<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20459
----------------
FORM 10-Q
(Mark One)
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2000
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-83938
----------------
ASSISTED LIVING CONCEPTS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Nevada 93-1148702
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
</TABLE>
11835 NE Glenn Widing Drive, Bldg. E Portland, OR 97220
(Address of principle executive offices)
(503) 252-6233
(Registrant's telephone number, including area code)
----------------
Indicate by check mark whether Registrant (1) has filed all reports to be
filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that Registrant 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 17,120,745 shares of common stock, $.01 par value,
outstanding at May 11, 2000.
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<PAGE>
ASSISTED LIVING CONCEPTS, INC.
FORM 10-Q
March 31, 2000
INDEX
PART I--FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C>
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets, December 31, 1999 and March 31, 2000....... 3
Consolidated Statements of Operations and Consolidated Statements of
Comprehensive Loss, Three Months Ended March 31, 1999 and 2000......... 4
Consolidated Statements of Cash Flows, Three Months Ended March 31, 1999
and 2000............................................................... 5
Notes to Consolidated Financial Statements.............................. 6-8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.............................................. 9-14
PART II--OTHER INFORMATION
Item 1. Legal Proceedings................................................. 15
Item 6. Exhibits and Reports on Form 8-K.................................. 15
</TABLE>
2
<PAGE>
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements
ASSISTED LIVING CONCEPTS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
December 31, March 31,
1999 2000
------------ ----------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 7,606 $ 3,412
Restricted cash..................................... 7,555 8,388
Marketable securities, available for sale........... 1,680 1,610
Accounts receivable, net of allowance for doubtful
accounts of $1,062 and $1,192, respectively........ 4,069 4,136
Prepaid expenses.................................... 948 1,414
Other current assets................................ 3,419 3,243
-------- ---------
Total current assets.............................. 25,277 22,203
-------- ---------
Property and equipment................................ 321,622 322,293
Less accumulated depreciation....................... 15,974 18,314
-------- ---------
Property and equipment, net......................... 305,648 303,979
-------- ---------
Goodwill, net......................................... 5,077 5,005
Other assets, net..................................... 10,186 9,770
-------- ---------
Total assets...................................... $346,188 $ 340,957
======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................... $ 1,318 $ 956
Construction payable................................ 1,078 302
Accrued real estate taxes........................... 4,466 3,788
Accrued interest expense............................ 1,940 4,093
Accrued payroll expense............................. 2,773 1,581
Other accrued expenses.............................. 2,030 1,512
Other current liabilities........................... 2,586 2,666
Current portion of long-term debt................... 1,494 1,506
-------- ---------
Total current liabilities........................... 17,685 16,404
-------- ---------
Other liabilities..................................... 5,960 6,067
Long-term debt........................................ 71,949 71,745
Convertible subordinated debentures................... 161,250 161,250
-------- ---------
Total liabilities................................. 256,844 255,466
-------- ---------
Commitments and Contingencies
Shareholders' equity:
Preferred Stock, $.01 par value; 1,000,000 shares
authorized;
None issued and outstanding........................ -- --
Common Stock, $.01 par value; 80,000,000 shares
authorized; issued and outstanding 17,120,745
shares in 1999 and 2000............................ 171 171
Additional paid-in capital.......................... 144,443 144,451
Fair market value in excess of historical cost of
acquired net assets attributable to related party
transactions......................................... (239) (239)
Accumulated other comprehensive loss................ (320) (390)
Accumulated deficit................................. (54,711) (58,502)
-------- ---------
Total shareholders' equity.......................... 89,344 85,491
-------- ---------
Total liabilities and shareholders' equity........ $346,188 $ 340,957
======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
ASSISTED LIVING CONCEPTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
1999 2000
--------- ---------
<S> <C> <C>
Revenue.................................................. $ 26,583 $ 33,132
Operating expenses:
Residence operating expenses........................... 19,765 22,682
Corporate, general and administrative.................. 4,230 4,048
Building rentals....................................... 3,025 3,645
Building rentals to related party...................... 317 317
Depreciation and amortization.......................... 2,180 2,412
Site abandonment costs................................. 1,309 --
--------- ---------
Total operating expenses............................. 30,826 33,104
--------- ---------
Operating income (loss).................................. (4,243) 28
--------- ---------
Other income (expense):
Interest expense....................................... (3,795) (4,028)
Interest income........................................ 605 209
Gain (loss) on sale and disposal of assets............. (127) --
Other income (expense)................................. (100) --
--------- ---------
Total other income (expense)......................... (3,417) (3,819)
--------- ---------
Net loss................................................. $ (7,660) $ (3,791)
========= =========
Basic and diluted net loss per common share.............. $ (0.45) $ (0.22)
========= =========
Basic and diluted weighted average common shares
outstanding............................................. 17,116 17,121
========= =========
</TABLE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
1999 2000
--------- ---------
<S> <C> <C>
Net loss.................................................. $(7,660) $(3,791)
Other comprehensive loss:
Unrealized losses on investments........................ (45) (70)
--------- ---------
Comprehensive loss........................................ $(7,705) $(3,861)
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
ASSISTED LIVING CONCEPTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
1999 2000
--------- --------
<S> <C> <C>
Operating activities:
Net loss................................................. $ (7,660) $ (3,791)
Adjustment to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 2,180 2,412
Provision for doubtful accounts........................ 58 130
Site abandonment costs................................. 1,309 --
Loss on sale of assets................................. 127 --
Compensation expense on restricted stock............... 174 --
Compensation expense on issuance of consultant options. -- 8
Changes in assets and liabilities:
Accounts receivable.................................... (1,175) (197)
Prepaid expenses....................................... (216) (466)
Other current assets................................... (37) 176
Other assets........................................... 1,146 416
Accounts payable....................................... (581) (362)
Accrued expenses....................................... 3,235 (235)
Other current liabilities.............................. (2,841) 80
Other liabilities...................................... 1,536 107
--------- --------
Net cash used in operating activities.................... (2,745) (1,722)
--------- --------
Investing activities:
Purchase of marketable securities, available for sale.... (4,400) --
Restricted cash.......................................... -- (833)
Proceeds from sale of land............................... 19 --
Purchases of property and equipment...................... (17,216) (1,447)
--------- --------
Net cash used in investing activities.................... (21,597) (2,280)
--------- --------
Financing activities:
Payments on long-term debt............................... (141) (192)
Proceeds from issuance of common stock................... 154 --
Purchase of restricted stock............................. (750) --
--------- --------
Net cash used in financing activities.................... (737) (192)
--------- --------
Net decrease in cash and cash equivalents................ (25,079) (4,194)
Cash and cash equivalents, beginning of period........... 55,036 7,606
--------- --------
Cash and cash equivalents, end of period................. $ 29,957 $ 3,412
========= ========
Supplemental disclosure of cash flow information:
Cash payments for interest............................. $ 2,415 $ 1,472
Unrealized loss on investment.......................... $ (45) $ (70)
Amendment of leases and removal of related debt........ $ 31,488 $ --
Amendment of leases and removal of related assets...... $ 29,492 $ --
Decrease in construction payables and property and
equipment............................................. $ (945) $ (776)
Retirement of restricted stock......................... $ 3,412 $ --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Assisted Living Concepts, Inc. (the "Company") owns, operates and leases
assisted living residences which provide housing and services to older persons
who need help with the activities of daily living such as bathing and
dressing. The Company provides personal care and support services and makes
available routine health care services, which are designed to meet the needs
of its residents.
Basis of Presentation and Principles of Consolidation
These consolidated financial statements have been prepared without being
audited, as allowed by the rules and regulations of the Securities and
Exchange Commission. The accompanying consolidated financial statements
include the Company's accounts and its wholly owned subsidiaries that manage,
own, and lease assisted living residences. All significant intercompany
accounts and transactions have been eliminated in consolidation. Certain
information and footnote disclosures that are normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted as allowed by rules and regulations
of the Securities and Exchange Commission. These consolidated financial
statements should be read in conjunction with the audited consolidated
financial statements and notes included in the Company's annual report on Form
10-K for the year ended December 31, 1999.
The financial information included in these financial statements contain all
adjustments (which consist of normal recurring adjustments, with the exception
in the three-month period ended March 31, 1999 of site abandonment costs ($1.3
million), terminated merger costs ($228,000), loss on disposal of assets
($127,000) and severance costs associated with the termination of certain
employment agreements ($530,000)) which are, in the opinion of management,
necessary for a fair presentation of results for the quarterly periods. The
results of operations for the three-month period ended March 31, 2000 do not
necessarily indicate the results that are expected for the full year.
2. RESTRICTED CASH
Restricted cash consists of: i) $6.1 million related to loan agreements with
U.S. Bank National Association, ii) $800,000 related to certain lease
agreements and iii) $1.5 million related to required workers compensation
insurance deposits.
3. MARKETABLE SECURITIES
Marketable securities consist of U.S. Treasury securities and other highly
liquid marketable debt securities. The aggregate market value of securities
held at December 31, 1999 and March 31, 2000 was $1.7 million and $1.6
million, respectively. These investments which have a historical cost of $2.0
million have been classified as available for sale in accordance with
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." As a result, unrealized investment
losses of $320,000 and $390,000 are included as a component of comprehensive
loss and shareholders' equity at December 31, 1999 and March 31, 2000,
respectively.
6
<PAGE>
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
4. PROPERTY AND EQUIPMENT
The Company's property and equipment, stated at cost, consists of the
following (in thousands):
<TABLE>
<CAPTION>
December 31, March 31,
1999 2000
------------ ---------
<S> <C> <C>
Land.................................................. $ 21,329 $ 21,336
Buildings............................................. 286,347 286,746
Equipment............................................. 5,344 5,599
Furniture............................................. 8,602 8,612
-------- --------
Property and equipment................................ 321,622 322,293
Less accumulated depreciation......................... 15,974 18,314
-------- --------
Property and equipment, net........................... $305,648 $303,979
======== ========
</TABLE>
During the three months ended March 31, 1999, the Company capitalized
interest costs of $1.0 million related to financing of construction in
process. In addition, the Company capitalized payroll costs that were directly
related to construction and development of the residences of $246,000 for the
three months ended March 31, 1999. No such costs were capitalized during the
three months ended March 31, 2000.
5. 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
Leased Residences Leaseback Units under
Residences Accounted for Total Number Residences Units under Leases
("Oregon as Operating of Operating Accounted for Operating Accounted for
Leases") Leases Leases as Financings Leases as Financings
---------- ------------- ------------ ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Leases at December 31,
1994................... 4 -- 4 -- 114 --
Leases entered into
during 1995............ -- 5 5 -- 150 --
--- --- --- --- ----- ----
Leases at December 31,
1995................... 4 5 9 -- 264 --
Leases entered into
during 1996............ 1 19 20 9 763 316
Residences repurchased
during 1996............ -- (4) (4) -- (146) --
--- --- --- --- ----- ----
Leases at December 31,
1996................... 5 20 25 9 881 316
Leases entered into
during 1997............ 2 24 26 7 1,025 247
--- --- --- --- ----- ----
Leases at December 31,
1997................... 7 44 51 16 1,906 563
Lease expansions in
1998................... -- -- -- -- 47 10
Leases entered into
during 1998............ -- 4 4 -- 139 --
Leases terminated during
1998................... (1) -- (1) -- (45) --
--- --- --- --- ----- ----
Leases at December 31,
1998................... 6 48 54 16 2,047 573
Lease expansions during
1999................... -- -- -- -- 13 --
Leases modified and
reclassified during
1999................... -- 16 16 (16) 573 (573)
--- --- --- --- ----- ----
Leases at December 31,
1999 and March 31,
2000................... 6 64 70 -- 2,633 --
=== === === === ===== ====
</TABLE>
7
<PAGE>
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
6. LIQUIDITY
The Company had a total of $5.1 million in cash and cash equivalents and
marketable securities on hand at March 31, 2000. On May 1, 2000, the Company
made a semi-annual interest payment on its convertible subordinated debentures
of $4.7 million. The Company believes its current cash on hand, cash available
from operations and potential loans on uncollateralized properties will be
sufficient to meets its operating needs through June 2001. However, many of
the Company's properties opened in the last two to three years, and the
Company has had little experience in the maintenance capital expenditures that
are necessary to retain these properties in their current condition. The
Company is currently exploring various financing alternatives for both its
encumbered and unencumbered properties. No such future financing commitments
are currently in place.
7. SUBSEQUENT EVENTS
On April 21, 2000 the Company eliminated the position of Vice President and
Chief Operating Officer which had been held by Leslie Mahon. As a result of
eliminating this position, the Company will enter into a Release and
Separation Agreement with Mr. Mahon under which, pursuant to his employment
agreement, he will receive a severance payment of $350,000.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
References in this section to "ALC," the "Company," "us" or "we" refer to
Assisted Living Concepts, Inc. and its subsidiaries.
This Report on Form 10-Q, as well as the Risk Factors included in our Report
on Form 10-K for the fiscal year ended December 31, 1999, contain forward-
looking statements made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. These forward-looking statements may
be affected by risks and uncertainties, including without limitation (i) our
ability to control costs and improve operating margins, (ii) the degree to
which our future operating results and financial condition will be affected by
the securityholder litigation and the resulting distraction of management's
time and attention, (iii) the possibility that we may incur start-up costs in
excess of our present expectations, (iv) the possibility that we will
experience slower fill-up of our start-up residences and/or declining
occupancy in our stabilized residences, either of which would adversely affect
residence operating margins, and (v) the possibility that we will not be able
to obtain financing needed to fund our operations after June 2001 and (vi)
other risks described in our filings with the Securities and Exchange
Commission. In light of such risks and uncertainties, our actual results could
differ materially from such forward-looking statements. Except as required by
applicable law, we do not undertake any obligation to publicly release any
revisions to any forward-looking statements contained herein to reflect events
and circumstances occurring after the date hereof or to reflect the occurrence
of unanticipated events.
Securityholder Litigation
In 1999, an amended consolidated complaint ("the Complaint") was filed
against us and certain of our past and present officers, directors and
indemnities. The Complaint alleges violations of the federal securities laws
and seeks unspecified damages. We filed an answer to the Complaint on December
7, 1999. See Part II, Item 1 (Legal Proceedings) for information regarding
this litigation.
Management Changes
On March 3, 2000, our Board of Directors announced the appointment of W.
James Nicol and John Gibbons to our Board of Directors, including the
appointment of Mr. Nicol as Chairman of the Board. We also announced the
formation of an Executive Committee of our Board of Directors comprised of Dr.
Keren Brown Wilson, Mr. Nicol and Mr. Gibbons. On March 3, 2000, we also
announced the resignation of James W. Cruckshank as our Chief Financial
Officer and the appointment of Mr. Gibbons as Interim Chief Financial Officer.
At that time, we entered into a Separation and Consulting Agreement with Mr.
Cruckshank, pursuant to which Mr. Cruckshank's employment agreement with us
was terminated, and Mr. Cruckshank agreed to provide us with consulting
services through the end of 2000.
On March 16, 2000, we announced the addition of Drew Q. Miller as our Chief
Financial Officer and Treasurer and the resignation of Mr. Gibbons as Interim
Chief Financial Officer.
On April 21, 2000 we eliminated the position of Vice President and Chief
Operating Officer which had been held by Leslie Mahon. Keren Brown Wilson,
President and Chief Executive Officer has assumed these duties.
Overview
We operate, own and lease free-standing assisted living residences,
primarily in small middle-market rural and suburban communities with a
population typically ranging from 10,000 to 40,000. We also provide personal
care and support services, and make available routine health care services (as
permitted by applicable regulations) designed to meet the personal and health
care needs of our residences. As of March 31, 2000 we operated 185 assisted
living residences (7,148 units) in 16 states, of which we owned 115 residences
(4,515 units) and leased 70 residences (2,633 units).
9
<PAGE>
We derive our revenues primarily from resident fees for rent and for the
delivery of assisted living services. Resident fees typically are paid monthly
by residents, their families, state Medicaid agencies or other third parties.
Resident fees include revenue derived from a multi-tiered rate structure,
which varies based on the level of care provided. Resident fees are recognized
as revenues when services are provided.
Our operating expenses include:
. residence operating expenses, such as staff payroll and benefits, food,
property taxes, utilities, insurance and other direct residence
operating costs;
. general and administrative expenses, consisting of corporate and support
functions which also include legal, accounting and other administrative
expenses;
. building rentals; and
. depreciation and amortization.
The following table sets forth, for the periods presented, the number of
residences and units operated, average occupancy rates and sources of revenue.
The portion of revenues received from state Medicaid agencies are labeled as
"Medicaid state portion" while the portion of our revenues that a Medicaid-
eligible resident must pay out of his or her own resources is labeled
"Medicaid resident portion."
<TABLE>
<CAPTION>
Three
Months
Ended March
31,
------------
1999 2000
----- -----
<S> <C> <C>
Total Residences:
Residences operated (end of period).......................... 169 185
Units operated (end of period)............................... 6,496 7,148
Average occupancy rate (based on occupied units)............. 72.9% 78.4%
Sources of revenue:
Medicaid state portion....................................... 10.5% 10.6%
Medicaid resident portion.................................... 5.8% 6.0%
Private...................................................... 83.7% 83.4%
----- -----
Total.......................................................... 100.0% 100.0%
===== =====
</TABLE>
The following tables set forth, for the periods presented, the compilation
of operating results of the 165 Same Store Residences. Same Store Residences
are defined as those residences which were operating throughout comparable
reporting periods.
COMPILATION OF SAME STORE RESIDENCES
THREE MONTHS ENDED MARCH 31, 2000
(in thousands except unit and average rent data)
<TABLE>
<CAPTION>
March 31, March 31,
1999 2000
--------- ---------
<S> <C> <C>
Revenue.................................................. $26,484 $30,679
Residence operating expense.............................. 19,393 20,527
------- -------
Residence operating income............................. 7,091 10,152
Building rentals......................................... 3,335 3,952
Depreciation and amortization............................ 1,914 1,787
------- -------
Total other operating expenses......................... 5,249 5,739
------- -------
Operating income..................................... $ 1,842 $ 4,413
======= =======
Residences operating..................................... 165 165
Units operating.......................................... 6,325 6,350
Average occupancy rate (based on occupied units)......... 73.7% 82.2%
Weighted average rent.................................... $ 1,870 $ 1,940
Residence operating income margin........................ 26.8% 33.1%
</TABLE>
10
<PAGE>
Results of Operations
Three months ended March 31, 2000 compared to three months ended March 31,
1999
We incurred a net loss of $3.8 million, or $0.22 per basic and diluted
common share, on revenue of $33.1 million for the three months ended March 31,
2000 (the "March 2000 Quarter") as compared to a net loss of $7.7 million or
$0.45 per basic and diluted common share, on revenues of $26.6 million for the
three months ended March 31, 1999 (the "March 1999 Quarter").
We had certificates of occupancy for 185 residences, all of which were
included in our operating results for the March 2000 Quarter as compared to
181 residences with certificates of occupancy, 169 of which were included in
our operating results as of the end of the March 1999 Quarter.
Of the residences included in our operating results at the end of the March
2000 Quarter, we owned 115 residences and leased 70 residences as compared to
99 owned residences and 70 leased residences as of the end of the March 1999
Quarter.
Revenues. Revenues were $33.1 million for the March 2000 Quarter as compared
to $26.6 million for the March 1999 Quarter, a net increase of $6.5 million.
Revenue increases consisted of:
. $4.2 million related to the 165 Same Store Residences (6,350 units); and
. $2.3 million related to the 20 residences (798 units) which commenced
operations subsequent to the March 1999 Quarter.
The increase in revenue from Same Store Residences was a combination of:
. An increase in occupancy to 82.2% for the March 2000 Quarter as compared
to 73.7% for the March 1999 Quarter; and
. An increase in average monthly rental rate to $1,940 for the March 2000
Quarter as compared to $1,870 for the March 1999 Quarter.
Residence Operating Expenses. Residence operating expenses were $22.7
million for the March 2000 Quarter as compared to $19.8 million for the March
1999 Quarter, a net increase of $2.9 million.
Residence operating expense increases consisted of:
. $1.1 million related to the 165 Same Store Residences (6,350 units); and
. $1.8 million related to the 20 residences (798 units) which commenced
operations subsequent to the March 1999 Quarter.
The increase in operating expenses from Same Store Residences was
attributable to additional expenses associated with the increase in occupancy
at the Same Store Residences subsequent to the March 1999.
Corporate, General and Administrative. Corporate, general and
administrative expenses were $4.0 million for the March 2000 Quarter compared
to $4.2 million for the March 1999 Quarter. Our corporate general and
administrative expenses before capitalized payroll costs were $4.0 million for
the March 2000 Quarter as compared to $4.5 million for the March 1999 Quarter,
a decrease of approximately $500,000.
Corporate, general and administrative expenses decreased by:
. $264,000 due to reduced professional fees associated with legal,
financial advisory and accounting costs due to regulatory issues and
securityholder litigation; and
11
<PAGE>
. $530,000 due to separation costs incurred during the 1999 Quarter for
certain terminated corporate employees.
These decreases were offset by increases in the following:
. $172,000 is a result of increased infrastructure costs associated with
expansion of three to five operating regions. This includes telephone
and network communication expenses; and
. $145,000 as a result of increases in insurance coverage.
As a result of the completion of our development projects, we did not
capitalize payroll costs during the 2000 Quarter. We capitalized $246,000 of
payroll costs for the March 1999 Quarter.
Building Rentals. Building rentals were $4.0 million for the March 2000
Quarter as compared to $3.3 million for the March 1999 Quarter, an increase of
$620,000. This increase was due to the amendment of certain of our operating
leases in 1999. In March 1999, we amended lease terms on 16 leases which were
previously accounted for as financings. The amendments eliminated our
continuing involvement in the residences in the form of a fair value purchase
option. As a result, the leases were accounted for as operating leases,
effective March 31, 1999. Accordingly, rent expense related to such leases
after the date of the amendment, approximately $840,000 has been classified as
building rentals, rather than interest expense as previously recorded. This
increase in building rentals was offset by a decrease related to the amendment
of other operating leases, effective December 31, 1998, to contain escalating
rent payments that are contingent. Prior to such amendment, the leases
contained rent escalation clauses that were not deemed contingent, resulting
in the recognition of lease expense on a straight line basis over the term
instead of on a cash basis.
Depreciation and Amortization. Depreciation and amortization expense was
$2.4 million in the March 2000 Quarter as compared to $2.2 in the March 1999
Quarter, an increase of $200,000. The increase is due to depreciation expense
related to the 16 residences that commenced operations subsequent to the March
1999 Quarter.
Site Abandonment Costs. As the result of our decision to terminate new
construction we recorded site abandonment costs of $1.3 million in the March
1999 Quarter with respect to certain sites which we determined we would not
develop. We incurred no such costs in the March 2000 Quarter.
Interest Expense. Interest expense was $4.0 million for the March 2000
Quarter compared to $3.8 million for the March 1999 Quarter. Gross interest
expense for the March 2000 Quarter was $4.0 million compared to $4.8 million
for the March 1999 Quarter, a net decrease of $800,000. This decrease was due
primarily to a decrease of $840,000 in interest expense related to the
amendment to 16 of our leases, as discussed above.
As a result of the completion of our development projects, we did not
capitalize interest expense in the March 2000 Quarter. In the March 1999
Quarter, we capitalized $1.0 million of interest expense directly related to
financing development activities.
Interest Income. Interest income was $209,000 for the March 2000 Quarter
compared to $605,000 for the March 1999 Quarter, a decrease of $396,000. This
decrease is the result of decreased balances in cash and cash equivalents and
marketable securities.
Gain (Loss) on Sale and Disposal of Assets. The loss of $127,000 in the
March 1999 Quarter primarily related to the write-off of leasehold
improvements associated with relocating our corporate office.
Other Expenses. Other expenses of $100,000 during the March 1999 Quarter
primarily related to the repurchase of the operations of 17 residences
formerly operated pursuant to our joint venture agreements.
Net Loss. As a result of the above, we incurred a net loss of $3.8 million
or $0.22 per basic and diluted common share for the March 2000 Quarter,
compared to a net loss of $7.7 million, or $0.45 per basic and diluted common
share, for the March 1999 Quarter.
12
<PAGE>
Liquidity and Capital Resources
At March 31, 2000, we had working capital of $5.8 million, including
unrestricted cash and marketable securities of $5.0 million.
Net cash used in operating activities was $1.7 million during the March 2000
Quarter. The primary use of cash in operations was to fund the cash component
of the net loss of $3.8 million.
Net cash used in investing activities totaled $2.3 million during the March
2000 Quarter. The primary use of cash was $1.4 million related to final
payment of construction billings for the assisted living residences which
opened in 1999. Additionally, restricted cash increased $833,000 during the
2000 Quarter due to the net effect of the release of funds related to the
achievement of specific targets associated with our loan agreement with U.S.
Bank National Association ("U.S. Bank") ($1.1 million) and the restriction of
funds in accordance with deposits required certain lease agreements ($400,000)
and for changes in our workers compensation insurance programs ($1.5 million).
Net cash used in financing activities totaled $192,000 during the March 2000
Quarter.
During the third quarter of 1999, we amended certain loan agreements with
U.S. Bank. Pursuant to the amendment, we agreed to provide $8.3 million of
additional cash collateral in exchange for the waiver of certain possible
defaults realted to the delivery of financial statements and compliance with
financial covenants, including an amendment to certain financial covenants.
The amendment also provides for the release of the additional collateral upon
the achievement of specified performance targets, provided that we are in
compliance with the other terms of the loan agreements. We achieved certain of
these specified targets during the fourth quarter of fiscal 1999 and the first
quarter of fiscal 2000 resulting in the release of $1.2 million and $1.1
million of the restricted cash, respectively.
Several of our debt instruments and leases contain financial covenants,
including debt to cash flow and net worth tests. There can be no assurance
that we will be in compliance with these financial covenants in the future,
particularly if we are unable to stabilize our operations and efficiently
manage our business. Our credit agreements with U.S. Bank require us to comply
with two financial ratios that become more restrictive commencing in the
second quarter of 2000. Although we were in compliance with these less
restrictive covenants at March 31, 2000, we have determined that it is
probable that we will not meet these more restrictive covenants at June 30,
2000. If we fail to comply with one or more of the U.S. Bank covenants or any
other debt or lease covenants (after giving effect to any applicable cure
period), the lender or lessor may declare us in default of the underlying
obligation and exercise any available remedies, which may include:
. in the case of debt, declaring the entire amount of the debt immediately
due and payable;
. foreclosing on any residences or other collateral securing the
obligation;
. in the case of a lease, terminating the lease and suing for damages.
In addition, our debt instruments and leases contain "cross-default"
provisions pursuant to which a default under one obligation can cause a
default under one or more other obligations. Accordingly, it could have a
material adverse effect on our financial condition if any lender or lessor
notifies us that we are in default under any debt instrument or lease.
We believe that our current cash on hand, cash available from operations and
potential loans on uncollateralized properties are sufficient to meet our
operating needs through June 2001. However, many of our properties opened in
the last two to three years, and we have very little experience in the
maintenance capital expenditures necessary to retain these properties in their
current condition. To provide us with additional capital, we may explore
various financing alternatives and/or commitments to engage in sale and
leaseback transactions. We currently do not have in place any such loan or
lease commitments for future financing beyond our existing
13
<PAGE>
financing and sale and leaseback arrangements. As a result of the
securityholder litigation and other factors, there can be no assurances that
financing from any source will be available in the future, or, if available,
that such financing will be available on terms acceptable to us.
As of March 31, 2000, we had invested excess cash balances in short-term
certificates of deposit and highly liquid marketable debt securities.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (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 significant
impact on our financial condition or results of operations.
In March 2000, the Financial Accounting Standards Board, or FASB, issued
Interpretation No. 44, Accounting for Certain Transactions involving Stock
Compensation--an interpretation of APB Opinion No. 25, (FIN 44). FIN 44
applies prospectively to new awards, exchanges of awards in a business
combination, modifications to outstanding awards, and changes in grantee
status that occur on or after July 1, 2000, except for the provisions related
to repricings and the definition of an employee, which apply to awards issued
after December 15, 1998. The provisions related to modifications to fixed
stock options awards to add a reload feature are effective for awards modified
after January 12, 2000. We do not expect the adoption of this statement to
have a significant impact on our financial condition or results of operations.
14
<PAGE>
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Securityholder Litigation
Since February 1, 1999, 12 separate complaints were filed in the United
States District Court for the District of Oregon against us and certain of our
past and present officers and directors. Pursuant to Order signed on June 1,
1999, those complaints were consolidated for all purposes. On July 23, 1999, a
consolidated complaint was filed, and on October 20, 1999, an amended
consolidated complaint (the "Complaint") was filed.
The Complaint purports to be brought on behalf of a class of purchasers of:
(a) our common stock from February 6, 1997 through March 31, 1999, inclusive;
(b) our 6.0% convertible subordinated debentures due 2002 (the "6.0%
Debentures") from October 21, 1997 through March 31, 1999, inclusive; and (c)
our 5.625% convertible subordinated debentures due 2003 (the "5.625%
Debentures") from July 22, 1998 through March 31, 1999, inclusive.
The Complaint also names as defendants Schroder & Co., Inc., Morgan Stanley
Dean Witter and Smith Barney, Inc. (qsoley as underwriters in connection with
the 6.0% Debentures) and KPMG LLP, our independent auditors (in connection
with our offerings of common stock, the 6.0% Debentures and the 5.625%
Debentures).
The Complaint alleges violations of the federal securities laws and seeks
unspecified damages. We filed an answer to the Complaint on December 7, 1999.
Pursuant to our by-laws, we are obligated to indemnify our officers and
directors to the maximun extent allowed by law for any liability incurred by
them as a result of the litigation. In addition, we previously entered into
indemnity agreements with certain of the individual defendants and the
underwriters.
We cannot predict the outcome of the foregoing litigation and currently are
unable to evaluate the likelihood of success or the range of possible loss.
However, if the foregoing consolidated action were determined adversely to us
and/or to those to whom our indemnity obligations exist, such a determination
could have a material adverse effect on our financial condition, results of
operations, cash flow and liquidity.
Other Litigation
In addition to the matter referred to in the immediately preceding
paragraphs, we are involved in various lawsuits and claims arising in the
normal course of business. Although the outcomes of these other suits and
claims are uncertain and because of the early stages of these matters,
management cannot estimate the losses or range of losses, should the outcomes
be unfavorable. In the aggregate, such other suits and claims should not have
a material adverse effect on our financial condition, results of operations,
cash flow or liquidity.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
<TABLE>
<CAPTION>
Exhibit
Number
-------
<C> <S>
12 Ratio of Earnings to Fixed Charges
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K. We filed a report on Form 8-K on March 3, 2000
announcing the following: i) the appointment of W. James Nicol and John
M. Gibbons to the Company's Board of Directors, including the
appointment of Mr. Nicol as Chairman of the Board, ii) the formation of
an Executive Committee of the Board of Directors, iii) the resignation
of James W. Cruckshank as Chief Financial Officer, iv) the appointment
of Mr. Gibbons as Interim Chief Financial Officer and iv) our press
release dated March 3, 2000.
We also filed a report on Form 8-K on March 16, 2000 announcing the
following: i) the appointment of Drew Q. Miller as the Chief Financial
Officer and Treasurer, ii) the resignation of John M. Gibbons as
Interim Chief Financial Officer and iii) our press release dated
March 16, 2000.
15
<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/ Drew Q. Miller
May 11, 2000 By: __________________________________
Name: Drew Q. Miller
Title: Chief Financial Officer
May 11, 2000 /s/ M. Catherine Maloney
By: __________________________________
Name: M. Catherine Maloney
Title: Vice President and Chief
Accounting Officer
16
<PAGE>
EXHIBIT 12
Ratio of Earnings to Fixed Charges:
<TABLE>
<CAPTION>
Three Months Ended
-------------------
March 31, March 31,
1999 2000
--------- ---------
(in thousands)
<S> <C> <C>
Net loss.................................................... $(7,660) $(3,791)
Add fixed charges:
Interest expense including amortization of debt issuance
cost................................................... 3,795 4,028
------- -------
Earnings (loss)............................................. $(3,865) $ 237
------- -------
Fixed Charges
Interest expense including amortization of debt issuance
cost..................................................... $ 3,795 $ 4,028
Capitalized interest...................................... 1,027 --
------- -------
Total Fixed Charges......................................... $ 4,822 $ 4,028
======= =======
Ratio of Earnings to Fixed Charges.......................... -- --
======= =======
Deficiency of Earnings to Cover Fixed Charges............... $ 8,687 $ 3,791
======= =======
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 3,412
<SECURITIES> 1,610
<RECEIVABLES> 5,328
<ALLOWANCES> 1,192
<INVENTORY> 0
<CURRENT-ASSETS> 22,203
<PP&E> 322,293
<DEPRECIATION> 18,314
<TOTAL-ASSETS> 340,957
<CURRENT-LIABILITIES> 16,404
<BONDS> 232,995
0
0
<COMMON> 171
<OTHER-SE> 85,320
<TOTAL-LIABILITY-AND-EQUITY> 340,957
<SALES> 33,132
<TOTAL-REVENUES> 33,132
<CGS> 22,682
<TOTAL-COSTS> 33,104
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 130
<INTEREST-EXPENSE> 4,028
<INCOME-PRETAX> (3,791)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,791)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,791)
<EPS-BASIC> (.22)
<EPS-DILUTED> (.22)
</TABLE>
