<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20459
FORM 10-K/A
(Mark One)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
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 1-13498
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 NE Glenn Widing Drive, Bldg. E
Portland, OR 97220-9057
(503) 252-6233
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
Securities Registered Pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Name of each exchange
Title of each class on which registered
- ------------------- -----------------------
<S> <C>
Common Stock, par value $.01 American Stock Exchange
7% Convertible Subordinated Debentures Due August 2005 American Stock Exchange
6% Convertible Subordinated Debentures Due November
2002 American Stock Exchange
</TABLE>
Securities Registered Pursuant to Section 12(g) of the Act:
None.
Indicate by check mark whether the registrant (1) has filed all reports
required 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 the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for at least the past 90 days. YES [X] NO [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K: [_]
As of February 28, 1998, 15,683,864 shares of the registrant's Common Stock,
par value $.01 per share, were outstanding. The aggregate market value of the
voting stock held by non-affiliates of the registrant on such date was
approximately $292.1 million.
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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 of the fiscal year ended December 31,
1998. This amendment includes in Item 8 and 14 such restated consolidated
financial statements for the fiscal year ended December 31, 1997 and other
information relating to such restated consolidated financial statements,
including Selected Financial Data (Item 6) and Management's Discussion and
Analysis of Financial Condition and Results of Operations (Item 7).
Information regarding the effect of the restatement on the Company's results
of operations for the year ended December 31, 1997 is provided in Item 7 of
this amendment and in Note 16 to the consolidated financial statements
included in Item 14 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, and 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 6, 7, 8 and 14, no other information included in the
Company's Annual Report on Form 10-K 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>
PART II
ITEM 6. Selected Financial Data
The following table presents selected historical condensed consolidated
financial data for the Company and the Predecessor. The Predecessor consisted
of Assisted Living Facilities, Inc., an S-corporation; Madras Elder Care, a
partnership; and Lincoln City Partners, a partnership, which, prior to
December 1, 1994, collectively owned the five residences operated by the
Company commencing in December 1994. The selected financial data below should
be read in conjunction with the consolidated financial statements of the
Company, including the notes thereto, and the information in "Management's
Discussion and Analysis of Financial Condition and Results of Operations" on
page 5.
<TABLE>
<CAPTION>
Predecessor The Company
-------------------------- -------------------------------------------
Year Ended December 31,
Eleven Months One Month ------------------------------
Year Ended Ended Ended 1997
December 31, November 30, December 31, (As
1993 1994 1994(1) 1995 1996 Restated)(2)
------------ ------------- ------------ ------- ------- ------------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Statements
of Operations:
Revenue................. $1,884 $1,841 $ 212 $ 4,067 $21,022 $49,605
Operating expenses:
Residence operating
expenses............. 1,090 1,127 125 2,779 14,055 31,591
Management fees....... 92 93 -- -- -- --
Corporate general and
administrative....... -- -- 152 1,252 1,864 4,050
Building rentals...... -- -- 42 798 3,949 7,969
Depreciation and
amortization......... 132 105 13 296 1,094 3,683
------ ------ ------ ------- ------- -------
Total operating
expenses............... 1,314 1,325 332 5,125 20,962 47,293
------ ------ ------ ------- ------- -------
Operating income
(loss)................. 570 516 (120) (1,058) 60 2,312
Other (income) expense.. 309 285 (56) (483) 1,975 4,791
------ ------ ------ ------- ------- -------
Net income (loss)....... $ 261 $ 231 $ (64) $ (575) $(1,915) $(2,479)
====== ====== ====== ======= ======= =======
Unaudited pro forma
data:
Net income (loss)....... $ 261 $ 231
Pro forma provision for
income taxes(3)........ 67 85
------ ------
Pro forma net income
(loss)................. $ 194 $ 146
====== ======
Basic and diluted net
loss per share......... $(0.01) $ (0.10) $ (0.23) $ (0.21)
Basic and diluted
weighted average common
shares outstanding..... 6,000 6,000 8,404 11,871
</TABLE>
<TABLE>
<CAPTION>
Predecessor The Company
------------------------- ---------------------------------------
At December 31,
---------------------------------------
At At 1997
December 31, November 30, (As
1993 1994 1994 1995 1996 Restated)(2)
------------ ------------ ------- ------- -------- ------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Balance
Sheet Data:
Working capital......... $ 351 $ 299 $13,122 $(5,320) $(27,141) $ 40,062
Total assets............ 4,110 5,699 17,903 53,546 147,223 324,367
Long-term debt,
excluding current
portion................ 3,700 5,266 1,101 24,553 49,663 157,700
Shareholders' equity.... 263 197 16,219 15,644 56,995 132,244
</TABLE>
- --------
(1) The Company commenced operating the residences on December 1, 1994.
(2) The financial data as of and for the year ended December 31, 1997 has been
restated as described in Item 7 and Note 16 to the Consolidated Financial
Statements.
(3) The Predecessor was exempt from U.S. federal and state income taxes as a
result of its partnership and subchapter S status. The financial data
reflects the income tax expenses that would have been recorded had the
Predecessor not been exempt from paying such income taxes. The pro forma
financial data includes the effect of the Company adopting Statement of
Financial Accounting Standards (SFAS) No. 109.
3
<PAGE>
Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
1997 Quarterly Financial Data
1996 Quarterly Financial Data As Restated(1)
--------------------------------------- -----------------------------------------
1st 2nd 3rd 4th Year to 1st 4th Year to
Qtr Qtr Qtr Qtr Date Qtr 2nd Qtr 3rd Qtr Qtr Date
------ ------ ------ ------ ------- ------ ------- ------- ------- -------
(in thousands except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Results of Operation
Revenue................. $2,789 $4,396 $6,017 $7,820 $21,022 $9,479 $11,108 $12,765 $16,253 $49,605
Operating income
(loss)................. (362) (140) 125 437 60 805 1,010 303 194 2,312
Net income (loss)....... (605) (669) (601) (40) (1,915) 31 (74) (1,475) (961) (2,479)
Basic and diluted income
(loss) per share(2).... $(0.10) $(0.11) $(0.06) $ 0.00 $ (0.23) $ 0.00 $ (0.01) $ (0.13) $ (0.07) $ (0.21)
Basic and diluted
weighted average common
shares outstanding..... 6,010 6,026 10,530 11,030 8,404 11,004 11,044 11,084 14,429 11,871
</TABLE>
- --------
(1) The financial data as of and for the year ended December 31, 1997 has been
restated as described in Item 7 and Note 16 to the Consolidated Financial
Statements.
(2) Quarter net loss per share amounts may not add to the full year total due
to rounding and increasing number of shares.
ITEM 7. 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 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 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 by $2.1 million and $6.7 million, respectively. The
cumulative effect of the restatement reduced shareholders' equity by $8.8
million through December 31, 1997. As a result of the restatement, the Company
reported net losses of $1.9 million and $2.5 million for the fiscal years 1996
and 1997, respectively, compared to previously reported net income of $149,000
and $4.2 million, respectively. As a result of the restatement, the Company
reported net loss per diluted share of $0.23 and $0.21 for the fiscal years
1996 and 1997, respectively, compared to previously reported net income of
$0.03 and $0.34, per diluted share, respectively. After the restatement, the
Company's cash position as of December 31, 1996 and 1997 was $2.1 million and
$63.3 million, respectively, as compared to $2.1 million and $63.4 million,
respectively, as previously reported. As a result of the restatement, the
Company's working capital position as of December 31, 1996 and 1997 was
negative $27.1 million and positive $40.1 million, respectively, as compared
to previously reported working capital of negative $26.4 million and positive
$41.0 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 of its lease arrangements; (iii) a modification in how the Company
accounted for certain of its acquisitions and its joint venture arrangements;
and (iv) the capitalization of fees received by the Company previously
recognized as either a reduction of expenses or as other income.
For statement of operations and balance sheet data, as originally reported
and as restated as of and for the year ended December 31, 1997, as well as a
description of the adjustments to the originally reported data resulting from
the restatement, see Note 16 to the consolidated financial statements included
in Item 14 of this report.
4
<PAGE>
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
December 31, 1997, the Company had received a Certificate of Occupancy on 130
residences (4,888 units) of which 109 residences (4,024 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 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, Start-up and Same Store Residences (as defined in the tables
below) at the beginning of each period, and the operating results of
Stabilized, Start-up and Same Store Residences in each period, have been
restated. See footnote (A) to Note 16 of the consolidated financial statements
included in Item 14.
The following table sets forth, for periods presented, the number of total
residences and units included in operating results, average occupancy rates
and the 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".
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------
1997
Total Residences 1995 1996 (As Restated)
---------------- ----- ----- -------------
<S> <C> <C> <C>
Residences operated (end of period).............. 19 60 109
Units operated (end of period)................... 595 2,139 4,024
Average occupancy rate........................... 82.3% 76.7% 71.7%
Sources of revenue:
Medicaid state portion......................... 21.4% 12.4% 11.1%
Medicaid resident portion...................... 9.6% 6.9% 5.9%
Private........................................ 69.0% 80.7% 83.0%
----- ----- -----
Total........................................ 100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
5
<PAGE>
The following table sets forth, for the periods presented for Stabilized
Residences, the total number of residences and units included in operating
results, average occupancy rates and the sources of revenue for the Company.
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.
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------
1997
Stabilized Residences 1995 1996 (As Restated)
- --------------------- ----- ----- -------------
<S> <C> <C> <C>
Residences operated (end of period)................. 5 7 32
Units operated (end of period)...................... 137 204 1,063
Average occupancy rate.............................. 99.1% 96.5% 95.1%
Sources of revenue:
Medicaid state portion............................ 23.9% 19.9% 11.4%
Medicaid resident portion......................... 11.3% 11.5% 6.5%
Private........................................... 64.8% 68.6% 82.1%
----- ----- -----
Total........................................... 100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
The following table sets forth, for the periods presented for Start-up
Residences, the total number of residences and units included in operating
results, average occupancy rates and the sources of revenue for the Company.
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>
Years Ended December 31,
---------------------------
1997
Start-up Residences 1995 1996 (As Restated)
- ------------------- ----- ----- -------------
<S> <C> <C> <C>
Residences operated (end of period)................. 14 53 77
Units operated (end of period)...................... 458 1,935 2,961
Average occupancy rate.............................. 77.3% 73.0% 59.8%
Sources of revenue:
Medicaid state portion............................ 16.4% 9.8% 11.3%
Medicaid resident portion......................... 6.3% 5.3% 5.7%
Private........................................... 77.3% 84.9% 83.0%
----- ----- -----
Total........................................... 100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
The following table sets forth, for the periods presented for Same Store
Residences, the total number of residences and units included in operating
results, average occupancy rates and the sources of revenue for the Company.
Same Store Residences are defined as those residences which were operating
throughout comparable periods.
<TABLE>
<CAPTION>
Years Ended Years Ended
December 31, December 31,
------------ --------------------
1997
Same Store Residences 1995 1996 1996 (As Restated)
- --------------------- ----- ----- ----- -------------
<S> <C> <C> <C> <C>
Residences operated (end of period).......... 5 5 19 19
Units operated (end of period)............... 137 137 595 605
Average occupancy rate....................... 99.1% 97.8% 90.0% 95.6%
Sources of revenue:
Medicaid state portion..................... 23.9% 21.7% 16.1% 13.8%
Medicaid resident portion.................. 11.3% 11.7% 9.1% 7.6%
Private.................................... 64.8% 66.6% 74.8% 78.6%
----- ----- ----- -----
Total.................................... 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
</TABLE>
6
<PAGE>
The following tables relating to Stabilized Residences, Start-up Residences
and Same Store Residences exclude the effects of corporate level expenses,
including general and administrative expenses and interest expense.
The following table sets forth, for the periods presented, the results of
operations for Stabilized Residences (in thousands).
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------
1997
Stabilized Residences 1995 1996 (As Restated)
- --------------------- ------ ------ -------------
<S> <C> <C> <C>
Revenue............................................. $2,699 $4,084 $21,245
Residence operating expense......................... 1,667 2,422 12,255
------ ------ -------
Residence operating income........................ 1,032 1,662 8,990
------ ------ -------
Building rentals.................................... 500 935 3,323
Depreciation and amortization....................... 116 138 945
------ ------ -------
Total other operating expenses.................... 616 1,073 4,268
------ ------ -------
Operating income................................ $ 416 $ 589 $ 4,722
====== ====== =======
</TABLE>
The following tables sets forth, for the periods presented, the results of
operations for Start-up Residences (in thousands).
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------
1997
Start-up Residences 1995 1996 (As Restated)
- ------------------- ------ ------- -------------
<S> <C> <C> <C>
Revenue........................................... $1,368 $16,938 $27,164
Residence operating expense....................... 1,112 11,633 18,519
------ ------- -------
Residence operating income...................... 256 5,305 8,645
------ ------- -------
Building rentals.................................. 298 3,014 4,612
Depreciation and amortization..................... 180 956 2,010
------ ------- -------
Total other operating expenses.................. 478 3,970 6,622
------ ------- -------
Operating income.............................. $ (222) $ 1,335 $ 2,023
====== ======= =======
</TABLE>
The following table sets forth, for the periods presented, the results of
operations for the five Same Store Residences included in operating results
for all of fiscal years 1995 and 1996, and the 19 Same Store Residences
included in operating results for all of fiscal years 1996 and 1997 (in
thousands).
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------
1997
Same Store Residences 1995 1996 1996 (As Restated)
- --------------------- ------ ------ ------- -------------
<S> <C> <C> <C> <C>
Revenue..................................... $2,699 $2,823 $10,877 $12,397
Residence operating expense................. 1,667 1,652 6,682 7,070
------ ------ ------- -------
Residence operating income................ 1,032 1,171 4,195 5,327
------ ------ ------- -------
Building rentals............................ 500 499 2,374 2,440
Depreciation and amortization............... 116 115 543 461
------ ------ ------- -------
Total other operating expenses............ 616 614 2,917 2,901
------ ------ ------- -------
Operating income........................ $ 416 $ 557 $ 1,278 $ 2,426
====== ====== ======= =======
</TABLE>
7
<PAGE>
Results of Operations
Year ended December 31, 1997 compared to year ended December 31, 1996
The Company incurred a net loss of $2.5 million, or $0.21 per basic and
diluted share, on revenue of $49.6 million for the year ended December 31,
1997 (the "1997 Period") as compared to a net loss of $1.9 million, or $0.23
per basic and diluted share, on revenues of $21.0 million for the year ended
December 31, 1996 (the "1996 Period").
The Company had certificates of occupancy for 130 residences, 109 of which
were included in the operating results as of the end of the 1997 Period as
compared to 67 residences with certificates of occupancy, 60 of which were
included in the operating results as of the end of the 1996 Period. Of the
residences included in the operating results as of the end of the 1997 Period,
the Company owned 42 residences and leased 67 residences (51 of which were
operating leases and 16 of which were accounted for as financings) as compared
to 26 owned residences and 34 leased residences (25 of which were operating
leases and nine of which were accounted for as financings) as of the end of
the 1996 Period.
Revenue. Revenue was $49.6 million for the 1997 Period as compared to $21.0
million for the 1996 Period, an increase of $28.6 million. Of this increase,
$13.2 million or 46.2% related to the full year impact of the 41 residences
(1,544 units) which opened during the 1996 Period, $12.7 million or 44.4%
related to the opening of an additional 49 residences (1,885 units) during the
1997 Period, $1.5 million or 5.2% was attributable to the 19 Same Store
Residences (605 units) and the remaining $1.2 million or 4.2% related to
ancillary revenues earned in connection with the acquisition of Home and
Community Care, Inc. ("HCI").
Revenue from the Same Store Residences was $12.4 million for the 1997 Period
as compared to $10.9 million for the 1996 Period, an increase of $1.5 million
or 13.8%. All of the increase in revenue for Same Store Residences was
attributable to an increase in average occupancy to 95.6% for the 1997 period
as compared to 90.0% for the 1996 period. The average monthly rental rate for
the Same Store Residences increased to $1,772 for the 1997 Period as compared
to $1,670 per month for the 1996 Period.
Of the $49.6 million in revenues reported for the 1997 Period, $21.2 million
or 42.8% was attributable to Stabilized Residences, $27.2 million or 54.8% was
attributable to Start-Up Residences and $1.2 million or 2.4% was attributable
to ancillary service operations. As of the end of the 1997 Period, the Company
had 32 Stabilized Residences (1,063 units) with an average occupancy of 95.1%
and an average monthly rental rate of $1,735 and the Company had 77 Start-Up
Residences (2,961 units) with an average occupancy of 59.8% and an average
monthly rental rate of $1,782.
Residence Operating Expenses. Residence operating expenses were $31.6
million for the 1997 Period as compared to $14.1 million for the 1996 Period,
an increase of $17.5 million. Of this increase, $6.1 million or 34.9% related
to the full year impact of the 41 residences (1,544 units) which opened during
the 1996 Period, $10.2 million or 58.3% related to the opening of an
additional 49 residences (1,885 units) during the 1997 Period, $388,000 or
2.2% was attributable to the 19 Same Store Residences (605 units) and the
remaining $800,000 or 4.6% related to expenses associated with the Company's
ancillary service operation.
Residence operating expenses for the Same Store Residences were $7.1 million
for the 1997 Period as compared to $6.7 million for the 1996 Period, an
increase of $388,000 or 5.8%. This increase results from the additional
expenses incurred in connection with the increase in occupancy at the Same
Store Residences during the period.
Of the $31.6 million in residence operating expenses reported for the 1997
Period, $12.3 million or 38.9% was attributable to Stabilized Residences,
$18.5 million or 58.6% was attributable to Start-Up Residences and $800,000 or
2.5% was attributable to the Company's ancillary service operation.
8
<PAGE>
Corporate General and Administrative. Corporate general and administrative
expenses were $4.1 million for the 1997 Period as compared to $1.9 million for
the 1996 Period. The Company's corporate general and administrative expenses
before capitalized payroll costs were $5.9 million for the 1997 Period as
compared to $3.0 million for the 1996 Period, an increase of $2.9 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
$1.8 million of payroll costs for the 1997 Period as compared to $1.1 million
for the 1996 Period resulting from an increase in development activities.
Building Rentals. Building rentals were $8.0 million for the 1997 Period as
compared to $4.0 million for the 1996 Period, an increase of $4.0 million. Of
this increase, $1.3 million or 32.5% related to the full year impact of the 20
leases (four of which were repurchased) entered into during the 1996 Period
and the remaining $2.7 million or 67.5% related to the 26 leases entered into
during the 1997 Period. The nine leases entered into prior to the 1996 Period
remained relatively unchanged. As of the end of the 1997 Period the Company
had 51 operating leases as compared to 25 operating leases as of the end of
the 1996 Period.
Depreciation and Amortization. Depreciation and amortization was $3.7
million for the 1997 Period as compared to $1.1 million for the 1996 Period,
an increase of $2.6 million. Depreciation expense was $2.9 million and
amortization expense was $800,000 for the 1997 Period as compared to $805,000
and $289,000, respectively, for the 1996 Period. The increase in depreciation
is the result of the full year effect of depreciation on the 26 owned
residences which commenced operations during the 1996 Period, depreciation
associated with the 16 owned residences that commenced operations during the
1997 Period, and depreciation associated with the sale and leaseback of seven
residences during the 1997 Period and nine residences during the 1996 Period
which were accounted for as financings. Amortization expense increased as a
result of the amortization of additional pre-opening costs and goodwill.
Interest Expense. Interest expense was $4.9 million for the 1997 Period as
compared to $1.2 million for the 1996 Period. Gross interest expense for the
1997 Period was $11.5 million compared to $3.5 million for the 1996 Period, a
net increase of $8.0 million. Of the increase, $5.3 million or 66.2% was due
to construction financing used to fund development activity during the 1997
Period, $1.5 million or 18.7% was related to the sale and leaseback of an
additional seven residences during the 1997 Period which were accounted for as
financings, $1.1 million or 13.8% was due to interest expense related to the
October 1997 issuance of 6.0% Convertible Subordinated Debentures due 2002
(the "6.0% Debentures") and the remaining $100,000, or 1.3%, was related to
new mortgage financing incurred during the 1997 Period. The Company
capitalized $6.6 million of interest expense for the 1997 Period compared to
$2.3 million for the 1996 Period. The Company completed the sale and leaseback
of seven residences during the 1997 Period and nine residences during the 1996
Period, which were accounted for as financings, and recorded building rental
payments as interest expense.
Interest Income. Interest income was $1.5 million for the 1997 Period as
compared to $455,000 for the 1996 Period, an increase of $1.1 million. The
increase is related to in interest income earned on higher cash balances
primarily resulting from the October 1997 offerings of common stock and 6.0%
Debentures from which the Company received net proceeds of approximately
$155.0 million.
Loss on Sale of Assets. Loss on sale of assets was $1.3 million for the 1997
Period as compared to $854,000 (net of an $82,000 gain on the sale of land)
for the 1996 Period. Of the loss on sale of assets recorded during the 1997
Period, $650,000 or 52.0% resulted from losses incurred in connection with 10
sale and leaseback transactions entered into during the 1997 Period and the
remaining $600,000 or 48.0% resulted from losses resulting primarily from
additional capital costs incurred during the 1997 Period on sale and leaseback
transactions completed in the 1996 Period. The Company entered into 24 sale
and leaseback transactions during the 1997 Period as compared to 19 sale and
leaseback transactions (four of which were repurchased) during the 1996
Period.
9
<PAGE>
Debenture Conversion Cost. In the third quarter of 1996, $6.1 million of the
$20.0 million of 7% Convertible Subordinated Debentures due August 2005 (the
"7.0% Debentures") were converted into 811,333 shares of the Company's common
stock. The Company incurred a charge of $426,000 during the 1996 Period in
connection with the conversion.
Net Loss. As a result of the above, net loss was $2.5 million or $0.21 per
basic and diluted share for the 1997 Period, compared to $1.9 million, or
$0.23 per basic and diluted share for the 1996 Period.
Year ended December 31, 1996 compared to year ended December 31, 1995
The Company incurred a net loss of $1.9 million, or $0.23 per basic and
diluted share, on revenue of $21.0 million for the year ended December 31,
1996 (the "1996 Period") as compared to a net loss of $575,000, or $0.10 per
basic and diluted share, on revenues of $4.1 million for the year ended
December 31, 1995 (the "1995 Period").
The Company had certificates of occupancy for 67 residences, 60 of which
were included in the operating results as of the end of the 1996 Period as
compared to 25 residences with certificates of occupancy, 19 of which were
included in the operating results as of the end of the 1995 Period. Of the
residences included in the operating results, as of the end of the 1996
Period, the Company owned 26 residences and leased 34 residences (25 of which
were operating leases and nine of which were accounted for as financings) as
compared to 10 owned residences and nine leased residences (all of which were
operating leases) as of the end of the 1995 Period.
Revenue. Revenue was $21.0 million for the 1996 Period as compared to $4.1
million for the 1995 Period, an increase of $17.0 million. Of this increase,
$6.7 million or 39.4% related to the full year impact of the 14 residences
(458 units) which opened during the 1995 Period, $10.2 million or 60.0%
related to the opening of an additional 41 residences (1,544 units) during the
1996 Period, and the remaining $124,000 or 0.6% was attributable to the five
Same Store Residences (137 units).
Revenue from the Same Store Residences was $2.8 million for the 1996 Period
as compared to $2.7 million for the 1995 Period, an increase of $124,000 or
4.6%. All of the increase in revenue for Same Store Residences was
attributable to an increase in average monthly rental rate to $1,735 for the
1996 Period as compared to $1,631 per month for the 1995 Period. Average
occupancy for the Same Store Residences was 97.8% for the 1996 Period as
compared to 99.1% for the 1995 Period.
Of the $21.0 million in revenues reported for the 1996 Period, $4.1 million
or 19.5% was attributable to Stabilized Residences and $16.9 million or 80.5%
was attributable to Start-Up Residences. As of the end of the 1996 Period, the
Company had seven Stabilized Residences (204 units) with an average occupancy
of 96.5% and the Company had 53 Start-Up Residences (1,935 units) with an
average occupancy of 73.0%.
Residence Operating Expenses. Residence operating expenses were $14.1
million for the 1996 Period as compared to $2.8 million for the 1995 Period,
an increase of $11.3 million. Of this increase, $3.9 million or 34.5% related
to the full year impact of the 14 residences (458 units) which opened during
the 1995 Period, and $7.4 million or 65.5% related to the opening of an
additional 41 residences (1,544 units) during the 1996 Period. Residence
operating expenses for the five Same Store Residences (137 units) were
relatively unchanged at $1.6 million for the 1996 Period.
Of the $14.1 million in residence operating expenses reported for the 1996
Period, $2.5 million or 17.7% was attributable to Stabilized Residences and
$11.6 million or 82.3% was attributable to Start-Up Residences.
Corporate General and Administrative. Corporate general and administrative
expenses were $1.9 million for the 1996 Period as compared to $1.3 million for
the 1995 Period. The Company's corporate general and administrative expenses
before capitalized payroll costs were $3.0 million for the 1996 Period as
compared to $1.6 million for the 1995 Period, 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
10
<PAGE>
residences including the expansion into new states. The Company capitalized
$1.1 million of payroll costs for the 1996 Period as compared to $344,000 for
the 1995 Period resulting from an increase in development activities.
Building Rentals. Building rentals were $4.0 million for the 1996 Period as
compared to $798,000 for the 1995 Period, an increase of $3.2 million. Of this
increase, $819,000 or 25.8% related to the full year impact of the five leases
entered into during the 1995 Period, $2.3 million or 72.6% related to 20
leases (four of which were repurchased) entered into during the 1996 Period,
and the remaining $50,000 or 1.6% was attributable to the four leases entered
into prior to the 1995 Period. As of the end of the 1996 Period the Company
had 25 operating leases as compared to nine operating leases as of the end of
the 1995 Period.
Depreciation and Amortization. Depreciation and amortization was $1.1
million for the 1996 Period as compared to $296,000 for the 1995 Period, an
increase of $798,000. Depreciation expense was $805,000 and amortization
expense was $289,000 for the 1996 Period as compared to $200,000 and $96,000,
respectively, for the 1995 Period. The increase in depreciation is the result
of the full year effect of depreciation on the 9 owned residences which
commenced operations during the 1995 Period, depreciation associated with the
26 owned residences that commenced operations during the 1996 Period, and
depreciation associated with the sale and leaseback of nine residences during
the 1996 Period which were accounted for as financings. Amortization expense
increased as a result of the amortization of additional start-up costs.
Interest Expense. Interest expense was $1.2 million for the 1996 Period as
compared to $96,000 for the 1995 Period. Gross interest expense for the 1996
Period was $3.5 million compared to $673,000 for the 1995 Period, an increase
of $2.8 million. Of the increase, $800,000 or 28.6% was attributable to the
full year effect of interest expense associated with the 7% Debentures, $1.1
million or 39.3% was related to the sale and leaseback of nine residences
during the 1996 Period which were accounted for as financings, $600,000 or
21.4% was related to the full year impact of mortgage financing on six
residences located in Oregon entered into during the 1995 Period, and the
remaining $300,000 or 10.7% was due to interest expense related to new
mortgage financing incurred during the 1996 Period. The Company capitalized
$2.3 million of interest expense for the 1996 Period compared to $577,000 for
the 1995 Period. The Company completed the sale and leaseback of nine
residences during the 1996 Period which were accounted for as financings, and
has recorded the related building rental payments as interest expense.
Interest Income. Interest income was $455,000 for the 1996 Period as
compared to $579,000 for the 1995 Period, a decrease of $124,000. The decrease
in interest income was a result of lower average cash balances during the 1996
Period.
Loss on Sale of Assets. Loss on sale of assets was $854,000 (net of an
$82,000 gain on the sale of land) for the 1996 Period as compared to $0 for
the 1995 Period. The Company incurred losses of $936,000 in connection with
nine sale and leaseback transactions entered into during the 1996 Period. The
Company entered into 19 sale and leaseback transactions (four of which were
repurchased) during the 1996 Period as compared to five during the 1995
Period.
Debenture Conversion Cost. In the third quarter of 1996, $6.1 million of the
$20.0 million of 7% Debentures were converted into 811,333 shares of the
Company's common stock. The Company incurred a charge of $426,000 during the
1996 Period in connection with the conversion.
Net Loss. As a result of the above, the Company incurred a net loss of $1.9
million or $0.23 per basic and diluted share for the 1996 Period, compared to
a net loss of $575,000, or $0.10 per basic and diluted share for the 1995
Period.
11
<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 restatement discussed in Note
16 to the consolidated financial statements for the year ended December 31,
1997 (in thousands).
<TABLE>
<CAPTION>
As Previously
Reported(1) As Restated
------------- -----------
<S> <C> <C>
Net cash provided by operating activities....... $ 6,928 $ 4,497
Net cash used in investing activities........... (82,110) (93,973)
Net cash provided by financing activities....... 136,471 150,640
-------- --------
Net increase in cash and cash equivalents..... $ 61,289 $ 61,164
======== ========
</TABLE>
- --------
(1) Reflects certain reclassifications to conform to the presentation in the
current year's consolidated statement of cash flows.
After the restatement, the Company's cash position as of December 31, 1996
and 1997 was $2.1 million and $63.3 million, respectively, as compared to $2.1
million and $63.4 million, respectively, as previously reported. After the
restatement, the Company's working capital positions as of December 31, 1996
and 1997 were negative $27.1 million and positive $40.1 million, respectively,
compared to previously reported working capital positions of negative $26.4
million and positive $41.0 million, respectively. As a result of the
restatement, net cash provided by operating activities decreased by $2.4
million. Net cash used in investing activities increased by $11.9 million and
net cash provided by financing activities increased by $14.2 million,
primarily as a result of accounting for certain sale and leaseback
transactions, previously accounted for as operating leases, as financings.
At December 31, 1997, the Company had positive working capital of $40.1
million. The Company had $63.3 million in cash and cash equivalents as of
December 31, 1997, compared to $2.1 million as of December 31, 1996. The
increase is attributed primarily to the public offering of 4,100,000 shares of
Common Stock and $86.3 million in principal amount of the Company's 6.0%
Convertible Subordinated Debentures due November 2002 (the "6.0% Debentures")
completed in October 1997. The Company received net proceeds of $155.0 million
from the offerings after deducting underwriting discounts, commissions and
other offering expenses.
Net cash provided by operating activities was approximately $4.5 million for
the year ended December 31, 1997.
Net cash used in investing activities totaled $94.0 million for the year
ended December 31, 1997. The primary use of cash was $148.1 million related to
the development of new assisted living residences in Idaho, Oregon,
Washington, Arizona, Texas, Indiana, Ohio, New Jersey, Pennsylvania and South
Carolina. This was offset by proceeds of $51.7 million related to the sale and
leaseback of 24 residences. In addition, the Company completed the acquisition
of HCI using approximately $4.0 million of cash (which reflects approximately
$5.3 million of cash paid net of (i) approximately $250,000 in cash acquired,
(ii) approximately $850,000 in fees received from HCI, and (iii) $150,000 in
dividends received from HCI). In addition, the restrictions on $6.6 million of
funds held in trust were released by the Washington Housing Finance
Commission.
Net cash provided by financing activities totaled $150.6 million during the
year ended December 31, 1997. In addition to the offerings discussed above,
the Company entered into 19 additional construction financing loans resulting
in proceeds of $43.2 million. As of December 31, 1997, the Company had repaid
$63.5 million of construction financing with $2.2 million in construction
financing remaining. The Company completed an additional $21.9 million in
financing $7.4 million of which was associated with four residences financed
with Idaho Housing and Finance Association and $14.5 million of which resulted
from seven sale and leaseback transactions, which were accounted for as
financings.
As of December 31, 1997, the Company had invested excess cash balances in
short-term certificates of deposit.
12
<PAGE>
In June 1997, the Company's Board of Directors declared a two for one stock
split on the Company's common stock. The record date for the stock split was
June 30, 1997 and the stock split occurred on July 10, 1997.
In addition, in June 1997 the Company's Board of Directors declared a
dividend distribution of one preferred share purchase right ("Preferred Share
Purchase Right") on each outstanding share of the Company's common stock. In
the event that a person or group of persons acquires or announces a tender
offer to acquire 15% or more of the common stock (the "Acquiring Person"), the
Preferred Stock Purchase Rights, subject to certain limited exceptions, will
entitle each shareholder (other than the Acquiring Person) to buy one one-
hundredth of a share of newly created Series A Junior Participating Preferred
Stock of the Company at an exercise price of $54 (after giving effect to the
stock split). The Company may redeem the rights at one cent per right at any
time before a person or group has acquired 15% or more of the outstanding
common stock. The record date for the Preferred Share Purchase Right
distribution was June 30, 1997. The stock split occurred immediately prior to
the Preferred Share Purchase Right distribution.
ITEM 8. Financial Statements and Supplementary Data
Financial statements and other supplementary data required by this Item 8
are set forth as indicated in Item 14.
PART IV
ITEM 14. Exhibits, Financial Statement Schedules
(a) 1 and 2. Consolidated Financial Statements and Financial Statement
Schedules.
The financial statements and financial statement schedules listed in the
accompanying index to financial statements and financial statement schedules
are filed as part of this Annual Report.
3. Exhibits
Those exhibits required to be filed by Item 601 of Regulation S-K are listed
on the accompanying index immediately following the signature page and are
filed as part of this Report.
13
<PAGE>
ASSISTED LIVING CONCEPTS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. Financial Statements:
Independent Auditors' Report............................................ 15
Consolidated Balance Sheets, December 31, 1996 and 1997................. 16
Consolidated Statements of Operations, Years Ended December 31, 1995,
1996 and 1997.......................................................... 17
Consolidated Statements of Shareholders' Equity, Years Ended December
31, 1995, 1996 and 1997................................................ 18
Consolidated Statements of Cash Flows, Years Ended December 31, 1995,
1996 and 1997.......................................................... 19
Notes to Consolidated Financial Statements.............................. 20
</TABLE>
2. Financial Statement Schedules:
All schedules have been omitted since the required information is not present
or not present in amounts sufficient to require submission of the schedules.
14
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors, Shareholders
of Assisted Living Concepts, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Assisted
Living Concepts, Inc. and subsidiaries as of December 31, 1996 and 1997 (as
restated), and the related consolidated statements of operations,
shareholders' equity, and cash flows for the years ended December 31, 1995,
1996 and 1997 (as restated). These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Assisted
Living Concepts Inc. and subsidiaries as of December 31, 1996 and 1997, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1997 in conformity with generally
accepted accounting principles.
As discussed in note 16 to the consolidated financial statements, the
Company has restated its financial statements as of and for the years ended
December 31, 1996 and 1997.
KPMG LLP
Portland, Oregon
February 13, 1998, except as to Note 16
to the consolidated financial statements
as to which the date is September 10, 1999.
15
<PAGE>
ASSISTED LIVING CONCEPTS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
At December 31,
-----------------------
1997
(As Restated)
1996 (Note 16)
-------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................ $ 2,105 $ 63,269
Funds held in trust (Note 3)......................... 8,515 1,956
Accounts receivable, net of allowance for doubtful
accounts of $33 at 1996 and $79 at 1997............. 730 2,185
Prepaid expenses..................................... 365 904
Other current assets (Note 6)........................ 712 3,579
-------- --------
Total current assets............................... 12,427 71,893
-------- --------
Property and equipment (Notes 2, 5 and 7).............. 76,592 131,623
Construction in process (Note 5)....................... 53,372 102,025
-------- --------
Total property and equipment....................... 129,964 233,648
Less accumulated depreciation...................... 878 3,370
-------- --------
Property and equipment-net......................... 129,086 230,278
-------- --------
Goodwill (Note 2)...................................... 362 12,447
Other assets .......................................... 5,348 9,749
-------- --------
Total assets....................................... $147,223 $324,367
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................... $ 1,864 $ 1,859
Construction payable................................. 16,002 18,883
Accrued real estate taxes............................ 704 2,354
Other accrued expenses............................... 1,494 4,045
Other current liabilities (Note 6)................... 544 2,368
Construction financing with related party (Note 11).. 18,850 2,150
Current portion of long-term debt (Note 7)........... 110 172
-------- --------
Total current liabilities.......................... 39,568 31,831
-------- --------
Other liabilities...................................... 997 2,592
Long-term debt (Note 7)................................ 35,748 57,535
Convertible subordinated debentures (Note 8)........... 13,915 100,165
-------- --------
Total liabilities.................................. 90,228 192,123
-------- --------
Commitments and contingencies (Note 14)
Shareholders' equity:
Preferred Stock, $.01 par value; 1,000,000 shares
authorized; none issued or outstanding.............. -- --
Common Stock, $.01 par value; 80,000,000 shares
authorized; issued and outstanding 11,030,500 shares
in 1996 and 15,646,478 shares in 1997............... 110 156
Additional paid-in capital........................... 59,678 141,460
Unearned compensation expense (Note 12).............. -- (4,100)
Fair market value in excess of historical cost of
acquired net assets attributable to related party
transactions........................................ (239) (239)
Accumulated deficit.................................. (2,554) (5,033)
-------- --------
Total shareholders' equity......................... 56,995 132,244
-------- --------
Total liabilities and shareholders' equity......... $147,223 $324,367
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
16
<PAGE>
ASSISTED LIVING CONCEPTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------
1997
(As Restated)
1995 1996 (Note 16)
------- ------- -------------
<S> <C> <C> <C>
Revenue....................................... $ 4,067 $21,022 $49,605
Operating expenses:
Residence operating expenses................ 2,779 14,055 31,591
Corporate general and administrative........ 1,252 1,864 4,050
Building rentals (Note 4)................... 5 1,137 2,691
Building rentals to related party (Notes 4,
10 and 11)................................. 793 2,812 5,278
Depreciation and amortization (Note 5)...... 296 1,094 3,683
------- ------- -------
Total operating expenses.................. 5,125 20,962 47,293
------- ------- -------
Operating income (loss)....................... (1,058) 60 2,312
------- ------- -------
Other (income) expense:
Interest expense (Notes 7 and 8)............ 96 1,146 4,946
Interest income............................. (579) (455) (1,526)
Loss on sale of assets (Notes 4 and 11)..... -- 854 1,250
Debenture conversion cost (Note 8).......... -- 426 --
Other expense............................... -- 4 121
------- ------- -------
Total other (income) expense.............. (483) 1,975 4,791
------- ------- -------
Net loss...................................... $ (575) $(1,915) $(2,479)
======= ======= =======
Basic and diluted net loss per common share... $ (0.10) $ (0.23) $ (0.21)
======= ======= =======
Basic and diluted weighted average common
shares outstanding........................... 6,000 8,404 11,871
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
17
<PAGE>
ASSISTED LIVING CONCEPTS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Fair
Market
Value in
Common Stock Additional Unearned Excess of Total
------------- Paid-In Compensation Historical Accumulated Shareholders'
Shares Amount Capital Expense Cost Deficit Equity
------ ------ ---------- ------------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1994................... 6,000 $ 60 $ 16,462 $ -- $(239) $ (64) $ 16,219
Net Loss................ -- -- -- -- -- (575) (575)
------ ---- -------- ------- ----- ------- --------
Balance at December 31,
1995................... 6,000 60 16,462 -- (239) (639) 15,644
Net proceeds from public
offering............... 4,192 42 37,299 -- -- -- 37,341
Exercise of employee
stock options.......... 28 -- 132 -- -- -- 132
Conversion of
subordinated
debentures............. 810 8 5,785 -- -- -- 5,793
Net loss................ -- -- -- -- -- (1,915) (1,915)
------ ---- -------- ------- ----- ------- --------
Balance at December 31,
1996................... 11,030 110 59,678 -- (239) (2,554) 56,995
Net proceeds from public
offering............... 4,140 42 72,086 -- -- -- 72,128
Shares issued for
acquisition............ 337 3 5,073 -- -- -- 5,076
Exercise of employee
stock options.......... 139 1 373 -- -- -- 374
Grant of restricted
stock (As Restated).... -- -- 4,250 (4,250) -- -- --
Compensation expense
earned on restricted
stock (As Restated).... -- -- -- 150 -- -- 150
Net loss (As Restated).. -- -- -- -- -- (2,479) (2,479)
------ ---- -------- ------- ----- ------- --------
Balance at December 31,
1997
(As Restated).......... 15,646 $156 $141,460 $(4,100) $(239) $(5,033) $132,244
====== ==== ======== ======= ===== ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
18
<PAGE>
ASSISTED LIVING CONCEPTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------
1997
(As Restated)
1995 1996 (Note 16)
-------- --------- -------------
<S> <C> <C> <C>
Operating activities:
Net loss................................... $ (575) $ (1,915) $ (2,479)
Adjustment to reconcile net loss to net
cash provided by (used in) operating
activities:
Depreciation and amortization............ 296 1,094 3,683
Provision for doubtful accounts.......... -- 33 23
Loss on sale of assets................... 854 1,250
Compensation expense earned on restricted
stock................................... -- -- 150
Changes in assets and liabilities,
excluding effects of acquisitions:
Accounts receivable...................... (78) (627) (808)
Prepaid expenses......................... (192) (138) (530)
Other current assets..................... (62) (392) (3,039)
Other assets............................. (2,828) (1,554) (633)
Accounts payable......................... 821 866 (155)
Accrued expenses......................... 4,350 (2,508) 3,616
Other current liabilities................ 157 196 1,824
Other liabilities........................ -- 997 1,595
-------- --------- ---------
Net cash provided by (used in) operating
activities................................ 1,889 (3,094) 4,497
-------- --------- ---------
Investing activities:
Funds held in trust........................ -- (8,515) 6,559
Proceeds from sale and leaseback
transactions.............................. 8,067 41,385 51,671
Purchases of property and equipment........ (38,651) (122,169) (148,139)
Acquisitions, net of cash, debt acquired
and issuance of common stock.............. -- -- (4,064)
-------- --------- ---------
Net cash used in investing activities...... (30,584) (89,299) (93,973)
-------- --------- ---------
Financing activities:
Proceeds from construction financing....... -- 18,850 43,210
Repayments of construction financing....... -- -- (63,497)
Proceeds from long-term debt............... 3,505 31,346 21,854
Payments on long-term debt................. (18) (88) (5,516)
Proceeds from issuance of common stock,
net....................................... -- 37,473 72,502
Debt issuance costs of offerings and long-
term debt................................. (800) (418) (4,163)
Proceeds from issuance of convertible
subordinated debentures................... 20,000 -- 86,250
-------- --------- ---------
Net cash provided by financing activities.. 22,687 87,163 150,640
-------- --------- ---------
Net increase (decrease) in cash and cash
equivalents............................... (6,008) (5,230) 61,164
Cash and cash equivalents, beginning of
year...................................... 13,343 7,335 2,105
-------- --------- ---------
Cash and cash equivalents, end of year..... $ 7,335 $ 2,105 $ 63,269
======== ========= =========
Supplemental disclosure of cash flow
information:
Cash payments for interest............... $ 154 $ 3,218 $ 9,741
Cash payments for income taxes........... -- -- 1,547
Non-cash transactions:
Increase in construction payable and
property and equipment.................. $ 7,250 $ 8,752 $ 2,881
Conversion of subordinated debentures.... -- $ 6,085 --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
19
<PAGE>
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Business and Summary of Significant Accounting Policies
The Company
Assisted Living Concepts, Inc. ("the Company") owns, operates and develops
assisted living residences which provide housing to older persons who need
help with the activities of daily living such as bathing and dressing. The
Company provides personal care and support services and makes available
routine health care services designed to meet the needs of its residents. The
accompanying financial statements reflect the operating results of 19, 60 and
109 residences for the years ended 1995, 1996 and 1997, respectively.
Residences are included in operating results as of the first day of the month
following licensure.
On November 22, 1994, the Company sold 4,000,000 shares of common stock at
$4.625 per share in an initial public offering realizing net proceeds of
approximately $16.4 million after underwriter discounts, commissions and other
expenses.
In August 1995, the Company completed the offering of $20.0 million 7%
Convertible Subordinated Debentures ("7% Debentures") due August, 2005
realizing net proceeds of approximately $19.2 million after discounts,
commissions and other expenses. The 7% Debentures are convertible at any time
at or prior to maturity, unless previously redeemed, at a conversion price of
$7.50 per common share, which initially equated to an aggregate of 2,666,667
shares of the Company's common stock. In September 1996, $6.1 million of the
7% Debentures were converted to 811,333 shares of the Company's common stock
which resulted in $13.9 million of 7% Debentures remaining.
In July 1996, the Company sold 4,192,500 shares of common stock at $9.50 per
share in a public offering realizing net proceeds of $37.3 million, after
underwriter discounts, commissions and other expenses.
In June 1997, the Company's Board of Directors declared a two for one stock
split on the Company's common stock. The record date for the stock split was
June 30, 1997 and the stock split occurred on July 10, 1997.
In addition, in June 1997 the Company's Board of Directors declared a
dividend distribution of one preferred share purchase right ("Preferred Share
Purchase Right") on each outstanding share of the Company's common stock. In
the event that a person or group of persons acquires or announces a tender
offer to acquire 15% or more of the common stock (the "Acquiring Person"), the
Preferred Stock Purchase Rights, subject to certain limited exceptions, will
entitle each shareholder (other than the Acquiring Person) to buy one one-
hundredth of a share of newly created Series A Junior Participating Preferred
Stock of the Company at an exercise price of $54 (after giving effect to the
stock split). The Company may redeem the rights at one cent per right at any
time before a person or group has acquired 15% or more of the outstanding
common stock. The record date for the Preferred Share Purchase Right
distribution was June 30, 1997. The stock split occurred immediately prior to
the Preferred Share Purchase Right distribution.
In October 1997 the Company sold 4,140,000 shares of common stock at $18.50
per share in a public offering realizing net proceeds of $72.1 million, after
underwriter discounts, commissions and other expenses.
In October 1997, the Company completed the public offering of $86.3 million
of 6% Convertible Subordinated Debentures (6% Debentures) due November 2002
realizing net proceeds of $82.9 million after underwriter discounts,
commissions and other expenses. The 6% Debentures are convertible at any time
at or prior to maturity, unless previously redeemed, at a conversion price of
$22.57 per common share, which equates to an aggregate of 3,821,444 shares of
the Company's common stock.
20
<PAGE>
Principles of Consolidation
The consolidated financial statements include the accounts of Assisted
Living Concepts Inc. and its wholly owned subsidiaries (the "Company"). All
significant intercompany balances and transactions have been eliminated in
consolidation.
Cash and Cash Equivalents
Cash and cash equivalents include cash on deposit and highly liquid
investments with maturities of three months or less at the date of purchase.
The Company's investments in cash equivalents are classified as held to
maturity and are stated at cost.
Leases
The Company determines the classification of its leases as either operating
or capital at their inception. The Company reevaluates such classification
whenever circumstances or events occur that require the reevaluation of the
leases.
The Company accounts for arrangements entered into under sale and leaseback
agreements pursuant to Statement of Financial Accounting Standards (SFAS) No.
98, "Accounting for Leases." For transactions that qualify as sales and
operating leases, a sale is recognized and the asset is removed from the
books. For transactions that qualify as sales and capital leases, the sale is
recognized, but the asset remains on the books and a capital lease obligation
is recorded. Transactions that do not qualify for sales treatment are treated
as financing transactions. In the case of financing transactions, the asset
remains on the books and a finance obligation is recorded as part of long-term
debt. Losses on sale and leaseback agreements are recognized at the time of
the transaction absent indication that the sales price is not representative
of fair value. Gains are deferred and recognized on a straight-line basis over
the initial term of the lease.
All of the Company's 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 considered contingent
rents. The total amount of the rent payments under such leases with non-
contingent rent escalators is being charged to expense on the straight-line
method over the term of the leases. The Company records a deferred credit,
included in other liabilities, to reflect the excess of rent expense over cash
payments. This deferred credit is reduced in the later years of the lease term
as the cash payments exceed the rent expense.
Property and Equipment
Property and equipment are recorded at cost and depreciation is computed
over the assets' estimated useful lives on the straight-line basis as follows:
<TABLE>
<S> <C>
Buildings......................................................... 40 years
Furniture and equipment........................................... 7 years
</TABLE>
Asset impairment is analyzed on assets to be held and used by the rental
demand by market to determine if future cash flows (undiscounted and without
interest charges) are less than the carrying amount of the asset. If an
impairment is determined to have occurred, an impairment loss is recognized to
the extent the assets carrying amount exceeds its fair value. Assets the
Company intends to dispose of are reported at the lower of (i) their carrying
amount or (ii) fair value less cost to sell. There were no impairment losses
for any of the periods presented.
Interest and certain payroll costs incurred during construction periods are
capitalized as part of the building costs. Maintenance and repairs are charged
to expense as incurred, and significant betterments and improvements are
capitalized. Construction in progress includes pre-acquisition costs and other
direct costs related to acquisition, development and construction of
residences. If a project is abandoned, any costs previously capitalized are
expensed.
21
<PAGE>
Goodwill
Costs in excess of the fair value of the net assets acquired in purchase
transactions as of the date of acquisition have been recorded as goodwill and
are being amortized over periods ranging between 15 and 20 years on a
straight-line basis. Amortization of goodwill was $28,000, $30,000 and
$128,000 for the years ended December 31, 1995, 1996 and 1997, respectively.
Accumulated amortization of goodwill at December 31, 1996 and 1997 was $60,000
and $188,000, respectively. Management maintains an impairment review policy
whereby the future economic benefit of the recorded balance is substantiated
at the end of each reporting period. No impairment losses have been recognized
in any of the periods presented.
Deferred Financing Costs
Financing costs related to the issuance of debt are capitalized in other
assets and amortized to interest expense over the term of the related debt
using the straight-line method, which approximates the effective interest
method.
Deferred Pre-opening Costs
Deferred pre-opening costs associated with newly developed residences, prior
to the commencement of their operations, are capitalized and amortized over 12
months.
Income Taxes
The Company uses the asset and liability method of accounting for income
taxes under which deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to the differences between the
financial statement carrying amounts of the existing assets and liabilities
and their respective tax bases (temporary differences). Deferred tax assets
are reduced by a valuation allowance when, in the opinion of management, it is
more likely than not that some portion or all of the deferred tax assets will
not be realized.
Revenue Recognition
Revenue is recognized when services are rendered and consists of residents'
fees for basic housing and support services and fees associated with
additional services such as routine health care and personalized assistance on
a fee for service basis. Management of the Company assesses the collectibility
of accounts receivable periodically and records a provision for doubtful
accounts as considered necessary.
Classification of Expenses
All expenses (except interest, depreciation, amortization, residence
operating expenses) associated with corporate or support functions have been
classified as corporate general and administrative expense. All other expenses
incurred by the Company have been classified as residence operating expenses.
Net Income (Loss) Per Common Share
The Company adopted Statement of Financial Accounting Standard No. 128,
Earnings Per Share (FAS 128) in the fourth quarter of 1997 and has restated
all previously reported amounts. Basic earnings per share (EPS) and diluted
EPS replace primary EPS and fully diluted EPS. Basic EPS is calculated using
income (loss) attributable to common shares (after deducting preferred
dividends) divided by the weighted average number of common shares outstanding
for the period. Diluted EPS is calculated in periods with net income using
income attributable to common shares (after deducting preferred dividends and
considering the effects of dilutive potential common shares) divided by the
weighted average number of common shares and dilutive potential common shares
outstanding for the period.
Vested options to purchase 382,000 and 568,000 shares of common stock were
outstanding during the years ended December 31, 1996 and 1997, respectively.
These options were excluded from the respective computations of diluted loss
per share, as their inclusion would be antidilutive.
Also excluded from the computations of diluted loss per share, for the years
ended December 31, 1996 and 1997, were 1,855,333 and 5,676,777 shares of
common stock, respectively, issuable upon conversion of the Company's
convertible subordinated debentures (see Note 8) as their inclusion would be
antidilutive.
22
<PAGE>
Use of Estimates
Management of the Company has made certain estimates and assumptions
relating to the reporting of assets and liabilities, and the disclosure of
contingent assets and liabilities, and the reported amounts of revenue and
expenses during the reporting period to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
Reclassifications
Certain reclassifications have been made in the prior years' financial
statements to conform to the current year's presentation. Such
reclassifications had no effect on previously reported net loss or
shareholders' equity.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, accounts receivable and
accounts payable approximate fair value because of the short-term nature of
these accounts and/or because they are invested in accounts earning market
rates of interest. The carrying value of funds held in trust approximates fair
value because they bear interest at current market rates. The carrying amount
of the Company's debt, construction financing and convertible subordinated
debentures approximates fair value because the interest rates approximate the
current rates available to the Company.
Stock-based Compensation
In October 1995, the Financial Accounting Standards Board (FASB) Issued
Statement of Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-
Based Compensation," which provides an alternative to APB Opinion No. 25,
"Accounting for Stock Issued to Employee," in accounting for stock-based
compensation issued to employees. The Statement encourages, but does not
require financial reporting to reflect compensation expense for grants of
stock, stock options and other equity instruments to employees based on change
in the fair value of the underlying stock. The Company continues to apply the
existing accounting rules contained in APB Option No. 25, "Accounting for
Stock Issued to Employees." While recognition of employee stock-based
compensation is not mandatory, SFAS 123 requires companies that choose to
continue applying the provisions of APB No. 25 to disclose pro forma net
income (loss) and earnings (loss) per share data (See Note 12).
Concentration of Credit Risk
State Medicaid reimbursement programs constitute a significant source of
revenue for the Company. Adverse changes in general economic factors affecting
the health care industry or laws and regulatory environment, including
Medicaid reimbursement rates, could have a material adverse effect on the
Company's financial condition and results of operations. As of December 31,
1997, 28.5% of the Company's residences are in Texas, 15.4% are in Oregon,
13.1% in Ohio and 10.8% in Washington. During the years ended December 31,
1995, 1996 and 1997, direct payments received from state Medicaid agencies
accounted for approximately 21.4%, 12.4% and 11.1%, respectively, of the
Company's revenue while the tenant paid portion received from Medicaid
residents accounted for approximately 9.6%, 6.9% and 5.9%, respectively, of
the Company's revenue during these periods. The Company expects in the future
that State Medicaid reimbursement programs will constitute a significant
source of revenue for the Company.
2. Acquisitions and Joint Venture
Acquisitions
Effective October 23, 1997, the Company acquired 98.8% of the outstanding
capital stock of Home and Community Care, Inc. ("HCI"). The Company had
acquired an initial 1.2% interest in HCI as a result of HCI's acquisition of
Pacesetter Home Health Care, Inc., a home health care agency in which the
Company had made an investment in November 1996. Several employees of the
Company, including members of the Board of Directors, owned collectively
approximately 40.0% of the outstanding common stock in HCI (See Notes 10 and
23
<PAGE>
11). HCI develops assisted living facilities, operates five home health care
agencies (three Medicare certified), one home health care branch agency, two
hospice agencies and two home medical equipment offices, primarily in Texas.
In addition, HCI manages two hospice agencies. HCI's home health agencies
provide home care to residents in 14 of the Company's assisted living
residences, as well as to persons living in surrounding communities. In the
second quarter of 1997 the Company signed a licensing agreement with HCI,
pursuant to which the Company agreed to allow HCI to use certain of the
Company's proprietary information and materials in connection with the
development of HCI's assisted living residences. During the second quarter of
1997, the Company received $178,000 in fees from HCI and recorded such fees as
other income included in other income/expenses. The HCI purchase was completed
at a purchase price of approximately $4.0 million in cash (which reflects
approximately $5.3 million of cash paid net of (i) approximately $250,000 in
cash acquired, (ii) approximately $850,000 in fees from HCI for services
rendered during 1997, and (iii) $150,000 in dividends received from HCI during
1997) (See Note 16), and the assumption of approximately $6.6 million in
liabilities. HCI stockholders are entitled to receive certain "earnout"
payments over a two-year period based on the number of HCI's assisted living
residence sites, which the Company elects to complete. At the time of the
acquisition, HCI had 20 sites under development. For each completed residence,
HCI stockholders will receive an additional $7,500 per unit (approximately
$300,000 per residence) in cash. Such earnout payments will be capitalized in
property and equipment when paid. No such earnout payments were incurred in
1997.
The acquisition was accounted for as a purchase, and the operating results
of HCI have been included in the Company's consolidated financial statements
since the date of acquisition. The cost of the acquisition has been allocated
based on the estimated fair value of the net assets acquired of approximately
$3.4 million. The excess of the aggregate purchase price over the fair market
value of net assets acquired of approximately $7.5 million has been recorded
as goodwill and is being amortized on a straight-line basis over 20 years.
Effective October 23, 1997, the Company acquired 90.1% of the outstanding
capital stock of Carriage House Assisted Living Inc. ("Carriage House").
Several employees of the Company, including members of the Board of Directors,
owned collectively approximately 23.0% of the outstanding common stock of
Carriage House (See Notes 10 and 11). The Company had acquired its initial
9.9% in Carriage House's outstanding capital stock during 1996. Carriage
House, located in Nebraska, operates 4 facilities with 156 units and has an
additional 6 facilities with 198 units under development or construction. The
purchase was completed at a purchase price of $5.2 million with the exchange
of 337,460 shares of Common Stock (based on a stock price of $15.41 per share)
for all of the outstanding common stock of Carriage House and the assumption
of approximately $3.2 million in liabilities.
The acquisition was accounted for as a purchase and the operating results of
Carriage House have been included in the Company's consolidated financial
statements since the acquisition date. The cost of the acquisition has been
allocated based on the estimated fair value of the net assets acquired of
approximately $3.4 million. The excess of the aggregate purchase price over
the fair market value of net assets acquired of approximately $4.7 million has
been recorded as goodwill and is being amortized on a straight-line basis over
20 years.
The following unaudited pro forma consolidated results of operations for the
years ended December 31, 1996 and 1997 assume that HCI and Carriage House
acquisitions had occurred as of January 1 of each year (in thousands, except
per share amounts):
<TABLE>
<CAPTION>
(Unaudited) Total
----------- -------
<S> <C>
1996
Net revenue....................................................... $22,155
Net loss.......................................................... (2,467)
Basic and diluted net loss per common share....................... (0.29)
1997
Net revenue....................................................... $55,241
Net loss.......................................................... (2,680)
Basic and diluted net loss per common share....................... (0.23)
</TABLE>
24
<PAGE>
The unaudited pro forma consolidated results of operations do not purport to
be indicative of the results that would have been reported if the acquisitions
had been completed as of the beginning of the periods presented, nor are they
indicative of future results of operations. The Company cannot predict whether
the consummation of the acquisitions described above will conform to the
assumptions used to prepare the unaudited pro forma consolidated results of
operations.
Joint Venture
During 1997, the Company entered into joint venture agreements with a joint
venture partner to operate certain new assisted living residences which
commenced operations during the second, third and fourth quarters of 1997. Of
the $2.3 million of total capital raised by the joint venture partner to
invest in such arrangements, the Company contributed $300,000 and recorded
such investment in other non-current assets. In addition, certain members of
management held interests in the joint venture partner (See Note 10). Pursuant
to the joint venture agreements, the Company entered into non-cancelable
management agreements under which the Company manages the residences operated
by the joint venture for an amount equal to the greater of 8% of gross
revenues or $2,000 per month per residence. The Company consolidates 100% of
the revenues and expenses attributable to these residences with the revenues
and expenses of the Company. The joint venture partner reimburses the Company
for 90.0% of the start-up losses of the joint venture, and the Company
recognizes such reimbursements as loans included in other liabilities. The
Company also reflects amounts paid to repurchase the joint venture partner's
interest in excess of reimbursed losses as interest and other expense.
Interest is calculated based on the average loan balance using an imputed
20.0% interest rate and other expense is calculated based on a $10,000
administrative fee per residence. The Company received loss reimbursements of
$2.3 million for the year ended December 31, 1997. The Company did not repay
any of these loans, and incurred interest expense of $52,000 in connection
with these loans during the year ended December 31, 1997. As of December 31,
1997, seventeen residences owned or leased by the Company were being operated
by the joint venture (See Note 16).
3. Funds Held In Trust
During 1996, the Company issued $8.5 million in tax-exempt bonds to provide
permanent financing on five Washington residences. During 1997, four of the
five properties were completed and $6.5 million of the funds held in trust
were released from restriction. The remaining $2.0 million is expected to be
released by the end of the first quarter of 1998 once the residence has been
completed and licensed. The funds are being held in trust by a national bank
on behalf of the Company and are invested in guaranteed investment
certificates that are 100% collateralized. The funds are restricted for
construction.
4. 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 Number of Sale Units under
Leased Residences Total and Leaseback Leases
Residences Accounted for Number of Residences Units under Accounted
("Oregon as Operating Operating Accounted for Operating for as
Leases") Leases Leases as Financings Leases Financings
---------- ------------- --------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Leases at December 31,
1994................... 4 -- 4 -- 114 --
Leases entered into
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
======= ======== ======== ======== ======== ========
</TABLE>
25
<PAGE>
The Company has entered into agreements to lease seven assisted living
residences in Oregon, six from Assisted Living Facilities, Inc., and one from
Oregon Height Partners ("OHP"), each a related party (the "Oregon Leases").
Two of these leases were entered into in 1997. The lessor in each case
obtained funding through the sale of bonds issued by the Oregon, Housing and
Community Services Department ("OHCS"). In connection with the Oregon Leases,
the Company entered into "Lease Approval Agreements" with the OHCS and
Assisted Living Facilities, Inc., pursuant to which the Company is obligated
to comply with the terms and conditions of certain regulatory agreements to
which the lessor is a party (See Note 7). The leases, which have fixed terms
of 10 years, have been accounted for as operating leases. Aggregate deposits
on these residences as of December 31, 1996 and 1997 were $224,000 and
$176,000, respectively, which are reflected in other assets.
During 1995, 1996 and 1997, the Company completed the sale of five, 19 and
24 residences under sale and leaseback arrangements, respectively. The Company
sold the residences for approximately $8.1 million in 1995, $41.4 million in
1996 and $51.7 million in 1997, and leased them back over initial terms
ranging from 12 to 20 years. During 1996, four of the 19 properties were
repurchased, for $7.8 million, in connection with a $50.2 million sale and
leaseback commitment with LTC Properties, Inc. ("LTC") (See Note 11). The
properties were repurchased at a cost of $7.6 million plus a $214,000
administrative fee. In addition, the Company assumed four leases under sale
and leaseback agreements that were acquired with the Carriage House purchase
that was completed in October of 1997.
The Company recognized losses of $0, $936,000 and $1.3 million on the above
sale and leaseback transactions for the years ended December 31, 1995, 1996
and 1997, respectively. The losses net of a 1996 unrelated land sale gain of
$82,000 are presented in the consolidated statements of operations as net loss
on sale of assets. Gains on sale and leaseback transactions of $153,000,
$399,000 and $1.1 million for the years ended December 31, 1995, 1996 and
1997, respectively, have been recorded as deferred income included in other
liabilities and are being amortized over the initial terms of the
corresponding leases. A substantial portion of these gains and losses resulted
from sale leaseback transactions with LTC (See Note 11).
Certain of the Company's leases and loan agreements contain covenants and
cross-default provisions such that a default on one of those instruments could
cause the Company to be in default on one or more other instruments. The
Company was not in compliance with certain lease and loan covenants and has
obtained necessary waivers as a result of such non-compliance.
As of December 31, 1997, future minimum annual lease payments under
operating leases are as follows (in thousands):
<TABLE>
<S> <C>
1998................................ $ 11,837
1999................................ 11,843
2000................................ 11,849
2001................................ 11,849
2002................................ 11,842
Thereafter.......................... 85,627
--------
$144,847
========
</TABLE>
During the years ended December 31, 1996 and 1997, respectively, the Company
entered into nine and seven sale and leaseback agreements, which are accounted
for as financings due to the Company's continuing involvement in the
properties in the form of a fair value purchase option which provides the
Company with the option to purchase the residence at fair market value at the
end of the initial lease term, ranging from 14 to 15 years. These financings
are included in long term-debt and the related assets remain on the
consolidated balance sheets in property and equipment. See Notes 5, 7 and 16.
26
<PAGE>
5. Property and Equipment
As of December 31, 1996 and 1997, property and equipment, stated at cost,
consist of the following (in thousands):
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Land...................................................... $ 4,788 $ 7,924
Buildings................................................. 69,919 119,649
Equipment................................................. 613 1,419
Furniture................................................. 1,272 2,631
-------- --------
Property and equipment.................................... 76,592 131,623
Construction in process................................... 53,372 102,025
-------- --------
Total property and equipment............................ 129,964 233,648
Less accumulated depreciation............................. 878 3,370
-------- --------
Property and equipment-net.............................. $129,086 $230,278
======== ========
</TABLE>
Land, buildings and certain furniture and equipment relating to 16
residences serve as collateral for long-term debt (See Note 7). Depreciation
expense was $200,000, $805,000 and $2.9 million, for the years ended December
31, 1995, 1996 and 1997, respectively.
As of December 31, 1996 and 1997, construction in process consists of the
following (in thousands):
<TABLE>
<CAPTION>
1996 1997
------- --------
<S> <C> <C>
Land purchased and earnest deposits........................ $ 5,763 $ 8,791
Construction costs......................................... 40,403 80,325
Other costs................................................ 7,206 12,909
------- --------
$53,372 $102,025
======= ========
</TABLE>
During the years ended December 31, 1995, 1996 and 1997, the Company
capitalized interest costs of $577,000, $2.3 million and $6.6 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 $344,000, $1.1 million and
$1.8 million for the years ended December 31, 1995, 1996 and 1997,
respectively.
The Company had certificates of occupancy for 130 residences, 109 of which
were included in the operating results as of December 31, 1997 as compared to
67 residences with certificates of occupancy, 60 of which were included in the
operating results as of December 31, 1996. Of the residences with certificates
of occupancy, the Company owned 63 residences and leased 67 residences (51 of
which were operating leases and 16 of which were accounted for as financings)
as compared to 33 owned residences and 34 leased residences (25 of which were
operating leases and nine of which were accounted for as financings) as of
December 31, 1996. At December 31, 1996 and 1997, property and equipment
included $16.9 million and $31.4 million respectively, in land and buildings
related to sale leaseback transactions accounted for as financings (See Note
16).
As of December 31, 1997, construction in process reflects: (i) 34 residences
(1,296 units) under construction ($49.3 million); (ii) 21 residences (857
units) that have received a certificate of occupancy, but are pending
licensure ($48.7 million); and (iii) other development costs ($4.0 million).
6. Resident Deposits
Pursuant to lease agreements, residents are required to provide security
deposits, and in certain cases, the last month's rent. As of December 31, 1996
and 1997, such deposits of $544,000 and $958,000, respectively,
27
<PAGE>
have been recorded as other current assets with a corresponding liability
recorded in other current liabilities. These funds are restricted as to use by
the Company.
7. Long-Term Debt
As of December 31, 1996 and 1997 long-term debt consists of the following
(in thousands):
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Trust Deed Notes, payable to the State of Oregon Housing
and Community Services Department through 2028........... $10,378 $10,256
Variable Rate Multifamily Revenue Bonds, payable to the
Washington State Housing Finance Commission Department
through 2028............................................. 8,500 8,500
Variable Rate Demand Revenue Bonds, Series 1997 payable to
the Idaho Housing and Finance Association through 2017... -- 7,350
Finance lease obligations................................. 16,980 31,488
Capital lease obligations payable through 2002 with a
weighted average interest rate of 10.1%.................. -- 113
------- -------
Total long-term debt...................................... $35,858 $57,707
Less current portion...................................... 110 172
------- -------
$35,748 $57,535
======= =======
</TABLE>
The Trust Deed Notes payable to OHCS are secured by buildings, land,
furniture and fixtures of six Oregon residences. The notes are payable in
monthly installments including interest at effective rates ranging from 7.375%
to 11.80%.
The Variable Rate Multifamily Revenue Bonds are payable to the Washington
State Housing Finance Commission Department and at December 31, 1997 were
secured by an $8.7 million letter of credit and by buildings, land, furniture
and fixtures of the five Washington residences. The letter of credit expires
in 2001. The bonds had a weighted average interest rate of 3.91% during 1997.
The Variable Rate Demand Housing Revenue Bonds, Series 1997 are payable to
the State of Idaho Housing and Finance Association and at December 31, 1997
were secured by a $7.5 million letter of credit and by buildings, land,
furniture and fixtures of four Idaho residences. The letter of credit expires
in 2002. The bonds had a weighted average interest rate of 3.77% during 1997.
As of December 31, 1997, the following annual principal payments are
required (in thousands):
<TABLE>
<S> <C>
1998................................. $ 172
1999................................. 654
2000................................. 672
2001................................. 703
2002................................. 738
Thereafter........................... 54,768
-------
Total.............................. $57,707
=======
</TABLE>
Certain of the Company's leases and loan agreements contain covenants and
cross-default provisions such that a default on one of those instruments could
cause the Company to be in default on one or more other instruments. The
Company was not in compliance with certain lease and loan covenants and has
obtained necessary waivers as a result of such non-compliance.
In addition to the debt agreements with OHCS related to the six owned
residences in Oregon, the Company has entered into a Lease Approval Agreement
with OHCS and the lessor of the Oregon Leases, which obligates
28
<PAGE>
the Company to comply with the terms and conditions of the underlying trust
deed relating to the leased buildings. During 1997, the Company entered into
two lease agreements, one with Assisted Living Facilities, Inc. and one with
Oregon Heights Partners, for two Oregon residences with the same terms as the
previous five agreements. Under the terms of the OHCS debt agreements, the
Company is required to maintain a capital replacement escrow account to cover
expected capital expenditure requirements for the Oregon Leases, which as of
December 31, 1996 and 1997, was $61,000 and $136,000, respectively, and is
reflected in other assets in the accompanying financial statements. In
addition, for the six OHCS loans in the Company's name, a contingency escrow
account in the amount of 3% of the original loan balance is required. This
account had a balance of $373,000 and $351,000, respectively, as of December
31, 1996 and 1997 and is reflected in other current assets. Distribution of
any assets or income of any kind by the Company is limited to once per year
after all reserve and loan payments have been made, and only after receipt of
written authorization from OHCS.
As of December 31, 1996 and 1997, the Company was restricted from paying
dividends on $394,000 and $860,000, respectively, of income and retained
earnings, in accordance with the terms of the loan agreements and Lease
Approval Agreements with OHCS.
As a further condition of the debt agreements, the Company is required to
comply with the terms of certain regulatory agreements which provide, among
other things, that in order to preserve the federal income tax exempt status
of the bonds, the Company is required to lease at least 20% of the units of
the projects to low or moderate income persons as defined in Section 142(d) of
the Internal Revenue Code. There are additional requirements as to the age and
physical condition of the residents with which the Company must also comply.
Non-compliance with these restrictions may result in an event of default and
cause acceleration of the scheduled repayment.
During the years ended December 31, 1996 and 1997, respectively, the Company
entered into nine and seven sale and leaseback agreements, respectively, which
are accounted for as financings due to the Company's continuing involvement in
the properties in the form of a fair value purchase option. As such, these
financings are included in long term debt and the related assets remain on the
balance sheet in property and equipment. See Notes 4 and 16.
8. Convertible Subordinated Debentures
In August 1995, the Company completed the offering of $20.0 million of 7%
Debentures due August 2005. The 7% Debentures are convertible at any time at
or prior to maturity, unless previously redeemed, at a conversion price of
$7.50 per common share, which equates to an aggregate of approximately
2,666,667 shares of the Company's common stock and bear interest payable
semiannually on January 31 and July 31 of each year subject to adjustments
under certain circumstances. The 7% Debentures are unsecured and subordinated
to all other indebtedness of the Company. The Debentures are subject to
redemption, as a whole or in part, at any time or from time to time commencing
after July 31, 1998 at the Company's option at a redemption price equal to
100% of the principal amount thereof, plus accrued and unpaid interest to the
redemption date.
In September 1996, $6.1 million of the 7% Debentures were converted to
811,333 shares of the Company's common stock which resulted in $13.9 million
of 7% Debentures remaining outstanding. The Company incurred a charge of
$426,000 in 1996 in connection with the conversion.
In October 1997, the Company completed the offering of $86.3 million of 6%
Debentures due November 2002. The 6% Debentures are convertible at any time at
or prior to maturity, unless previously redeemed, at a conversion price of
$22.57 per common share, which equates to an aggregate of 3,821,444 shares of
the Company's common stock and bear interest payable semi annually on May 1
and November 1 of each year, commencing May 1, 1998. The 6% Debentures are
unsecured and subordinated to all other indebtedness of the Company. The 6%
Debentures are subject to redemption, as a whole or in part, at any time from
time to time commencing after November 15, 2000 at the Company's option at a
redemption price equal to 100% of the principal amount thereof, plus accrued
and unpaid interest to the redemption date.
29
<PAGE>
9. Income Taxes
The provision for income taxes differs from the amount of loss determined by
applying the applicable U.S. statutory federal rate to pretax loss as a result
of the following items for the years ended December 31:
<TABLE>
<CAPTION>
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Statutory federal tax rate......................... (34.0)% (34.0)% (34.0)%
Non deductible stock issuance costs................ -- % 8.4% --
Losses for which no benefit is provided............ 34.6% 25.5% 34.6 %
Other.............................................. (0.6)% 0.1% (0.6) %
----- ----- -----
Effective tax rate................................. -- % -- % -- %
===== ===== =====
</TABLE>
An analysis of the significant components of deferred tax assets and
liabilities, consists of the following as of December 31 (in thousands):
<TABLE>
<CAPTION>
1996 1997
------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss
carryforward........... $ 743 $ 4,408
Deferred gain on sale
and leaseback
transactions........... 230 636
Debt financing recorded
for books.............. 6,520 11,890
Other................... 398 1,332
Valuation allowance....... (858) (2,848)
Deferred tax liabilities:
Property and equipment,
primarily due to
depreciation........... (172) (3,014)
Debt financing
capitalized asset
basis.................. (6,456) (11,363)
Deferred operating
costs.................. (208) (702)
Prepaid expenses........ (134) (339)
Other................... (63) --
------- --------
Net deferred tax asset
(liability).............. $ -- $ --
======= ========
</TABLE>
The valuation allowance for deferred tax assets as of December 31, 1996 and
1997 was $858,000 and $2.9 million, respectively. The increase in the
valuation allowance for the years ended December 31, 1995, 1996 and 1997 was
$186,000, $617,000 and $2.0 million, respectively.
As a result of the acquisitions discussed in Note 2, the Company acquired
net operating loss carryforwards for federal and state tax purposes
approximating $950,000 which are available to offset future taxable income, if
any, through 2011. The future use of these net taxable operating loss
carryforwards is subject to certain limitations under the Internal Revenue
Code and therefore, the Company has established a valuation allowance of
$358,000 to offset the deferred tax asset related to the loss carryforwards.
Additionally, any tax benefit realized from the use of the acquired operating
loss carryforwards will be applied to reduce goodwill.
At December 31, 1997, the Company had federal and state net operating loss
carryforwards of approximately $11.7 million available to reduce future
taxable income. The carryforwards expire at various dates beginning in the
year 2009 through the year 2012. Utilization of the carryforwards is subject
to certain limitations due to the change in ownership of the Company, which
occurred in connection with the public stock offering during October 1997. As
a result of the public stock offering, utilization of approximately $9.5
million available net operating loss carryforwards is limited to approximately
$8.1 million per year.
The portion of the valuation allowance for deferred tax assets for which
subsequently recognized tax benefits will be applied directly to contributed
capital is approximately $732,000 as of December 31, 1997. This amount is
attributable to differences between financial and tax reporting of employee
stock option transactions.
30
<PAGE>
10. Related Party Transactions
The Company leases six residences from Assisted Living Facilities, Inc., one
of which was entered into during 1997. The spouse of the Company's president
owns a 25% interest in Assisted Living Facilities, Inc. During the years ended
December 31, 1995, 1996 and 1997, the Company paid such entity aggregate lease
deposits of $0, $35,700 and $31,500, respectively, and aggregate rental
payments of $734,000, $912,000 and $1.1 million, respectively. In addition, in
1997 the Company leased one residence from OHP in which the president's spouse
owns an interest. The Company paid OHP $50,000 in lease deposits and $278,000
in rent payments in 1997.
In 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. SHS is owned 80% by the
president's spouse. The Company paid $480,000 during the fourth quarter of
1997 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 with 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 for such services and has recorded such fees as a reduction of
construction in process. See Note 16.
Commencing in 1995, the Company contracted, directly and through its
developers, with Concepts in Community Living, Inc. ("CCL") to perform
feasibility studies and pre-development consulting services for the developers
on the Company's behalf. CCL is owned 100% by the president's spouse. For the
years ended December 31, 1995, 1996 and 1997, the Company paid CCL for these
services fees of $605,000, $623,000 and $568,000, respectively, which were
capitalized in construction in process on the consolidated balance sheets.
The Company acquired HCI and Carriage House in October of 1997 (See Note 2).
Several employees of the Company, including members of the Board of Directors,
owned collectively approximately 40.0% of the outstanding common stock in HCI
and approximately 23.0% of the outstanding common stock of Carriage House. In
addition, LTC held substantial interests in HCI and Carriage House prior to
their acquisition by the Company (See Note 11).
During 1997, the Company entered into joint venture agreements with a joint
venture partner to operate certain new assisted living residences which
commenced operations during the second, third and fourth quarters of 1997 (See
Note 2). The Company, Mr. William McBride, the Company's Chairman and Chief
Executive Officer, and Dr. Keren Brown Wilson, the Company's President and
Chief Operating Officer, each acquired interests in the joint venture partner.
11. Transactions with LTC Properties, Inc.
During the period November 1994 to September 1997, two members of the
Company's Board of Directors served as executive officers and directors of
LTC. In September 1997, Mr. Andre Dimitriadis resigned from the Company's
Board of Directors and Mr. William McBride resigned as an executive officer
and director of LTC. The Company engaged in the following transactions with
LTC since January 1, 1995.
<TABLE>
<CAPTION>
Number of Sale
and Leaseback
Residences
Accounted for as Sales Price
Operating Leases Number of Units (in millions)
---------------- --------------- -------------
<S> <C> <C> <C>
Leases at December 31,
1994....................... -- -- $ --
Leases entered into during
1995....................... 2 60 3.2
---- ------- -------
Leases at December 31,
1995....................... 2 60 3.2
Leases entered into during
1996....................... 16 591 34.1
Residences repurchased
during 1996................ (4) (146) (7.6)
---- ------- -------
Leases at December 31,
1996....................... 14 505 29.7
Leases entered into during
1997....................... 21 832 52.7
---- ------- -------
Leases at December 31,
1997....................... 35 1,337 $ 82.4
==== ======= =======
</TABLE>
31
<PAGE>
The Company incurred annual lease expense of $61,000, $2.1 million and $4.3
million for the years ended December 31, 1995, 1996 and 1997, respectively,
pursuant to leases with LTC (See Note 4). The Company recognized losses of $0,
and $656,000, $1.1 million on these sale and leaseback transactions for the
years ended December 31, 1995, 1996 and 1997, respectively. For the same
periods, the Company deferred gains of $85,000, $384,000 and $951,000,
respectively.
During 1995 the Company sold and leased back from LTC two residences for
$3.2 million with annual lease payments of $380,000. During 1996 the Company
sold and leased back 16 residences for $34.1 million with annual lease
payments of $3.3 million. Subsequently, the Company repurchased four of the 16
residences at a cost of $7.6 million plus a $214,000 administrative fee.
During 1997, the Company sold and leased back 21 residences for $52.7 million
with annual rent payments of $5.3 million. As of December 31, 1997 the Company
had sold and leased back 35 residences for $82.4 million with annual lease
payments of $8.3 million.
During 1996 and 1997, the Company received from LTC $18.9 million and $43.2
million, respectively, of mortgage financing on eight and 19 residences,
respectively. As of December 31, 1997, the Company had converted all of such
mortgages to sale leaseback financings or had repaid them, except for one
mortgage ($2.2 million) which was converted to a sale leaseback financing
subsequent to December 31, 1997. Interest was paid on a monthly basis ranging
from 9.9% to 10.4% per annum. The Company incurred $158,000 and $5.4 million
in interest expense related to these mortgage financings in the years ended
1996 and 1997, respectively. Such mortgage financing was in connection with a
$50.2 million sale leaseback financing commitment entered into with LTC during
1996. This commitment was renegotiated in November 1997 committing the Company
to complete sale and leaseback transactions with LTC with respect to nine
residences by September 30, 1998. The Company paid LTC $614,000 in connection
with such commitment and recorded such costs as deferred financing costs. In
addition, the Company entered into a commitment with LTC in October 1997 to
complete $50.0 million of sale and leaseback transactions by December 2000.
Pursuant to this commitment, the Company is obligated to pay a 2.0% fee on any
unused portion of the commitment as of the expiration date (or up to a maximum
of $1.0 million if none of the commitment were utilized).
The Company acquired Carriage House in October 1997. LTC owned 9.9% of the
outstanding common stock of Carriage House (see Notes 2 and 10). As a result,
the Company became the tenant on four assisted living residences leased by
Carriage House from LTC. These four leases are included in the table above and
the lease table in Note 4. In addition, as a result of the Carriage House
acquisition the Company was obligated to enter into sale and leaseback
arrangements with LTC by September 1998 with respect to six Carriage House
residences which were under development or construction.
The Company acquired HCI in October of 1997. LTC owned 41.2% of the
outstanding common stock in HCI (see Notes 2 and 10). In addition, HCI entered
into a commitment with LTC in September 1997, which was assumed by the Company
as part of the acquisition, to complete $50.0 million of sale and leaseback
transactions by December 1999. Pursuant to this commitment, the Company is
obligated to pay a 2.0% fee on any unused portion of the commitment as of the
expiration date (or up to a maximum of $1.0 million if none of the commitment
were utilized).
During 1997, the Company contracted with LTC Development Services, Inc. to
provide services to the Company for market feasibility analysis, pre-
acquisition services and construction management oversight on several of the
residences under development. LTC Development Services, Inc. is owned 100% by
LTC. The Company paid approximately $415,000 for these services during 1997
and capitalized such fees and recorded them on its balance sheet as
construction in process.
12. Stock Option Plan and Restricted Stock
The Company has a Stock Option Plan (the "Plan") which provides for the
issuance of incentive and non-qualified stock options and restricted stock.
The Plan is administered by the Compensation Committee of the Board of
Directors which sets the terms and provisions of options granted under the
Plan. Incentive options may be granted only to officers or other full-time
employees of the Company, while non-qualified options may be granted to
directors, officers or other employees of the Company, or consultants who
provide services to the Company.
32
<PAGE>
The Plan combines an incentive and non-qualified stock option plan, a stock
appreciation rights ("SAR") plan and a stock award plan (including restricted
stock). The Plan is a long-term incentive compensation plan and is designed to
provide a competitive and balanced incentive and reward program for
participants.
Under the Plan, the Company may grant options or award restricted stock to
its employees for up to 2,208,000 shares of common stock. The exercise price
of each option equals the market price of the Company's stock on the date of
grant. Each option shall expire on the date specified in the option agreement,
but not later than the tenth anniversary of the date on which the option was
granted. Options typically vest three years from the date of issuance and
typically are exercisable within seven to nine years from the date of vesting.
Each option is exercisable in equal installments as designated by the
Compensation Committee or the Board at the option price designated by the
Compensation Committee; however, incentive options cannot be less than the
fair market value of the common stock on the date of grant. All options are
nontransferable and subject to adjustment by the Compensation Committee upon
changes in the Company's capitalization. The Board of Directors, at its
option, may discontinue the Plan or amend the Plan at any time.
The per share weighted-average fair value of each option grant is estimated
on the date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grants in 1995, 1996 and 1997,
respectively: dividend yield of zero percent; expected volatility of 37.53%,
36.67% and 39.81%, respectively; risk-free interest rate fixed at 6.69%, 6.69%
and 5.66%, respectively, based on the 10-year treasury rate, and estimated
life of 10 years.
The Company applies APB Opinion No. 25 in accounting for its Plan, and
accordingly, no compensation cost has been recognized for its stock options in
the financial statements. Had the Company determined compensation cost based
on the fair value at the grant date for its stock options under SFAS 123, the
Company's net loss would have been increased to the pro forma amounts
indicated below: (in thousands except per share data)
<TABLE>
<CAPTION>
1995 1996 1997
------ ------- -------
<S> <C> <C> <C>
Net loss as reported............................. $ (575) $(1,915) $(2,479)
Net loss pro forma............................... (719) (2,507) (3,928)
Net loss per basic and diluted common share as
reported........................................ $(0.10) $ (0.23) $ (0.21)
Pro forma net loss per basic and diluted common
share as reported............................... $(0.12) $ (0.30) $ (0.33)
</TABLE>
Pro forma net loss reflects only options granted in 1995, 1996 and 1997.
Therefore, the full impact of calculating compensation costs for stock options
under SFAS 123 is not reflected in the pro forma net income amounts presented
above because compensation cost is reflected over the option's vesting period
of three years and compensation cost for options granted prior to January 1,
1995 is not considered. The resulting pro forma compensation costs may not be
representative of that expected in the future years.
A summary of the status of the Company's stock options as of December 31,
1995, 1996 and 1997 and changes during the years ended on those dates is
presented below:
<TABLE>
<CAPTION>
1995 1996 1997
------------------- -------------------- --------------------
Weighted- Weighted- Weighted-
Average Average Average
Number of Exercise Number of Exercise Number of Exercise
Shares Price Shares Price Shares Price
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Options at beginning of
the year............... 440,000 $4.63 806,068 $5.43 1,105,202 $ 6.15
Granted................. 430,500 6.17 563,400 8.22 940,350 15.08
Exercised............... -- -- (28,170) 4.69 (139,770) 6.05
Canceled................ (64,432) 4.88 (236,096) 8.79 (275,815) 9.53
------- ----- --------- ----- --------- ------
Options at end of the
year................... 806,068 $5.43 1,105,202 $6.15 1,629,967 $10.82
======= ===== ========= ===== ========= ======
Options exercisable at
end of year............ 146,670 381,988 567,756
Weighted-average fair
value of options
granted during the
year................... $ 3.67 $ 4.99 $ 9.24
</TABLE>
33
<PAGE>
The following table summarized information about fixed stock options
outstanding at December 31, 1997.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------- -------------------------------
Number Weighted-Average Number
Range of Outstanding Remaining Weighted-Average Exercisable at Weighted-Average
Exercise Prices at 12/31/97 Contractual Life Exercise Price 12/31/97 Exercise Price
---------------- ----------- ---------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C> <C>
$ 4.63 to 4.63 40,000 5.92 $ 4.63 40,000 $4.63
$ 4.63 to 4.63 278,166 6.02 4.63 273,665 4.63
$ 4.81 to 5.81 88,600 7.51 5.72 59,066 5.72
$ 6.38 to 6.50 208,964 7.69 6.45 136,024 6.50
$ 6.69 to 7.38 180,603 8.52 7.36 52,275 7.36
$ 7.50 to 14.88 173,684 9.29 11.54 6,726 8.58
$15.13 to 16.00 21,500 9.62 15.79 0 0.00
$16.50 to 16.50 556,100 9.90 16.50 0 0.00
$16.63 to 20.50 82,100 9.79 17.70 0 0.00
$22.38 to 22.38 250 9.84 22.38 0 0.00
---------------- --------- ---- ------ ------- -----
$ 4.63 to $22.38 1,629,967 8.50 $10.82 567,756 $5.49
================ ========= ==== ====== ======= =====
</TABLE>
In October 1997, the Company awarded 250,000 shares of non-voting restricted
stock to two key executive officers. 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. Such shares vest in
three equal annual installments, commencing on the fourth anniversary of
grant. The Company has recorded the restricted stock as of the date of the
grant as unearned compensation expense of $4.3 million. This unearned
compensation expense has been reflected as a separate component of
shareholders' equity to be amortized as compensation expense over the seven
year vesting period. The Company recorded $150,000 of compensation expense
during the fourth quarter of 1997.
13. Non-cash Investing and Financing Activities
The following is a summary of non-cash investing and financing activities
for the year ended December 31, 1997 (in thousands):
In October of 1997, the Company acquired all of the outstanding capital
stock of Carriage House as follows:
<TABLE>
<S> <C>
Fair value of assets acquired....................................... $ 8,279
Issuance of 337,460 shares of the Company's common stock............ 5,076
-------
Liabilities assumed................................................. $ 3,203
=======
In October of 1997, the Company acquired all of the outstanding capital
stock of HCI as follows:
Fair value of assets acquired....................................... $11,877
Cash paid........................................................... 5,262
-------
Liabilities assumed................................................. $ 6,615
=======
</TABLE>
14. Legal Proceedings
The Company is involved in various lawsuits and claims arising in the normal
course of business. In the opinion of Management, although the outcomes of
these suits and claims are uncertain, in the aggregate they should not have a
material adverse effect on the Company's business or its financial statements
taken as a whole.
34
<PAGE>
15. Subsequent Event
Subsequent to December 31, 1997, the Company's board of directors adopted a
Non-Officer Stock Option Plan (the "Non-Officer Plan") pursuant to which up to
500,000 shares of Common Stock are issuable pursuant to non-qualified options
granted under the Non-Officer Plan. Officers, directors and significant
employees of the Company are not eligible to participate in the Non-Officer
Plan.
16. Restatement
On February 1, 1999, 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 financial statements for the fiscal year ended December 31, 1996, the
fiscal year ended December 31, 1997 and the first three 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 by $2.1 million and $6.7 million, respectively. The
cumulative effect of the restatement reduced shareholders' equity by $8.8
million through December 31, 1997. After the restatement, the Company reported
net losses of $1.9 million and $2.5 million for the fiscal years 1996 and
1997, respectively, compared to previously reported net income of $149,000 and
$4.2 million, respectively. As a result of the restatement, the Company
reported net loss per diluted share of $0.23 and $0.21 for the fiscal years
1996 and 1997, respectively, compared to previously reported net income of
$0.03 and $0.34, per diluted share, respectively. After the restatement, the
Company's cash position as of December 31, 1996 and 1997 was $2.1 million and
$63.3 million, respectively, as compared to $2.1 million and $63.4 million,
respectively, as previously reported. As a result of the restatement, the
Company's working capital positions as of December 31, 1996 and 1997 were
negative $27.1 million and positive $40.1 million, respectively, compared to
previously reported working capital of negative $26.4 million and positive
$41.0 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 of its lease arrangements; (iii) a modification in how the Company
accounted for certain of its acquisitions and its joint venture arrangements;
and (iv) the capitalization of fees received by the Company previously
recognized as either a reduction of expenses or as other income.
The following table sets forth statement of operations and balance sheet
data, as originally reported and as restated as of and for the year ended
December 31, 1997. 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 1997 balance sheet is
affected by changes that resulted from the restatement of fiscal year 1996
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 fiscal year 1997 (which adjustments are
set forth in the balance sheet under the heading "1997 Adjustments").
35
<PAGE>
STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
For the Year Ended December 31, 1997
------------------------------------------------
As Previously As
Reported Adjustments Restated
-------------- ------------ ------------
(in thousands, except per share data)
<S> <C> <C> <C>
Revenues.................... $ 48,673 $ 932 (A) $ 49,605
Operating Expenses:
Residence operating
expenses................. 30,271 952 (A) 31,591
95 (H)
104 (I)
169 (K)
Corporate general and
administrative........... 2,780 128 (A) 4,050
693 (B)
149 (J)
300 (L)
Building rentals.......... 5,110 198 (A) 2,691
(2,661)(C)
44 (D)
Building rentals to
related party............ 4,718 560 (D) 5,278
Depreciation and
amortization............. 3,021 51 (A) 3,683
565 (C)
46 (E)
------------ ------------ ------------
Total operating
expenses............... 45,900 1,393 47,293
------------ ------------ ------------
Operating income (loss)..... 2,773 (461) 2,312
------------ ------------ ------------
Other (income) expense:
Interest expense.......... 930 227 (A) 4,946
2,661 (C)
280 (E)
796 (F)
52 (G)
Interest income........... (1,601) 75 (M) (1,526)
Loss on sale of assets ... -- 1,250 (E) 1,250
Other (income) expense.... (2,892) 2,263 (G) 121
100 (H)
650 (L)
------------ ------------ ------------
Total other (income)
expense................ (3,563) 8,354 4,791
------------ ------------ ------------
Income (loss) before
income taxes............. 6,336 (8,815) (2,479)
Provision for income
taxes.................... 2,127 (2,127)(I) --
------------ ------------ ------------
Net income (loss)......... $ 4,209 $ (6,688)(O) $ (2,479)
============ ============ ============
Basic net income (loss) per
common share............... $ 0.35 $ (0.21)
Diluted net income (loss)
per common share........... $ 0.34 $ (0.21)
Basic weighted average
common shares outstanding.. 11,871 11,871
Diluted weighted average
common shares outstanding.. 14,190 11,871
</TABLE>
36
<PAGE>
BALANCE SHEET DATA
<TABLE>
<CAPTION>
As of December 31, 1997
-------------------------------------------------------
Cumulative
Adjustments
Resulting from
As Previously Prior 1997
Reported Restatements(N) Adjustments As Restated
------------- --------------- ----------- -----------
(in thousands)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents....................... $ 63,394 $ -- $ (125)(M) $ 63,269
Funds held in trust................ 1,956 -- -- 1,956
Accounts receivable................ 2,185 -- -- 2,185
Prepaid expenses................... 904 -- -- 904
Other current assets............... 3,600 34 (336)(A) 3,579
107 (E)
(1,150)(G)
(169)(K)
1,443 (I)
50 (M)
-------- ------- ------- --------
Total currents assets............ 72,039 34 (180) 71,893
-------- ------- ------- --------
Property and equipment............... 100,751 17,018 13,854 (C) 131,623
Construction in
process............................. 103,795 (86) (693)(B) 102,025
(796)(F)
(195)(H)
-------- ------- ------- --------
Total property and equipment....... 204,546 16,932 12,170 233,648
Less accumulated
depreciation...................... 2,477 204 113 (A) 3,370
576 (C)
-------- ------- ------- --------
Property and equipment-net....... 202,069 16,728 11,481 230,278
-------- ------- ------- --------
Goodwill............................. 13,397 -- (950)(L) 12,447
Other assets......................... 10,800 (46) (175)(A) 9,749
665 (C)
(1,495)(E)
-------- ------- ------- --------
Total assets..................... $298,305 $16,716 $ 9,346 $324,367
======== ======= ======= ========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable................... $ 1,859 $ -- $ -- $ 1,859
Construction
payables.......................... 18,883 -- -- 18,883
Accrued real estate
taxes............................. 2,354 -- -- 2,354
Other accrued
expenses.......................... 3,993 803 (803)(E) 4,045
52 (G)
Other current
liabilities....................... 1,256 -- 1,112 (G) 2,368
Accrued income taxes............... 411 -- (411)(I) --
Construction
financing......................... 2,150 -- -- 2,150
Current portion of
long-term debt.................... 172 -- -- 172
-------- ------- ------- --------
Total current
liabilities..................... 31,078 803 (50) 31,831
-------- ------- ------- --------
Other liabilities.................... -- 997 604 (D) 2,592
991 (E)
Long-term debt....................... 26,047 16,980 14,508 (C) 57,535
Convertible subordinated
debentures.......................... 100,165 -- -- 100,165
-------- ------- ------- --------
Total liabilities................ 157,290 18,780 16,053 192,123
-------- ------- ------- --------
Shareholders' equity:
Preferred Stock.................... -- -- -- --
Common Stock....................... 156 -- -- 156
Additional paid-in
capital........................... 137,379 -- 4,250 (J) 141,460
(169)(I)
Unearned compensation
expense........................... -- -- (4,100)(J) (4,100)
Fair market value in
excess of historical
cost of acquired net
assets attributed to
related........................... (239) -- -- (239)
Accumulated deficit................ 3,719 (2,064) (6,688)(O) (5,033)
-------- ------- ------- --------
Total Shareholders'
equity............................ 141,015 (2,064) (6,707) 132,244
-------- ------- ------- --------
Total liabilities
and shareholders'
equity.......................... $298,305 16,716 $ 9,346 $324,367
======== ======= ======= ========
</TABLE>
37
<PAGE>
- --------
(A) The Company previously capitalized (i) certain costs associated with pre-
opening activities and (ii) the operating results of certain start-up
residences for approximately the first two months of operations. These
capitalized costs were previously amortized over a 12 month period. The
Company has determined to expense a portion of the costs incurred prior to
opening a residence as incurred and to recognize the operating results of
newly opened residences in the periods to which they relate.
In the first, second and third quarters of 1997, the Company capitalized the
startup costs and operating results of two residences, one for four months
and the other for five months, as other assets on the balance sheet. This
adjustment also records the operating results of the two residences for the
periods in which such results were previously capitalized as other assets.
Statement of Operations. Reflects the recognition of certain costs
incurred prior to the opening of the residence and the operating results
of certain start-up residences during the period. The previously
capitalized costs and operating results of these residences are reported
as revenues and expenses in the periods in which they were incurred.
Balance Sheet. Reflects changes resulting from the immediate recognition
of certain costs incurred prior to the opening of the residence and the
operating results of certain start-up residences, which had previously
been capitalized.
(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 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.
38
<PAGE>
Balance Sheet. Reflects increases in property and equipment, accumulated
depreciation, other assets and in long-term debt 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 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 pre-opening
costs and 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 removed the deferred pre-opening costs from the gain/loss
calculation, amortized such costs over a 12-month period and recorded
unamortized deferred financing costs as interest expense at the time the
construction financing is repaid.
Statement of Operations. Reflects increases in loss on sale of assets,
interest expense and amortization expense, resulting from certain sale and
leaseback transactions during the period resulting from the changes as
described above.
Balance Sheet. Reflects an increase in other current assets resulting from
the elimination of deferred losses, in conjunction with sale and leaseback
transactions. In addition, deferred gains, which were previously offset
against such deferred losses, have been reclassified to other liabilities
from other assets.
(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.
39
<PAGE>
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 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 ventures for unfunded losses.
(H) Commencing in the fourth quarter of 1997, the Company contracted with
Supportive Housing Services, Inc. ("SHS") to provide services to the
Company for market feasibility analysis, site pre-acquisition services and
construction management oversight in conjunction with the Company's
development activities. The Company paid $480,000 and $2.7 million during
the fourth quarter of 1997 and for the nine months ended September 30,
1998, respectively, for such development services. The Company capitalized
such payments as construction in process. In addition, the Company and SHS
entered into a consulting agreement whereby the Company agreed to provide
SHS consulting services in the assisted living industry, including
providing data on the Company's facility prototypes, facilitating the
introduction to other potential customers and providing market analysis on
the assisted living industry. The Company received fees from SHS of
$195,000 during the fourth quarter of 1997 and $906,000 during the year
ended December 31, 1998. The Company recorded a portion of these fees as a
reduction of residence operating expenses or corporate, general and
administrative expenses, and recognized a portion of these fees as
revenues or other income. As a result of the restatement, the Company has
recorded the fees received from SHS as a reduction of construction in
process.
Statement of Operations. Reflects an increase in residence operating
expenses and a reduction in other income 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.
40
<PAGE>
(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 a reduction in accrued taxes and additional paid in
capital and an increase 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 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 the
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.
Statement of Operations. Reflects an increase in residence operating
expense resulting from the change described above.
Balance Sheet. Reflects a reduction in other assets resulting from the
reclassification described above.
(L) In the second quarter of 1997 the Company signed a licensing agreement
with Home and Community Care, Inc. ("HCI"), a provider of home health
care, hospice care and other ancillary services and a start-up assisted
living company. Under the agreement, the Company agreed to allow HCI to
use certain of the Company's proprietary information and materials in
connection with the development of HCI's assisted living residences.
Pursuant to the agreement, during the second quarter of 1997, the Company
recorded $178,000 in fees from HCI and recognized such fees as other
income. In September 1997, the Company announced that it had entered into
an agreement to purchase HCI for $5.3 million in cash and the assumption
of $6.6 million of indebtedness. In October 1997, the Company recognized
an additional
41
<PAGE>
payment of approximately $850,000 from HCI for services rendered during
1997. The Company recorded a portion of these fees as a reduction in
corporate general and administrative expenses and recognized a portion as
other income. In addition, in October 1997, the Company received $150,000
in dividends from HCI and recorded $50,000 of these dividends as a
reduction in its investment in HCI and recognized $100,000 as other
income. As a result of the restatement, the Company has recorded the
$850,000 fee and the $100,000 in dividends received in excess of the
Company's investment in HCI as a reduction of the purchase price paid for
HCI from $5.3 million to approximately $4.3 million. As such, the amount
of goodwill recorded as part of the acquisition of HCI has been reduced by
approximately $950,000. The Company received this cash during the fourth
quarter of 1997.
Statement of Operations. Reflects an increase in corporate general and
administrative expenses and a reduction in other income resulting from the
elimination of fees received from HCI subsequent to the signing of the
purchase agreement as described above.
Balance Sheet. Reflects a reduction in goodwill recorded in the fourth
quarter of 1997 in connection with the HCI acquisition as described above.
In addition, the Company has reclassified fees earned by the Company
through the third quarter of 1997, but not paid by HCI until the fourth
quarter, as an account receivable rather than as cash.
(M) 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.
(N) These adjustments reflect the cumulative impact of the fiscal year 1996
restatement on beginning 1997 balance sheet amounts.
(O) This adjustment is the net effect on net income and accumulated deficit as
a result of the adjustments described in Notes (A) through (M).
42
<PAGE>
ASSISTED LIVING CONCEPTS, INC. AND SUBSIDIARIES
Index to Exhibits
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
2.1 Merger Agreement between the Company and CCL Sub, Inc. (Incorporated
by reference to the same titled exhibit to the Company's Registration
Statement on Form S-1, File No. 33-83938).
2.2 Agreement and Plan of Corporate Separation and Reorganization between
Concepts In Community Living, Inc. and Keren Wilson (Incorporated by
reference to the same titled exhibit to the Company's Registration
Statement on Form S-1, File No. 33-83938).
2.3 Assignment, Bill of Sale, License, and Assumption Agreement between
Concepts In Community Living, Inc., and CCL Sub, Inc. (Incorporated
by reference to the same titled exhibit to the Company's Registration
Statement on Form S-1, File No. 33-83938).
2.4 Purchase Agreement between the Company and Lincoln City Limited
Partnership (Incorporated by reference to the same titled exhibit to
the Company's Registration Statement on Form S-1, File No. 33-83938).
2.5 Letter Purchase Agreement between the Company and Madras Senior
Residence, LRW partners, Keren Brown Wilson and Joseph Hughes
(Incorporated by reference to the same titled exhibit to the
Company's Registration Statement on Form S-1, File No. 33-83938).
3.1 Articles of Incorporation of the Company (Incorporated by reference to
the same titled exhibit to the Company's Registration Statement on
Form S-1, File No. 33-83938).
3.2 By laws of the Company (Incorporated by reference to the same titled
exhibit to the Company's Registration Statement on Form S-1, File No.
33-83938).
4.1 Indenture, dated as of August 15, 1995, between the Company and Harris
Trust and Savings Bank, as Trustee, in respect of the Company's 7.0%
Convertible Subordinated Debentures due 2005. (Incorporated by
reference to the same titled exhibit to the Company's Quarterly
Report on Form 10-Q for the period ended September 30, 1995, File No.
1-83938).
4.2 Form of 7.0% Convertible Subordinated Debentures due 2005
(Incorporated by reference to the same titled exhibit to the Company
Quarterly Report on Form 10-Q for the period ended September 30,
1995, File No. 1-83938).
4.3 Registration Rights Agreement dated August 2, 1995 between the Company
and the Purchasers of its 7% Convertible Subordinated Debentures due
2005 (Incorporated by reference to the same titled exhibit to the
Company's Quarterly Report on Form 10-Q for the period ended
September 30, 1995, File No. 1-83938).
4.4 Indenture, dated as of October 2, 1997 by and between the Company and
Harris Trust and Savings Bank, as Trustee providing for Issuance of
Securities in Series. (Incorporated by reference to Exhibit 4.1 to
the Company's Report on Form 8-K, dated October 20, 1997, File No. 1-
13498).
4.5 Rights Agreement dated as of June 12, 1997, between Assisted Living
Concepts, Inc. and American Stock Transfer & Trust Company, as Rights
Agent, which includes the form of Certificate of Resolution
Establishing Designations, Preferences and Rights of Series A Junior
Participating Preferred Stock of Assisted Living Concepts Inc. as
Exhibit A, the form of Right Certificate as Exhibit B and the Summary
of Rights to Purchase Preferred Shares as Exhibit C (Incorporated by
reference to the same titled exhibit to the Company's Form 8-K, dated
July 24, 1997, File No. 1-83938).
10.1 Restricted Stock Agreement dated October 3, 1997 by and between the
Company and William McBride III (Incorporated by reference to the
same titled exhibit to the Company's Report on Form 8-K, dated
October 20, 1997, File No. 1-13498).
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
10.2 Restricted Stock Agreement dated October 3, 1997 by and between the
Company and Keren Brown Wilson. (Incorporated by reference to the
same titled exhibit to the Company's Report on Form 8-K, dated
October 20, 1997, File No. 1-13498).
10.3 Employment Agreement dated October 3, 1997 by and between the Company
and William McBride III. (Incorporated by reference to the same
titled exhibit to the Company's Report on Form 8-K, dated October 20,
1997, File No. 1-13498).
10.4 Amended and Restated Employment Agreement dated October 3, 1997 by and
between the Company and Keren Brown Wilson. (Incorporated by
reference to the same titled exhibit to the Company's Report on Form
8-K, dated October 20, 1997, File No. 1-13498).
10.5 Indemnification Agreement dated October 3, 1997 by and between the
Company and William McBride III. (Incorporated by reference to the
same titled exhibit to the Company's Report on Form 8-K, dated
October 20, 1997, File No. 1-13498).
10.6 Indemnification Agreement dated October 3, 1997 by and between the
Company and Keren Brown Wilson. (Incorporated by reference to the
same titled exhibit to the Company's Report on Form 8-K, dated
October 20, 1997, File No. 1-13498).
10.7 Amended and Restated 1994 Stock Option Plan of the Company.
(Incorporated by reference to the same titled exhibit to the
Company's Report on Form 8-K, dated October 20, 1997,
File No. 1-13498).
10.8 Merger Agreement dated as of October 4, 1997 by and between the
Company and Home and Community Care, Inc. (Incorporated by reference
to the same titled exhibit to the Company's Report on Form 8-K, dated
October 20, 1997, File No. 1-13498).
10.9 $20,440,000 Agreement to Purchase and Lease Assisted Living Residences
dated October 3, 1997 by and between the Company and LTC Properties,
Inc. (Incorporated by reference to the same titled exhibit to the
Company's Report on Form 8-K, dated October 20, 1997, File No. 1-
13498).
10.10 $50,000,000 Agreement to Purchase and Lease Assisted Living Residences
dated October 3, 1997 by and between the Company and LTC Properties,
Inc. (Incorporated by reference to the same titled exhibit to the
Company's Report on Form 8-K, dated October 20, 1997, File No. 1-
13498).
10.11 Management Agreement dated as of April 1, 1997 by and between the
Company and Health Equity Investors, LLC. (Incorporated by reference
to the same titled exhibit to the Company's Report on Form 8-K, dated
October 20, 1997, File No. 1-13498).
10.12 Joint Venture Agreement dated as of April 1, 1997 by and between the
Company and Health Equity Investors, LLC. (Incorporated by reference
to the same titled exhibit to the Company's Report on Form 8-K, dated
October 20, 1997, File No. 1-13498).
12 Computation of Ratio of Earnings to Fixed Charges
23 Consent of KPMG LLP
27 Financial Data Schedule Article 5 of Regulation S-X
</TABLE>
44
<PAGE>
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
ASSISTED LIVING CONCEPTS INC.
Registrant
September 23, 1999 /s/ James W. Cruckshank
By: _________________________________
Name: James W. Cruckshank
Title: Vice President and Chief
Financial Officer
September 23, 1999 /s/ M. Catherine Maloney
By: _________________________________
Name: M. Catherine Maloney
Title: Vice President, Controller
and Chief Accounting Officer
45
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS:
That the undersigned officers and directors of Assisted Living Concepts,
Inc. do hereby constitute and appoint Keren Brown Wilson and James W.
Cruckshank, and each of them the lawful attorney and agent or attorneys and
agents with power and authority to do any and all acts and things and to
execute any and all instruments which said attorneys and agents, or either of
them, determine may be necessary or advisable or required to enable to comply
with the Securities and Exchange Act of 1934, as amended, and any rules or
regulations or requirements of the Securities and Exchange Commission in
connection with this Annual Report on Form 10-K. Without limiting the
generality of the foregoing power and authority, the powers granted include
the power and authority to sign the names of the undersigned officers and
directors in the capacities indicated below to this Annual Report on Form 10-K
or amendment or supplements thereto, and each of the undersigned hereby
ratifies and confirms all that said attorneys and agent, or either of the,
shall do or cause to be done by virtue hereof. This Power of Attorney may be
signed in several counterparts.
IN WITNESS WHEREOF, each of the undersigned has executed this Power of
Attorney as of the dated indicated opposite his or her name.
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Keren Brown Wilson Chief Executive Officer, September 23, 1999
______________________________________ President and Director
Keren Brown Wilson (Principal Executive
Officer)
/s/ James W. Cruckshank Vice President and Chief September 23, 1999
______________________________________ Financial Officer
James W. Cruckshank
/s/ M. Catherine Maloney Vice President and Chief September 23, 1999
______________________________________ Accounting Officer And
M. Catherine Maloney Controller
/s/ Leslie Mahon Vice President and Chief September 23, 1999
______________________________________ Operating Officer
Leslie Mahon
/s/ Gloria Cavanaugh Director September 23, 1999
______________________________________
Gloria Cavanaugh
/s/ Richard C. Ladd Director September 23, 1999
______________________________________
Richard C. Ladd
/s/ Bradley Razook Director September 23, 1999
______________________________________
Bradley Razook
/s/ Jill Krueger Director September 23, 1999
______________________________________
Jill Krueger
/s/ William McBride III Director September 23, 1999
______________________________________
William McBride III
</TABLE>
46
<PAGE>
EXHIBIT 12
RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1996 1997
------------ ------------
(in thousands)
<S> <C> <C>
Loss before provision for income taxes............... $(1,915) $(2,479)
Add fixed charges
Interest costs including amortization of debt
issuance cost....................................... 1,146 4,946
------- -------
Earnings (loss) before fixed charges............. $ (769) $ 2,467
======= =======
Fixed charges:
Interest expense including amortization of debt
issuance costs.................................... 1,146 4,946
Capitalized interest............................... 2,317 6,616
------- -------
Total fixed charges.............................. $ 3,463 $11,562
======= =======
Ratio of earnings to fixed charges................... -- .20
======= =======
Deficiency of earnings to cover fixed charges........ $ 4,232 $ 9,095
======= =======
</TABLE>
<PAGE>
Exhibit 23
Consent of Independent Certified Public Accountants
The Board of Directors
Assisted Living Concepts, Inc.:
We consent to incorporation by reference in the Registration Statements (No.
333-58953 and No. 333-2352) on Forms S-8 of Assisted Living Concepts, Inc. of
our report dated February 13, 1998, except as to note 16 to the consolidated
financial statements as to which the date is September 10, 1999 relating to
the consolidated balance sheets of Assisted Living Concepts, Inc. and
subsidiaries as of December 31, 1996 and 1997 (as restated), and the related
consolidated statements of operations, shareholders' equity, and cash flows
for the years ended December 31, 1995, 1996 and 1997 (as restated), which
report appears in the December 31, 1997 annual report on Form 10-K/A of
Assisted Living Concepts, Inc.
As discussed in note 16 to the consolidated financial statements, the
Company has restated its financial statements as of and for the year ended
December 31, 1996 and 1997.
KPMG LLP
Portland, Oregon
September 27, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K/A
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 63,269
<SECURITIES> 0
<RECEIVABLES> 2,264
<ALLOWANCES> 79
<INVENTORY> 0
<CURRENT-ASSETS> 71,893
<PP&E> 233,648
<DEPRECIATION> 3,370
<TOTAL-ASSETS> 324,367
<CURRENT-LIABILITIES> 31,831
<BONDS> 157,700
0
0
<COMMON> 156
<OTHER-SE> 132,088
<TOTAL-LIABILITY-AND-EQUITY> 324,367
<SALES> 49,605
<TOTAL-REVENUES> 49,605
<CGS> 31,591
<TOTAL-COSTS> 47,293
<OTHER-EXPENSES> 121
<LOSS-PROVISION> 23
<INTEREST-EXPENSE> 4,946
<INCOME-PRETAX> (2,479)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,479)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,479)
<EPS-BASIC> (.21)
<EPS-DILUTED> (.21)
</TABLE>