<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20459
FORM 10-Q/A
(Mark One)
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 12 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition period from to
Commission file number 1-13498
ASSISTED LIVING CONCEPTS, INC.
(Exact name of registrant as specified in its charter)
Nevada 93-1148702
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
11835 N.E. Glenn Widing Drive, Building E
Portland, Oregon 97220-9057
(Address of 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 17,388,695 shares of common stock, $.01 par value,
outstanding at October 31, 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- and nine-month periods ended September 30, 1998 and
other information relating to such restated consolidated financial statements,
including Management's Discussion and Analysis of Financial Condition and
Results of Operations (Item 2). Information regarding the effect of the
restatement on the Company's results of operations for the three and nine
months ended September 30, 1998 is included in Item 2 of this amendment and in
Note 10 to the consolidated financial statements included in Item 1 of this
amendment.
Since February 1, 1999 12 separate complaints, which have since been
consolidated into one action, have been filed against the Company and certain
of its officers and directors in the United States District Court for the
District of Oregon. On July 23, 1999, a consolidated complaint was filed in
connection with this litigation. The consolidated complaint purports to be
brought on behalf of a class of purchasers of the Company's common stock from
July 28, 1997 through March 31, 1999 and on behalf of a class of purchasers of
its 6.0% Convertible Subordinated Debentures (the "6.0% Debentures") and
5.625% Convertible Subordinated Debentures (the "5.625% Debentures" and,
together with the 6.0% Debentures, the "Debentures") from the date of issuance
through March 31, 1999. The consolidated complaint alleges violations of the
federal securities laws and seeks unspecified damages. It also names as
additional defendants certain of the Company's directors that were not named
previously, as well as the Company's independent auditors (solely in
connection with the Company's 1998 offering of 5.625% Debentures) and the
underwriters in connection with the Company's 1997 offering of 6.0%
Debentures.
Except for Items 1, 2 and 6, no other information included in the original
report on Form 10-Q is amended by this amendment. For additional information
regarding the restatement, please see the Company's reports on Form 8-K filed
on February 1, 1999 and March 31, 1999. For additional information regarding
the litigation described in the preceding paragraph, please see the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1998. For
current information regarding risks, uncertainties and other factors that may
affect the Company's future performance, please see the "Risk Factors"
included in Item 7 of the Company's Annual Report on Form 10-K for the year
ended December 31, 1998.
2
<PAGE>
ASSISTED LIVING CONCEPTS, INC.
FORM 10-Q/A
September 30, 1998
INDEX
PART I--FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets as of December 31, 1997 and
September 30, 1998............................................. 4
Consolidated Statements of Operations for the three and nine
months ended September 30, 1997 and September 30, 1998........ 5
Consolidated Statements of Cash Flows for the nine months ended
September 30, 1997 and September 30, 1998..................... 6
Notes to Condensed Consolidated Financial Statements .......... 7-17
Management's Discussion and Analysis of Financial Condition and
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 18-24
PART II--OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................... 25
</TABLE>
3
<PAGE>
PART 1
ITEM 1--FINANCIAL INFORMATION
ASSISTED LIVING CONCEPTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
September, 1998
December 31, (Unaudited)
1997 As Restated (Note 10)
------------ ---------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................. $ 63,269 $ 79,611
Funds held in trust....................... 1,956 --
Accounts receivable....................... 2,185 5,096
Prepaid expense........................... 904 --
Other current assets...................... 3,579 8,582
-------- --------
Total current assets.................... 71,893 93,289
-------- --------
Property and equipment...................... 131,623 247,984
Construction in process..................... 102,025 66,699
-------- --------
Total property and equipment.............. 233,648 314,683
Less accumulated depreciation............. 3,370 7,284
-------- --------
Property and equipment-net................ 230,278 307,399
Goodwill.................................... 12,447 4,962
Other assets................................ 9,749 11,870
-------- --------
Total assets............................ $324,367 $417,520
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses..... $ 8,258 $ 19,527
Construction payables..................... 18,883 6,840
Other current liabilities................. 2,368 2,810
Construction financing.................... 2,150 --
Current portion of long-term debt......... 172 1,127
-------- --------
Total current liabilities............... 31,831 30,304
-------- --------
Other liabilities........................... 2,592 2,880
Convertible subordinated debentures......... 100,165 161,250
Long-term debt.............................. 57,535 96,736
-------- --------
Total liabilities....................... 192,123 291,170
-------- --------
Commitments and Contingencies
Shareholders' equity:
Preferred Stock, $.01 par value; 1,000,000
shares authorized; none issued and
outstanding.............................. -- --
Common Stock, $.01 par value; 40,000,000
shares authorized; issued and outstanding
15,646,478 and 17,346,312 shares in 1997
and 1998................................. 156 173
Additional paid-in capital................ 141,460 148,429
Unearned compensation expense............. (4,100) (3,644)
Fair market value in excess of historical
cost of acquired net assets attributable
to related party transactions............ (239) (239)
Accumulated deficit....................... (5,033) (18,369)
-------- --------
Total shareholders' equity.............. 132,244 126,350
-------- --------
Total liabilities and shareholders'
equity................................. $324,367 $417,520
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
ASSISTED LIVING CONCEPTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
1998 1998
As Restated As Restated
1997 (Note 10) 1997 (Note 10)
------- ----------- ------- -----------
<S> <C> <C> <C> <C>
Revenues............................. $12,765 $24,012 $33,352 $ 63,938
Operating expenses:
Residence operating expenses....... 8,235 15,002 20,991 39,558
Corporate general and
administrative.................... 1,115 2,436 2,690 6,049
Building rentals................... 1,604 2,857 3,573 8,459
Building rentals to related party.. 496 366 1,464 1,146
Depreciation and amortization...... 1,012 1,694 2,516 4,394
Site abandonment costs............. -- -- -- 1,001
Write-off of impaired assets and
related expenses.................. -- -- -- 8,874
------- ------- ------- --------
Total operating expenses......... 12,462 22,355 31,234 69,481
------- ------- ------- --------
Operating income (loss).............. 303 1,657 2,118 (5,543)
------- ------- ------- --------
Other (income) expense:
Interest expense................... 1,301 3,351 3,136 7,358
Interest income.................... (138) (1,287) (414) (2,887)
Loss on sale of assets............. 603 8 1,027 428
Other (income) expense............. 12 305 (113) 1,370
------- ------- ------- --------
Total other (income) expense....... 1,778 2,377 3,636 6,269
------- ------- ------- --------
Net loss before cumulative effect of
change in accounting principle...... (1,475) (720) (1,518) (11,812)
Cumulative effect of change in
accounting principle................ -- -- -- (1,523)
------- ------- ------- --------
Net loss............................. $(1,475) $ (720) $(1,518) $(13,335)
======= ======= ======= ========
Basic and diluted net loss per common
share before cumulative effect of
change in accounting principle...... $ (0.13) $ (0.04) $ (0.14) $ (0.74)
Cumulative effect of change in
accounting principle................ -- -- -- (0.10)
------- ------- ------- --------
Basic and diluted net loss per common
share............................... $ (0.13) $ (0.04) $ (0.14) $ (0.84)
======= ======= ======= ========
Basic and diluted weighted average
common shares outstanding........... 11,084 16,604 11,018 15,994
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
ASSISTED LIVING CONCEPTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------
1998
As Restated
1997 (Note 10)
------- -----------
<S> <C> <C>
Operating activities:
Net loss.................................................. $(1,518) $(13,335)
Adjustment to reconcile net loss to net cash provided by
operating activities:
Loss on sale of assets.................................. 1,027 428
Depreciation and amortization........................... 2,516 4,394
Write-off of impaired assets and related expenses....... -- 8,874
Compensation expense earned on restricted stock......... -- 456
Abandoned sites......................................... -- 1,001
Cumulative effect of change in accounting principle..... -- 1,523
Changes in assets and liabilities, excluding effects of
acquisitions:
Accounts receivable, net................................ (1,352) (2,911)
Other current assets.................................... (1,069) (4,115)
Other assets............................................ 811 10
Other liabilities....................................... 815 730
Accounts payable and accrued expenses................... 2,046 9,543
------- --------
Net cash provided by operating activities................. 3,276 6,598
------- --------
Investing activities:
Funds held in trust....................................... 6,675 1,956
Acquisitions, net of cash acquired........................ -- (8,373)
Proceeds from sale of land and residences................. 39,018 8,293
Purchases of property and equipment....................... (94,668) (97,706)
------- --------
Net cash used in investing activities..................... (48,975) (95,830)
------- --------
Financing activities:
Proceeds from short-term construction borrowings expected
to be refinanced ........................................ 43,210 --
Repayments of construction financing...................... (15,370) --
Proceeds from long-term debt.............................. 21,858 40,306
Payments on long-term debt................................ (83) (150)
Proceeds from issuance of common stock.................... 268 641
Proceeds from issuance of convertible subordinated
debentures............................................... -- 75,000
Purchase of common stock.................................. -- (7,062)
Debt issuance costs of long-term debt..................... (1,702) (3,161)
------- --------
Net cash provided by financing activities................. 48,181 105,574
------- --------
Net increase in cash and cash equivalents................. 2,482 16,342
Cash and cash equivalents, beginning of period............ 2,105 63,269
------- --------
Cash and cash equivalents, end of period.................. $ 4,587 $ 79,611
======= ========
Supplemental disclosure of cash flow information:
Cash payments for interest.............................. $ 2,656 $ 5,527
Cash payments for income taxes.......................... -- 1,438
Extinguishment of construction financing with sale
leaseback transaction.................................. -- 2,150
Increase (decrease) in construction payables............ 4,749 (12,043)
Conversion of subordinated debentures (net of $509 of
unamortized financing costs)........................... -- 13,406
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. 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 September 30, 1998, the Company had received certificates of occupancy for
170 residences of which 154 were included in operating results.
Basis of Presentation
These consolidated financial statements have been prepared without audit,
pursuant to the rules and regulations of the Securities and Exchange
Commission. The accompanying consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries that manage, own and
develop assisted living residences and provide ancillary services such as home
health, hospice and durable medical equipment. The consolidated financial
statements also include residences the Company owns or leases but are operated
through joint venture agreements. All significant intercompany accounts and
transactions have been eliminated in consolidation. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed
or omitted pursuant to such rules and regulations. These consolidated
financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto included in the Company's
annual report on Form 10-K/A for the year ended December 31, 1997.
The financial information included herein reflects all adjustments
(consisting of normal recurring adjustments with the exception of the
cumulative effect of the change in accounting principle, site abandonment
costs, and the write-off of impaired assets and related expenses) which are,
in the opinion of management, necessary for a fair presentation of the results
for interim periods. The results of operations for the three month and nine
month periods ended September 30, 1997 and 1998 (as restated), respectively,
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, September 30,
1997 1998
------------ -------------
<S> <C> <C>
Land............................................ $ 7,924 $ 15,761
Buildings and improvements...................... 119,649 223,785
Equipment....................................... 1,419 2,449
Furniture....................................... 2,631 5,989
-------- --------
Property and Equipment.......................... 131,623 247,984
Construction in process......................... 102,025 66,699
-------- --------
Total property and equipment.................. 233,648 314,683
Less accumulated depreciation................... 3,370 7,284
-------- --------
Property and equipment, net................... $230,278 $307,399
======== ========
</TABLE>
As a result of the Company's decision to reduce the number of new residence
openings during the year ended December 31, 1999 and beyond, the Company
wrote-off $1.0 million of capitalized costs during the three months ended June
30, 1998 relating to the abandonment of 11 development sites and other
miscellaneous development costs.
7
<PAGE>
During the three and nine months ended September 30, 1998, the Company
capitalized interest costs of $1.3 million, and $4.8 million, respectively,
relating to financing of construction in process. In addition, the Company
capitalized payroll costs that are directly related to the construction and
development of the residences of $445,000 and $1.5 million for the three and
nine months ended September 30, 1998, respectively.
As of September 30, 1998, the Company had begun construction on 12
residences (477 units) ($35.8 million). Construction in process also includes
16 residences (633 units) ($27.9 million) that have received a certificate of
occupancy, but are pending licensure. As of September 30, 1998, the Company
had also entered into agreements pursuant to which it may purchase, subject to
completion of due diligence and various other conditions, 22 additional sites.
The Company has capitalized $2.4 million of direct costs in conjunction with
the due diligence associated with these 22 sites (776 units). The remaining
costs are associated with site selection and pre-acquisition activity.
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
Leaseback Sale and Units
Number of Residences Leaseback under
Leased Accounted Total Residences Leases
Residences for as Number of Accounted Units under Accounted
("Oregon Operating Operating for as Operating for as
Leases") Leases Leases 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
Leases entered into in
1997................... 2 24 26 7 1,025 247
--- --- --- --- ----- ---
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
Leases entered into in
Second Quarter 1998.... -- 1 1 -- 35 --
--- --- --- --- ----- ---
Leases at June 30,
1998................... 7 46 53 16 1,977 563
Leases entered into in
Third Quarter 1998..... -- 2 2 -- 78 --
--- --- --- --- ----- ---
Leases at September 30,
1998................... 7 48 55 16 2,055 563
=== === === === ===== ===
</TABLE>
During the three months ended September 30, 1998, the Company completed the
sale of two residences located in South Carolina under sale and leaseback
arrangements. The Company sold the residences for approximately $5.3 million
and leased them back over initial terms of 15 years. The residences were
leased back at initial annual lease rates of approximately $451,000.
During the three months ended September 30, 1998, the Company terminated one
lease effective October 1, 1998.
The Company recognized losses of $8,000 on the above sale and leaseback
transactions for the three months ended September 30, 1998. Gains on sale and
leaseback transactions of approximately $425,000 for the three months ended
September 30, 1998, have been recorded as deferred income and are being
amortized over the initial terms of the corresponding leases.
8
<PAGE>
4. Convertible Subordinated Debentures
Effective August 3, 1998, the Company called for redemption all of its 7.0%
Convertible Subordinated Debentures Due 2005. All debentures were converted at
a price of $7.50 per share, resulting in the issuance of 1,855,334 shares of
common stock.
5. Stock Buyback
During the nine months ended September 30, 1998, the Company purchased
529,000 shares of its common stock for a total purchase price of approximately
$7.0 million in accordance with a stock repurchase plan initiated in May,
1998. As of November 12, 1998, all shares purchased by the Company have been
reissued in accordance with such plan.
6. Long-term Debt
During the three months ended September 30, 1998, the Company closed on
$12.7 million of tax exempt financing and $530,000 of taxable bond financing,
secured by seven residences in the state of Ohio, at an all inclusive variable
rate of approximately 5% and obtained mortgage financing for three Oregon
properties in the amount of $6.6 million at a fixed rate of 7.6%. In addition,
in September, 1998 the Company closed on $5.9 million of mortgage financing
for one property in South Carolina and one property in Pennsylvania at an
interest rate of approximately 8.8%.
7. 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. During the period the swap
was outstanding, the Company completed $21.2 million of financing under the
mortgage commitment. The Company elected to terminate the swap before its
effective date and paid $1.9 million in connection with settling the swap,
recording $1.6 million of such expense as deferred financing costs relating to
the $21.2 million of financing completed during the term of the swap, and the
remaining $293,000 (relating to the unutilized portion of the swap) as other
expense during the third quarter of 1998.
8. Write-off of Impaired Assets and Related Expenses
In June 1998, the Company announced a plan to exit all home health business
operations being conducted by Pacesetter Home Health Care, Inc.
("Pacesetter"). The decision to exit Pacesetter's operations was a result of
certain laws becoming effective that adversely affect the prospective payment
system for home health care services. The Company recorded a $8.9 million
charge to earnings in the second quarter of 1998. Such charge consisted of (i)
a $7.5 million write-off of all unamortized goodwill incurred in connection
with the purchase of Home and Community Care, Inc. ("HCI") in October 1997 and
(ii) a $1.4 million provision for estimated exit costs expected to be incurred
during the HCI phase out period. Of this $1.4 million provision, $560,000
related to severance, salaries and benefits incremental to the shut down
effort; $720,000 related to leases, equipment and related costs of closing
offices; and $150,000 related to travel and moving costs. As of September 30,
1998, approximately $130,000 of this accrual had been utilized. The Company
expects the phase out period to conclude during 1999.
9. Change in Accounting Principle
On April 3, 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, Reporting on the Costs of Start-up
Activities (SOP 98-5). The Company adopted SOP 98-5 effective as of January 1,
1998. The impact of this change in accounting principle on the Company relates
to the treatment of pre-opening costs associated with newly-developed
residences. SOP 98-5 requires that these costs be expensed as incurred
compared to the Company's previous policy to capitalize these costs prior to
the commencement of residence operations, amortizing them over a twelve-month
period.
9
<PAGE>
10. Restatement
On February 1, 1999, the Company announced that after consultation with its
independent auditors the Company would restate its financial statements for
the fiscal quarter ended June 30, 1997, the fiscal quarter ended September 30,
1997, the fiscal year ended December 31, 1997, the fiscal quarter ended March
31, 1998, the fiscal quarter ended June 30, 1998 and the fiscal quarter ended
September 30, 1998. On March 31, 1998, the Company announced that the
restatement would be more extensive than the Company had previously believed,
and might include periods prior to the second quarter of 1997, including the
fiscal year ended December 31, 1996. After further consultation with its
independent auditors, the Company determined to restate its consolidated
financial statements for the fiscal year ended December 31, 1996, the fiscal
year ended December 31, 1997, and the first three fiscal quarters of the
fiscal year ended December 31, 1998.
The restatement reduced the net income for the fiscal years ended December
31, 1996 and 1997 and the nine months ended September 31, 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 31, 1998. As a result of the restatement, the Company 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 31, 1998, respectively, as
compared to previously reported net income of $149,000, $4.2 million, and a
net loss of $2.4 million, respectively. As a result of the restatement, the
Company 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. After the restatement,
the Company's cash position 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. In addition, the Company's working
capital position on a restated basis as of December 31, 1996 and 1997 and as
of September 31, 1998 was 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 of the financial data included in this report resulted
primarily from: (i) the earlier recognition of certain expenses which were
previously capitalized in association with the Company's development and
financing activities; (ii) a modification in how the Company accounted for
certain lease arrangements; (iii) a modification in how the Company accounted
for certain of its acquisitions and its joint venture arrangements; (iv) the
capitalization of fees received by the Company previously recognized as either
a reduction of expenses or as other income; (v) the elimination of an
impairment write-down that the Company had previously recorded on three of its
residences; (vi) elimination of certain accrued expenses previously recorded
pursuant to a change in accounting principle; and (vii) the increase in
goodwill written-off in the second quarter of 1998 relating to exiting the
Company's home health operation.
The following table sets forth statement of operations and balance sheet
data, as originally reported and as restated, as of and for the three and nine
months ended September 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 September
30, 1998 balance sheet is affected by changes that resulted from the
restatement of fiscal year 1996 and 1997 financial statements (which
cumulative adjustments are set forth in the balance sheet under the heading
"Cumulative Adjustments resulting from Prior Restatements") and by adjustments
in the nine months ended September 30, 1998 (which adjustments are set forth
in the balance sheet under the heading "Adjustments for Nine Months Ended
September 30, 1998").
10
<PAGE>
STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1998 September 30, 1998
------------------------------------ ------------------------------------
As Previously As As Previously As
Reported Adjustment Restated Reported Adjustment Restated
------------- ---------- -------- ------------- ---------- --------
(in thousands except per share data)
<S> <C> <C> <C> <C> <C> <C>
Revenues................ $24,162 $ (150)(H) $24,012 $64,458 $ (520)(H) $ 63,938
Operating Expenses:
Residence operating
expenses.............. 15,002 -- 15,002 39,727 (169)(K) 39,558
Corporate general and
administrative........ 1,629 305 (B) 2,436 4,077 720 (B) 6,049
150 (H) 250 (H)
152 (J) 456 (J)
200 (P) 146 (A)
200 (O)
200 (P)
Building rentals....... 3,628 (843)(C) 2,857 10,688 (2,529)(C) 8,459
118 (D) 358 (D)
(46)(E) (108)(E)
50 (M)
Building rentals to
related party......... 341 25 (D) 366 1,120 76 (D) 1,146
(50)(M)
Depreciation and
amortization.......... 1,557 (6)(A) 1,694 3,646 101 (A) 4,394
191 (C) 569 (C)
(27)(G) (27)(G)
(21)(O) 105 (O)
Site abandonment
costs................. -- -- -- 1,001 (O) 1,001
Write-off of impaired
assets................ -- -- 8,495 379 (O) 8,874
------- ------- ------- ------- -------- --------
Total operating
expenses.............. 22,157 198 22,355 67,753 1,728 69,481
------- ------- ------- ------- -------- --------
Operating income
(loss).............. 2,005 (348) 1,657 (3,295) (2,248) (5,543)
Other (income) expense:
Interest expense....... 723 843 (C) 3,351 1,376 2,529 (C) 7,358
2 (E) 22 (E)
1,658 (F) 3,098 (F)
125 (G) 333 (G)
Interest income........ (1,227) (60)(L) (1,287) (2,872) (15)(L) (2,887)
Loss on sale of
assets................ -- 8 (E) 8 -- 428 (E) 428
Other (income)
expense............... (1,881) 1,893 (G) 305 (4,685) 4,762 (G) 1,370
293 (N) 1,000 (O)
293 (N)
------- ------- ------- ------- -------- --------
Total other (income)
expense............. (2,385) 4,762 2,377 (6,181) 12,450 6,269
------- ------- ------- ------- -------- --------
Income (loss) before
income taxes........... 4,390 (5,110) (720) 2,886 (14,698) (11,812)
Provision for income
taxes.................. 1,668 (1,668)(I) -- 2,477 (2,477)(I) --
------- ------- ------- ------- -------- --------
Net income (loss) before
cumulative effect of
change in accounting
principle.............. 2,722 (3,442) (720) 409 (12,221) (11,812)
Cumulative effect of
change in accounting
principle.............. -- -- -- (2,770) 1,247 (A) (1,523)
------- ------- ------- ------- -------- --------
Net income (loss)....... $ 2,722 $(3,442)(R) $ (720) $(2,361) $(10,974)(R) $(13,335)
======= ======= ======= ======= ======== ========
Basic and diluted net
income (loss) per
common share:
Net income (loss)
before cumulative
effect of change in
accounting
principle............. $ 0.16 $ (0.04) $ 0.02 $ (0.74)
Cumulative effect of
change in accounting
principle............. -- -- (0.16) (.10)
------- ------- ------- --------
Basic and diluted net
income (loss) per
share................. $ 0.16 $ (0.04) $ (0.14) $ (0.84)
======= ======= ======= ========
Weighted average common
shares outstanding
Basic................. 17,274 16,604 (1) 17,435 15,994 (1)
Diluted............... 17,555 16,604 (1) 17,435 15,994 (1)
</TABLE>
- --------
(1) Reflects a recalculation of weighted average common shares outstanding.
11
<PAGE>
BALANCE SHEET DATA
<TABLE>
<CAPTION>
As of September 30, 1998
----------------------------------------------------------
Cumulative Adjustments
Adjustments for Nine
Resulting Months Ended
As Previously from Prior September 30,
Reported Restatements (Q) 1998 As Restated
------------- ---------------- ------------- -----------
(in thousands)
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash
equivalents........... $ 79,773 $ (125) $ (162)(A) $ 79,611
125 (L)
Funds held in trust.... 238 -- (238)(M) --
Accounts receivable.... 5,096 -- -- 5,096
Other current assets... 7,182 (21) 505 (A) 8,582
(713)(G)
169 (K)
1,332 (I)
238 (M)
(110)(L)
-------- ------- -------- --------
Total Current Assets... 92,289 (146) 1,146 93,289
-------- ------- -------- --------
Property and Equipment.. 216,112 30,872 1,000 (O) 247,984
Construction in
process................ 72,011 (1,770) 1,046 (A) 66,699
(720)(B)
(3,098)(F)
(770)(H)
-------- ------- -------- --------
Total property and
equipment............. 288,123 29,102 (2,542) 314,683
Less accumulated
depreciation.......... 5,741 893 101 (A) 7,284
549 (C)
-------- ------- -------- --------
Property and equipment-
net................... 282,382 28,209 (3,192) 307,399
-------- ------- -------- --------
Goodwill................ 9,597 (950) (3,685)(O) 4,962
Other assets............ 16,421 (1,051) (521)(A) 11,870
(20)(C)
(342)(E)
(2,324)(G)
(293)(N)
-------- ------- -------- --------
Total assets........... $400,689 $26,062 $ (9,231) $417,520
======== ======= ======== ========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and
accrued expenses...... $ 20,216 $ 52 $ 333 (G) $ 19,527
(1,274)(A)
200 (P)
Construction payables.. 6,840 -- -- 6,840
Other current
liabilities........... -- 1,112 1,698 (G) 2,810
Accrued income taxes... -- (411) 411 (I)
Current portion of
long-term debt........ 1,127 -- -- 1,127
-------- ------- -------- --------
Total current
liabilities........... 28,183 753 1,368 30,304
-------- ------- -------- --------
Other Liabilities....... -- 2,592 (146)(A) 2,880
434 (D)
Long-term debt.......... 65,248 31,488 -- 96,736
Convertible subordinated
debentures............. 161,250 -- -- 161,250
-------- ------- -------- --------
Total liabilities...... 254,681 34,833 1,656 291,170
-------- ------- -------- --------
Shareholders' equity:
Preferred Stock........ -- -- -- --
Common Stock........... 173 -- -- 173
Additional paid-in
capital............... 144,716 4,081 (368)(I) 148,429
Unearned compensation
expense............... -- (4,100) 456 (J) (3,644)
Fair market value in
excess of historical
cost of acquired net
assets attributed to
related party
transactions.......... (239) -- -- (239)
Accumulated deficit.... 1,358 (8,752) (10,975)(R) (18,369)
-------- ------- -------- --------
Shareholders' equity... 146,008 (8,771) (10,887) 126,350
-------- ------- -------- --------
Total liabilities and
shareholders' equity.. $400,689 $26,062 $ (9,231) $417,520
======== ======= ======== ========
</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
straight-line method and the actual cash rent expense paid. During fiscal
years 1997 and 1998 and during 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
13
<PAGE>
the second quarter of 1999, substantially all of these leases were amended
to restructure such rent escalators. From the date of the amendment
forward, the Company has accounted for the amended leases on a contractual
cash payment basis. The deferred liability is amortized from the date of
the applicable amendment over the remaining initial lease terms as an
offset to future rent expense.
Statement of Operations. Reflects an increase in rent expense during the
period resulting from changing the accounting treatment associated with
the rent escalators.
Balance Sheet. Reflects a deferred liability resulting from the
difference between the lease expense reported under the straight-line
method compared to the actual cash payment.
(E) The Company incurred losses from certain sale and leaseback transactions
because the Company's cost basis in the residences (which included the
capital costs associated with the development and construction of the
residences) together with capitalized costs associated with opening such
residences, exceeded the sale proceeds to the Company. Such losses were
recorded as deferred assets and amortized over the initial term of the
leases, which ranged from 15 to 20 years. The Company has determined to
eliminate the deferred assets from its consolidated balance sheet and to
recognize such losses in the period in which they were incurred. Gains
resulting from sale and leaseback transactions continue to be recorded as
deferred liabilities and amortized over the initial lease term as an
offset to future reported rent expense. Unamortized deferred financing
costs related to construction financing were previously included in the
basis of the residence for purposes of calculating gain or loss on sale
and leaseback transactions. The Company has recorded unamortized deferred
financing costs as interest expense at the time the construction
financing is repaid.
Statement of Operations. Reflects an increase in loss on sale of assets
and interest expense, and a reduction in rent expense, resulting from the
changes described above.
Balance Sheet. Reflects a decrease in other assets resulting from the
elimination of deferred losses, in conjunction with sale and leaseback
transactions.
(F) The Company capitalizes a portion of gross interest expense based upon
(i) the amount of average construction in process during the period and
(ii) the average cost of its financing. Capitalized interest is included
on the Company's balance sheet as construction in process and property
and equipment. The amount of interest capitalized is impacted by changes
to the average construction in process and changes in the costs of the
Company's financing as a result of the cumulative impact of the
adjustments in Notes (A), (B) and (C).
During fiscal year 1997 and for the nine months ended September 30, 1998,
the Company also included in its effective cost of financing a cost of
capital related to the Company's convertible debentures. As part of the
restatement, the Company has eliminated such incremental costs from its
effective financing cost calculation during this time period.
Statement of Operations. Reflects a change in interest expense resulting
from recalculating capitalized interest.
Balance Sheet. Reflects a change in construction in process resulting
from recalculating capitalized interest.
(G) During fiscal years 1997 and 1998, the Company entered into joint venture
agreements with respect to the operation of certain start-up residences
pursuant to which 90% of the operating risks and rewards related to such
residences were allocated to the joint venture partner, in which the
Company had an interest. The Company consolidated 100% of the revenues
and expenses attributable to these residences with the revenues and
expenses of the Company. The joint venture partner reimbursed the Company
for 90% of the start-up losses of the joint venture residences incurred
in the second quarter of 1997 and through the third quarter of 1998, and
the Company recognized such reimbursements as other income in its
financial statements during such quarters. The Company has determined to
restate such loss reimbursements as loans, rather than other income. The
Company has also reflected amounts paid to repurchase the joint venture
partner's interest in the operations of joint venture residences as a
reduction of the loan balance for the amount of reimbursed losses on
those residences, with the excess recorded as interest and other
14
<PAGE>
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. Other
assets decreased to reflect the elimination of an asset which, prior to
the restatement was recorded in connection with the repurchase of the
joint venture partner's interest in the operations of the joint venture.
(H) Commencing in the fourth quarter of 1997, the Company contracted with
Supportive Housing Services, Inc. ("SHS") to provide services to the
Company for market feasibility analysis, site pre-acquisition services
and construction management oversight in conjunction with the Company's
development activities. The Company paid $480,000 and $2.7 million during
the fourth quarter of 1997 and for the nine months ended September 30,
1998, respectively, for such development services. The Company
capitalized such payments as construction in process. In addition, the
Company and SHS entered into a consulting agreement whereby the Company
agreed to provide SHS consulting services in the assisted living
industry, including providing data on the Company's facility prototypes,
facilitating the introduction to other potential customers and providing
market analysis on the assisted living industry. The Company received
fees from SHS of $195,000 during the fourth quarter of 1997 and $906,000
during the year ended December 31, 1998. The Company recorded a portion
of these fees as a reduction of residence operating expenses or corporate
general and administrative expenses, and recognized a portion of these
fees as revenues or other income. As a result of the restatement, the
Company has recorded the fees received from SHS as a reduction of
construction in process.
Statement of Operations. Reflects a reduction in revenue and an increase
in corporate general and administrative expenses resulting from the
change in the accounting treatment for fees received from SHS as
described above.
Balance Sheet. Reflects a decrease in construction in process resulting
from the change in the accounting treatment for fees received from SHS as
described above.
(I) As a result of the restatement, the Company has reversed previously
reported tax expense, accrued taxes, certain tax benefits for stock
options exercised, and has recorded a receivable for taxes paid, which
taxes are refundable. 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
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
15
<PAGE>
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) During the fourth quarter 1997, the Company entered into a $50.0 million
floating rate mortgage loan commitment with a commercial lender. During
the first quarter 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 could be settled in cash on or before its
effective date of September 30, 1998. During the period the swap was
outstanding, the Company completed $21.2 million of financing under the
mortgage commitment. The Company elected to terminate the swap before its
effective date and paid $1.9 million in connection with settling the swap
and recorded all of such expense as deferred financing costs relating to
the $21.2 million of financing completed during the term of the swap. As
a result of the restatement, the Company recorded $293,000 of the $1.9
million of swap settlement costs (relating to the unutilized portion of
the swap) as other expense during the third quarter 1998.
Statement of Operations. Reflects an increase in other expense for fees
relating to the unutilized portion of the swap.
16
<PAGE>
Balance sheet. Reflects a decrease in other assets resulting from a
decrease in deferred financing costs as discussed above.
(O) In the second quarter of 1998, the Company recorded an $8.5 million
charge consisting of:
(i) a $3.9 million write-off of goodwill resulting from the Company's
exit from a home health care operation acquired in October 1997 (the
Company had recorded total goodwill of $7.7 million in connection
with its home health operations);
(ii) a $1.4 million reserve for exit costs associated with closing the
home health care operation acquired in October 1997;
(iii) a $1.2 million liability for expenses expected to be incurred in
connection with sale and leaseback commitments (the "Financing
Commitment Accrual") which the Company did not intend to utilize;
(iv) a $1.0 million write-off relating to development sites (the
"Development Site Write-off") that the Company had determined not to
develop; and
(v) a $1.0 million write-down of three impaired residences as required by
Financial Accounting Standard No. 121, Accounting for the Impairment
of Long Lived Assets and for Long Lived Assets to be Disposed of.
As a result of the restatement, the Company has written-off all of the
$7.5 million of unamortized goodwill associated with the home health care
operation and has eliminated the $1.0 million write-down relating to
three residences previously accounted for as impaired. In addition, the
Company has reclassified the Development Site Write-off to site
abandonment expense and the Financing Commitment Accrual to other expense
and general and administrative expense on the statement of operations.
Amortization expense increased to reflect a 20 year useful life on
goodwill.
Statement of Operations. Reflects a reduction in amortization expense, an
increase in write-off of impaired assets resulting in the write-off of
additional goodwill associated with exiting the home health care
operation and an increase in amortization expense to reflect a 20 year
useful life on goodwill as described above. In addition, site abandonment
expense, other expense and general and administrative expense increased
as a result of the reclassification of a portion of the charges as
described above.
Balance sheet. Reflects a reduction in goodwill resulting in the write-
off of additional goodwill associated with exiting the home health care
operation as described above.
(P) During the third quarter of 1998, the Company under-accrued corporate
payroll costs by $200,000. During the fourth quarter of 1998, the Company
adjusted for this under-accrual by increasing accrued payroll costs by
the amount of such under-accrual. As a result of the restatement, the
Company will increase accrued payroll in the third quarter of 1998 and
decrease accrued payroll in the fourth quarter of 1998 by the same
amount.
Statement of Operations. Reflects an increase in corporate general and
administrative expenses as a result of the increase in accrued payroll
during the third quarter of 1997 as described above.
Balance Sheet. Reflects an increase in accounts payable and accruals as a
result of the increase in accrued payroll during the third quarter of
1997 as described above.
(Q) These adjustments reflect the cumulative impact of the restatement of
prior periods on the balance sheet amounts.
(R) This adjustment is the net effect on net income and accumulated deficit
as a result of the adjustments described in Notes (A) through (P).
17
<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, 1998, the Company announced that the
restatement would be more extensive than the Company had previously believed,
and might include periods prior to the second quarter of 1997, including the
fiscal year ended December 31, 1996. After further consultation with its
independent auditors, the Company determined to restate its financial
statements for the fiscal year ended December 31, 1996, the fiscal year ended
December 31, 1997 and the first three fiscal quarters 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 the nine months ended September 31, 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 31, 1998. As a result of the restatement, the Company 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 31, 1998, respectively,
compared to previously reported net income of $149,000, $4.2 million, and a
net loss of $2.4 million, respectively. As a result of the restatement, the
Company 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. After the restatement,
the Company's cash position 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. In addition, the Company's working
capital position on a restated basis as of December 31, 1996 and 1997 and as
of September 31, 1998 was 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 of the financial data included in this report resulted
primarily from: (i) the earlier recognition of certain expenses which were
previously capitalized in association with the Company's development and
financing activities; (ii) a modification in how the Company accounted for
certain lease arrangements; (iii) a modification in how the Company accounted
for certain of its acquisitions and its joint venture arrangements; (iv) the
capitalization of fees received by the Company previously recognized as either
a reduction of expenses or as other income; (v) the elimination of an
impairment write-down that the Company had previously recorded on three of its
residences; (vi) elimination of certain accrued expenses previously recorded
pursuant to a change in accounting principle; and (vii) the increase in
goodwill written-off in the second quarter of 1998 relating to exiting the
Company's home health operation.
For statement of operations and balance sheet data, as originally reported
and as restated as of and for the three and nine months ended September 30,
1998, as well as a description of the adjustments to the originally reported
data resulting from the restatement, see Note 10 to the unaudited consolidated
financial statements included in Item 1 of this report.
Overview
At the closing of the initial public offering in November, 1994, the Company
began operating five assisted living residences located in Oregon. As of
September 30, 1998, the Company had received a Certificate of Occupancy on 170
residences (6,497 units) of which 154 residences (5,867 units) were included
in the Company's operating results.
The Company derives its revenues primarily from resident fees for the
delivery of assisted living services. Resident fees typically are paid monthly
by residents, their families, state Medicaid agencies or other responsible
parties. Resident fees include revenue derived from a multi-tiered rate
structure, which varies based on the level of care required. Resident fees are
recognized as revenues when services are provided. Operating expenses
18
<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 10 of the
consolidated financial statements included in Item 1.
The following table sets forth, for the periods presented the number of
residences and units included in operating results, and the average occupancy
rates and sources of revenue for the Company. The portion of revenues received
from state Medicaid agencies are labeled as "Medicaid State Portion" while the
portion of the Company's revenues that a Medicaid-eligible resident must pay
out of his or her own resources is labeled "Medicaid Resident Portion".
Stabilized Residences are defined as those residences which were operating for
more than twelve months prior to the beginning of the period or had achieved a
95% occupancy rate as of the beginning of the reporting period. Start-up
Residences are defined as those residences, which were operating for less than
twelve months prior to the beginning of the period or had not achieved a 95%
occupancy rate as of the beginning of the reporting period.
<TABLE>
<CAPTION>
Three Months Ended
September 30, 1998
---------------------------
Stabilized Start-up
Total Residences Residences Residences Total
---------------- ---------- ---------- -----
<S> <C> <C> <C>
Residences operated (end of period)........... 88 66 154
Units operated (end of period)................ 3,238 2,629 5,867
Average occupancy rate........................ 89.8% 58.2% 75.9%
Sources of revenue:
Medicaid state portion...................... 13.9% 5.0% 11.0%
Medicaid resident portion................... 7.7% 2.4% 6.0%
Private..................................... 78.4% 92.6% 83.0%
----- ----- -----
Total..................................... 100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
Results of Operations
Three months ended September 30, 1998 compared to three months ended
September 30, 1997
The Company had a net loss of $720,000, or $0.04 per basic and diluted
share, on revenue of $24.0 million for the three months ended September 30,
1998 as compared to a net loss of $1.5 million, or $0.13 per basic and diluted
share, on revenues of $12.8 million for the three months ended September 30,
1997.
The Company had certificates of occupancy for 170 residences, 154 of which
were included in the operating results as of September 30, 1998 as compared to
109 residences with certificates of occupancy, 93 of which were included in
the operating results as of September 30, 1997. Of the residences included in
the operating results as of September 30, 1998, the Company owned 83
residences and leased 71 residences (55 of which were operating leases and 16
of which were accounted for as financings) as compared to 31 owned residences
and 62 leased residences (46 of which were operating leases and 16 of which
were accounted for as financings) as of September 30, 1997. During the three
months ended September 30, 1998, the Company terminated one lease effective
October 1, 1998.
19
<PAGE>
Revenue. Revenue was $24.0 million for the three months ended September 30,
1998 as compared to $12.8 million for the three months ended September 30,
1997, an increase of $11.2 million. This increase is primarily a result of the
full three months impact of the 10 residences (384 units) which opened during
the three months ended September 30, 1997 and the 61 residences (2,467 units)
that opened subsequent to September 30, 1997.
Residence Operating Expenses. Residence operating expenses were $15.0
million for the three months ended September 30, 1998 as compared to $8.2
million for the three months ended September 30, 1997, an increase of $6.8
million. This increase is primarily a result of the full three months impact
of the 10 residences (384 units) which opened during the three months ended
September 30, 1997 and the 61 residences (2,467 units) that opened subsequent
to September 30, 1997.
Corporate General and Administrative. Corporate general and administrative
expenses were $2.4 million for the three months ended September 30, 1998 as
compared to $1.1 million for the three months ended September 30, 1997. The
Company's corporate general and administrative expenses before capitalized
payroll costs were $2.9 million for the three months ended September 30, 1998
as compared to $1.5 million for the three months ended September 30, 1997, an
increase of $1.4 million. This increase results from an additional investment
in the Company's corporate and regional infrastructure to support the
development and operation of new residences including the expansion into new
states. The Company capitalized $445,000 of payroll costs for the three months
ended September 30, 1998 as compared to $407,000 for the three months ended
September 30, 1997 resulting from the Company's on-going development
activities.
Building Rentals. Building rentals were $3.2 million for the three months
ended September 30, 1998 as compared to $2.1 million for the three months
ended September 30, 1997, an increase of $1.1 million. This increase is due
primarily to the impact of the nine leases entered into subsequent to
September 30, 1997. As of September 30, 1998, the Company had 55 operating
leases as compared to 46 operating leases as of September 30, 1997.
Depreciation and Amortization. Depreciation and amortization was $1.7
million for the three months ended September 30, 1998 as compared to $1.0
million for the three months ended September 30, 1997, an increase of
$682,000. The increase in depreciation is the result of additional owned
residences due to the Company's increased emphasis on asset ownership. As of
September 30, 1998, the Company owned 83 residences as compared to 31
residences as of September 30, 1997. Depreciation expense also included
depreciation associated with sale and leaseback transactions completed during
fiscal years 1996 and 1997, which were accounted for as financings.
Amortization expense decreased as a result of the adoption of SOP 98-5,
effective January 1, 1998 which requires start-up costs to be expensed as
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 $3.4 million for the three months
ended September 30, 1998 as compared to $1.3 million for the three months
ended September 30, 1997. Gross interest expense for the three months ended
September 30, 1998 was $4.6 million compared to $2.8 million for the three
months ended September 30, 1997, an increase of $1.8 million. The increase is
due to interest expense incurred during the three months ended September 30,
1998 of $1.5 million on 6.0% Debentures issued in October, 1997, $1.2 million
of interest incurred on 5.625% Debentures issued in April, 1998, $125,000 of
interest incurred on loans pursuant to the Company's joint venture agreements,
an increase of $392,000 on mortgage financings entered into subsequent to
September 30, 1997, an increase of $72,000 on State of Idaho Housing and
Finance Association loans completed subsequent to September 30, 1997, combined
with a decrease of interest incurred on construction bridge loans of $1.4
million. The Company capitalized $1.3 million and $1.5 million of interest
expense for the three months ended September 30, 1998 and 1997, respectively.
Interest Income. Interest income was $1.3 million for the three months ended
September 30, 1998 as compared to $138,000 for the three months ended
September 30, 1997, an increase of $1.1 million. The increase
20
<PAGE>
is due to higher cash balances available to invest as a result of the
Company's issuance of $75.0 million of convertible debentures in April, 1998.
Loss on Sale of Assets. Loss on sale of assets was $8,000 for the three
months ended September 30, 1998 as compared to $603,000 for the three months
ended September 30, 1997. This decrease was due to fewer sale and leaseback
transactions entered into during the three months ended September 30, 1998 as
compared to prior periods. The Company entered into two sale and leaseback
transactions during the three months ended September 30, 1998 as compared to
12 during the three months ended September 30, 1997.
Net Loss. As a result of the above, net loss was $720,000 or $0.04 per basic
and diluted share for the three months ended September 30, 1998, compared to a
net loss of $1.5 million, or $0.13 per basic and diluted share for the three
months ended September 30, 1997.
Nine months ended September 30, 1998 compared to nine months ended September
30, 1997
The Company had a net loss of $13.3 million, or $0.84 per basic and share,
on revenue of $63.9 million for the nine months ended September 30, 1998 as
compared to a net loss of $1.5 million, or $0.14 per basic and diluted share,
on revenues of $33.4 million for the nine months ended September 30, 1997.
The Company had certificates of occupancy for 170 residences, 154 of which
were included in the operating results as of September 30, 1998 as compared to
109 residences with certificates of occupancy, 93 of which were included in
the operating results as of September 30, 1997. Of the residences included in
the operating results as of September 30, 1998, the Company owned 83
residences and leased 71 residences (55 of which were operating leases and 16
of which were accounted for as financings) as compared to 31 owned residences
and 62 leased residences (46 of which were operating leases and 16 of which
were accounted for as financings) as of September 30, 1997. During the three
months ended September 30, 1998, the Company terminated one lease effective
October 1, 1998.
Revenue. Revenue was $63.9 million for the nine months ended September 30,
1998 as compared to $33.4 million for the nine months ended September 30,
1997, an increase of $30.6 million. This increase was due primarily to the
full nine months impact of the 33 residences (1,261 units) which opened during
the nine months ended September 30, 1997, and to the opening of an additional
61 residences (2,467 units) since September 30, 1997.
Residence Operating Expenses. Residence operating expenses were $39.6
million for the nine months ended September 30, 1998 as compared to $21.0
million for the nine months ended September 30, 1997, an increase of $18.6
million. This increase was due primarily to the full nine months impact of the
33 residences (1,261 units) which opened during the nine months ended
September 30, 1997, and to the opening of an additional 61 residences (2,467
units) since September 30, 1997.
Corporate General and Administrative. Corporate general and administrative
expenses were $6.0 million for the nine months ended September 30, 1998 as
compared to $2.7 million for the nine months ended September 30, 1997. The
Company's corporate general and administrative expenses before capitalized
payroll costs were $7.6 million for the nine months ended September 30, 1998
as compared to $4.0 million for the nine months ended September 30, 1997, an
increase of $3.6 million. This increase results from an additional investment
in the Company's corporate and regional infrastructure to support the
development and operation of new residences including the expansion into new
states. The Company capitalized $1.5 million of payroll costs for the
nine months ended September 30, 1998 as compared to $1.3 million for the nine
months ended September 30, 1997 resulting from an increase in development
activities.
Building Rentals. Building rentals were $9.6 million for the nine months
ended September 30, 1998 as compared to $5.0 million for the nine months ended
September 30, 1997, an increase of $4.6 million. This increase is due
primarily to the impact of the nine leases entered into subsequent to
September 30, 1997. As of
21
<PAGE>
September 30, 1998 the Company had 55 operating leases as compared to 46
operating leases as of September 30, 1997.
Depreciation and Amortization. Depreciation and amortization was $4.4
million for the nine months ended September 30, 1998 as compared to $2.5
million for the nine months ended September 30, 1997, an increase of $1.9
million. The increase in depreciation is the result of additional owned
residences due to the Company's increased emphasis on asset ownership. As of
September 31, 1998, the Company owned 83 residences as compared to 31
residences as of September 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 adoption of SOP 98-5 as of
January 1, 1998, which requires start-up costs to be expensed as incurred.
Prior to the adoption of SOP 98-5, the Company's policy was to defer certain
start-up costs associated with opening new residences and amortize them over
the first twelve months of the residence's operations.
Site Abandonment Costs. As a result of the Company's decision to reduce the
number of new residence openings during fiscal year 1999 and beyond, the
Company wrote-off $1.0 million of capitalized costs during the nine months
ended September 30, 1998 relating to the abandonment of 11 development sites
and other miscellaneous development costs. The Company had not written-off any
such costs prior to the quarter ended June 30, 1998.
Write-off of Impaired Assets and Related Expenses. The Company recorded a
$8.9 million charge during the nine months ended September 30, 1998 consisting
of (i) a $7.5 million write-off of goodwill resulting from the exit from its
home health care operation acquired in October 1997 and (ii) a $1.4 million
provision for exit costs associated with closing such home health care
operation.
Interest Expense. Interest expense was $7.4 million for the nine months
ended September 30, 1998 as compared to $3.1 million for the nine months ended
September 30, 1997. Gross interest expense for the nine months ended September
30, 1998 was $12.1 million compared to $7.5 million for the nine months ended
September 30, 1997, an increase of $4.6 million. The increase is due to
interest expense incurred during the nine months ended September 30, 1998 of
$4.4 million on 6.0% Debentures issued in October, 1997, $2.2 million of
interest incurred on 5.625% Debentures issued in April, 1998, an increase of
$753,000 of interest on 16 sale and leaseback transactions accounted for as
financings, seven of which were entered into during the three months ended
September 30, 1997, $384,000 of interest incurred on loans pursuant to the
Company's joint venture agreements, an increase of $680,000 on mortgage
financings entered into subsequent to September 30, 1997, an increase of
$215,000 on State of Idaho Housing and Finance Association loans completed
subsequent to September 30, 1997, combined with a decrease of interest
incurred on construction bridge loans of $4.0 million. The Company capitalized
$4.8 million and $4.4 million of interest expense for the six months ended
June 30, 1998 and 1997, respectively.
Interest Income. Interest income was $2.9 million for the nine months ended
September 30, 1998 as compared to $414,000 for the nine months ended September
30, 1997, an increase of $2.5 million. The increase is due to higher cash
balances available to invest.
Loss on Sale of Assets. Loss on sale of assets was $428,000 for the three
months ended September 30, 1998 as compared to $1.0 million for the three
months ended September 30, 1997. This decrease was due to a decrease in sale
and leaseback transactions. The Company entered into four sale and leaseback
transactions during the nine months ended September 30, 1998 as compared to 19
during the nine months ended September 30, 1997.
Net Loss. As a result of the above, net loss was $13.3 million or $0.84 per
basic and diluted share for the nine months ended September 30, 1998, compared
to a net loss of $1.5 million, or $0.14 per basic and diluted share for the
nine months ended September 30, 1997.
22
<PAGE>
Liquidity and Capital Resources
The following table sets forth certain data from the statement of cash flows
as reported and as restated as a result of the adjustments discussed in Note
10 to the financial statements for the nine months ended September 30, 1998
(in thousands).
<TABLE>
<CAPTION>
As Previously As
Reported(1) Restated
------------- --------
<S> <C> <C>
Net cash provided by operating activities.......... $ 8,795 $ 6,598
Net cash used in investing activities.............. (86,201) (95,830)
Net cash provided by financing activities.......... 93,785 105,574
-------- --------
Net increase in cash and cash equivalents.......... $ 16,379 $ 16,342
======== ========
</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 September 31, 1998 was $2.1 million, $63.3 million
and $79.6 million, respectively, compared to $2.1 million, $63.2 million and
$79.8 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 September 31, 1998 was 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. As a result of the
restatement, net cash provided by operating activities decreased by
$2.2 million, primarily as a result of increase in net losses. Net cash used
in investing activities increased by $9.6 million, and net cash provided by
financing activities increased by $11.8 million, primarily as a result of
accounting for change in construction payable balances as a non-cash
transaction.
At September 30, 1998, the Company had positive working capital of
approximately $63.0 million including liabilities for construction payables.
Exclusive of construction related activities, working capital was
$70.1 million.
Net cash provided by operating activities was $6.6 million during the nine
month period ended September 30, 1998.
Net cash used in investing activities totaled $95.8 million during the nine
month period ended September 30, 1998. The primary use of cash was $97.7
million related to the development of new assisted living residences and $8.4
related primarily to the acquisition of three assisted living facilities. The
primary source of cash was proceeds from sale and leaseback transactions of
$8.3 million for three residences and $2.0 million of funds held in trust
which were released during the period. In addition, during the first quarter
of 1998 the Company converted $2.2 million of construction financing to a sale
and leaseback with respect to one residence.
Net cash provided by financing activities totaled $105.6 million during the
nine month period ended September 30, 1998. The primary source of funds was
from the issuance of $75.0 million of convertible subordinated debentures
issued in April, 1998 and $40.3 million in mortgage financing received during
the third quarter.
As of September 30, 1998, the Company had invested excess cash balances in
short-term certificates of deposit and U.S. Treasury securities.
23
<PAGE>
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. SFAS No. 137, issued in June 1999, deferred the effective
date of SFAS No. 133 to all fiscal quarters of fiscal years beginning after
June 15, 2000. We do not expect the adoption of this statement to have a
material impact on our results of operations.
24
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
<TABLE>
<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 September 30, 1998.
25
<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
/s/ James W. Cruckshank
September 23, 1999 By: _________________________________
Name: James W. Cruckshank
Title: Vice President Chief
Financial Officer
/s/ M. Catherine Maloney
September 23, 1999 By: _________________________________
Name: M. Catherine Maloney
Title: Vice President/Controller
Chief Accounting Officer
26
<PAGE>
EXHIBIT 12
Ratio of Earnings to Fixed Charge
<TABLE>
<CAPTION>
Three Months Nine Months
Three Months Ended Nine Months Ended
Ended September 30, Ended September 30,
September 30, 1998 September 30, 1998
1997 (As Restated) 1997 (As Restated)
------------- ------------- ------------- -------------
(in thousands)
<S> <C> <C> <C> <C>
Loss before cumulative
change in accounting
principle.............. $(1,475) $ (720) $(1,518) $(11,812)
Add fixed charges:
Interest costs
including
amortization of
debt issuance cost... 1,301 3,351 3,136 7,358
------- ------ ------- --------
Earnings (Loss)......... $ (174) $2,631 $ 1,618 $ (4,454)
======= ====== ======= ========
Fixed Charges:
Interest expense
including
amortization of
debt issuance cost... $ 1,301 $3,351 $ 3,136 $ 7,358
Capitalized interest.. 1,517 1,291 4,363 4,783
------- ------ ------- --------
Total Fixed
Charges............ $ 2,818 $4,642 $ 7,499 $ 12,141
======= ====== ======= ========
Ratio of Earnings to
Fixed Charges.......... -- .57 .22 --
======= ====== ======= ========
Deficiency of Earnings
to Cover Fixed
Charges................ $ 2,992 $2,011 $ 5,881 $ 16,595
======= ====== ======= ========
</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>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> JUL-01-1998 JAN-01-1998
<PERIOD-END> SEP-30-1998 SEP-30-1998
<CASH> 79,611 79,611
<SECURITIES> 0 0
<RECEIVABLES> 5,175 5,175
<ALLOWANCES> 79 79
<INVENTORY> 0 0
<CURRENT-ASSETS> 93,289 93,289
<PP&E> 314,683 314,683
<DEPRECIATION> 7,284 7,284
<TOTAL-ASSETS> 417,520 417,520
<CURRENT-LIABILITIES> 30,304 30,304
<BONDS> 257,986 257,986
0 0
0 0
<COMMON> 173 173
<OTHER-SE> 126,177 126,177
<TOTAL-LIABILITY-AND-EQUITY> 417,520 417,520
<SALES> 24,012 63,938
<TOTAL-REVENUES> 24,012 63,938
<CGS> 15,002 39,558
<TOTAL-COSTS> 22,355 69,481
<OTHER-EXPENSES> 305 1,370
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 3,351 7,358
<INCOME-PRETAX> (720) (11,812)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (720) (11,812)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 (1,523)
<NET-INCOME> (720) (13,335)
<EPS-BASIC> (.04) (.84)
<EPS-DILUTED> (.04) (.84)
</TABLE>