1998. As a result of the restatement, the Company reported net losses of
$1.9 million, $2.5 million and $784,000 for the fiscal years 1996 and 1997,
and the three months ended March 31, 1998 respectively, as compared to
previously reported net income of $149,000, $4.2 million and $1.9 million,
respectively. As a result of the restatement, the Company reported net loss
per diluted share of $0.23, $0.21 and $0.05 for the fiscal years 1996 and 1997
and the three months ended March 31, 1998 respectively, compared to previously
reported net income of $0.03, $0.34 and $0.12 per diluted share, respectively.
After the restatement, the Company's cash position as of December 31, 1996 and
1997 and as of March 31, 1998 was $2.1 million, $63.3 million and $29.7
million, respectively, as compared to $2.1 million, $63.4 million and $29.9
million, respectively, as previously reported. In addition, the Company's
working capital position on a restated basis as of December 31, 1996 and 1997
and as of March 31, 1998 was negative $27.1 million, positive $40.1 million
and positive $12.2 million, respectively, as compared to previously reported
working capital of negative $26.4 million, positive $41.0 million and positive
$13.9 million, respectively.
The restatement of the financial data included in this report resulted
primarily from: (i) the earlier recognition of certain expenses which were
previously capitalized in association with the Company's development and
financing activities; (ii) a modification in how the Company accounted for
certain lease arrangements; (iii) a modification in how the Company accounted
for certain of its acquisitions and its joint venture arrangements; (iv) the
capitalization of fees received by the Company previously recognized as either
a reduction of expenses or as other income; and (v) elimination of certain
accrued expenses previously recorded pursuant to a change in accounting
principle.
9
<PAGE>
The following table sets forth statement of operations and balance sheet
data, as originally reported and as restated as of and for the three months
ended March 31, 1998. The table also sets forth the adjustments to the
originally reported data resulting from the restatement, which adjustments are
described in the related footnotes. As restated, the Company's March 31, 1998
balance sheet is affected by changes that resulted from the restatement of
fiscal year 1996 and 1997 financial statements (which cumulative adjustments
are set forth in the balance sheet under the heading "Cumulative Adjustments
resulting From Prior Restatements") and by adjustments in quarter ended March
31, 1998 (which adjustments are set forth in the balance sheet under the
heading "Adjustments for Quarter Ended March 31, 1998").
10
<PAGE>
STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
For the three months ended
March 31, 1998
------------------------------------
As Previously As
Reported Adjustment Restated
------------- ---------- --------
(in thousands, except share data)
<S> <C> <C> <C>
Revenues................................... $18,648 $ 295 (A) $18,773
(170)(H)
Operating Expenses:
Residence operating expenses............. 11,366 221 (A) 11,418
(169)(K)
Corporate General and administrative..... 1,068 137 (A) 1,568
211 (B)
152 (J)
Building rentals......................... 3,537 122 (D) 2,791
(843)(C)
(25)(E)
Building rentals--related party.......... 365 26 (D) 391
Depreciation and amortization............ 1,045 (143)(A) 1,197
189 (C)
106 (O)
------- ------- -------
Total operating expenses............... 17,381 (16) 17,365
------- ------- -------
Operating income........................... 1,267 141 1,408
------- ------- -------
Other (income) expense:
Interest expense......................... 268 5 (A) 1,062
843 (C)
20 (E)
(167)(F)
93 (G)
Interest income.......................... (700) 105 (L) (595)
Loss on sale of assets................... -- 209 (E) 209
Other (income) expense................... (1,375) 1,368 (G) (7)
------- ------- -------
Total other (income) expense........... (1,807) 2,476 669
------- ------- -------
Income (Loss) before income taxes.......... 3,074 (2,335) 739
Provision for income taxes................. 1,168 (1,168)(I) --
------- ------- -------
Net income before cumulative effect of
change in accounting principle............ $ 1,906 $(1,167) $ 739
Cumulative effect of change in accounting
principle................................. -- (1,523)(A) (1,523)
------- ------- -------
Net income (loss).......................... $ 1,906 $(2,690)(Q) $ (784)
======= ======= =======
Basic and diluted net income (loss) per
common share:
Net income (loss) before cumulative
effect of change in accounting
principle............................... $ 0.12 $ 0.05
Cumulative effect of change in accounting
principle............................... -- (0.10)
------- -------
Basic and diluted net income (loss) per
share................................... $ 0.12 $ (0.05)
======= =======
Weighted average common shares outstanding:
Basic.................................... 15,688 15,688
Diluted.................................. 17,982 15,688
</TABLE>
11
<PAGE>
BALANCE SHEET DATA
<TABLE>
<CAPTION>
As of March 31, 1998
----------------------------------------------
Cumulative
Adjustments
Resulting Adjustments
As from Prior for Quarter
Previously Restatements Ended March 31, As
Reported (P) 1998 Restated
---------- ------------ --------------- --------
(in thousands)
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents..... $ 29,885 $ (125) $ (162)(A) $ 29,723
125 (L)
Funds held in trust........... 188 -- (188)(M) --
Accounts receivable........... 3,139 -- -- 3,139
Other currents assets......... 5,211 (21) (2)(A) 6,548
(218)(G)
169 (K)
1,451 (I)
188 (M)
(230)(L)
-------- ------- ------- --------
Total currents assets......... 38,423 (146) 1,133 39,410
-------- ------- ------- --------
Property and equipment......... 154,118 30,872 -- 184,990
Construction in process........ 79,402 (1,770) (686)(A) 76,732
(211)(B)
167 (F)
(170)(H)
-------- ------- ------- --------
Total property and equipment.. 233,520 29,102 (900) 261,722
Less accumulated
depreciation................. 3,206 893 37 (A) 4,319
183 (C)
-------- ------- ------- --------
Property and equipment--net... 230,314 28,209 (1,120) 257,403
-------- ------- ------- --------
Goodwill....................... 13,684 (950) (106)(O) 12,628
Other assets................... 11,965 (1,051) (521)(A) 10,183
(6)(C)
(204)(E)
-------- ------- ------- --------
Total assets.................. $294,386 $26,062 $ (824) $319,624
======== ======= ======= ========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current Liabilities:
Accounts payable and accrued
expenses..................... $ 11,690 $ 52 $ 93 (G) $ 12,119
284 (A)
Construction payables......... 12,595 -- -- 12,595
Other current liabilities..... -- 1,112 1,150 (G) 2,262
Accrued income taxes.......... -- (411) 411 (I) --
Current portion of long-term
debt......................... 268 -- -- 268
-------- ------- ------- --------
Total current liabilities..... 24,553 753 1,938 27,244
Other liabilities.............. -- 2,592 (146)(A) 2,594
148 (D)
Long-term debt................. 26,033 31,488 -- 57,521
Convertible subordinated
debentures.................... 100,165 -- -- 100,165
-------- ------- ------- --------
Total liabilities............. 150,751 34,833 1,940 187,524
-------- ------- ------- --------
Shareholder equity:
Preferred stock............... -- -- -- --
Common stock.................. 157 -- -- 157
Additional paid-in capital.... 138,092 4,081 (226)(I) 141,947
Unearned compensation
expense...................... -- (4,100) 152 (J) (3,948)
Fair market value in excess of
historical cost of acquired
net assets attributed to
related party transactions... (239) -- -- (239)
Accumulated earnings
(deficit).................... 5,625 (8,752) (2,690)(Q) (5,817)
-------- ------- ------- --------
Shareholders' equity.......... 143,635 (8,771) (2,764) 132,100
-------- ------- ------- --------
Total liabilities and
shareholders' equity......... $294,386 $26,062 $ (824) $319,624
======== ======= ======= ========
</TABLE>
12
<PAGE>
- --------
(A) During the second quarter 1998, the Company adopted Statement of Position
98-5, Reporting on the Costs of Start-up Activities ("SOP 98-5") effective
January 1, 1998. Under SOP 98-5, start-up costs associated with the
opening of new residences are expensed as incurred. The Company recognized
a charge of $2.8 million associated with adopting SOP 98-5. Prior to the
adoption of SOP 98-5, the Company capitalized pre-opening costs on its
balance sheet and amortized such costs over a 12-month period. As a result
of (i) the cumulative effect of balance sheet adjustments from prior
restatements and (ii) a change in the accrual related to the adoption, the
charge was reduced by $1.2 million to $1.5 million.
Statement of Operations. Reflects changes resulting from the adoption of
SOP 98-5.
Balance Sheet. Reflects changes resulting from the adoption of SOP 98-5 as
described above.
(B) The Company's policy is to capitalize payroll costs related to operations
employees and certain corporate and regional employees directly associated
with the development of new residences. As a result of the restatement,
certain previously capitalized payroll costs, primarily those related to
corporate and regional employees, are being reported as expenses during
the period in which they were incurred rather than capitalized as part of
the cost of the residences and depreciated over the lives of the related
assets.
Statement of Operations. Reflects an increase in general and administrative
expenses during the period resulting from expensing payroll costs, which
were previously capitalized in connection with the Company's development
activities.
Balance Sheet. Reflects a decrease in construction in process resulting from
expensing previously capitalized payroll costs associated with the Company's
development activities.
(C) The Company has changed the accounting treatment of 16 sale and leaseback
transactions entered into during fiscal years 1996 and 1997, which had
previously been accounted for as operating leases rather than as
financings. These agreements contained a purchase option, entitling the
Company to purchase the residences at fair market value at the end of
initial lease terms ranging from 14 to 15 years. As a result of the
restatement, these agreements are being accounted for using the finance
method in Statement of Financial Accounting Standard No. 98, Accounting
for Leases (SFAS No. 98). Accordingly, for periods between April 1, 1996
and March 30, 1999, the Company has recorded on its balance sheet the
property and equipment and financing obligation associated with these
agreements. During this same time period, the Company has recorded (i) all
rent payments as interest expense and (ii) depreciation expense resulting
from depreciating the property and equipment over periods ranging from
seven to 40 years. The Company has amended these agreements effective
March 30, 1999 to eliminate the purchase option, resulting in a
reclassification of these leases as operating leases from the date of the
amendment forward. Effective March 30, 1999, in accordance with SFAS No.
98 the Company has removed both the property and equipment and financing
obligation from the Company's balance sheet resulting in a deferred gain
that will be included in other liabilities and amortized over the
remaining initial lease term as an offset to future rent expense.
Statement of Operations. Reflects an increase in depreciation expense and
interest expense and a decrease in rent expense during the period resulting
from the change described above.
Balance Sheet. Reflects an increase in accumulated depreciation and a
decrease in other assets resulting from the change described above.
(D) All of the Company's operating leases contain various provisions for
annual increases in rent, or rent escalators. Certain of these leases
contain rent escalators with future minimum annual rent increases that are
not deemed to be contingent rents. As a result of the restatement, the
Company is accounting for rental expense related to such operating leases
with non-contingent rent escalators on a straight-line basis over the
initial term of the leases ranging from 10 to 20 years, rather than on a
contractual cash payment basis. The Company is recording a deferred
liability representing the difference between reported rent under the
13
<PAGE>
straight-line method and the actual cash rent expense paid. During fiscal
years 1997 and 1998 and during the second quarter of 1999, substantially
all of these leases were amended to restructure such rent escalators. From
the date of the amendment forward, the Company has accounted for the
amended leases on a contractual cash payment basis. The deferred liability
is amortized from the date of the applicable amendment over the remaining
initial lease terms as an offset to future rent expense.
Statement of Operations. Reflects an increase in rent expense during the
period resulting from changing the accounting treatment associated with the
rent escalators.
Balance Sheet. Reflects a deferred liability resulting from the difference
between the lease expense reported under the straight-line method compared
to the actual cash payment.
(E) The Company incurred losses from certain sale and leaseback transactions
because the Company's cost basis in the residences (which included the
capital costs associated with the development and construction of the
residences) together with capitalized costs associated with opening such
residences, exceeded the sale proceeds to the Company. Such losses were
recorded as deferred assets and amortized over the initial term of the
leases, which ranged from 15 to 20 years. The Company has determined to
eliminate the deferred assets from its consolidated balance sheet and to
recognize such losses in the period in which they were incurred. Gains
resulting from sale and leaseback transactions continue to be recorded as
deferred liabilities and amortized over the initial lease term as an
offset to future reported rent expense. Unamortized deferred financing
costs related to construction financing were previously included in the
basis of the residence for purposes of calculating gain or loss on sale
and leaseback transactions. The Company has recorded unamortized deferred
financing costs as interest expense at the time the construction financing
is repaid.
Statement of Operations. Reflects an increase in loss on sale of assets and
interest expense, and a reduction in rent expense, resulting from the
changes described above.
Balance Sheet. Reflects a decrease in other assets resulting from the
elimination of deferred losses, in conjunction with sale and leaseback
transactions.
(F) The Company capitalizes a portion of gross interest expense based upon (i)
the amount of average construction in process during the period and (ii)
the average cost of its financing. Capitalized interest is included on the
Company's balance sheet as construction in process and property and
equipment. The amount of interest capitalized is impacted by changes to
the average construction in process and changes in the costs of the
Company's financing as a result of the cumulative impact of the
adjustments in Notes (A), (B) and (C).
During fiscal year 1997 and for the nine months ended September 30, 1998,
the Company also included in its effective cost of financing an additional
diluted equity carrying cost on the Company's convertible debentures. As
part of the restatement, the Company has eliminated such incremental costs
from its effective financing cost calculation during this time period.
Statement of Operations. Reflects a change in interest expense resulting
from recalculating capitalized interest.
Balance Sheet. Reflects a change in construction in process resulting from
recalculating capitalized interest.
(G) During fiscal years 1997 and 1998, the Company entered into joint venture
agreements with respect to the operation of certain start-up residences
pursuant to which 90% of the operating risks and rewards related to such
residences were allocated to the joint venture partner, in which the
Company had an interest. The Company consolidated 100% of the revenues and
expenses attributable to these residences with the revenues and expenses
of the Company. The joint venture partner reimbursed the Company for 90%
of the start-up losses of the joint venture residences incurred in the
second quarter of 1997 and through the third quarter of
14
<PAGE>
1998, and the Company recognized such reimbursements as other income in its
financial statements during such quarters. The Company has determined to
restate such loss reimbursements as loans, rather than other income. The
Company has also reflected amounts paid to repurchase the joint venture
partner's interest in the operations of joint venture residences as a
reduction of the loan balance for the amount of reimbursed losses on those
residences, with the excess recorded as interest and other expense.
Interest was calculated based on the average loan balance using an imputed
20% interest rate, and other expense was calculated based on a $10,000
administrative fee per residence. During the first quarter of 1999, the
Company negotiated with the joint venture partner to acquire, for $3.8
million, all of such partner's remaining interests in the operations of the
remaining 17 residences entered into under joint venture agreements through
the third quarter of 1998. The Company was not reimbursed for any start-up
losses, nor has the Company entered into any new joint venture agreements
with respect to the operation of start-up residences, subsequent to the
third quarter of 1998.
Statement of Operations. Reflects a decrease in other income and an
increase in interest and other expenses resulting from the treatment of
loss reimbursements as loans rather than other income.
Balance Sheet. Reflects an increase in accrued liabilities to reflect cash
received as loss reimbursements as loans rather than other income. Other
current assets decrease as a result of eliminating an account receivable
from the joint venture partner for unfunded losses.
(H) Commencing in the fourth quarter of 1997, the Company contracted with
Supportive Housing Services, Inc. ("SHS") to provide services to the
Company for market feasibility analysis, site pre-acquisition services and
construction management oversight in conjunction with the Company's
development activities. The Company paid $480,000 and $2.7 million during
the fourth quarter of 1997 and for the nine months ended September 30,
1998, respectively, for such development services. The Company capitalized
such payments as construction in process. In addition, the Company and SHS
entered into a consulting agreement whereby the Company agreed to provide
SHS consulting services in the assisted living industry, including
providing data on the Company's facility prototypes, facilitating the
introduction to other potential customers and providing market analysis on
the assisted living industry. The Company received fees from SHS of
$195,000 during the fourth quarter of 1997 and $906,000 during the year
ended December 31, 1998. The Company recorded a portion of these fees as a
reduction of residence operating expenses or corporate, general and
administrative expenses, and recognized a portion of these fees as
revenues or other income. As a result of the restatement, the Company has
recorded the fees received from SHS as a reduction of construction in
process.
Statement of Operations. Reflects a reduction in revenue resulting from the
change in the accounting treatment for fees received from SHS as described
above.
Balance Sheet. Reflects a decrease in construction in process resulting
from the change in the accounting treatment for fees received from SHS as
described above.
(I) As a result of the restatement, the Company has reversed previously
reported tax expense, accrued taxes, certain tax benefits for stock
options exercised, and has recorded a receivable for taxes paid, which
taxes are refundable. Furthermore, certain franchise taxes have been
reclassified from income tax expense to residence operating expense.
Statement of Operations. Reflects a reduction of income tax expense and an
increase in residence operating costs resulting from the changes described
above.
Balance Sheet. Reflects changes in accrued taxes, additional paid in
capital and in other current assets. The increase in other current assets
reflects the refundable portion of taxes, which were previously paid. The
decrease in additional paid in capital reflects the reversal of the tax
benefit for exercise of stock options.
(J) In the fourth quarter of 1997, the Company granted 250,000 shares of
restricted common stock to certain key officers, the terms of which
provided for vesting during the fourth year through the seventh year
15
<PAGE>
following the grant date. At the time of the grant, the Company's common
stock had a fair market value of $17.00 per share. No cash consideration was
paid for such shares by the recipients. The Company recorded no compensation
expense with respect to the restricted stock during the period prior to
vesting. As a result of the restatement, the Company has recorded the
restricted stock as of the date of the grant as unearned compensation
expense in the amount of $17.00 per share, or approximately $4.3 million.
This unearned compensation expense has been reported as a separate component
of shareholders' equity to be amortized as compensation expense over the
seven year vesting period. The Company has reported this compensation
expense at a rate of $152,000 per quarter during the periods in which the
restricted stock was outstanding, and reported total compensation expense of
$912,000 from the fourth quarter of 1997 through the first quarter of 1999.
During the first and second quarters of 1999 the Company repurchased the
restricted stock from the key officers for an aggregate cost of $938,000. As
a result of the repurchase, the Company has reported additional compensation
expense in the first quarter of 1999 in the amount of $26,000 (the excess of
the purchase price over previously amortized unearned compensation expense)
and thereafter will record no compensation expense for the restricted stock
and the restricted stock will be eliminated from the Company's balance
sheet.
Statement of Operations. Reflects an increase in corporate general and
administrative expense for the compensation expense recognized as a result
of the issuance of the restricted stock.
Balance Sheet. Reflects an increase in common stock resulting from the
fourth quarter 1997 grant of approximately $4.3 million of restricted
stock, as well as the creation of unearned compensation expense in the same
amount, which is amortized over subsequent periods.
(K) During 1997, the Company recorded a vendor invoice as part of other
current assets. In the first quarter of 1998, the Company charged such
vendor invoice to residence operating expense. As a result of the
restatement, the Company has charged this invoice to residence operating
expense in the period in which it was incurred in 1997, and reversed the
charge to residence operating expense previously recorded in 1998.
Statement of Operations. Reflects the change described above.
Balance Sheet. Reflects the change described above.
(L) During the fourth quarter of 1997, the Company overstated cash equivalents
by $125,000 (which was realized in cash in the first quarter of 1998), and
understated accrued interest receivable (included in other current assets
on its balance sheet) by $50,000. As a result, the Company overstated
interest income by $75,000 on its 1997 statement of operations. During the
first quarter of 1998, the Company adjusted accrued interest receivable on
its balance sheet and reduced interest income by the amount of such
adjustment. Additionally, during the first quarter of 1998, the Company
accrued $180,000 of interest receivable. The Company recognized this
amount as a reduction in interest income over the remaining three quarters
of 1998. As a result of the restatement, the Company has reduced cash and
cash equivalents and eliminated the excess portion of interest income
recorded during the fourth quarter of 1997. The Company also eliminated
the excess interest receivable in the first quarter of 1998 and reversed
the reduction of interest income previously recorded. As such, the
reported net loss during fiscal 1997 will increase by $75,000 and the
reported net loss for fiscal year 1998 will decrease by the same amount.
Statement of Operations. Reflects the changes as discussed above.
Balance Sheet. Reflects the changes as discussed above.
(M) Certain reclassifications have been made to conform to the current
period's presentation.
(N) Not Used.
(O) Reflects an increase of amortization expense to reflect a 20 year useful
life on goodwill.
(P) These adjustments reflect the cumulative impact of the restatement of
prior periods on the balance sheet amounts.
(Q) This adjustment is the net effect on net income and accumulated deficit as
a result of the adjustments described in Notes (A) through (O).
16
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Restatement
On February 1, 1999, the Company announced that after consultation with its
independent auditors the Company would restate its financial statements for
the fiscal quarter ended June 30, 1997, the fiscal quarter ended September 30,
1997, the fiscal year ended December 31, 1997, the fiscal quarter ended March
31, 1998, the fiscal quarter ended June 30, 1998 and the fiscal quarter ended
September 30, 1998. On March 31, 1999, the Company announced that the
restatement would be more extensive than the Company had previously believed,
and might include periods prior to the second quarter of 1997, including the
fiscal year ended December 31, 1996. After further consultation with its
independent auditors the Company determined to restate its financial
statements for the fiscal year ended December 31, 1996, the fiscal year ended
December 31, 1997 and the first three fiscal quarters in the fiscal year ended
December 31, 1998.
The restatement reduced the net income for the fiscal years ended December
31, 1996 and 1997 and for the three months ended March 31, 1998 by $2.1
million, $6.7 million and $2.7 million, respectively. The cumulative effect of
the restatement reduced shareholders' equity by $11.5 million through March
31, 1998. As a result of the restatement, the Company reported net losses of
$1.9 million, $2.5 million and $784,000 for the fiscal years 1996 and 1997,
and the three months ended March 31, 1998 respectively, as compared to
previously reported net income of $149,000, $4.2 million and $1.9 million,
respectively. As a result of the restatement, the Company reported net loss
per diluted share of $0.23, $0.21 and $0.05 for the fiscal years 1996 and 1997
and the three months ended March 31, 1998, respectively, compared to
previously reported net income of $0.03, $0.34 and $0.12 per diluted share,
respectively. After the restatement, the Company's cash position as of
December 31, 1996 and 1997 and as of March 31, 1998 was $2.1 million, $63.3
million and $29.7 million, respectively, as compared to $2.1 million, $63.4
million and $29.9 million, respectively, as previously reported. In addition,
the Company's working capital position on a restated basis as of December 31,
1996 and 1997 and as of March 31, 1998 was negative $27.1 million, positive
$40.1 million and positive $12.2 million, respectively, as compared to
previously reported working capital of negative $26.4 million, positive $41.0
million and positive $13.9 million, respectively.
The restatement of the financial data included in this report resulted
primarily from: (i) the earlier recognition of certain expenses which were
previously capitalized in association with the Company's development and
financing activities; (ii) a modification in how the Company accounted for
certain lease arrangements; (iii) a modification in how the Company accounted
for certain of its acquisitions and its joint venture arrangements; (iv) the
capitalization of fees received by the Company previously recognized as either
a reduction of expenses or as other income; and (v) elimination of certain
accrued expenses previously recorded pursuant to a change in accounting
principle.
For statement of operations and balance sheet data, as originally reported
and as restated as of and for the three months ended March 31, 1998, as well
as a description of the adjustments to the originally reported data resulting
from the restatement, see Note 7 to the unaudited consolidated financial
statements included in Item 1 of this report.
Overview
At the closing of the initial public offering in November, 1994, the Company
began operating five assisted living residences located in Oregon. As of March
31, 1998, the Company had received a Certificate of Occupancy on 145
residences (5,460 units) of which 122 residences (4,540 units) were included
in the Company's operating results.
The Company derives its revenues primarily from resident fees for the
delivery of assisted living services. Resident fees typically are paid monthly
by residents, their families, state Medicaid agencies or other responsible
parties. Resident fees include revenue derived from a multi-tiered rate
structure, which varies based on the level of care required. Resident fees are
recognized as revenues when services are provided. Operating expenses
17
<PAGE>
include (i) residence operating expenses, such as staff payroll, food,
property taxes, utilities, insurance and other direct residence operating
expenses, (ii) general and administrative expenses consisting of corporate and
support function such as legal, accounting and other administrative expenses,
(iii) building rentals and (iv) depreciation and amortization.
The Company previously capitalized the operating results of certain start-up
residences for approximately the first two months of operations. As a result
of the restatement, residences are included in operating results as of the
first day of the month following licensure. Accordingly, the number of
Stabilized and Start-up Residences (as defined below) at the beginning of each
period, and the operating results of Stabilized and Start-up Residences in
each period, have been restated. See footnote (A) to Note 7 of the
consolidated financial statements included in Item 1.
The following table sets forth, for the periods presented the number of
residences and units included in operating results, and the average occupancy
rates and sources of revenue for the Company. The portion of revenues received
from state Medicaid agencies are labeled as "Medicaid State Portion" while the
portion of the Company's revenues that a Medicaid-eligible resident must pay
out of his or her own resources is labeled "Medicaid Resident Portion".
Stabilized Residences are defined as those residences which were operating for
more than twelve months prior to the beginning of the period or had achieved a
95% occupancy rate as of the beginning of the reporting period. Start-up
Residences are defined as those residences, which were operating for less than
twelve months prior to the beginning of the period or had not achieved a 95%
occupancy rate as of the beginning of the reporting period.
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1998
---------------------------
Stabilized Start-up
Total Residences Residences Residences Total
- ---------------- ---------- ---------- -----
<S> <C> <C> <C>
Residences operated (end of period)................ 63 59 122
Units operated (end of period)..................... 2,276 2,264 4,540
Average occupancy rate............................. 92.9% 47.7% 71.7%
Sources of revenue:
Medicaid state portion........................... 13.2% 9.0% 10.6%
Medicaid resident portion........................ 7.6% 4.3% 5.9%
Private.......................................... 79.2% 86.7% 83.5%
----- ----- -----
Total.......................................... 100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
Results of Operations
Three months ended March 31, 1998 compared to three months ended March 31,
1997
The Company had a net loss of $784,000, or $0.05 per basic and diluted
share, on revenue of $18.8 million for the three months ended March 31, 1998
as compared to net income of $31,000, or $0.00 per basic and diluted share, on
revenues of $9.5 million for the three months ended March 31, 1997.
The Company had certificates of occupancy for 145 residences, 122 of which
were included in the operating results as of March 31, 1998 as compared to 85
residences with certificates of occupancy, 70 of which were included in the
operating results as of March 31, 1997. Of the residences included in the
operating results as of March 31, 1998, the Company owned 54 residences and
leased 68 residences (52 of which were operating leases and 16 which are
accounted for as financings) as compared to 27 owned residences and 43 leased
residences (34 of which were operating leases and nine which are accounted for
as financings) as of March 31, 1997.
Revenue. Revenue was $18.8 million for the three months ended March 31, 1998
as compared to $9.5 million for the three months ended March 31, 1997, an
increase of $9.3 million. This increase was primarily due to the opening of an
additional 52 residences (2,036 units) since March 31, 1997.
18
<PAGE>
Residence Operating Expenses. Residence operating expenses were $11.4
million for the three months ended March 31, 1998 as compared to $5.9 million
for the three months ended March 31, 1997, an increase of $5.5 million. The
increase was primarily due to the opening of an additional 52 residences
(2,036 units) since March 31, 1997.
Corporate General and Administrative. Corporate general and administrative
expenses were $1.6 million for the three months ended March 31, 1998 as
compared to $793,000 for the three months ended March 31, 1997. The Company's
corporate general and administrative expenses before capitalized payroll costs
were $2.2 million for the three months ended March 31, 1998 as compared to
$1.3 million for the three months ended March 31, 1997, an increase of
$867,000. This increase results from an additional investment in the Company's
corporate and regional infrastructure to support the development and operation
of new residences including the expansion into new states. The Company
capitalized $576,000 of payroll costs for the three months ended March 31,
1998 as compared to $493,000 for the three months ended March 31, 1997
resulting from the Company's on-going development activities.
Building Rentals. Building rentals were $3.2 million for the three months
ended March 31, 1998 as compared to $1.3 million for the three months ended
March 31, 1997, an increase of $1.9 million. This increase is due to the 18
operating leases entered into subsequent to March 31, 1997. As of March 31,
1998 the Company had 52 operating leases as compared to 34 operating leases as
of March 31, 1997.
Depreciation and Amortization. Depreciation and amortization was $1.2
million for the three months ended March 31, 1998 as compared to $652,000 for
the three months ended March 31, 1997, an increase of $545,000. The increase
in depreciation is the result of additional owned residences due to the
Company's increased emphasis on asset ownership. As of March 31, 1998, the
Company owned 54 residences as compared to 27 residences as of March 31, 1997.
Depreciation expense also included depreciation associated with sale and
leaseback transactions completed during fiscal years 1996 and 1997 which were
accounted for as financings. Amortization expense decreased as a result of the
impact of the adoption of SOP 98-5 as of January 1, 1998 which requires the
Company to expense start-up costs as they are incurred. Prior to the adoption
of SOP 98-5, the Company's policy was to defer certain start-up costs
associated with opening new residences and amortize them over the first twelve
months of the residence's operations.
Interest Expense. Interest expense was $1.1 million for the three months
ended March 31, 1998 as compared $694,000 for the three months ended March 31,
1997. Gross interest expense for the three months ended March 31, 1998 was
$3.1 compared to $2.0 million for the three months ended March 31, 1997, an
increase of $1.1 million. The increase is due primarily to interest expense
incurred during the three months ended March 31, 1998 of $1.5 million on the
6.0% Debentures due 2005 issued in October, 1997, an increase of $380,000 of
interest on the 16 sale and leaseback transactions accounted for as
financings, seven of which were entered into subsequent to March 31, 1997,
$144,000 of interest incurred on loans pursuant to the Company's joint venture
agreements, an increase of $65,000 on State of Idaho Housing and Finance
Association loans completed subsequent to March 31, 1997, combined with a
decrease of interest incurred on construction bridge loans of $1.0 million.
The Company capitalized $2.0 million and $1.3 million of interest expense for
the three months ended March 31, 1998 and 1997, respectively.
Interest Income. Interest income was $595,000 for the three months ended
March 31, 1998 as compared to $123,000 for the three months ended March 31,
1997, an increase of $472,000. The increase is due to higher cash balances
available to invest.
Loss on Sale of Assets. Loss on sale of assets was $209,000 for the three
months ended March 31, 1998 as compared to $203,000 for the three months ended
March 31, 1997. This increase was due to losses incurred in connection with
the one sale and leaseback transaction entered into during the three months
ended March 31, 1998 and due to additional capital costs incurred during the
three months ended March 31, 1998 on transactions completed in 1997. The
Company entered into one sale and leaseback transaction during the three
months ended March 31, 1998 as compared to no such transactions during the
three months ended March 31, 1997.
19
<PAGE>
Net Income (Loss). As a result of the above, net loss was $784,000 or $0.05
per basic and diluted share for the three months ended March 31, 1998,
compared to net income of $31,000, or $0.00 per basic and diluted share for
the three months ended March 31, 1997.
Liquidity and Capital Resources
The following table sets forth certain data from the statement of cash flows
as reported and as restated as a result of the adjustments discussed in Note 7
to the financial statements for the three months ended March 31, 1998 (in
thousands).
<TABLE>
<CAPTION>
As Previously As
Reported(/1/) Restated
------------- --------
<S> <C> <C>
Net cash provided by operating activities.......... $ 1,941 $ 2,339
Net cash used in investing activities.............. (29,621) (36,018)
Net cash (used in) provided by financing
activities........................................ (5,829) 133
-------- --------
Net decrease in cash and cash equivalents........ $(33,509) $(33,546)
======== ========
</TABLE>
- --------
(1) Reflects certain reclassifications to conform to the presentation in the
current year's consolidated statement of cash flows. Amounts as previously
reported do not reflect the adoption of SOP 98-5, which is reflected in
amounts as restated. SOP 98-5 was adopted during the second quarter of
1998 effective as of January 1, 1998.
As a result of the restatement, the Company's cash position as of December
31, 1996 and 1997 and as of March 31, 1998 was $2.1 million, $63.3 million and
$29.7 million, respectively, as compared to $2.1 million, $63.4 million and
$29.9 million, respectively, as previously reported. The Company's working
capital position on a restated basis as of December 31, 1996 and 1997 and as
of March 31, 1998 was negative $27.1 million, positive $40.1 million and
positive $12.2 million, respectively, as compared to previously reported
working capital of negative $26.4 million, positive $41.0 million and positive
$13.9 million, respectively. Net cash provided by operating activities
increased by $398,000. Net cash used in investing activities increased by $6.4
million and net cash used by financing activities decreased by $6.0 million,
primarily as a result of the reclassification of change in construction
payables to a non-cash disclosure (See Supplemental disclosure of cash flow
information).
At March 31, 1998, the Company had positive working capital of approximately
of $12.2 million including liabilities for construction payables. Exclusive of
these, working capital was $24.8 million.
Net cash provided by operating activities was approximately $2.3 million
during the three month period ended March 31, 1998.
Net cash used in investing activities totaled $36.0 million during the three
month period ended March 31, 1998. The primary use of cash was $37.6 million
related to the development of new assisted living residences. During the first
quarter of 1998 the Company converted $2.2 million of construction financing
to a long-term operating lease through a sale and leaseback transaction
completed with respect to one residence.
Net cash provided by financing activities totaled $133,000 during the three
month period ended March 31, 1998. The source of funds was primarily from
$488,000 of proceeds received from the issuance of common stock.
As of March 31, 1998, the Company had invested excess cash balances in
short-term certificates of deposit and U.S. Treasury securities.
20
<PAGE>
PART II
Other Information
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, 1998.
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 W. Cruckshank
By: _________________________________
Name: James W. Cruckshank
Title: Vice President and Chief
Financial Officer
September 23, 1999 /s/ M. Catherine Maloney
By: _________________________________
Name: M. Catherine Maloney
Title: Vice President/Controller
and Chief Accounting Officer
22
<PAGE>
EXHIBIT 12
Ratio of Earnings to Fixed Charges:
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------
March 31, 1997 March 31, 1998
-------------- --------------
(in thousands)
<S> <C> <C>
Net income before provision for income taxes and
cumulative effect of change in accounting
principle....................................... $ 31 $ 739
Add fixed charges
Interest costs including amortization of debt
issuance cost................................. 694 1,062
------ ------
Earnings......................................... $ 725 $1,801
====== ======
Fixed Charges
Interest expense including amortization of debt
issuance cost................................. $ 694 $1,062
Capitalized interest........................... 1,334 2,060
------ ------
Total Fixed Charges.............................. 2,028 3,122
====== ======
Ratio of Earnings to Fixed Charges............... .36 .58
====== ======
Deficiency of Earnings to Cover Fixed Charges.... $1,303 $1,321
====== ======
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q/A
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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 29,723
<SECURITIES> 0
<RECEIVABLES> 3,218
<ALLOWANCES> 79
<INVENTORY> 0
<CURRENT-ASSETS> 39,410
<PP&E> 261,722
<DEPRECIATION> 4,319
<TOTAL-ASSETS> 319,624
<CURRENT-LIABILITIES> 27,244
<BONDS> 157,686
0
0
<COMMON> 157
<OTHER-SE> 131,943
<TOTAL-LIABILITY-AND-EQUITY> 319,624
<SALES> 18,773
<TOTAL-REVENUES> 18,773
<CGS> 11,418
<TOTAL-COSTS> 17,365
<OTHER-EXPENSES> (7)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,062
<INCOME-PRETAX> 739
<INCOME-TAX> 0
<INCOME-CONTINUING> 739
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (1,523)
<NET-INCOME> (784)
<EPS-BASIC> (.05)
<EPS-DILUTED> (.05)
</TABLE>
