<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20459
----------------
FORM 10-K/A
(Mark One)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-13498
----------------
ASSISTED LIVING CONCEPTS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Nevada 93-1148702
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
</TABLE>
11835 NE Glenn Widing Dr., Building E
Portland, OR 97220-9057
(503) 252-6233
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
----------------
Securities Registered Pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Name of each exchange
Title of each class on which registered
- ------------------- -----------------------
<S> <C>
Common Stock, par value $.01 American Stock Exchange
7% Convertible Subordinate Debentures Due August 2005 American Stock Exchange
</TABLE>
Securities Registered Pursuant to Section 12(g) of the Act:
None.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for at least the past 90 days. YES [X] NO [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K: [_]
As of February 28, 1997, 5,515,250 shares of the registrant's Common Stock,
par value $.01 per share, were outstanding. The aggregate market value of the
voting stock held by non-affiliates of the registrant on such date was
approximately $89.7 million.
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<PAGE>
Explanatory Note
On February 1, 1999, Assisted Living Concepts, Inc. (the "Company")
announced that after consultation with its independent auditors the Company
would restate its consolidated financial statements for the fiscal quarter
ended June 30, 1997, the fiscal quarter ended September 30, 1997, the fiscal
year ended December 31, 1997, the fiscal quarter ended March 31, 1998, the
fiscal quarter ended June 30, 1998 and the fiscal quarter ended September 30,
1998. On March 31, 1999, the Company announced that the restatement would be
more extensive than the Company had previously believed, and might include
periods prior to the second quarter of 1997, including the fiscal year ended
December 31, 1996. After further consultation with its independent auditors,
the Company determined to restate its consolidated financial statements for
the fiscal year ended December 31, 1996, the fiscal year ended December 31,
1997 and the first three fiscal quarters of the fiscal year ended December 31,
1998. This amendment includes in Items 8 and 14 such restated consolidated
financial statements for the fiscal year ended December 31, 1996 and other
information relating to such restated consolidated financial statements,
including Selected Financial Data (Item 6) and Management's Discussion and
Analysis of Financial Condition and Results of Operations (Item 7).
Information regarding the effect of the restatement on the Company's results
of operations for the fiscal year ended December 31, 1996 is provided in Item
7 of this amendment and in Note 16 to the consolidated financial statements
included in Item 14 of this amendment.
Since February 1, 1999 12 separate complaints, which have since been
consolidated into one action, have been filed against the Company and certain
of its officers and directors in the United States District Court for the
District of Oregon. On July 23, 1999, a consolidated complaint was filed in
connection with this litigation. The consolidated complaint purports to be
brought on behalf of a class of purchasers of the Company's common stock from
July 28, 1997 through March 31, 1999 and on behalf of a class of purchasers of
its 6.0% Convertible Subordinated Debentures (the "6.0% Debentures") and
5.625% Convertible Subordinated Debentures (the "5.625% Debentures" and,
together with the 6.0% Debentures, the "Debentures") from the date of issuance
through March 31, 1999. The consolidated complaint alleges violations of the
federal securities laws and seeks unspecified damages. It also names as
additional defendants certain of the Company's directors that were not named
previously, as well as the Company's independent auditors (solely in
connection with the Company's 1998 offering of 5.625% Debentures) and the
underwriters in connection with the Company's 1997 offering of 6.0%
Debentures.
Except for Items 6, 7, 8 and 14, no other information included in the
Company's Annual Report on Form 10-K is amended by this amendment. For
additional information regarding the restatement, please see the Company's
reports on Form 8-K filed on February 1, 1999 and March 31, 1999. For
additional information regarding the litigation described in the preceding
paragraph, please see the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1998. For current information regarding risks,
uncertainties and other factors that may affect the Company's future
performance, please see the "Risk Factors" included in Item 7 of the Company's
Annual Report on Form 10-K for the year ended December 31, 1998.
2
<PAGE>
PART II
ITEM 6. Selected Financial Data
The following table presents selected historical condensed financial data
for the Company and the Predecessor as of the dates and for the periods
indicated. The Predecessor consisted of Assisted Living Facilities, Inc., an
S-corporation; Madras Elder Care, a partnership; and Lincoln City Partners, a
partnership, which, prior to December 1, 1994, collectively owned the five
residences operated by the Company commencing in December 1994. The selected
financial data below should be read in conjunction with the consolidated
financial statements of the Predecessor and the Company, including the notes
thereto, and the information in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" on page 4.
<TABLE>
<CAPTION>
Predecessor The Company
-------------------------- --------------------------------------
Year ended
December 31, Eleven One Year ended December 31,
------------- Months Ended Month Ended -------------------------
November 30, December 31, 1996
1992 1993 1994 1994(1) 1995 (As Restated)(2)
------ ------ ------------ ------------ ------- ----------------
(in thousands except per share data)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Revenues................ $1,377 $1,884 $1,841 $ 212 $ 4,067 $ 21,022
Operating expenses:
Residence operating
expenses............. 908 1,090 1,127 125 2,779 14,055
Management fees from
related party........ 69 92 93 -- -- --
Corporate general and
administrative....... -- -- -- 152 1,252 1,864
Building rentals...... -- -- -- 42 798 3,949
Depreciation and
amortization......... 93 132 105 13 296 1,094
------ ------ ------ ------- ------- --------
Total operating
expenses........... 1,070 1,314 1,325 332 5,125 20,962
------ ------ ------ ------- ------- --------
Operating income
(loss)................. 307 570 516 (120) (1,058) 60
Other (income) expense.. 247 309 285 (56) (483) 1,975
------ ------ ------ ------- ------- --------
Net income (loss)....... $ 60 $ 261 $ 231 $ (64) $ (575) $ (1,915)
====== ====== ====== ======= ======= ========
Unaudited pro forma
data:
Net income (loss)....... $ 60 $ 261 $ 231
Pro forma provision for
income taxes(3)........ -- 67 85
------ ------ ------
Pro forma net income
(loss)................. $ 60 $ 194 $ 146
====== ====== ======
Net loss per share...... $ (0.02) $ (0.19) $ (0.46)
Weighted average common
shares outstanding..... 3,000 3,000 4,202
<CAPTION>
Predecessor The Company
-------------------------- --------------------------------------
At
December 31, At December 31,
------------- At --------------------------------------
November 30, 1996 (As
1992 1993 1994 1994 1995 Restated)(2)
------ ------ ------------ ------------ ------- ----------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Balance
Sheet data:
Working capital......... $ 109 $ 351 $ 299 $13,122 $(5,320) $(27,141)
Total assets............ 3,965 4,110 5,699 17,903 53,546 147,223
Long-term debt,
excluding current
portion................ 3,703 3,700 5,266 1,101 24,553 49,663
Shareholders' equity.... 105 263 197 16,219 15,644 56,995
</TABLE>
- --------
(1) The Company commenced operating the residences on December 1, 1994.
(2) The financial data as of and for the year ended December 31, 1996 have
been restated as described in Item 7 and Note 16 to the Consolidated
Financial Statements.
(3) The Predecessor was exempt from U.S. federal and state income taxes as a
result of its partnership and subchapter S status. The financial data
reflects the income tax expenses that would have been recorded had the
Predecessor not been exempt from paying such income taxes. The pro forma
financial data included the effect of the Company adopting Statement of
Financial Accounting Standards (SFAS) No. 109.
3
<PAGE>
Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
1996 Quarterly Financial Data As
1995 Quarterly Financial Data Restated(1)
--------------------------------------- ---------------------------------------
1st 2nd 3rd 4th Year to 1st 2nd 3rd 4th Year to
Qtr Qtr Qtr Qtr Date Qtr Qtr Qtr Qtr Date
------ ------ ------ ------ ------- ------ ------ ------ ------ -------
(in thousands except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Results of Operation
Revenue................. $ 682 $ 793 $ 977 $1,615 $4,067 $2,789 $4,396 $6,017 $7,820 $21,022
Operating income
(loss)................. (183) (149) (249) (477) (1,058) (362) (140) 125 437 60
Net income (loss)....... (27) (45) (160) (343) (575) (605) (669) (601) (40) (1,915)
Net income (loss) per
share(2)............... $(0.01) $(0.02) $(0.05) $(0.11) $(0.19) $(0.20) $(0.22) $(0.11) $(0.01) $ (0.46)
Weighted average Common
shares outstanding..... 3,000 3,000 3,000 3,000 3,000 3,005 3,013 5,265 5,515 4,202
</TABLE>
- --------
(1) The financial data as of and for the year ended December 31, 1996 have
been restated as described in Item 7 and Note 16 to the Consolidated
Financial Statements.
(2) Quarter net loss per share amounts do not add to the full year total due
to rounding and change in the number of shares outstanding.
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Predecessor
The historical financial statements for the eleven months ended November
30, 1994 and years ended December 31, 1993 and 1992 represent the combined
historical results of operations and financial condition of the Predecessor.
The Predecessor consists of the entities which, prior to December 1, 1994,
owned and operated residences now operated by the Company.
Restatement
On February 1, 1999, the Company announced that after consultation with its
independent auditors the Company would restate its consolidated financial
statements for the fiscal quarter ended June 30, 1997, the fiscal quarter
ended September 30, 1997, the fiscal year ended December 31, 1997, the fiscal
quarter ended March 31, 1998, the fiscal quarter ended June 30, 1998 and the
fiscal quarter ended September 30, 1998. On March 31, 1999 the Company
announced that the restatement would be more extensive than the Company had
previously believed, and might include periods prior to the second quarter of
1997, including the fiscal year ended December 31, 1996. After further
consultation with its independent auditors, the Company determined to restate
its consolidated financial statements for the fiscal year ended December 31,
1996, the fiscal year ended December 31, 1997 and the first three fiscal
quarters of the fiscal year ended December 31, 1998.
The restatement reduced both net income and total shareholders' equity by
$2.1 million for fiscal year 1996. As a result of the restatement, the Company
reported a net loss of $1.9 million or $0.46 per share for fiscal year 1996
compared to net income of $149,000 or $0.03 per share as previously reported.
The restatement related to changes in non-cash items, and did not affect the
Company's cash position as of December 31, 1996. After the restatement, the
Company's working capital position as of December 31, 1996 was a deficit of
$27.1 million, compared to previously reported working capital deficit of
$26.4 million.
The restatement of the financial data included in this report resulted
primarily from: (i) the earlier recognition of certain expenses which were
previously capitalized in association with the Company's development and
financing activities; and (ii) a modification in how the Company accounted for
certain of its lease arrangements.
For statement of operations and balance sheet data, as originally reported
and as restated as of and for the year ended December 31, 1996, as well as a
description of the adjustments to the originally reported data resulting from
the restatement, see Note 16 to the consolidated financial statements included
in Item 14 of this report.
4
<PAGE>
Overview
At the closing of the initial public offering in November, 1994, the
Company began operating five assisted living residences located in Oregon. As
of December 31, 1996, the Company had received a Certificate of Occupancy on
67 residences (2,394 units), of which 60 residences (2,139 units) were
included in operating results.
The Company derives its revenues primarily from resident fees for the
delivery of assisted living services. Resident fees typically are paid monthly
by residents, their families, state Medicaid agencies or other responsible
parties. Resident fees include revenue derived from a multi-tiered rate
structure, which varies based on the level of care required. Resident fees are
recognized as revenues when services are provided. Operating expenses include
(i) residence operating expenses, such as staff payroll, food, property taxes,
utilities, insurance and other direct residence operating expenses, (ii)
general and administrative expenses consisting of corporate and support
function such as legal, accounting and other administrative expenses, (iii)
building rentals and (iv) depreciation and amortization. Operating expenses of
the predecessor include costs incurred under management agreements whereby a
management fee equal to 5% of revenue was charged by Concepts in Community
Living, Inc. ("CCL Sub Inc.") for residence management and administrative
support.
The Company previously capitalized the operating results of certain start-
up residences for approximately the first two months of operations. As a
result of the restatement, residences are included in operating results as of
the first day of the month following licensure. Accordingly, the number of
Stabilized, Start-up and Same Store Residences (as defined in the tables
below) at the beginning of each period, and the operating results of
stabilized and start-up residences in each period, have been restated. See
footnote (A) to Note 16 of the consolidated financial statements included in
Item 14.
The following table sets forth, for periods presented, the number of total
residences and units included in operating results, average occupancy rates
and the sources of revenue for the Company and the Predecessor. The portion of
revenues received from state Medicaid agencies are labeled as "Medicaid State
Portion" while the portion of the Company's revenues that a Medicaid-eligible
resident must pay out of his or her own resources is labeled "Medicaid
Resident Portion".
<TABLE>
<CAPTION>
Predecessor The Company
------------- ---------------------------------
Year Ended December
Eleven months One month 31,
ended ended --------------------
November 30, December 31, 1996
Total Residences 1994 1994 1995 (As Restated)
---------------- ------------- ------------ ----- -------------
<S> <C> <C> <C> <C>
Residences operated (end of
period)................... 5 5 19 60
Units operated (end of
period)................... 137 137 595 2,139
Average occupancy rate..... 96.4% 97.0% 82.3% 76.7%
Source of revenue:
Medicaid State Portion... 29.0% 27.0% 21.4% 12.4%
Medicaid Resident
Portion................. 13.0% 11.9% 9.6% 6.9%
Private.................. 58.0% 61.1% 69.0% 80.7%
----- ----- ----- -----
Total.................. 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
</TABLE>
5
<PAGE>
The following table sets forth, for the periods presented for Stabilized
Residences, the total number of residences and units included in operating
results, average occupancy rates and the sources of revenue for the Company
and the Predecessor. Stabilized Residences are defined as those residences
which were operating for more than nine 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>
Predecessor The Company
------------- ---------------------------------
Year Ended December
Eleven months One month 31,
ended ended --------------------
November 30, December 31, 1996
Stabilized Residences 1994 1994 1995 (As Restated)
--------------------- ------------- ------------ ----- -------------
<S> <C> <C> <C> <C>
Residences operated (end of
period)................... 4 4 5 7
Units operated (end of
period)................... 104 104 137 204
Average occupancy rate..... 99.2% 100.0% 99.1% 96.5%
Source of Revenue
Medicaid State Portion... 28.9% 28.4% 23.9% 19.9%
Medicaid Resident
Portion................. 13.2% 12.1% 11.3% 11.5%
Private.................. 57.9% 59.5% 64.8% 68.6%
----- ----- ----- -----
Total.................. 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
</TABLE>
The following table sets forth, for the periods presented for Start-up
Residences, the total number of residences and units included in operating
results, average occupancy rates and the sources of revenue for the Company
and the Predecessor. Start-up Residences are defined as those residences which
were operating for less than nine months prior to the beginning of the period
and had not achieved a 95% occupancy rate as of the beginning of the reporting
period.
<TABLE>
<CAPTION>
Predecessor The Company
------------- ---------------------------------
Year Ended December
Eleven months One month 31,
ended ended --------------------
November 30, December 31, 1996
Start-up Residences 1994 1994 1995 (As Restated)
------------------- ------------- ------------ ----- -------------
<S> <C> <C> <C> <C>
Residences operated (end of
period)................... 1 1 14 53
Units operated (end of
period)................... 33 33 458 1,935
Average occupancy rate..... 87.5% 87.5% 77.3% 73.0%
Source of Revenue:
Medicaid State Portion... 36.4% 21.3% 16.4% 9.8%
Medicaid Resident
Portion................. -- 10.6% 6.3% 5.3%
Private.................. 63.6% 68.1% 77.3% 84.9%
----- ----- ----- -----
Total.................. 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
</TABLE>
6
<PAGE>
The following tables relating to Stabilized Residences, Start-up Residences
and Same Store Residences exclude the effects of corporate level expenses,
including general and administrative expenses and interest expense.
The following table sets forth, for the periods presented, the results of
operations for Stabilized Residences (in thousands).
<TABLE>
<CAPTION>
Predecessor The Company
------------- ---------------------------------
Year Ended
Eleven months One month December 31,
ended ended --------------------
November 30, December 31, 1996
Stabilized Residences 1994 1994 1995 (As Restated)
--------------------- ------------- ------------ ------ -------------
<S> <C> <C> <C> <C>
Revenue.................... $1,819 $165 $2,699 $4,084
Residence operating
expenses.................. 1,073 96 1,667 2,422
------ ---- ------ ------
Residence operating
income.................. 746 69 1,032 1,662
------ ---- ------ ------
Management fees............ 90 -- -- --
Building rentals........... -- 42 500 935
Depreciation and
amortization.............. 100 4 116 138
------ ---- ------ ------
Total other operating
expenses................ 190 46 616 1,073
------ ---- ------ ------
Operating income....... 556 23 416 589
====== ==== ====== ======
</TABLE>
The following table sets forth, for the periods presented, the results of
operations for Start-up Residences (in thousands).
<TABLE>
<CAPTION>
Predecessor The Company
------------- ----------------------------------
Year Ended
Eleven months One month December 31,
ended ended ---------------------
November 30, December 31, 1996
Start-up Residences 1994 1994 1995 (As Restated)
------------------- ------------- ------------ ------ -------------
<S> <C> <C> <C> <C>
Revenue................... $ 22 $47 $1,368 $16,938
Residence operating
expenses................. 54 29 1,112 11,633
---- --- ------ -------
Residence operating
income................. (32) 18 256 5,305
---- --- ------ -------
Management fees........... 3 -- -- --
Building rentals.......... -- -- 298 3,014
Depreciation and
amortization............. 5 9 180 956
---- --- ------ -------
Total other operating
expenses............... 8 9 478 3,970
---- --- ------ -------
Operating income...... (40) 9 (222) 1,335
==== === ====== =======
</TABLE>
The following table sets forth, for the periods presented, the results of
operations for the five Same Store Residences included in operating results
for all of fiscal years 1995 and 1996. Same Store Residences are defined as
those residences which were operating throughout comparable periods (in
thousands).
<TABLE>
<CAPTION>
Year ended
December 31,
--------------------
1996
Same Store Residences 1995 (As Restated)
--------------------- ------ -------------
<S> <C> <C>
Revenue................................................. $2,699 $2,823
Residence operating expenses............................ 1,667 1,652
------ ------
Residence operating income............................ 1,032 1,171
------ ------
Management fees......................................... -- --
Building rentals........................................ 500 499
Depreciation and amortization........................... 116 115
------ ------
Total other operating expenses........................ 616 614
------ ------
Operating income.................................... 416 557
====== ======
</TABLE>
7
<PAGE>
Results of Operations
Year ended December 31, 1996 compared to year ended December 31, 1995
The Company incurred a net loss of $1.9 million, or $0.46 per share, on
revenue of $21.0 million for the year ended December 31, 1996 (the "1996
Period") as compared to a net loss of $575,000, or $0.19 per share, on
revenues of $4.1 million for the year ended December 31, 1995 (the "1995
Period").
The Company had certificates of occupancy for 67 residences, 60 of which
were included in the operating results as of the end of the 1996 Period as
compared to 25 residences with certificates of occupancy, 19 of which were
included in the operating results as of the end of the 1995 Period. Of the
residences included in the operating results as of the end of the 1996 Period,
the Company owned 26 residences and leased 34 residences (25 of which were
operating leases and nine of which were accounted for as financings) as
compared to 10 owned residences and nine leased residences (all of which were
operating leases) as of the end of the 1995 Period.
Revenue. Revenue was $21.0 million for the 1996 Period as compared to $4.1
million for the 1995 Period, an increase of $17.0 million. Of this increase,
$6.7 million or 39.6% related to the full year impact of the 14 residences
(458 units) which opened during the 1995 Period, $10.1 million or 59.8%
related to the opening of an additional 41 residences (1,544 units) during the
1996 Period, and the remaining $124,000 or 0.6% was attributable to the five
Same Store Residences (137 units).
Revenue from the Same Store Residences was $2.8 million for the 1996 Period
as compared to $2.7 million for the 1995 Period, an increase of $124,000 or
4.6%. All of the increase in revenue for Same Store Residences was
attributable to an increase in average monthly rental rate to $1,735 for the
1996 Period as compared to $1,631 per month for the 1995 Period. Average
occupancy for the Same Store Residences was 97.8% for the 1996 Period as
compared to 99.1% for the 1995 Period.
Of the $21.0 million in revenues reported for the 1996 Period, $4.1 million
or 19.4% was attributable to Stabilized Residences and $16.9 million or 80.6%
was attributable to Start-Up Residences. As of the end of the 1996 Period, the
Company had seven Stabilized Residences (204 units) with an average occupancy
of 96.5% and a total average monthly rate of $1,709 and the Company had 53
Start-Up Residences (1,935 units) with an average occupancy of 76.7% and a
total average monthly rate of $1,679.
Residence Operating Expenses. Residence operating expenses were $14.1
million for the 1996 Period as compared to $2.8 million for the 1995 Period,
an increase of $11.3 million. Of this increase, $3.9 million or 34.5% related
to the full year impact of the 14 residences (458 units) which opened during
the 1995 Period, and $7.4 million or 65.5% related to the opening of an
additional 41 residences (1,544 units) during the 1996 Period. Residence
operating expenses for the five Same Store Residences (137 units) were
relatively unchanged at $1.6 million for the 1996 Period.
Of the $14.1 million in residence operating expenses reported for the 1996
Period, $2.5 million or 17.7% was attributable to Stabilized Residences and
$11.6 million or 82.3% was attributable to Start-Up Residences.
Corporate General and Administrative. Corporate general and administrative
expenses were $1.9 million for the 1996 Period as compared to $1.3 million for
the 1995 Period. The Company's corporate general and administrative expenses
before capitalized payroll costs were $3.0 million for the 1996 Period as
compared to $1.6 million for the 1995 Period, an increase of $1.4 million.
This increase results from an additional investment in the Company's corporate
and regional infrastructure to support the development and operation of new
residences including the expansion into new states. The Company capitalized
$1.1 million of payroll costs for the 1996 Period as compared to $344,000 for
the 1995 Period resulting from an increase in development activities.
Building Rentals. Building rentals were $4.0 million for the 1996 Period as
compared to $798,000 for the 1996 Period, an increase of $3.2 million. Of this
increase, $819,000 or 25.8% related to the full year impact of
8
<PAGE>
the five leases entered into during the 1995 Period, $2.3 million or 72.6%
related to 20 leases (four of which were repurchased) entered into during the
1996 Period, and the remaining $50,000 or 1.6% was attributable to the four
leases entered into prior to the 1995 Period. As of the end of the 1996 Period
the Company had 25 operating leases as compared to nine operating leases as of
the end of the 1995 Period.
Depreciation and Amortization. Depreciation and amortization was $1.1
million for the 1996 Period as compared to $296,000 for the 1995 Period, an
increase of $798,000. Depreciation expense was $805,000 and amortization
expense was $289,000 for the 1996 Period as compared to $200,000 and $96,000,
respectively, for the 1995 Period. The increase in depreciation is the result
of the full year effect of depreciation on the 9 owned residences which
commenced operations during the 1995 Period, depreciation associated with the
26 owned residences that commenced operations during the 1996 Period, and
depreciation associated with the sale and leaseback of nine residences during
the 1996 Period which were accounted for as financings. Amortization expense
increased as a result of the amortization of additional start-up costs.
Interest Expense. Interest expense was $1.2 million for the 1996 Period as
compared to $96,000 for the 1995 Period. Gross interest expense for the 1996
Period was $3.5 million compared to $673,000 for the 1995 Period, an increase
of $2.8 million. Of the increase, $800,000 or 28.6% was attributable to the
full year effect of interest expense associated with the 7% Debentures, $1.1
million or 39.3% was related to the sale and leaseback of nine residences
during the 1996 Period which were accounted for as financings, $600,000 or
21.4% was related to the full year impact of mortgage financing on six
residences located in Oregon entered into during the 1995 Period, and the
remaining $300,000 or 10.7% was due to interest expense related to new
mortgage financing incurred during the 1996 Period. The Company capitalized
$2.3 million of interest expense for the 1996 Period compared to $577,000 for
the 1995 Period. The Company completed the sale and leaseback of nine
residences during the 1996 Period which were accounted for as financings, and
has recorded the related building rental payments as interest expense.
Interest Income. Interest income was $455,000 for the 1996 Period as
compared to $579,000 for the 1995 Period, a decrease of $124,000. The decrease
in interest income was a result of lower average cash balances during the 1996
Period.
Loss on Sale of Assets. Loss on sale of assets was $854,000 (net of an
$82,000 gain on the sale of land) for the 1996 Period as compared to $0 for
the 1995 Period. The Company incurred losses of $936,000 in connection with
nine sale and leaseback transactions entered into during the 1996 Period. The
Company entered into 19 sale and leaseback transactions (four of which were
repurchased) during the 1996 Period as compared to five during the 1995
Period.
Debenture Conversion Cost. In the third quarter of 1996, $6.1 million of
the $20.0 million of 7% Debentures were converted into 405,667 shares of the
Company's common stock. The Company incurred a charge of $426,000 during the
1996 Period in connection with the conversion.
Net Loss. As a result of the above, the Company incurred a net loss of $1.9
million or $0.46 per share for the 1996 Period, compared to a net loss of
$575,000, or $0.19 per share for the 1995 Period.
Year ended December 31, 1995 compared to One-Month Ended December 31, 1994
(and Eleven Months Ended November 30, 1994)
The Company incurred a net loss of $575,000, or $0.19 per share, on revenue
of $4.1 million for the year ended December 31, 1995 (the "1995 Period") as
compared to a net loss of $64,000, or $0.02 per share, on revenues of $212,000
for the one month ended December 31, 1994.
The Company had certificates of occupancy for 25 residences, 19 of which
were included in the operating results as of the end of the 1995 Period as
compared to five residences with certificates of occupancy, all of which were
included in the operating results as of the end of the 1994 Period. Of the
residences included in the
9
<PAGE>
operating results as of the end of the 1995 Period, the Company owned 10
residences and leased nine residences (all of which were operating leases) as
compared to one owned residence and four leased residences (all of which were
operating leases) as of the end of the 1994 Period.
Revenue. Revenue was $4.1 million for the 1995 Period as compared to
$212,000 for the one month ended December 31, 1994 and $1.8 million for the
eleven months ended November 30, 1994 for a combined total of $2.0 million, an
increase of $2.1 million. The increase was the direct result of the addition
of 14 residences (458 units) which commenced operations during the 1995
Period.
Of the $4.1 million in revenues reported for the 1995 Period, $2.7 million
or 65.8% was attributable to Stabilized Residences and $1.4 million or 34.2%
was attributable to Start-Up Residences. As of the end of the 1995 Period, the
Company had five Stabilized Residences (137 units) with an average occupancy
of 99.1% and the Company had 14 Start-Up Residences (458 units) with an
average occupancy of 85.5%.
Residence Operating Expenses. Residence operating expenses were $2.8
million for the 1995 Period as compared to $125,000 for the one month ended
December 31, 1994 and $1.1 million for the eleven months ended November 30,
1994 for a combined total of $1.2 million, an increase of $1.6 million. The
increase was the direct result of the addition of 14 residences (458 units)
which commenced operations during the 1995 Period.
Of the $2.8 million in residence operating expenses reported for the 1995
Period, $1.7 million or 60.7% was attributable to Stabilized Residences and
$1.1 million or 39.3% was attributable to Start-Up Residences.
Corporate General and Administrative. Corporate general and administrative
expenses were $1.3 million for the 1995 Period as compared to $152,000 for the
one month ended December 31, 1994. The Company's corporate general and
administrative expenses before capitalized payroll costs were $1.6 million for
the 1995 Period. This increase results from an additional investment in the
Company's corporate and regional infrastructure to support the development and
operation of new residences including the expansion into new states. The
Company capitalized $344,000 of payroll costs for the 1995 Period associated
with development activities.
Building Rentals. Building rentals were $798,000 for the 1995 Period as
compared to $42,000 for the one month ended December 31, 1994. As of the end
of the 1995 Period, the Company had nine operating leases, five of which were
entered into during the 1995 Period.
Depreciation and Amortization. Depreciation and amortization was $296,000
for the 1995 Period as compared to $13,000 for the one month ended December
31, 1994. Depreciation expense was $200,000 and amortization expense was
$96,000 for the 1995 Period. As of the end of the 1995 Period, depreciation
expense included the depreciation associated with 10 owned residences, 9 of
which commenced operations during the 1995 Period. Amortization expense
reflects the amortization of start-up costs during the 1995 Period.
Interest Expense. Interest expense was $96,000 for the 1995 Period as
compared to $8,000 for the one month ended December 31, 1994. Gross interest
expense for the 1995 Period was $673,000 which was primarily related to
interest incurred in connection with the August 1995 offering of the 7.0%
Convertible Subordinated Debentures due 2005. The Company capitalized $577,000
of interest expense for the 1995 Period.
Interest Income. Interest income was $579,000 for the 1995 Period as
compared to $64,000 for the one month ended December 31, 1994. Interest income
during the 1995 Period primarily relates to income earned on investment of
corporate cash from the proceeds of the initial public offering in 1994 and
the 7.0% Debentures in August 1995.
Net Loss. As a result of the above, the Company incurred a net loss of
$575,000 or $0.19 per share for the 1995 Period.
10
<PAGE>
Liquidity and Capital Resources
The following table sets forth certain data from the statement of cash
flows as reported originally and as restated as a result of the restatement
discussed in Note 16 to the consolidated financial statements for the year
ended December 31, 1996 (in thousands).
<TABLE>
<CAPTION>
As Previously As
Reported(1) Restated
------------- ---------
<S> <C> <C>
Net cash used in operating activities.............. $ (4,139) $ (3,094)
Net cash used in investing activities.............. (71,259) (89,299)
Net cash provided by financing activities.......... 70,168 87,163
-------- ---------
Net decrease in cash and cash equivalents........ $ (5,230) $ (5,230)
======== =========
</TABLE>
- --------
(1) Reflects certain reclassifications to conform to the presentation in the
current year's consolidated statement of cash flows.
The restatement related to changes in non-cash items, and did not affect
the Company's cash position as of December 31, 1996. After the restatement,
the Company's working capital position as of December 31, 1996 was a deficit
of $27.1 million, compared to previously reported working capital deficit of
$26.4 million. As a result of the restatement, net cash provided by operating
activities increased by $1.0 million. Net cash used in investing activities
increased by $18.0 million, and net cash provided by financing activities
increased by $17.0 million, primarily as a result of accounting for certain
sale and leaseback transactions, previously accounted for as operating leases,
as financings.
At December 31, 1996, the Company had negative working capital of $27.1
million. This is mainly due to construction draws of approximately $16.0
million and interim construction financing of $18.9 million. The Company had
$2.1 million of cash and cash equivalents as of December 31, 1996 as compared
to $7.3 million as of December 31, 1995.
Net cash used in investing activities for the year ended December 31, 1996,
totaled approximately $89.3 million which represents investments in new site
development in Oregon, Washington, Texas, Idaho, New Jersey and Ohio of
approximately $122.2 million. This amount is offset by $41.4 million received
from the sale of 15 residences in sale and leaseback transactions and funds
held in trust of $8.5 million pending licensure on five Washington residences.
Net cash provided by financing activities totaled $87.2 million during the
year ended December 31, 1996. The Company completed an additional $31.3
million in financing, including $14.4 million in mortgage financing on eight
residences (three with the State of Oregon and five with the State of
Washington) and completed nine sale and leaseback transactions accounted for
as financings resulting in proceeds of $17.0 million. In addition, the Company
completed short-term construction financing on eight residences totaling $18.9
million. In July 1996, the Company sold 2,096,250 shares of common stock at
$19.00 in a public offering realizing net proceeds of $37.3 million, after
underwriter discounts, commissions and other expenses.
As of December 31, 1996, the Company had invested excess cash balances in
short-term certificates of deposit.
ITEM 8. Financial Statements and Supplementary Data
Financial statements and supplementary data required by this Item 8 are set
forth as indicated in Item 14.
11
<PAGE>
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1 and 2. Financial Statements and Financial Statement Schedules.
The financial statements and financial statement schedules listed in the
accompanying index to financial statements and financial statement schedules
are filed as part of this Annual Report.
3. Exhibits
Those exhibits required to be filed by Item 601 of Regulation S-K are
listed on the accompanying index immediately following the signature pages and
are filed as part of this report.
12
<PAGE>
ASSISTED LIVING CONCEPTS, INC. ("The Company")
AND ASSISTED LIVING CONCEPTS GROUP ("Predecessor")
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
Page
-----
<C> <S> <C>
1. Financial Statements:
Reports of Independent Auditors................................... 14-16
Consolidated Balance Sheets of Assisted Living Concepts, Inc. as
of December 31, 1996 and 1995.................................... 17
Consolidated Statements of Operations of Assisted Living Concepts
Inc. for the years ended December 31, 1996 and 1995, and the one
month ended December 31, 1994 and Assisted Living Concepts, Group
(Predecessor) for the eleven months ended November 30, 1994...... 18
Consolidated Statements of Changes in Shareholders' Equity of
Assisted Living Concepts, Inc. for the period July 19, 1994 to
December 31, 1996................................................ 19
Statements of Changes in Partners' and Shareholders' Equity for
Assisted Living Concepts, Group (Predecessor) for the period
December 31, 1993 to November 30, 1994........................... 19
Consolidated Statements of Cash Flows of Assisted Living Concepts,
Inc. for the years ended December 31, 1996 and 1995, and the one
month ended December 31, 1994 and Assisted Living Concepts, Group
(Predecessor) for the eleven months ended November 30, 1994...... 20
Notes to Consolidated Financial Statements........................ 21
2. Financial Statement Schedules:
All schedules have been omitted since the required information is
not present or not present in amounts sufficient to require
submission of the schedules.
</TABLE>
13
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders
of Assisted Living Concepts, Inc.
We have audited the accompanying consolidated balance sheets of Assisted
Living Concepts, Inc. as of December 31, 1995 and 1996 (as restated), and the
related consolidated statements of operations, changes in shareholders'
equity, and cash flows for the years ended December 31, 1995 and 1996 (as
restated). These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these 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
statements 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. as of December 31, 1995 and 1996, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
As discussed in note 16 to the consolidated financial statements, the Company
has restated its financial statements as of and for the year ended December
31, 1996.
KPMG LLP
Portland, Oregon
February 28, 1997, Except for Notes 15 and 16
to the consolidated financial
statements, as to which the
dates are March 14, 1997
and September 10, 1999, respectively
14
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Assisted Living Concepts, Inc.
In our opinion, the accompanying combined statements of operations, of
partners' and shareholders' equity and of cash flows present fairly, in all
material respects, the results of their operations and their cash flows of
Assisted Living Concepts Group (the Predecessor), which is comprised of
Assisted Living Facilities, Inc., a subchapter S corporation, Madras Elder
Care (dba Aspen Court), a general partnership, and Lincoln City Partners, a
general partnership, for the eleven month period ended November 30, 1994, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Predecessor's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for the
opinion expressed above. We have not audited the financial statements of
Assisted Living Concepts Group for any period subsequent to November 30, 1994.
Price Waterhouse LLP
Portland, Oregon
March 17, 1995
15
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Assisted Living Concepts, Inc.
In our opinion, the accompanying statements of operations, of shareholders'
equity and of cash flows present fairly, in all material respects, the results
of operations and cash flows of Assisted Living Concepts, Inc. (the Company-
formerly Assisted Living Concepts Group), for the month ended December 31,
1994, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for the
opinion expressed above. We have not audited the financial statements of
Assisted Living Concepts, Inc. for any period subsequent to December 31, 1994.
Price Waterhouse LLP
Portland, Oregon
March 17, 1995
16
<PAGE>
ASSISTED LIVING CONCEPTS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
At December 31,
----------------------
1996
(As Restated)
1995 (Note 16)
------- -------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents............................. $ 7,335 $ 2,105
Funds held in trust (Note 3).......................... -- 8,515
Accounts receivable, net of allowance for doubtful
accounts of $0 at 1995 and $33 at 1996............... 136 730
Other current assets (Note 6)......................... 558 1,077
------- --------
Total current assets................................ 8,029 12,427
------- --------
Property and equipment (Notes 2, 5 and 7)............... 28,446 76,592
Construction in process (Note 5)........................ 13,075 53,372
------- --------
Total property and equipment.......................... 41,521 129,964
Less accumulated depreciation......................... 163 878
------- --------
Property and equipment-net............................ 41,358 129,086
------- --------
Goodwill (Note 2)....................................... 393 362
Other assets ........................................... 3,766 5,348
------- --------
Total assets........................................ $53,546 $147,223
======= ========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Accounts payable...................................... $ 998 $ 1,864
Construction payable.................................. 7,250 16,002
Accrued expenses...................................... 4,706 2,198
Other current liabilities (Note 6).................... 348 544
Construction financing with related party (Note 11)... -- 18,850
Current portion of long-term debt (Note 7)............ 47 110
------- --------
Total current liabilities........................... 13,349 39,568
------- --------
Other liabilities....................................... -- 997
Long-term debt (Note 7)................................. 4,553 35,748
Convertible subordinated debentures (Note 8)............ 20,000 13,915
------- --------
Total liabilities................................... 37,902 90,228
------- --------
Commitments and contingencies
Shareholders' equity:
Preferred Stock, $.01 par value; 1,000,000 shares
authorized; none issued or outstanding............... -- --
Common Stock, $.01 par value; 40,000,000 shares
authorized; 3,000,000 and 5,515,250 shares issued and
outstanding.......................................... 30 55
Additional paid-in capital............................ 16,492 59,733
Fair market value in excess of historical cost of
acquired net assets attributable to related party
transactions (Note 2)................................ (239) (239)
Accumulated deficit................................... (639) (2,554)
------- --------
Total shareholders' equity.......................... 15,644 56,995
------- --------
Total liabilities and shareholders' equity.......... $53,546 $147,223
======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
17
<PAGE>
ASSISTED LIVING CONCEPTS, INC. ("The Company")
AND ASSISTED LIVING CONCEPTS GROUP ("Predecessor")
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Predecessor The Company
------------------------- ---------------------
Year ended
December 31,
Eleven One month ---------------------
months ended ended 1996
November 30, December 31, (As Restated)
1994 1994 1995 (Note 16)
------------ ------------ ------ -------------
<S> <C> <C> <C> <C>
Revenues....................... $1,841 $ 212 $4,067 $21,022
Operating expenses:
Residence operating
expenses.................... 1,127 125 2,779 14,055
Management fees to related
party (Note 10)............. 93 -- -- --
Corporate general and
administrative.............. -- 152 1,252 1,864
Building rentals (Note 4).... -- 5 5 1,137
Building rentals to related
party (Notes 10 and 11)..... -- 37 793 2,812
Depreciation and amortization
(Note 5).................... 105 13 296 1,094
------ ------ ------ -------
Total operating expenses... 1,325 332 5,125 20,962
------ ------ ------ -------
Operating income (loss)........ 516 (120) (1,058) 60
------ ------ ------ -------
Other (income) expense
Interest expense (Notes 7 and
8).......................... 297 8 96 1,146
Interest (income)............ (12) (64) (579) (455)
Net loss on sale of assets
(Notes 4 and 11)............ -- -- -- 854
Debenture conversion expense
(Note 8).................... -- -- -- 426
Miscellaneous expenses....... -- -- -- 4
------ ------ ------ -------
Total other (income)
expense................... 285 (56) (483) 1,975
------ ------ ------ -------
Net income (loss).............. $ 231 $ (64) $ (575) $(1,915)
====== ====== ====== =======
Unaudited pro forma data:
Net income................... $ 231
Provision for income taxes... 85
------
Pro forma net income......... $ 146
======
Net loss per common share...... $(0.02) $(0.19) $ (0.46)
====== ====== =======
Weighted average common shares
outstanding................... 3,000 3,000 4,202
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
18
<PAGE>
ASSISTED LIVING CONCEPTS, INC. ("The Company")
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the period July 19, 1994 to December 31, 1996
(in thousands)
<TABLE>
<CAPTION>
Fair
Market
Value in
Common Stock Additional Excess of Total
-------------- Paid-In Historial Accumulated Shareholders'
Shares Amount Capital Cost Deficit Equity
------ ------ ---------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of shares to
founders............... 1,000 $10 $ 90 $ -- $ -- $ 100
Net proceeds from public
offering............... 2,000 20 16,402 -- -- 16,422
Fair market value in
excess of historical
cost of acquired net
assets attributable to
related party
transaction............ -- -- -- (239) -- (239)
Net loss................ -- -- -- -- (64) (64)
----- --- ------- ----- ------- -------
Shareholders' equity,
December 31, 1994...... 3,000 30 16,492 (239) (64) 16,219
Net loss................ -- -- -- -- (575) (575)
----- --- ------- ----- ------- -------
Shareholders' equity,
December 31, 1995...... 3,000 30 16,492 (239) (639) 15,644
Net proceeds from public
offering............... 2,096 21 37,320 -- -- 37,341
Exercise of employee
stock options.......... 14 -- 132 -- -- 132
Conversion of
subordinated
debentures............. 405 4 5,789 -- -- 5,793
Net loss (as restated).. -- -- -- -- (1,915) (1,915)
----- --- ------- ----- ------- -------
Shareholders' equity,
December 31, 1996
(as restated).......... 5,515 $55 $59,733 $(239) $(2,554) $56,995
===== === ======= ===== ======= =======
ASSISTED LIVING CONCEPTS GROUP ("Predecessor")
STATEMENTS OF CHANGES IN PARTNERS' AND SHAREHOLDERS' EQUITY FOR
ASSISTED LIVING CONCEPTS, GROUP (Predecessor)
For the period December 31, 1993 to November 30, 1994
(in thousands)
Partners' and
shareholders' equity,
December 31, 1993...... $263
Capital contributions... --
Capital distributions... (297)
Net income.............. 231
-----
Partners' and
shareholders' equity,
November 30, 1994...... $197
=====
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
19
<PAGE>
ASSISTED LIVING CONCEPTS, INC. ("The Company")
AND ASSISTED LIVING CONCEPTS GROUP ("Predecessor")
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Predecessor The Company
-------------------------- -----------------------
Year ended
December 31,
Eleven months One month -----------------------
ended ended 1996
November 30, December 31, (As Restated)
1994 1994 1995 (Note 16)
------------- ------------ -------- -------------
<S> <C> <C> <C> <C>
Operating activities:
Net income (loss).......... $ 231 $ (64) $ (575) $ (1,915)
Adjustment to reconcile net
income (loss) to net cash
provided by (used in)
operating activities:
Depreciation and
amortization............ 105 13 296 1,094
Provision for doubtful
accounts................ -- -- -- 33
Net loss on sale of
assets.................. -- -- -- 854
Changes in operating assets
and liabilities:
Accounts receivable...... (9) (58) (78) (627)
Other current assets..... (22) (307) (254) (530)
Other assets............. 31 (264) (2,828) (1,554)
Accounts payable......... 4 177 821 866
Accrued expenses......... 96 356 4,350 (2,508)
Accounts payable to
related party........... (7) -- -- --
Other current
liabilities............. (5) 38 157 196
Other liabilities........ -- -- -- 997
------- ------- -------- ---------
Net cash provided by (used
in) operating activities.. 424 (109) 1,889 (3,094)
------- ------- -------- ---------
Investing activities:
Funds held in trust........ -- -- -- (8,515)
Proceeds from sale and
leaseback transactions.... -- -- 8,067 41,385
Purchases of property and
equipment................. (1,688) (3,069) (38,651) (122,169)
------- ------- -------- ---------
Net cash used in investing
activities................ (1,688) (3,069) (30,584) (89,299)
------- ------- -------- ---------
Financing activities:
Proceeds from construction
financing................. 1,600 -- -- 18,850
Proceeds from long-term
debt...................... -- -- 3,505 31,346
Payments on long-term
debt...................... (33) (1) (18) (88)
Proceeds from issuance of
common stock, net......... -- 16,522 -- 37,473
Debt issuance costs........ -- -- (800) (418)
Proceeds from convertible
subordinated debentures... -- -- 20,000 --
Capital distributions...... (297) -- -- --
------- ------- -------- ---------
Net cash provided by
financing activities...... 1,270 16,521 22,687 87,163
------- ------- -------- ---------
Net increase (decrease) in
cash and cash
equivalents............... 6 13,343 (6,008) (5,230)
Cash and cash equivalents,
beginning of period....... 357 -- 13,343 7,335
------- ------- -------- ---------
Cash and cash equivalents,
end of period............. $ 363 $13,343 $ 7,335 $ 2,105
======= ======= ======== =========
Supplemental disclosure of
cash flow information:
Cash payments for
interest................ $ 297 $ 8 $ 154 $ 3,218
Non-cash transactions:
Increase in construction
payable and property and
equipment............... -- -- 7,250 8,752
Conversion of
subordinated
debentures.............. -- -- -- 6,085
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
20
<PAGE>
ASSISTED LIVING CONCEPTS, INC. ("The Company")
AND ASSISTED LIVING CONCEPTS GROUP ("Predecessor")
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 5, 19 and
60 residences for the one month period ended December 31, 1994 and for the
years ended 1995 and 1996, respectively. Residences are included in operating
results as of the first day of the month following licensure.
The Company was organized in July 1994 and initially capitalized through
the sale of 500,000 shares of $0.01 par value common stock for $100,000. From
July 19, 1994 to November 22, 1994, the date of its initial public offering,
the Company began to put into place the management organization to commence
operations and execute its strategy to expand the Company's business. On
September 9, 1994, the Company merged with CCL Sub, Inc., a wholly owned
subsidiary of Concepts in Community Living, Inc. Pursuant to the merger
agreement (the "Merger"), the sole shareholder of CCL Sub, Inc. exchanged its
100% interest in CCL Sub, Inc., which consisted primarily of an operating
leasehold interest in its office premises; all management agreements and all
operating systems for six operating facilities known as Juniper House,
Rackleff House, Huffman House, Brookside House, Aspen Court and Hillside
House; and all intangible assets used in connection with these facilities, for
500,000 shares of the Company's $0.01 par value common stock. The shares,
which represented a 50% interest in the Company, were valued at $100,000. Due
to their propriety nature, the assets transferred had no historical basis.
Since the Company's president was the sole shareholder of CCL Sub, Inc., the
recorded value of the assets acquired has been reduced by $100,000 which
represented the president's proportional interest in the excess of the fair
value over historical cost.
On November 22, 1994, the Company sold 2,000,000 shares of common stock at
$9.25 per share in an initial public offering realizing net proceeds of
approximately $16.4 million after underwriter discounts, commissions and other
expenses. On December 1, 1994, the Company purchased one and leased four
assisted living residences (See Note 2) from Assisted Living Concepts Group
("the Predecessor") and commenced operations.
In August 1995, the Company completed the offering of $20.0 million of 7%
Convertible Subordinated Debentures ("7% Debentures") due August, 2005
realizing net proceeds of approximately $19.2 million after discounts,
commissions and other expenses. The 7% Debentures are convertible at any time
at or prior to maturity, unless previously redeemed, at a conversion price of
$15.00 per common share, which initially equated to an aggregate of 1,333,334
shares of the Company's common stock. In September 1996, $6.1 million of the
7% Debentures were converted to 405,667 shares of the Company's common stock
which resulted in $13.9 million of 7% Debentures remaining.
In July 1996, the Company sold 2,096,250 shares of common stock at $19.00
per share in a public offering realizing net proceeds of $37.3 million, after
underwriter discounts, commissions and other expenses.
Predecessor
The Predecessor consists of the entities which, prior to December 1, 1994,
owned and operated residences which are now owned and operated by the Company.
The Predecessor developed and owned assisted living residences for senior
citizens and disabled individuals. Pursuant to purchase and lease agreements,
the Company acquired the businesses of the Predecessor. The president of the
Company owned a 30% interest in Madras Elder
21
<PAGE>
Care ("Madras"), and the president and her husband each owned a 20% interest
in Assisted Living Facilities, Inc. and jointly owned a 50% interest in Redbud
Associates which owned a 35% interest in Lincoln City Partners ("LCP") (See
Note 10).
Basis of Presentation
The financial statements as of and for the one month ended December 31,
1994, the year ended December 31, 1995 and the year ended December 31, 1996
(as restated, See Note 16) are those of the Company. The financial statements
for the eleven months ended November 30, 1994, are those of the Predecessor
before its business and substantially all of its assets were acquired by the
Company.
The accompanying combined financial statements of the Predecessor include
the assets, liabilities and operations associated with the residences listed
above. Since the residences have ownership and management interest in common,
the assets and liabilities are reflected at historical cost. As discussed in
Note 2, the Predecessor has sold or leased the assets to the Company. All
significant inter-company accounts and transactions have been eliminated.
Principles of Consolidation
The consolidated financial statements include the accounts of Assisted
Living Concepts, Inc. and its wholly owned subsidiaries (the "Company"). All
significant intercompany balances and transactions have been eliminated in
consolidation.
Cash and Cash Equivalents
Cash and cash equivalents include cash on deposit and debt securities held
at financial institutions with maturities of three months or less at the date
of purchase. The Company's investments in cash equivalents are classified as
held to maturity and are stated at cost.
Leases
The Company determines the classification of its leases as either operating
or capital at their inception. The Company reevaluates such classification
whenever circumstances or events occur that require the reevaluation of the
leases.
The Company accounts for arrangements entered into under sale and leaseback
agreements pursuant to Statement of Financial Accounting Standards (SFAS) No.
98, "Accounting for Leases". For transactions that qualify as sales and
operating lease, 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.
22
<PAGE>
Property and Equipment
Property and equipment are recorded at cost and depreciation is computed
over the assets' estimated useful lives on the straight-line basis as follows:
<TABLE>
<S> <C>
Buildings....................................................... 40 years
Furniture and equipment......................................... 7 years
</TABLE>
Asset impairment is analyzed on assets to be held and used by the rental
demand by market to determine if future cash flows (undiscounted and without
interest charges) is 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 asset's carrying amount exceeds its fair value. Assets the
Company intends to dispose of are reported at the lower of (i) their carrying
amount or (ii) fair value less cost to sell. There were no impairment losses
for any of the periods presented.
Interest and certain payroll costs incurred during construction periods are
capitalized as part of the building costs. Maintenance and repairs are charged
to expense as incurred, and significant betterments and improvements are
capitalized. Construction in progress includes pre-acquisition costs and other
direct costs related to acquisition, development and construction of
residences. If a project is abandoned, any costs previously capitalized are
expensed.
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 15 years on a straight-line basis. Amortization of
goodwill was $2,000, $28,000 and $30,000 for the month ended December 31, 1994
and for the years ended December 31, 1995 and 1996, respectively. Accumulated
amortization of goodwill at December 31, 1995 and 1996 was $30,000 and
$60,000, respectively. Management maintains an impairment review policy
whereby the future economic benefit of the recorded balance is substantiated
at the end of each reporting period. No impairment losses have been recognized
in any of the periods presented.
Deferred Financing Costs
Financing costs related to the issuance of debt are capitalized in other
assets and amortized to interest expense over the term of the related debt
using the straight-line method, which approximates the effective interest
method.
Deferred Pre-Opening Costs
Deferred pre-opening costs associated with newly developed residences,
prior to the commencement of their operations, are capitalized and amortized
over 12 months.
Income Taxes
The Company uses the asset and liability method of accounting for income
taxes under which deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to the differences between the
financial statement carrying amounts of the existing assets and liabilities
and their respective tax bases (temporary differences). Deferred tax assets
are reduced by a valuation allowance when, in the opinion of management, it is
more likely than not that some portion or all of the deferred tax assets will
not be realized.
The businesses comprising the Predecessor elected to be taxed as either S-
Corporations or as Partnerships pursuant to the provisions of the Internal
Revenue Code and, as such, were not individually subject to federal or state
income taxes because their taxable income or loss accrues to individual
shareholders or partners,
23
<PAGE>
respectively (See Note 9). The pro forma data reflects the income tax expense
that would have been recorded had the Predecessor operated as a C-Corporation,
subject to income taxes for these periods.
Revenue Recognition
Revenue is recognized when services are rendered and consists of residents'
fees for basic housing and support services and fees associated with
additional services such as routine health care and personalized assistance on
a fee for service basis. Management of the Company assesses the collectibility
of accounts receivable periodically and records a provision for doubtful
accounts as considered necessary.
Classification of Expenses
All expenses (except interest, depreciation, amortization, residence
operating expenses and management fees) 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.
Management Fees-Predecessor
Each residence of the Predecessor was operated under a management agreement
with Concepts in Community Living, Inc. ("CCL"), a related party, whereby CCL
charged a management fee of 5% of revenues in exchange for providing each
facility certain management and administrative support services (See Note 10).
Net Income (Loss) Per Common Share
Net income (loss) per common share has been calculated by dividing the net
income (loss) for the period by the weighted average common shares outstanding
and, in periods with net income, dilutive common equivalent shares assumed to
be outstanding using the treasury stock method. Common stock equivalent shares
consist of options to purchase common stock during the period. Fully diluted
earnings per share is not presented since it approximates income (loss) per
share.
Use of Estimates
Management of the Company has made a number of 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 period's financial
statements to conform to the current year's presentation. Such
reclassifications had no effect on previously reported net loss or
shareholders' and partners' equity.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, accounts receivable and
accounts payable approximate fair value because of the short-term nature of
these accounts and/or because they are invested in accounts earning market
rates of interest. The carrying value of funds held in trust approximates fair
value because they bear interest at current market rates. The carrying amount
of the Company's debt, construction financing and convertible subordinated
debentures approximates fair value because the interest rates approximate the
current rates available to the Company.
24
<PAGE>
Stock-based Compensation
In October 1995, the Financial Accounting Standards Board (FASB) Issued
Statement of Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-
Based Compensation," which provides an alternative to APB Opinion No. 25,
"Accounting for Stock Issued to Employee," in accounting for stock-based
compensation issued to employees. The Statement encourages, but does not
require financial reporting to reflect compensation expense for grants of
stock, stock options and other equity instruments to employees based on change
in the fair value of the underlying stock. The Company continues to apply the
existing accounting rules contained in APB Option No. 25, "Accounting for
Stock Issued to Employees." While recognition of employee stock-based
compensation is not mandatory, SFAS 123 requires companies that choose to
continue applying the provisions of APB No. 25 to disclose pro forma net
income and earnings per share data (See Note 12).
Concentration of Credit Risk
State Medicaid reimbursement programs constitute a significant source of
revenue for the Company. Adverse changes in general economic factors affecting
the health care industry or laws and regulatory environment, including
Medicaid reimbursement rates, could have a material adverse effect of the
Company's financial condition and results of operations. As of December 31,
1996, 47.4% of the Company's residences are in Texas, 24.4% are in Oregon,
10.3% in Ohio and 11.5% in Washington. During the years ended December 31,
1995 and 1996, direct payments received from state Medicaid agencies accounted
for approximately 21.4% and 12.4%, respectively, of the Company's revenue
while the tenant paid portion received from Medicaid residents accounted for
approximately 9.6% and 6.9%, respectively, of the Company's revenue during
these periods. The Company expects in the future that State Medicaid
reimbursement programs will constitute a significant source of revenue for the
Company.
2. Acquisition of Residences
In December 1994, the Company purchased two assisted living residences
known as Aspen Court and Hillside House, from Madras and LCP for $1.7 million
and $2.2 million, respectively (including closing costs of $20,000 and $9,000,
respectively). The Company paid $2.8 million cash and assumed $1.1 million of
long-term notes (See Note 7).
The acquisition has been accounted for as a purchase and, accordingly, the
purchase price was allocated to assets based on estimated fair value at date
of acquisition. Allocation of the cash purchase price is summarized as follows
(in thousands):
<TABLE>
<CAPTION>
Aspen Court Hillside House Total
----------- -------- -----------
<S> <C> <C> <C>
Property and equipment..................... $1,328 $1,900 $3,228
Goodwill................................... 186 225 411
Fair value in excess of historical cost.... 191 48 239
Long-term debt............................. (1,114) -- (1,114)
------ ------ ------
Total cash purchase price................ $ 591 $2,173 $2,764
====== ====== ======
</TABLE>
The Company's president beneficially owned 48% of the common stock of the
Company prior to the purchase of these residences and was the sole shareholder
of CCL Sub, Inc. who managed the day-to-day operations of Aspen Court under a
management agreement. The president also held a 30% interest in Madras, and
with her husband, together owned a 17.5% interest in LCP, the predecessor
entities which sold these residences to the Company. Because of the
controlling interest in Aspen Court, the recorded value of Aspen Court was
reduced by $112,000 representing the president's 30% interest in the excess of
Aspen Court's appraised value over its historical cost of $1.1 million. This
amount has been charged directly to shareholders' equity reflected under the
caption "Fair market value in excess of historical cost of acquired net assets
attributable to related party transactions " in the accompanying financial
statements.
25
<PAGE>
Goodwill of $186,000 and $225,000 related to Aspen Court and Hillside
House, respectively, represents the excess of purchase price ($1.7 million and
$2.2 million, respectively) over appraised value ($1.4 million and $1.9
million respectively). Goodwill related to Aspen Court and Hillside House has
been reduced by $79,000 and $48,000, respectively, in order to reflect a
reduction for the president's 30% interest in Madras and 17.5% interest in
LCP. The aggregate reduction of $127,000 has also been charged directly to
shareholders' equity reflected under the caption "Fair market value in excess
of historical cost of acquired net assets attributable to related party
transactions" in the accompanying financial statements. Amortization of
goodwill was $2,000, $28,000 and $30,000 for the month ended December 31, 1994
and for the years ended December 31, 1995 and 1996, respectively.
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. These properties are
currently under construction and are estimated to be completed towards the end
of the second quarter of 1997. The funds are being held in trust by a national
bank on behalf of the Company and are invested in guaranteed investment
certificates that are 100% collateralized. The funds are restricted for
construction and are expected to be released to the Company as the individual
residences are completed and licensed.
4. Leases
A summary of leases that the Company has entered into since its inception
is as follows:
<TABLE>
<CAPTION>
Number of
Sale and Number of
Leaseback Sale and Units
Number of Residences Leaseback under
Leased Accounted Total Residences Units Leases
Residences for as Number of Accounted under Accounted
("Oregon Operating Operating for as Operating for as
Leases") Leases Leases Financings Leases Financings
---------- ---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Leases at December 31,
1994................... 4 -- 4 -- 114 --
Leases entered into
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
==== ==== ==== ==== ==== ====
</TABLE>
The Company has entered into agreements to lease five assisted living
residences in Oregon from Assisted Living Facilities, Inc. a related party
(the "Oregon Leases"). One of these leases was entered into in 1996. Assisted
Living Facilities, Inc. 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 7). The leases,
which have fixed terms of 10 years, have been accounted for as operating
leases. Aggregate deposits on these residences as of December 31, 1995 and
1996 were $59,000 and $224,000, respectively which are reflected in other
assets in the accompanying financial statements.
During 1995 and 1996, the Company completed the sale of five and 19
residences under sale and leaseback arrangements, respectively. The Company
sold the residences for approximately $8.1 million in 1995 and $41.4 million
in 1996 and leased them back over initial terms ranging from 12 to 20 years.
Four of the 19 properties were repurchased for $7.8 million, in connection
with a $50.2 million sale and leaseback commitment with LTC Properties, Inc.
("LTC") (See Note 11). The properties were repurchased at a cost of $7.6
million plus a $214,000 administrative fee. The 15 remaining residences
completed during 1996 have initial annual rent payments of $3.6 million.
Twelve of the 15 residences were sold and leased back from LTC (See Note 11)
for $26.4 million with annual rentals of approximately $2.6 million.
26
<PAGE>
The Company recognized losses of $0 and $936,000 on the above sale and
leaseback transactions for the years ended December 31, 1995 and 1996,
respectively. The losses net of a 1996 unrelated land sale gain of $82,000 are
presented in the consolidated statements of operations as net loss on sale of
assets. Gains on sale and leaseback transactions of $153,000 and $399,000 for
the years ended December 31, 1995 and 1996, respectively, have been recorded
as deferred income included in other liabilities and are being amortized over
the initial terms of the corresponding leases. A substantial portion of these
gains and losses were incurred in connection with sale leaseback transactions
with LTC (See Note 11).
Certain of the Company's leases and loan agreements contain covenants and
cross-default provisions such that a default on one of these 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, 1996, future minimum lease payments under operating
leases are as follows (in thousands):
<TABLE>
<S> <C>
1997............................................................. $ 4,261
1998............................................................. 4,351
1999............................................................. 4,443
2000............................................................. 4,537
2001............................................................. 4,633
Thereafter....................................................... 45,790
-------
$68,015
=======
</TABLE>
During the year ended December 31, 1996, the Company entered into nine sale
leaseback agreements, which were 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 balance sheet in property and equipment. See
Notes 5, 7 and 16.
5. Property and Equipment
December 31, 1995 and 1996, the Company's property and equipment, stated at
cost, consist of the following (in thousands):
<TABLE>
<CAPTION>
1995 1996
------- --------
<S> <C> <C>
Land....................................................... $ 1,747 $ 4,788
Buildings.................................................. 25,804 69,919
Equipment.................................................. 214 613
Furniture.................................................. 681 1,272
------- --------
Property and Equipment..................................... 28,446 76,592
Construction in process.................................... 13,075 53,372
------- --------
Total property and equipment............................. 41,521 129,964
Less accumulated depreciation.............................. 163 878
------- --------
Property and equipment-net............................... $41,358 $129,086
======= ========
</TABLE>
Land, buildings and certain furniture and equipment relating to six Oregon
residences serve as collateral for long-term debt (see Note 7). Depreciation
expense was $105,000, $8,000, $200,000 and $805,000 for the 11 months ended
November 30, 1994, the one month ended December 31, 1994 and the years ended
December 31, 1995 and 1996, respectively.
27
<PAGE>
As of December 31, 1995 and 1996, construction in process consists of the
following (in thousands):
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Land purchased.............................................. $ 2,402 $ 5,644
Earnest money deposits...................................... 61 119
Construction and other costs................................ 10,612 47,609
------- -------
Total..................................................... $13,075 $53,372
======= =======
</TABLE>
During the one month ended December 31, 1994 and the years ended December
31, 1995 and 1996, the Company capitalized interest cost of $0, $577,000 and
$2.3 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 $0, $344,000 and $1.1
million for the one month ended December 31, 1994 and for the years ended
December 31, 1995 and 1996, respectively.
The Company had certificates of occupancy for 67 residences, 60 of which
were included in the operating results as of December 31, 1996 as compared to
25 residences with certificates of occupancy, 19 of which were included in the
operating results as of December 31, 1995. Of the residences with certificates
of occupancy as of December 31, 1996, the Company owned 33 residences and
leased 34 residences (25 of which were operating leases and 9 of which were
accounted for as financings) as compared to 16 owned residences and nine
leased residences (all of which were accounted for as operating leases) as of
December 31, 1995. At December 31, 1995 and 1996, property and equipment
included $0 and $16.9 million, respectively, in land and buildings related to
sale and leaseback transactions accounted for as financings (See Note 16).
As of December 31, 1996, the Company has entered into agreements pursuant
to which it may purchase, subject to completion of due diligence and various
other conditions, twenty-one undeveloped sites in Idaho, New Jersey, Ohio and
other states for an aggregate purchase price of approximately $3.3 million.
The Company has paid initial deposits relating to these sites and/or has
entered into agreements to purchase and has completed or is in the process of
completing demographic analyses and initial architectural plans for these
sites for purposes of building assisted living residences. In addition, the
Company has thirty-one other sites identified and has either purchased the
land or begun construction to develop assisted living residences.
6. Resident Deposits
Pursuant to lease agreements, residents are required to provide security
deposits, and in certain cases, the last month's rent. As of December 31, 1995
and 1996, such deposits of $128,000 and $544,000, 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.
7. Long-Term Debt
As of December 31, 1995 and 1996, long-term debt consists of the following
(in thousands):
<TABLE>
<CAPTION>
1995 1996
------ -------
<S> <C> <C>
Trust Deed Notes, payable to the State of Oregon Housing
and Community Services Department through 2028.......... $4,600 $10,378
Variable Rate Multifamily Revenue Bonds, payable to the
Washington State Housing Finance Commission Department
through 2028............................................ -- 8,500
Finance lease obligations................................ -- 16,980
------ -------
Total long-term debt..................................... $4,600 $35,858
Less current portion..................................... (47) (110)
------ -------
$4,553 $35,748
====== =======
</TABLE>
28
<PAGE>
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, 1996 were
secured by an $8.7 million letter of credit and are secured by buildings,
land, furniture and fixtures of five Washington residences. The line of credit
expires in 2001. The bonds had a weighted average interest rate of 3.13%
during 1996.
As of December 31, 1996, the following annual principal payments are
required (in thousands):
<TABLE>
<S> <C>
1997............................................................. $ 110
1998............................................................. 382
1999............................................................. 401
2000............................................................. 429
2001............................................................. 454
Thereafter....................................................... 34,082
-------
Total.......................................................... $35,858
=======
</TABLE>
Certain of the Company's leases and loan agreements contain covenants and
cross-default provisions such that a default on one of these 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
Indebtedness of the Predecessor used to finance Huffman House, Juniper
House, Rackleff House, and Brookside remained an obligation of previous owners
and was not assumed by the Company. 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 Assisted Living Facilities, Inc.,
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. In addition during 1996, the Company entered a lease agreement with
Assisted Living Facilities, Inc. for another Oregon residence with the same
terms as the previous four agreements. Under the terms of the Lease Approval
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, 1995 and 1996, was $42,000 and $61,000,
respectively, and is reflected in other assets. 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
$100,000 and $373,000 as of December 31, 1995 and 1996, respectively, and is
reflected in other current assets in the accompanying financial statements.
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, 1995 and 1996, the Company was restricted from paying
dividends on $17,000 and $394,000, 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 these agreements, the Company is required to
comply with the terms of certain regulatory agreements which provide, among
other things, that in order to preserve the federal income tax exempt status
of the bonds, the Company is required to lease at least 20% of the units of
the projects to low or moderate income persons as defined in Section 142(d) of
the Internal Revenue Code. There are additional requirements as to the age and
physical condition of the residents with which the Company must also comply.
Non-compliance with these restrictions may result in an event of default and
cause acceleration of the scheduled repayment.
During the year ended December 31, 1996 the Company entered into nine sale
and leaseback agreements which are accounted for as financings due to the
Company's continuing involvement in the form of a fair value purchase option.
As such, these financings are included in long term debt and the related
assets remain on the balance sheet in property and equipment. See Notes 4 and
16.
29
<PAGE>
8. Convertible Subordinated Debentures
In August 1995, the Company completed the offering of $20.0 million of 7%
Debentures. The 7% Debentures are convertible at any time at or prior to
maturity, unless previously redeemed, at a conversion price of $15.00 per
common share, which equates to an aggregate of 1,333,334 shares of the
Company's common stock and bear interest payable semiannually on January 31
and July 31 of each year subject to adjustments under certain circumstances.
The 7% Debentures are unsecured and subordinated to all other indebtedness of
the Company. The Debentures are subject to redemption, as a whole or in part,
at any time or from time to time commencing after July 31, 1998 at the
Company's option at a redemption price equal to 100% of the principal amount
thereof, plus accrued and unpaid interest to the redemption date.
In September 1996, $6.1 million of the 7% Debentures were converted to
405,667 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.
9. Income Taxes
At December 31, 1996, the Company had net operating loss carryforwards of
approximately $1.9 million, for income tax purposes. This loss will be carried
forward and expires in the years 2009 through 2011. As such, no provision for
income taxes has been recorded.
The provision for income taxes differs from the amount of income (loss)
determined by applying the applicable U.S. statutory federal rate to pretax
income (loss) as a result of the following items:
<TABLE>
<CAPTION>
Predecessor The Company
------------- ---------------------------------
Year Ended
Eleven Months One Month December 31,
Ended Ended --------------------
November 30, December 31, 1996
1994 1994 1995 (As Restated)
------------- ------------ ----- ------------
<S> <C> <C> <C> <C>
Statutory federal tax
rate..................... 34.0% (34.0%) (34.0%) (34.0%)
State taxes, net of
federal tax benefits..... 6.9% -- -- --
Non deductible stock
issuance costs........... -- -- -- 8.4%
Losses for which no
benefit is provided...... -- 34.0% 34.6% 25.5%
Other..................... (4.1%) -- (0.6%) 0.1%
---- ----- ----- -----
Effective tax rate........ 36.8% -- -- --
==== ===== ===== =====
</TABLE>
30
<PAGE>
An analysis of the significant components of deferred tax assets and
liabilities consists of the following as of December 31 (in thousands):
<TABLE>
<CAPTION>
1995 1996
----- -------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward............................ $ 231 $ 743
Deferred gain on sale and leaseback transactions........... 59 230
Debt financing recorded for books.......................... -- 6,520
Other...................................................... 43 398
Valuation allowance.......................................... (241) (858)
Deferred tax liabilities:
Property and equipment, primarily due to depreciation...... (92) (172)
Debt financing capitalized asset basis..................... -- (6,456)
Deferred operating costs................................... -- (208)
Prepaid expenses........................................... -- (134)
Other...................................................... -- (63)
----- -------
Net deferred tax asset (liability)........................... $ -- $ --
===== =======
</TABLE>
The valuation allowance for deferred taxes as of December 31, 1995 and 1996
was $241,000 and $858,000, respectively. The increase in the valuation
allowance for the years ended December 31, 1995 and 1996 was $186,000 and
$617,000, respectively.
The portion of the valuation allowance for deferred tax assets for which
subsequently recognized tax benefits will be applied directly to contributed
capital is approximately $49,000 as of December 31, 1996. This amount is
attributable to differences between financial and tax reporting of employee
stock option transactions.
10. Related Party Transactions
The Company
The Company leases five residences from Assisted Living Facilities, Inc.,
one of which was entered into during 1996. The spouse of the Company's
president owns a 25% interest in Assisted Living Facilities, Inc. During the
month ended December 31, 1994 and the years ended December 31, 1995 and 1996,
the Company paid such entity aggregate lease deposits of $75,000, $0 and
$35,700, respectively and aggregate rentals of $37,000, $734,000 and $912,000,
respectively.
In December 1994, the Company purchased Aspen Court and Hillside Manor from
Madras and LCP for $1.7 million and $2.2 million (including the assumption of
$1.1 million in debt, but excluding closing costs), respectively (See Note 2).
Prior to the purchase, the president of the Company owned a 30% interest in
Madras and, together with her spouse, owned a 50% partnership interest in
Redbud Associates which held a 35% partnership interest in LCP.
Commencing in 1995, the Company contracted, directly and through its
developers, with CCL to perform feasibility studies and pre-development
consulting services for the developers on the Company's behalf. CCL is owned
100% by the president's spouse. For the years ended December 31, 1995 and
1996, the Company paid CCL for these services fees of $605,000 and $623,000,
respectively, which were capitalized in construction in process on the
consolidated balance sheets.
Predecessor
The Predecessor residences operated under management agreements with CCL
(the CCL Management Agreements). Under the terms of the CCL Management
Agreements, CCL provided management and administrative support to the
Predecessor and, as such, was entitled to reimbursement for accounting,
marketing and other expenses incurred on behalf of the Predecessor. Fees paid
to CCL under the CCL Management Agreements are reflected as management fees in
the accompanying Statements of Operations.
31
<PAGE>
11. Transactions with LTC Properties, Inc.
At December 31, 1996, two of the Company's Board of Directors serve as
executive officers of LTC and three executive officers of LTC own in the
aggregate approximately 5.5% of the Company's common stock.
The Company engaged in the following transactions with LTC since January 1,
1995.
<TABLE>
<CAPTION>
Number of Sale
and Leaseback
Residences
Accounted for as Sales Price
Operating Leases Number of Units (in millions)
---------------- --------------- -------------
<S> <C> <C> <C>
Leases at December 31,
1994....................... -- -- $ --
Leases entered into during
1995....................... 2 60 3.2
------- ------- -------
Leases at December 31,
1995....................... 2 60 3.2
Leases entered into during
1996....................... 16 591 34.1
Residences repurchased
during 1996................ (4) (146) (7.6)
------- ------- -------
Leases at December 31,
1996....................... 14 505 $29.7
======= ======= =======
</TABLE>
The Company incurred annual lease expense of $61,000 and $2.1 million, for
the years ended December 31, 1995 and 1996, respectively, pursuant to leases
with LTC (See Note 4). The Company recognized losses of $0 and $656,000 on
these sale and leaseback transactions during the years ended December 31, 1995
and 1996, respectively. For the same periods, and the Company deferred gains
of $85,000 and $384,000, 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, in
connection with a commitment of $50.2 million to sell and leaseback
residences, LTC sold back to the Company four Texas properties for
approximately $7.8 million. The four residences were purchased at a cost of
$7.6 million plus a $214,000 administration fee. During 1996, the Company sold
and leased back with LTC 16 residences for $34.1 million. As of December 31,
1996, after giving effect to the Company's repurchase of four residences, the
Company had sold and leased back with LTC 14 residences for $29.7 million with
annual rental payments of $3.0 million. See Note 15 for transaction occurring
subsequent to December 31, 1996.
During 1996, the Company received from LTC $18.9 million of mortgage
financing on eight residences to be converted to sale leaseback transactions
from LTC. Interest is paid on a monthly basis at rates ranging from 9.9% to
10.4% per annum. These mortgage financing agreements are in connection with a
$50.2 million commitment with LTC to provide financing through sale and
leaseback arrangements, which expires in June 1997.
12. Stock Option Plan
The Company has a Stock Option Plan (the "Plan") which provides for the
issuance of incentive and non-qualified stock options and restricted stock.
The Plan is administered by the Compensation Committee of the Board of
Directors which sets the terms and provisions of options granted under the
Plan. Incentive options may be granted only to officers or other full-time
employees of the Company, while non-qualified options may be granted to
directors, officers or other employees of the Company, or consultants who
provide services to the Company.
The Plan combines an incentive and non-qualified stock option plan, a stock
appreciation rights ("SAR") plan and a stock award plan (including restricted
stock). The Plan is a long-term incentive compensation plan and is designed to
provide a competitive and balanced incentive and reward program for
participants.
Under the Plan, the Company may grant options or award restricted stock to
its employees for up to 600,000 shares of common stock. The exercise price of
each option equals the market price of the Company's
32
<PAGE>
stock on the date of grant. Each option shall expire on the date specified in
the option agreement, but not later than the tenth anniversary of the date on
which the option was granted. Options typically vest three years from the date
of issuance and typically are exercisable within seven to nine years from the
date of vesting. Each option is exercisable in equal installments as
designated by the Compensation Committee or the Board at the option price
designated by the Compensation Committee; however, incentive options cannot be
less than the fair market value of the common stock on the date of grant. All
options are nontransferable and subject to adjustment by the Compensation
Committee upon changes in the Company's capitalization. The Board of
Directors, at its option, may discontinue the Plan or amend the Plan at any
time.
The per share weighted-average fair value of each option grant is estimated
on the date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grants in 1995 and 1996:
dividend yield of zero percent, expected volatility of 37.53 and 36.67%,
respectively, risk-free interest rate has been fixed at 6.32% and 6.69%,
respectively, based on the 10-year treasury rate on March 11, 1997 and
estimated life of 10 years.
The Company applies APB Opinion No. 25 in accounting for its Plan, and
accordingly, no compensation cost has been recognized for its stock options in
the financial statements. Had the Company determined compensation cost based
on the fair value at the grant date for its stock options under SFAS 123, the
Company's net loss would have increased to the proforma amounts indicated
below: (in thousands except per share data)
<TABLE>
<CAPTION>
1995 1996
------ -------
<S> <C> <C>
Net loss as reported....................................... $ (575) $(1,915)
Net loss pro forma......................................... (719) (2,507)
Net loss per common share as reported...................... $(0.19) $ (0.46)
Pro forma net loss per common share........................ $(0.24) $ (0.60)
</TABLE>
Pro forma net loss reflects only options granted in 1995 and 1996.
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.
A summary of the status of the Company's stock options as of December 31,
1995 and 1996 and changes during the years ended on those dates is presented
below:
<TABLE>
<CAPTION>
1995 1996
------------------ --------------------
Weighted- Weighted-
Number Average Average
of Exercise Number of Exercise
Shares Price Shares Price
------- --------- --------- ---------
<S> <C> <C> <C> <C>
Options at beginning of the year...... 220,000 $ 9.250 403,033 $10.862
Granted............................... 215,250 12.343 281,700 16.428
Exercised............................. -- -- (14,085) 9.362
Canceled.............................. (32,217) 9.754 (118,046) 17.571
------- ------- --------- -------
Outstanding at end of the year........ 403,033 $10.862 552,602 $12.304
======= ======= ========= =======
Options exercisable at end of year.... 73,335 191,022
Weighted-average fair value of options
granted during the year.............. $ 3.67 $ 4.99
</TABLE>
33
<PAGE>
The following table summarized information about fixed stock options
outstanding at December 31, 1996.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------- --------------------------
Number Weighted-Average Weighted- Number Weighted-
Outstanding at Remaining Average Exercisable Average
Range of Exercise Prices 12/31/96 Contractual Life Exercise Price at 12/31/96 Exercise Price
- ------------------------ -------------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$9.250.................. 197,750 7.02 $ 9.250 132,588 $ 9.25
$9.875 to 12.750........ 45,968 8.53 11.516 15,605 11.487
$13.000 to 13.000....... 122,734 8.66 13.000 41,308 13.000
$13.375 to 14.625....... 6,750 9.08 13.766 1,252 13.511
$14.750 to 14.750....... 143,100 9.62 14.750 -- --
$14.875 to 19.625....... 30,300 9.71 17.047 269 15.256
$19.750 to 19.750....... 2,000 9.63 19.750 -- --
$20.125 to 20.125....... 1,000 9.61 20.125 -- --
$21.500 to 21.500....... 1,000 9.45 21.500 -- --
$22.000 to 22.000....... 2,000 9.44 22.000 -- --
------- ---- ------- ------- -------
$9.250 to $22.000....... 552,602 8.38 $12.304 191,022 $10.280
======= ==== ======= ======= =======
</TABLE>
13. Pro Forma Financial Information (Unaudited)
The following table sets forth the pro forma statement of operations of the
Company for the year ended December 31, 1994, as if the acquisition of the
Predecessor's assets and the initial public offering had occurred at January
1, 1994 (in thousands except per share amounts):
<TABLE>
<S> <C>
Revenues.......................................................... $2,053
Operating income.................................................. (402)
Interest expense-net.............................................. 84
Net loss.......................................................... (486)
Loss per common share............................................. $(0.16)
Weighted average common shares.................................... 3,000
</TABLE>
14. Legal Proceedings
The Company is involved in various lawsuits and claims arising in the
normal course of business. In the opinion of Management, although the outcomes
of these suits and claims are uncertain, in the aggregate they should not have
a material adverse effect on the Company's business or its financial
statements taken as a whole.
15. Subsequent Event
In March 1997, the Company received mortgage financing on an additional
sixteen residences for $36.4 million dollars from LTC with interest payable on
a monthly basis at 9.9% per annum. These loans are to be repaid or converted
to sale leaseback transactions by June 30, 1997.
16. Restatement
On February 1, 1999, the Company announced that after consultation with its
independent auditors the Company would restate its consolidated financial
statements for the fiscal quarter ended June 30, 1997, the fiscal quarter
ended September 30, 1997, the fiscal year ended December 31, 1997, the fiscal
quarter ended March 31, 1998, the fiscal quarter ended June 30, 1998 and the
fiscal quarter ended September 30, 1998. On March 31, 1999, the Company
announced that the restatement would be more extensive than the Company had
previously believed, and might include periods prior to the second quarter of
1997, including the fiscal year ended December 31, 1996. After further
consultation with its independent auditors, the Company determined to restate
its financial statements for the fiscal year ended December 31, 1996, the
fiscal year ended December 31, 1997 and the first three fiscal quarters of the
fiscal year ended December 31, 1998.
34
<PAGE>
The restatement reduced both net income and total shareholders' equity by
$2.1 million for fiscal year 1996. As a result of the restatement, the Company
reported a net loss of $1.9 million or $0.46 per share for fiscal year 1996
compared to net income of $149,000 or $0.03 per share as previously reported.
The restatement did not affect the Company's cash position as of December 31,
1996. After the restatement, the Company's working capital position as of
December 31, 1996 was a deficit of $27.1 million, compared to previously
reported working capital deficit of $26.4 million.
The restatement of the financial data included in this report resulted
primarily from: (i) the earlier recognition of certain expenses which were
previously capitalized in association with the Company's development and
financing activities; and (ii) a modification in how the Company accounted for
certain of its lease arrangements.
The following table sets forth statement of operations and balance sheet
data, as originally reported and as restated, as of and for the year ended
December 31, 1996. The table also sets forth the adjustments to the originally
reported data resulting from the restatement, which adjustments are described
in the related footnotes.
35
<PAGE>
STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
For the Year Ended December 31, 1996
--------------------------------------------------
As
Previously
Reported Adjustment As Restated
------------ ------------ -------------
(in thousands, except per share)
<S> <C> <C> <C>
Revenues................ $ 18,949 $ 2,073 (A) $ 21,022
Operating expenses:
Residence operating
expenses............. 12,116 1,939 (A) 14,055
Corporate general and
administrative....... 1,649 215 (B) 1,864
Building rentals...... 1,908 134 (A) 1,137
(1,017)(C)
112 (D)
Building rentals to
related party........ 2,244 147 (A) 2,812
421 (D)
Depreciation and
amortization......... 990 (168)(A) 1,094
207 (C)
65 (E)
------------ ------------ ------------
Total operating
expenses........... 18,907 2,055 20,962
------------ ------------ ------------
Operating income........ 42 18 60
------------ ------------ ------------
Other (income) expense:
Interest expense...... -- 77 (A) 1,146
1,017 (C)
181 (E)
(129)(F)
Interest (income)..... (455) -- (455)
Loss (gain) on sale of
assets............... (82) 931 (E) 854
5 (C)
Debenture conversion
expense.............. 426 -- 426
Miscellaneous
expense.............. 4 -- 4
------------ ------------ ------------
Total other (income)
expense............ (107) 2,082 1,975
------------ ------------ ------------
Net income (loss)..... $ 149 $ (2,064)(G) $ (1,915)
============ ============ ============
Net income (loss) per
common share......... $ 0.03 $ (0.46)
Weighted average
common shares
outstanding.......... 4,500 (1) 4,202 (1)
</TABLE>
- --------
(1) Reflects a recalculation of weighted average common shares outstanding.
36
<PAGE>
BALANCE SHEET DATA
<TABLE>
<CAPTION>
As of December 31, 1996
---------------------------------------
As Previously
Reported Adjustment As Restated
------------- ---------- -----------
(in thousands)
ASSETS
<S> <C> <C> <C>
Current Assets:
Cash and cash equivalents............. $ 2,105 $ -- $ 2,105
Funds held in trust................... 8,515 -- 8,515
Accounts receivable................... 730 -- 730
Other current assets.................. 1,043 (56)(A) 1,077
90 (E)
-------- ------- --------
Total current assets................. 12,393 34 12,427
-------- ------- --------
Property and equipment.................. 59,574 17,018 (C) 76,592
Construction in process................. 53,458 (215)(B) 53,372
129 (F)
-------- ------- --------
Total property and equipment......... 113,032 16,932 129,964
Less accumulated depreciation........ 674 204 (C) 878
-------- ------- --------
Property and equipment-net........... 112,358 16,728 129,086
Goodwill................................ 362 -- 362
Other assets............................ 5,394 (46)(C) 5,348
-------- ------- --------
Total assets......................... $130,507 16,716 $147,223
======== ======= ========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C> <C>
Current Liabilities:
Accounts payable...................... $ 1,864 -- $ 1,864
Construction payables................. 16,002 -- 16,002
Accrued expenses...................... 1,395 803 (E) 2,198
Other current liabilities............. 544 -- 544
Construction financing................ 18,850 -- 18,850
Current portion of long-term debt..... 110 -- 110
-------- ------- --------
Total current liabilities............ 38,765 803 39,568
Other liabilities....................... -- 464 (E) 997
533 (D)
Long-term debt.......................... 18,768 16,980 (C) 35,748
Convertible subordinated debentures..... 13,915 -- 13,915
-------- ------- --------
Total liabilities.................... 71,448 18,780 90,228
-------- ------- --------
Shareholders equity:
Preferred Stock....................... -- -- --
Common Stock.......................... 55 -- 55
Additional paid-in capital............ 59,733 -- 59,733
Fair market value in excess of
historical cost of acquired net
assets attributable to related party
transactions......................... (239) -- (239)
Accumulated deficit................... (490) (2,064)(G) (2,554)
-------- ------- --------
Total Shareholders' equity............ 59,059 (2,064) 56,995
-------- ------- --------
Total liabilities and shareholders'
equity.............................. $130,507 $16,716 $147,223
======== ======= ========
</TABLE>
37
<PAGE>
- --------
(A) The Company previously capitalized (i) certain costs associated with pre-
opening activities and (ii) the operating results of certain start-up
residences for approximately the first two months of operations. These
capitalized costs were previously amortized over a 12 month period. The
Company has determined to expense a portion of the costs incurred prior to
opening a residence as incurred and to recognize the operating results of
newly opened residences in the periods to which they relate.
Statement of Operations. Reflects the recognition of certain costs incurred
prior to the opening of the residence and the operating results of certain
start-up residences during the period. The previously capitalized costs and
operating results of these residences are reported as revenues and expenses
in the periods in which they were incurred.
Balance Sheet. Reflects a reduction in other current assets resulting from
the immediate recognition of certain costs incurred prior to the opening of
the residence and the operating results of certain start-up residences,
which had previously been capitalized.
(B) The Company's policy is to capitalize payroll costs related to operations
employees and certain corporate and regional employees directly associated
with the development of new residences. As a result of the restatement,
certain previously capitalized payroll costs, primarily those related to
corporate and regional employees, are being reported as expenses during
the period in which they were incurred rather than capitalized as part of
the cost of the residences and depreciated over the lives of the related
assets.
Statement of Operations. Reflects increased general and administrative
expenses during the period resulting from expensing payroll costs, which
were previously capitalized in connection with the Company's development
activities.
Balance Sheet. Reflects a decrease in construction in process resulting from
expensing previously capitalized payroll costs associated with the Company's
development activities.
(C) The Company has changed the accounting treatment of 16 sale and leaseback
transactions entered into during fiscal years 1996 and 1997, which had
previously been accounted for as operating leases rather than as
financings. These agreements contained a purchase option, entitling the
Company to purchase the residences at fair market value at the end of
initial lease terms ranging from 14 to 15 years. As a result of the
restatement, these agreements are being accounted for using the finance
method in Statement of Financial Accounting Standard No. 98, Accounting
for Leases (SFAS No. 98). Accordingly, for periods between April 1, 1996
and March 30, 1999, the Company has recorded on its balance sheet the
property and equipment and financing obligation associated with these
agreements. During this same time period, the Company has recorded (i) all
rent payments as interest expense and (ii) depreciation expense resulting
from depreciating the property and equipment over periods ranging from
seven to 40 years. The Company has amended these agreements effective
March 30, 1999 to eliminate the purchase option, resulting in a
classification of these leases as operating leases from the date of the
amendment forward. Effective March 30, 1999, in accordance with SFAS No.
98 the Company has removed both the property and equipment and financing
obligation from the Company's balance sheet resulting in a deferred gain
that will be included in other liabilities and amortized over the
remaining initial lease term as an offset to future rent expense.
Statement of Operations. Reflects an increase in depreciation expense and
interest expense and a decrease in rent expense during the period resulting
from the change described above.
Balance Sheet. Reflects an increase in property and equipment a decrease in
other assets and an increase in long-term debt resulting from the change
described above.
(D) All of the Company's operating leases contain various provisions for
annual increases in rent, or rent escalators. Certain of these leases
contain rent escalators with future minimum annual rent increases that are
not deemed to be contingent rents. As a result of the restatement, the
Company is accounting for rental expense related to such operating leases
with non-contingent rent escalators on a straight-line basis over the
initial term of the leases ranging from 10 to 20 years, rather than on a
contractual cash payment basis. The Company is recording a deferred
liability representing the difference between reported rent under the
38
<PAGE>
straight-line method and the actual cash rent expense paid. During fiscal
years 1997 and 1998 and during the second quarter of 1999, substantially
all of these leases were amended to restructure such rent escalators. From
the date of the amendment forward, the Company has accounted for the
amended leases on a contractual cash payment basis. The deferred liability
is amortized from the date of the applicable amendment over the remaining
initial lease terms as an offset to future rent expense.
Statement of Operations. Reflects an increase in rent expense during the
period resulting from changing the accounting treatment associated with the
rent escalators.
Balance Sheet. Reflects a deferred liability, which is created as a result of
the difference between the lease expense reported under the straight-line
method compared to the actual cash payment.
(E) The Company incurred losses from certain sale and leaseback transactions
because the Company's cost basis in the residences (which included the
capital costs associated with the development and construction of the
residences) together with capitalized costs associated with opening such
residences, exceeded the sale proceeds to the Company. Such losses were
recorded as deferred assets and amortized over the initial term of the
leases, which ranged from 15 to 20 years. The Company has determined to
eliminate the deferred assets from its consolidated balance sheet and to
recognize such losses in the period in which they were incurred. Gains
resulting from sale and leaseback transactions continue to be recorded as
deferred liabilities and amortized over the initial lease term as an
offset to future reported rent expense. Unamortized deferred pre-opening
costs and unamortized deferred financing costs related to construction
financing were previously included in the basis of the residence for
purposes of calculating gain or loss on sale and leaseback transactions.
The Company has removed the deferred pre-opening costs from the gain/loss
calculation, amortized such costs over a 12-month period and recorded
unamortized deferred financing costs as interest expense at the time the
construction financing is repaid.
Statement of Operations. Reflects an increase in loss on sale of assets,
interest expense and amortization expense, resulting from certain sale and
leaseback transactions resulting from the changes as described above.
Balance Sheet. Reflects an increase in other current assets resulting from
the elimination of deferred pre-opening costs in the calculation of gain or
loss on sale and leaseback transactions. In addition, deferred gains, which
were previously offset against such deferred losses, have been reclassified
to other liabilities from other assets.
(F) The Company capitalizes a portion of gross interest expense based upon (i)
the amount of average construction in process during the period and (ii)
the average cost of its financing. Capitalized interest is included on the
Company's balance sheet as construction in process and property and
equipment. The amount of interest capitalized is impacted by changes to
the average construction in process and changes in the costs of the
Company's financing as a result of the cumulative impact of the
adjustments in Notes (A), (B) and (C).
Statement of Operations. Reflects a change in interest expense resulting
from recalculating capitalized interest.
Balance Sheet. Reflects a change in construction in process resulting from
recalculating capitalized interest.
(G) This adjustment is the net effect on net income and accumulated deficit as
a result of the adjustments described in Notes (A) through (F).
39
<PAGE>
ASSISTED LIVING CONCEPTS, INC.
Index to Exhibits
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
2.1 Merger Agreement between the Company and CCL Sub, Inc. (Incorporated
by reference to the same titled exhibit to the Company's Registration
Statement on Form S-1, File No. 33-83938).
2.2 Agreement and Plan of Corporate Separation and Reorganization between
Concepts In Community Living, Inc. and Keren Wilson (Incorporated by
reference to the same titled exhibit to the Company's Registration
Statement on Form S-1, File No. 33-83938)
2.3 Assignment, Bill of Sale, License, and Assumption Agreement between
Concepts In Community Living, Inc., and CCL Sub, Inc. (Incorporated
by reference to the same titled exhibit to the Company's Registration
Statement on Form S-1, File No. 33-83938).
2.4 Purchase Agreement between the Company and Lincoln City Limited
Partnership (Incorporated by reference to the same titled exhibit to
the Company's Registration Statement on Form S-1,
File No. 33-83938).
2.5 Letter Purchase Agreement between the Company and Madras Senior
Residence, LRW partners, Keren Brown Wilson and Joseph Hughes
(Incorporated by reference to the same titled exhibit to the
Company's Registration Statement on Form S-1, File No. 33-83938).
3.1 Articles of Incorporation of the Company (Incorporated by reference to
the same titled exhibit to the Company's Registration Statement on
Form S-1, File No. 33-83938).
3.2 By laws of the Company (Incorporated by reference to the same titled
exhibit to the Company's Registration Statement on Form S-1, File No.
33-83938).
4.1 Indenture, dated as of August 15, 1995, between the Company and Harris
Trust and Savings Bank, as Trustee, in respect of the Company's 7.0%
Convertible Subordinated Debentures due 2005. (Incorporated by
reference to the same titled exhibit to the Company's Quarterly
Report on Form 10-Q for the period ended September 30, 1995, File No.
1-83938).
4.2 Form of 7.0% Convertible Subordinated Debentures due 2005
(Incorporated by reference to the same titled exhibit to the Company
Quarterly Report on Form 10-Q for the period ended September 30,
1995, File No. 1-83938).
4.3 Registration Rights Agreement dated August 2, 1995 between the Company
and the Purchasers of its 7% Convertible Subordinated Debentures due
2005 (Incorporated by reference to the same titled exhibit to the
Company's Quarterly Report on Form 10-Q for the period ended
September 30, 1995, File No. 1-83938).
10.1 Stock Option Plan of the Company (Incorporated by referenced exhibit
to the Company's Registration Statement on Form S-1, File No. 33-
83938).
10.2 Employment Agreement between the Company and Keren B. Wilson
(Incorporated by reference to the same titled exhibit to the
Company's Registration Statement on Form S-8, File No. 333-2352).
10.3 Amendment to 1994 Stock Option Plan (Incorporated by reference to the
same titled exhibit to the Company's Registration Statement on Form
S-8, File No. 333-2352).
12 Computation of Ratio of Earnings to Fixed Charges
23.1 Consent of KPMG LLP
23.2 Consent of PricewaterhouseCoopers LLP
27 Financial Data Schedule Article 5 of Regulation S-X
</TABLE>
40
<PAGE>
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) the Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
ASSISTED LIVING CONCEPTS, INC.
Registrant
/s/ James W. Cruckshank
September 23, 1999 By: _________________________________
Name: James W. Cruckshank
Title: Vice President and Chief
Financial Officer
/s/ M. Catherine Maloney
September 23, 1999 By: _________________________________
Name: M. Catherine Maloney
Title: Vice President, Controller
and Chief Accounting Officer
41
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS:
That the undersigned officers and directors of Assisted Living Concepts
Inc., do hereby constitute and appoint Keren Brown Wilson and James W.
Cruckshank, and each of them the lawful attorney and agent or attorneys and
agents with power and authority to do any and all acts and things and to
execute any and all instruments which said attorneys and agents, or either of
them, determine may be necessary or advisable or required to enable to comply
with the Securities and Exchange Act of 1934, as amended, and any rules or
regulations or requirements of the Securities and Exchange Commission in
connection with this Annual Report on Form 10-K. Without limiting the
generality of the foregoing power and authority, the powers granted include
the power and authority to sign the names of the undersigned officers and
directors in the capacities indicated below to this Annual Report on Form 10-K
or amendment or supplements thereto, and each of the undersigned hereby
ratifies and confirms all that said attorneys and agent, or either of the,
shall do or cause to be done by virtue hereof. This Power of Attorney may be
signed in several counterparts.
IN WITNESS WHEREOF, each of the undersigned has executed this Power of
Attorney as of the dated indicated opposite his or her name.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Keren Brown Wilson Chief Executive Officer, September 23, 1999
____________________________________ President and Director
Keren Brown Wilson (Principal Executive
Officer)
/s/ James W. Cruckshank Vice President and Chief September 23, 1999
____________________________________ Financial Officer
James W. Cruckshank
/s/ M. Catherine Maloney Vice President, Controller September 23, 1999
____________________________________ and Chief Accounting
M. Catherine Maloney Officer
/s/ Leslie Mahon Vice President and Chief September 23, 1999
____________________________________ Operating Officer
Leslie Mahon
/s/ Gloria Cavanaugh Director September 23, 1999
____________________________________
Gloria Cavanaugh
/s/ Richard C. Ladd Director September 23, 1999
____________________________________
Richard C. Ladd
/s/ Bradley Razook Director September 23, 1999
____________________________________
Bradley Razook
/s/ Jill Krueger Director September 23, 1999
____________________________________
Jill Krueger
/s/ William McBride III Director September 23, 1999
____________________________________
William McBride III
</TABLE>
42
<PAGE>
Exhibit 12
Ratio of Earnings to Fixed Charges
<TABLE>
<CAPTION>
Year Ended
Year Ended December 31,
December 31, 1996
1995 (As Restated)
------------ -------------
(in thousands)
<S> <C> <C>
Loss before provision for income taxes.............. $ (575) $(1,915)
Add fixed charges
Interest expense including amortization of debt
issuance cost.................................... 96 1,146
------ -------
Loss before fixed charges........................... $ (479) $ (769)
====== =======
Fixed charges
Interest expense including amortization of debt
issuance cost.................................... 96 1,146
Capitalized interest.............................. 577 2,317
------ -------
Total fixed charges................................. 673 3,463
====== =======
Ratio of Earnings to Fixed Charges.................. -- --
====== =======
Deficiency of earnings to cover fixed charges....... $1,152 $ 4,232
====== =======
</TABLE>
<PAGE>
Exhibit 23.1
Consent of Independent Certified Public Accountants
The Board of Directors
Assisted Living Concepts, Inc.:
We consent to incorporation by reference in the Registration Statements
(No. 333-58953 and No. 333-2352) on Forms S-8 of Assisted Living Concepts,
Inc. of our report dated February 28, 1997, except for notes 15 and 16 to the
consolidated financial statements, as to which the dates are March 4, 1997 and
September 10, 1999, respectively, relating to the consolidated balance sheets
of Assisted Living Concepts, Inc. and subsidiaries as of December 31, 1995 and
1996 (as restated), and the related consolidated statements of operations,
shareholders' equity, and cash flows for the years ended December 31, 1995 and
1996 (as restated), which report appears in the December 31, 1996 annual
report on Form 10-K/A of Assisted Living Concepts, Inc.
As discussed in note 16 to the consolidated financial statements, the
Company has restated its financial statements as of and for the year ended
December 31, 1996.
KPMG LLP
Portland, Oregon
September 27, 1999
<PAGE>
Exhibit 23.2
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-2352) of our reports dated March 17, 1995 of
Assisted Living Concepts, Inc.'s Annual Report on Form 10-K/A for the year
ended December 31, 1996 relating to the financial statements of Assisted Living
Concepts Group (which is comprised of Assisted Living Facilities, Inc., a
subchapter S corporation, Madras Elder Care (d.b.a. Aspen Court), a general
partnership, and Lincoln City Partners, a general partnership) for the eleven
months ended November 30, 1994 and of Assisted Living Concepts, Inc. for the
one month period ended December 31, 1994, which appear in this Annual Report to
Shareholders, which is incorporated in this Annual Report on Form 10-K/A.
PricewaterhouseCoopers LLP
Portland, Oregon
September 27, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K/A
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,105
<SECURITIES> 0
<RECEIVABLES> 763
<ALLOWANCES> 33
<INVENTORY> 0
<CURRENT-ASSETS> 12,427
<PP&E> 129,964
<DEPRECIATION> 878
<TOTAL-ASSETS> 147,223
<CURRENT-LIABILITIES> 39,568
<BONDS> 49,663
0
0
<COMMON> 55
<OTHER-SE> 56,940
<TOTAL-LIABILITY-AND-EQUITY> 147,223
<SALES> 21,022
<TOTAL-REVENUES> 21,022
<CGS> 14,055
<TOTAL-COSTS> 20,962
<OTHER-EXPENSES> 4
<LOSS-PROVISION> 33
<INTEREST-EXPENSE> 1,146
<INCOME-PRETAX> (1,915)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,915)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,915)
<EPS-BASIC> (.46)
<EPS-DILUTED> (.46)
</TABLE>
