UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20459
Form 10-Q
| [X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the quarterly period ended June 30, 2002 |
or
| [ ] | TRANSITION REPORT PURSUANT TO SECTION 12 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the Transition period from to |
Commission file number 1-83938
Assisted Living Concepts, Inc.
(Exact name of registrant as specified in its charter)
| Nevada | 93-1148702 | |
| (State or other jurisdiction of incorporation or organization) |
(IRS Employer Identification No.) |
11835 NE Glenn Widing Drive, Building E
Portland, Oregon 97220
(Address of principle executive offices)
(503) 252-6233
(Registrant’s telephone number, including area code)
Indicate by check mark whether Registrant (1) has filed all reports to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that Registrants was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
The Registrant had 6,431,759 shares of common stock, $.01 par value, outstanding at August 1, 2002.
ASSISTED LIVING CONCEPTS, INC.
FORM 10-Q
June 30, 2002
INDEX
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| PART I — FINANCIAL INFORMATION | ||||
| Item 1. | Financial Statements | |||
| Condensed Consolidated Balance Sheets |
3
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| Condensed Consolidated Statements of Operations |
4
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| Condensed Consolidated Statements of Cash Flows |
5
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| Notes to Condensed Consolidated Financial Statements |
6
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| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
16
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| Risk Factors |
26
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| Item 3. | Quantitative and Qualitative Disclosures About Market Risk and Risk Sensitive Instruments |
31
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PART II — OTHER INFORMATION
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| Item 1. | Legal Proceedings |
32
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| Item 4. | Submission of Matters to a Vote of Security Holders |
32
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| Item 6. | Exhibits and Reports on Form 8-K |
32
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2
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
ASSISTED LIVING CONCEPTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
(Unaudited)
| Successor Company | |||||||||||
| December 31, | June 30, | ||||||||||
| 2001 | 2002 | ||||||||||
ASSETS |
|||||||||||
Current Assets: |
|||||||||||
Cash and cash equivalents |
$ | 6,077 | $ | 5,536 | |||||||
Cash restricted for resident security deposits |
2,415 | 2,422 | |||||||||
Accounts receivable, net of allowance for doubtful accounts: 2002 - $132 |
2,328 | 2,332 | |||||||||
Prepaid expenses |
983 | 2,185 | |||||||||
Cash restricted for workers’ compensation claims |
2,825 | 5,525 | |||||||||
Assets held for sale |
— | 5,557 | |||||||||
Other current assets |
3,862 | 3,690 | |||||||||
Total current assets |
18,490 | 27,247 | |||||||||
Restricted cash |
5,349 | 5,322 | |||||||||
Property and equipment, net |
196,548 | 188,711 | |||||||||
Other assets, net |
1,866 | 2,003 | |||||||||
Total assets |
$ | 222,253 | $ | 223,283 | |||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|||||||||||
Current liabilities: |
|||||||||||
Accounts payable |
$ | 1,450 | $ | 1,232 | |||||||
Accrued real estate taxes |
4,523 | 3,937 | |||||||||
Other accrued expenses |
12,390 | 13,650 | |||||||||
Accrued interest expense payable to related parties |
— | 769 | |||||||||
Resident security deposits |
2,471 | 2,380 | |||||||||
Other current liabilities |
652 | 1,095 | |||||||||
Current portion of unfavorable lease adjustment |
681 | 647 | |||||||||
Current portion of long-term debt and capital lease obligation |
2,622 | 7,696 | |||||||||
Total current liabilities |
24,789 | 31,406 | |||||||||
Other liabilities |
89 | 277 | |||||||||
Unfavorable lease adjustment |
3,115 | 2,809 | |||||||||
Long-term debt and capital lease obligation, net of current portion |
161,461 | 160,072 | |||||||||
Total liabilities |
189,454 | 194,564 | |||||||||
Commitments and contingencies |
|||||||||||
Shareholders’ equity: |
|||||||||||
Preferred stock, $.01 par value; 3,250,000 shares authorized; none issued or outstanding |
— | — | |||||||||
Common Stock, $.01 par value; 20,000,000 shares authorized; issued and outstanding
6,431,759 shares (68,241 shares to be issued upon settlement of pending claims) |
65 | 65 | |||||||||
Additional paid-in capital |
32,734 | 32,734 | |||||||||
Accumulated deficit |
— | (4,080 | ) | ||||||||
Total shareholders’ equity |
32,799 | 28,719 | |||||||||
Total liabilities and shareholders’ equity |
$ | 222,253 | $ | 223,283 | |||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
ASSISTED LIVING CONCEPTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
| Predecessor | Successor | Predecessor | Successor | |||||||||||||||
| Company | Company | Company | Company | |||||||||||||||
| Three Months | Three Months | Six Months | Six Months | |||||||||||||||
| Ended | Ended | Ended | Ended | |||||||||||||||
| June 30, 2001 | June 30, 2002 | June 30, 2001 | June 30, 2002 | |||||||||||||||
Revenue |
$ | 36,493 | $ | 37,904 | $ | 72,537 | $ | 75,024 | ||||||||||
Operating expenses: |
||||||||||||||||||
Residence operating expenses |
24,136 | 26,268 | 48,900 | 51,846 | ||||||||||||||
Corporate general and administrative |
4,440 | 5,578 | 8,708 | 9,895 | ||||||||||||||
Building rentals |
1,746 | 948 | 3,600 | 1,865 | ||||||||||||||
Building rentals with related party |
2,340 | 2,120 | 4,592 | 4,240 | ||||||||||||||
Depreciation and amortization |
2,440 | 1,650 | 4,861 | 3,268 | ||||||||||||||
Total operating expenses |
35,102 | 36,564 | 70,661 | 71,114 | ||||||||||||||
Operating income |
1,391 | 1,340 | 1,876 | 3,910 | ||||||||||||||
Other income (expense): |
||||||||||||||||||
Interest expense |
(4,905 | ) | (3,082 | ) | (9,307 | ) | (6,288 | ) | ||||||||||
Interest expense to related parties |
— | (384 | ) | — | (769 | ) | ||||||||||||
Interest income |
138 | 52 | 287 | 106 | ||||||||||||||
Other income (expense), net |
(99 | ) | 20 | (69 | ) | 21 | ||||||||||||
Total other expense, net |
(4,866 | ) | (3,394 | ) | (9,089 | ) | (6,930 | ) | ||||||||||
Loss before debt restructure and reorganization costs |
(3,475 | ) | (2,054 | ) | (7,213 | ) | (3,020 | ) | ||||||||||
Debt restructure and reorganization costs |
1,063 | 219 | 1,366 | 666 | ||||||||||||||
Loss from continuing operations |
(4,538 | ) | (2,273 | ) | (8,579 | ) | (3,686 | ) | ||||||||||
Loss from discontinued operations |
(73 | ) | (357 | ) | (230 | ) | (394 | ) | ||||||||||
Net loss |
$ | (4,611 | ) | $ | (2,630 | ) | $ | (8,809 | ) | $ | (4,080 | ) | ||||||
Basic and diluted loss per share from continuing operations |
$ | (.27 | ) | $ | (.35 | ) | $ | (.50 | ) | $ | (.57 | ) | ||||||
Basic and diluted loss per share from discontinued operations |
— | (.05 | ) | (.01 | ) | (.06 | ) | |||||||||||
Basic and diluted net loss per share |
$ | (.27 | ) | $ | (.40 | ) | $ | (.51 | ) | $ | (.63 | ) | ||||||
Basic and diluted weighted average shares outstanding |
17,121 | 6,500 | 17,121 | 6,500 | ||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
ASSISTED LIVING CONCEPTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
| Predecessor | Successor | |||||||||
| Company | Company | |||||||||
| Six Months | Six Months | |||||||||
| Ended | Ended | |||||||||
| June 30, 2001 | June 30, 2002 | |||||||||
Operating Activities: |
||||||||||
Net loss |
$ | (8,809 | ) | $ | (4,080 | ) | ||||
Adjustment to reconcile net loss to net cash (used in) provided by
operating activities |
||||||||||
Depreciation and amortization |
5,123 | 3,359 | ||||||||
Amortization of debt issuance costs |
1,412 | 52 | ||||||||
Amortization of fair value adjustment to building rentals |
— | (306 | ) | |||||||
Amortization of fair market adjustment to long-term debt |
— | 213 | ||||||||
Amortization of discount on long-term debt |
— | 211 | ||||||||
Straight line adjustment to building rentals |
32 | 188 | ||||||||
Interest paid-in-kind |
— | 610 | ||||||||
Provision for doubtful accounts |
(21 | ) | 132 | |||||||
Gain on disposal of assets |
88 | — | ||||||||
Loss on discontinued operations |
— | 443 | ||||||||
Changes in working capital items: |
||||||||||
Accounts receivable |
262 | (136 | ) | |||||||
Prepaid expenses |
1,228 | (1,202 | ) | |||||||
Other current assets |
(444 | ) | 172 | |||||||
Other assets |
(718 | ) | (299 | ) | ||||||
Accounts payable |
(1,183 | ) | (218 | ) | ||||||
Accrued expenses |
(1,211 | ) | 1,443 | |||||||
Other current liabilities |
(3,753 | ) | 294 | |||||||
Other liabilities |
(340 | ) | — | |||||||
Net cash (used in) provided by operating activities |
(8,334 | ) | 876 | |||||||
Investing Activities: |
||||||||||
Increase in restricted cash |
(2,008 | ) | (2,680 | ) | ||||||
Purchases of property and equipment |
(938 | ) | (1,333 | ) | ||||||
Net cash used in investing activities |
(2,946 | ) | (4,013 | ) | ||||||
Financing Activities: |
||||||||||
Proceeds from long-term debt |
14,777 | 3,400 | ||||||||
Payments on long-term debt and capital lease obligation |
(573 | ) | (725 | ) | ||||||
Payments on bridge loan payable |
(4,000 | ) | — | |||||||
Debt issuance costs |
(3,134 | ) | (79 | ) | ||||||
Net cash provided by financing activities |
7,070 | 2,596 | ||||||||
Net decrease in cash and cash equivalents |
(4,210 | ) | (541 | ) | ||||||
Cash and cash equivalents, beginning of period |
9,889 | 6,077 | ||||||||
Cash and cash equivalents, end of period |
$ | 5,679 | $ | 5,536 | ||||||
Supplemental disclosure of cash flow information: |
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Cash payments for interest |
$ | 7,819 | $ | 5,422 | ||||||
Reclassification of other current and other liabilities to
current and non-current long-term debt and capital lease
obligation |
$ | 550 | $ | — | ||||||
Reclassification of property and equipment to assets held for sale |
$ | — | $ | 5,811 | ||||||
Reclassification of other current assets to assets held for sale |
$ | — | $ | 189 | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The Company
Assisted Living Concepts, Inc., a Nevada Corporation, (“the Company”) owns, leases and operates 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, as permitted by applicable law, designed to meet the needs of its residents.
2. Reorganization
On October 1, 2001, Assisted Living Concepts, Inc. (the “Company”), and its wholly owned subsidiary, Carriage House Assisted Living, Inc. (“Carriage House”, and together with the Company, the “Debtors”) each filed a voluntary petition under Chapter 11 of Title 11 of the United States Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the District of Delaware in Wilmington (the “Court”), case nos. 01-10674 and 01-10670, respectively, which are being jointly administered. The Court gave final approval to the first amended joint plan of reorganization (the “Plan”) on December 28, 2001.
On January 1, 2002 (the “Effective Date”) the Plan became effective. The Plan authorized the issuance as of the Effective Date (subject to the Reserve described below) of $40.25 million aggregate principal amount of seven-year secured notes (the “New Senior Secured Notes”), bearing interest at 10% per annum, payable semi-annually in arrears, and $15.25 million aggregate principal amount of ten-year secured notes (the “New Junior Secured Notes” and collectively with the New Senior Secured Notes, the “New Notes”), bearing interest payable in additional New Junior Secured Notes for three years at 8% per annum and thereafter payable in cash at 12% per annum, payable semi-annually in arrears, and (c) 6,500,000 shares of new common stock, par value $0.01 (the “New Common Stock”) of the reorganized Company, of which 4% was issued to shareholders of the Predecessor Company.
At the Effective Date, the new Board of Directors of the reorganized Company consisted of seven members as follows: W. Andrew Adams (Chairman), Leonard Tannenbaum, Andre Dimitriadis, Matthew Patrick, Mark Holliday, Richard Ladd and Wm. James Nicol, then the President and Chief Executive Officer of the Company. In February 2002, Steven L. Vick replaced Mr. Nicol as President, Chief Executive Officer and Director.
The Company held back from the initial issuance of New Common Stock and New Notes on the Effective Date, $440,178 of New Senior Secured Notes, $166,775 of New Junior Secured Notes and 68,241 shares of New Common Stock (collectively, the “Reserve”) to be issued to holders of general unsecured claims at a later date. The total amount of, and the identities of all of the holders of, the general unsecured claims were not known as of the Effective Date, either because they were disputed or they were not made by their holders prior to December 19, 2001, the cutoff date for calculating the Reserve (the “Cutoff Date”). Once the total amount and the identities of the holders of those claims are determined, the shares of New Common Stock and the New Notes held in the Reserve will be distributed pro rata among the holders of those claims (the date of this distribution, the “Subsequent Distribution Date”).
If the Reserve is insufficient to cover the general unsecured claims allowed after the Cutoff Date, the Company and its subsidiaries will have no further liability with respect to those general unsecured claims and the holders of those claims will receive proportionately lower distributions of shares of New Common Stock and New Notes than the holders of general unsecured claims allowed prior to the Cutoff Date. If the Reserve exceeds the distributions necessary to cover the general unsecured claims allowed after the Cutoff Date, the additional securities remaining in the Reserve will be distributed among all holders of the general unsecured claims so as to ensure that each holder of a general unsecured claim receives, in the aggregate, its pro rata share of the New Common Stock and the New Notes. In this case, the holders of the general unsecured claims allowed prior to the Cutoff Date will receive distributions of securities both on the Effective Date and on the Subsequent Distribution Date.
3. Basis of Presentation
The condensed consolidated financial statements included herein have been prepared by the Company without audit and in the opinion of management include all adjustments (all of which are normal and re-occurring) necessary for a fair presentation of the
6
results of operations for the three and six months ended June 30, 2001 and 2002, pursuant to the rules and regulations of the Securities and Exchange Commission. The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain reclassifications have been made to the prior period financial statements to conform to the current period presentation. Certain information and footnote disclosures normally included in financial statements in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations; however the Company believes that the disclosures in the accompanying financial statements are adequate to make the information presented not misleading. The accompanying condensed consolidated financial statements should be read in conjunction with the Company’s annual report on Form 10-K/A for the fiscal year ended December 31, 2001 filed with the Securities and Exchange Commission. The results of operations for the six months ended June 30, 2002 are not necessarily indicative of the results for a full year.
The results of operations for the three and six months ended June 30, 2001 and 2002 reflect the continuing operations of 178 residences. Results of operations for the six residences available for sale are included in “Loss from Discontinued Operations” in the accompanying financial statements. (See Note 12).
4. Fresh Start Reporting and Factors Affecting Comparability of Financial Information
Upon emergence from Chapter 11 proceedings, the Company adopted fresh-start reporting in accordance with the American Institute of Certified Public Accountants Statement of Position 90-7, Financial Reporting By Entities in Reorganization Under the Bankruptcy Code (SOP 90-7). In connection with the adoption of fresh-start reporting, a new entity has been deemed created for financial reporting purposes. For financial reporting purposes, the Company adopted the provisions of fresh-start reporting effective December 31, 2001. Consequently, the condensed consolidated balance sheet and related information at and subsequent to December 31, 2001 is labeled “Successor Company,” and reflects the Plan and the principles of fresh-start reporting. Periods presented prior to December 31, 2001 have been designated “Predecessor Company.”
In adopting the requirements of fresh-start reporting as of December 31, 2001, the Company was required to value its assets and liabilities at fair value and eliminate its accumulated deficit as of December 31, 2001. A $32.8 million reorganization value was determined by the Company with the assistance of financial advisors in reliance upon various valuation methods, including discounted projected cash flow analysis and other applicable ratios and economic industry information relevant to the operation of the Company and through negotiations with various creditor parties in interest.
As a consequence of the implementation of fresh-start reporting effective December 31, 2001 the financial information presented in the condensed consolidated statement of operations for the three and six months ended June 30, 2001 and the corresponding statements of cash flows for the six months ended June 30, 2001 are generally not comparable to the financial results for the three and six months ended June 30, 2002. Any financial information herein labeled “Predecessor Company” refers to periods prior to the adoption of fresh-start reporting, while those labeled “Successor Company” refer to periods following the Company’s reorganization.
The lack of comparability in the accompanying condensed consolidated financial statements relates primarily to the Company’s capital costs (building rentals, interest, depreciation and amortization), as well as debt restructuring and reorganization costs.
5. New Accounting Pronouncement
In October 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Standards (“SFAS”) No.144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No.144 addresses significant issues relating to the implementation of SFAS No.121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,” and develops a single accounting method under which long-lived assets that are to be disposed of by sale are measured at the lower of book value or fair value less cost to sell. Additionally, SFAS No.144 expands the scope of discontinued operations to include all components of an entity with operations that (1) can be distinguished from the rest of the entity and