<PAGE>
As filed with the Securities and Exchange Commission on December 7, 1999
Registration No. 333-52297
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
POST EFFECTIVE AMENDMENT NO. 1
To
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
ASSISTED LIVING CONCEPTS, INC.
(Exact name of registrant as specified in its charter)
----------------
<TABLE>
<S> <C>
Nevada 93-1148702
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
</TABLE>
11835 N.E. Glenn Widing Drive
Building E
Portland, Oregon 97220
(503) 252-6233
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
----------------
JAMES CRUCKSHANK
Vice President and Chief Financial Officer
11835 N.E. Glenn Widing Drive
Building E
Portland, Oregon 97220
(503) 252-6233
(Name, address, including zip code, telephone number, including area code, of
agent for service)
Copies to:
<TABLE>
<S> <C>
GARY OLSON, ESQ. ROBERT KENNEDY, ESQ.
Latham & Watkins Latham & Watkins
633 West Fifth Street--Suite 4000 885 Third Avenue--Suite 1000
Los Angeles, California 90071 New York, New York 10022
(213) 485-1234 (212) 906-1200
</TABLE>
----------------
Approximate date of commencement of proposed sale to the public: From time
to time after this Registration Statement becomes effective, depending on
market conditions.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [_]
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
----------------
The registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Securities and Exchange Commission,
acting pursuant to said section 8(a), may determine.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
The information contained in this Prospectus is not complete. We may change
or amend the information without notice. We are not offering to sell, or
asking you to buy, any securities. We will not make any offer to sell these
securities or accept offers to buy them until we have delivered this
Prospectus in its final form. We also will not sell these securities in any
jurisdiction where it would be illegal to offer or sell them, or solicit
purchasers, prior to registering or qualifying them under that jurisdiction's
securities laws.
Subject To Completion, Dated December 7, 1999.
PROSPECTUS
[ LOGO]
$75,000,000
5.625% Convertible Subordinated Debentures Due 2003
(Interest Payable May 1 and November 1)
2,864,344 Shares
Common Stock, Par Value $.01 Per Share
ASSISTED LIVING CONCEPTS, INC.
----------------
This Prospectus relates to the resale of the following securities of
Assisted Living Concepts, Inc., a Nevada corporation, by the present holders
of the following securities:
. $75,000,000 aggregate principal amount of 5.625% Convertible Subordinated
Debentures Due 2003;
. 2,864,344 shares of our common stock into which our 5.625% Convertible
Subordinated Debentures may convert.
Our 5.625% Convertible Subordinated Debentures and the shares of our common
stock will be offered and sold by their present holders. We will not receive
any proceeds from any resale by the present holders.
We first registered the Debentures and the Conversion Shares on July 22,
1998. The Debentures that have been resold and registered under the Securities
Act of 1933, as amended, since that date are traded on the American Stock
Exchange under the symbol "ALS5E03." The remaining Debentures, and the shares
of common stock into which all of the Debentures are convertible, have been
approved for listing on AMEX, subject to registration under the Securities Act
and, in the case of the common stock, notice of issuance. Shares of our common
stock are listed for trading on the American Stock Exchange under the symbol
"ALF." On December 6, 1999, the last reported sales price for our common stock
on the American Stock Exchange was $1.44. Debentures that are not resold
pursuant to this Prospectus are eligible for trading on The PORTALSM
("PORTAL") Market of the Nasdaq Stock Market.
INVESTING IN OUR COMMON STOCK OR OUR 5.625% CONVERTIBLE SUBORDINATED
DEBENTURES INVOLVES CERTAIN RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 11.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF
THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
The date of this prospectus is , 1999.
<PAGE>
AVAILABLE INFORMATION
We are subject to the informational reporting requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). In accordance with the
Exchange Act, we file reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). You may inspect and copy
these reports, proxy statements and other information at the public reference
facilities of the Commission located at Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, at the New York Regional Office of the
Commission, Seven World Trade Center, Suite 1300, New York, New York 10048, and
at the Chicago Regional Office of the Commission, Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. You may also obtain copies
of these materials at prescribed rates from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. You may also
inspect these reports and other information at the offices of the American
Stock Exchange ("AMEX"), 86 Trinity Place, New York, New York 10006. The
Commission also maintains a World Wide Web Site that contains reports, proxy
and information statements and other information regarding registrants,
including the Company, that file electronically with the Commission, at
http://www.sec.gov.
We have filed with the Commission a registration statement (the
"Registration Statement") on Form S-1 under the Securities Act of 1933, as
amended (the "Securities Act"), with respect to the registration of the 5.625%
Convertible Subordinated Debentures (the "Debentures") and the shares of common
stock into which the Debentures are convertible (the "Conversion Shares")
offered hereby. This Prospectus does not contain all of the information set
forth in the Registration Statement and the exhibits thereto, certain portions
of which have been omitted as permitted by the rules and regulations of the
Commission. Statements contained in this Prospectus or in any document
incorporated by reference herein as to the contents of any contract or other
documents referred to are not necessarily complete. In each instance, we refer
you to the copy of such documents filed as an exhibit to the Registration
Statement or such other documents, which you may obtain from the Commission as
indicated above upon payment of the fees prescribed by the Commission. Each
such statement is qualified in its entirety by such reference.
FORWARD LOOKING STATEMENTS
This registration statement contains forward-looking statements made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. These forward-looking statements may be affected by risks
and uncertainties, including without limitation (i) our ability to control
costs and improve operating margins (ii) the degree to which our future
operating results and financial condition will be affected by the
securityholder litigation described in this registration statement and the
resulting distraction of management's time and attention, (iii) the possibility
that we may incur start-up costs in excess of our present expectations, (iv)
the possibility that we will experience slower fill-up of our start-up
residences and/or declining occupancy in our stabilized residences, either of
which would adversely affect residence operating margins, (v) the effect that
the restatement of our financial statements for certain prior reporting periods
described in this registration statement may have on our compliance with lease
and loan covenants and (vi) our ability to develop an appropriate strategy to
maximize shareholder value. In light of such risks and uncertainties, our
actual results could differ materially from such forward-looking statements. We
do not undertake any obligation to publicly release any revisions to any
forward-looking statements contained herein to reflect events and circumstances
occurring after the date hereof or to reflect the occurrence of unanticipated
events.
2
<PAGE>
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding our company and the securities being registered hereby
and our consolidated financial statements and related notes appearing elsewhere
in this Prospectus. Because this is only a summary, you should read the rest of
this Prospectus before you invest in our common stock or our 5.625% Convertible
Subordinated Debentures. Read the entire Prospectus carefully, especially the
risks described under "Risk Factors."
The Company
We operate, own, lease and develop free-standing assisted living residences.
These residences are primarily located in small middle-market rural and
suburban communities with a population typically ranging from 10,000 to 40,000.
As of September 30, 1999 we had operations or development activities in five
regions (as defined by us) in 16 states.
We also provide personal care and support services and make available
routine nursing services (as permitted by applicable regulations) designed to
meet the health care needs of our residents. We believe that this combination
of residential, personal care, support and health care services provides a
cost-efficient alternative and affords an independent lifestyle for individuals
who do not require the broader array of medical services that nursing
facilities are required by law to provide.
We have experienced significant and rapid growth, primarily through the
development of assisted living residences and, to a much lesser extent, through
acquisitions of residences. When we completed our initial public offering in
November 1994 we had a base of five residences (137 units). As of September 30,
1999, we had 181 assisted living residences in operation representing an
aggregate of 6,986 units. Of these residences, we owned 111 residences (4,353
units) and leased 70 residences (2,633 units). For the three months ended
September 30 , 1999, our 145 Stabilized Residences (those residences that had
been operating for twelve months prior to the beginning of the period or had
achieved 95.0% occupancy within the first twelve months of operations) had an
average occupancy rate of approximately 83.0% and a weighted average monthly
rental rate of approximately $1,893 per unit. Our 181 residences in operation
during the three months ended September 30, 1999 had an average occupancy rate
of approximately 76.0% and an average monthly rental rate of approximately
$1,903 per unit.
We are currently completing development of four residences. As of September
30, 1999, we had two residences with 78 units that had received certificates of
occupancy but were not yet operating. In addition, we had two residences with
78 units that were under construction as of the same date. We have
significantly reduced our development activity in 1999 in order to focus on
stabilizing our current base of operating residences. We wrote-off
approximately $2.4 million in fiscal year 1998 and $4.8 million during the nine
months ended September 30, 1999 primarily associated with sites which we will
no longer seek to develop. In addition to the 181 residences (6,986 units) in
operation as of September 30, 1999, we intend to commence operation of an
additional 4 residences (156 units) through 1999. We have incurred
approximately $27.0 million in capital expenditures on our development
activities through the nine months ended September 30, 1999. We expect to incur
up to an additional $3.0 million in capital expenditures to complete the
residences under construction.
We have significantly reduced development activity in order to focus on our
core business of operating our existing residences. The principal elements of
our business strategy are to:
. increase occupancy and improve operating efficiencies at our existing
base of residences;
3
<PAGE>
. expand market penetration in existing markets;
. serve higher-acuity residents; and
. pursue strategic business alliances.
We anticipate that revenues at a majority of our residences will continue to
come from private pay sources. However, we believe that locating residences in
states with favorable regulatory and reimbursement climates should provide a
stable source of residents eligible for Medicaid reimbursement to the extent
that private pay residents are not available and, in addition, provide our
private pay residents with alternative sources of income when their private
funds are depleted and they become Medicaid eligible.
Assisted Living Concepts, Inc. is a Nevada corporation. Our principal
executive offices are located at 11835 N.E. Glenn Widing Drive, Building E,
Portland, Oregon 97220-9057, and our telephone number is (503) 252-6233.
4
<PAGE>
THE OFFERING
In April 1998, we sold $75,000,000 aggregate principal amount of our
Debentures. As part of that offering, we agreed to register the Debentures and
the Conversion Shares on behalf of the purchasers. To comply with that
agreement, we originally registered the Debentures and the Conversion Shares on
July 22, 1998. We have amended the Registration Statement, of which this
prospectus is a part, to convert the form of the Registration Statement to Form
S-1 following our delay in filing certain reports under the Exchange Act. See
"--The Company; Recent Developments; Restatement of Historical Financial
Statements".
Under the Registration Statement, holders of Debentures (the "Selling
Debentureholders") may sell Debentures and holders of Conversion Shares
registered under the Registration Statement may sell such Conversion Shares in
one or more offerings. We must use our best efforts to keep the Registration
Statement effective for a period of two years from July 22, 1998, or such
shorter period which will terminate when all of the Debentures and the
Conversion Shares have been sold pursuant to this registration statement or
when all Debentures and the Conversion Shares otherwise have been sold pursuant
to Rule 144 or are otherwise freely tradable. This Prospectus provides you with
a general description of the Debentures and the Conversion Shares that may be
sold. For more detailed information, you should read the exhibits filed with
the Registration Statement of which this Prospectus is a part.
OUR 5.625% CONVERTIBLE SUBORDINATED DEBENTURES
Amount Offered............. $75,000,000 principal amount of 5.625%
Convertible Subordinated Debentures Due 2003.
Maturity Date.............. May 1, 2003.
Interest Payment Dates..... May 1 and November 1 of each year, commencing
November 1, 1998.
Conversion Rights.......... You may convert our Debentures into Conversion
Shares at any time prior to maturity at a
conversion price of $26.184 per share, subject
to adjustment under certain conditions.
However, the right to convert Debentures called
for redemption terminates on the business day
immediately preceding the redemption date or
such earlier date as the holder presents any of
our Debentures for redemption.
Optional Redemption of
Debentures by Us........... We cannot redeem any Debentures prior to May
15, 2001. On and after May 15, 2001, we may
redeem the Debentures in whole or in part, at
any time, at the redemption prices listed in
the section "Description of Debentures" under
the heading "Optional Redemption."
Sinking Fund............... None.
Change in Control.......... If we sell certain assets or experience
specific kinds of changes in control, we must
offer to repurchase the Debentures (if any
remain outstanding) at the prices listed in
"Description of Debentures." If we experience
an event that triggers this obligation, we
cannot assure that we will have enough cash to
pay the purchase price for the Debentures, or
that we could do so without violating the terms
of other agreements.
5
<PAGE>
Subordination.............. The Debentures are general unsecured
obligations of ours and rank behind all of our
existing and future senior indebtedness. As of
September 30, 1999 we had $97.0 million of
senior indebtedness outstanding (including
accounts payable, trade payables, construction
payables and accrued real estate taxes and
other accrued expenses) as well as
approximately $19.6 million of annual operating
lease payment obligations that would have been
senior in right of payment to the Debentures.
The Debentures rank behind all existing and
future indebtedness and other liabilities
(including trade payables) of any subsidiaries
which we may acquire or establish. The
Indenture with Harris Trust and Savings Bank
governing the Debentures does not limit our
ability to take on senior or other
indebtedness.
Use of Proceeds............ We will not receive any proceeds from the sale
of the Debentures or the Conversion Shares
offered hereby.
Trading.................... The Debentures are listed for trading on the
American Stock Exchange. However, we cannot
assure that there will be any liquidity or
trading market for our Debentures.
Registration Rights........ We have agreed to file this Registration
Statement with respect to the resale of the
Debentures and the Conversion Shares and to use
our best efforts to keep this Registration
Statement effective until July 22, 2000, or
such shorter period which will terminate when
all of the Debentures and the Conversion Shares
have been sold pursuant to this registration
statement or when all Debentures and the
Conversion Shares otherwise have been sold
pursuant to Rule 144 or are otherwise freely
tradable.
Minimum Denomination....... The Debentures are issued in amounts of $1,000
principal amount and integral multiples
thereof.
Common Stock Offered....... We are offering for resale up to 2,864,344
shares of our common stock. This total includes
shares issuable upon conversion of the
Debentures, at a conversion price of $26.184
per share. Our common stock trades on the
American Stock Exchange under the symbol "ALF."
6
<PAGE>
Summary Consolidated Financial Data
<TABLE>
<CAPTION>
Predecessor The Company
------------ --------------------------------------------------------------------
Eleven One Month Nine Months Ended
Months Ended Ended Years ended December 31, September 30,
November 30, December 31, ----------------------------------- ------------------
1994 1994 1995 1996 1997 1998 1998 1999
------------ ------------ ------- ------- ------- -------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statements
of Operations Data:
Revenue................. $1,841 $ 212 $ 4,067 $21,022 $49,605 $ 89,384 $ 63,938 $ 85,460
Operating Expenses:
Residence operating
expenses.............. 1,127 125 2,779 14,055 31,591 57,443 39,558 60,018
Management fees........ 93 -- -- -- -- -- -- --
Corporate general and
administrative........ -- 152 1,252 1,864 4,050 11,099 6,049 15,400
Building rentals....... -- 5 5 1,157 2,691 11,508 8,459 10,726
Building rentals to
related party......... -- 37 793 2,812 5,278 1,456 1,146 850
Depreciation and
amortization.......... 105 13 296 1,094 3,683 6,339 4,394 6,552
Terminated merger
expense............... -- -- -- -- -- 1,068 -- --
Site abandonment
costs................. -- -- -- -- -- 2,377 1,001 4,833
Write-off of impaired
assets................ -- -- -- -- -- 8,521 8,874 --
------ ------ ------- ------- ------- -------- -------- --------
Total operating
expenses............ 1,325 332 5,125 20,962 47,293 99,611 69,481 98,379
------ ------ ------- ------- ------- -------- -------- --------
Operating income
(loss)................. 516 (120) (1,058) 60 2,312 (10,227) (5,543) (12,919)
------ ------ ------- ------- ------- -------- -------- --------
Other income (expense):
Interest expense....... (297) (8) (96) (1,146) (4,946) (11,039) (7,358) (11,058)
Interest income........ 12 64 579 455 1,526 3,869 2,887 1,320
Loss on sale of
assets................ -- -- -- (854) (1,250) (651) (428) (127)
Debenture conversion
costs................. -- -- -- (426) -- -- -- --
Other income
(expense)............. -- -- -- (4) (121) (1,174) (1,370) (138)
------ ------ ------- ------- ------- -------- -------- --------
Total other income
(expense)........... (285) 56 483 (1,975) (4,791) (8,995) (6,269) (10,003)
------ ------ ------- ------- ------- -------- -------- --------
Income (loss) before
taxes and
cumulative effect of
change in
accounting principle... 231 (64) (575) (1,915) (2,479) (19,222) (11,812) (22,922)
Provision for income
taxes.................. 85 -- -- -- -- -- -- --
Cumulative effect of
change in accounting
principle.............. -- -- -- -- -- (1,523) (1,523) --
------ ------ ------- ------- ------- -------- -------- --------
Net income (loss)....... $ 146 $ (64) $ (575) $(1,915) $(2,479) $(20,745) $(13,335) $(22,922)
====== ====== ======= ======= ======= ======== ======== ========
Basic and diluted net
loss per common share:
Loss before cumulative
effect of change in
accounting
principle............. -- $(0.01) $ (0.10) $ (0.23) $ (0.21) $ (1.18) $ (0.74) $ (1.34)
Cumulative effect of
change in accounting
principle............. -- -- -- -- -- $ (0.09) (0.10) --
------ ------ ------- ------- ------- -------- -------- --------
Basic and diluted net
loss per common share.. -- $(0.01) $ (0.10) $ (0.23) $ (0.21) $ (1.27) $ (0.84) $ (1.34)
====== ====== ======= ======= ======= ======== ======== ========
Basic and diluted
weighted average common
shares outstanding..... -- 6,000 6,000 8,404 11,871 16,273 15,994 17,119
Ratio of earnings to
fixed charges(1)....... 1.78 -- -- -- 0.21 -- -- --
</TABLE>
<TABLE>
<CAPTION>
At December 31, At September 30,
-------------------------------------------- ----------------
1994 1995 1996 1997 1998 1999
------- ------- -------- -------- -------- ----------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Balance
Sheet Data:
Working capital......... $13,122 $(5,320) $(27,141) $ 40,062 $ 43,856 $ 12,029
Total Assets............ 17,903 53,546 147,223 324,367 414,669 358,793
Long term debt,
excluding current
portion................ 1,101 24,553 49,663 157,700 266,286 233,705
Shareholders' equity.... 16,219 15,644 56,995 132,244 119,197 95,633
</TABLE>
- --------
(1) Earnings were insufficient to cover fixed charges by $64,000, $1.2 million,
$4.2 million, $9.1 million, $25.2 million, $16.6 million and $24.8 million
for the one month ended December 31, 1994, the year ended December 31,
1995, the year ended December 31, 1996, the year ended December 31, 1997,
the year ended December 31, 1998, the nine months ended September 30, 1998
and the nine months ended September 30, 1999, respectively.
7
<PAGE>
USE OF PROCEEDS
The proceeds from the sale of the Debentures and Conversion Shares offered
by this Prospectus are solely for the account of the Selling Debentureholders.
Accordingly, we will not receive any of the proceeds from sales of the
Debentures or Conversion Shares.
8
<PAGE>
PRICE RANGE OF COMMON STOCK
Our common stock, par value $0.01, is listed on the American Stock Exchange
("AMEX") under the symbol "ALF." The following table sets forth the high and
low closing sales prices of the common stock, as reported by the AMEX, for the
periods indicated.
<TABLE>
<CAPTION>
1997 1998
------------ -------------
High Low High Low
------ ----- ------ ------
<S> <C> <C> <C> <C>
Years ended December 31:
1st Quarter........................................ $10.68 $7.13 $21.63 $17.50
2nd Quarter........................................ 14.50 9.88 21.38 14.13
3rd Quarter........................................ 19.75 13.25 18.00 12.44
4th Quarter........................................ 22.38 15.75 14.50 9.88
</TABLE>
For the period from January 1, 1999 to April 15, 1999, the high and low
closing sales prices of the common stock, as reported by the AMEX, was $14.50
and $2.88, respectively. On April 15, 1999, the AMEX halted trading in the
common stock. On October 4, 1999, trading in the common stock resumed on the
AMEX, and the high and low closing sales price for the period from October 4,
1999 to December 6, 1999, as reported by AMEX, was $2 and $0.81, respectively.
As of September 30, 1999, we had approximately 87 holders of record of
common stock. We are unable to estimate the number of additional stockholders
whose shares are held for them in street name or nominee accounts.
DIVIDEND POLICY
Our current policy is to retain any earnings to finance the operations and
expansion of our business. In addition, certain outstanding indebtedness and
certain lease agreements restrict the payment of cash dividends. It is
anticipated that the terms of future debt financing may do so as well.
Therefore, the payment of any cash dividends on the common stock is unlikely in
the foreseeable future.
9
<PAGE>
CAPITALIZATION
(in thousands, except share and per share data)
The following table sets forth the consolidated capitalization of the
Company at September 30, 1999. The capitalization table should be read in
connection with the Company's consolidated financial statements and related
notes included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
At September 30, 1999
---------------------
<S> <C>
Trust deed notes, payable to the State of Oregon Housing
and Community Services Department....................... $ 10,067
Variable rate multifamily revenue bonds, payable to the
Washington State Housing Finance Commission Department.. 8,500
Variable rate demand revenue bonds, Series 1997, payable
to the Idaho Housing and Finance Association............ 7,120
Variable rate demand revenue bonds, Series A-1 and A-2
payable to the State of Ohio Housing Finance Agency..... 12,845
Mortgages Payable........................................ 35,324
Capital Lease Obligations................................ 73
5.625% Convertible Subordinated Debentures due 2003...... 86,250
6.0% Convertible Subordinated Debentures due 2002........ 75,000
--------
Total long-term debt................................. 235,179
Less current portion..................................... 1,474
--------
Total long-term debt excluding current portion....... $233,705
========
Shareholders' equity:
Preferred Stock, $.01 par value; 1,000,000 shares
authorized; none issued and outstanding............... --
Common Stock, $.01 par value; 80,000,000 shares
authorized; 17,120,745 shares issued and outstanding.. 171
Additional paid-in-capital............................. 144,651
Fair market value in excess of historical cost of
acquired net assets attributable to related party
transactions.......................................... (239)
Accumulated other comprehensive loss................... (250)
Accumulated deficit.................................... (48,700)
--------
Total shareholders' equity........................... 95,633
--------
Total capitalization................................. $329,338
========
</TABLE>
- --------
(1) Does not include: 2,708,000 shares of common stock reserved for issuance
pursuant to the Company's stock option plans, under which options to
purchase 1,800,369 shares have been granted at a weighted average exercise
price of $10.30 per share. See "Management."
10
<PAGE>
RISK FACTORS
Set forth below are the risks that we believe are material. This report,
including the risks discussed below, contains forward-looking statements made
pursuant to the safe harbor provisions of the Private Securities Reform Act of
1995. Forward-looking statements involve known and unknown risks, uncertainties
and other factors that may cause our actual results and future events to differ
materially from those set forth or contemplated in the forward-looking
statements. Forward-looking statements depend on assumptions, data or methods
which may be incorrect or imprecise.
We face difficulties in stabilizing our operations following our rapid growth.
We have experienced rapid growth since 1994, which has placed significant
demands on our management resources. Our ability to stabilize operations and
manage our business following this growth requires us to continue to expand our
operational, financial and management information systems and to continue to
attract, train, motivate, manage and retain key employees. If we are unable to
manage this growth effectively, our business, financial condition and results
of operations could be adversely affected. Our ability to stabilize operations
and manage our business efficiently has been, and for the foreseeable future
will continue to be, adversely affected by the diversion of management's time
and attention to the pending securityholder litigation. See "--We may incur
significant costs and liability as a result of our securityholder litigation"
and "--Defaults may be declared under our loan and lease obligations."
We are highly leveraged; our loan and lease agreements contain financial
covenants.
We are highly leveraged. We had total indebtedness, including short term
portion, of $235.2 million as of September 30, 1999. We also had approximately
$19.6 million of annual operating lease payment obligations as of September 30,
1999. In addition, we had shareholders' equity of $119.2 million as of December
31, 1998 ($95.6 million as of September 30, 1999). The degree to which we are
leveraged could have important consequences, including:
. making it more difficult to satisfy our debt or lease obligations;
. increasing our vulnerability to general adverse economic and industry
conditions;
. limiting our ability to obtain additional financing;
. requiring dedication of a substantial portion of our cash flow from
operations to the payment of principal of, and interest on, our debt or
leases, thereby reducing the availability of such cash flow to fund
working capital, capital expenditures or other general corporate
purposes;
. limiting our flexibility in planning for, or reacting to, changes in our
business or industry; and
. placing us at a competitive disadvantage to less leveraged competitors.
Several of our debt instruments and leases contain financial covenants,
including debt to cash flow and net worth tests. There can be no assurance that
we will be in compliance with these financial covenants in the future,
particularly if we are unable to stabilize our operations and efficiently
manage our business. If we fail to comply with one or more of these covenants
(after giving effect to any applicable cure period), the lender or lessor may
declare us in default of the underlying obligation and exercise any available
remedies, which may include:
. in the case of debt, declaring the entire amount of the debt immediately
due and payable;
. foreclosing on any residences or other collateral securing the
obligation; and
. in the case of a lease, terminating the lease and suing for damages.
In addition, many of our debt instruments and leases contain "cross-default"
provisions pursuant to which a default under one obligation can cause a default
under one or more other obligations. Accordingly, it could have a material
adverse effect on our financial condition if any lender or lessor notifies us
that we are in default under any debt instrument or lease.
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We may require additional financing.
Our ability to satisfy our obligations, including payments with respect to
our outstanding indebtedness and lease obligations, will depend on future
performance, which is subject to our ability to stabilize our operations and to
a certain extent, to general economic, financial, competitive, legislative,
regulatory and other factors that are beyond our control. Although we believe
that our current cash on hand and our working capital resources will be
sufficient to meet our capital needs for the next 12 to 18 months, there can be
no assurance that cash available from operations will be sufficient to fund our
operations beyond such time. We are reviewing our future capital requirements
to identify financing options. As a result of a pending securityholder
litigation, the restatement of historical financial statements for certain
prior periods and other factors, there can be no assurance that financing from
any source will be available in the future, or, if available, that such
financing will be available on terms acceptable to us. See "Business--Recent
Developments--Securityholder Litigation" and "--Restatement of Historical
Financial Statements."
Approximately $28.5 million of our indebtedness was secured by letters of
credit as of September 30, 1999 which in some cases have termination dates
prior to the maturity of the underlying debt. As such letters of credit expire,
we will need to obtain replacement letters of credit, post cash collateral or
refinance the underlying debt. There can be no assurance that we will be able
to procure replacement letters of credit from the same or other lending
institutions on terms that are acceptable to us. In the event that we are
unable to obtain a replacement letter of credit or provide alternate collateral
prior to the expiration of any of these letters of credit, we would be in
default on the underlying debt.
We require substantial amounts for debt service.
We will likely require substantial amounts of cash to fund scheduled
payments of principal and interest on the Debentures, amounts due under our
operating leases, future capital expenditures and any increased working capital
requirements. Earnings were insufficient to cover fixed charges for the year
ended December 31, 1998 by $25.2 million and by $24.8 million for the nine
months ended September 30, 1999. We may be unable to meet our cash requirements
beyond the next 12 to 18 months. We also may be unable to obtain alternative
financing. Our 6.0% Debentures and our 5.625% Debentures mature in November
2002 and May 2003, respectively, which will require us to make aggregate
payments of $86.3 million and $75.0 million, respectively, on those dates. We
could attempt to refinance the Debentures if our cash flow from operations is
insufficient to repay them at maturity. However, a refinancing might not be
available on terms acceptable to us, or at all. If we fail to make necessary
payments on the Debentures, we will be in default under the terms of the
Debentures, and may also be in default under agreements controlling our other
indebtedness. Any default by us under the Debentures or on other indebtedness
or our operating leases could adversely affect our financial condition and
operating results.
The Debentures rank below existing and future indebtedness.
The Debentures are unsecured and subordinated in right of payment to all of
our existing and future senior indebtedness. As of September 30, 1999, we had
approximately $97.0 million of senior indebtedness outstanding (including
accounts payable, trade payables, construction payables and accrued real estate
taxes and other accrued expenses), and $19.6 million of annual operating lease
payment obligations. Because the Debentures are subordinate to our senior
indebtedness, in the event of our bankruptcy, liquidation, reorganization or
certain other events, we will pay obligations on the Debentures only after we
satisfy all senior indebtedness. Therefore, we may have insufficient assets
remaining to pay amounts on the Debentures. The Debentures are subordinate to
all existing and future indebtedness and other liabilities (including trade
payables) of any subsidiaries which currently exist or which we may in the
future acquire or establish. Our right to receive assets of our subsidiaries
upon their liquidation or reorganization (and the consequent right of the
holders of the Debentures to share in those assets) would be subordinate to the
claims of that subsidiary's creditors (including trade creditors).
Our Indenture with Harris Trust and Savings Bank does not limit our ability,
or that of any of our subsidiaries, to incur senior indebtedness, indebtedness
and liabilities. We may have difficulty paying our
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obligations under the Debentures if we, or any of our subsidiaries, incur
indebtedness or liabilities, or if we agree to guarantee the indebtedness of
any subsidiaries. We anticipate that we will incur additional indebtedness and
liabilities, including senior indebtedness. For more detailed information you
should review the section of this Prospectus entitled "Description of
Debentures--Subordination of Debentures."
The Debentures are our obligation exclusively. If we acquire or establish
any subsidiaries, our cash flow and our ability to pay our debt, including the
Debentures, may depend upon the subsidiaries' operating results and their
ability to provide cash (in the form of dividends, loans or otherwise) to pay
amounts due on our obligations. Any subsidiary will be a separate and distinct
legal entity and will have no obligation to pay any amounts due on the
Debentures. In addition, dividends, loans or other distributions from any
subsidiary to us may be subject to contractual or other restrictions, would
depend upon the subsidiary's operating results and may be subject to other
business considerations.
Our Indenture with Harris Trust and Savings Bank does not contain any
financial covenants or restrict our ability to do any of the following:
. pay dividends in the absence of a default;
. incur indebtedness, including senior indebtedness; or
. issue or repurchase our securities or those of any subsidiary.
Change in control; we may be unable to repurchase our Debentures.
The terms of our Indenture with Harris Trust and Savings Bank do not
prohibit us from engaging in a change in our control, except to the extent
described under "Description of Debentures--Certain Rights to Require Us to
Repurchase the Debentures." The term "change in control" is limited in our
Indenture with Harris Trust and Savings Bank to a small number of specified
transactions.
Although we must offer to repurchase the Debentures upon a change in
control, this fact does not necessarily protect holders of the Debentures if we
conduct a highly leveraged transaction, reorganization, merger or similar
transaction. Similarly, transactions other than a change in control might
adversely affect our financial condition and leave holders of the Debentures
without protection.
If we experience a change in control, a holder of the Debentures may request
that we buy back all or a portion of the Debentures. If a change in control
occurs, we may be unable to pay the purchase price for all the Debentures
tendered to us. We would likely need additional financing to repurchase the
Debentures tendered to us upon a change in control. We may enter into future
agreements that prohibit us from purchasing your Debentures, or that consider a
change in control an event of default. If a change in control occurs when we
cannot purchase the Debentures, we could seek our lenders' consent to purchase
the Debentures or attempt to refinance the borrowings that contain this
prohibition. We will be unable to purchase the Debentures if we do not obtain
this consent or repay these borrowings. In that case, our failure to repurchase
any tendered Debentures would constitute an event of default under our
Indenture with Harris Trust and Savings Bank, which may constitute a further
default under the terms of our other indebtedness. In those circumstances, the
subordination provisions in our Indenture with Harris Trust and Savings Bank,
would likely prohibit us from purchasing the Debentures.
We may incur significant costs and liability as a result of our securityholder
litigation.
In early 1999, twelve complaints were filed against us and certain of our
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 and an amendment was subsequently filed on October 20, 1999.
The amended consolidated complaint purports to be brought on behalf of a class
of purchasers of our common stock from February 6, 1997 through March 31, 1999
and on behalf of a class of purchasers of our 6.0% Convertible
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Subordinated Debentures (the "6.0% Debentures") and the Debentures from the
dates of issuance through March 31, 1999. The amended consolidated complaint
alleges violations of the federal securities laws and seeks unspecified
damages. It names as additional defendants our independent auditors in
connection with our offerings of common stock, 6.0% Debentures and Debentures
and our underwriters in connection with our 1997 offering of the 6.0%
Debentures.
Pursuant to our by-laws, we are obligated to indemnify our officers and
directors to the maximum extent allowed by law for any liability incurred by
them as a result of the litigation. In addition, we previously entered into
indemnity agreements with certain of these defendants. We cannot predict the
outcome of the foregoing litigation and currently are unable to evaluate the
likelihood of success or the range of possible loss. However, if the foregoing
litigation were determined adversely to us, such a determination could have a
material adverse effect on our financial condition, results of operations, cash
flow and liquidity. See "Legal Proceedings."
We face significant competition.
We believe that the rapid growth of the assisted living industry has
resulted in an oversupply of assisted living residences in certain of our
markets. Recently, we have experienced slower fill-up of new residences in
these markets than expected, as well as declining occupancy in our stabilized
residences due to the increase in options available to potential new residents
when units are vacated. There can be no assurance that we will be able to
compete effectively in those markets where overbuilding exists, or that future
overbuilding in other markets where we have opened or plan to open residences
will not adversely affect our operations.
The long-term care industry is a highly competitive industry. We expect that
the assisted living business, in particular, will become even more competitive
in the future. We compete with numerous other companies providing similar long-
term care alternatives.
We expect to face increased competition from new market entrants as assisted
living receives increased attention and the number of states which include
assisted living in their Medicaid waiver programs increases. These new market
entrants will include publicly and privately held companies, including not for
profit corporations, focusing primarily on assisted living, as well as
hospitals and nursing homes that offer assisted living as a segment of their
overall businesses. We also compete with nursing facilities that provide long-
term care services. We also face competition for development and acquisition of
assisted living residences. Some of our present and potential competitors are
significantly larger and have, or may obtain, greater financial resources than
we do. Consequently, we cannot guarantee that we will not encounter increased
competition in the future which could limit our ability to attract residents or
expand our business and could have a material adverse effect on our financial
condition and results of operations and prospects.
Defaults may be declared under our debt and lease agreements.
Almost all of our loan agreements and leases contain customary covenants
requiring that we deliver periodic financial statements and certify that they
are materially accurate. As a result of the restatement it is possible that a
lender or lessor may assert a default under the terms of these instruments with
regard to the financial statements for reporting periods in 1996, 1997 and
1998. We have received waivers from certain of our creditors and lessors with
respect to possible defaults under certain of these covenants. There can be no
assurance that one or more other creditors or lessors will not attempt to
declare a default and exercise any remedies they may deem available, which
could include attempting to terminate the applicable lease or foreclose on one
or more residences securing the applicable indebtedness. As of November 30,
1999, we had not received notice of a declaration of default from any such
other creditor or lessor. We continue to make all required payments under each
of these instruments.
We may not be able to attract and retain qualified employees and control labor
costs.
We compete with other providers of long-term care with respect to attracting
and retaining qualified personnel. We also depend upon the available labor pool
of low-wage employees. A shortage of qualified
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personnel may require us to enhance our wage and benefits packages in order to
compete. Some of the states in which we operate impose licensing requirements
on individuals serving as program directors at assisted living residences. In
some states in which we operate, such as South Carolina, the growth in demand
for licensed assisted living program directors has exceeded the rate at which
candidates can be licensed. Until a program director at a particular residence
can be licensed, we are required to retain the services of outside licensed
managers at a significant additional cost. We cannot guarantee that our labor
costs will not increase, or that, if they do increase, they can be matched by
corresponding increases in revenues.
We will suffer operating losses for each of our new residences.
We opened 16 new residences through September 30, 1999, and plan to open 4
additional residences in 1999. We expect that Start-Up Residences will incur
significant operating losses during the fill-up period. As a result, our
operating income will be adversely affected by operating losses at certain
residences, primarily residences opened during 1999, which we expect will range
from $3.5 million to $5.0 million in 1999. We cannot guarantee that we will not
experience unforeseen expenses, difficulties, complications and delays in
connection with the expansion of our operational base which could have a
material adverse effect on our financial condition and results of operations.
Our properties are geographically concentrated and we depend on the economies
and Medicaid waiver programs of the specific areas in which we operate our
properties.
We depend on the economies of Texas, Oregon, Ohio, Indiana and Washington
and, to some extent, on the continued funding of state Medicaid waiver program
in those states. As of September 30, 1999, 22.1% of our properties were in
Texas, 10.5% in Oregon, 9.9% in Ohio, 11.0% in Indiana and 8.8% in Washington.
Adverse changes in general economic factors affecting the respective health
care industries or laws and regulatory environment in each of these states,
including Medicaid reimbursement rates, could have a material adverse effect on
our financial condition and results of operations.
We depend on reimbursements by third-party payors.
A portion of our revenues depends upon reimbursement from third-party
payors, including state Medicaid waiver programs and private insurers. For the
years ended December 31, 1996, 1997 and 1998, and the nine months ended
September 30, 1999, direct payments received from Medicaid funded programs
accounted for approximately 12.4%, 11.1%, 10.7%, and 10.4% respectively, of our
revenue. Also, our tenant-paid portion of Medicaid residents accounted for
approximately 6.9%, 5.9%, 5.8%, and 5.9% respectively, of our revenue during
the years ended December 31, 1996, 1997 and 1998 and the nine months ended
September 30, 1999. We expect that state Medicaid waiver programs will
constitute a significant source of our revenue in the future. Furthermore, we
cannot guarantee that our proportionate percentage of revenue received from
Medicaid waiver programs will not increase. There are continuing efforts by
governmental and private third-party payors to contain or reduce the costs of
health care by lowering reimbursement rates, increasing case management review
of services and negotiating reduced contract pricing. Our revenues and
profitability will be affected if these efforts are successful. Also, there has
been, and our management expects that there will continue to be, a number of
proposals attempting to reduce the federal and some state budget deficits by
limiting Medicaid reimbursement in general. Adoption of any of these proposals
at either the federal or the state level could have a material adverse effect
on our business, financial condition, results of operations and prospects.
We are subject to significant government regulation.
We are subject to federal and state regulations which govern various aspects
of our business. The development and operation of assisted living facilities
and the provision of health care services are subject to federal laws, and
state and local licensure, certification and inspection laws that regulate,
among other matters:
. the number of licensed residences;
. the provision of services;
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. equipment;
. staffing, including professional licensing and criminal background
checks;
. operating policies and procedures;
. fire prevention measures;
. environmental matters;
. resident characteristics; and
. physical design and compliance with building and safety codes.
In the ordinary course of our business, we receive and have received notices
of deficiencies for failure to comply with various regulatory requirements. We
review such notices and, in most cases, we will agree with the regulator upon
the steps to be taken to bring the facility into compliance with regulatory
requirements. From time to time we may dispute the matter and sometimes will
seek a hearing if we do not agree with the regulator. In some cases or upon
repeat violations, the regulator may take one or more adverse actions against a
facility. These adverse actions can include:
. the imposition of fines;
. temporary stop placement of admission of new residents, or imposition of
other conditions to admission of new residents to the facility;
. termination of a facility's Medicaid contract; and
. suspension or revocation of a facility's license.
During 1998 and the first nine months of 1999, these adverse actions
resulted in our paying aggregate fines of $14,150 on ten residences and
temporary suspension of admissions at certain residences. During 1998, a
license revocation action was commenced with respect to one of our residences
in the State of Washington. In July 1999 following discussions with the
licensing agency we settled this action without the revocation becoming
effective. Because regulations vary from one jurisdiction to another and
because determinations regarding whether to seek a suspension or revocation, or
to impose a fine, are subject to administrative discretion, it is difficult for
us to predict whether a particular remedy will be sought or obtained in any
given case. These types of regulatory enforcement actions may adversely affect
facility occupancy levels, revenues and costs of operation. We cannot guarantee
that federal, state, or local governments will not impose additional
restrictions on our activities that could materially adversely affect us.
We are also subject to various laws and regulations, both federal and state,
due to the size and nature of our business, including laws and regulations
relating to:
. safe working conditions;
. family leave; and
. disposal of medical waste.
Our cost to comply with these regulations is significant. In addition, it
could adversely affect our financial condition or results of operations if a
court or regulatory tribunal were to determine that we had failed to comply
with any of these laws or regulations. Because these laws and regulations are
amended from time to time, we cannot predict when and to what extent liability
may arise. See "--Restrictions imposed by laws benefiting disabled persons" and
"--Medical waste."
Federal and state fraud and abuse laws, such as "anti-kickback" laws and
"self-referral" laws, govern some financial arrangements among health care
providers and others who may be in a position to refer or recommend patients to
these providers. We have established policies and procedures that we believe
are
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sufficient to ensure that our facilities will operate in substantial compliance
with applicable regulatory requirements. However, we cannot guarantee that
these fraud and abuse laws will be interpreted in a manner consistent with our
practices.
Restrictions imposed by laws benefiting disabled persons.
Under the Americans with Disabilities Act of 1990, all places of public
accommodation are required to meet certain federal requirements related to
access and use by disabled persons. A number of additional federal, state and
local laws exist that also may require us to modify existing and planned
residences to allow disabled persons to access the residences. We believe that
our residences are either substantially in compliance with present requirements
or are exempt from them, and we attempt to check for compliance in all
facilities we consider acquiring. However, if required changes cost more than
anticipated, or must be made sooner than anticipated, we would incur additional
costs. Further legislation may impose additional burdens or restrictions
related to access by disabled persons, and the costs of compliance could be
substantial.
Medical waste.
Some of our facilities generate potentially infectious waste due to the
illness or physical condition of the residents, including, for example, blood-
soaked bandages, swabs and other medical waste products and incontinence
products of those residents diagnosed with infectious diseases. The management
of potentially infectious medical waste, including handling, storage,
transportation, treatment and disposal, is subject to regulation under various
laws, both federal and state. These laws and regulations set forth the
management requirements, as well as permit, record keeping, notice and
reporting obligations. Any finding that we are not in compliance with these
laws and regulations could adversely affect our business operations and
financial condition. Because these laws and regulations are amended from time
to time, we cannot predict when and to what extent liability may arise.
We may be adversely affected by health care reform efforts.
Health care and related services is an area of extensive and dynamic
regulatory change. Changes in the law, new interpretations of existing laws, or
changes in payment methodology, which may be applied retroactively, may have a
dramatic effect on:
. the definition of permissible or impermissible activities;
. the relative costs associated with doing business; and
. the amount of reimbursement by both government and other third-party
payors.
Congress and state legislatures, from time to time, consider and enact
various health care reform proposals. Congress and state legislatures can be
expected to continue to review and assess alternative health care delivery
systems and payment methodologies. Also, public debate of these issues can be
expected to continue in the future. We cannot predict the ultimate timing or
effect of legislative efforts or their impact on us. We cannot guarantee that
either the various states or the federal government will not impose additional
regulations upon our activities which might adversely affect our business,
financial condition, results of operations or prospects.
We face significant pressure to reduce our prices.
The health care services industry is currently experiencing market-driven
reforms from forces within and outside the industry pressuring health care and
related companies to reduce health care costs. These market-driven reforms are
resulting in industry-wide consolidation that is expected to increase the
downward pressure on health care service providers' margins, as larger buyer
and supplier groups exert pricing pressure on health care providers. We cannot
predict the ultimate timing or effect of these market-driven reforms. We cannot
guarantee that any of these reforms will not have a material adverse effect on
our financial position, results of operations or cash flows.
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We may be liable for losses not covered by or in excess of our insurance.
The provision of health care services entails an inherent risk of liability.
In recent years, participants in the long-term care industry have been subject
to an increasing number of lawsuits alleging malpractice or related legal
theories. Many of these lawsuits involve large claims and significant defense
costs. In addition, we may be subject to claims alleging violations of federal
or state laws relating to safe working conditions, environmental matters and
the use and disposal of hazardous or potentially hazardous substances such as
medical waste. We currently maintain liability insurance intended to cover such
claims. We believe our insurance is in keeping with industry standards. We
cannot guarantee, however, that claims in excess of our insurance coverage or
claims not covered by our insurance coverage will not arise. A successful claim
against us not covered by, or in excess of, our insurance coverage could have a
material adverse effect upon our financial condition or results of operations.
Claims against us, regardless of their merit or eventual outcome, may also have
a material adverse effect upon our ability to attract residents or expand our
business and would require management to devote time to matters unrelated to
the operation of our business. In addition, we must renew our insurance
policies annually. We cannot guarantee that we will be able to obtain liability
insurance coverage in the future or that, if such coverage is available, it
will be available on acceptable terms.
We could incur significant costs related to environmental remediation or
compliance.
We are subject to various federal, state and local environmental laws,
ordinances and regulations. Some of these laws, ordinances and regulations hold
a current or previous owner, lessee or operator of real property liable for the
cost of removal or remediation of some hazardous or toxic substances,
including, without limitation, asbestos-containing materials, that could be
located on, in or under such property. These laws and regulations often impose
liability whether or not we knew of, or were responsible for, the presence of
the hazardous or toxic substances. The costs of any required remediation or
removal of these substances could be substantial. Furthermore, there is no
limit to our liability under such laws and regulations. As a result, our
liability could exceed our property's value and aggregate assets. The presence
of these substances or failure to remediate these substances properly may also
adversely affect our ability to sell or lease the property, or to borrow using
our property as collateral.
We may be liable under some laws and regulations as an owner, operator or an
entity that arranges for the disposal of hazardous or toxic substances, such as
asbestos-containing materials, at a disposal site. In that event, we may be
liable for the costs of any required remediation or removal of the hazardous or
toxic substances at the disposal site. In connection with the ownership or
operation of our properties, we could be liable for these costs, as well as
some other costs, including governmental fines and injuries to persons or
properties. As a result, any hazardous or toxic substances which are present,
with or without our knowledge, at any property we hold or operate, or which we
acquire or operate in the future, could have an adverse effect on our business,
financial condition or results of operations.
Our common stock has experienced significant volatility.
During the past 12 months, our common stock has fluctuated materially from a
high of $14.50 during the fourth quarter of 1998 to a low of $0.75 on October
14, 1999. Even if our stock price stabilizes in the short term, the market
price of our common stock may fluctuate significantly in the future in response
to various factors and events, including:
. the liquidity of the market for our common stock;
. variations in our operating results;
. an unfavorable outcome in the shareholder litigation;
. new statutes or regulations or changes in the interpretation of existing
statutes or regulations affecting the health care industry generally or
assisted living residence businesses in particular; and
. the impact of other risk factors disclosed in this prospectus.
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In addition, the stock market in recent years has experienced broad price
and volume fluctuations that often have been unrelated to the operating
performance of particular companies. These market fluctuations also may
adversely affect the market price of our common stock.
We depend on senior management and skilled personnel.
We depend, and will continue to depend, upon the services of Dr. Wilson,
President, Chief Executive Officer and Vice Chairman of the Board of Directors;
Ms. Campbell, Senior Vice President, General Counsel and Secretary; Ms. Gorshe,
Senior Vice President of Community Relations; Mr. Mahon, Vice President and
Chief Operating Officer; Mr. Cruckshank, Vice President and Chief Financial
Officer; Ms. Maloney, Vice President, Controller and Chief Accounting Officer;
and Mr. Parker, Vice President of Development.
We have entered into employment agreements with these officers as well as
other key personnel. We also depend upon our ability to attract and retain
management personnel who will be responsible for the day-to-day operations of
each residence. If we lose the services of any or all of our officers or we are
unable to attract additional management personnel in the future, our business,
financial condition or results of operations could be adversely affected.
We could be adversely affected if our year 2000 problems are significant.
The year 2000 issue refers to a computer system's potential failure to
recognize dates on or beyond January 1, 2000 due to reading two digits, rather
than four, to define the applicable year. As a result, computer programs and
systems may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations causing
disruptions of operations. Our year 2000 readiness plan consists of:
. identify and assess year 2000 issues in our information and non-
information technology systems, including inquiring of third parties with
whom we do significant business, such as vendors and suppliers, as to the
state of their year 2000 readiness;
. repair or replace noncompliant information and non-information technology
systems;
. test and verify year 2000 readiness for previously non-compliant systems;
and
. compliance with state requirements related to disaster plan amendments.
We have identified year 2000 risks in the following areas:
. Our information technology systems might not be year 2000 compliant. We
have assessed our readiness in regard to year 2000 issues and believe
that all material hardware and software utilized in our operations and,
specifically, in our accounting systems, is year 2000 compliant. Despite
our efforts to identify and resolve year 2000 issues, we cannot guarantee
that all of our systems will be year 2000 compliant.
. Our non-information technology systems might not be year 2000
compliant. Our non-information technology systems are our building
management and life/safety systems, which include our emergency call
systems, electrical locking systems, fire alarm systems and fire alarm
monitoring systems. We have assessed our readiness of these systems in
regard to year 2000 issues. We are using four salaried employees, as part
of their normal course of business, to contact all manufacturers and
vendors and request that they verify in writing that each of their
systems is year 2000 compliant. Any systems identified as not in
compliance will be upgraded or replaced.
. We may have year 2000 issues with significant third parties. We are in
the process of obtaining year 2000 compliance letters and reports from
suppliers, banks, and other third party payors, including the federal
government. To date, no such payor has indicated an inability to continue
remittances in the normal course of business. However, most such payors,
including the federal government, are in the
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process of evaluating and updating their internal systems and cannot yet
assure us that their systems are year 2000 compliant. We also face the
risk that vendors from which we purchase goods and services, such as
utility providers and our payroll provider, may have systems that are not
year 2000 compliant. We plan to monitor the progress of our major vendors
in achieving year 2000 compliance.
We do not anticipate any major interruption in our business as a result of
year 2000 issues. Accordingly, we do not expect that Year 2000 issues will
have a material adverse effect upon our operations or prospects or that we
will incur any material expense associated with year 2000 compliance. However,
despite our efforts to identify and resolve year 2000 compliance problems, we
cannot guarantee that all of our systems or that of third parties on which we
rely will be year 2000 compliant. As a result our operations could be
interrupted or adversely affected.
In the worst case scenario, if our non-information technology systems
suffered year 2000 issues, we would implement our standard emergency operation
plan. This plan primarily includes incurring additional staffing. If we needed
to sustain this additional staffing for an extended period of time, it could
have a material adverse effect on our business and operations.
We have not established a contingency plan to address potential year 2000
noncompliance with respect to our information systems or those of our major
vendors. We are currently considering the extent to which such a plan is
necessary. Because we depend on systems outside our control, such as
telecommunications and power supplies, and because third party payors,
including the federal government, with whom we have relationships may not have
adequately addressed year 2000 issues, we cannot guarantee that we will not
face unexpected problems associated with year 2000 issues that may affect our
operations, business, and financial condition.
We anticipate that our future Year 2000 compliance expenditures will be
less than $25,000.
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SELECTED FINANCIAL AND OTHER DATA
The following table presents selected historical condensed consolidated
financial data for us and our Predecessor. Our "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
31, 1994, owned the five residences operated by us in December 1994. The
consolidated statement of operations data of the Predecessor for the eleven
months ended November 30, 1994 and our consolidated statement of operations
data for the one month ended December 31, 1994 and the year ended December 31,
1995, as well as our consolidated balance sheet data at December 31, 1994, 1995
and 1996, are derived from our audited consolidated financial statements and
those of the Predecessor. The consolidated statement of operations data for the
years ended December 31, 1996, 1997 and 1998, as well as the consolidated
balance sheet data at December 31, 1997 and 1998, are derived from our
consolidated financial statements included elsewhere in this registration
statement which have been audited by KPMG LLP, independent auditors. The
consolidated financial data at September 30, 1999 and for the nine-month
periods ended September 30, 1998 and 1999 have been prepared without being
audited, as allowed by the Securities and Exchange Commission. Such financial
data contain all adjustments which are, in the opinion of our management,
necessary for a fair presentation of results for such interim periods, but do
not necessarily indicate the results that are expected for the full year. You
should read the selected financial data below in conjunction with our
consolidated financial statements, including the related notes, and the
information in "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
<TABLE>
<CAPTION>
Predecessor The Company
------------ -------------------------------------------------------------------
Eleven
Months One Month Nine Months Ended
Ended Ended Years ended December 31, September 30,
November 30, December 31, ---------------------------------- ------------------
1994 1994 1995 1996 1997 1998 1998 1999
------------ ------------ ------ ------- ------- -------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statements
of Operations Data:
Revenue................. $1,841 $ 212 $4,067 $21,022 $49,605 $ 89,384 $ 63,938 $ 85,460
Operating expenses:
Residence operating
expenses.............. 1,127 125 2,779 14,055 31,591 57,443 39,558 60,018
Management fees........ 93 -- -- -- -- -- -- --
Corporate general and
administrative........ -- 152 1,252 1,864 4,050 11,099 6,049 15,400
Building rentals....... -- 5 5 1,137 2,691 11,308 8,459 10,726
Building rentals to
related party......... -- 37 793 2,812 5,278 1,456 1,146 850
Depreciation and
amortization.......... 105 13 296 1,094 3,683 6,339 4,394 6,552
Terminated merger
expense............... -- -- -- -- -- 1,068 -- --
Site abandonment
costs................. -- -- -- -- -- 2,377 1,001 4,833
Write-off of impaired
assets................ -- -- -- -- -- 8,521 8,874 --
------ ------ ------ ------- ------- -------- -------- --------
Total operating
expenses............ 1,325 332 5,125 20,962 47,293 99,611 69,481 98,379
------ ------ ------ ------- ------- -------- -------- --------
Operating income
(loss)................. 516 (120) (1,058) 60 2,312 (10,227) (5,543) (12,919)
------ ------ ------ ------- ------- -------- -------- --------
Other income (expense):
Interest expense....... (297) (8) (96) (1,146) (4,946) (11,039) (7,358) (11,058)
Interest income........ 12 64 579 455 1,526 3,869 2,887 1,320
Loss on sale of
assets................ -- -- -- (854) (1,250) (651) (428) (127)
Debenture conversion
costs................. -- -- -- (426) -- -- -- --
Other expenses......... -- -- -- (4) (121) (1,174) (1,370) (138)
------ ------ ------ ------- ------- -------- -------- --------
Total other income
(expense)........... (285) 56 483 (1,975) (4,791) (8,995) (6,269) (10,003)
------ ------ ------ ------- ------- -------- -------- --------
Income (loss) before
taxes and cumulative
effect of change in
accounting principle... 231 (64) (575) (1,915) (2,479) (19,222) (11,812) (22,922)
Provision for income
taxes.................. 85 -- -- -- -- -- -- --
Cumulative effect of
change in accounting
principle.............. -- -- -- -- -- (1,523) (1,523) --
------ ------ ------ ------- ------- -------- -------- --------
Net income (loss)....... $ 146 $ (64) $ (575) $(1,915) $(2,479) $(20,745) $(13,335) $(22,922)
====== ====== ====== ======= ======= ======== ======== ========
Basic and diluted net
loss per common share:
Loss before cumulative
effect of change in
accounting principle... -- $(0.01) $(0.10) $ (0.23) $ (0.21) $ (1.18) $ (0.74) $ (1.34)
Cumulative effect of
change in accounting
principle.............. -- -- -- -- -- $ (0.09) (0.10) --
------ ------ ------ ------- ------- -------- -------- --------
Basic and diluted net
loss per common share.. -- $(0.01) $(0.10) $ (0.23) $ (0.21) $ (1.27) $ (0.84) $ (1.34)
====== ====== ====== ======= ======= ======== ======== ========
Basic and diluted
weighted average common
shares outstanding..... -- 6,000 6,000 8,404 11,871 16,273 15,994 17,119
Ratio of earnings to
fixed charges(1)....... 1.78 -- -- -- 0.21 -- -- --
</TABLE>
- -------
(1) Earnings were insufficient to cover fixed charges by $64,000, $1.2 million,
$4.2 million, $9.1 million, $25.2 million, $16.6 million and $24.8 million
for the one month ended December 31, 1994, the year ended December 31,
1995, the year ended December 31, 1996, the year ended December 31, 1997,
the year ended December 31, 1998, the nine months ended September 30, 1998
and the nine months ended September 30, 1999, respectively.
21
<PAGE>
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------- At September 30,
1994 1995 1996 1997 1998 1999
------- ------- -------- -------- -------- ----------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Balance
Sheet Data:
Working capital......... $13,122 $(5,320) $(27,141) $ 40,062 $ 43,856 $ 12,029
Total assets............ 17,903 53,546 147,223 324,367 414,669 358,793
Long term debt,
excluding current
portion................ 1,101 24,553 49,663 157,700 266,286 233,705
Shareholders' equity.... 16,219 15,644 56,995 132,244 119,197 95,633
</TABLE>
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Restatement
On February 1, 1999, we announced that after consultation with our
independent auditors, we would restate our 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, we announced that the restatement would be more
extensive than we 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 our independent auditors, we determined to
restate our financial statements for the fiscal year ended December 31, 1996,
the fiscal year ended December 31, 1997 and each of the first three fiscal
quarters of the fiscal year ended December 31, 1998.
The restatement reduced the net income for the fiscal years ended December
31, 1996 and 1997 and for the nine months ended September 30, 1998 by $2.1
million, $6.7 million and $11.0 million, respectively. The cumulative effect of
the restatement reduced shareholders' equity by $19.7 million through September
30, 1998. As a result of the restatement, we reported net losses of $1.9
million, $2.5 million and $13.3 million for the fiscal years 1996 and 1997 and
the nine months ended September 30, 1998, respectively, compared to previously
reported net income of $149,000, $4.2 million and a net loss of $2.4 million,
respectively. As a result of the restatement, the Company reported net loss per
diluted share of $0.23, $0.21 and $0.84 for the fiscal years ended December 31,
1996 and 1997 and the nine months ended September 30, 1998, respectively,
compared to previously reported net income of $0.03 and $0.34, and net loss of
$0.14, per diluted share, respectively. After the restatement, the Company's
cash position as of December 31, 1996 and 1997 and as of September 30, 1998 was
$2.1 million, $63.3 million and $79.6 million, respectively, as compared to
$2.1 million, $63.4 million and $79.8 million, respectively, as previously
reported. In addition, our working capital position as of December 31, 1996 and
1997 and as of September 30, 1998 was negative $27.1 million, positive $40.1
million and positive $63.0 million, respectively, as compared to previously
reported working capital of negative $26.4 million, positive $41.0 million and
positive $64.1 million, respectively.
The restatement resulted primarily from: (i) the earlier recognition of
certain expenses that we previously capitalized in association with our
development and financing activities; (ii) a modification in how we accounted
for certain of our lease arrangements; (iii) a modification in how we accounted
for certain of our acquisitions and our joint venture arrangements; (iv) the
capitalization of fees we received during 1997 and 1998 that we previously
recorded as a reduction of expenses or other income; (v) the elimination of an
impairment write-down that we had previously recorded on three of our
residences; (vi) the elimination of certain accrued expenses previously
recorded pursuant to a change in accounting principle and (vii) an increase in
the amount of goodwill that we wrote off in the second quarter of 1998 related
to exiting our home health operations.
Securityholder Litigation
In early 1999, twelve complaints were filed against us and certain of our
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, and an amendment was subsequently filed on October 20, 1999.
The amended consolidated complaint purports to be brought on behalf of a class
of purchasers of our common stock from February 6, 1997 through March 31, 1999
and on behalf of a class of purchasers of our 6.0% Debentures and the
Debentures from the dates of issuance through March 31, 1999. The amended
consolidated complaint alleges violations of various federal securities laws,
and seeks unspecified damages. It names as additional defendants our
independent auditors in connection with our offerings of common stock, 6.0%
Debentures and Debentures and the underwriters in connection with our 1997
offering of the 6.0% Debentures. We cannot predict the outcome of the foregoing
litigation and currently are unable to evaluate the likelihood of success or
23
<PAGE>
the range of possible loss. However, if the foregoing litigation were
determined adversely to us, such a determination could have a material adverse
effect on our financial condition, results of operations, cash flow and
liquidity. See "Legal Proceedings" and Note 7 of the unaudited consolidated
financial statements included in this registration statement for information
regarding this litigation.
Development Cost Write-Off
As a result of a continued reduction in our new residence development
activities, we wrote-off an additional $4.8 million of previously capitalized
development costs during the nine-months ended September 30, 1999. We wrote-off
$1.3 million of such costs during the first quarter of 1999, $3.5 million
during the second quarter 1999 and $2.4 million during the fiscal year of 1998
relating to the reduction in development activities. In the event that in the
future we do not complete and open residences planned for development, we may
incur similar write-offs. However, we have no present intention of commencing
further development activity beyond the four residences currently included in
construction in process as of September 30, 1999.
Regulatory Matters
During 1998, a license revocation action was commenced at one of our
residencies in the State of Washington. During the third quarter of 1999, we
settled an administrative proceeding in Washington involving this license
revocation. The proceeding was dismissed and the license remains intact. We
also have been subject to other regulatory proceedings.
Employment Agreement
In March 1999, we entered into an amendment with Dr. Wilson to her
employment agreement to provide that we will employ Dr. Wilson as President and
Chief Operation Officer. In addition, we agreed to pay Dr. Wilson a lump sum
cash payment of $187,500 (which was reduced to $87,500 to reflect repayment of
a $100,000 bonus paid in 1998) in consideration for Dr. Wilson's agreement to
forfeit her interest in 50,000 shares of restricted stock held by her and to
terminate the restricted stock agreement related to those shares. We made the
cash payment and cancelled the restricted stock in June 1999.
Overview
We operate, own, lease and develop free-standing assisted living residences,
primarily in small middle-market rural and suburban communities with a
population typically ranging from 10,000 to 40,000. We provide personal care
and support services, and make available routine nursing services (as permitted
by applicable regulations) designed to meet the personal and health care needs
of our residents. As of September 30, 1999, we had operations or development
activities in five regions (as defined by us) in 16 states.
We have experienced significant and rapid growth, primarily through the
development of assisted living residences and, to a lesser extent, through the
acquisition of assisted living residences. At the closing of our initial public
offering in November 1994, we began operating five residences (137 units)
located in Oregon. As of September 30, 1999, we had received certificates of
occupancy on 183 residences (7,064 units), of which 181 residences (6,986
units) were included in operating results. Residences typically receive a
certificate of occupancy upon completion of construction. Residences are
included in operating results when they receive a license or its equivalent
from the state in which they are located. It may take several months to receive
a license after receiving a certificate of occupancy. Of the residences
included in our operating results, we owned 111 residences (4,353 units) and
leased 70 residences (2,633 units).
We derive our 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
24
<PAGE>
provided. Resident fees are recognized as revenues when services are provided.
Our operating expenses include:
. residence operating expenses, such as staff payroll, food, property
taxes, utilities, insurance and other direct residence operating
expenses;
. general and administrative expenses consisting of corporate and regional
support functions such as legal, accounting and other administrative
expenses;
. building rentals; and
. depreciation and amortization.
Our operating results for the year ended December 31, 1998 were adversely
affected by several factors, including:
. write-offs in the second quarter and fourth quarter relating to our
decisions not to proceed with the development of certain sites which we
had acquired for development;
. a write-off in the second quarter relating to our decision to discontinue
the home health care business which we acquired in October 1997; and
. merger related expenses incurred during the fourth quarter related to our
proposed merger with American Retirement Corporation ("ARC").
In addition, our results of operations were negatively impacted, commencing
in the fourth quarter of 1998, as a result of the diversion of management's
time and attention resulting from the proposed merger with ARC and its
subsequent termination, as well as from certain regulatory issues in Washington
and Oregon.
Our operating results for the nine months ended September 30, 1999 were
adversely affected by increased competition for both labor and residents,
increased corporate, general and administrative expenses, development site
write-offs and by the diversion of management's time and attention to:
. the proposed merger with ARC and its subsequent termination in February
1999;
. certain regulatory matters in the State of Washington and Oregon;
. the financial statement restatement; and
. the securityholder litigation.
Certain of these factors led to a decline in occupancy rates at our
Stabilized Residences (as defined below) and to slower fill-up of our Start-Up
Residences (as defined below). In addition, food, labor and certain other
operating costs at many of our residences have increased, primarily due to the
diversion of management's time and attention. As a result, our residence
operating margins at our Stabilized and Same Store Residences were
substantially lower in each of the first three fiscal quarters of 1999 than in
the comparable periods in 1998 due to the decline in occupancy rates and
increased operating costs as described above. We expect this trend to continue
in the fourth quarter of 1999.
25
<PAGE>
Results of Operations
The following table sets forth, for periods presented, the number of total
residences and units operated, average occupancy rates and the sources of our
revenue. The portion of revenues received from state Medicaid agencies are
labeled as "Medicaid state portion" while the portion of our revenues that a
Medicaid-eligible resident must pay out of his or her own resources is labeled
"Medicaid resident portion."
<TABLE>
<CAPTION>
Nine Months
Years Ended Ended
December 31, September 30,
------------------- --------------
1996 1997 1998 1998 1999
----- ----- ----- ------ ------
<S> <C> <C> <C> <C> <C>
Total Residences
Residences operated (end of period)........ 60 109 165 154 181
Units operated (end of period)............. 2,139 4,024 6,329 5,867 6,986
Average occupancy rate..................... 76.7% 71.7% 72.3% 72.6% 71.5%
Sources of revenue:
Medicaid state portion................... 12.4% 11.1% 10.7% 10.8% 10.4%
Medicaid resident portion................ 6.9% 5.9% 5.8% 5.8% 5.9%
Private.................................. 80.7% 83.0% 83.5% 83.4% 83.7%
----- ----- ----- ------ ------
Total.................................. 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ====== ======
</TABLE>
The following table sets forth, for the periods presented for Stabilized
Residences, the total number of residences and units operated, average
occupancy rates and the sources of our revenue. 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,
-------------------
1996 1997 1998
----- ----- -----
<S> <C> <C> <C>
Stabilized Residences
Residences operated (end of period)........................ 7 32 65
Units operated (end of period)............................. 204 1,063 2,434
Average occupancy rate..................................... 96.5% 95.1% 93.9%
Sources of revenue:
Medicaid state portion................................... 19.9% 11.4% 14.5%
Medicaid resident portion................................ 11.5% 6.5% 8.2%
Private.................................................. 68.6% 82.1% 77.3%
----- ----- -----
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 operated, average
occupancy rates and the sources of our revenue. 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,
-------------------
1996 1997 1998
----- ----- -----
<S> <C> <C> <C>
Start-up Residences
Residences operated (end of period)........................ 53 77 100
Units operated (end of period)............................. 1,935 2,961 3,895
Average occupancy rate..................................... 73.0% 59.8% 55.7%
Sources of revenue:
Medicaid state portion................................... 9.8% 11.3% 7.1%
Medicaid resident portion................................ 5.3% 5.7% 3.4%
Private.................................................. 84.9% 83.0% 89.5%
----- ----- -----
Total.................................................. 100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
26
<PAGE>
The following table sets forth, for the periods presented for Same Store
Residences, the total number of residences and units operated, average
occupancy rates and the sources of our revenue. Same Store Residences are
defined as those residences, which were operating throughout comparable
periods.
<TABLE>
<CAPTION>
Nine Months
Years Ended Years Ended Ended
December December September
31, 31, 30,
------------ ------------ ------------
1996 1997 1997 1998 1998 1999
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Same Store Residences
Residences operated (end of
period)......................... 19 19 59 59 108 108
Units operated (end of period)... 595 605 2,104 2,157 3,995 4,047
Average occupancy rate........... 90.0% 95.6% 86.9% 93.5% 79.6% 84.0%
Sources of revenue:
Medicaid state portion......... 16.1% 13.8% 11.9% 15.1% 12.5% 13.2%
Medicaid resident portion...... 9.1% 7.6% 6.5% 8.7% 6.8% 7.6%
Private........................ 74.8% 78.6% 81.6% 76.2% 80.7% 79.2%
----- ----- ----- ----- ----- -----
Total.......................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== ===== =====
</TABLE>
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 corporate level interest
expense. In addition, the following tables exclude the effect of the
capitalization of corporate and property level 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,
----------------------
1996 1997 1998
------ ------- -------
<S> <C> <C> <C>
Stabilized Residences
Revenue.............................................. $4,084 $21,245 $46,260
Residence operating expenses......................... 2,422 12,255 27,456
------ ------- -------
Residence operating income......................... 1,662 8,990 18,804
Building rentals..................................... 935 3,323 7,193
Depreciation and amortization........................ 138 945 1,777
------ ------- -------
Total other operating expenses..................... 1,073 4,268 8,970
------ ------- -------
Operating income................................. $ 589 $ 4,722 $ 9,834
====== ======= =======
</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,
-----------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Start-up Residences
Revenue............................................. $16,938 $27,164 $40,013
Residence operating expenses........................ 11,633 18,519 27,591
------- ------- -------
Residence operating income........................ 5,305 8,645 12,422
Building rentals.................................... 3,014 4,612 5,535
Depreciation and amortization....................... 956 2,010 4,063
------- ------- -------
Total other operating expenses.................... 3,970 6,622 9,598
------- ------- -------
Operating income................................ $ 1,335 $ 2,023 $ 2,824
======= ======= =======
</TABLE>
27
<PAGE>
The following table sets forth, for the periods presented, the results of
operations for the 19 Same Store Residences included in operating results for
all of fiscal years 1996 and 1997, the 59 Same Store Residences included in
operating results for all of fiscal years 1997 and 1998 and the 108 Same Store
Residences included in operating results for all of the nine-month periods
ended September 30, 1998 and September 30, 1999 (in thousands).
<TABLE>
<CAPTION>
Nine Months
Years Ended Years Ended Ended September
December 31, December 31, 30,
--------------- --------------- ---------------
1996 1997 1997 1998 1998 1999
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Same Store Residences
Revenue.................... $10,877 $12,397 $38,274 $42,002 $52,233 $57,707
Residence operating
expenses.................. 6,682 7,070 22,908 24,801 31,328 38,892
------- ------- ------- ------- ------- -------
Residence operating
income.................. 4,195 5,327 15,366 17,201 20,905 18,815
Building rentals........... 2,374 2,440 5,635 6,375 9,239 11,968
Depreciation and
amortization.............. 543 461 2,280 1,647 2,578 2,156
------- ------- ------- ------- ------- -------
Total other operating
expenses................ 2,917 2,901 7,915 8,022 11,817 14,124
------- ------- ------- ------- ------- -------
Operating income....... $ 1,278 $ 2,426 $ 7,451 $ 9,179 $ 9,088 $ 4,691
======= ======= ======= ======= ======= =======
</TABLE>
Nine Months ended September 30, 1999 compared to Nine Months ended September
30, 1998
We incurred a net loss of $22.9 million, or $1.34 per basic and diluted
share, on revenue of $85.5 million for the nine months ended September 30, 1999
(the "September 1999 YTD Period"), as compared to a net loss of $13.3 million
or $0.84 per basic and diluted share, on revenues of $63.9 million for the nine
months ended September 30, 1998 (the "September 1998 YTD Period").
Revenues. Revenues were $85.5 million for the September 1999 YTD Period as
compared to $63.9 million for the September 1998 YTD Period, a net increase of
$21.6 million.
Of this increase:
. $5.5 million related to the 108 Same Store Residences (4,047 units); and
. $19.2 million related to the 73 residences (2,939 units) which commenced
operations during or subsequent to the September 1998 YTD Period.
This increase in revenue was offset by a $3.1 million reduction in revenue
from ancillary services. As a result of the shut down of our home health care
operations, we had no revenue from ancillary services during the September 1999
YTD Period as compared to $3.1 million of revenue from ancillary services for
the September 1998 YTD Period.
Revenue from Same Store Residences were $57.7 million for the September 1999
YTD Period as compared to $52.2 million for the September 1998 YTD Period, an
increase of $5.5 million. The increase in revenue from Same Store Residences
was a combination of:
. An increase in occupancy to 84.0% for the September 1999 YTD Period as
compared to 79.6% for the September 1998 YTD Period; and
. An increase in average monthly rental rate to $1,867 for the September
1999 YTD Period as compared to $1,812 for the September 1998 YTD Period.
Residence Operating Expenses. Residence operating expenses were $60.0
million for the September 1999 YTD Period compared to $39.6 million for the
September 1998 YTD Period, a net increase of $20.4 million.
28
<PAGE>
Of this increase:
. $7.6 million related to the 108 Same Store Residences (4,047 units); and
. $15.1 million related to the 73 residences (2,939 units) which commenced
operations during or subsequent to the September 1998 YTD Period.
This increase in residence operating expense was offset by a $2.3 million
reduction in operating expenses associated with ancillary services. As a result
of the discontinued operations of our home health care operations, we had no
expenses from ancillary services during the September 1999 YTD Period as
compared to $2.3 million of expenses from ancillary services for the September
1998 YTD Period.
Residence operating expenses for the Same Store Residences were $38.9
million for the September 1999 YTD Period as compared to $31.3 million for the
September 1998 YTD Period, an increase of $7.6 million. The increase in
operating expenses from Same Store Residences was partly attributable to
additional expenses associated with the increase in occupancy at the Same Store
Residences subsequent to the September 1998 and partly due to inefficiencies
resulting from the diversion of management's attention as discussed above.
Corporate, General and Administrative. Corporate, general and administrative
expenses were $15.4 million for the September 1999 YTD Period compared to $6.0
million in the September 1998 YTD Period. Our corporate, general and
administrative expenses before capitalized payroll costs were $16.0 million for
the September 1999 YTD Period as compared to $7.5 million for the September
1998 YTD Period, an increase of $8.5 million. Corporate, general and
administrative expenses increased due to the following:
. $4.2 million of the increase is due to additional professional fees
associated with increased legal, financial advisory and accounting costs
due to regulatory issues, securityholder litigation and the restatement
of our earnings for the years ended December 31, 1996, 1997 and the
interim 1998 periods;
. $1.5 million as a result of expansion of the corporate offices, the
expansion of regional-level management and increased activity due to the
number of operating residences. This includes increased travel and
communications costs;
. $1.8 million is a result of increased payroll costs for corporate and
regional staff;
. $960,000 of the increase is due to separation costs for certain
terminated corporate employees including costs associated with severance
and consulting agreements between us and our former chief executive
officer.
We capitalized $569,000 of payroll costs for the September 1999 YTD Period
as compared to $1.5 million for the September 1998 YTD Period. The decrease is
a result of a decrease in development activities.
Included in additional general and administrative expenses are certain costs
associated with the shut down of our home health operations, including
transitioning certain employees to corporate and regional functions.
Building Rentals. Building rentals increased to $11.6 million in the
September 1999 Quarter from $9.6 million in the corresponding 1998 period, an
increase of $2.0 million. This increase was due to the following:
. the March 1999 amendment of 16 of our leases, as discussed above, which
were previously accounted for as financings. As a result of the
amendment, the leases have been reclassified as operating leases for the
last six months of the September 1999 YTD Period;
. rate increases on our operating leases; and
. the above increases were offset by one operating lease terminated
subsequent to the September 1998 Quarter.
Depreciation and Amortization. Depreciation and amortization expense was
$6.6 million for the September 1999 YTD Period compared to $4.4 million for the
September 1998 YTD Period, an increase of
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$2.2 million. This increase in depreciation and amortization was due primarily
to the depreciation expense related to the 27 new residences that opened
subsequent to September 30, 1998.
The increase in depreciation and amortization was offset by:
. $180,000 reduction in depreciation as a result of the amendment to 16 of
our operating leases, as discussed above, which were previously accounted
for as financings; and
. $140,000 reduction of goodwill amortization as a result of the write-off
of $7.5 million of goodwill in the September 1998 YTD Period.
Site Abandonment Costs. As a result of the continued reduction in our
development activities, we recorded site abandonment costs of $4.8 million
during the September 1999 YTD Period with respect to certain sites which we
will not develop. We wrote-off $2.4 million during the fiscal year 1998
relating to the reduction in development activities with respect to such sites.
We do not anticipate incurring similar write-offs in the future.
Interest Expense. Interest expense was $11.1 million for the September 1999
YTD Period compared to $7.4 million for the September 1998 YTD Period. Gross
interest expense for the September 1999 YTD Period was $13.0 million compared
to $12.1 million for the September 1998 YTD Period, a net increase of $900,000.
Interest expense increased by:
. $1.7 million relating to the full period impact of mortgage financing
completed during fiscal year 1998; and
. $1.6 million due to the full period impact of the 5.625% Convertible
Subordinated Debentures issued in April 1998.
The increase was offset by decreases in interest expense of:
. $1.7 million as a result of the amendment to 16 of our leases, as
discussed above. As a result of the amendment, effective March 31, 1999,
we will no longer record interest expense with respect to these
residences;
. $530,000 as a result of the August 1998 redemption of the 7.0%
Convertible Subordinated Debentures; and
. $240,000 as a result of the February 1999 repayment of loans receivable
from our joint venture partner.
We capitalized $1.9 million of interest expense for the September 1999 YTD
Period as compared to $4.7 million for the September 1998 YTD Period. The
decrease is a result of lower development activities. We expect a further
reduction in future periods.
Interest Income. Interest income was $1.3 million for the September 1999 YTD
Period compared to $2.9 million for the September 1998 YTD Period, a decrease
of $1.6 million. The decrease in interest income is due to lower average cash
balances available for investment during the September 1999 YTD Period.
Loss on sale or disposal of assets. Loss on sale or disposal of assets was
$127,000 for the September 1999 YTD Period compared to $428,000 for the
September 1998 YTD Period. The loss for the September 1999 YTD Period related
to the write off of leasehold improvements related to corporate office space
vacated in February 1999 when we relocated our corporate headquarters. The loss
for the September 1998 YTD Period resulted from losses incurred in connection
with one sale and leaseback transaction entered into during the period and from
losses resulting primarily from additional capital costs incurred during the
period on sale and transactions completed during fiscal year 1997.
Other income/expenses. Other expense was $138,000 for the September 1999 YTD
Period as compared to other expense of $1.4 million for the September 1998 YTD
Period. Other expense during the September
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1999 YTD Period primarily related to the repurchase of the operations of 17
residences formerly operated pursuant to our joint venture agreements. Other
expenses during the September 1998 YTD Period primarily related to a
$1.2 million liability, $1.0 million of which was included in other expense, we
recorded in connection with our determination to not enter into sale and
leaseback arrangements with one our lessors to the full extent of certain
outstanding commitments. In December 1998, we agreed with the lessor to
terminate the above referenced commitments at no cost to us, other than
approximately $200,000 of professional fees. As such, we reversed the $1.0
million liability included in other expense during the fourth quarter of 1998.
Cumulative Effect of Change in Accounting Principle. We adopted Statement of
Position 98-5, Reporting on the Costs of Start-Up Activities ("SOP 98-5")
effective January 1, 1998. We recognized a charge of $1.5 million during fiscal
year 1998 associated with adopting such provision.
Net Income (Loss). As a result of the above, we incurred a net loss of $22.9
million or $1.34 per share for the September 1999 YTD Period, compared to a net
loss of $13.3 million, or $0.84 per share for the September 1998 YTD Period.
Year ended December 31, 1998 compared to year ended December 31, 1997
We incurred a net loss (after the cumulative effect of change in accounting
principle and other charges as described below) of $20.7 million, or $1.27 per
basic and diluted share, on revenue of $89.4 million for the year ended
December 31, 1998 (the "1998 Period") as compared to 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").
We had certificates of occupancy for 173 residences, 165 of which were
included in the operating results as of the end of the 1998 Period as compared
to 130 residences with certificates of occupancy, 109 of which were included in
the operating results as of the end of the 1997 Period. Of the residences
included in operating results as of the end of the 1998 Period, we owned 95
residences and leased 70 residences (54 of which were operating leases and 16
of which were accounted for as financings) as compared to 42 owned residences
and 67 leased residences (51 of which were operating leases and 16 of which
were accounted for as financings) as of the end of the 1997 Period.
Revenue. Revenue was $89.4 million for the 1998 Period as compared to $49.6
million for the 1997 Period, an increase of $39.8 million. Of this increase:
. $18.5 million or 46.5% related to the full year impact of the 49
residences (1,875 units) which opened during the 1997 Period;
. $15.7 million or 39.4% related to the opening of an additional 57
residences (2,297 units) during the 1998 Period;
. $3.7 million or 9.3% was attributable to the 59 Same Store Residences
(2,157 units); and
. the remaining $1.9 million or 4.8% related to our ancillary service
operation.
Revenue from the Same Store Residences was $42.0 million for the 1998 Period
as compared to $38.3 million for the 1997 Period, an increase of $3.7 million
or 9.7%. The increase in revenue for Same Store Residences was attributable to
a combination of an increase in average occupancy to 93.5% and average monthly
rental rate to $1,753 for the 1998 Period as compared to 86.9% and $1,720,
respectively, for the 1997 Period.
Of the $89.4 million in revenues reported for the 1998 Period:
. $46.3 million or 51.8% was attributable to Stabilized Residences;
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. $40.0 million or 44.7% was attributable to Start-Up Residences; and
. $3.1 million or 3.5% was attributable to our ancillary service operation.
As of the end of the 1998 Period, we had 65 Stabilized Residences (2,434
units) with an average occupancy of 93.9% and an average monthly rental rate of
$1,762 and we had 100 Start-Up Residences (3,895 units) with an average
occupancy of 55.7% and an average monthly rental rate of $1,934.
Residence Operating Expenses. Residence operating expenses were $57.4
million for the 1998 Period as compared to $31.6 million for the 1997 Period,
an increase of $25.8 million. Of this increase:
. $10.5 million or 40.7% related to the full year impact of the 49
residences (1,885 units) which opened during the 1997 Period;
. $11.8 million or 45.7% related to the opening of an additional 57
residences (2,297 units) during the 1998 Period;
. $1.9 million or 7.4% was attributable to the 59 Same Store Residences
(2,157 units); and
. the remaining $1.6 million or 6.2% related to expenses associated with
our ancillary service operation.
Residence operating expenses for the Same Store Residences were $24.8
million for the 1998 Period as compared to $22.9 million for the 1997 Period,
an increase of $1.9 million or 8.3%. 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 $57.4 million in residence operating expenses reported for the 1998
Period, $27.5 million or 47.9% was attributable to Stabilized Residences, $27.6
million or 48.1% was attributable to Start-Up Residences and $2.3 million or
4.0% was attributable to our ancillary service operation.
Corporate General and Administrative. Corporate general and administrative
expenses as reported were $11.1 million for the 1998 Period as compared to $4.1
million for the 1997 Period. Our corporate general and administrative expenses
before capitalized payroll costs were $12.9 million for the 1998 Period as
compared to $5.9 million for the 1997 Period, an increase of $7.0 million. This
increase results from additional investments in our corporate and regional
infrastructure to support the opening of new residences and the on-going
operation of our existing base of residences. Of the increase:
. $3.9 million or 56.0% related to increased payroll costs;
. $525,000 or 7.5% related to increased marketing expenses;
. $450,000 or 6.5% related to the increased corporate office rental
expense; and
. the remaining $2.1 million or 30.0% related to increased general
corporate expenses such as legal and travel related expenses.
We capitalized $1.8 million of payroll costs associated with the development
of new residences for each of the 1998 Period and the 1997 Period.
We expect to incur increased corporate general and administrative expenses
for the 1999 Period primarily as a result of:
. the increase in the number of regional offices from three to five;
. increased marketing and advertising expenses associated with residence
fill-up activities;
. an increase in professional fees associated with the restatement and
security-holder litigation;
. an increase in severance expense associated with management changes; and
. an increase in expenses associated with final operations of our home
health operations.
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In addition, corporate general and administrative expenses as reported in
the 1999 Period are expected to increase as a result of the reduction in the
amount of capitalized payroll costs associated with development activities.
Building Rentals. Building rentals were $12.8 million for the 1998 Period as
compared to $8.0 million for the 1997 Period, an increase of $4.8 million. Of
the increase:
. $4.2 million was the result of the full year impact of the 26 operating
leases entered into during the 1997 Period;
. $400,000 related to the four leases entered into during the 1998 Period;
and
. the remainder of the increase was primarily driven by an increase in
expense on leases entered into prior to the 1997 Period offset by one
operating lease which was terminated during the 1998 Period.
As of the end of the 1998 Period we had 54 operating leases as compared to
51 operating leases as of the end of the 1997 Period.
Depreciation and Amortization. Depreciation and amortization was $6.3
million for the 1998 Period as compared to $3.7 million for the 1997 Period, an
increase of $2.6 million. Depreciation expense was $5.9 million and
amortization expense was $398,000 for the 1998 Period as compared to $2.9
million and $800,000, respectively, for the 1997 Period. The increase in
depreciation is the result of:
. the full year effect of depreciation on the 16 owned residences which
commenced operations during the 1997 Period;
. depreciation associated with the 53 owned residences that commenced
operations during the 1998 Period; and
. depreciation associated with the full year impact of seven residences
which were sold and leased back during the 1997 Period which were
accounted for as financings.
Amortization expense decreased as a result of the change in accounting for
certain costs incurred prior to opening new residences. Effective January 1,
1998, we adopted Statement of Position 98-5, Reporting on the Costs of Start-Up
Activities ("SOP 98-5"). See the discussion of cumulative effect of change in
accounting principle below.
Terminated Merger Expense. During the fourth quarter of the 1998 Period, we
recorded a $1.1 million charge relating to our terminated merger with ARC. On
February 1, 1999 we agreed with ARC to terminate our previously announced
merger agreement, which had been entered into during November 1998. We incurred
approximately $200,000 of additional merger related expenses during the first
quarter of 1999.
Site Abandonment Costs. As a result of our decision to reduce the number of
new residence openings during the 1999 Period and beyond, we wrote-off $2.4
million of capitalized costs during the 1998 Period relating to the abandonment
of 36 development sites. Of such costs, $1.0 million were written-off during
the second quarter and the remaining $1.4 million were written-off during the
fourth quarter 1998. We had not written-off any such costs prior to 1998.
As a result of a continued reduction in our new residence development
activities, we will incur write-offs of $1.3 million relating to previously
capitalized development costs during the first quarter of 1999 and an
additional $3.5 million in the second quarter of 1999. In the event that in the
future we do not complete and open residences planned for development, we may
incur similar write-offs. However, we have no present intention of commencing
further development activity beyond the 10 residences currently included in
construction in process as of June 30, 1999.
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Write-Off of Impaired Assets and Related Expenses. In the 1998 Period, we
recorded an $8.5 million charge consisting of:
. $7.5 million write-off of unamortized goodwill resulting from the exit
from our home health operations;
. a $1.0 million provision for exit costs associated with closing such home
health care operation. During the fourth quarter of 1998, we reduced the
provision by $400,000 from $1.4 million as a result of a change in the
estimate for such exit costs.
Interest Expense. Interest expense was $11.0 million for the 1998 Period as
compared to $4.9 million for the 1997 Period. Gross interest expense for the
1998 Period was $17.0 million compared to $11.5 million for the 1997 Period, a
net increase of $5.5 million.
Interest expense increased by:
. $4.8 million due to the full year impact of interest expense related to
the October 1997 issuance of 6.0% Debentures;
. $3.6 million due to interest expense related to the April 1998 issuance
of 5.625% Debentures;
. $1.8 million related to the new mortgage financing entered into during
the 1998 Period;
. $750,000 related to the full year impact of seven residences which were
sold and leased back during the 1997 Period which were accounted for as
financings; and
. $475,000 related to interest expense associated with losses which were
reimbursed by the partner to our joint venture agreement (accounted for
as loans) incurred in connection with the operation of joint venture
residences (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).
This increase was offset by:
. a $5.5 million reduction associated with construction financing used to
fund development activity during the 1997 Period which was either repaid
or converted to leases prior to the 1998 Period; and
. a $400,000 reduction as a result of the redemption in August 1998 of the
7.0% Convertible Subordinated Debentures due 2005 (the "7.0%
Debentures").
We capitalized $6.0 million of interest expense for the 1998 Period compared
to $6.6 million for the 1997 Period. We expect a further reduction in the
amount of capitalized interest in the 1999 Period as a result of the reduction
in our development activities. As such, we expect reported interest expense in
the 1999 Period to increase.
Interest Income. Interest income was $3.9 million for the 1998 Period as
compared to $1.5 million for the 1997 Period, an increase of $2.4 million. The
increase is related to interest income earned on higher average cash balances
during the 1998 Period primarily resulting from the April 1998 offering of the
5.625% Debentures from which we received net proceeds of approximately $72.2
million.
Loss on Sale of Assets. Loss on sale of assets was $651,000 for the 1998
Period as compared to $1.3 million for the 1997 Period. Of the loss on sale of
assets recorded during the 1998 Period, $547,000 resulted from losses
pertaining primarily to additional capital costs incurred during the 1998
Period on sale and leaseback transactions completed in the 1997 Period and
$75,000 related to losses incurred in connection with terminating one operating
lease during the 1998 Period. The remainder of the loss on sale of assets was
attributable to losses incurred in connection with one sale and leaseback
transaction completed during the 1998 Period. We entered into four sale and
leaseback transactions during the 1998 Period as compared to 24 sale and
leaseback transactions during the 1997 Period.
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Other Expenses. Other expense was $1.2 million for the 1998 Period as
compared to $121,000 for the 1997 Period. Other expenses during the 1998 Period
included $907,000 of financing costs which were expensed during the period. Of
such amount, $614,000 related to financing costs which had been previously
capitalized and deferred in association with a future financing commitment
terminated during the fourth quarter 1998 and the remaining $293,000 was
associated with the termination of a swap agreement at the end of the third
quarter of the 1998 Period. In addition, other expenses during the 1998 Period
included $210,000 of administrative fees incurred in connection with our
repurchase of the joint venture partner's interest in the operations of
21 residences during the period.
Cumulative Effect of Change in Accounting Principle. We adopted AICPA
Statement of Position 98-5, Reporting on the Costs of Start-up Activities ("SOP
98-5") effective January 1, 1998. Under SOP 98-5, start-up costs associated
with the opening of new residences are expensed as incurred. We recognized a
charge of $1.5 million during the 1998 Period associated with adopting such
provision. Prior to the adoption of SOP 98- 5, we capitalized pre-opening costs
on our balance sheet and amortized such costs over a 12-month period.
Net Loss. As a result of the above, net loss (after the cumulative effect of
change in accounting principle and other charges as described above) was $20.7
million or $1.27 per basic and diluted share for the 1998 Period, compared to
$2.5 million, or $0.21 per basic and diluted share for the 1997 Period.
Year ended December 31, 1997 compared to year ended December 31, 1996
We 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").
We 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, we 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 (1,875 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.
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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, we had 32 Stabilized Residences (1,063
units) with an average occupancy of 95.1% and an average monthly rental rate of
$1,735 and we 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 our
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 our ancillary service operation.
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. Our 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 our corporate and regional
infrastructure to support the development and operation of new residences
including the expansion into new states.
We 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 we 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;
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. 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, an
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 the 6.0% Debentures; and
. the remaining $100,000 or 1.3% was related to new mortgage financing
incurred during the 1997 Period.
We capitalized $6.6 million of interest expense for the 1997 Period compared
to $2.3 million for the 1996 Period. We 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 interest income earned on higher average cash balances
during the 1997 Period primarily resulting from the October 1997 our offerings
of common stock and the 6.0% Debentures from which we 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. We 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.
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 our common
stock. We incurred a charge of $426,000 during the third quarter of 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 a net loss of $1.9
million, or $0.23 per basic and diluted share for the 1996 Period.
Liquidity and Capital Resources
We have historically financed our activities with the net proceeds from the
offerings of debt and equity securities, sale and leaseback financing, long-
term mortgage financing and cash flows from operations. At December 31, 1998
and September 30, 1999, respectively, we had $267.7 million and $235.2 million,
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respectively, of indebtedness outstanding, in each case including $161.3
million of convertible subordinated debentures. The decrease in indebtedness
was primarily the result of the amendment of 16 leases, resulting in the
reclassification of such leases from financings to operating leases. As of
December 31, 1998, we had working capital of $43.9 million as compared to $40.1
million as of December 31, 1997. At September 30, 1999, the Company had working
capital of approximately of $12.0 million including cash and marketable
securities of $23.9 million. As of September 30, 1999, our unrestricted cash
balance was $13.5 million as compared to $55.0 million as of December 31, 1998,
and $63.3 million as of December 31, 1997.
Net cash provided by operating activities was $3.0 million for the year
ended December 31, 1998, as compared with $4.5 million provided by operating
activities for the year ended December 31, 1997 and $3.1 million used in
operating activities for the year ended December 31, 1996, respectively. Net
cash used in operating activities was approximately $6.3 million during the
nine-month period ended September 30, 1999. The primary use of cash was to fund
the cash component of the net loss of $22.9 million.
Net cash used in investing activities was $123.3 million for the year ended
December 31, 1998, as compared with $94.0 million and $82.3 million,
respectively, for the years ended December 31, 1997 and 1996. During the year
ended December 31, 1998, the primary uses of cash were:
. $118.0 million related to the development of new assisted living
residences in Arizona, Iowa, Indiana, Nebraska, New Jersey, Ohio,
Pennsylvania, South Carolina, Florida, Michigan and Washington;
. $11.4 million related to the acquisition of three residences in Texas and
one residence in Louisiana; and
. $4.0 million invested in marketable securities.
Net cash used in investing activities totaled $33.7 million during the nine-
month period ended September 30, 1999. The primary use of cash was $27.0
million related to the development of new assisted living residences in
Florida, Michigan, Georgia, Indiana, Iowa, New Jersey, and South Carolina.
During the year ended December 31, 1998, we received proceeds of $8.1
million relating to the sale and leaseback of three residences and restrictions
on $2.0 million of funds held in trust were released. In addition, we converted
construction financing on one residence of approximately $2.2 million into an
operating lease through the completion of a sale and leaseback transaction.
Net cash provided by financing activities was $112.0 million for the year
ended December 31, 1998, as compared with $150.6 million and $87.2 million,
respectively, for the years ended December 31, 1997 and 1996. In April 1998, we
completed the offering of $75.0 million of 5.625% Debentures due May 2003
realizing net proceeds of $72.2 million after discounts, commissions and other
expenses. The 5.625% Debentures are convertible at any time at or prior to
maturity, unless previously redeemed, at a conversion price of $26.184
per common share, which equates to an aggregate of 2,864,344 shares of common
stock. In addition, for the year ended December 31, 1998, we received $49.0
million of proceeds from long-term mortgage financing, including:
. $35.8 million of fixed rate first mortgages secured by 15 assisted living
residences, with an average rate of 8.0%, and
. $13.2 million of variable rate financing with Ohio Housing Finance Agency
secured by seven residences.
Net cash used in financing activities totaled $1.6 million during the nine-
month period ended September 30, 1999. The Company made principal payments on
existing debt in the amount of $1.0 million and paid $750,000 to retire
restricted stock. This was offset by the proceeds from the issuance of common
stock of $154,000 in connection with the exercise of certain stock options.
Several of our leases and loan agreements contain restrictive covenants that
generally relate to the use, operation and disposition of the residences that
are leased or, in the case of loan agreements, serve as collateral for the
subject indebtedness. In addition, certain of our leases and loan agreements
contain cross-default
38
<PAGE>
provisions such that a default on one of those instruments could cause us to be
in default on one or more other instruments. We were not in compliance with
certain lease and loan covenants during 1998 and 1999 and have obtained
necessary waivers as a result of such non-compliance.
During the third quarter of 1999, we amended certain loan agreements with
one of our creditors. Pursuant to the amendment, we agreed to provide $8.3
million of additional cash collateral in exchange for the waiver of certain
possible defaults, including an amendment to certain financial covenants. In
August 1999, we restricted $8.3 million of cash balances as a result of such
amendment. The amendment also provides for the release of the additional
collateral upon the achievement of specified performance targets, provided that
we are in compliance with the other terms of the loan agreements. During the
third quarter of 1999, we agreed to provide $418,000 of additional cash
collateral pursuant to certain lease agreements with one of our lessors. We
restricted $418,000 of cash balances as a result of such action.
In addition to the 181 residences (6,986 units) in operation as of September
30, 1999, we intend to commence operation on an additional 4 residences
(approximately 156 units) through 1999. We have incurred approximately $27.0
million in capital expenditures on our development activities through the nine
months ended September 30, 1999. We expect to incur up to an additional
$3.0 million in capital expenditures to complete the residences under
construction. We have no present intention of commencing further development
activity beyond the four residences currently included in construction in
process as of September 30, 1999. We expect that Start-Up Residences will incur
significant start-up losses during the fill-up period and will adversely affect
our operating results. We intend to utilize our cash on hand and current
working capital resources to complete the four residences that we had under
construction at September 30, 1999 and to fund any operating losses until the
residences under construction and any other Start-Up Residences achieve
positive cash flows. In addition, we estimate we will spend approximately
$350,000 to develop the information technology needed to effectively operate
our residences. We do not anticipate any significant capital expenditure within
the foreseeable future with respect to the residences currently operating or
those pending licensure as of September 30, 1999.
We believe our current cash on hand and our working capital resources will
be sufficient to meet our capital needs for the next 12 to 18 months. However,
to provide us with additional capital, we are exploring various financing
alternatives and/or commitments to engage in sale and leaseback transactions.
We currently do not have in place any such loan or lease commitments. As a
result of the class action suits, the restatement and other factors, there can
be no assurances that financing from any source will be available in the
future, or, if available, that such financing will be on terms acceptable to
us.
As of September 30, 1999, we had invested excess cash balances in short-term
certificates of deposit, U.S. Treasury securities and highly liquid marketable
debt securities.
Inflation
We do not believe that inflation has materially adversely affected our
operations. We expect salary and wage increases for our skilled staff will
continue to be higher than average salary and wage increases, as is common in
the health care industry. We expect that we will be able to offset the effects
of inflation on salaries and other operating expenses by increases in rental
and service rates, subject to applicable restrictions with respect to services
that are provided to residents eligible for Medicaid reimbursement.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. SFAS No. 137, issued in June 1999, deferred the effective
date of SFAS No. 133 to all fiscal quarters of fiscal years beginning after
June 15, 2000. We do not expect the adoption of this statement to have a
material impact on our results of operations.
Year 2000
See discussion regarding year 2000 issues in Risk Factors.
39
<PAGE>
BUSINESS
Overview
We operate, own, lease and develop free-standing assisted living residences.
These residences are primarily located in small middle-market rural and
suburban communities with a population typically ranging from 10,000 to 40,000.
As of September 30, 1999 we had operations or development activities in five
regions in 16 states.
We also provide personal care and support services and make available
routine nursing services (as permitted by applicable regulations) designed to
meet the health care needs of our residents. We believe that this combination
of residential, personal care, support and health care services provides a
cost-efficient alternative and affords an independent lifestyle for individuals
who do not require the broader array of medical services that nursing
facilities are required by law to provide.
We have experienced significant and rapid growth, primarily through the
development of assisted living residences and, to a much lesser extent, through
acquisitions of residences. When we completed our initial public offering in
November 1994 we had a base of five residences (137 units). As of September 30,
1999, we had 181 assisted living residences in operation representing an
aggregate of 6,986 units. Of these residences, we owned 111 residences (4,353
units) and leased 70 residences (2,633 units). For the three months ended
September 30, 1999, our 145 Stabilized Residences (those residences that had
been operating for twelve months prior to the beginning of the period or had
achieved 95.0% occupancy within the first twelve months of operations) had an
average occupancy rate of approximately 83.0% and an average monthly rental
rate of approximately $1,893 per unit. Our 181 residences in operation during
the three months ended September 30, 1999 had an average occupancy rate of
approximately 76.0% and an average monthly rental rate of approximately $1,903
per unit.
We are currently completing development of four residences. As of September
30, 1999, we had two residences with 78 units that had received certificates of
occupancy but were not yet operating. In addition, we had two residences with
78 units that were under construction as of the same date. We have
significantly reduced our development activity in 1999 in order to focus on
stabilizing our current base of operating residences. We wrote-off
approximately $2.4 million in fiscal year 1998 and $4.8 million through
September 30, 1999 primarily associated with sites which we will no longer seek
to develop. For the twelve months ended December 31, 1998, we commenced
operations with respect to 57 residences (2,297 units). We intend to commence
operation on an additional 20 residences (800 units) for the comparable period
in 1999, 16 of which commenced operation through September 30, 1999. In
addition to the development and construction costs incurred during 1998 with
respect to these residences, we expect to incur up to an additional $30.0
million in capital expenditures and related start-up costs for the twelve
months ended December 31, 1999, approximately $27.0 million of which had been
incurred as of September 30, 1999.
We have significantly reduced development activity in order to focus on our
core business of operating our existing residences. The principal elements of
our business strategy are to:
. increase occupancy and improve operating efficiencies at our existing
base of residences;
. expand market penetration in existing markets;
. serve higher-acuity residents; and
. pursue strategic business alliances.
We anticipate that revenues at a majority of our residences will continue to
come from private pay sources. However, we believe that locating residences in
states with favorable regulatory and reimbursement climates
should provide a stable source of residents eligible for Medicaid reimbursement
to the extent that private pay residents are not available and, in addition,
provide our private pay residents with alternative sources of income when their
private funds are depleted and they become Medicaid eligible.
40
<PAGE>
Assisted Living Concepts, Inc. is a Nevada corporation. Our principal
executive offices are located at 11835 N.E. Glenn Widing Drive, Building E,
Portland, Oregon 97220-9057, and our telephone number is (503) 252-6233.
Recent Developments
Restatement of Historical Financial Statements
On February 1, 1999, we announced that after consultation with our
independent auditors we would restate our 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, we announced that the restatement would be more
extensive than we 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 our independent auditors, we determined to
restate our financial statements for the fiscal year ended December 31, 1996,
the fiscal year ended December 31, 1997 and each of the first three fiscal
quarters of the fiscal year ended December 31, 1998.
The restatement resulted primarily from:
. the earlier recognition of certain expenses that we previously
capitalized in connection with our development and financing activities;
. a modification in how we accounted for certain of our lease arrangements;
. a modification in how we accounted for certain of our acquisitions and
joint venture agreements;
. the capitalization of fees we received during 1997 and 1998 that we
previously recorded as a reduction of expenses or other income;
. the elimination of an impairment write-down that we had previously
recorded on three of our residences;
. the elimination of certain accrued expenses previously recorded pursuant
to a change in accounting principle; and
. an increase in the amount of goodwill that we wrote-off in the second
quarter of 1998 relating to exiting our home health operations.
The overall effect of the restatement on net income and net income per share
in each of the periods subject to the restatement is illustrated in the
following table:
<TABLE>
<CAPTION>
As previously reported As restated
-------------------------- -----------------------
Net Income
(Loss) Per
Share Net Loss Per
Net Income --------------- Basic and
Period (Loss) Basic Diluted Net Loss Diluted Share
- ------ ---------- ------ ------- -------- -------------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Year ended 12/31/96........ $ 149 $ 0.02 $ 0.01 $ (1,915) $(0.23)
Year ended 12/31/97........ $ 4,209 $ 0.35 $ 0.34 $ (2,479) $(0.21)
Quarter ended 3/31/98(1)... $ 1,906 $ 0.12 $ 0.12 $ (784) $(0.05)
Quarter ended 6/30/98...... $(4,378) $(0.28) $(0.28) $(11,831) $(0.75)
Quarter ended 9/30/98...... $ 2,722 $ 0.16 $ 0.16 $ (720) $(0.04)
</TABLE>
- --------
(1) Net income and net income per share, as previously reported for the quarter
ended March 31, 1998, do not reflect the cumulative effect of the change in
accounting principle which was adopted during the quarter ended June 30,
1998, effective January 1, 1998.
41
<PAGE>
Termination of Merger Agreement
On February 1, 1999, we agreed with American Retirement Corporation to
terminate our previously announced merger agreement, which had been entered
into during November 1998. We recorded a charge of approximately $1.1 million
in the fourth quarter of 1998, and $200,000 the first quarter of 1999 for
expenses incurred related to the terminated merger.
Securityholder Litigation
In early 1999, twelve complaints were filed against us and certain of our
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 and an amendment was subsequently filed on October 20, 1999.
The amended consolidated complaint purports to be brought on behalf of a class
of purchasers of our common stock from July 28, 1997 through March 31, 1999 and
on behalf of a class of purchasers of our 6.0% Debentures and Debentures from
the dates of issuance through March 31, 1999. The amended consolidated
complaint alleges violations of the federal securities laws and seeks
unspecified damages. It names as additional defendants our independent auditors
in connection with our offerings of common stock, 6.0% Debentures and
Debentures and the underwriters in connection with our 1997 offering of 6.0%
Debentures. We cannot predict the outcome of the foregoing litigation and
currently are unable to evaluate the likelihood of success or the range of
possible loss. See "Legal Proceedings" for information regarding this
litigation.
Termination of Joint Venture Agreements
During fiscal years 1997 and 1998, we 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 we had an interest. We
consolidated the operations of the joint venture agreements in our financial
statements. The joint venture partner reimbursed us 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 we recognized such reimbursements as
other income in our financial statements during such quarters. We have
determined to restate such loss reimbursements as loans, rather than other
income. We also have reflected amounts paid to repurchase the joint venture
partner's interest in the operations of the joint venture residences in excess
of reimbursed losses as interest and other expense.
During the first quarter of 1999, we 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 subject to joint venture
agreements through the third quarter of 1998. The joint venture partner did not
reimburse us for any start-up losses, nor have we entered into any new joint
venture agreements with respect to the operation of start-up residences,
subsequent to the third quarter of 1998.
Management Changes
On March 16, 1999, our board of directors announced the appointment of Dr.
Keren Brown Wilson, our co-founder, as our President and Chief Executive
Officer. The board also announced the appointment of Leslie J. Mahon as Vice
President and Chief Operating Officer and James W. Cruckshank as Vice President
and Chief Financial Officer. As of March 16, 1999, we also entered into a
consulting agreement with William McBride, pursuant to which Mr. McBride agreed
to provide us with consulting services and to resign from his position as our
Chief Executive Officer, and amended Dr. Wilson's existing employment
agreement.
On March 31, 1999, we announced the resignation of Mr. McBride as Chairman
of the Board of Directors and the election by the board of Richard C. Ladd as
Interim Chairman. We also announced that Mr. McBride had decided not to seek
reelection to the board of directors at the next annual meeting.
In April 1999, we announced the increase in the number of board members from
five to six and the election by the board of Jill Krueger to serve as a
director and as chairman of our Audit Committee.
42
<PAGE>
Amendments to Certain Leases
In March 1999, we amended 16 leases with a single lessor. Prior to the
amendment the leases were accounted for as financings due to our continuing
involvement in the residences in the form of a fair market value purchase
option. The amendments resulted in the reclassification of such leases from
financings to operating leases.
In June 1999, we amended all of our 37 leases with another lessor. These
amendments restructured provisions related to future minimum annual rent
increases, or "rent escalators," which prior to the amendments required us to
account for rent expense related to such leases on a straight-line basis. From
the date of the amendment forward, we will account for the amended leases on a
contractual cash payment basis and amortize the deferred rent balance as of the
date of the amendment over the remaining initial terms of the leases. Those
amendments also redefined the lease renewal option with respect to certain
leases and provided the lessor with the option to declare an event of default
in the event of a change of control under certain circumstances. In addition,
the amendments also provide us with the ability, subject to certain conditions,
to sublease or assign our leases with respect to two Washington residences.
Write-off Related to Reduced Development Activity
As a result of a continued reduction in our new residence development
activities, we incurred write-offs of $4.8 million relating to previously
capitalized development costs during the nine months ended September 30, 1999.
Amendment of Loan Agreements
During the third quarter of 1999, we amended certain loan agreements with
one of our creditors. Pursuant to the amendment, we agreed to provide $8.3
million of additional cash collateral in exchange for the forbearance or waiver
of certain possible defaults, including an amendment to certain financial
covenants. The amendment provides for the release of the additional collateral
upon the achievement of specified performance targets, provided that we are in
compliance with the other terms of the loan agreements.
Services
Our residences offer residents a supportive, "home-like" setting and
assistance with activities of daily living. Residents are individuals who, for
a variety of reasons, cannot live alone but do not typically need the 24-hour
skilled medical care provided in nursing facilities. We design services
provided to these residents to respond to their individual needs and to improve
their quality of life. This individualized assistance is available 24 hours a
day, to meet both anticipated and unanticipated needs, including routine
health-related services, which are made available and are provided according to
the resident's individual needs and state regulatory requirements.
Available services include:
. General services, such as meals, laundry and housekeeping;
. Support services, such as assistance with medication, monitoring health
status and transportation; and
. Personal care, such as dressing, grooming and bathing.
We also provide or arrange access to additional services beyond basic
housing and related services, including physical therapy and pharmacy services.
Although a typical package of basic services provided to a resident includes
meals, housekeeping, laundry and personal care, we do not have a standard
service package for all residents. Instead, we are able to accommodate the
changing needs of our residents through the use of individual service plans and
flexible
43
<PAGE>
staffing patterns. Our multi-tiered rate structure for services is based upon
the acuity of, or level of services needed by, each resident. Supplemental and
specialized health-related services for those residents requiring 24-hour
supervision or more extensive assistance with activities of daily living are
provided by third-party providers who are reimbursed directly by the resident
or a third-party payor (such as Medicaid or long-term care insurance). We
assess the level of need of each resident regularly.
Operations
Each residence has an on-site program director who is responsible for the
overall day-to-day operation of the residence, including quality of care,
marketing, social services and financial performance. The program director is
assisted by professional and non-professional personnel, some of whom may be
independent providers or part-time personnel, including nurses, personal
service assistants, maintenance and kitchen personnel. The nursing hours vary
depending on the residents' needs. We consult with outside providers, such as
registered nurses, pharmacists, and dietitians, for purposes of medication
review, menu planning and responding to any special dietary needs of residents.
Personal service assistants who primarily are full-time employees are
responsible for personal care, dietary services, housekeeping and laundry
services. Maintenance services are performed by full and part-time employees.
We have established an infrastructure that includes five regional
operational managers who oversee the overall performance and finances of each
region, operations managers who oversee the day-to-day operations of up to 10
to 12 residences, and team leaders who provide peer support for up to three to
four residences. Presently, residence personnel also are supported by corporate
staff based at our headquarters. Corporate and regional personnel work with the
program directors to establish residence goals and strategies, quality
assurance oversight, development of our policies and procedures, government
relations, marketing and sales, community relations, development and
implementation of new programs, cash management and treasury functions, and
human resource management.
Competition
The long-term care industry generally is highly competitive. We compete with
other assisted living providers, including an increasing number of hospitals
offering assisted living, and with numerous other companies providing similar
long-term care alternatives, such as home health agencies, life care at home,
community-based service programs, retirement communities and convalescent
centers. We expect that, as assisted living receives increased attention and
the number of states which include assisted living in their Medicaid programs
increases, competition will grow from new market entrants, including publicly
and privately held companies focusing primarily on assisted living. Nursing
facilities that provide long-term care services are also a potential source of
competition for us. Providers of assisted living residences compete for
residents primarily on the basis of quality of care, price, reputation,
physical appearance of the facilities, services offered, family preferences,
physician referrals and location. Some of our competitors operate on a not-for-
profit basis or as charitable organizations. Some of our competitors are
significantly larger than us and have, or may obtain, greater resources than
ours. While we generally believe that there is moderate competition for less
expensive segments of the private market and for Medicaid residents in small
communities, we have seen an increase in competition in certain of our markets.
Our major competitors are other long-term care facilities, including assisted
living facilities within the same geographic area as our residences because our
experience indicates that senior citizens who move into long-term care
communities frequently choose communities near their homes.
We believe that the rapid growth of the assisted living industry has
resulted in an oversupply of assisted living residences in certain of our
markets. Recently, we have experienced slower fill-up of Start-Up Residences in
these markets than expected, as well as declining occupancy in our Stabilized
Residences due to the increase in options available to potential new residents
when units are vacated. There can be no assurance that we will be able to
compete effectively in those markets where overbuilding exists, or that future
overbuilding in other markets where we have opened or plan to open residences
will not adversely affect our operations.
44
<PAGE>
Funding
Assisted living residents or their families generally pay the cost of care
from their own financial resources. Depending on the nature of an individual's
health insurance program or long-term care insurance policy, the individual may
receive reimbursement for costs of care under an "assisted living," "custodial"
or "alternative care benefit." Government payments for assisted living have
been limited. Some state and local governments offer subsidies for rent or
services for low-income elders. Others may provide subsidies in the form of
additional payments for those who receive Supplemental Security Income (SSI).
Medicaid provides coverage for certain financially or medically needy persons,
regardless of age, and is funded jointly by federal, state and local
governments. Medicaid contracts for assisted living vary from state to state.
Although a majority of our revenues come from private payors, the cost
structure of the residences has historically been, and is expected to continue
to be, sufficiently low so that the residences are able to operate profitably
if all of their revenues are derived through Medicaid contracts.
In 1981, the federal government approved a Medicaid waiver program called
Home and Community Based Care which was designed to permit states to develop
programs specific to the healthcare and housing needs of the low-income elderly
eligible for nursing home placement (a "Medicaid Waiver Program"). In 1986,
Oregon became the first state to use federal funding for licensed assisted
living services through a Medicaid Waiver Program authorized by the Health Care
Financing Administration ("HCFA"). Under a Medicaid Waiver Program, states
apply to HCFA for a waiver to use Medicaid funds to support community-based
options for the low-income elderly who need long-term care. These waivers
permit states to reallocate a portion of Medicaid funding for nursing facility
care to other forms of care such as assisted living. In 1994, the federal
government implemented new regulations which empowered states to further expand
their Medicaid Waiver Programs and eliminated restrictions on the amount of
Medicaid funding states could allocate to community-based care, such as
assisted living. A limited number of states including Oregon, New Jersey,
Texas, Arizona, Nebraska, Florida and Washington currently have operating
Medicaid Waiver Programs that allow them to pay for assisted living care.
Without a Medicaid Waiver Program, states can only use federal Medicaid funds
for long-term care in nursing facilities.
During the years ended December 31, 1996, 1997 and 1998 and the nine months
ended September 30, 1999, direct payments received from state Medicaid agencies
accounted for approximately 12.4%, 11.1%, 10.7%, and 10.4% respectively, of our
revenue while the tenant-paid portion received from Medicaid residents
accounted for approximately 6.9%, 5.9%, 5.8%, and 5.9% respectively, of our
revenue during these periods. We expect in the future that state Medicaid
reimbursement programs will continue to constitute a significant source of our
revenue.
Government Regulation
Our assisted living residences are subject to certain state statutes, rules
and regulations, including those which provide for licensing requirements. In
order to qualify as a state licensed facility, our residences must comply with
regulations which address, among other things, staffing, physical design,
required services and resident characteristics. As of September 30, 1999, we
had obtained licenses in Oregon, Washington, Idaho, Nebraska, Texas, Arizona,
Iowa, Louisiana, Ohio, New Jersey, Pennsylvania, Florida, Michigan, Georgia and
South Carolina. We are not subject to state licensure requirements in Indiana
and we expect that we will obtain licenses in other states as required. Our
residences are also subject to various local building codes and other
ordinances, including fire safety codes. These requirements vary from state to
state and are monitored to varying degrees by state agencies.
As a provider of services under the Medicaid program in the United States,
we are subject to Medicaid fraud and abuse laws, which prohibit any bribe,
kickback, rebate or remuneration of any kind in return for the referral of
Medicaid patients, or to induce the purchasing, leasing, ordering or arranging
of any goods or services to be paid for by Medicaid. Violations of these laws
may result in civil and criminal penalties and exclusions from participation in
the Medicaid program. The Inspector General of the Department of Health and
45
<PAGE>
Human Services issued "safe harbor" regulations specifying certain business
practices, which are exempt from sanctions under the fraud and abuse law.
Several states in which we operate or intend to operate have laws that prohibit
certain direct or indirect payments or fee-splitting arrangements between
health care providers if such arrangements are designed to induce or encourage
the referral of patients to a particular provider. We at all times attempt to
comply with all applicable fraud and abuse laws. There can be no assurance that
administrative or judicial interpretation of existing laws or regulations or
enactments of new laws or regulations will not have a material adverse effect
on our results of operations or financial condition.
Currently, the federal government does not regulate assisted living
residences as such. State standards required of assisted living providers are
less in comparison with those required of other licensed health care operators.
For instance, the states we initially targeted for development/expansion
typically do not set staffing ratios. Current Medicaid regulations provide for
comparatively flexible state control over the licensure and regulation of
assisted living residences. There can be no assurance that federal regulations
governing the operation of assisted living residences will not be implemented
in the future or that existing state regulations will not be expanded.
Under the Americans with Disabilities Act of 1990, all places of public
accommodation are required to meet certain federal requirements related to
access and use by disabled persons. A number of additional federal, state and
local laws exist that also may require modifications to planned facilities to
create access to the properties by disabled persons. Although we believe that
our facilities currently under development are substantially in compliance
with, or are exempt from, present requirements, we will incur additional costs
if required changes involve a greater expenditure than anticipated or must be
made on a more accelerated basis than anticipated. Further legislation may
impose additional burdens or restrictions with respect to access by disabled
persons, the costs of compliance with which could be substantial.
Employees
As of September 30, 1999 we had 3,674 employees, of whom 1,500 were full-
time employees, 86 were temporary on-call employees and 2,088 were part-time
employees. None of our employees are represented by any labor union. We believe
that our labor relations are generally good.
46
<PAGE>
Properties
The following chart sets forth, as of September 30, 1999 the location,
number of units, date of licensure, ownership status, and occupancy percentage
of our residences.
<TABLE>
<CAPTION>
Opening Occupancy %
Residence Units Date(1) Ownership(2) at 9/30/99
- --------- ----- ------- ------------ -----------
<S> <C> <C> <C> <C>
Western Region
Idaho
Burley................................... 35 08/97 Leased 77.1
Caldwell................................. 35 08/97 Leased 51.4
Garden City.............................. 48 04/97 Owned 79.2
Hayden................................... 39 11/96 Leased 92.3
Idaho Falls.............................. 39 01/97 Owned 97.4
Moscow................................... 35 04/97 Owned 68.6
Nampa.................................... 39 02/97 Leased 71.8
Rexburg.................................. 35 08/97 Owned 77.1
Twin Falls............................... 39 09/97 Owned 41.0
---
Sub Total.............................. 344
Oregon
Astoria.................................. 28 08/96 Owned 85.7
Bend..................................... 46 11/95 Owned 87.0
Brookings................................ 36 07/96 Owned 86.1
Canby.................................... 25 12/90 Leased 96.0
Estacada................................. 30 01/97 Owned 96.7
Eugene................................... 47 08/97 Leased 95.7
Hood River............................... 30 10/95 Owned 100.0
Klamath Falls............................ 36 10/96 Leased 94.4
Lincoln City............................. 33 10/94 Owned 66.7
Madras................................... 27 03/91 Owned 100.0
Myrtle Creek............................. 34 03/96 Leased 94.1
Newberg.................................. 26 10/92 Leased 100.0
Newport.................................. 36 06/96 Leased 88.9
Pendleton................................ 39 04/91 Leased 64.1
Prineville............................... 30 10/95 Owned 86.7
Redmond.................................. 37 03/95 Leased 97.3
Silverton................................ 30 07/95 Owned 100.0
Sutherlin................................ 30 01/97 Leased 96.7
Talent................................... 36 10/96 Owned 94.4
---
Sub Total.............................. 636
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
Opening Occupancy %
Residence Units Date(1) Ownership(2) at 9/30/99
- --------- ----- ------- ------------ -----------
<S> <C> <C> <C> <C>
Washington
Battle Ground............................ 40 11/96 Leased 100.0
Bremerton................................ 39 05/97 Owned 53.8
Camas.................................... 36 03/96 Leased 94.4
Enumclaw................................. 40 04/97 Owned 87.5
Ferndale................................. 39 10/98 Owned 56.4
Grandview................................ 36 02/96 Leased 83.3
Hoquiam.................................. 40 07/97 Leased 100.0
Kelso.................................... 40 08/96 Leased 97.5
Kennewick................................ 36 12/95 Leased 52.8
North Spokane............................ 39 09/97 Owned 76.9
Port Orchard............................. 39 06/97 Owned 100.0
Port Townsend............................ 39 01/98 Owned 94.9
Sumner................................... 48 03/98 Owned 91.7
Vancouver................................ 44 06/96 Leased 59.1
Walla Walla.............................. 36 02/96 Leased 94.4
Yakima................................... 48 07/98 Owned 85.4
---
Sub Total.............................. 639
Midwest Region
Indiana
Bedford.................................. 39 03/98 Owned 53.8
Bloomington.............................. 39 01/98 Owned 38.5
Camby.................................... 39 12/98 Owned 38.5
Crawfordsville........................... 39 06/99 Owned 61.5
Elkheart................................. 39 09/97 Leased 100.0
Fort Wayne............................... 39 06/98 Owned 43.6
Franklin................................. 39 05/98 Owned 53.8
Huntington............................... 39 02/98 Owned 51.3
Jeffersonville........................... 39 03/99 Owned 20.5
Kendalville.............................. 39 05/98 Owned 48.7
LaPorte.................................. 39 10/98 Owned 56.4
Logansport............................... 39 02/98 Owned 100.0
Madison.................................. 39 10/97 Leased 94.9
Marion................................... 39 03/98 Owned 33.3
Muncie................................... 39 02/98 Owned 100.0
New Albany............................... 39 05/98 Owned 51.3
New Castle............................... 39 02/98 Owned 82.1
Seymour.................................. 39 05/98 Owned 76.9
Shelbyville.............................. 39 05/98 Owned 87.2
Warsaw................................... 39 10/97 Owned 41.0
---
Sub Total.............................. 780
Iowa
Atlantic................................. 30 09/98 Owned 86.7
Carroll.................................. 35 01/99 Owned 48.6
Clarinda................................. 35 09/98 Owned 71.4
Council Bluff............................ 50 03/99 Owned 48.0
Denison.................................. 35 05/98 Leased 51.4
---
Sub Total.............................. 185
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
Opening Occupancy %
Residence Units Date(1) Ownership(2) at 9/30/99
- --------- ----- ------- ------------ -----------
<S> <C> <C> <C> <C>
Michigan
Three Rivers............................. 39 04/99 Owned 23.1
---
Sub Total.............................. 39
Nebraska
Beatrice................................. 39 07/97 Leased 100.0
Blair.................................... 30 07/98 Owned 66.7
Columbus................................. 39 06/98 Owned 100.0
Fremont.................................. 39 05/98 Owned 76.9
Nebraska City............................ 30 06/98 Owned 90.0
Norfolk.................................. 39 04/97 Leased 74.4
Seward................................... 30 10/98 Owned 66.7
Wahoo.................................... 39 06/97 Leased 61.5
York..................................... 39 05/97 Leased 100.0
---
Sub Total.............................. 324
Southeast Region
Florida
Defuniak................................. 39 08/99 Owned 17.9
Pensacola................................ 39 07/99 Owned 30.8
Quincy................................... 39 04/99 Owned 33.3
Milton................................... 39 06/99 Owned 33.3
---
Sub Total.............................. 156
Louisiana
Alexandria............................... 47 07/98 Owned 57.4
Bunkie................................... 39 01/99 Owned 46.2
Houma.................................... 48 08/98 Owned 81.3
Ruston................................... 39 01/99 Owned 53.9
---
Sub Total.............................. 173
South Carolina
Aiken.................................... 39 02/98 Owned 76.9
Clinton.................................. 39 11/97 Leased 33.3
Goose Creek.............................. 39 08/98 Owned 48.7
Greenwood................................ 39 05/98 Leased 17.9
Greer.................................... 39 07/99 Owned 71.8
James Island............................. 39 08/98 Owned 66.7
North Augusta............................ 39 10/98 Owned 17.9
Port Royal............................... 39 09/98 Owned 66.7
Summerville.............................. 39 02/98 Owned 76.9
---
Sub Total.............................. 351
Texas
Athens................................... 38 11/95 Leased 89.5
Carthage................................. 30 10/95 Leased 100.0
Greenville............................... 40 11/95 Leased 85.5
Gun Barrel City.......................... 40 10/95 Leased 100.0
Henderson................................ 30 09/96 Leased 100.0
Jacksonville............................. 39 12/95 Leased 100.0
Longview................................. 30 09/95 Leased 96.7
Marshall................................. 40 07/95 Leased 100.0
Sulpher Springs.......................... 30 01/96 Owned 100.0
Paris Oaks............................... 50 12/98 Owned 100.0
---
Sub Total.............................. 367
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
Opening Occupancy %
Residence Units Date(1) Ownership(2) at 9/30/99
- --------- ----- ------- ------------ -----------
<S> <C> <C> <C> <C>
Southwest Region
Texas
Abilene.................................. 38 10/96 Leased 100.0
Amarillo................................. 50 03/96 Leased 100.0
Beaumont................................. 50 04/96 Leased 94.0
Big Springs.............................. 38 05/96 Leased 100.0
Bryan.................................... 30 06/96 Leased 90.0
Canyon................................... 30 06/96 Leased 100.0
Cleburne................................. 44 01/96 Owned 100.0
College Station.......................... 39 10/96 Leased 92.3
Conroe................................... 38 07/96 Leased 97.4
Denison.................................. 30 01/96 Owned 96.7
Gainesville.............................. 40 01/96 Leased 100.0
Levelland................................ 30 01/96 Leased 100.0
Lubbock.................................. 50 07/96 Leased 100.0
Lufkin................................... 39 05/96 Leased 97.4
McKinney................................. 39 01/97 Owned 100.0
McKinney................................. 50 05/98 Owned 100.0
Mesquite................................. 50 07/96 Leased 100.0
Midland.................................. 50 12/96 Owned 92.0
Mineral Wells............................ 30 07/96 Leased 100.0
Nagodoches............................... 30 06/96 Leased 100.0
Orange................................... 36 03/96 Leased 100.0
Pampa.................................... 36 08/96 Leased 100.0
Plainview................................ 36 07/96 Leased 100.0
Plano.................................... 60 05/98 Owned 98.3
Port Arthur.............................. 50 05/96 Owned 90.0
Rowlett.................................. 36 10/96 Owned 100.0
Sherman.................................. 39 10/95 Leased 97.4
Sweetwater............................... 30 03/96 Leased 100.0
Temple................................... 40 01/97 Leased 62.5
Wichita Falls............................ 50 10/96 Leased 90.0
-----
Sub Total.............................. 1,208
Georgia
Rome..................................... 39 08/99 Owned 0.0
-----
Sub Total.............................. 39
Arizona
Apache Junction.......................... 48 03/98 Owned 83.3
Bullhead City............................ 40 08/97 Leased 82.5
Lake Havasu.............................. 36 04/97 Leased 52.8
Mesa..................................... 50 01/98 Owned 60.0
Payson................................... 39 10/98 Owned 89.7
Peoria................................... 50 07/99 Owned 0.0
Prescott Valley.......................... 39 10/98 Owned 53.8
Surprise................................. 50 10/98 Owned 20.0
Yuma..................................... 48 03/98 Owned 77.1
-----
Sub Total.............................. 400
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
Opening Occupancy %
Residence Units Date(1) Ownership(2) at 9/30/99
- --------- ----- ------- ------------ -----------
<S> <C> <C> <C> <C>
Northeast Region
New Jersey
Bridgeton................................ 39 03/98 Owned 71.8
Burlington............................... 39 11/97 Owned 100.0
Egg Harbor............................... 39 04/99 Owned 100.0
Glassboro................................ 39 03/97 Leased 100.0
Millville................................ 39 05/97 Leased 100.0
Pennsville............................... 39 11/97 Owned 100.0
Rio Grande............................... 39 11/97 Owned 100.0
Vineland................................. 39 01/97 Leased 100.0
-----
Sub Total.............................. 312
Ohio
Bellefountaine........................... 35 03/97 Owned 65.7
Bucyrus.................................. 35 01/97 Owned 97.1
Cambridge................................ 39 10/97 Owned 59.0
Celina................................... 39 04/97 Owned 66.7
Defiance................................. 35 02/97 Owned 91.4
Findlay.................................. 39 03/97 Owned 38.5
Fremont.................................. 39 07/97 Leased 76.9
Greenville............................... 39 02/97 Owned 94.9
Hillsboro................................ 39 03/98 Owned 61.5
Kenton................................... 35 03/97 Owned 100.0
Lima..................................... 39 06/97 Owned 35.9
Marion................................... 39 04/97 Owned 53.8
Newark................................... 39 10/97 Leased 89.7
Sandusky................................. 39 09/98 Owned 30.8
Tiffin................................... 35 06/97 Leased 65.7
Troy..................................... 39 03/97 Leased 100.0
Wheelersburg............................. 39 09/97 Leased 33.3
Zanesville............................... 39 12/97 Owned 89.7
-----
Sub Total.............................. 682
Pennsylvania
Butler................................... 39 12/97 Owned 82.1
Hermitage................................ 39 03/98 Owned 84.6
Indiana.................................. 39 03/98 Owned 59.0
Johnstown................................ 39 06/98 Owned 53.8
Latrobe.................................. 39 12/97 Owned 100.0
Lower Burrell............................ 39 01/98 Owned 89.7
New Castle............................... 39 04/98 Owned 100.0
Penn Hills............................... 39 05/98 Owned 64.1
Uniontown................................ 39 06/98 Owned 71.8
-----
Sub Total.............................. 351
-----
Grand Total............................ 6,986
=====
</TABLE>
- --------
(1) Reflects the date operations commenced, typically the licensure date for
developed residences or the date of purchase for acquired residences.
(2) As of September 30, 1999, we owned 111 residences, 37 of which were subject
to permanent mortgage financing and 74 of which were unencumbered, and we
leased 70 residences pursuant to long-term operating leases. See Notes 5
and 8 to the audited consolidated financial statements included elsewhere
herein.
51
<PAGE>
We also lease in total approximately 28,000 square feet of office space for
the Corporate and Regional offices in Portland, Oregon; Glendale, Arizona;
Dallas, Texas; Omaha, Nebraska; and Dublin, Ohio.
Construction and Development Activities
We are developing additional residences or expanding existing residences in
Indiana, Michigan and Iowa. As of September 30, 1999, we had two residences
with 78 units that had received certificates of occupancy but were not yet
operating. In addition, we had two residences with 78 units that were under
construction as of the same date. We also owned land for development of nine
sites, including three for expansion projects, where construction had not yet
commenced. We have significantly reduced our development activity in 1999 in
order to focus on stabilizing our current base of operating residences.
We generally locate our residences in well-established residential
neighborhoods in smaller rural and suburban communities, where the population
typically ranges from 10,000 to 40,000 with a higher than average percentage of
middle aged or elderly individuals. To provide the appropriate level of
personal care efficiently and economically, and to ensure that residents are
not intimidated by residence size, we develop residences ranging in size from
30 to 50 residential units and containing approximately 16,000 to 32,000 total
square feet, with studio and one-bedroom units comprising an average of 320
square feet and 450 square feet, respectively, of private living space.
Historically, we have either retained outside developers to construct
residences or acquired newly constructed residences from developers under
"turn-key" agreements. Since the end of 1997 we have expanded almost entirely
through outside development. Because of the planned reduction of development
activities in 1999, we intend to conduct an increasing portion of such
development activities internally. Where we use outside developers, we approve
all aspects of development including, among other things, market feasibility,
site selection, plans and specifications, the proposed construction budget and
selection of the architect and general contractor. We estimate the average
construction time for a typical residence to be approximately five to nine
months, depending upon the number of units.
Legal Proceedings
Securityholder Litigation
In early 1999, 12 complaints were filed against us and certain of our
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, and an amendment was subsequently filed on October 20 , 1999.
The amended consolidated complaint purports to be brought on behalf of a class
of purchasers of our common stock from February 6, 1997 through March 31, 1999
and on behalf of a class of purchasers of our 6.0% Debentures and Debentures
from the dates of issuance through March 31, 1999. The amended consolidated
complaint alleges violations of the federal securities laws and seeks
unspecified damages. It names as additional defendants our independent auditors
in connection with our offerings of common stock, 6.0 % Debentures and
Debentures and the underwriters in connection with our 1997 offering of 6.0%
Debentures. We cannot predict the outcome of the foregoing litigation and
currently are unable to evaluate the likelihood of success or the range of
possible loss. However, if the foregoing consolidated action were determined
adversely to us, such a determination could have a material adverse effect on
our financial condition, results of operations, cash flow and liquidity.
Other Litigation
In addition to the matter referred to in the immediately preceding
paragraph, we are involved in various lawsuits and claims arising in the normal
course of business. In the opinion of our management, although the outcomes of
these other suits and claims are uncertain, in the aggregate such other suits
and claims should not have a material adverse effect on our financial
condition, results of operations, cash flow or liquidity.
52
<PAGE>
MANAGEMENT
General
We have provided below certain information regarding our directors and
executive officers:
<TABLE>
<CAPTION>
Name Age(1) Position
---- ------ --------
<C> <C> <S>
Dr. Keren Brown Wilson..... 51 President, Chief Executive Officer and
Vice Chairman of the Board of Directors
Richard C. Ladd(2)......... 60 Chairman of the Board of Directors
Jill M. Krueger(2)(3)...... 40 Director
Bradley G. Razook(3)....... 43 Director
Gloria J. Cavanaugh(2)(3).. 56 Director
Senior Vice President, General Counsel
Sandra Campbell............ 53 and Secretary
Senior Vice President of Community
Nancy Gorshe............... 49 Relations
Vice President and Chief Operating
Leslie W. Mahon............ 51 Officer
Vice President and Chief Financial
James W. Cruckshank........ 44 Officer
Vice President of Operational Strategy
Connie J. Baldwin.......... 54 and Planning
Paul B. Parker............. 33 Vice President of Development
Vice President, Controller and Chief
M. Catherine Maloney....... 36 Accounting Officer
</TABLE>
- --------
(1) As of September 30, 1999.
(2) Member of the Audit Committee.
(3) Member of the Compensation Committee.
Dr. Keren Brown Wilson is a co-founder of the Company and served as the
President/Chief Executive Officer of the Company from its formation in July
1994 until September 1997, and as President/Chief Operating Officer from
September 1997 until March 1999. She has served as Vice Chairman of our Board
of Directors since September 1997, and as President and Chief Executive Officer
since March 1999. From September 1997 until March 1999 Dr. Wilson served as our
Chief Operating Officer. Dr. Wilson has over twenty years of experience in
aging service delivery systems and has, for the past 17 years, focused
primarily on assisted living. From 1988 to September 1994, Dr. Wilson was the
President and sole director of Concepts in Community Living, Inc. a corporation
which specializes in the development and management of assisted living
residences. From 1992 to August 1994, Dr. Wilson was also President of Sterling
Management Company, a company which provided management services to private
(non-Medicaid) assisted living facilities in the state of Kansas. From 1986 to
1988, Dr. Wilson was a Senior Vice President at Milestone, Inc., an assisted
living development and management company. Prior to 1986, Dr. Wilson was an
owner and management agent for Park Place Living Center in Portland, Oregon,
and the Director of Research and Education for the Oregon Association of Homes
for the Aging in Portland, Oregon. Since 1983, Dr. Wilson has also been an
Associate Professor at the Institute for Aging at Portland State University. In
these capacities, Dr. Wilson was responsible for designing, developing and
managing the state of Oregon's first assisted living residence along with the
state's first Medicaid-eligible assisted living residence. She currently serves
as Vice Chair of the Assisted Living Federation of America and is on the Board
of Directors of the American Society on Aging and the IOM Quality of LTC
Committee.
Richard C. Ladd has served as Chairman of our Board of Directors since March
1999 and has been a director of the Company since September 1994. Since
September 1994, Mr. Ladd has been the President of Ladd and Associates, a
health and social services consulting firm. He is also co-director of the
National Long-
53
<PAGE>
Term Care Balancing Project and was an adjunct assistant professor at the
School of Internal Medicine, University of Texas Medical Branch at Galveston,
Texas. From June 1992 to September 1994, Mr. Ladd served as the Texas
Commissioner of Health and Human Services where he oversaw the development and
implementation of a 22,000-bed Medicaid Waiver Program to be used for assisted
living and other community-based service programs. From November 1981 to June
1992, Mr. Ladd served as Administrator of the Oregon Senior and Disabled
Services Division. He is also a member of numerous professional and honorary
organizations.
Jill M. Krueger was elected to the Board of Directors in April 1999, and
presently serves as Chairman of our Audit Committee. Since 1996, Ms. Krueger
has served as President and Chief Executive Officer of Health Resources
Alliance, an organization designed to optimize market position and achieve
synergies which enable its 20 member organizations to prosper in a managed care
environment. From 1988 to 1996 Ms. Krueger was a partner at KPMG LLP where she
served as its Partner in charge of the firm's National Long Term Care and
Retirement Housing Practice.
Bradley G. Razook has been a director of the Company since August 1994. Mr.
Razook is currently President and Managing Director at Cohen & Steers Capital
Advisors, LLC. From July 1997 until February 1999, Mr. Razook served as
Managing Director and Head of Health Care Industry Group of Schroder & Co.,
Inc. From 1990 to July 1997, Mr. Razook was Executive Vice President of
National Westminster Bank PLC, New York Branch. Prior to being appointed
Executive Vice President, Mr. Razook held the position of Managing Director.
From 1985 to 1990, Mr. Razook was a First Vice President and counsel at Drexel
Burnham Lambert, Inc., an investment banking firm.
Gloria J. Cavanaugh was appointed as a director of the Company on September
7, 1997. Ms. Cavanaugh has been the executive director of the American Society
on Aging since 1975. From 1968 to 1975, she was Director of Continuing
Education at the Andrus Gerontology Center, University of Southern California.
Ms. Cavanaugh has almost thirty years experience developing and offering
educational programming on aging issues, including such areas as aging in
place/housing and assisted living. Ms. Cavanaugh serves on the Board of
Directors of Generations United, The National Alliance for Caregiving, The
National Policy and Resource Center on Women and Aging and the Center for
Assistive Technology, State University of New York at Buffalo.
Sandra Campbell joined the Company as Senior Vice President, General Counsel
and Secretary in January of 1998. Ms. Campbell has almost 20 years of
experience in practicing law in real property, secured transactions and general
business law. Prior to joining the Company she was a partner in the law firm of
Bullivant Houser Bailey where she was employed from April 1995 to December
1998. From January 1992 to April 1995, Ms. Campbell served as Chief Legal
Counsel for First Fidelity Thrift & Loan Association.
James W. Cruckshank joined the Company as Vice President and Chief Financial
Officer in March of 1999 and brings with him over 20 years experience in
accounting and treasury. He served as the Corporate Controller and Assistant
Treasurer of Schnitzer Steel Industries, Inc., a public company in the Portland
area, from 1987 until March 1999. Prior to this assignment, Mr. Cruckshank was
an Audit Manager for Price Waterhouse.
Nancy Gorshe joined the Company as Vice President of Community Relations in
January of 1998 and has over twenty years of experience in the field of
geriatric health, community and long-term care and housing. Prior to joining
the Company, she was President of Franciscan ElderCare Corporation which is
comprised of nursing homes, assisted living facilities, and subacute units in
nursing homes and hospitals from 1993 to 1997. In addition, Ms. Gorshe has
served as Executive Director of Providence Elderplace, a long-term care HMO.
Leslie W. Mahon joined the Company as Vice President and Chief Operating
Officer in March of 1999 and his background includes 10 years experience in the
health care industry as the Chief Executive Officer of Lantis Enterprises,
Inc., a private company that operates 37 assisted living facilities in five
states.
54
<PAGE>
Connie J. Baldwin has over twenty years of experience in designing and
implementing services to the elderly. Ms. Baldwin joined the Company in
February 1995 as Director of Operations and has served as the Vice President of
Operational Strategy and Planning since March 1999. From December 1993 to
January 1995, Ms. Baldwin was Executive Director for the Center for Developing
Older Adult Resources, a non-profit entity in Phoenix, Arizona. From September
1990 to December 1993, she was the Health Care Administrator for Managed Care
Systems, a division of the State of Arizona's Long-Term Care Medicaid Program.
In addition, Ms. Baldwin has held the position of Manager of Home and Community
Based Care in the State of Oregon with the Senior and Disabled Services
Department and was instrumental in the development of the State's assisted
living rules.
Paul B. Parker joined the Company in July 1998, and currently serves as Vice
President of Development. Mr. Parker has eight years experience in the
development and acquisition of assisted living facilities, health policy and
regulation as well as reimbursement. Prior to joining ALC, he served as Chief
Executive Officer of Supportive Housing Services, Inc. and President of LTC
Development Company. Both firms specialize in the development of assisted
living facilities.
M. Catherine Maloney joined the Company as Controller in June 1998, and
currently serves as Vice President, Controller, and Chief Accounting Officer.
Prior to joining the Company, Ms. Maloney was an Audit Manager with KPMG LLP.
55
<PAGE>
EXECUTIVE COMPENSATION
We have set forth in the following table information concerning the
compensation paid during the fiscal year ended December 31, 1998 to our Chief
Executive Officer and each of our four other most highly compensated executive
officers (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation(1) Long-Term Compensation Awards
------------------------------- ----------------------------------
Restricted Securities
Name and Principal Other Annual Stock Underlying All Other
Position Year Salary Bonus(2) Compensation Awards(3) Options Compensation
------------------ ---- -------- -------- ------------ ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
William McBride III(4).... 1998 $246,987 $100,000 -- -- -- --
Chief Executive Officer 1997 -- -- -- $3,400,000 -- --
and Chairman
Dr. Keren Brown Wilson.... 1998 $203,061 $100,000 -- -- -- --
Chief Operating Officer, 1997 200,000 -- -- $ 850,000 -- --
President, Vice Chairman 1996 130,000 -- -- -- 15,000 --
Sandra Campbell(5)........ 1998 $141,644 $ 25,000 -- -- 15,000 --
Senior Vice President,
General Counsel and
Secretary
Nancy Gorshe(6)........... 1998 $101,263 -- -- -- 55,000 --
Vice President of
Community Relations
Rhonda S. Marsh(7)........ 1998 $105,513 -- -- -- 15,000 --
Vice President/Treasurer, 1997 75,000 $ 14,569 -- -- 25,000 --
Chief Accounting Officer 1996 62,382 -- -- -- 20,000 --
</TABLE>
- --------
(1) Excludes certain perquisites and other personal benefit amounts, such as
car allowance, which, for any executive officer did not exceed, in the
aggregate, the lesser of $50,000 or 10% of the total annual salary and
bonus for such executive.
(2) Each of Mr. McBride and Dr. Wilson was paid a bonus of $100,000 related to
the execution of the ARC merger agreement. Payments made to each of them
subsequent to December 31, 1998 were reduced by $100,000 to reflect
repayment of these bonus payments.
(3) Restricted stock awards are valued in the table above at their fair market
value based on $17.00, the per share closing price of our common stock on
the American Stock Exchange on the date of the award. At December 31, 1998,
Mr. McBride and Dr. Wilson held 200,000 and 50,000 shares, respectively, of
restricted stock valued at $2.6 million and $656,000, respectively
(calculated by multiplying the amount of restricted stock by the closing
market price of $13.125 on the last trading day of 1998). As of March 15,
1999 Mr. McBride and Dr. Wilson agreed to forfeit the shares of restricted
stock held by each of them. See "Employment and Consulting Agreements."
(4) Mr. McBride became Chief Executive Officer on October 3, 1997, but did not
begin receiving compensation until January 1, 1998. Subsequent to December
31, 1998, Mr. McBride resigned as Chief Executive Officer and did not stand
for re-election to the Board of Directors at the 1999 annual meeting of
shareholders.
(5) Ms. Campbell began her employment with us on December 31, 1997 and began
receiving compensation in January 1998.
(6) Ms. Gorshe began her employment with us in February 1998.
(7) Ms. Marsh resigned as an executive officer in February 1999.
56
<PAGE>
We have provided in the following table information on stock options granted
during 1998 to the Named Executive Officers.
STOCK OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants Potential
---------------------------------------------- Realizable
Value at Assumed
Annual Rate of
Number of Stock Price
Securities % of Total Appreciation for
Underlying Options Granted Exercise Option Term(1)
Options to Employees in Price Expiration -----------------
Name Granted Fiscal Year ($/Sh) Date 5% 10%
- ---- ---------- --------------- -------- ---------- -- --------
<S> <C> <C> <C> <C> <C> <C>
William McBride III..... -- -- -- -- -- --
Dr. Keren Brown Wilson.. -- -- -- -- -- --
Sandra Campbell......... 15,000 2.2% $14.50 11/08/08 $136,785 $346,639
Nancy Gorshe............ 20,000 3.0% $19.31 01/05/08 $242,879 $615,503
20,000 3.0% $16.75 07/27/08 $210,680 $533,904
15,000 2.2% $14.50 11/08/08 $136,785 $346,639
Rhonda S. Marsh......... 15,000 2.2% $14.50 11/08/08 $136,785 $346,639
</TABLE>
- --------
(1) In accordance with rules of the Commission, shown are the gains or "option
spreads" that would exist for the respective options granted. These gains
are based on the assumed rates of annual compound stock price appreciation
of 5% and 10% from the date the option was granted over the full option
term. These assumed annual compound rates of stock price appreciation are
mandated by the rules of the Commission and do not represent our estimate
or projection of future common stock prices.
We have provided in the following table information with respect to the
Named Executive Officers concerning unexercised stock options held as of
December 31, 1998.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying In-The-Money Options
Unexercised Options at Fiscal Year-
at Fiscal Year-End End(1)
Shares -------------------- --------------------
Acquired Value Exercisable/ Exercisable/
Name on Exercise Realized Unexercisable Unexercisable
---- ----------- -------- -------------------- --------------------
<S> <C> <C> <C> <C>
William McBride III..... -- -- 145,000/5,000 $1,176,225/$28,775
Keren Brown Wilson...... -- -- 210,000/5,000 $1,606,850/$28,725
Sandra Campbell......... -- -- 16,667/48,333 $ 0/$ 0
Nancy Gorshe............ -- -- 0/55,000 $ 0/$ 0
Rhonda S. Marsh......... 12,500 $102,188 29,167/38,333 $ 126,286/$38,302
</TABLE>
- --------
(1) The closing trading price on the American Stock Exchange for the common
stock on December 31, 1998 was $13.125. As of October 6, 1999, the closing
trading price for the common stock was $1.31, and the value of all of the
exercisable and unexercisable options held by each of the Named Executive
Officers was $0.
57
<PAGE>
Compensation of Directors
During 1998 each non-employee director received a fee of $12,000 per year
for services as a director, plus $500 for attendance in person at each meeting
of the Board of Directors or any committee meeting held on a day on which the
Board of Directors does not meet. For 1999, we increased the amount of
attendance fees to $1,000 for attendance in person, or $500 for attendance by
telephone, at each meeting of the Board of Directors or any committee meeting
held on a day on which the Board of Directors does not meet. In addition, we
reimburse the directors for travel expenses incurred in connection with their
duties as our directors. During 1998, we granted the non-employee directors
non-qualified stock options to purchase a total of 22,500 shares of common
stock at $14.50 per share. Each of the non-employee directors received options
to purchase 7,500 shares. These options vest ratably on each of November 5,
1999, 2000 and 2001. On November 16, 1999, we granted each of our directors
non-qualified options to purchase 7,500 shares of common stock at $1.688 per
share. Each new non-employee director receives options exercisable for 20,000
shares of common stock at the time he or she joins the Board of Directors.
Director options vest with respect to one third of the amount of each grant on
each of the first, second and third anniversaries of the grant date, and expire
on the earlier of the seventh anniversary of the date of vesting or one year
following the director's ceasing to be a director for any reason.
Employment and Consulting Agreements
Set forth below are summaries of employment and consulting agreements
between certain individuals and us who were Named Executive Officers during
1998, as well as summaries of employment agreements entered into during 1999
with certain individuals who are expected to be among the top five most highly
compensated officers in 1999.
Keren Brown Wilson
We entered into an employment agreement with Dr. Wilson in October 1997,
providing for Dr. Wilson's services as President and Chief Operating Officer.
The agreement provides for a four-year term with automatic extensions until the
fourth anniversary of the our notice, or six months after Dr. Wilson's notice,
of a desire to terminate the agreement. Notwithstanding such "evergreen"
provision, the agreement provides that we can terminate it for "Cause" or Dr.
Wilson can terminate it for "Good Reason" (each as defined in the agreement).
The latter is defined in the agreement as
(1) material diminution of title, duties, or salary;
(2) reduction in benefit not generally applicable to senior executive
personnel; or
(3) a direction by the Board of Directors to report to any person or
group other than the Board of Directors.
It also constitutes "Good Reason" for Dr. Wilson to terminate her employment if
our shareholders fail to elect Dr. Wilson to the Board of Directors, or if the
Directors fail to elect Dr. Wilson as Vice-Chairman of the Board of Directors
unless in either case Dr. Wilson has declined to be so elected.
Under the agreement, in the event of a termination of employment for any
reason other than cause, Dr. Wilson will be entitled to the payment of an
amount equal to four times her annual salary. In the event of a termination
within one year of a change in control (as defined in the agreement) for any
reason other than her death or disability or a termination by us for cause, Dr.
Wilson would be entitled to a $3.0 million termination payment. The agreement
also contains a "gross-up" provision to compensate Dr. Wilson in the event that
any payment under such contract is subject to an excise tax imposed under
Section 4999 of the Internal Revenue Code. The employment agreement provides
that Dr. Wilson is entitled to compensation at an annual rate of $200,000.
Pursuant to the employment agreement, Dr. Wilson was awarded, without cost to
her, 50,000 shares of "restricted stock" under the Amended and Restated 1994
Stock Option Plan. The restricted stock agreement relating to the restricted
stock provided that the restrictions applicable to such shares would lapse, and
such shares will no longer be subject to forfeiture in the event of termination
of employment, at the rate of 25% per year commencing on October 3, 2001, the
fourth anniversary of the date of award, subject to acceleration in the event
of a change in control.
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In connection with her employment agreement, we agreed to indemnify Dr.
Wilson to the extent permitted under Nevada law against liability and expenses
incurred by her in any proceeding in which she is involved due to her role as
an officer or director. The indemnity agreement excludes certain claims from
indemnification by us.
Effective as of March 15, 1999, we and Dr. Wilson entered into an amendment
to her employment agreement to provide that we will employ Dr. Wilson as
President and Chief Executive Officer. In addition, we paid Dr. Wilson a lump-
sum cash payment of $187,500 (which was reduced to $87,500 to reflect repayment
of a $100,000 bonus paid in 1998 related to the execution of the our merger
agreement with American Retirement Corporation in consideration for Dr.
Wilson's agreement to forfeit her interest in 50,000 shares of restricted stock
held by her and to terminate the restricted stock agreement related to those
shares.
Sandra Campbell
On December 31, 1997, we entered into an employment agreement with Sandra
Campbell providing for Ms. Campbell's services as Senior Vice President,
General Counsel and Secretary. The agreement provides for an initial two and
one-half-year term. If the agreement has not been terminated prior to the
expiration of the initial term, then the agreement is automatically extended on
a continuous basis. We may terminate the agreement by providing Ms. Campbell
with two and one-half years' prior notice of our intention to terminate her
employment, and Ms. Campbell may terminate the agreement by providing us with
four months prior notice of her intention to resign. In addition, we may
terminate the agreement at any time for "Cause" and Ms. Campbell may terminate
the agreement for "Good Reason" (each as defined in the agreement), and the
agreement automatically terminates upon Ms. Campbell's death or permanent
disability. If we terminate Ms. Campbell's employment other than for Cause and
without providing the notice referred to above, or if Ms. Campbell terminates
the agreement for Good Reason, then we must make a lump-sum payment to
Ms. Campbell equal to twice her then-annual salary plus $100,000. In addition,
if there is a Change in Control (as defined in the agreement), regardless of
whether she remains in our employ, Ms. Campbell is entitled to receive an
additional amount equal to two times her then-annual salary plus $100,000, and
all options exercisable for common stock automatically vest and become
exercisable. The agreement provides that our President or Chief Executive
Officer will determine Ms. Campbell's annual compensation subject to adjustment
from time to time at the discretion of the Board of Directors. Ms. Campbell's
current annual salary is $150,000. In addition, Ms. Campbell received options
to purchase 50,000 shares of common stock, to become exercisable in annual
installments of 16,666 shares commencing December 31, 1998, at an exercise
price of $16.50, equal to the fair market value of the common stock on the date
of grant. The agreement includes an agreement to indemnify Ms. Campbell to the
extent permitted under Nevada law against liability and expenses incurred by
her in any proceeding in which she is involved due to her role as an officer.
The indemnity agreement excludes certain claims from indemnification by us.
James W. Cruckshank
On March 15, 1999, we entered into an employment agreement with James W.
Cruckshank providing for Mr. Cruckshank's services as Vice President and Chief
Financial Officer. The agreement provides for an initial two-year term, subject
to automatic one-year extensions unless we notify Mr. Cruckshank during the 90-
day period ending on March 15 of each year that we wish to terminate the
agreement on March 15 of the following year. Notwithstanding this "evergreen"
provision, we may terminate the agreement at any time for "Cause" (as defined
in the agreement) and Mr. Cruckshank may resign at any time upon 90 days' prior
written notice to us. If we terminate Mr. Cruckshank's employment without
"Cause" and without offering Mr. Cruckshank comparable employment (employment
with us or an affiliated company that is not materially different in level of
responsibility, at the same or higher salary level, with same or similar title
or rank and within a 20-mile radius of the location of his immediately prior
position with us), then we must make a lump-sum payment to Mr. Cruckshank in an
amount equal to twice his then-annual salary. The agreement provides that our
Chief Executive Officer will determine Mr. Cruckshank's annual compensation
subject to adjustment from time to time at the discretion of the Board of
Directors. Mr. Cruckshank's current annual salary is $150,000. The agreement
further provides that Mr. Cruckshank is subject to confidential information
restrictions for as long as
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Mr. Cruckshank possesses any confidential information, and non-competition
provisions until one year after the termination of Mr. Cruckshank's employment.
In addition, Mr. Cruckshank received options to purchase 30,000 shares of
Common Stock, to become exercisable in annual installments of 10,000 shares
commencing March 15, 2000, at an exercise price of $3.81, equal to the fair
market value of common stock on the date of grant.
Leslie Mahon
On March 15, 1999, we entered into an employment agreement with Leslie Mahon
providing for Mr. Mahon's services as Vice President and Chief Operating
Officer. The agreement provides for an initial two- year term, subject to
automatic one-year extensions unless we notify Mr. Mahon during the 90-day
period ending on March 15 of each year that we wish to terminate the agreement
on March 15 of the following year. Notwithstanding this "evergreen" provision,
we may terminate the agreement at any time for "Cause" (as defined in the
agreement) and Mr. Mahon may resign at any time upon 90 days' prior written
notice to us. If we terminate Mr. Mahon's employment without "Cause" and
without offering Mr. Mahon comparable employment (employment with us or an
affiliated company that is not materially different in level of responsibility,
at the same or higher salary level, with same or similar title or rank and
within a 20-mile radius of his immediately prior position with us), then we
must make a lump-sum payment to Mr. Mahon in an amount equal to twice his then
annual salary. The agreement provides that our Chief Executive Officer will
determine Mr. Mahon's annual compensation subject to adjustment from time to
time at the discretion of the Board of Directors. Mr. Mahon's current annual
salary is $175,000. The agreement further provides that Mr. Mahon is subject to
confidential information restrictions for as long as Mr. Mahon possesses any
confidential information, and non-competition provisions until one year after
the termination of Mr. Mahon's employment. In addition, Mr. Mahon received
options to purchase 30,000 shares of common stock, to become exercisable in
annual installments of 10,000 shares commencing March 15, 2000, at an exercise
price of $5.00, equal to the fair market value of the common stock on the date
of the grant.
Nancy Gorshe
On February 3, 1998, we entered into an employment agreement with Nancy
Gorshe providing for Ms. Gorshe's services as Vice President/Community
Relations. The agreement provides for a two-year term. We may terminate the
agreement at any time for "Cause" (as defined in the agreement). If we
terminate Ms. Gorshe's employment without "Cause" and without offering Ms.
Gorshe comparable employment or if within one year following a Change of
Control (as defined in the agreement) we either terminate Ms. Gorshe without
cause or she voluntarily resigns (and we have not offered her comparable
employment in either case), then we must make a lump-sum payment to Ms. Gorshe
in an amount equal to twice her then annual salary. In addition, if we
terminate Ms. Gorshe within one year following a Change in Control, all common
stock options held by Ms. Gorshe will automatically become immediately
exercisable. The agreement provides that our President or Chief Executive
Officer will determine Ms. Gorshe's annual compensation subject to adjustment
from time to time at the discretion of the Board of Directors. Ms. Gorshe's
current annual salary is $125,000. The agreement further provides that Ms.
Gorshe is subject to confidential information, and non-competition provisions
until one year after the termination of Ms. Gorshe's employment. In addition,
Ms. Gorshe received options to purchase 20,000 shares of common stock, to
become exercisable in annual installments of 6,667 shares commencing on July
27, 1999, at an exercise price of $16.50, equal to the fair market value of
the commons stock on the date of grant.
Agreements With Mr. McBride
Effective as of March 15, 1999, we entered into a consulting agreement with
Mr. McBride which provided, among other things, for the termination of Mr.
McBride's employment agreement, entered into in October 1997.
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The employment agreement with Mr. McBride provided for Mr. McBride's
services as Chief Executive Officer. The agreement provided for a four-year
term with automatic extensions until the fourth anniversary of our notice, or
six months after Mr. McBride's notice, of a desire to terminate the agreement.
Notwithstanding such "evergreen" provision, the employment agreement provided
that we may terminate it for "Cause" or Mr. McBride may terminate it for "Good
Reason." Under the employment agreement, in the event of a termination of
employment for any reason other than cause, Mr. McBride would have been
entitled to the payment of an amount equal to four times his annual salary. In
the event of a termination within one year of a change in control (as defined
in the employment agreement) for any reason other than his death or disability
or a termination by us for cause, Mr. McBride would have been be entitled to a
$4.0 million termination payment. The employment agreement also contained a
"gross-up" provision to compensate Mr. McBride in the event that any payment
under such contract was subject to an excise tax imposed under Section 4999 of
the Internal Revenue Code. The employment agreement provided that Mr. McBride
was entitled to compensation at an annual rate of $265,000. Pursuant to the
employment agreement, Mr. McBride was awarded, without cost to him, 200,000
shares of "restricted stock" under the Amended and Restated 1994 Employee Stock
Option Plan. The restricted stock agreement relating to the restricted stock
provided that the restrictions applicable to such shares would lapse, and such
shares would no longer be subject to forfeiture in the event of termination of
employment, at the rate of 25% per year commencing on October 3, 2001, the
fourth anniversary of the date of award, subject to acceleration in the event
of a change in control.
Effective as of March 15, 1999, we entered into a consulting agreement with
Mr. McBride which provided for the termination of his employment agreement, the
forfeiture of his $4.0 million termination payment, the forfeiture of his
restricted stock and the extinguishment of Mr. McBride's and our rights and
obligations under that agreement. Pursuant to the consulting agreement, Mr.
McBride agreed to provide consulting services to us and to resign from his
position as the our Chief Executive Officer. The termination of Mr. McBride's
employment pursuant to the consulting agreement was by mutual agreement.
Pursuant to the consulting agreement Mr. McBride received a lump-sum cash
termination payment of $490,000 (which was reduced to $390,000 to reflect
repayment of a $100,000 bonus paid in 1998 related to the execution of the our
merger agreement with ARC). In addition, we paid Mr. McBride a lump-sum cash
payment of $750,000 in consideration for Mr. McBride's agreement to forfeit his
interest in 200,000 shares of restricted stock held by him and to terminate the
related restricted stock agreement.
Pursuant to the consulting agreement, Mr. McBride will provide consulting
services to us for a period of two years, on a basis of not more than forty
hours per month at a rate of $15,000 per month. During the consulting term, Mr.
McBride will also be entitled to participate in our medical insurance plans at
no cost to Mr. McBride, except that Mr. McBride must pay any incremental costs
with respect to participation by his dependants. If we terminate the consulting
relationship without "Cause" (as defined in the consulting agreement), Mr.
McBride will be entitled to the balance of the cash amounts which he would have
received had the consulting relationship continued for the remainder of the two
year term. In addition, upon the occurrence of a "Change in Control" (as
defined in the consulting agreement), the consulting relationship will
automatically terminate and Mr. McBride will be entitled to a lump-sum cash
payment in an amount equal to the balance of the cash amounts which he would
have received had the consulting relationship continued for the remainder of
the two year term.
In addition, Mr. McBride has agreed that he will not disclose any of our
confidential information and, for a period of two years following the
effectiveness of the consulting agreement, he will not compete with us or
solicit the our employees. However, if the consulting relationship is
terminated as a result of our Change in Control, Mr. McBride's covenant not to
compete will automatically terminate. Pursuant to the consulting agreement, we
also reimbursed Mr. McBride for his attorneys fees incurred in the negotiation
and preparation of the consulting agreement in the amount of approximately
$8,000.
In connection with his employment agreement, we agreed to indemnify Mr.
McBride to the extent permitted under Nevada law against liability and expenses
incurred by him in any proceeding in which he is
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involved due to his role as officer or director. The indemnity agreement
excludes certain claims from indemnification by us. We and Mr. McBride have
also entered into certain stock option agreements pursuant to which Mr. McBride
has been granted options exercisable for 150,000 shares of Common Stock. Mr.
McBride's indemnity agreement and option agreements with us survive the
termination of his employment agreement. Effective November 11, 1999, our Board
of Directors approved an amendment to our option agreements with non-employee
directors to clarify that the provisions of the 1994 Plan relating to the
expiration of options following a termination of directorship apply to all
options granted to such directors and not only to the original 20,000 options
granted at the time each director joined the Board of Directors. This amendment
also applied to 120,000 options granted to Mr. McBride prior to his employment
as our Chief Executive Officer. As a result of the amendment, these options,
which have an exercise price of $4.50 per share, will expire one year after
Mr. McBride's departure from the Board, rather than three months after such
departure as provided in his original option agreement.
Stock Option Plan and Restricted Stock
We have two Stock Option Plans (the "Plans") which provide for the issuance
of incentive and non-qualified stock options and restricted stock. The Plans
are administered by the Compensation Committee of the Board of Directors which
set the terms and provisions of options granted under the plans. Incentive
options may be granted only to our officers or other full-time employees, while
non-qualified options may be granted to directors, officers or other employees,
or consultants who provide us with services.
The Amended and Restated 1994 Employee Stock Option Plan (the "1994 Plan")
combines an incentive and nonqualified stock option plan, a stock appreciation
rights ("SAR") plan and a stock award plan (including restricted stock). The
1994 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 1994 Plan, we may grant options or award restricted stock to
employees, consultants and other key persons for up to 2,208,000 shares of
Common Stock. The exercise price of each option equals the market price of the
Common 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 the grant. All options are nontransferable and subject to adjustment by
the Compensation Committee upon changes in our capitalization. The Board of
Directors, at its option, may discontinue or amend the 1994 Plan at any time.
During the year ended December 31, 1998, our Board of Directors adopted the
Non-Executive Employee Equity Participation Plan of Assisted Living Concepts,
Inc. (the "Non-Officer Plan") pursuant to which up to 500,000 shares of common
stock were issuable pursuant to non-qualified options granted under the Non-
Officer Plan. On November 5, 1999, we authorized an additional 500,000 shares
of common stock for issuance under the Non-Officer Plan. Officers, directors
and significant employees are not eligible to participate in the Non-Officer
Plan; however, consultants and non-executives are eligible.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
We have set forth in the following table information as of November 30, 1999
with respect to the beneficial ownership of our common stock by:
(1) each of our directors;
(2) each of the Named Executive Officers for the fiscal year ended December
31, 1998;
(3) each other person who is known by us to own beneficially more than 5% of
our Shares; and
(4) our directors and executive officers as a group.
<TABLE>
<CAPTION>
Shares Percent
Beneficially of
Name and Address of Beneficial Owner(1) Owned(2) Class
--------------------------------------- ------------ -------
<S> <C> <C>
Dr. Keren Brown Wilson............................. 1,085,412 6.2%
Richard C. Ladd.................................... 45,000 *
Bradley G. Razook(3)............................... 34,000 *
170 Water Street, 20th Floor
New York, NY 10038
Gloria Cavanaugh................................... 10,000 *
William McBride III(4)............................. 504,000 2.9%
Sandra Campbell.................................... 17,461 *
Nancy Gorshe....................................... 6,667 *
Bruce E. Toll(5)................................... 2,645,098.65 14.9%
3103 Philmont Avenue
Huntington Valley, Pennsylvania 19006
Dresdner Bank AG(6)................................ 1,786,300 10.3%
Jurgen-Ponto-Platz 1
60301 Frankfurt, Germany
Palisade Capital Management, L.L.C.(7)............. 1,368,955 7.9%
One Bridge Plaza, Suite 695
Fort Lee, NJ 07024
John W. Adams(8)................................... 1,200,000 7.0%
885 Third Avenue, 34th Floor
New York, New York 10022
Wellington Management Company, LLP(9).............. 1,163,582 6.7%
75 State Street
Boston, MA 02109
The TCW Group, Inc.(10)............................ 1,076,675 6.2%
865 South Figueroa Street
Los Angeles, CA 90017
All directors and executive officers as a group
(13 persons)...................................... 1,850,923 10.2%
</TABLE>
- --------
* Less than 1%.
(1) Except as otherwise noted below, the address of our directors and officers
is c/o Assisted Living Concepts, Inc., 11835 NE Glenn Widing Drive,
Portland, Oregon, 97220.
(2) Includes options to purchase 145,000 shares of common stock held by Mr.
McBride, 210,000 by Dr. Wilson, 45,000 by Mr. Ladd, 30,000 by Mr. Razook,
10,000 by Ms. Cavanaugh, 16,667 by Ms. Campbell, and 6,667 by Ms. Gorshe,
which are exercisable within 60 days of May 31, 1999.
(3) Includes 4,000 shares owned by Mr. Razook's children.
(4) Mr. McBride no longer serves as a director or executive officer.
(5) Based on the Form 13D as filed on November 8, 1999. 575,098.65 of such
shares are held by BET Associates, L.P., a partnership controlled by Mr.
Toll.
(6) Based on the Form 13G as filed on February 16, 1999.
(7) Based on the Form 13G as filed on February 9, 1999.
(8) Based on the Form 13D as filed on November 30, 1999. These shares are held
by JWA Investment Corp. and Temp Wicke Investments L.P., which in turn are
controlled by Mr. Adams.
(9) Based on the Form 13G as filed on February 8, 1999.
(10) Based on the Form 13G as filed on February 12, 1999. Such Form 13G
identifies Robert Day, 200 Park Avenue, Suite 2200, New York, NY 10166 as
a control person with respect to The TCW Group, Inc.
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DESCRIPTION OF DEBENTURES
We issued the Debentures under an indenture, dated as of April 13, 1998 (the
"Indenture"), between us and Harris Trust and Savings Bank, as the trustee (the
"Trustee"). The terms of the Debentures include those stated in the Indenture
and those made a part of the Indenture by reference to the Trust Indenture Act
of 1939, as amended. We filed a copy of the Indenture with the Registration
Statement.
The following is a summary of certain provisions of the Indenture. The
summary is not a complete description of the entire Indenture and is qualified
in its entirety by reference to the detailed provisions of the Indenture,
including the related definitions. Wherever we reference particular provisions
or sections of, or defined terms used in, the Indenture, we are incorporating
those provisions or definitions in this summary by reference. In this section,
the term "the Company" refers to us.
General
We have issued $75.0 million aggregate principal amount of Debentures
subject to the following general terms and provisions:
.Interest
We must pay interest on the Debentures on May 1 and November 1 of each
year, beginning November 1, 1998, at an annual rate of 5.625%. We will pay
interest on the Debentures to the persons who are registered holders of
Debentures at the close of business on the April 15 or October 15 preceding
the interest payment date.
.Maturity
If not previously redeemed or repurchased pursuant to the terms of the
Indenture described below, we must repay the entire principal amount of the
Debentures on May 1, 2003.
.Subordination
The Debentures are unsecured general obligations of ours. If holders of
Senior Indebtedness accelerate the maturity of that Indebtedness, or if we
are ever involved in a bankruptcy, insolvency or similar event or
proceeding, holders of Senior Indebtedness would have the right to be
repaid in full before holders of the Debentures would be entitled to any
payment with respect to the Debentures.
.Conversion Rights
The holders of the Debentures are entitled to convert the Debentures into
shares of common stock at the conversion price of $26.184 per share
(subject to the provisions described below).
We will maintain an office or agency (which initially is at the offices of
the Trustee) for purposes of paying principal (and premium, if any) and
interest and to register the conversion, exchange, and transfer of Debentures.
We may pay principal and interest by check and may mail an interest check to a
holder's registered address. Holders must surrender Debentures to a paying
agent to collect principal payments.
Initially, the Trustee will act as paying agent, registrar and conversion
agent. We may change any paying agent, registrar, conversion agent or co-
registrar upon prior written notice to the Trustee and may act in any such
capacity ourselves.
Delivery and Form of Debentures
On April 13, 1998 we deposited the Debentures in the form of a single global
security (a "Global Security") with The Depository Trust Company, New York, New
York ("DTC"), registered in the name of Cede & Co., DTC's nominee. Except under
certain limited circumstances described below, the Debentures will be
represented by one or more Global Securities and will not be issued in
definitive form.
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DTC is a limited-purpose trust company organized under the New York Banking
Law, a "banking organization" within the meaning of the New York Banking Law, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Securities Exchange
Act of 1934, as amended. DTC holds securities that its participants
("participants") deposit with DTC. DTC also facilitates the settlement among
participants of securities transactions, such as transfers and pledges, in
deposited securities through electronic computerized book-entry changes in
participants' accounts, thereby eliminating the need for physical movement of
securities certificates. Direct participants include securities brokers and
dealers, banks, trust companies, clearing corporations, and certain other
organizations. DTC is owned by a number of its participants and by the New York
Stock Exchange, Inc., the American Stock Exchange, Inc., and the National
Association of Securities Dealers, Inc. Access to the DTC system is also
available to others such as securities brokers and dealers, banks and trust
companies that clear through or maintain a custodial relationship with a direct
participant, either directly or indirectly. The rules applicable to DTC and its
participants are on file with the Securities and Exchange Commission.
As long as DTC or its nominee is the registered owner of a Global Security,
DTC or its nominee, as the case may be, will be considered the sole owner or
holder of the Debentures represented by that Global Security for all purposes
under the indenture. Except under certain limited circumstances described
below, owners of beneficial interests in a Global Security will not be entitled
to have Debentures represented by that Global Security registered in their
names, will not receive or be entitled to receive physical delivery of the
Debentures in definitive form and will not be considered the owners or holders
of the Debentures under the indenture.
Upon the issuance of a Global Security, DTC will credit the accounts of
persons designated by the underwriters on its book-entry registration and
transfer system with the respective principal amounts of the Debentures
represented by the Global Security. Ownership of beneficial interests in a
Global Security will be limited to participants or persons that clear through
or maintain a custodial relationship with a participant. Ownership of
beneficial interests in a Global Security will be shown on, and the transfer of
that ownership will be effected only through, DTC's or its nominee's records
(with respect to interests of participants) and on participant's records (with
respect to interests of persons other than participants). The laws of some
states require that certain purchasers of securities take physical delivery of
such securities in definitive form. These laws and their limitations may impair
the ability to transfer beneficial interests in a Global Security.
Principal and interest payments on Debentures registered in the name of DTC
or its nominee will be made to DTC or its nominee, as the case may be, as the
registered owner of the relevant Global Security. Neither us nor the Trustee or
any paying agent for the Debentures will have any responsibility or liability
for any aspect of the records relating to or payments made on account of
beneficial interests in a Global Security or for maintaining, supervising or
reviewing any records relating to such beneficial interests.
We expect that DTC or its nominee, upon receipt of any payment of principal
or interest, will immediately credit each participant's accounts with payments
in amounts proportionate to their respective beneficial interests in the
principal amount of the relevant Global Security as shown on its records. We
also expect that payments by participants to owners of beneficial interests in
a Global Security held through such participants will be governed by standing
instructions and customary practices, as is now the case with securities held
for the accounts of customers in bearer form or registered in "street name,"
and will be the responsibility of such participants.
If DTC is at any time unwilling or unable to continue as depository with
respect to any Global Security and we do not appoint a successor depository
within 90 days, we will issue Debentures in definitive form in exchange for the
entire Global Security. In addition, we may at any time and in our sole
discretion determine not to have the Debentures represented by a Global
Security and, in such event, will issue Debentures in definitive form in
exchange for the entire Global Security. In any such instance, an owner of a
beneficial interest in a Global Security will be entitled to physical delivery
of Debentures in definitive form represented by such Global Security equal in
principal amount to such beneficial interest and to have such Debentures
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registered in its name. Debentures issued in definitive form will be issued as
registered Debentures in denominations of $1,000 and integral multiples
thereof, unless otherwise specified by us.
DTC management is aware that some computer applications, systems, and the
like for processing data ("Systems") that are dependent upon calendar dates,
including dates before, on, or after January 1, 2000, may encounter "Year 2000
problems." DTC has informed its participants and other members of the financial
community that it has developed and is implementing a program so that its
Systems, as the same relate to the timely payment of distributions (including
principal and income payments) to securityholders, book-entry deliveries, and
settlement of trades within DTC, continue to function appropriately. This
program includes a technical assessment and a remediation plan, each of which
is complete. Additionally, DTC's plan includes a testing phase, which is
expected to be completed within appropriate time frames.
However, DTC's ability to perform properly its services is also dependent
upon other parties, including but not limited to issuers and their agents, as
well as third party vendors from whom DTC licenses software and hardware, and
third party vendors on whom DTC relies for information or the provision of
services, including telecommunication and electrical utility service providers,
among others. DTC has informed its participants and other members of the
financial community that it is contacting (and will continue to contact) third-
party vendors from whom DTC acquires services to impress upon them the
importance of such services being Year 2000 compliant and to determine the
extent of their efforts for Year 2000 remediation (and, as appropriate,
testing) of their services. In addition, DTC is in the process of developing
contingency plans it deems appropriate.
According to DTC, the foregoing information with respect to DTC has been
provided to its participants and other members of the financial community for
informational purposes only and is not intended to serve as a representation,
warranty, or contract modification of any kind.
The information contained in this section concerning DTC and DTC's book-
entry system has been obtained from sources that we believe to be reliable, but
we take no responsibility for the accuracy thereof.
Conversion Rights
The holders of the Debentures are entitled at any time after July 22, 1998,
(the "Registration Date") and prior to maturity, subject to prior redemption,
to convert all or a portion of the Debentures (in denominations of $1,000 or
multiples thereof) into shares of common stock at the conversion price of
$26.184 per share (subject to adjustments as described below). We will not make
any payment or adjustment for accrued interest on a converted Debenture. If any
registered holder converts a Debenture not called for redemption between a
record date for the payment of interest and the next succeeding interest
payment date, such Debenture must be accompanied by funds equal to the interest
payable to the registered holder on such interest payment date on the principal
amount so converted. We will not issue fractional interests in shares of common
stock upon conversion of the Debentures and instead will deliver a check for
the fractional share based upon the market value of the common stock on the
last trading date prior to the conversion date. If we call the Debentures for
redemption, conversion rights will expire at the close of business on the
redemption date, unless we default in payment due upon such redemption.
The conversion price is subject to adjustments, as set forth in the
Indenture, if:
. we pay dividends or distributions on our common stock in shares of
capital stock;
. we subdivide or combine the common stock into a greater or smaller number
of shares of common stock;
. we reclassify the shares of common stock resulting in an issuance of any
shares of our capital stock;
. we distribute rights or warrants to all holders of common stock entitling
them to purchase common stock at less than the then current price at that
time; or
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. we distribute assets to all holders of common stock, excluding certain
cash dividends and distributions, or debt securities or any rights or
warrants to purchase our securities.
The conversion price is not subject to any adjustment:
. if holders of the Debentures receive notice of and are allowed to
participate in a transaction described in the preceding sentence;
. for rights to purchase common stock pursuant to a plan for reinvestment
of dividends or interest, or for a change in the par value of the common
stock;
. as to cash received on conversion, to the extent that Debentures become
convertible into cash; or
. unless such adjustment would require a change of at least 1.0% in the
conversion price; however, any adjustment that would otherwise be
required to be made will be carried forward and taken into account in any
subsequent adjustment.
We may voluntarily reduce the conversion price for a period of time.
. If we pay dividends on the common stock in shares of capital stock or
subdivide or combine the common stock or
. issue by reclassification of its common stock any shares of our capital
stock or
. merge with, or transfer or lease substantially all of our assets to,
another corporation or trust
then the holders of the Debentures then outstanding will be entitled thereafter
to convert such Debentures into the kind and amount of shares of capital stock,
other securities, cash or other assets which they would have owned immediately
after such event had such Debentures been converted before the effective date
of the transaction.
Subordination of Debentures
The indebtedness evidenced by the Debentures is subordinated and junior in
right of payment to the extent set forth in the Indenture to the prior payment
in full of amounts then due on all Senior Indebtedness. "Senior Indebtedness"
means the principal, premium, if any, interest on and all other amounts payable
under or in respect of Indebtedness other than
. Indebtedness owed to a subsidiary of ours,
. Indebtedness of ours which is expressly pari passu with the Debentures or
. Indebtedness of ours which is expressly subordinated to the Debentures.
As of September 30, 1999, we had $97.0 million of Senior Indebtedness
outstanding. There is no limit on the amount of Senior Indebtedness that we may
incur.
We will not make any payment on account of principal of (or premium if any)
or interest on the Debentures or on account of the purchase or other
acquisition of Debentures, if:
. there is a continuing default with respect to any Senior Indebtedness
that
. would permit the holders to accelerate the maturity of the Senior
Indebtedness or
. is the subject of a judicial proceeding; or
. we have received notice of such default from certain authorized persons,
unless and until such default or event of default has been cured or
waived or ceases to exist.
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By reason of these provisions, in the event of default on any Senior
Indebtedness, whether now outstanding or hereafter issued, we may be prohibited
from making payments of principal of (and premium, if any) and interest on the
Debentures until we have repaid such Senior Indebtedness in full, or until we
have cured (or the holders of such Senior Indebtedness have waived) the event
of default on such Senior Indebtedness.
If the holders of Debentures accelerate their maturity, or any of our assets
are distributed upon any receivership, dissolution, winding-up, liquidation,
reorganization or similar proceedings, whether voluntary or involuntary, or in
bankruptcy or insolvency, all amounts due or to become due on all Senior
Indebtedness must be paid in full before the holders of the Debentures or the
Trustee are entitled to receive or retain any assets so distributed in respect
of the Debentures. By reason of this provision, in the event of insolvency,
holders of the Debentures may recover less, ratably, than holders of Senior
Indebtedness.
Optional Redemption
We may, at our option at any time on or after May 15, 2001, redeem all of
the Debentures or some of them, at a redemption price equal to 100% of the
principal amount thereof, plus accrued interest to the redemption date. If we
elect to redeem all or some of the Debentures we must provide at least 30 days'
but not more than 60 days' notice to each holder of Debentures to be redeemed
at his or her registered address. We may not so redeem the Debentures before
May 15, 2001.
If we call any Debentures for redemption, we may agree with one or more
investment banks or other purchasers that such purchasers will purchase such
Debentures from the holder at the redemption price and convert them into common
stock, unless the holder surrenders such Debentures for conversion on or before
the close of business on the redemption date.
Certain Rights to Require Us to Repurchase the Debentures
In the event of any Change in Control occurring after the date of issuance
of the Debentures and on or prior to maturity, each holder of Debentures will
have the right to require us to repurchase all or any part of such holder's
Debentures on the date (the "Repurchase Date") that is 75 days after the date
we give notice of the Change in Control (as described below) at a price (the
"Repurchase Price") equal to 101% of their principal amount, together with
accrued and unpaid interest to the Repurchase Date. On or prior to the
Repurchase Date, we must deposit with the Trustee or a paying agent an amount
of money sufficient to pay the Repurchase Price of the Debentures that are to
be repaid on the Repurchase Date. Neither our Board of Directors nor the
Trustee, acting alone or together, can modify or waive this required repurchase
of the Debentures.
It will be an event of default under the Indenture if we fail to repurchase
the Debentures when required under the preceding paragraph, whether or not such
repurchase is permitted by the subordination provisions of the Indenture.
On or before the fifteenth day after the occurrence of a Change in Control,
we must mail to all holders a notice that includes
. a description of the event constituting, and the date of, such Change in
Control,
. the Repurchase Date,
. the date by which the repurchase right must be exercised,
. the Repurchase Price, and
. the procedures that a holder must follow to exercise a repurchase right.
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To exercise the repurchase right, a holder of a Debenture must deliver, on
or before the tenth day prior to the Repurchase Date, written notice to us (or
an agent designated by us for such purpose) and to the Trustee of the holder's
exercise of such right, together with the certificates evidencing the
Debentures with respect to which the right is being exercised, duly endorsed
for transfer.
Subject to the exceptions described in the immediately following paragraphs,
a "Change in Control" will occur when:
(1) we sell all or substantially all of our assets as an entirety to any
person or related group of persons;
(2) we consummate any consolidation or merger
(A) in which we are not the continuing or surviving corporation (other
than a consolidation or merger with a wholly-owned subsidiary of
ours in which all shares of common stock outstanding immediately
prior to the effectiveness the consolidation or merger are changed
into or exchanged for the same consideration) or
(B) pursuant to which our common stock is converted into cash,
securities, or other property, in each case other than a
consolidation or merger in which the holders of the common stock
immediately prior to the consolidation or merger have, directly or
indirectly, at least a majority of the common stock of the
continuing or surviving corporation immediately after such
consolidation or merger; or
(3) any person, or any persons acting together that would constitute a
"group" for purposes of Section 13(d) of the Exchange Act, together with
any affiliates of such person or persons, acquires beneficial ownership
(as defined in Rule 13d-3 under the Exchange Act) of at least 50% of the
total voting power of all classes of our capital shares entitled to vote
generally in the election of directors.
Notwithstanding clause (3) of the foregoing definition, a Change in Control
will not be deemed to have occurred solely by virtue of
. us;
. any of our subsidiaries;
. any employee share purchase plan, share option plan, or other share
incentive plan or program;
. any retirement plan or automatic dividend reinvestment plan; or
. any substantially similar plan of ours or any Subsidiary or any person
holding securities of ours for or pursuant to the terms of any such
employee benefit plan,
filing or becoming obligated to file a report under or in response to Schedule
13D or Schedule 14D-1 (or any successor schedule, form, or report) under the
Exchange Act disclosing beneficial ownership by it of shares or securities of
ours, whether at least 50% of the total voting power referred to in clause (3)
of the foregoing definition or otherwise. A recapitalization or a leveraged
buyout or similar transaction involving members of management or their
affiliates will constitute a Change in Control if it meets the foregoing
definition.
Notwithstanding the foregoing, a Change in Control as described above will
not be deemed to have occurred if
(1) the Current Market Price of our common stock on the date of a Change in
Control is at least equal to 105% of the conversion price of the
Debentures in effect immediately preceding the time of such Change in
Control; or
(2) all of the consideration (excluding cash payments for fractional
shares) in the transaction giving rise to such Change in Control to the
holders of our common stock consists of shares of common stock that
are, or immediately upon issuance will be, listed on a national
securities exchange or quoted on the Nasdaq National Market, and as a
result of such transaction the Debentures will become convertible
solely into such shares of common stock; or
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(3) the consideration in the transaction giving rise to such Change in
Control to the holders of our common stock consists of cash or
securities that are, or immediately upon issuance will be, listed on a
national securities exchange or quoted on the Nasdaq National Market,
or a combination of cash and such securities, and the aggregate fair
market value of such consideration (which, in the case of such
securities, will be equal to the average of the daily closing prices of
such securities during the 10 consecutive trading days commencing with
the sixth trading day following consummation of such transaction) is at
least 105% of the conversion price of the Debentures in effect on the
date immediately preceding the closing date of such transaction.
There is no definition of the phrase "all or substantially all" as applied
to our assets and used in the definition of Change in Control in the Indenture,
and there is no clear definition of the phrase under applicable law. As a
result of the uncertainty of the meaning of this phrase, in the event we were
to sell a significant amount of its assets, the holders may disagree with us
over whether the sale gives rise to the right of holders to require us to
repurchase the Debentures. In such event, the holders would likely not be able
to require us to repurchase any Debentures unless and until the disagreement
were resolved in favor of the holders.
The right to require us to repurchase Debentures as a result of a Change in
Control could create an event of default under Senior Indebtedness, as a result
of which any repurchase could, absent a waiver, be blocked by the subordination
provisions of the Debentures. See "Subordination of Debentures." Our ability to
pay cash to the holders upon a repurchase may also be limited by certain
financial covenants contained in our Senior Indebtedness.
In the event a Change in Control occurs and the holders exercise their
rights to require us to repurchase Debentures, we intend to comply with
applicable tender offer rules under the Exchange Act, including Rules 13e-4 and
14e-1, as then in effect, with respect to any such purchase. The Change in
Control purchase feature of the Debentures may in certain circumstances make
more difficult or discourage a takeover of us and, thus, the removal of
incumbent management. The Change in Control purchase feature, however, is not
the result of management's knowledge of any specific effort to accumulate
common stock or to obtain control of us by means of a merger, tender offer,
solicitation, or otherwise, or part of a plan by management to adopt a series
of anti-takeover provisions. Instead, the Change in Control purchase feature is
a standard term contained in other similar debt offerings and the specific
terms of this feature resulted from negotiations between us and the initial
purchasers of the Debentures.
The foregoing provisions would not necessarily afford holders protection in
the event that we enter into highly leveraged or other transactions that may
adversely affect holders.
Modification of the Indenture
Under the Indenture, with certain exceptions, our rights and obligations
with respect to the Debentures and the rights of holders of the Debentures may
only be modified by us and the Trustee with the written consent of the holders
of not less than 66-2/3% in principal amount of the outstanding Debentures.
However, without the consent of each holder of any Debenture affected, an
amendment, waiver or supplement may not:
. reduce the amount of Debentures whose holders may consent to an
amendment;
. reduce the rate or change the time of payment of interest on any
Debenture;
. reduce the principal of or change the fixed maturity of any Debenture;
. make any Debenture payable in money other than that stated in the
Debenture;
. change the provisions of the Indenture regarding the right of the holders
of a majority of the Debenture to waive defaults under the Indenture or
impair the right of any holder of Debentures to institute suit for the
enforcement of any payment of principal and interest on the Debentures on
and after their respective due dates; or
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. make any change that adversely affects the right to convert any
Debenture.
No consent of the holders of the Debentures is required for us to
consolidate with or merge into or transfer or lease substantially all of our
assets to another corporation or trust which assumes our obligations under the
Indenture and Debentures or for any reorganization within the meaning of
Section 368(a)(1)(B) of the Internal Revenue Code; nor is any such consent of
holders of the Debentures required for any amendment of the Indenture or the
Debentures by us or the Trustee to cure any ambiguity, defect or inconsistency,
or to provide for uncertificated Debentures in addition to certified
Debentures, or to make any change that does not adversely affect the right of a
holder of a Debenture.
Events of Default, Notice and Waiver
The following is a summary of certain provisions of the Indenture relating
to events of default notice and waiver.
It will be an Event of Default under the Indenture with respect to the
Debentures if:
(1) we default in the payment of interest on the Debentures when due and
payable which continues for 30 days;
(2) we default in the payment of principal of (and premium, if any) on the
Debentures when due and payable, at maturity, upon redemption or
otherwise, which continues for five business days;
(3) we fail to perform any of our other covenants contained in the
Indenture or the Debentures which continues for 60 days after notice as
provided in the Indenture;
(4) there is an acceleration of any Indebtedness for money borrowed
(including obligations under leases required to be capitalized on the
balance sheet of the lessee under generally accepted accounting
principles but not including any Indebtedness or obligation for which
recourse is limited to property purchased) in an aggregate principal
amount in excess of $5.0 million, whether existing on the date of the
execution of the Indenture or thereafter created, if such Indebtedness
is not paid or such acceleration is not annulled within ten days after
notice to us of such acceleration; or
(5) certain events of bankruptcy, insolvency or reorganization occur.
If an Event of Default occurs and is continuing with respect to the
Debentures, either the Trustee or the holders of at least a majority in
principal amount of the Debentures may declare all of the Debentures to be due
and payable immediately.
We will not (1) declare or pay any dividends or make any distribution to
holders of our capital stock or (2) purchase, redeem or otherwise acquire or
retire for value any of our common stock, or any warrants, rights or options,
to purchase or acquire any shares of our common stock (other than the
Debentures or any other convertible indebtedness of ours that is neither
secured nor subordinated to the Debentures), if at the time any of the
aforementioned Events of Default has occurred and is continuing or would exist
immediately after giving effect to such action.
Matters Related to Trustee
The Trustee may require indemnity reasonably satisfactory to it before it
enforces the Indenture or the Debentures. Subject to certain limitations,
holders of a majority in principal amount of the Debentures may direct the
Trustee in its exercise of any trust or power. The Trustee may withhold from
holders of the Debentures notice of any default (except a default in payment of
principal or interest) if it determines that withholding notice is in their
interests. We are required to file with the Trustee annually an officer's
statement as to the absence of defaults in fulfilling any of its obligations
under the Indenture.
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Consolidation, Merger, Sale or Conveyance
The Indenture provides that we may not merge or consolidate with, or sell or
convey all, or substantially all, of our assets to another person unless:
. such person is a company or a trust;
. such person assumes by supplemental indenture all of our obligations
under the Debentures and the Indenture; and
. immediately after the transaction no default or Event of Default exists.
Marketability
At present there is a limited public market for the Debentures. We
originally sold the Debentures pursuant to exemptions from registration under
the Securities Act. Although we are obligated to file a Registration Statement
under the Securities Act relating to the resale of Debentures and the
Conversion Shares, there can be no assurance that we will be able to maintain
an effective and current Registration Statement as required. The absence of
such a Registration Statement may limit the holder's ability to sell such
Debentures and Conversion Shares or could adversely affect the price at which
such Debentures and Conversion Shares can be sold.
Governing Law
The Indenture and the Debentures are governed by and construed in accordance
with the laws of the State of New York.
Registration Rights Agreement
We entered into a registration rights agreement (the "Registration Rights
Agreement") in connection with the initial offering of the Debentures, pursuant
to which we have caused the Debentures and the Conversion Shares to be
registered under the Securities Act with the Commission. We have agreed to
prepare and file such amendments and supplements to the Registration Statement
as may be necessary to keep the Registration Statement effective until all the
Debentures and the Conversion Shares have been sold thereby or until the
Debentures and the Conversion Shares are no longer, by reason of Rule 144(k)
promulgated under the Securities Act or any other rule of similar effect,
required to be registered for the sale thereof by the initial purchasers of the
Debentures. The Registration Rights Agreement entitles us to suspend
temporarily the right of holders of Debentures and Conversion Securities to
make dispositions of their securities pursuant to the Registration Statement to
the extent the Board of Directors determines such suspension to be necessary in
light of the existence of any undisclosed acquisition, financing activity or
other material event the disclosure of which may reasonably be expected to
materially disadvantage us.
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DESCRIPTION OF CAPITAL STOCK
The following is a brief description of our capital stock, Chapter 78 of the
Nevada Revised Statutes (the "Nevada General Corporation Law" or "NGCL") and
the provisions contained in our Articles of Incorporation, as amended (the
"Charter") and By-Laws. The summary of the terms of our capital stock set forth
below does not purport to be complete and is subject to and qualified in its
entirety by reference to our Charter and By-Laws. See "Available Information."
Preferred Stock
Our charter authorizes us to issue 1,000,000 shares of preferred stock, par
value $.01 per share. Our Board of Directors is authorized to issue shares of
preferred stock in one or more series with such preferences, conversion or
other rights, voting powers, restrictions, limitations as to dividends,
qualifications and other rights as the Board establishes at the time.
Stockholder approval is not required to issue preferred stock. Our Board of
Directors has authority to classify or reclassify authorized but unissued
shares of preferred stock by setting or changing the preferences, conversion
and other rights, voting powers, restrictions and limitations as to dividends,
qualifications and terms and conditions of redemption of stock.
The preferred stock and the variety of characteristics that the Board of
Directors may assign to it offers us flexibility in financing and acquisition
transactions. An issuance of preferred stock could dilute the book value or
adversely affect the relative voting power of the common stock. The issuance of
these shares could be used to enable the holder to block such a transaction.
Although the Board of Directors is required when issuing preferred stock to act
based on its judgment as to the best interests of our stockholders, the Board
could act in a manner which would discourage or prevent a transaction some
stockholders may deem desirable.
Series A Preferred Stock
On July 15, 1997, our Board of Directors created a class of preferred stock,
par value $0.01 per share, consisting of 800,000 shares and designated as
Series A Junior Participating Preferred Stock. Holders of shares of Series A
Preferred Stock are entitled to receive quarterly dividends in preference to
the holders of common stock and any other stock ranking junior to the Series A
Preferred Stock. The quarterly dividends will be in an amount per share equal
to the greater of $1.00 or 100 times the aggregate per share amount of all cash
and non-cash dividends (except for a dividend payable in shares of common
stock). These dividends are cumulative and do not bear interest.
Each share of Series A Preferred Stock entitles its holder to 100 votes on
all matters submitted to a vote of our stockholders. Shares of Series A
Preferred Stock may be issued in fractional amounts, may not be redeemed by the
Company and will rank, with respect to the payment of dividends and the
distribution of assets upon liquidation, dissolution or winding up, junior to
all series of any other class of our Preferred Stock (except to the extent that
any other series specifically provides that it will rank on a parity with or
junior to the Series A Preferred Stock). If we enter into any consolidation,
merger, combination or other transaction in which shares of common stock are
exchanged for or changed into other stock or securities, cash or any other
property, then each share of Series A Preferred Stock will at the same time be
similarly exchanged or changed into an amount per share equal to 100 times the
aggregate amount of stock, securities, cash or any other property into which or
for which each share of common stock is changed or exchanged. Any shares of
Series A Preferred Stock purchased or otherwise acquired by us must be promptly
canceled and upon this cancellation will become authorized but unissued shares
of preferred stock which may be reissued as part of a new series of preferred
stock.
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Common Stock
Our Charter authorizes us to issue 80,000,000 shares of common stock, par
value $.01 per share. Each share of common stock entitles the holder to one
vote on all matters submitted to the shareholders. A majority vote is required
for all actions to be taken by stockholders. Cumulative voting of shares is
prohibited. Accordingly, the holders of a majority of the voting power of the
shares voting for the election of directors can elect all of the directors if
they choose to do so. The common stock bears no preemptive rights, and is not
subject to redemption, sinking fund or conversion provisions. The shares of
common stock offered will be, when issued and paid for, fully paid and non-
assessable.
Holders of common stock are entitled to receive dividends if, as and when
declared by our Board of Directors. These dividends will be paid out of funds
legally available for that purpose, subject to the dividend and liquidation
rights of any preferred stock that may be issued (and subject to any dividend
restriction contained in any credit facility which we may enter into in the
future). The dividends will be distributed pro rata in accordance with the
number of shares of common stock held by each stockholder. See "Dividend
Policy."
As of September 30, 1999, there were 17,120,745 shares of common stock
issued and outstanding.
Rights Plan
On June 12, 1997, our Board of Directors declared a dividend of one
preferred share purchase right on each outstanding share of common stock. The
rights were payable to stockholders of record on June 30, 1997. After the
rights become exercisable and until June 30, 2007 (or the earlier redemption,
exchange of termination of the rights), each right entitles its holder to buy
one one-hundredth of a share of Series A Preferred Stock at an exercise price
of $54.00, subject to certain anti-dilution adjustments. The rights will be
represented by the common stock certificates. The rights will not be
exercisable or transferable apart from the common stock until the earlier of
(1) the tenth day after the public announcement that a person or group has
become an Acquiring Person (a person who has acquired, or obtained the right to
acquire, beneficial ownership of 15% or more of the common stock) or (2) the
tenth day after a person or group commences, or announces an intention to
commence, a tender or exchange offer, the consummation of which would result in
the beneficial ownership by a person or group of 15% or more of the common
stock (the earlier of (1) and (2) is referred to herein as the "Distribution
Date"). Prior to the Distribution Date, our Board of Directors has the power,
under certain circumstances, to postpone the Distribution Date. If the
Distribution Date occurs, we will mail separate certificates representing the
rights to holders of the common stock as of the Distribution Date. The rights
will first become exercisable on the Distribution Date, unless earlier redeemed
or exchanged, and may then begin trading separately from the common stock. The
rights will at no time have any voting rights.
In the event that
. a person becomes an Acquiring Person (except pursuant to certain cash
offers for all outstanding common stock approved by our Board of
Directors), or
. we were the surviving corporation in a merger and our common stock were
not changed or exchanged
each holder of a right, other than rights that are or were acquired or
beneficially owned by the Acquiring Person, will have the right to receive upon
exercise that number of shares of common stock having a market value of two
times the then-current exercise price of one right. The rights that are
acquired or beneficially owned by the Acquiring Person will be void. With
certain exceptions, in the event that
. we were acquired in a merger or other business combination transaction in
which we were not the surviving corporation or our common stock were
changed or exchanged (other than a merger which follows certain cash
offers for all outstanding common stock approved by our Board of
Directors), or
. more than 50% of our assets or earning power were sold
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We will make proper provision so that each holder of a right (except rights
which are void) will have the right to receive, upon exercise, that number of
shares of common stock of the acquiring company which at the time of the
transaction would have a market value of two times the then-current exercise
price of one right.
At any time after a person has become an Acquiring Person and prior to the
acquisition of 50% or more of our then-outstanding common stock by the
Acquiring Person, our Board of Directors may cause us to acquire the rights
(other than rights owned by an Acquiring Person which have become void), in
whole or in part, in exchange for that number of shares of common stock having
an aggregate value equal to the excess of the value of the common stock
issuable upon exercise of a right after a person becomes an Acquiring Person
over the purchase price.
The rights are redeemable at $0.01 per right prior to the first date of
public announcement that a person or group has become an Acquiring Person.
Prior to the expiration of the period during which the rights may be redeemed,
our Board of Directors has the power, under certain circumstances, to extend
the redemption period. The rights will expire on June 12, 2007 (unless earlier
redeemed or exchanged). American Stock Transfer & Trust Company is the Rights
Agent. Under certain circumstances set forth in the rights agreement, the
decision to redeem or to lengthen or shorten the redemption period will require
the concurrence of a majority of the continuing directors (those directors who
were members of the Board prior to the time that any person becomes an
Acquiring Person, and any other person who is subsequently elected to the Board
of Directors if the person is recommended or approved by a majority of the
continuing directors). Continuing directors do not include an Acquiring Person,
or an affiliate or associate of an Acquiring Person, or any of their
representatives.
The Purchase Price payable, and the number of shares of Series A Preferred
Stock or other securities or property issuable upon exercise of the rights are
subject to adjustment from time to time to prevent dilution
. in the event of a stock dividend on, or a subdivision, combination or
reclassification of, the Series A Preferred Stock,
. upon the grant to holders of the Series A Preferred Stock of certain
rights or warrants to subscribe for or purchase the Series A Preferred
Stock or convertible securities at less than the current market price of
the Series A Preferred Stock, or
. upon the distribution to holders of the Series A Preferred Stock of
evidences of indebtedness, cash, securities or assets (excluding regular
periodic cash dividends at a rate not above 125% of the last regular
periodic cash dividend previously paid, or in case regular periodic
dividends have not previously been paid, at a rate not in excess of 50%
of our average net income per share for the four quarters ended
immediately prior to the payment of such dividend, or dividends payable
in the Series A Preferred Stock) or of subscription rights or warrants
(other than those referred to above).
No adjustments in the purchase price will be required until cumulative
adjustments require an adjustment of at least 1% in such purchase price.
As long as the rights are attached to the common stock, we will issue one
right with each new share of common stock so that all new shares will have
attached rights. We have reserved 800,000 shares of Series A Preferred Stock
for issuance upon exercise of the rights.
The rights have certain anti-takeover effects. The rights will cause
substantial dilution to a person or group that attempts to acquire us on terms
not approved by our Board, except pursuant to an offer conditioned on a
substantial number of rights being acquired. The rights should not interfere
with any merger or other business combination approved by our Board prior to
the time that a person or group has become an Acquiring Person, as we may
redeem the rights at $.01 per right prior to such time.
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Restrictions On Business Combinations And Corporate Control
The Nevada General Corporation Law contains provisions restricting the
ability of a corporation to engage in business combinations with an "interested
stockholder." Under the NGCL, except under certain circumstances, business
combinations are not permitted for a period of three years following the date a
stockholder became an interested stockholder. The NGCL defines an "interested
stockholder," generally, as a person who beneficially owns 10% or more of the
outstanding shares of a corporation's voting stock.
In addition, the NGCL generally disallows the exercise of voting rights with
respect to "control shares" of an "issuing corporation" (as defined in the
NGCL). "Control shares" are the voting shares of an issuing corporation
acquired in connection with the acquisition of a "controlling interest."
"Controlling interest" is defined in terms of threshold levels of voting share
ownership, which triggers application of the voting bar with respect to the
newly acquired shares. The NGCL also permits directors to resist a change or
potential change in control of the corporation if the directors determine that
such a change is opposed to or not in the best interest of the corporation.
Limitations On Directors Liability
Our Charter limits the liability of directors and officers to us or our
stockholders to the fullest extent permitted by the NGCL. The inclusion of this
provision in the Charter may have the effect of reducing the likelihood of
derivative litigation against directors and may discourage or deter
stockholders or management from bringing a lawsuit against directors for breach
of their duty of care, even though such an action, if successful, might
otherwise have benefited us and our stockholders.
Transfer Agent and Registrar
Our transfer agent is American Stock Transfer & Trust Company.
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SHARES ELIGIBLE FOR FUTURE SALE
As of September 30, 1999, we have 17,120,745 shares of common stock issued
and outstanding. Of these shares, 16,900,872 shares of common stock are freely
transferable without restriction in the public market, except to the extent
that these shares have been acquired by our affiliates; resales of shares
acquired by affiliates are subject to restrictions under Rule 144 of the
Securities Act. The remaining 219,873 shares of common stock were issued in
reliance on exemptions from the registration requirements of the Securities
Act, and these shares are "restricted" securities under Rule 144. The number of
"restricted" shares available for sale in the public market is limited by the
restrictions under Rule 144, although as to shares held by persons who are not
our affiliates, many of those restrictions do not apply. The restricted
securities will generally be available for sale in the open market, subject to
the applicable requirements of Rule 144.
In general, under Rule 144, as currently in effect, a shareholder (or
shareholders whose shares are aggregated) who has beneficially owned restricted
securities for at least one year (including persons who may be deemed
"affiliates" under Rule 144) is entitled to sell a number of shares within any
three-month period that does not exceed the greater of 1% of the then
outstanding shares of the class of common stock or the average weekly trading
volume of such stock during the four calendar weeks preceding such sale,
subject to certain manner of sale limitations. A shareholder who is deemed not
to have been an affiliate for at least three months prior to the date of sale
and who has beneficially owned restricted securities for at least two years
would be entitled to sell such shares under Rule 144 without regard to the
volume or manner of sale limitations described above. As of November 30, 1999
of the 219,873 shares of common stock that are "restricted securities," 60,873
have been held for more than two years by persons who have not been our
affiliates during the last three months and the remaining 159,000 shares are
held by Mr. McBride, who ceased to be our affiliate on November 16, 1999.
In addition, there are 1,800,369 shares of common stock subject to
outstanding stock options and 6,685,788 shares subject to issuance upon
conversion of outstanding convertible indebtedness, including the Debentures.
All of such shares are issuable at exercise or conversion prices that are
greater than current market price of our common stock as of November 8, 1999.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following is a general discussion of certain U.S. federal income tax
considerations to holders of our 5.625% Convertible Subordinated Debentures. We
have based this discussion upon the Internal Revenue Code of 1986, as amended,
Treasury Regulations, Internal Revenue Service rulings, and judicial decisions
now in effect, all of which are subject to change (possibly with retroactive
effect) or different interpretations. We cannot assure that the IRS will not
challenge one or more of the tax consequences described herein. We have not
obtained a ruling from the IRS with respect to the U.S. federal income tax
consequences of acquiring or holding our 5.625% Convertible Subordinated
Debentures or our common stock.
This discussion does not deal with all aspects of U.S. federal income
taxation that may be important to you as a holder of our 5.625% Convertible
Subordinated Debentures, or common stock into which our 5.625% Convertible
Subordinated Debentures may cover. This discussion does not deal with tax
consequences arising under the laws of any foreign, state or local
jurisdiction. This discussion is for general information purposes only, and
does not purport to address all tax consequences that may be important to you
in light of your personal circumstances (for example, persons subject to the
alternative minimum tax provisions of the Code). This discussion also does not
purport to address all the tax consequences that may be important to you if you
are subject to special rules such as those applicable to:
. certain financial institutions;
. insurance companies;
. tax exempt entities;
. dealers in securities;
. persons who hold our 5.625% Convertible Subordinated Debentures or common
stock as part of a hedging, conversion transaction, straddle, or other
integrated transactions; or
. persons deemed to sell any of our 5.625% Convertible Subordinated
Debentures or common stock under the constructive sale provisions of the
Code.
This discussion assumes that you hold our 5.625% Convertible Subordinated
Debentures and that you will hold the common stock received upon conversion
thereof as capital assets under Section 1221 of the Code, and that our 5.625%
Convertible Subordinated Debentures are properly characterized as debt
instruments for federal income tax purposes.
For the purpose of this discussion, a "U.S. Holder" refers to any holder of
our 5.625% Convertible Subordinated Debentures that is a U.S. person, and a
"Non-U.S. Holder" refers to any holder of our 5.625% Convertible Subordinated
Debentures who is not a U.S. person. The term "U.S. person" means any of the
following:
. a citizen or resident of the United States;
. a corporation, partnership (or other entity treated as a corporation or a
partnership for U.S. federal income tax purposes) created or organized in
the United States or any state thereof or the District of Columbia;
. an estate the income of which is includible in income for U.S. federal
income tax purposes regardless of its source; or
. a trust subject to primary supervision by a court in the United States
and control by one or more U.S. persons.
WE URGE YOU TO CONSULT YOUR OWN TAX ADVISORS REGARDING THE FEDERAL STATE,
LOCAL AND FOREIGN TAX CONSEQUENCES OF OWNERSHIP AND DISPOSITION OF OUR 5.625%
CONVERTIBLE SUBORDINATED DEBENTURES, INCLUDING CONVERSION OF OUR 5.625%
CONVERTIBLE SUBORDINATED DEBENTURES, AND OUR COMMON STOCK AND THE EFFECT THAT
YOUR PARTICULAR CIRCUMSTANCES MAY HAVE ON SUCH TAX CONSEQUENCES.
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Tax Consequences to U.S. Holders
Ownership of Notes
Interest on Notes. The stated interest on our 5.625% Convertible
Subordinated Debentures generally will be includible in your gross income and
taxable to you as ordinary income in accordance with your method of tax
accounting.
Adjustments to conversion price. The conversion price of our 5.625%
Convertible Subordinated Debentures may change under certain circumstances. In
such a case, Section 305 of the Code and the Treasury Regulations issued
thereunder may treat you as having received a constructive distribution
whether or not you ever exercise your conversion privilege. The constructive
distribution will be taxed as ordinary income (subject to a possible dividends
received deduction if you are a corporate holder) to the extent our current
and/or accumulated earnings and profits, if, and to the extent that, the
adjustment in the conversion price increases your proportionate interest in
the fully diluted common stock. Moreover, common stock holders themselves will
generally be treated as having received a constructive distribution if there
is not a full adjustment to the conversion price of our 5.625% Convertible
Subordinated Debentures to reflect a stock dividend or other event increasing
the proportionate interest of the common stock holders in our assets or
earnings and profits. In such an event, the constructive distribution will be
taxable as ordinary income (subject to a possible dividends received deduction
if you are a corporate holder) to the extent of our current and/or accumulated
earnings and profits.
Sale, exchange or retirement of Debentures. In general, you will recognize
gain or loss upon the sale, exchange, redemption, retirement or other
disposition of our 5.625% Convertible Subordinated Debentures. The gain or
loss will equal:
(1) the amount realized; minus
(2) your adjusted tax basis in our 5.625% Convertible Subordinated
Debentures.
Your adjusted tax basis in our 5.625% Convertible Subordinated Debentures
generally will equal:
(1) the amount you paid for our 5.625% Convertible Subordinated
Debentures; plus
(2) the amount of any market discount (as discussed below) you
previously recognized; or minus
(3) any amortized bond premium (as discussed below).
Any such gain or loss you recognize on the sale, exchange, redemption,
retirement or other disposition of any of our 5.625% Convertible Subordinated
Debentures should be capital gain or loss. Such gain or loss also will
generally be long term capital gain or loss if you held or are deemed to have
held the 5.625% Convertible Subordinated Debentures for more than one year at
the time of the sale or exchange.
Conversions of Debentures into common stock. In general, you will not
recognize gain or loss on the conversion of our 5.625% Convertible
Subordinated Debentures into shares of our common stock, unless you receive
cash in lieu of a fractional share. Your tax basis in the shares of our common
stock received upon conversion of our 5.625% Convertible Subordinated
Debentures will equal your aggregate basis in our 5.625% Convertible
Subordinated Debentures exchanged therefor (less any portion thereof allocable
to a fractional share). Your holding period of the shares of common stock you
receive upon conversion of our 5.625% Convertible Subordinated Debentures
generally will include the period during which you held our 5.625% Convertible
Subordinated Debentures prior to the conversion. Any cash you receive in lieu
of a fractional share of common stock should be treated as a payment in
exchange for such fractional share. Any gain or loss you recognize on the
receipt of cash paid in lieu of a fractional share generally will equal the
difference between the amount of cash you receive and the amount of tax basis
allocable to the fractional share.
Our common stock. Any distribution paid to you with respect to our common
stock after a conversion of any of our 5.625% Convertible Subordinated
Debentures will constitute ordinary income (subject to a possible
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dividends received deduction if you are a corporate holder) to the extent made
from our current and/or accumulated earnings and profits. The amount of gain or
loss you realize on the sale or exchange of common stock will equal:
(1) the amount you realize on such sale or exchange; minus
(2) your adjusted tax basis in such common stock.
Such gain or loss will generally be long term capital gain or loss if you have
held or are deemed to have held the common stock for more than one year.
However, special rules may apply if you originally purchased our 5.625%
Convertible Subordinated Debentures at a market discount (as discussed below).
Market discount. If you purchase any of our 5.625% Convertible Subordinated
Debentures at a lower price than their principal amount, you may be affected by
the "market discount" provisions of the Code. Market discount on any of our
5.625% Convertible Subordinated Debentures will generally equal:
(1) the principal amount of the 5.625% Convertible Subordinated
Debentures; minus
(2) the price at which you sell the 5.625% Convertible Subordinated
Debenture.
The market discount provisions generally require a U.S. Holder acquiring any of
our 5.625% Convertible Subordinated Debentures at market discount to treat as
ordinary income any gain recognized on a subsequent disposition of such
Debenture to the extent of the "accrued market discount" at the time of
subsequent disposition. If any of our 5.625% Convertible Subordinated
Debentures with accrued market discount is converted into common stock, the
amount of such accrued market discount generally will be taxable as ordinary
income upon disposition of the common stock. Unless a purchaser of our 5.625%
Convertible Subordinated Debentures with market discount elects otherwise,
market discount on our 5.625% Convertible Subordinated Debentures will be
treated as accruing on a straight line basis over the term of such Debenture.
In addition, if a purchaser of any of our 5.625% Convertible Subordinated
Debentures with market discount incurs or maintains indebtedness to purchase or
carry the 5.625% Convertible Subordinated Debenture, an interest deduction
attributable to such indebtedness may be disallowed until the 5.625%
Convertible Subordinated Debenture is disposed of in a taxable transaction.
Amortizable premium. If you purchase any of our 5.625% Convertible
Subordinated Debentures at a premium over its stated principal amount, plus any
accrued interest, you generally may elect to amortize such premium ("Section
171 premium") from the purchase date to the 5.625% Convertible Subordinated
Debenture's maturity date under a constant yield method. Section 171 premium,
however, will not include any amount attributable to any of our 5.625%
Convertible Subordinated Debentures' conversion feature. The amount
attributable to the conversion feature generally equals:
(1) the purchase price of the 5.625% Convertible Subordinated Debenture;
minus
(2) what the 5.625% Convertible Subordinated Debenture's fair market
value would be if there were no conversion feature.
Amortized Section 171 premium is treated as an offset to interest income on any
of our 5.625% Convertible Subordinated Debentures and not as a separate
deduction.
Tax Consequences to Non-U.S. Holders
Interest on Notes. Generally, if you are a Non-U.S. Holder, stated interest
paid to you on our 5.625% Convertible Subordinated Debentures will not be
subject to U.S. federal income tax if such interest is not effectively
connected with the conduct of a trade or business by you within the United
States, and you meet the following three requirements:
(1) you do not actually or constructively own 10% or more of the total
voting power of all classes of our stock entitled to vote;
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(2) you are not a "controlled foreign corporation" with respect to which
we are a "related person" within the meaning of the Code; and
(3) you certify, under penalty of perjury, that you are not a U.S.
person and such certificate provides your name and address.
If you meet certain requirements, the certification described in paragraph
3 above may be provided by:
. a securities clearing organization;
. a bank, or
. other financial institution that holds customers' securities in the
ordinary course of its trade or business.
For purposes of paragraph (2) above, the Non-U.S. Holder of our 5.625%
Convertible Subordinated Debentures would be deemed to own constructively the
common stock into which it could be converted.
A Non-U.S. Holder that is not exempt from tax under the above rules
generally will be subject to U.S. federal income tax withholding at a rate of
30% unless:
(1) the interest is effectively connected with the conduct of a U.S.
trade or business, in which case the interest will be subject to the U.S.
federal income tax on net income that applies to U.S. persons generally; or
(2) an applicable income tax treaty provides for a lower rate of, or
exemption from, withholding tax.
If you are a foreign corporation, such U.S. trade or business income may also
be subject to the branch profits tax at a 30% rate. (The branch profits tax
generally is imposed on a foreign corporation on the actual or deemed
repatriation from the United States of earnings and profits attributable to
U.S. trade or business income.) The branch profits tax may not apply (or may
apply at a reduced rate) if the foreign corporation is a qualified resident of
a country with which the United States has an income tax treaty.
To claim either (A) the benefit of a tax treaty, or (B) an exemption from
withholding because the income is effectively connected with a U.S. trade or
business, the Non-U.S. Holder must provide a properly executed Form 1001 or
4224, as applicable, prior to the payment of interest. These forms must be
periodically updated. Under new rules that will apply to payments made after
December 31, 2000, the Forms 1001 and 4224 will be replaced by Form W-8. Also,
under the new rules, a Non-U.S. Holder who is claiming the benefits of a
treaty may be required:
(1) to obtain a U.S. taxpayer identification number; and/or
(2) to prove residence in a foreign country by providing certain
documentary evidence issued by foreign governmental authorities.
In addition, the new rules provide certain special procedures for payments
through qualified intermediaries.
Sale, exchange or redemption of notes or shares of common stock. A Non-U.S.
Holder generally will not be subject to U.S. federal income tax on gain
recognized upon the sale or other disposition of our 5.625% Convertible
Subordinated Debentures or shares of our common stock received in exchange
therefor unless:
(1) the gain is effectively connected with the conduct of a trade or
business within the United States by the Non-U.S. Holder; or
(2) the Non-U.S. Holder:
(A) is a nonresident alien individual;
(B) holds the common stock as a capital asset; and
(C) is present in the United States for 183 or more days in the
taxable year; or
(3) the Company is a United States real property holding corporation
under the Code.
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A Non-U.S. Holder will be subject to federal withholding tax at 10% of the
proceeds from, and federal income tax with respect to gain realized on, the
disposition of Debentures or shares of common stock if the Company is a
"United States real property holding corporation" under the Code. In that
case, such Non-U.S. Holder can credit any withholding tax withheld pursuant to
the rules applicable to dispositions of a "United States real property
interest" against such Non-U.S. Holder's U.S. federal income tax liability.
Based on the current and projected value of the assets of the Company, the
Company may currently be a United States real property holding corporation
under the Code. Even if the Company is a United States real property holding
corporation, however, the 10% withholding tax and the income tax will not
apply to a Non-U.S. Holder upon the disposition of Debentures or shares of
common stock provided that:
(1) common stock of the Company is and continues to be regularly traded
on an established securities market for U.S. federal income tax purposes;
and
(2) a Non-U.S. Holder does not hold, and has not held during certain
periods, directly or indirectly, more than 5% of the common stock (or, in
the case of 5.625% Convertible Subordinated Debentures, such Debentures
that have a fair market value greater than 5% of the common stock).
Conversion of Notes. A Non-U.S. Holder generally will not be subject to
U.S. federal income tax on the conversion of any of our 5.625% Convertible
Subordinated Debentures into shares of our common stock. However, a Non-U.S.
Holder may recognize gain to the extent of cash received in lieu of a
fractional share on conversion. Such gain would be subject to the rules
described above with respect to the rules regarding the sale or exchange of
any of our 5.625% Convertible Subordinated Debentures or shares of common
stock by a Non-U.S. Holder.
Dividends on shares of common stock. Generally, any distribution on shares
of our common stock to a Non-U.S. Holder will be subject to U.S. federal
income tax withholding at a rate of 30% unless:
(1) the dividend is effectively connected with the conduct of a trade or
business within the United States by the Non-U.S. Holder; or
(2) an applicable income tax treaty provides for a lower rate of, or
exemption from, withholding tax.
If the dividend is effectively connected with the conduct of a trade or
business within the United States by the Non-U.S. Holder, the dividend will be
subject to:
(A) the U.S. federal income tax on net income that applies to U.S.
persons generally; and
(B) with respect to corporate Non-U.S. Holders under certain
circumstances, the branch profits tax.
A Non-U.S. Holder may be required to satisfy certain certification
requirements in order to claim a reduction of or exemption from withholding
under the foregoing rules.
Information Reporting and Backup Withholding
U.S. Holders. Information reporting and backup withholding may apply to
payments of principal, interest or dividends on, or the proceeds from the sale
or other disposition of, our 5.625% Convertible Subordinated Debentures or
common stock with respect to certain noncorporate U.S. Holders. If you are
such a U.S. Holder, then you generally will be subject to backup withholding
at a rate of 31% unless, among other conditions, you supply a taxpayer
identification number and certain other information, certified under penalties
of perjury, to the payer or you otherwise establish an exemption from backup
withholding. Any amount withheld under backup withholding is allowable as a
credit against the U.S. Holder's federal income tax liability.
Non-U.S. Holders. Generally, information reporting will apply to payments
of interest on our 5.625% Convertible Subordinated Debentures or dividends on
our common stock, and backup withholding at a rate of 31% will apply unless
the payee certifies that it is not a U.S. person or otherwise establishes an
exemption. The 31% backup withholding tax will not apply, however, to interest
or dividends subject to the 30% withholding
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tax described above. In addition, information reporting and backup withholding
will apply to payments of principal on our 5.625% Convertible Subordinated
Debentures unless you certify that you are not a U.S. person or otherwise
establish an exemption.
The payment of the proceeds from the disposition of any of our 5.625%
Convertible Subordinated Debentures or common stock to or through the U.S.
office of a U.S. or foreign broker will be subject to information reporting and
possible backup withholding, unless the Non-U.S. Holder certifies as to its
Non-U.S. Holder status or otherwise establishes an exemption, provided that the
broker does not have actual knowledge that the holder is a U.S. person or that
the conditions of any other exemption are not, in fact, satisfied. The proceeds
of the disposition by a Non-U.S. Holder of our 5.625% Convertible Subordinated
Debentures or common stock to or through a foreign office of a broker generally
will not be subject to information reporting or backup withholding. However, if
the broker is either:
(1) a U.S. person;
(2) a controlled foreign corporation for U.S. tax purposes; or
(3) a foreign person 50% or more of whose gross income from all sources
for certain periods is from activities that are effectively connected with
a U.S. trade or business,
information reporting generally will apply unless the broker has documentary
evidence in its files of the Non-U.S. Holder's foreign status and has no actual
knowledge to the contrary.
New Withholding Regulations
The recently finalized withholding rules referred to above (the "New
Regulations") make certain modifications to the withholding and information
reporting rules described above. The New Regulations attempt to unify
certification requirements and modify reliance standards. The New Regulations
generally will be effective for payments made after December 31, 2000, subject
to certain transition rules. We urge you to consult your own tax advisors
regarding the New Regulations.
THE PRECEDING DISCUSSION OF CERTAIN UNITED STATES FEDERAL INCOME TAX
CONSEQUENCES IS FOR GENERAL INFORMATION ONLY AND IS NOT TAX ADVICE.
ACCORDINGLY, YOU SHOULD CONSULT YOUR OWN TAX ADVISER AS TO PARTICULAR TAX
CONSEQUENCES TO IT OF PURCHASING, HOLDING AND DISPOSING OF OUR 5.625%
CONVERTIBLE SUBORDINATED DEBENTURES AND OUR COMMON STOCK, INCLUDING THE
APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS, AND OF ANY
PROPOSED CHANGES IN APPLICABLE LAWS.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 1998, Supportive Housing Services, Inc. ("SHS") provided services to
us for market feasibility analysis, site pre-acquisition services, construction
management oversight and building setup in conjunction with our development
activities. SHS was owned 80% by Dr. Wilson's spouse and 20% by Paul Parker, an
executive officer of ours, through June 30, 1998, and, as of July 1, 1998,
owned 75% by Dr. Wilson's spouse. SHS billed us approximately $3.9 million for
such services in 1998, approximately $3.8 million (including $566,000
reflecting payment to CCL (as defined below)) of which was paid as of December
31, 1998. As of September 30, 1999, we had incurred additional fees totaling
$658,000 to SHS. In July 1999 we delivered 180 days' written notice terminating
our agreement with SHS. We expect to incur additional fees of approximately
$75,000 for all remaining services to be provided by SHS under the agreement.
In December 1997, we entered into a consulting services agreement with SHS
pursuant to which we provided SHS with consulting services in the assisted
living industry, including providing data on our facility prototypes,
facilitating the introduction of SHS to other potential customers and providing
market analysis on the assisted living industry. This consulting agreement
expired in September 1998. We received approximately $1.1 million in fees and
reimbursable expenses from SHS for such consulting services.
During 1998, Concepts in Community Living, Inc. ("CCL"), a company owned by
Dr. Wilson's spouse, provided feasibility studies and pre-development
consulting services to SHS and certain developers with respect to certain
assisted living residence sites we were developing and constructing. We paid
CCL approximately $566,000 and $310,000 indirectly through SHS for rendering
such services in 1998 and 1999, respectively. In June 1999, we entered into a
new agreement with CCL pursuant to which CCL will provide market research,
demographic review and competitor analysis in many of our current and potential
markets. We will pay CCL a retainer of $10,000 per month, plus fees in excess
of the retainer in connection with specific projects that we authorize under
the agreement. We have paid CCL approximately $73,000 for such services through
September 30, 1999.
We lease six residences from Assisted Living Facilities, Inc., in which Dr.
Wilson's spouse owns a 25% interest. During 1998, we paid Assisted Living
Facilities, Inc. rent of approximately $1.2 million, and during the nine months
ended September 30, 1999, we paid rent of approximately $1.0 million. In
addition, we leased one residence from Oregon Heights Partners in 1998, in
which Dr. Wilson's spouse owns through CCL a 34% interest. Through September
30, 1998, we paid Oregon Heights Partners approximately $195,000 in rent. The
Oregon Heights Partners lease was terminated in September 1998, effective
October 1, 1998.
During 1998, Mr. McBride owned a $400,000 or 16.6% interest, and Dr.
Wilson's spouse owned a $200,000 or 8.3% interest, in Health Equity Investors
("HEI"). In the second quarter of 1997, we entered into joint venture
agreements with HEI to operate certain new assisted living residences that we
owned or leased. The joint venture concurrently entered into a non-cancelable
management agreement with us pursuant to which we managed the properties
operated by the joint venture for an amount equal to the greater of 8% of gross
revenues or $2,000 per month per residence. Through February 10, 1999, we
consolidated 100% of the revenues and expenses attributable to these residences
with our revenues and expenses, and HEI reimbursed us for 90.0% of the start-up
losses of the joint venture. We received loss reimbursements from HEI of $4.7
million for the year ended December 31, 1998, and no loss reimbursements in
1999. As of December 31, 1998, 17 residences owned or leased by us were being
operated by the joint venture.
On February 10, 1999, we purchased HEI's joint venture interest with respect
to the 17 properties then being operated by the joint venture for an aggregate
purchase price of approximately $3.8 million. HEI's investment with respect to
such properties was $3.2 million. As a result of such purchases, Mr. McBride
and Dr. Wilson's spouse received distributions of approximately $537,000 and
$269,000, respectively, in 1999.
In October 1997, we acquired Home and Community Care, Inc. ("HCI"). Certain
of our officers and directors were officers, directors or stockholders of HCI.
Mr. McBride and Dr. Wilson's spouse owned 13.9% and 4.7%, respectively, of
HCI's outstanding common stock at the time of acquisition, substantially all of
which was acquired in March 1997. The terms of the acquisition were approved by
a committee of
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independent directors. Pursuant to the HCI acquisition agreement, during 1998,
Mr. McBride and Dr. Wilson's spouse received "earnout" payments from us of
$174,000 and $70,000, respectively, related to HCI sites we elected to develop.
Additional "earnout" payments totaling $153,000 to Mr. McBride and $61,000 to
Dr. Wilson's spouse have been made under the HCI agreement in 1999. No further
"earnout" payments are expected.
In October 1997, we acquired Carriage House Assisted Living, Inc. ("Carriage
House"). Certain of our employees and directors collectively owned 23% of
Carriage House's stock at the time of acquisition.
During 1998 Mr. Razook, one of the members of the Compensation Committee,
was Managing Director and Head of the Health Care Industry Group of Schroder &
Co. Inc. ("Schroders"), an investment banking firm. During 1998 Schroders
served as the initial purchaser of our $75.0 million offering of 5.625%
Debentures for which Schroders received a customary commission. Also during
1998, Schroders provided financial advisory services and delivered a fairness
opinion in connection with a proposed merger for which we paid Schroders a fee
of $200,000. In March 1999, Mr. Razook became President and Managing Director
at Cohen & Steers Capital Advisors LLC ("C&S Advisors"). Pursuant to an
agreement with C&S Advisors, we anticipate that we will pay C&S Advisors up to
$1.2 million in 1999 for financial advisory services, $909,865 of which had
been paid as of September 30, 1999. In addition, the agreement provides for
customary fees and commissions in the event we are advised by C&S Advisors in
connection with certain types of transactions. The agreement terminates on
December 31, 2000, except that we may terminate the agreement as it relates to
the advisory services on December 31, 1999.
85
<PAGE>
SELLING DEBENTUREHOLDERS
The Debentures being offered were acquired by the Selling Debentureholders
in connection with a private placement of the Debentures by Assisted Living
Concepts on April 13, 1998. The offering was pursuant to Rule 144A and
Regulation D under the Securities Act or in permitted resale transactions from
the initial purchasers of the Debentures or holders acquiring these Debentures
from prior holders in permitted resale transactions.
The following table sets forth the following information:
. names of the Selling Debentureholders
. the number of shares of common stock owned by each of them as of the date
of this supplement
. the principal amount of Debentures which may be offered pursuant to this
Prospectus
Other than as a result of the ownership of Debentures or common stock, none
of the Selling Debentureholders has had any position, office or other material
relationship with Assisted Living Concepts or any of its predecessors or
affiliates within the past three years, except as noted. The information in the
table and accompanying footnotes has been prepared based upon information
furnished to Assisted Living Concepts by or on behalf of the Selling
Debentureholders.
We cannot provide an estimate as to the principal amount of Debentures or
shares of common stock that will be held by the Selling Debentureholders after
completion of this offering. This is because the Selling Debentureholders may
offer all or some of the Debentures which they hold and/or shares of common
stock issued upon conversion pursuant to this offering. Furthermore, there are
currently no agreements, arrangements or understandings with respect to the
sale of any of the Debentures or shares of common stock that will be held by
the Selling Debentureholders after completion of this Offering. See "Plan of
Distribution."
<TABLE>
<CAPTION>
Principal Principal
Amount of Amount of
Debentures Debentures
Beneficially That May be
Name Owned Sold
---- ------------ -----------
<S> <C> <C>
Deephaven Domestic Convertible Trading Ltd. .......... 3,340,000 3,340,000
Donaldson Lufkin & Jenrette........................... 6,585,000 6,585,000
Forest Alternative Strategies Fund A-5................ 4,287,000 4,287,000
Fortis Growth and Income Fund......................... 2,000,000 2,000,000
Fortis Growth and Income Series Portfolio............. 2,000,000 2,000,000
Goldman Sachs and Company............................. 130,000 130,000
JMG Convertible Investments, L.P. .................... 500,000 500,000
Lehman Brothers Inc. ................................. 1,580,000 1,580,000
Lewco Securities, Corp................................ 5,445,000 5,445,000
McMahan Securities Company, L.P. ..................... 500,000 500,000
Merrill Lynch Convertible Fund, Inc. ................. 400,000 400,000
Merrill Lynch Multinational Investment Portfolio
Equity/Convertible Series Convertible Securities
Portfolio (Offshore Fund)............................ 300,000 300,000
Merrill Lynch World Income Fund, Inc. ................ 1,300,000 1,300,000
Salomon Smith Barney.................................. 1,170,000 1,170,000
Schroders & Co. ...................................... 4,700,000 4,700,000
Triton Capital Investments, Ltd. ..................... 500,000 500,000
Winchester Convertible Plus, Ltd...................... 255,000 255,000
----------- -----------
Total............................................... $34,992,000 $34,992,000
=========== ===========
</TABLE>
86
<PAGE>
PLAN OF DISTRIBUTION
We will not receive any of the proceeds from this Offering. We have been
advised by the Selling Debentureholders that they may sell all or a portion of
the Debentures and Conversion Shares offered from time to time on AMEX (or
through the facilities of any national securities exchange or U.S. automated
interdealer quotation system of a registered national securities association,
on which any of the Debentures or Conversion Shares are then listed, admitted
to unlisted trading privileges or included for quotation) on terms to be
determined at the times of such sales. The Selling Debentureholders may also
make private sales, including "block transfers," directly or through a broker
or brokers. Alternatively, any of the Selling Debentureholders may from time to
time offer the Debentures or Conversion Shares through underwriters, including
any of the initial purchasers of the Debentures, dealers or agents. The
underwriters may receive compensation in the form of underwriting discounts,
commissions or concessions from the Selling Debentureholders and the purchasers
of the Debentures or Conversion Shares. To the extent required, the aggregate
principal amount of Debentures and number of Conversion Shares to be sold, the
names of the Selling Debentureholders, the purchase price, the name of any such
agent, dealer or underwriter and any applicable commissions with respect to a
particular offer will be set forth in an accompanying prospectus supplement.
The aggregate proceeds to the Selling Debentureholders from the sale of the
Debentures and Conversion Shares offered will be the purchase price of such
Debentures and Conversion Shares less any commissions. There is no assurance
that the Selling Debentureholders will sell any or all of the Debentures or
Conversion Shares offered.
The Debentures and the Conversion Shares may be sold from time to time in
one or more transactions at fixed offering prices, which may be changed, or at
varying prices determined at the time of sale or at negotiated prices. These
prices will be determined by the holders of the securities or by agreement
between such holders and underwriters or dealers who may receive fees or
commissions in connection therewith.
The Debentures are listed on AMEX. However, there can be no assurance that
an active market for the Debentures will develop.
Under the securities laws of certain states, the Debentures and Conversion
Shares may be sold in such states only through registered or licensed brokers
or dealers.
The Selling Debentureholders and any broker-dealers, agents or underwriters
that participate with the Selling Debentureholders in the distribution of the
Debentures or Conversion Shares may be deemed to be "underwriters" within the
meaning of the Securities Act. In such cases any commissions received by the
broker-dealers, agents or underwriters and any profit on the resale of the
Debentures or Conversion Shares purchased by them may be deemed to be
underwriting commissions or discounts under the Securities Act.
We originally sold the Debentures on April 13, 1998 in a private placement
at a purchase price of 100% of their principal amount. We agreed to indemnify
and hold the initial purchasers and certain subsequent holders of the
Debentures harmless against certain liabilities under the Securities Act that
could arise in connection with the sale of the Debentures by the initial
purchasers or such subsequent holders.
We will pay all expenses incident to the offering and sale of the Debentures
and common stock to the public other than underwriting discounts and selling
commissions and fees. See "Selling Debentureholders."
87
<PAGE>
LEGAL MATTERS
Latham & Watkins, Los Angeles, California and New York, New York and Schreck
Morris, Las Vegas, Nevada, have passed upon certain legal matters with respect
to the Debentures and the Conversion Shares being offered.
EXPERTS
The consolidated financial statements and schedule of Assisted Living
Concepts, Inc., as of December 31, 1997 and 1998 and for each of the years in
the three-year period ended December 31, 1998, have been included herein and in
the Registration Statement in reliance upon the reports of KPMG LLP,
independent certified public accountants, appearing elsewhere herein and in the
Registration Statement, and upon the authority of said firm as experts in
accounting and auditing. The report of KPMG LLP, dated September 10, 1999
refers to a change in accounting for pre-opening costs and the restatement of
the December 31, 1996 and 1997 consolidated financial statements.
88
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
I. Audited Financial Statements as of and for the Years Ended December 31,
1997 and 1998
Independent Auditors' Report............................................. F-2
Consolidated Balance Sheets, December 31, 1997 and 1998.................. F-3
Consolidated Statements of Operations, Years Ended December 31, 1996, 1997
and 1998................................................................ F-4
Consolidated Statements of Shareholders' Equity, Years Ended December 31,
1996, 1997 and 1998..................................................... F-5
Consolidated Statements of Cash Flows, Years Ended December 31, 1996, 1997
and 1998................................................................ F-6
Notes to Consolidated Financial Statements............................... F-7
II. Unaudited Financial Statements as of and for the three- and nine-month
periods ended September 30, 1998 and 1999
Consolidated Balance Sheets, December 31, 1998 (audited) and September 30,
1999.................................................................... F-33
Consolidated Statements of Operations and Consolidated Statements of
Comprehensive Income (Loss), Three and Nine months Ended September 30,
1998 and 1999........................................................... F-34
Consolidated Statements of Cash Flows, Nine Months ended September 30,
1998 and 1999........................................................... F-35
Notes to Consolidated Financial Statements............................... F-36
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and 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, 1997 and 1998, and
the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
1998. 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, 1997 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998, in conformity with generally
accepted accounting principles.
As discussed in note 13 to the consolidated financial statements, in 1998
the Company changed its method of accounting for pre-opening costs associated
with newly developed residences.
As discussed in note 20 to the consolidated financial statements, the
Company restated its financial statements as of and for the years ended
December 31, 1996 and 1997.
KPMG LLP
Portland, Oregon
September 10, 1999
F-2
<PAGE>
ASSISTED LIVING CONCEPTS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
December 31,
------------------
1997 1998
-------- --------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents................................ $ 63,269 $ 55,036
Funds held in trust (Note 3)............................. 1,956 --
Marketable securities, available for sale (Note 4)....... -- 4,000
Accounts receivable, net of allowance for doubtful
accounts of $79 at 1997, $179 at 1998 and $237 at 1999.. 2,185 5,127
Prepaid expenses......................................... 904 992
Other current assets (Note 7)............................ 3,579 4,472
-------- --------
Total current assets.................................... 71,893 69,627
-------- --------
Property and equipment (Notes 2, 5, 6 and 8)............... 131,623 284,754
Construction in process (Note 6)........................... 102,025 51,304
-------- --------
Total property and equipment............................ 233,648 336,058
Less accumulated depreciation........................... 3,370 9,133
-------- --------
Property and equipment--net............................. 230,278 326,925
-------- --------
Goodwill (Note 2).......................................... 12,447 5,371
Other assets (Notes 2, 5 and 8)............................ 9,749 12,746
-------- --------
Total assets............................................ $324,367 $414,669
======== ========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Accounts payable......................................... $ 1,859 $ 1,622
Construction payable..................................... 18,883 6,942
Accrued real estate taxes................................ 2,354 4,837
Other accrued expenses................................... 4,045 6,127
Other current liabilities (Note 7)....................... 2,368 4,857
Construction financing................................... 2,150 --
Current portion of long-term debt (Note 8)............... 172 1,386
-------- --------
Total current liabilities............................... 31,831 25,771
-------- --------
Other liabilities (Notes 2 and 5).......................... 2,592 3,415
Long-term debt (Note 8).................................... 57,535 105,036
Convertible subordinated debentures (Note 9)............... 100,165 161,250
-------- --------
Total liabilities....................................... 192,123 295,472
-------- --------
Commitments and contingencies (Notes 5 and 19)
Shareholders' equity (Notes 8 and 17):
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 15,646,478 shares in
1997, 17,344,143 shares in 1998 and 17,120,745 shares in
1999.................................................... 156 173
Additional paid-in capital............................... 141,460 148,533
Unearned compensation expense............................ (4,100) (3,492)
Fair market value in excess of historical cost of
acquired net assets attributable to related
party transactions...................................... (239) (239)
Accumulated other comprehensive income (loss)............ -- --
Accumulated deficit...................................... (5,033) (25,778)
-------- --------
Total shareholders' equity............................... 132,244 119,197
-------- --------
Total liabilities and shareholders' equity.............. $324,367 $414,669
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
ASSISTED LIVING CONCEPTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------
1996 1997 1998
------- ------- --------
<S> <C> <C> <C>
Revenue........................................... $21,022 $49,605 $ 89,384
Operating expenses
Residence operating expenses.................... 14,055 31,591 57,443
Corporate general and administrative............ 1,864 4,050 11,099
Building rentals................................ 1,137 2,691 11,308
Building rentals to related party (Notes 15 and
16)............................................ 2,812 5,278 1,456
Depreciation and amortization (Note 6).......... 1,094 3,683 6,339
Terminated merger expense (Note 12)............. -- -- 1,068
Site abandonment costs (Note 6)................. -- -- 2,377
Write-off of impaired assets and related
expenses (Note 11)............................. -- -- 8,521
------- ------- --------
Total operating expenses...................... 20,962 47,293 99,611
------- ------- --------
Operating income (loss)........................... 60 2,312 (10,227)
------- ------- --------
Other income (expense):
Interest expense (Notes 8 and 9)................ (1,146) (4,946) (11,039)
Interest income................................. 455 1,526 3,869
Loss on sale of assets (Notes 5 and 16)......... (854) (1,250) (651)
Debenture conversion costs (Note 9)............. (426) -- --
Other expenses (Notes 2, 8 and 16).............. (4) (121) (1,174)
------- ------- --------
Total other income (expense).................. (1,975) (4,791) (8,995)
------- ------- --------
Net loss before cumulative effect of change in
accounting principle............................. (1,915) (2,479) (19,222)
Cumulative effect of change in accounting
principle (Note 13).............................. -- -- (1,523)
------- ------- --------
Net loss.......................................... $(1,915) $(2,479) $(20,745)
======= ======= ========
Basic and diluted net loss per common share:
Loss before cumulative effect of change in
accounting principle........................... $ (0.23) $ (0.21) $ (1.18)
Cumulative effect of change in accounting
principle...................................... -- -- (0.09)
------- ------- --------
Basic and diluted net loss per common share....... $ (0.23) $ (0.21) $ (1.27)
======= ======= ========
Basic and diluted weighted average common shares
outstanding...................................... 8,404 11,871 16,273
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
ASSISTED LIVING CONCEPTS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Fair Market
Value in
Common Shares Additional Unearned Excess of Total
-------------- Paid-In Compensation Historical Accumulated Shareholder's
Shares Amount Capital Expense Cost Deficit Equity
------ ------ ---------- ------------ ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
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 (Note 17)........ -- -- 4,250 (4,250) -- -- --
Compensation expense
earned on restricted
stock (Note 17)........ -- -- -- 150 -- -- 150
Net loss................ -- -- -- -- -- (2,479) (2,479)
------ ---- -------- ------- ----- -------- --------
Balance at December 31,
1997................... 15,646 $156 $141,460 (4,100) $(239) $ (5,033) $132,244
Common stock
repurchased............ (529) (5) (7,057) -- -- -- (7,062)
Conversion of
subordinated
debentures............. 1,855 19 13,387 -- -- -- 13,406
Exercise of employee
stock options.......... 122 1 745 -- -- -- 746
Issuance of restricted
stock (Note 17)........ 250 2 (2) -- -- -- --
Compensation earned on
restricted stock
(Note 17).............. -- -- -- 608 -- -- 608
Net loss................ -- -- -- -- -- (20,745) (20,745)
------ ---- -------- ------- ----- -------- --------
Balance at December 31,
1998................... 17,344 $173 $148,533 $(3,492) $(239) $(25,778) $119,197
====== ==== ======== ======= ===== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
ASSISTED LIVING CONCEPTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Operating activities:
Net loss...................................... $ (1,915) $ (2,479) $ (20,745)
Adjustment to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization................ 1,094 3,683 6,339
Provision for doubtful accounts.............. 33 23 359
Loss on sale of assets....................... 854 1,250 651
Compensation expense earned on restricted
stock....................................... -- 150 608
Write-off of impaired assets and related
expenses.................................... -- -- 8,521
Site abandonment costs....................... -- -- 2,377
Cumulative effect of change in accounting
principle................................... -- -- 1,523
Changes in assets and liabilities, excluding
effects of acquisitions:
Accounts receivable, net..................... (627) (808) (3,302)
Prepaid expenses............................. (138) (530) (88)
Other current assets......................... (392) (3,039) (909)
Other assets................................. (1,554) (633) 1,314
Accounts payable, accrued expenses and other
current liabilities......................... (1,446) 5,258 5,525
Non-Current Liabilities...................... 997 1,595 823
--------- --------- ---------
Net cash (used in) provided by operating
activities................................... (3,094) 4,497 2,996
--------- --------- ---------
Investing activities:
Funds held in trust........................... (8,515) 6,559 1,956
Investment in marketable securities, available
for sale..................................... -- -- (4,000)
Proceeds from sale and leaseback
transactions................................. 41,385 51,671 8,113
Proceeds from sale of land and residences..... -- -- --
Purchases of property and equipment........... (122,169) (148,139) (117,972)
Acquisitions, net of cash, debt acquired and
issuance of common stock..................... -- (4,064) (11,366)
--------- --------- ---------
Net cash used in investing activities......... (89,299) (93,973) (123,269)
--------- --------- ---------
Financing activities:
Proceeds for construction financing........... 18,850 43,210 --
Repayments of construction financing.......... -- (63,497) --
Payments on long-term debt.................... (88) (5,516) (289)
Proceeds from issuance of common stock, net... 37,473 72,502 746
Repurchase of common stock.................... -- -- (7,062)
Debt issuance costs of offerings and long-term
debt......................................... (418) (4,163) (5,359)
Proceeds from long-term debt.................. 31,346 21,854 49,004
Retirement of restricted stock................ -- -- --
Proceeds from issuance of convertible
subordinated debentures...................... -- 86,250 75,000
--------- --------- ---------
Net cash provided by financing activities..... 87,163 150,640 112,040
--------- --------- ---------
Net increase (decrease) in cash and cash
equivalents.................................. (5,230) 61,164 (8,233)
Cash and cash equivalents, beginning of year.. 7,335 2,105 63,269
--------- --------- ---------
Cash and cash equivalents, end of year........ $ 2,105 $ 63,269 $ 55,036
========= ========= =========
Supplemental disclosure of cash flow
information (Note 18):
Cash payments for interest................... $ 3,218 $ 9,741 $ 16,480
Cash payments for income taxes............... -- 1,547 --
Unrealized loss on marketable securities..... -- -- --
Conversion of construction financing to sale-
leaseback................................... -- -- 2,150
Extinguishment of long term debt from lease
amendments.................................. -- -- --
Disposal of property, plant and equipment
from lease amendments....................... -- -- --
Increase (decrease) in construction payable
and property and equipment.................. $ 8,752 $ 2,881 $ (11,941)
Conversion of subordinated debentures (net of
$509 of unamortized financing costs in
1998)....................................... 6,085 -- 13,406
Conversion of construction financing to sale
leaseback................................... -- -- 2,150
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<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 60, 109 and 165
residences for the years ended 1996, 1997 and 1998, 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. In September 1996, $6.1 million of the 7%
Debentures were converted into 811,333 shares of the Company's common stock
which resulted in $13.9 million of 7% Debentures outstanding. In August 1998,
the Company called for redemption all of the remaining $13.9 million of the 7%
Debentures. All of the 7% Debentures were converted into shares of the
Company's common stock, resulting in the issuance of 1,855,334 additional
shares of common stock.
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 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.
F-7
<PAGE>
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In April 1998, the Company completed the offering of $75.0 million of 5.625%
Convertible Subordinated Debentures ("5.625% Debentures") due May 2003
realizing net proceeds of $72.2 million after discounts, commissions and other
expenses. The 5.625% Debentures are convertible at any time at or prior to
maturity, unless previously redeemed, at a conversion price of $26.184 per
common share, which equates to an aggregate of 2,864,344 shares of the
Company's common stock.
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, Cash Equivalents and Marketable Securities
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. The Company's investments in marketable
securities are classified as available for sale. These investments are stated
at fair value with any unrealized gains or losses included as a component of
shareholders' equity. Interest income is recognized when earned.
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......................................... 3 to 7 years
</TABLE>
F-8
<PAGE>
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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) fair carrying
amount or (ii) fair value less the cost to sell. The Company has not recognized
any impairment losses through the year ended December 31, 1998.
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 process 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.
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 $30,000, $128,000 and $398,000,
respectively, for the years ended December 31, 1996, 1997 and 1998. Accumulated
amortization of goodwill at December 31, 1997 and 1998 was $188,000 and
$278,000, 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.
During the year ended December 31, 1998, the Company wrote-off all the
unamortized goodwill (approximately $7.5 million) associated with Pacesetter
Home Health Care, Inc. ("Pacesetter"), a wholly owned subsidiary of Home and
Community Care, Inc. The shut-down of Pacesetter operations was a result of a
change in the regulatory reimbursement environment during the quarter ended
June 30, 1998 (See Note 11).
Pre-Opening Costs
Prior to the adoption of AICPA Statement of Position 98-5, Reporting on the
Costs of Start-up Activities (SOP 98-5), pre-opening costs associated with
newly developed residences, prior to the commencement of their operations were
capitalized and amortized over 12 months. As a result of the Company's adoption
of SOP 98-5 (effective as of January 1, 1998), pre-opening costs are expensed
as incurred (See Note 13).
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.
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.
F-9
<PAGE>
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 the
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.
Comprehensive Income (Loss)
On January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for reporting and
presentation of comprehensive income and its components in a full set of
financial statements. Comprehensive income consists of net income (loss) and
several other items that current accounting standards require to be recognized
outside of net income (loss) and is presented in the consolidated statements of
shareholders' equity and comprehensive income. The Statement requires only
additional disclosures in the consolidated financial statements; it does not
affect the Company's financial position or net income (loss). There were no
unrealized gains (losses) on marketable securities for the years ended December
31, 1997 or 1998. The Company had no items to be recognized in comprehensive
income (loss) outside net loss for the periods presented.
Net Income (Loss) Per Common Share
Basic earnings per share (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, 568,000 and 833,000 shares of common
stock were outstanding during the years ended December 31, 1996, 1997 and 1998,
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, 1997 and 1998 were 1,855,333, 5,676,777 and 6,685,789
shares of common stock, respectively, issuable upon conversion of the Company's
convertible subordinated debentures (see Note 9) and 250,000 shares of
restricted stock for the year ended December 31, 1998 (see Note 20) as their
inclusion would be antidilutive.
Segment Reporting
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information." This SFAS
requires public enterprises to report certain information about their operating
segments in a complete set of financial statements to shareholders. It also
requires reporting of certain enterprise-wide information about the Company's
products and services, its activities in different geographic areas, and its
reliance on major customers. The basis for determining the Company's operating
segments is the manner in which management operates the business. This SFAS is
F-10
<PAGE>
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
effective for financial statements for periods beginning after December 15,
1997 and, as such, was adopted by the Company in 1998. The Company has no
foreign operations, no customers which provide over 10 percent of gross
revenue, and has determined that it has only one operating segment.
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 amount of cash and cash equivalents, accounts receivable and
accounts payable approximates fair value because of the short-term nature of
the accounts and/or because they are invested in accounts earning market rates
of interest. The carrying value of marketable debt securities and funds held in
trust approximates fair value because they bear interest at market rates. The
carrying amount of the Company's long-term debt and construction financing
approximate fair value as the interest rates approximate the current rates
available to the Company. The following table sets forth the carrying amount
and approximate fair value (based on quoted market values) of the Company's
subordinated debentures as of December 31, 1997 and 1998 (in thousands):
<TABLE>
<CAPTION>
1997 1998
---------------- ----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ------- -------- -------
<S> <C> <C> <C> <C>
7% Debentures.............................. $13,915 $36,596 -- --
6% Debentures.............................. 86,250 93,581 $86,250 $71,156
5.625% Debentures.......................... -- -- 75,000 58,500
</TABLE>
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 changes
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 17).
The Non-Officer Stock Option Plan (the "Non-Officer Plan") is a non-
qualified stock option plan intended as a long-term incentive compensation plan
designed to provide a competitive and balanced incentive and reward program for
participants.
F-11
<PAGE>
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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,
1998, 23.1% of the Company's residences are in Texas, 11.0% are in Oregon,
10.4% in Ohio, 11.0% in Indiana and 9.2% in Washington. During the years ended
December 31, 1996, 1997 and 1998, direct payments received from state Medicaid
agencies accounted for approximately 12.4%, 11.1% and 10.7%, respectively, of
the Company's revenue while the tenant paid portion received from Medicaid
residents accounted for approximately 6.9%, 5.9% and 5.8%, 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, 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 15 and 16). 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), 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.
During the years ended December 31, 1997 and 1998, respectively, the Company
paid earnout payments of $0 and $1.7 million, respectively, and capitalized
such payments in property and equipment.
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 was recorded as
goodwill and amortized on a straight-line basis over 20 years.
During second quarter 1998 the Company announced a plan to exit all home
health business operations being conducted by Pacesetter. During the year ended
December 31, 1998, the Company incurred a $8.5 million charge to earnings
associated with exiting the Pacesetter operations. Such charge consisted of (i)
a $7.5 million write-off of all unamortized goodwill associated with Pacesetter
and (ii) a $1.0 million provision for exit costs expected to be incurred during
the phase out of the Pacesetter business. During the fourth quarter 1998, the
$1.0 million provision for exit costs was reduced by $400,000 from $1.4 million
as a result of a
F-12
<PAGE>
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
change in the estimate for such exit costs. In addition, the Company incurred a
$1.0 million charge recorded as site abandonment expense during second quarter
1998 for previously capitalized development costs relating to 11 sites acquired
in the HCI acquisition that it had determined not to develop (See Note 6 and
Note 11).
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 15 and 16). The Company had acquired its initial 9.9%
in Carriage House's outstanding capital stock during 1996. 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
Company for the year ended December 31, 1997 assume that HCI and Carriage House
acquisitions had occurred as of January 1, 1997 (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
(Unaudited)
Total
-----------
<S> <C>
Net revenue...................................................... $55,241
Net loss......................................................... (2,680)
Basic and diluted net loss per common share...................... $ (0.23)
</TABLE>
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.
On April 30, 1998, the Company completed the acquisitions of two assisted
living residences in Plano and McKinney, Texas, having units of 66 and 50,
respectively. The residences were acquired for a total purchase price of
approximately $5.2 million. The acquisitions were accounted for as purchases
and the operating results of the facilities have been included in the Company's
consolidated financial statements since the acquisition date. The cost of the
acquisitions has been allocated based on the estimated fair value of the net
assets acquired of approximately $5.2 million. No goodwill was recorded.
On July 1, 1998, the Company completed the acquisition of an assisted living
residence in Alexandria, Louisiana having 47 units. The residence was acquired
for a purchase price of approximately $2.8 million. The acquisition was
accounted for as a purchase and the operating results of the facility 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 $2.8 million.
No goodwill was recorded.
On December 1, 1998, the Company completed the acquisition of an assisted
living residence in Paris, Texas, having 50 units. The residence was acquired
for a purchase price of approximately $3.4 million. The
F-13
<PAGE>
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
acquisition was accounted for as a purchase and the operating results of the
facility 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
$3.0 million. The excess of the aggregate purchase price over the fair market
value of net assets acquired is approximately $432,000 and has been recorded as
goodwill and is being amortized on a straight-line basis over 20 years.
The pro forma consolidated results of operations for the four facilities
acquired during 1998 are excluded, as they are not considered significant to
the Company's 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 15). Pursuant
to the joint venture agreements, the Company entered into non-cancelable
management agreements under which the Company managed 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 consolidated the operations of
the joint venture agreements in its consolidated financial statements. The
joint venture partner reimbursed the Company for 90.0% of the start-up losses
of the joint venture, and the Company recognized such reimbursements as loans
included in other liabilities. The Company also reflected amounts paid to
repurchase the joint venture partner's interest in excess of reimbursed losses
as interest and other expense. Interest was calculated based on the average
loan balance using an imputed 20.0% interest rate and other expense was
calculated based on a $10,000 administrative fee per residence. The Company
received loss reimbursements of $2.3 million and $4.7 million for the years
ended December 31, 1997 and 1998, respectively. 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. The Company repaid $4.0
million of these loans in 1998, and incurred interest and other expense of
$687,000 in connection with these loans, for the year ended December 31, 1998.
As of December 31, 1998, 17 residences owned or leased by the Company were
being operated by the joint venture. During the first quarter of 1999 the
Company announced that it had negotiated with the joint venture partner to
purchase, for approximately $3.8 million, all of the joint venture partner's
interest in the remaining 17 residences subject to the joint venture agreements
(See Note 20).
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. As of December 31, 1997,
four of the five properties had been completed and the Company had received
proceeds of $6.5 million. The remaining $2.0 million of proceeds was released
during the first quarter of 1998 once the remaining residence had been
completed and licensed.
4. Marketable Securities
At December 31, 1998 marketable securities, classified as available-for-
sale, are comprised of $3.4 million of U.S. government and agency debt
securities with a maturity of 2030 and $600,000 of state and municipal debt
securities with a maturity of 2025. These marketable securities have right to
call or prepayment provisions, which may affect the maturity. At December 31,
1998 the cost of these securities which was determined on a specific
identification basis, was equal to their estimated fair value, as such, there
were no realized or unrealized gains or losses.
F-14
<PAGE>
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Leases
A summary of leases that the Company has entered into since its inception is
as follows:
<TABLE>
<CAPTION>
Number of
Sale and Number of Units
Leaseback Sale and under
Number of Residences Leaseback Leases
Leased Accounted Total Residences under
Residences for as Number of Accounted Units Accounted
("Oregon Operating Operating for as Operating for as
Leases") Leases Leases Financings Leases Financings
---------- ---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Leases at December 31,
1994................... 4 -- 4 -- 114 --
Leases entered into
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
Leases entered into
during 1998............ -- 4 4 -- 139 --
Lease expansions during
1998................... -- -- -- -- 47 10
Leases terminated during
1998................... (1) -- (1) -- (45) --
--- --- --- --- ----- ---
Leases at December 31,
1998................... 6 48 54 16 2,047 573
=== === === === ===== ===
</TABLE>
The Company has entered into agreements to lease six assisted living
residences in Oregon from Assisted Living Facilities, Inc., a related party
(the "Oregon Leases"). During 1998 the Company terminated a lease with Oregon
Heights Partners ("OHP"). The lessor in each case obtained funding through the
sale of bonds issued by the state of Oregon, Housing and Community Services
Department ("OHCS"). In connection with the Oregon Leases, the Company entered
into "Lease Approval Agreements" with 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 8). 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, 1997 and 1998 were $176,000 and $126,000 respectively, which are
reflected in other assets.
During the years ended December 31, 1996, 1997 and 1998, the Company
completed the sale of 19, 24 and four residences under sale and leaseback
arrangements, respectively. The Company sold the residences for approximately
$41.4 million in 1996, $51.7 million in 1997 and $10.3 million in 1998, 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 16). 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 $936,000, $1.3 million and $651,000 on the
above sale and leaseback transactions for the years ended December 31, 1996,
1997 and 1998, 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 $399,000,
$1.1 million and $508,000 for the years ended December 31, 1996, 1997 and 1998
respectively, have been recorded as deferred income included in
F-15
<PAGE>
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
other liabilities and are being amortized over the initial terms of the
corresponding leases. For the years ended December 31, 1996 and 1997, a
substantial portion of such gains and losses resulted from sale and leaseback
transactions with LTC (See Note 16).
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, 1998, future minimum annual lease payments under
operating leases are as follows (in thousands):
<TABLE>
<S> <C>
1999.............................................................. $ 16,139
2000.............................................................. 16,103
2001.............................................................. 16,099
2002.............................................................. 16,102
2003.............................................................. 16,123
Thereafter........................................................ 108,990
--------
$189,556
========
</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, plant and equipment (See Notes 6, 8 and 20).
6. Property and Equipment
As of December 31, 1997 and 1998, property and equipment, stated at cost,
consist of the following (in thousands):
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Land...................................................... $ 7,924 $ 18,217
Buildings................................................. 119,649 256,904
Equipment................................................. 1,419 2,865
Furniture................................................. 2,631 6,768
-------- --------
Property and equipment.................................... 131,623 284,754
Construction in process................................... 102,025 51,304
-------- --------
Total property and equipment.............................. 233,648 336,058
Less accumulated depreciation............................. 3,370 9,133
-------- --------
Property and equipment--net............................... $230,278 $326,925
======== ========
</TABLE>
Land, buildings and certain furniture and equipment relating to 37
residences serve as collateral for long-term debt (See Note 8). Depreciation
expense was $805,000, $2.9 million, and $5.9 million, for the years ended
December 31, 1996, 1997 and 1998, respectively.
F-16
<PAGE>
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As of December 31, 1997 and 1998 construction in process consists of the
following (in thousands):
<TABLE>
<CAPTION>
1997 1998
-------- -------
<S> <C> <C>
Land purchased and earnest deposits........................ $ 8,791 $ 4,217
Construction costs......................................... 80,325 37,883
Other costs................................................ 12,909 9,204
-------- -------
$102,025 $51,304
======== =======
</TABLE>
During the years ended December 31, 1996, 1997 and 1998, the Company
capitalized interest costs of $2.3 million, $6.6 million and $6.0 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 $1.1 million, $1.8 million
and $1.8 million for the years ended December 31, 1996, 1997 and 1998,
respectively.
As a result of the Company's decision to reduce the number of new residence
openings during the year ending December 31, 1999 and beyond, the Company
wrote-off $2.4 million of capitalized costs during 1998 relating to the
abandonment of 36 development sites. Of such costs, $1.0 million were written-
off during the second quarter and the remaining $1.4 million were written-off
during the fourth quarter 1998. The Company had not written-off any of such
costs prior to 1998 (See Note 20).
The Company had certificates of occupancy for 173 residences, 165 of which
were included in the operating results as of December 31, 1998, as compared to
130 residences with certificates of occupancy, 109 of which were included in
the operating results as of December 31, 1997. Of the residences with
certificates of occupancy, the Company owned 103 residences and leased 70
residences (54 of which were operating leases and 16 of which were accounted
for as financings) as compared to 63 owned residences and 67 leased residences
(51 of which were operating leases and 16 of which were accounted for as
financings) as of December 31, 1997. At each of December 31, 1997 and 1998,
property and equipment included $31.4 million in land and buildings related to
sale and leaseback transactions accounted for as financings (See Note 16).
As of December 31, 1998, construction in process reflects: (i) 12 residences
(479 units) under construction ($21.9 million); (ii) eight residences (319
units) that have received a certificate of occupancy, but are pending licensure
($23.5 million); (iii) one residence expansion (13 units) ($811,000); and (iv)
other development costs ($5.1 million); (See Note 20). The Company's 10
outstanding construction commitments were approximately $15.0 million at
December 31, 1998.
7. 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, 1997
and 1998, such deposits of $958,000 and $1.6 million, respectively 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.
F-17
<PAGE>
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Long-Term Debt
As of December 31, 1997 and 1998, long-term debt consists of the following
(in thousands):
<TABLE>
<CAPTION>
1997 1998
------- --------
<S> <C> <C>
Trust Deed Notes, payable to the State of Oregon Housing and
Community Services Department (OHCS) through 2028........... $10,256 $ 10,155
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 7,350
Variable Rate Demand Revenue Bonds, Series A-1 and A-2
payable to the State of Ohio Housing Finance Agency through
2018........................................................ -- 13,220
Finance lease obligations.................................... 31,488 31,488
Mortgages payable............................................ -- 35,627
Capital lease obligations payable through 2002 with a
weighted average interest rate of 10.1%..................... 113 82
------- --------
Total long-term debt......................................... $57,707 $106,422
Less current portion......................................... 172 1,386
------- --------
Long-term debt............................................... $57,535 $105,036
======= ========
</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, 1998 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 3.69% during 1998.
The Variable Rate Demand Housing Revenue Bonds, Series 1997 are payable to
the State of Idaho Housing and Finance Association and at December 31, 1998
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 3.56% during 1998.
In April 1998, the Company obtained $14.6 million in mortgage financing at a
fixed interest rate of 7.73% and secured by a mortgage encumbering each of
seven Texas residences. The mortgage is amortized with monthly payments of
$110,000 over 25 years with a balloon payment of $11.8 million due at maturity
in May 2008.
In July 1998, the Company obtained $12.7 million in Variable Rate Demand
Housing Revenue Bonds with the State of Ohio Housing Finance Agency ("OHFA")
and $530,000 in Taxable Variable Rate Demand Housing Revenue Bonds with OHFA.
The bonds are due July 2018 and are secured by a $13.5 million letter of credit
and by buildings, land, furniture and fixtures of seven Ohio residences. The
letter of credit expires in 2003. The bonds had a weighted average interest
rate of 3.57% during 1998.
In July 1998, the Company obtained $6.6 million in mortgage financing at an
initial interest rate of 7.58% and secured by a mortgage encumbering each of
three Oregon residences. The interest rate increases 15 basis points per year
through maturity. The mortgage is amortized with monthly payments of $49,000
over 25 years with a balloon payment of $5.3 million due at maturity in August
2008.
F-18
<PAGE>
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In September 1998, the Company obtained $5.9 million in mortgage financing
at an interest rate of 8.79% and secured by one Pennsylvania residence and one
South Carolina residence. The mortgage is amortized with monthly payments of
$43,000 over 25 years with a balloon payment of $5.9 million due at maturity in
September 2008.
In November 1998, the Company obtained $8.7 million in mortgage financing at
a fixed interest rate of 8.65% and secured by a mortgage encumbering each of
three New Jersey residences. The mortgage is amortized with monthly payments of
$71,000 over 25 years with a balloon payment of $7.2 million due at maturity in
December 2008.
As of December 31, 1998, the following annual principal payments are
required (in thousands):
<TABLE>
<S> <C>
1999.............................................................. $ 1,386
2000.............................................................. 1,494
2001.............................................................. 1,600
2002.............................................................. 1,695
2003.............................................................. 1,804
Thereafter........................................................ 98,443
--------
Total............................................................. $106,422
========
</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 Lease Approval Agreements
with OHCS and the lessor of the Oregon Leases, which obligates the Company to
comply with the terms and conditions of the underlying trust deed relating to
the leased buildings. 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, 1997 and 1998 was $136,000 and $286,000, 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, $351,000 and $240,000 as of December 31, 1996, 1997 and 1998,
respectively, 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, 1997 and 1998, the Company was restricted from
paying dividends on $394,000, $860,000 and $1,659,000, 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.
F-19
<PAGE>
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During the years ended December 31, 1996 and 1997, the Company entered into
nine and seven sale and leaseback agreements, respectively, which are accounted
for as financings due to the Company's continued 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 in the consolidated
balance sheet in property and equipment (See Notes 6 and 20).
During the fourth quarter of 1997, the Company entered into a $50.0 million
floating rate mortgage loan commitment with a commercial lender. During the
first quarter of 1998, the Company entered into a $25.0 million interest rate
swap in order to reduce its exposure with respect to such floating rate loan
commitment. The swap could be settled in cash on or before its effective date
of September 30, 1998. During the period the swap was outstanding, the Company
completed $21.2 million of financing under the mortgage commitment. The Company
elected to terminate the swap before its effective date and paid $1.9 million
in connection with settling the swap, recording $1.6 million of such payment as
deferred financing costs relating to the $21.2 million of financing completed
during the term of the swap, and the remaining $293,000 as other expense during
the third quarter of 1998.
9. Convertible Subordinated Debentures
In August 1995, the Company completed the offering of $20.0 million of 7%
Debentures. The 7% Debentures were convertible at any time at or prior to
maturity, unless previously redeemed, at a conversion price of $7.50 per common
share.
In September 1996, $6.1 million of the 7% Debentures were converted into
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, which was included in other expense.
In August 1998, the Company called for redemption of all of the remaining $13.9
million of the 7% Debentures. All of the 7% Debentures were converted into
shares of the Company's Common Stock, resulting in the issuance of 1,855,334
additional shares of common stock.
In October 1997, the Company completed the offering of $86.3 million of 6%
Debentures. 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 senior 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 on or 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.
In April 1998, the Company completed the private placement of $75.0 million
of 5.625% Debentures. The 5.625% Debentures are convertible at any time at or
prior to maturity, unless previously redeemed, at a conversion price of $26.184
per common share, which equates to an aggregate of approximately
2,864,344 shares of the Company's common stock and bear interest payable
semiannually on May 1 and November 1 of each year, commencing November 1, 1998.
The 5.625% Debentures are unsecured and subordinated to all senior indebtedness
of the Company. The 5.625% Debentures are subject to redemption, as a whole or
in part, at any time from time to time on or after May 15, 2001 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.
F-20
<PAGE>
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. Stock Repurchase
During the year ended December 31, 1998, the Company purchased approximately
529,000 shares of its common stock for a total purchase price of approximately
$7.1 million in accordance with a stock repurchase plan initiated in May 1998.
The Board of Directors terminated the stock repurchase plan in November 1998.
11. Write-off of Impaired Assets and Related Expenses
In June 1998, the Company announced a plan to exit all home health business
operations being conducted by Pacesetter. The decision to exit Pacesetter's
operations was a result of certain laws becoming effective that adversely
affect the prospective payment system for home health care services. Based on
this decision, the Company recorded a $8.9 million charge to earnings during
the second quarter 1998. Such charge consisted of (i) a $7.5 million write-off
of all unamortized goodwill associated with Pacesetter and (ii) a $1.4 million
provision for estimated exit costs expected to be incurred during the phase out
period. Of this $1.4 million provision, $560,000 related to severance, salaries
and benefits incremental to the shut down effort; $720,000 related to leases,
equipment and related costs of closing offices; and $150,000 related to travel
and moving costs. During the fourth quarter 1998, the $1.4 million provision
for exit costs was reduced by $400,000 to $1.0 million as a result of a change
in the estimate for such exit costs. As of December 31, 1998, approximately
$760,000 of this reserve had been utilized. The remaining reserve of
approximately $200,000 consists primarily of lease termination costs and
severance costs for one employee. Expenses related to Pacesetter's final
operations of $430,000 for the six month period of June 1998 through December
1998 have been expensed as incurred. The Company expects the phase out period
to conclude during 1999.
12. Termination of Merger Agreement
On February 1, 1999, the Company agreed with American Retirement Corporation
("ARC") to terminate its previously announced merger agreement, which had been
entered into during November 1998. The Company recorded a charge of
approximately $1.1 million in the fourth quarter of 1998 for costs relating to
the terminated merger agreement (See Note 20).
13. Cumulative Effect of Change in Accounting Principle
Effective January 1, 1998, the Company adopted SOP 98-5, which requires that
pre-opening costs be expensed as incurred. In connection with such adoption,
$1.5 million of previously capitalized, unamortized pre-opening costs were
written off as of January 1, 1998 and presented in the accompanying 1998
statement of operations for fiscal year 1998 as the cumulative effect of a
change in accounting principle.
14. 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 at December 31:
<TABLE>
<CAPTION>
1996 1997 1998
----- ----- -----
<S> <C> <C> <C>
Statutory federal tax
rate................... (34.0)% (34.0)% (34.0)%
Non deductible stock
issuance costs......... 8.4 % -- % -- %
Non deductible goodwill. -- % -- % 12.4 %
Losses for which no
benefit is provided.... 25.5 % 34.6 % 21.5 %
Other................... 0.1 % (0.6)% 0.1 %
----- ----- -----
Effective tax rate...... -- % -- % -- %
===== ===== =====
</TABLE>
F-21
<PAGE>
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
An analysis of the significant components of deferred tax assets and
liabilities, consists of the following as of December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward...................... $ 4,408 $ 6,635
Deferred gain on sale and leaseback transactions..... 636 631
Debt financing recorded for books.................... 11,890 12,174
Other................................................ 1,332 6,837
Valuation allowance.................................. (2,848) (8,937)
Deferred tax liabilities:
Property and equipment, primarily due to
depreciation........................................ (3,014) (5,722)
Debt financing capitalized asset basis............... (11,363) (11,364)
Deferred operating costs............................. (702) --
Prepaid expenses..................................... (339) (254)
-------- --------
Net deferred tax asset (liability)..................... $ -- $ --
======== ========
</TABLE>
The valuation allowance for deferred tax assets as of December 31, 1997 and
1998 was $2.9 million and $8.9 million, respectively. The increase in the total
valuation allowance for the years ended December 31, 1996, 1997 and 1998 was
$617,000, $2.0 million and $6.1 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 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 approximately $300,000 of the acquired
operating loss carryforwards will be applied to reduce goodwill.
At December 31, 1998, the Company had net operating loss carryforwards of
approximately $17.6 million available to reduce future taxable income. The
carryforwards expire at various dates beginning in the year 2009 through the
year 2019. Utilization of the carryforwards is subject to certain limitations
due to the change in ownership of the Company that 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 of the approximately
$17.6 million of 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 $1.3 million as of December 31, 1998. This amount is attributable to
differences between financial and tax reporting of employee stock option
transactions.
15. Related Party Transactions
The Company leases six residences from Assisted Living Facilities, Inc. The
spouse of the Company's president owns a 25% interest in Assisted Living
Facilities, Inc. During the years ended December 31, 1996, 1997 and 1998, the
Company paid such entity aggregate lease deposits of $35,700, $31,500 and $0,
respectively, and aggregate rental payments of $912,000, $1.1 million and $1.2
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 in 1997 and $278,000 and $195,000 in rent payments in
1997 and 1998, respectively. The lease with OHP was terminated in September
1998, effective October 1, 1998.
F-22
<PAGE>
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 75% by the
president's spouse. The Company paid $480,000 and $3.8 million during the years
ended December 31, 1997 and 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 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 for such
services from SHS of $195,000 and $906,000 during the years ended December 31,
1997 and 1998, respectively, and has recorded such fees as a reduction of
construction in process.
Commencing in 1995, the Company contracted with Concepts in Community
Living, Inc. ("CCL"), directly and through its developers, 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, 1996, 1997 and 1998, the Company paid CCL for these
services fees of $623,000, $568,000 and $566,000, 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 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 16). Pursuant to the HCI acquisition
agreement, during 1998, Mr. McBride and Dr. Wilson's spouse received "earnout"
payments from the Company of $174,000 and $70,000, respectively, related to HCI
sites the Company elected to develop.
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
Notes 2 and 20). The Company, Mr. McBride, the Company's Chairman and Chief
Executive Officer, Dr. Wilson, the Company's President and Chief Operating
Officer, and Dr. Wilson's spouse each acquired interests in the joint venture
partner. During 1998, Mr. McBride owned a $400,000 or 16.6% interest, and Dr.
Wilson's spouse owned a $200,000 or 8.3% interest, in the joint venture.
During 1998 Mr. Razook, one of the Company's directors, was Managing
Director and Head of the Health Care Industry Group of Schroder & Co. Inc.
("Schroders") an investment banking firm. During 1998 Schroders served as the
initial purchaser of the Company's $75.0 million offering of 5.625% Debentures
for which Schroders received a customary commission. Also during 1998,
Schroders provided financial advisory services and delivered a fairness opinion
in connection with a proposed merger for which the Company paid Schroders a fee
of $200,000.
F-23
<PAGE>
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
16. 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. Dimitriadis resigned from the Company's Board of
Directors and Mr. 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 Number of Sales Price
Operating Leases 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 purchased 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
Leases entered into during 1998.... 2 89 5.0
--- ----- -----
Leases at December 31, 1998........ 37 1,426 $87.4
=== ===== =====
</TABLE>
The Company incurred annual lease expense of $2.1 million, $4.3 million and
$9.1 million for the years ended December 31, 1996, 1997 and 1998,
respectively, pursuant to leases with LTC (See Notes 5 and 20). The Company
recognized losses of $656,000, $1.1 million and $504,000 on these sale and
leaseback transactions for the years ended December 31, 1996, 1997 and 1998,
respectively. For the same periods, the Company deferred gains of $384,000,
$951,000 and $55,000, 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. During 1998, the Company sold and leased
back two residences for $5.0 million with annual rent payments of $447,000. As
of December 31, 1998 the Company had sold and leased back 37 residences for
$87.4 million with annual lease payments of $8.8 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 repaid all of such
mortgage financing, except for one mortgage ($2.2 million) which was converted
to a sale and leaseback financing during the year ended December 31, 1998.
Interest was paid on a monthly basis ranging from 9.9% to 10.4% per annum. The
Company incurred $158,000, $5.4 million and $180,000 in interest expense
related to these mortgage financings during the years ended 1996, 1997 and
1998, respectively.
The Company acquired Carriage House in October 1997. LTC owned 9.9% of the
outstanding common stock of Carriage House (Notes 2 and 15). 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 5.
F-24
<PAGE>
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company acquired HCI in October of 1997. LTC owned 41.2% of the
outstanding common stock in HCI (See Notes 2 and 15).
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 the consolidated balance sheet as
construction in process. During 1998 LTC Development Services, Inc. did not
provide such services, and did not receive any such fees.
During the year ended December 31, 1996 the Company entered into a $50.2
million sale and leaseback financing commitment with LTC. This commitment was
renegotiated in November 1997 committing the Company to complete sale and
leaseback transactions with LTC with respect to nine residences during 1998. In
November 1997 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 was 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). As a result of the Carriage House
acquisition in October 1997 the Company also became 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. In
addition, HCI entered into a commitment with LTC in September 1997, which was
assumed by the Company as part of the HCI acquisition, to complete $50.0
million of sale and leaseback transactions by December 1999. Pursuant to this
commitment, the Company was 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 the second quarter of 1998, the Company determined that it would not
enter into sale and leaseback arrangements with LTC to the full extent of
certain of the sale and leaseback commitments, and recorded a $1.2 million
liability for expenses expected to be incurred in connection with this
determination. In December 1998, the Company and LTC terminated the commitments
referred to above at no cost to the Company, other than approximately $200,000
of professional fees. As such, the Company reversed $1.0 million of the
previously recorded liability during the fourth quarter of 1998.
In December 1998, the Company determined that it would not utilize an
additional commitment to complete sale and leaseback transactions with LTC with
respect to nine residences which it had entered into during November 1997. As
such, the Company wrote-off $614,000 of previously capitalized deferred
financing costs relating to such commitment.
17. Stock Option Plan and Restricted Stock
The Company has two Stock Option Plans (the "Plans") which provide for the
issuance of incentive and non-qualified stock options and restricted stock. The
Plans are administered by the Compensation Committee of the Board of Directors
which set the terms and provisions of options granted under the Plans.
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.
The Amended and Restated 1994 Employee Stock Option Plan combines an
incentive and nonqualified stock option plan, a stock appreciation rights
("SAR") plan and a stock award plan (including restricted stock). The 1994 Plan
is a long-term incentive compensation plan and is designed to provide a
competitive and balanced incentive and reward program for participants.
F-25
<PAGE>
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Under the Amended and Restated 1994 Stock Option Plan (the "1994 Plan"), the
Company may grant options or award restricted stock to its employees,
consultants and other key persons 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 or amend the 1994 Plan at any time.
During the year ended December 31, 1998, the Company's board of directors
adopted The Non-Executive Employee Equity Participation Plan of Assisted Living
Concepts, Inc. (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; however,
consultants and non-executives are eligible.
In June 1998 the Company repriced 43,750 of options for eligible
participants to $16.75 per share. The Company recorded no compensation expense
as a result of the repricing.
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 1996, 1997 and 1998,
respectively: dividend yield of zero percent, expected volatility of 36.67%,
39.81% and 45.12%, respectively, risk-free interest rate has been fixed at
6.69%, 5.66% and 5.56%, respectively based on the 10-year treasury rate and
expected 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 income would have been reduced to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- --------
(in thousands except
per share data)
<S> <C> <C> <C>
Net loss as reported........................... $(1,915) $(2,479) $(20,745)
Net loss pro forma............................. (2,507) (3,928) (23,990)
Net loss per basic and diluted common share as
reported...................................... $ (0.23) $ (0.21) $ (1.27)
Pro forma net loss per basic and diluted common
share as reported............................. $ (0.30) $ (0.33) $ (1.47)
</TABLE>
Pro forma net loss reflects only options granted in 1995 through 1998.
Therefore, the full impact of calculating compensation costs for stock options
under SFAS 123 is not reflected in the pro forma net loss 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.
F-26
<PAGE>
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A summary of the status of the Company's stock options as of December 31,
1996, 1997 and 1998 and changes during the years ended on those dates is
presented below:
<TABLE>
<CAPTION>
1996 1997 1998
------------------- ------------------- -------------------
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............... 806,068 $5.43 1,105,202 $ 6.15 1,629,967 $10.82
Granted................. 563,400 8.22 940,350 15.08 674,132 15.76
Exercised............... (28,170) 4.69 (139,770) 6.05 (121,606) 6.00
Canceled................ (236,096) 8.79 (275,815) 9.53 (315,324) 15.82
--------- ----- --------- ------ --------- ------
Options at end of the
year................... 1,105,202 $6.15 1,629,967 $10.82 1,867,169 $12.07
========= ===== ========= ====== ========= ======
Options exercisable at
end of year............ 381,988 567,756 833,465
Weighted-average fair
value of options
granted during the
year................... $ 4.99 $ 9.24 $ 10.22
</TABLE>
The following table summarized information about fixed stock options
outstanding at December 31, 1998.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------- --------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Number Contractual Exercise Number Exercise
Range of Exercise Prices Outstanding Life Price Exercisable Price
- ------------------------ ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$4.63 to 5.75............ 268,701 5.03 $ 4.63 268,701 $ 4.63
$5.81 to 7.19............ 262,436 6.66 6.34 257,769 6.33
$8.12 to 9.00............ 157,376 7.51 7.44 97,295 7.42
$9.19 to 11.00........... 60,752 8.53 10.40 16,329 10.37
$11.31 to 14.13.......... 92,416 9.58 13.03 5,167 12.97
$14.16 to 15.50.......... 285,284 9.69 14.52 8,669 14.84
$15.68 to 17.07.......... 631,369 9.00 16.55 173,190 16.50
$17.12 to 18.63.......... 60,334 9.14 17.74 4,842 18.02
$18.87 to 20.50.......... 38,751 9.04 19.50 1,503 19.89
$20.75 to 22.38.......... 9,750 9.24 21.12 -- --
--------- ---- ------ ------- ------
$4.63 to $22.38.......... 1,867,169 8.10 $12.07 833,465 $ 8.32
========= ==== ====== ======= ======
</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 and $608,000 of
compensation expense with respect to such award for the years ended December
31, 1997 and 1998, respectively. The Company recorded the issuance of the
restricted stock in 1998 upon issuance (See Note 20).
F-27
<PAGE>
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
18. Non-cash Investing and Financing Activities
The following is a summary of non-cash investing and financing activities
related to acquisitions 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
======
</TABLE>
In October of 1997, the Company acquired all of the outstanding capital
stock of HCI as follows:
<TABLE>
<S> <C>
Fair value of assets acquired..................................... $11,877
Cash paid......................................................... 5,262
-------
Liabilities assumed............................................... $ 6,615
=======
</TABLE>
19. Legal Proceedings
Shareholders Litigation
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
the Company's 6.0% Debentures and 5.625% Debentures from the date of issuance
through March 31, 1999. The consolidated complaint alleges violations of the
federal securities laws and seeks unspecified damages. It also names as
additional defendants certain of the Company's directors that were not named
previously, as well as the Company's independent auditors (solely in connection
with the Company's 1998 offering of 5.625% Debentures) and the underwriters in
connection with the Company's 1997 offering of 6.0% Debentures. The Company
cannot predict the outcome of the any of the foregoing lawsuits and currently
is unable to evaluate the likelihood of its success or the range of possible
loss.
Other Litigation
In addition to the matter referred to in the immediately preceding
paragraph, 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 other suits and claims are uncertain, in the aggregate such
other suits and claims should not have a material adverse effect on the
Company's financial condition, results of operations, cash flow or liquidity.
20. Subsequent Events
Restatement of Historical Financial Statements
On February 1, 1999, the Company announced that after consultation with its
independent auditors the Company would restate its financial statements for the
fiscal quarter ended June 30, 1997, the fiscal quarter ended September 30,
1997, the fiscal year ended December 31, 1997, the fiscal quarter ended March
31, 1998,
F-28
<PAGE>
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
The restatement reduced the net income for the fiscal years ended December
31, 1996 and 1997 and for the nine months ended September 30, 1998 by $2.1
million, $6.7 million and $11.0 million, respectively. The cumulative effect of
the restatement reduced shareholders' equity by $19.7 million through September
30, 1998. As a result of the restatement, the Company reported net losses of
$1.9 million, $2.5 million and $13.3 million for the fiscal years 1996 and 1997
and the nine months ended September 30, 1998 respectively, compared to
previously reported net income of $149,000 and $4.2 million, and net loss of
$2.4 million, respectively. The Company reported net loss per diluted share of
$0.23, $0.21 and $0.84 for the fiscal years ended December 31, 1996 and 1997
and the nine months ended September 30, 1998, respectively, compared to
previously reported net income per diluted share of $0.03 and $0.34 and net
loss per diluted share of $0.14, respectively. After the restatement, the
Company's cash position as of December 31, 1996 and 1997 and as of September
30, 1998 was $2.1 million, $63.3 million and $79.6 million, respectively, as
compared to $2.1 million, $63.4 million and $79.8 million respectively, as
previously reported. As a result of the restatement, the Company's working
capital position as of December 31, 1996 and 1997 and as of September 30, 1998
was negative $27.1 million, positive $40.1 million and positive $63.0 million,
respectively, compared to previously reported working capital of negative $26.4
million, positive $41.0 million and positive $64.1 million, respectively.
The restatement resulted primarily from: (i) the earlier recognition of
certain expenses which were previously capitalized in association with the
Company's development and financing activities; (ii) a modification in how the
Company accounted for certain lease arrangements; (iii) a modification in how
the Company accounted for certain of its acquisitions and its joint venture
arrangements; (iv) the capitalization of fees received by the Company
previously recognized as either a reduction of expenses or as other income;
(v) the elimination of an impairment write-down that the Company had previously
recorded on three of its residences; (vi) elimination of certain accrued
expenses previously recorded pursuant to a change in accounting principle; and
(vii) the increase in goodwill written off in the second quarter of 1998
relating to exiting the Company's home health operation.
Termination of Merger Agreement
On February 1, 1999, the Company and ARC mutually agreed to terminate their
previously announced merger agreement, which had been entered into during
November 1998. The Company recorded a charge of approximately $1.1 million in
the fourth quarter 1998, and $200,000 in the first quarter of 1999, for
expenses relating to the terminated merger agreement.
Securityholder Litigation
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
the Company's 6.0% Debentures and 5.625% Debentures from the date of issuance
through March 31, 1999. The
F-29
<PAGE>
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
consolidated complaint alleges violations of the federal securities laws and
seeks unspecified damages. It also names as additional defendants certain of
the Company's directors that were not named previously, as well as the
Company's independent auditors (solely in connection with the Company's 1998
offering of 5.625% Debentures) and the underwriters in connection with the
Company's 1997 offering of 6.0% Debentures.
Termination of Joint Venture Agreements
On February 10, 1999, the Company announced with respect to certain joint
venture agreements that it had negotiated with the joint venture partner to
purchase, for approximately $3.8 million, all of the joint venture partner's
interests in the operation of the remaining 17 residences subject to the joint
venture agreements (See Note 2). As a result of such purchases, Mr. McBride and
Dr. Wilson's spouse received distributions of approximately $537,000 and
$269,000, respectively in 1999. The Company has no current intention of
entering into similar arrangements in the future.
Management Changes
On March 16, 1999, the Company's Board of Directors announced the
appointment of Dr. Keren Brown Wilson, a co-founder of the Company, as
President and Chief Executive Officer. The board also announced the appointment
of Leslie J. Mahon as Vice President and Chief Operating Officer and James W.
Cruckshank as Vice President and Chief Financial Officer. Pursuant to an
agreement (the "Consulting Agreement") between Mr. McBride and the Company, Mr.
McBride agreed to provide consulting services to the Company and to resign from
his position as the Company's Chief Executive Officer.
The Consulting Agreement provided for the payment to Mr. McBride a lump sum
cash termination payment of $490,000, which was reduced to $390,000 to reflect
repayment of a $100,000 bonus paid to Mr. McBride in 1998. In addition, the
Company agreed to pay Mr. McBride a lump sum cash payment of $750,000 in
consideration for Mr. McBride's agreement to forfeit his interest in 200,000
shares of restricted stock held by him and to terminate the agreement related
thereto. In addition, pursuant to the Consulting Agreement, Mr. McBride agreed
to forfeit a $4.0 million termination payment he would be entitled to receive
under certain circumstances, including upon a change of control. The Company
will record a charge of approximately $525,000 to corporate, general and
administrative expense in the first quarter of 1999 in connection with such
payments.
In March 1999, the Company entered into an amendment with Dr. Wilson to her
employment agreement to provide that the Company will employ Dr. Wilson as
President and Chief Executive Officer. In addition, the Company agreed to pay
Dr. Wilson a lump sum cash payment of $187,500 (which was reduced to $87,000 to
reflect repayment of a $100,000 bonus paid in 1998) in consideration for Dr.
Wilson's agreement to forfeit her interest in 50,000 shares of restricted stock
held by her and to terminate the restricted stock agreement related to those
shares. The Company made the cash payment and cancelled the restricted stock in
June 1999.
Write-off Related to Development Activity
As a result of a continued reduction in the Company's new residence
development activities, the Company will incur write-offs of $1.3 million and
$3.5 million relating to previously capitalized development costs during the
first quarter and second quarter of 1999 respectively.
Agreement with CCL
In June 1999 the Company entered into a new agreement with CCL pursuant to
which CCL will provide market research, demographic review and competitor
analysis in many of the Company's current and potential
F-30
<PAGE>
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
markets. The Company will pay CCL a retainer of $10,000 per month, plus fees in
excess of the retainer, if any, in connection with specific projects that the
Company authorizes under the agreement.
Amendment to Certain Loan and Lease Agreements
During the third quarter of 1999, the Company amended certain loan
agreements with one of its creditors. Pursuant to the amendment, the Company
agreed to provide $8.3 million of additional cash collateral in exchange for
the forbearance or waiver of certain possible defaults, including an amendment
to certain financial covenants. The amendment also provides for the release of
the additional collateral upon the achievement of specified performance
targets, provided that the Company is in compliance with the other terms of the
loan agreements.
During 1996 and 1997 the Company entered into 16 sale and leaseback
transactions which contained purchase options entitling the Company to purchase
the properties at fair market value at the end of initial lease terms ranging
from 14 to 15 years. As a result of the purchase options the Company accounted
for these sale and leaseback transactions using the financing method in SFAS
No. 98, Accounting for Leases. In March 1999, the Company amended these leases.
The amendments eliminated the Company's purchase option; therefore, the leases
were reclassified as operating leases at that date. As a result of the
amendments, the Company recorded (i) the disposal of net property and equipment
in the amount of $30.0 million, (ii) the extinguishment of long-term debt in
the amount of $31.5 million and (iii) a deferred gain of $1.5 million. The
deferred gain will be included in other liabilities and amortized over the
remaining initial lease term as an offset to future rent expense.
In June 1999, the Company amended all of its 37 leases with LTC. These
amendments included provisions to restructure future minimum annual rent
increases, or "rent escalators," that were not deemed to be contingent rents.
Because of the rent escalators, prior to the amendments, the Company accounted
for rent expense related to such leases on a straight-line basis. From the date
of the amendment forward, the Company will account for the amended leases on a
contractual cash payment basis and amortize the deferred rent balance at the
date of the amendment over the remaining initial term of the lease. Those
amendments also redefined the lease renewal option with respect to certain
leases and provided the lessor with the option to declare an event of default
in the event of a change of control under certain circumstances. In addition,
the amendments also provide the Company with the ability, subject to certain
conditions, to sublease or assign its leases with respect to two Washington
residences.
F-31
<PAGE>
INDEX TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Consolidated Balance Sheets, December 31, 1998 (audited) and September 30,
1999..................................................................... F-33
Consolidated Statements of Operations and Consolidated Statements of
Comprehensive Income (Loss), Three and Nine Months Ended September 30,
1998 and 1999............................................................ F-34
Consolidated Statements of Cash Flows, Nine Months Ended September 30,
1998 and 1999............................................................ F-35
Notes to Consolidated Financial Statements................................ F-36
</TABLE>
F-32
<PAGE>
ASSISTED LIVING CONCEPTS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
September 30,
December 31, 1999
1998 (unaudited)
ASSETS ------------ -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents......................... $ 55,036 $ 13,452
Restricted cash................................... -- 8,718
Marketable securities, available for sale......... 4,000 1,750
Accounts receivable, net of allowance for doubtful
accounts of $179 at 1998 and $340 at 1999........ 5,127 6,720
Prepaid expenses.................................. 992 967
Other current assets.............................. 4,472 4,935
-------- --------
Total current assets............................. 69,627 36,542
-------- --------
Property and equipment.............................. 284,754 310,419
Construction in process............................. 51,304 11,370
-------- --------
Total property and equipment...................... 336,058 321,789
Less accumulated depreciation..................... 9,133 14,615
-------- --------
Property and equipment -- net..................... 326,925 307,174
-------- --------
Goodwill............................................ 5,371 5,133
Other assets........................................ 12,746 9,944
-------- --------
Total assets..................................... $414,669 $358,793
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................. $ 1,622 $ 1,591
Construction payable.............................. 6,942 2,397
Accrued real estate taxes......................... 4,837 5,488
Other accrued expenses............................ 6,127 11,220
Other current liabilities......................... 4,857 2,343
Current portion of long-term debt................. 1,386 1,474
-------- --------
Total current liabilities......................... 25,771 24,513
-------- --------
Other non-current liabilities....................... 3,415 4,942
Long term debt...................................... 105,036 72,455
Convertible subordinated debentures................. 161,250 161,250
-------- --------
Total liabilities................................ 295,472 263,160
-------- --------
Commitments and contingencies
Shareholders' equity:
Preferred Stock, $.01 par value; 1,000,000 shares
authorized; none issued and outstanding.......... -- --
Common Stock, $.01 par value; 80,000,000 shares
authorized; issued and outstanding 17,344,143
shares and 17,120,745 in 1998 and 1999........... 173 171
Unearned compensation expense on restricted
stock............................................ (3,492) --
Additional paid-in capital........................ 148,533 144,651
Fair market value in excess of historical cost of
acquired net assets attributable to related party
transactions..................................... (239) (239)
Accumulated other comprehensive income (loss)..... -- (250)
Accumulated deficit............................... (25,778) (48,700)
-------- --------
Total shareholders' equity........................ 119,197 95,633
-------- --------
Total liabilities and shareholders' equity....... $414,669 $358,793
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-33
<PAGE>
ASSISTED LIVING CONCEPTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months
Ended September Nine Months Ended
30, September 30,
---------------- ------------------
1998 1999 1998 1999
------- ------- -------- --------
<S> <C> <C> <C> <C>
Revenues................................. $24,012 $30,398 $ 63,938 $ 85,460
Operating expenses:
Residence operating expenses........... 15,002 20,453 39,558 60,018
Corporate general and administrative... 2,436 6,057 6,049 15,400
Building rentals....................... 2,857 3,807 8,459 10,726
Building rentals to related party...... 366 300 1,146 850
Depreciation and amortization.......... 1,694 2,285 4,394 6,552
Site abandonment costs................. -- 57 1,001 4,833
Write off of impaired assets and
related expenses...................... -- -- 8,874 --
------- ------- -------- --------
Total operating expenses............. 22,355 32,959 69,481 98,379
------- ------- -------- --------
Operating income (loss).................. 1,657 (2,561) (5,543) (12,919)
------- ------- -------- --------
Other income (expense):
Interest expense....................... (3,351) (3,962) (7,358) (11,058)
Interest income........................ 1,287 308 2,887 1,320
Loss on sale or disposal of assets..... (8) -- (428) (127)
Other income (expense)................. (305) (41) (1,370) (138)
------- ------- -------- --------
Total other income (expense)......... (2,377) (3,695) (6,269) (10,003)
------- ------- -------- --------
Net loss before cumulative effect of
change in accounting principle.......... (720) (6,256) (11,812) (22,922)
Cumulative effect of change in accounting
principle............................... -- -- (1,523) --
------- ------- -------- --------
Net loss................................. $ (720) $(6,256) $(13,335) $(22,922)
======= ======= ======== ========
Basic and diluted net loss per common
share before cumulative effect of change
in accounting principle................. $ (0.04) $ (0.37) $ (0.74) $ (1.34)
Cumulative effect of change in accounting
principle............................... -- -- (0.10) --
------- ------- -------- --------
Basic and diluted net loss per common
share................................... $ (0.04) $ (0.37) $ (0.84) $ (1.34)
======= ======= ======== ========
Basic and diluted weighted average common
shares outstanding...................... 16,604 17,121 15,994 17,119
</TABLE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- ------------------
1998 1999 1998 1999
--------- ---------- -------- --------
<S> <C> <C> <C> <C>
Net loss.............................. $ (720) $ (6,256) $(13,335) $(22,922)
Other comprehensive income (loss):
Unrealized losses on investments.... -- (50) -- (250)
-------- ---------- -------- --------
Comprehensive loss.................... $ (720) $ (6,306) $(13,335) $(23,172)
======== ========== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-34
<PAGE>
ASSISTED LIVING CONCEPTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------
1998 1999
-------- --------
<S> <C> <C>
Operating activities:
Net loss.................................................. $(13,335) $(22,922)
Adjustment to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization........................... 4,394 6,552
Provision for doubtful accounts......................... -- 161
Site abandonment cost................................... 1,001 4,833
Write-off of impaired assets and related expenses....... 8,874 --
Loss on sale or disposal of assets...................... 428 127
Cumulative effect of change in accounting principle..... 1,523 --
Compensation expense earned on restricted stock......... 456 204
Changes in assets and liabilities, excluding effects of
acquisitions:
Accounts receivable..................................... (2,911) (1,754)
Prepaid expenses........................................ -- 25
Other current assets.................................... (4,115) (463)
Other assets............................................ 10 2,247
Accounts payable and accrued expenses................... 9,543 3,199
Non-current liabilities................................. 730 1,527
-------- --------
Net cash provided by (used in) operating activities....... 6,598 (6,264)
-------- --------
Investing activities:
Sale (purchase) of marketable securities, available for
sale..................................................... -- 2,000
Restricted cash........................................... -- (8,718)
Funds held in trust....................................... 1,956 --
Acquisitions, net of cash and debt acquired............... (8,373) --
Proceeds from sale of land and residences................. 8,293 19
Purchases of property and equipment....................... (97,706) (27,020)
-------- --------
Net cash used in investing activities..................... (95,830) (33,719)
-------- --------
Financing activities:
Debt issuance costs....................................... (3,161) --
Proceeds from long-term debt.............................. 40,306 --
Payments on long-term debt................................ (150) (1,005)
Proceeds from issuance of common stock.................... 641 154
Proceeds from issuance of convertible subordinated
debentures............................................... 75,000 --
Purchase of common stock.................................. (7,062) --
Retirement of restricted stock............................ -- (750)
-------- --------
Net cash provided by (used in) financing activities....... 105,574 (1,601)
-------- --------
Net increase (decrease) in cash and cash equivalents...... 16,342 (41,584)
Cash and cash equivalents, beginning of period............ 63,269 55,036
-------- --------
Cash and cash equivalents, end of period.................. $ 79,611 $ 13,452
======== ========
Supplemental disclosure of cash flow information:
Cash payments for interest.............................. $ 5,527 $ 8,141
Cash payments for income taxes.......................... $ 1,438 $ --
Unrealized loss on marketable securities................ $ -- $ (250)
Conversion of construction financing to sale-leaseback.. $ 2,150 $ --
Extinguishment of long term debt from lease amendments.. $ -- $ 31,488
Disposal of property, plant and equipment from lease
amendments............................................. $ -- $ 30,933
Increase (decrease) in construction payable and property
and equipment.......................................... $(12,043) $ (4,545)
Retirement of restricted stock.......................... $ -- $ 4,038
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-35
<PAGE>
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Nature of Business and Summary of Significant Accounting Policies
Assisted Living Concepts, Inc. (the "Company") owns, operates and develops
assisted living residences which provide housing and services to older persons
who need help with the activities of daily living such as bathing and dressing.
The Company provides personal care and support services and makes available
routine health care services, which are designed to meet the needs of our
residents.
Basis of Presentation and Principles of Consolidation
These consolidated financial statements have been prepared without being
audited, as allowed by the rules and regulations of the Securities and Exchange
Commission. The accompanying consolidated financial statements include our
accounts and our wholly owned subsidiaries that manage, own, and develop
assisted living residences. All significant intercompany accounts and
transactions have been eliminated in the consolidation. Certain information and
footnote disclosures that are normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted as allowed by rules and regulations of the Securities and
Exchange Commission. These consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and notes
included in the Company's annual report on Form 10-K for the year ended
December 31, 1998.
The financial information included in these financial statements contain all
adjustments (which consist of normal recurring adjustments, with the exception
in 1999 of site abandonment costs, purchase of restricted stock and severance
costs associated with the termination of certain employment agreements and in
1998 of site abandonment costs and the write-off of impaired assets and related
expenses) which are, in the opinion of our management, necessary for a fair
presentation of results for the quarterly periods. The results of operations
for the three and nine month periods ended September 30, 1999 do not
necessarily indicate the results that are expected for the full year.
2. Restricted Cash
During the three months ended September 30, 1999, the Company restricted
$8.7 million of cash balances in accordance with certain loan and lease
agreements (see Notes 5 and 6).
3. Marketable Securities
Marketable securities consist of U.S. Treasury securities and other highly
liquid marketable debt securities. The aggregate market value of securities
held at September 30, 1999 was $1.8 million. These investments which have a
historical cost of $2.0 million have been classified as available for sale in
accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." As a
result, unrealized investment losses of $250,000 are included as a component of
comprehensive income and shareholders' equity at September 30, 1999.
F-36
<PAGE>
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Property and Equipment
The Company's property and equipment, stated at cost, consists of the
following (in thousands):
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ -------------
<S> <C> <C>
Land............................................ $ 18,217 $ 20,550
Buildings and improvements...................... 256,904 275,818
Equipment....................................... 2,865 5,752
Furniture....................................... 6,768 8,299
-------- --------
Sub-total..................................... 284,754 310,419
Construction in process......................... 51,304 11,370
-------- --------
Total property and equipment.................... 336,058 321,789
Less accumulated depreciation................... 9,133 14,615
-------- --------
Property and equipment, net..................... $326,925 $307,174
======== ========
</TABLE>
During the three and nine months ended September 30, 1999, the Company
capitalized interest costs of $258,000 and $1.9 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 $156,000 and $569,000 for the three and nine months ended
September 30, 1999, respectively.
As a result of the continued reduction in the Company's development
activities, the Company wrote-off $4.8 million of capitalized costs during the
nine months ended September 30, 1999 relating to the abandonment of certain
development sites and other related development costs. As of September 30,
1999, construction in process included only costs related to four residences
currently being constructed. Construction in process includes 2 residences (78
units) ($6.0 million) that have received a certificate of occupancy, but are
pending licensure, and 2 residences (78 units) ($5.4 million) that are under
construction.
The Company had certificates of occupancy for 183 residences, 181 of which
are included in the Company's operating results for the nine months ended
September 30, 1999 as compared to 170 residences with certificates of
occupancy, 154 of which were in operating results as of September 30, 1998.
During 1996 and 1997 the Company entered into 16 sale and leaseback
transactions which contained purchase options entitling the Company to purchase
the residences at fair market value at the end of the initial lease terms
ranging from 14 to 15 years. As a result of the purchase options, the Company
accounted for these sale and leaseback transactions using the finance method in
Statement of Accounting Standards No. 98, Accounting for Leases. In March 1999,
the Company amended these leases. The amendments eliminated the Company's
purchase option; therefore the leases are accounted for as operating leases. As
a result, the Company recorded (i) the disposal of net property, plant and
equipment in the amount of $30.9 million, (ii) the extinguishment of long-term
debt in the amount of $31.5 million, and (iii) a deferred gain of $1.5 million.
The deferred gain is included in other liabilities and is being amortized over
the remaining initial lease term as an offset to future reported rent expense.
F-37
<PAGE>
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Leases
A summary of leases that the Company has entered into since its inception is
as follows:
<TABLE>
<CAPTION>
Number of Sale Units
Number of and Leaseback Number of Sale Under
Leased Residences Total and Leaseback Units Leases
Residences Accounted for Number of Residences 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
Leases entered into
during 1998............ -- 4 4 -- 139 --
Lease unit expansion
during 1998............ -- -- -- -- 47 10
Leases terminated during
1998................... (1) -- (1) -- (45) --
---- ----- ---- ----- ----- -----
Leases at December 31,
1998................... 6 48 54 16 2,047 573
Lease unit expansion
during 1999............ -- -- -- -- 13 --
Leases with changed
terms during 1999...... -- 16 16 (16) 573 (573)
---- ----- ---- ----- ----- -----
Leases at September 30,
1999................... 6 64 70 -- 2,633 --
==== ===== ==== ===== ===== =====
</TABLE>
In March 1999, the Company amended 16 leases, resulting in the
reclassification of such leases from financings to operating leases (see Note
4).
In June 1999, the Company amended all of its 37 leases with LTC Properties,
Inc. ("LTC"). These amendments included provisions to eliminate future minimum
annual rent increases, or "rent escalators," that were not deemed to be
contingent rents. Because of the rent escalators, prior to the amendments, the
Company accounted for rent expense related to such leases on a straight-line
basis. From the date of the amendment forward, the Company will account for the
amended leases on a contractual cash payment basis and amortize the deferred
rent balance as of the date of the amendment over the remaining initial term of
the lease. Those amendments also redefined the lease renewal option with
respect to certain leases and provided the lessor with the option to declare an
event of default in the event of a change of control under certain
circumstances. In addition, the amendments also provide the Company with the
ability, subject to certain conditions, to sublease or assign its leases with
respect to two Washington residences.
During the third quarter of 1999, the Company agreed to provide $418,000 of
additional cash collateral pursuant to certain lease agreements with one of its
lessors. The Company restricted $418,000 of cash balances as a result of such
action (see Note 2).
F-38
<PAGE>
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Loan Amendments
During the third quarter of 1999, the Company amended certain loan
agreements with one of its creditors. Pursuant to the amendment, the Company
agreed to provide $8.3 million of additional cash collateral in exchange for
the waiver of certain possible defaults, including an amendment to certain
financial covenants. In August 1999, the Company restricted $8.3 million of
cash balances as a result of such amendment. The amendment also provides for
the release of the additional collateral upon the achievement of specified
performance targets, provided the Company is in compliance with other terms of
the loan agreements (see Note 2).
7. Securityholder Litigation
Securityholder Litigation
In early 1999, 12 complaints were 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 and an amendment was subsequently filed on October 20,
1999. The amended consolidated complaint purports to be brought on behalf of a
class of purchasers of the Company's common stock from February 6, 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 dates of issuance through March 31,
1999. The amended consolidated complaint alleges violations of the federal
securities laws and seeks unspecified damages. It names as additional
defendants the Company's independent auditors in connection with the Company's
Common stock and Debentures offerings and the underwriters in connection with
the Company's 1997 offering of the 6.0% Debentures. The Company cannot predict
the outcome of the foregoing litigation and currently is unable to evaluate the
likelihood of success or the range of possible loss.
F-39
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
No dealer, salesperson or other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus and, if given or made, such information or representations in
connection with this offering must not be relied upon as having been
authorized by the Company or by any Selling Stockholder. This Prospectus does
not constitute an offer to sell or a solicitation of an offer to buy any of
the securities offered hereby by anyone in any jurisdiction in which such
offer or solicitation is not authorized or in which the person making such
offer or solicitation is not qualified to do so or to any person to whom it is
unlawful to make such offer or solicitation. Neither the delivery of this
Prospectus nor any sale made hereunder shall, under any circumstances, create
an implication that the information contained herein is correct as of any time
subsequent to the date of this Prospectus.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Available Information.................................................... 2
Prospectus Summary....................................................... 3
Use of Proceeds.......................................................... 8
Price Range of Common Stock.............................................. 9
Dividend Policy.......................................................... 9
Capitalization........................................................... 10
Risk Factors............................................................. 11
Selected Financial and Other Data........................................ 21
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 23
Business................................................................. 40
Management............................................................... 53
Executive Compensation................................................... 56
Security Ownership of Certain Beneficial Owners and Management........... 63
Description of Debentures................................................ 64
Description of Capital Stock............................................. 73
Shares Eligible for Future Sale.......................................... 77
Certain Federal Income Tax Considerations................................ 78
Certain Relationships and Related Transactions........................... 84
Selling Debentureholders................................................. 86
Plan of Distribution..................................................... 87
Legal Matters............................................................ 88
Experts.................................................................. 88
Financial Statements..................................................... F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
$75,000,000
5.625% Convertible Subordinated
Debentures Due 2003
2,864,344 Shares
Common Stock
ASSISTED LIVING
CONCEPTS, INC.
----------------
PROSPECTUS
----------------
December , 1999
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth the fees and expenses in connection with the
issuance and distribution of the securities being registered hereunder. Except
for the SEC registration fee and AMEX filing fee, all amounts are estimates.
<TABLE>
<S> <C>
SEC Registration Fee............................................... $ 22,125
AMEX Filing Fee.................................................... 25,000
Printing Expenses.................................................. 30,000
Legal Fees and Expenses............................................ 70,000
Accounting Fees and Expenses....................................... 50,000
Registrar and Transfer Agent Fees and Expenses..................... 17,500
Miscellaneous Expenses............................................. 15,375
--------
Total............................................................ $230,000
========
</TABLE>
All of the costs identified above will be paid by the Company.
Item 14. Indemnification of Directors and Officers.
Pursuant to the Company's Articles of Incorporation and the Nevada General
Corporation Laws a director or officer of the Company shall not be personally
liable to the Company or its stockholders for damages for any breach of
fiduciary duty as a director or officer, except for liability for (i) acts or
omissions which involve intentional misconduct, fraud or a knowing violation of
law, or (ii) the payment of distributions in violation of Nevada Revised
Statutes 78.300. In addition and under certain circumstances, Nevada Revised
Statutes 78.751 and the Company's By-Laws, provide for the indemnification of
the Company's officers, directors, employees, and agents against liabilities
which they may incur in such capacities. A summary of the circumstances in
which such indemnification is provided for is contained herein, but that
description is qualified in its entirety by reference to the Nevada Revised
Statutes and the Company's By-Laws.
In general, any officer, director, employee or agent shall be indemnified
against expenses including attorneys' fees, fines, settlements, or judgments
which were actually and reasonably incurred in connection with a legal
proceeding, other than one brought by or on behalf of the Company, to which he
was a party as a result of such relationship, if he acted in good faith, and in
the manner he believed to be in or not opposed to the Company's best interest
and, with respect to any criminal action or proceeding, had no reasonable cause
to believe his conduct was unlawful. If the action or suit is brought by or on
behalf of the Company, the person to be indemnified must have acted in good
faith and in a manner he reasonably believed to be in or not opposed to the
Company's best interest. No indemnification will be made in respect of any
claim, issue or matter as to which such person shall have been adjudged by a
court of competent jurisdiction, after exhaustion of all appeals therefrom, to
be liable to the Company or for amounts paid in settlement to the Company,
unless and only to the extent that the court in which the action or suit was
brought or other court of competent jurisdiction, determines upon application
that in view of all the circumstances of the case, the person is fairly and
reasonably entitled to indemnity for such expenses which such court shall deem
proper.
Any indemnification under the previous paragraphs, unless ordered by a court
or advanced as provided in the succeeding paragraph, must be made by the
Company only as authorized in the specific case upon a determination that
indemnification of the director, officer, employee or agent is proper in the
circumstances. The determination must be made (i) by the stockholders, (ii) by
the Board of Directors by a majority vote of a quorum consisting of directors
who were not parties to the act, suit or proceeding, (iii) if a majority vote
of a quorum of directors who were not parties to the act, suit or proceeding so
orders, by independent legal counsel in a written opinion or (iv) if a quorum
consisting of directors who were not parties to the act, suit or
II-1
<PAGE>
proceeding cannot be obtained, by independent legal counsel in a written
opinion. To the extent that a director, officer, employee or agent of the
Company has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in the previous paragraph, or in defense
of any claim, issue or matter therein, he must be indemnified by the Company
against expenses, including attorneys' fees, actually and reasonably incurred
by him in connection with the defense.
Expenses incurred by an officer or director in defending a civil or criminal
action, suit or proceeding must be paid by the Company as they are incurred and
in advance of the final disposition of the action, suit or proceeding, upon
receipt of an undertaking by or on behalf of the director or officer to repay
the amount if it is ultimately determined by a court of competent jurisdiction
that he is not entitled to be indemnified by the Company as authorized by the
By-Laws. Such expenses incurred by other employees and agents may be so paid
upon such terms and conditions, if any, as the Board of Directors deems
appropriate.
The indemnification and advancement of expenses authorized in or ordered by
a court as provided in the foregoing paragraphs does not exclude any other
rights to which a person seeking indemnification or advancement of expenses may
be entitled under the Articles of Incorporation or any bylaw, agreement, vote
of stockholders or disinterested directors or otherwise, for either an action
in his official capacity or an action in another capacity while holding his
office, except that indemnification, unless ordered by a court as described in
the third preceding paragraph or for advancement of expenses made as described
in the next preceding paragraph, may not be made to or on behalf of any
director or officer if a final adjudication establishes that his acts or
omissions involved intentional misconduct, fraud or a knowing violation of the
law and was material to the cause of action. If a claim for indemnification or
payment of expenses under the Company's By-Laws is not paid in full within
ninety (90) days after a written claim therefor has been received by the
Company, the claimant may file suit to recover the unpaid amount of such claim,
and if successful in whole or in part, shall be entitled to be paid the expense
of prosecuting such claim. In any such action, the Company shall have the
burden of proving that the claimant was not entitled to the requested
indemnification or payment of expenses under applicable law.
The Board of Directors may authorize, by a vote of a majority of a quorum of
the Board of Directors, the Company to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of
the Company, or is or was serving at the request of the Company as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise against any liability asserted against him and
incurred by him in any such capacity, or arising out of his status as such,
whether or not the Company would have the power to indemnify him against such
liability under the provisions of the By-Laws. The Board of Directors may
authorize the Company to enter into a contract with any person who is or was a
director, officer, employee or agent of the Company or is or was serving at the
request of the Company as a director, officer, employee or agent of another
partnership, joint venture, trust or other enterprise providing for
indemnification rights equivalent to or, if the Board of Directors so
determines, greater than those provided for in the By-Laws.
The Company has also purchased insurance for its directors and officers for
certain losses arising from claims or charges made against them in their
capacities as directors and officers of the Company. In addition, the Company
has entered into agreements with certain present and former officers and
directors pursuant to which the Company will indemnify such officers and
directors from losses incurred in connection with their service to the Company,
to the maximum extent permissible by applicable law.
Item 15. Recent Sale of Unregistered Securities.
We issued 337,449 shares of common stock on October 31, 1997 to certain
selling stockholders in connection with our acquisition of Carriage House, Inc.
II-2
<PAGE>
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit
----------- ----------------------
<C> <S>
1.1 Placement Agency Agreement, dated as of April 7, 1998 by and
between the Company and Schroder & Co., Inc.*
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 April 13, 1998 by and between the Company
and Harris Trust and Savings Bank, as Trustee*
4.2 Registration Rights Agreement, dated as of April 7, 1998 by and
between the Company and Schroder & Co., Inc.*
4.3 Form of Debenture*
5.1 Opinion of Schreck Morris*
5.2 Opinion of Latham & Watkins*
10.1 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).
10.2 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).
10.3 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).
10.4 Non-Executive Employee Equity Participation Plan of the Company
(Incorporated by reference to the same titled exhibit to the
Company's Registration Statement on Form S-8, dated July 13,
1998, Registration No. 333-58953).
10.5 Deferred Compensation Plan of the Company (Incorporated by
reference to same titled exhibit to the Company's Report on Form
10-K dated September 29, 1999 File No. 001-13498).
10.6 Consulting Agreement, dated as of March 15, 1999, by and between
the Company and William McBride III (Incorporated by reference to
same titled exhibit to the Company's Report on Form 10-K dated
September 29, 1999 File No. 001-13498).
10.7 Amended and Restated Employment Agreement, dated October 1999, as
amended as of March 15, 1999, by and between the Company and
Keren Brown Wilson (Incorporated by reference to same titled
exhibit to the Company's Report on Form 10-K dated September 29,
1999 File No. 001-13498).
10.8 Employment Agreement, dated as of December 31, 1997, by and
between the Company and Sandra Campbell (Incorporated by
reference to same titled exhibit to the Company's Report on
Form 10-K dated September 29, 1999 File No. 001-13498).
10.9 Employment Agreement, dated as of February 3, 1998, by and between
the Company and Nancy Gorshe (Incorporated by reference to same
titled exhibit to the Company's Report on Form 10-K dated
September 29, 1999 File No. 001-13498).
10.10 Employment Agreement, dated as of March 15, 1999, by and between
the Company and James Cruckshank (Incorporated by reference to
same titled exhibit to the Company's Report on Form 10-K dated
September 29, 1999 File No. 001-13498).
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit
----------- ----------------------
<C> <S>
10.11 Employment Agreement, dated as of March 15, 1999, by and between
the Company and Leslie Mahon (Incorporated by reference to same
titled exhibit to the Company's Report on Form 10-K dated
September 29, 1999 File No. 001-13498).
10.12 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).
10.13 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).
10.14 Reimbursement Agreement, dated as of November 1, 1996, between the
Company and U.S. Bank of Washington, National Association.
(Incorporated by reference to the same titled exhibit to the
Company's Report on Form 10-K dated September 29, 1999 File No.
001-13498).
10.15 Reimbursement Agreement, dated as of July 1, 1997, between the
Company and United States National Bank of Oregon (Incorporated
by reference to the same titled exhibit to the Company's Report
on Form 10-K dated September 29, 1999 File No. 001-13498).
10.16 Reimbursement Agreement, dated as of July 1, 1998, between the
Company and U.S. Bank National Association (Incorporated by
reference to same titled exhibit to the Company's Report on Form
10-K dated September 29, 1999 File No. 001-13498).
10.17 Deed of Trust and Security Agreement, dated March 31, 1998, among
DMG Texas ALC, Partners, L.P., American Title Company of Houston
and Transatlantic Capital Company (Incorporated by reference to
same titled exhibit to the Company's Report on Form 10-K dated
September 29, 1999 File No. 001-13498).
10.18 Mortgage and Security Agreement, dated November 12, 1998, between
DMG New Jersey ALC, Inc. and Transatlantic Capital Company
(Incorporated by reference to same titled exhibit to the
Company's Report on Form 10-K dated September 29, 1999 File No.
001-13498).
10.19 Deed of Trust and Security Agreement, dated July 10, 1998, among
DMG Oregon ALC, Inc., Chicago Title Company and Transatlantic
Capital Company (Incorporated by reference to same titled exhibit
to the Company's Report on Form 10-K dated September 29, 1999
File No. 001-13498).
10.20 Loan Agreement, dated as of September 3, 1998, by and between MLD
Delaware Trust and the Company (Incorporated by reference to same
titled exhibit to the Company's Report on Form 10-K dated
September 29, 1999 File No. 001-13498).
10.21 Loan Agreement, dated as of September 3, 1998, by and between MLD
Delaware Trust and the Company (Incorporated by reference to same
titled exhibit to the Company's Report on Form 10-K dated
September 29, 1999 File No. 001-13498).
10.22 Amendment and Modification of Reimbursement Agreements, dated as
of August 18, 1999, by and between the Company and U.S. Bank
National Association (Incorporated by reference to same titled
exhibit to the Company's Report on Form 10-K dated September 29,
1999
File No. 001-13498).
12.1 Computation of Ratio of Earnings to Fixed Charges**
23.1 Consent of Schreck Morris*
23.2 Consent of Latham & Watkins*
23.3 Consent of KPMG LLP**
24.1 Power of Attorney*
25.1 Form T-1 Statement of Eligibility and Qualification under the
Trust Indenture Act of 1939 of the Trustee*
</TABLE>
- --------
* Filed previously as part of this Registration Statement
** Filed herewith
II-4
<PAGE>
(b) Financial Data Schedules
SCHEDULE II
ASSISTED LIVING CONCEPTS, INC.
VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1996, 1997 and 1998 and nine months ended September
30, 1999
(in thousands)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
-------- ---------- --------- ------------- ----------
Balance at Balance at
Beginning End of
Description of Period Additions Deductions(1) Period
----------- ---------- --------- ------------- ----------
<S> <C> <C> <C> <C>
Year ended December 31, 1996:
Valuation accounts deducted
from assets:
Allowance for doubtful
receivables................. $ -- $ 33(2) $ -- $ 33
---- ---- ---- ----
Year ended December 31, 1997:
Valuation accounts deducted
from assets:
Allowance for doubtful
receivables................. $ 33 $ 83(3) $ 37 $ 79
---- ---- ---- ----
Year ended December 31, 1998:
Valuation accounts deducted
from assets:
Allowance for doubtful
receivables................. $ 79 $359(2) $259 $179
---- ---- ---- ----
Nine months ended September 30,
1999:
Valuation accounts deducted
from assets:
Allowance for doubtful
receivables................. $179 $161(2) $ -- $340
---- ---- ---- ----
</TABLE>
- --------
(1) Represents amounts written off.
(2) Charged to residence operating expenses.
(3) $23,000 of additions were charged to operating expenses, $60,000 of
additions were a result of an acquisition.
II-5
<PAGE>
Item 17. Undertakings.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the Prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the Registration Statement
or any material change to such information in the Registration
Statement;
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if
the Registration Statement is on Form S-3, Form S-8 or Form F-3, and the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the registrant
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 that
are incorporated by reference in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer,
or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer of
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act of 1933 and will be governed by the final
adjudication of such issue.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned thereunto duly authorized in the City of Portland, State of Oregon
on the 7th day of December 1999.
ASSISTED LIVING CONCEPTS, INC.
/s/ Keren Brown Wilson
By: _________________________________
Keren Brown Wilson
President and Chief Executive
Officer
IN WITNESS HEREOF, each of the undersigned has executed this Power of
Attorney as of the date 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>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/ Keren Brown Wilson President and Chief December 7, 1999
____________________________________ Executive Officer
Keren Brown Wilson
/s/ James Cruckshank Vice President and Chief December 7, 1999
____________________________________ Financial Officer
James Cruckshank
/s/ M. Catherine Maloney Vice President, Controller December 7, 1999
____________________________________ and Chief Accounting
M. Catherine Maloney Officer
* Director December 7, 1999
____________________________________
Gloria Cavanaugh
* Chairman of the Board and December 7, 1999
____________________________________ Director
Richard C. Ladd
* Director December 7, 1999
____________________________________
Bradley Razook
/s/ Jill Krueger Director December 7, 1999
____________________________________
Jill Krueger
</TABLE>
<TABLE>
<S> <C>
/s/ Keren Brown Wilson
*By: _______________________________
Keren Brown Wilson
Attorney-in-Fact
</TABLE>
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------- ----------------------
<C> <S>
1.1 Placement Agency Agreement, dated as of April 7, 1998 by and between
the Company and Schroder & Co., Inc.*
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 April 13, 1998 by and between the Company and
Harris Trust and Savings Bank, as Trustee.*
4.2 Registration Rights Agreement, dated as of April 7, 1998 by and
between the Company and Schroder & Co., Inc.*
4.3 Form of Debenture*
5.1 Opinion of Schreck Morris*
5.2 Opinion of Latham & Watkins*
10.1 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).
10.2 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).
10.3 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).
10.4 Non-Executive Employee Equity Participation Plan of the Company
(Incorporated by reference to the same titled exhibit to the
Company's Registration Statement on Form S-8, dated July 13, 1998,
Registration No. 333-58953).
10.5 Deferred Compensation Plan of the Company (Incorporated by reference
to same titled exhibit to the Company's Report on Form 10-K dated
September 29, 1999 File No. 001-13498).
10.6 Consulting Agreement, dated as of March 15, 1999, by and between the
Company and William McBride III (Incorporated by reference to same
titled exhibit to the Company's Report on Form 10-K dated September
29, 1999 File No. 001-13498).
10.7 Amended and Restated Employment Agreement, dated October 1999, as
amended as of March 15, 1999, by and between the Company and Keren
Brown Wilson (Incorporated by reference to same titled exhibit to the
Company's Report on Form 10-K dated September 29, 1999
File No. 001-13498).
10.8 Employment Agreement, dated as of December 31, 1997, by and between
the Company and Sandra Campbell (Incorporated by reference to same
titled exhibit to the Company's Report on Form 10-K dated September
29, 1999 File No. 001-13498).
10.9 Employment Agreement, dated as of February 3, 1998, by and between the
Company and Nancy Gorshe (Incorporated by reference to same titled
exhibit to the Company's Report on Form 10-K dated September 29, 1999
File No. 001-13498).
10.10 Employment Agreement, dated as of March 15, 1999, by and between the
Company and James Cruckshank (Incorporated by reference to same
titled exhibit to the Company's Report on Form 10-K dated September
29, 1999 File No. 001-13498).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------- ----------------------
<C> <S>
10.11 Employment Agreement, dated as of March 15, 1999, by and between the
Company and Leslie Mahon (Incorporated by reference to same titled
exhibit to the Company's Report on Form 10-K dated September 29, 1999
File No. 001-13498).
10.12 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).
10.13 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).
10.14 Reimbursement Agreement, dated as of November 1, 1996, between the
Company and U.S. Bank of Washington, National Association.
(Incorporated by reference to the same titled exhibit to the
Company's Report on Form 10-K dated September 29, 1999 File No. 001-
13498).
10.15 Reimbursement Agreement, dated as of July 1, 1997, between the Company
and United States National Bank of Oregon (Incorporated by reference
to the same titled exhibit to the Company's Report on Form 10-K dated
September 29, 1999 File No. 001-13498).
10.16 Reimbursement Agreement, dated as of July 1, 1998, between the Company
and U.S. Bank National Association (Incorporated by reference to same
titled exhibit to the Company's Report on Form 10-K dated September
29, 1999 File No. 001-13498).
10.17 Deed of Trust and Security Agreement, dated March 31, 1998, among DMG
Texas ALC, Partners, L.P., American Title Company of Houston and
Transatlantic Capital Company (Incorporated by reference to same
titled exhibit to the Company's Report on Form 10-K dated September
29, 1999 File No. 001-13498).
10.18 Mortgage and Security Agreement, dated November 12, 1998, between DMG
New Jersey ALC, Inc. and Transatlantic Capital Company (Incorporated
by reference to same titled exhibit to the Company's Report on Form
10-K dated September 29, 1999 File No. 001-13498).
10.19 Deed of Trust and Security Agreement, dated July 10, 1998, among DMG
Oregon ALC, Inc., Chicago Title Company and Transatlantic Capital
Company (Incorporated by reference to same titled exhibit to the
Company's Report on Form 10-K dated September 29, 1999 File No. 001-
13498).
10.20 Loan Agreement, dated as of September 3, 1998, by and between MLD
Delaware Trust and the Company (Incorporated by reference to same
titled exhibit to the Company's Report on Form 10-K dated September
29, 1999 File No. 001-13498).
10.21 Loan Agreement, dated as of September 3, 1998, by and between MLD
Delaware Trust and the Company (Incorporated by reference to same
titled exhibit to the Company's Report on Form 10-K dated September
29, 1999 File No. 001-13498).
10.22 Amendment and Modification of Reimbursement Agreements, dated as of
August 18, 1999, by and between the Company and U.S. Bank National
Association (Incorporated by reference to same titled exhibit to the
Company's Report on Form 10-K dated September 29, 1999
File No. 001-13498).
12.1 Computation of Ratio of Earnings to Fixed Charges**
23.1 Consent of Schreck Morris*
23.2 Consent of Latham & Watkins*
23.3 Consent of KPMG LLP**
24.1 Power of Attorney.*
25.1 Form T-1 Statement of Eligibility and Qualification under the Trust
Indenture Act of 1939 of the Trustee.*
</TABLE>
- --------
* Filed previously as part of this Registration Statement
** Filed herewith
<PAGE>
EXHIBIT 12.1
Ratio of Earnings to Fixed Charge
<TABLE>
<CAPTION>
Eleven One Month Nine Months Ended
Months Ended Ended Years Ended December 31, September 30,
November 30, December 31, ---------------------------------- ------------------
1994 1994 1995 1996 1997 1998 1998 1999
------------ ------------ ------ ------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Income (loss) before
provision for income
taxes.................. $231 $(64) $ (575) $(1,915) $(2,479) $(19,222) $(11,812) $(22,922)
Add fixed charges
Interest costs
including
amortization of debt
issuance costs....... 297 8 96 1,146 4,946 11,039 7,358 11,058
---- ---- ------ ------- ------- -------- -------- --------
Earnings (loss) before
fixed charges.......... $528 $(56) $ (479) $ (769) $ 2,467 $ (8,183) $ (4,454) $(11,864)
==== ==== ====== ======= ======= ======== ======== ========
Fixed charges
Interest expense
including
amortization of debt
issuance costs....... 297 8 96 1,146 4,946 11,039 7,358 11,058
Capitalized interest.. -- -- 577 2,317 6,616 5,979 4,783 1,858
---- ---- ------ ------- ------- -------- -------- --------
Total fixed charges.... $297 $ 8 $ 673 $ 3,463 $11,562 $ 17,018 $ 12,141 $ 12,916
==== ==== ====== ======= ======= ======== ======== ========
Ratio of Earnings to
Fixed Charges.......... 1.78 -- -- -- 0.21 -- -- --
Deficiency of Earnings
to Cover Fixed
Charges................ $-- $ 64 $1,152 $ 4,232 $ 9,095 $ 25,201 $ 16,595 $ 24,780
</TABLE>
<PAGE>
EXHIBIT 23.3
Consent of Independent Certified Public Accountants
The Board of Directors
Assisted Living Concepts, Inc.:
The audits referred to in our report dated September 10, 1999, included the
related financial statement schedule as of December 31, 1998, and for each of
the years in the three-year period ended December 31, 1998, included in the
registration statement. This financial statement schedule is the responsibility
of the Company's management. Our responsibility is to express an opinion on
this financial statement schedule based on our audits. In our opinion, such
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
We consent to the use of our reports included herein and to the reference to
our firm under the heading "Experts" in the prospectus.
/s/ KPMG LLP
Portland, Oregon
December 7, 1999
