<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20459
FORM 10-K
(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, 1999
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 N.E. Glenn Widing Drive, 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
6.0% Convertible Subordinated Debentures Due November
2002 American Stock Exchange
5.625% Convertible Subordinated Debentures Due May
2003 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: [X]
The Registrant had 17,120,745 shares of common stock, $.01 par value,
outstanding at March 27, 2000. The aggregate market value of the voting stock
held by non-affiliates of the registrant on such date was approximately $30.0
million.
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<PAGE>
PART I
References in this report to "ALC," the "Company," "us" or "we" refer to
Assisted Living Concepts, Inc. and its subsidiaries.
ITEM 1. Business
Overview
We operate, own and lease free-standing assisted living residences. These
residences are primarily located in small middle-market rural and suburban
communities with a population typically ranging from 10,000 to 40,000. As of
December 31, 1999 we had operations in 16 states.
We also provide personal care and support services and make available
routine nursing services (as permitted by applicable regulations) designed to
meet the health care needs of our residents. We believe that this combination
of residential, personal care, support and health care services provides a
cost-efficient alternative and affords an independent lifestyle for
individuals who do not require the broader array of medical services that
nursing facilities are required by law to provide.
We have experienced significant and rapid growth, primarily through the
development of assisted living residences and, to a much lesser extent,
through acquisitions of residences. When we completed our initial public
offering in November 1994 we had a base of five residences (137 units). As of
December 31, 1999, we had 185 assisted living residences in operation
representing an aggregate of 7,148 units. Of these residences, we owned 115
residences (4,515 units) and leased 70 residences (2,633 units). For the
twelve months ended December 31, 1999, our 115 Stabilized Residences (those
residences that had been operating for twelve months prior to the beginning of
the period or had achieved 95.0% occupancy within the first twelve months of
operations) had an average occupancy rate of approximately 85.4% and an
average monthly rental rate of approximately $1,866 per unit.
For the twelve months ended December 31, 1999, we commenced operations with
respect to 20 residences (798 units) which were under construction at December
31, 1998. Except for the completion of these 20 residences, we discontinued
all development activity in 1999 in order to focus on stabilizing our current
base of operating residences. We wrote-off approximately $2.4 million and $4.9
million in fiscal years 1998 and 1999, respectively, primarily associated with
sites which we will no longer seek to develop. We own land for the development
of seven sites, and the expansion of three existing residences where
construction has not yet commenced. We currently have three of these sites
listed for sale and are retaining the remaining sites for possible future
development. We have no intention of developing these sites at this time.
During 1999 we discontinued all development activity in order to focus on
our core business of operating our existing residences. The principal elements
of our business strategy are to:
. increase occupancy and improve operating efficiencies at our existing
base of residences;
. expand market penetration in existing markets;
. serve higher-acuity residents; and
. pursue strategic business alliances.
We anticipate that revenues at a majority of our residences will continue to
come from private pay sources. However, we believe that locating residences in
states with favorable regulatory and reimbursement climates should provide a
stable source of residents eligible for Medicaid reimbursement to the extent
that private pay residents are not available and, in addition, provide our
private pay residents with alternative sources of income if their private
funds are depleted and they become Medicaid eligible.
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Although we will seek to manage the mix of private paying tenants and
Medicaid paying tenants residing in our facilities, any shift to a high
Medicaid population could have an adverse affect on our financial position,
results of operations or cash flows, particularly if third-party payors such
as Medicaid continue to seek limits on reimbursement rates. See "Risk
Factors--We depend on reimbursements by third-party payors."
Assisted Living Concepts, Inc. is a Nevada corporation. Our principal
executive offices are located at 11835 N.E. Glenn Widing Drive, Building E,
Portland, Oregon 97220-9057, and our telephone number is (503) 252-6233.
Restatement of Historical Financial Statements
On February 1, 1999, we announced that after consultation with our
independent auditors we would restate our financial statements for the fiscal
quarter ended June 30, 1997, the fiscal quarter ended September 30, 1997, the
fiscal year ended December 31, 1997, the fiscal quarter ended March 31, 1998,
the fiscal quarter ended June 30, 1998 and the fiscal quarter ended September
30, 1998. On March 31, 1999, we announced that the restatement would be more
extensive than we had previously believed, and might include periods prior to
the second quarter of 1997, including the fiscal year ended December 31, 1996.
After further consultation with our independent auditors, we determined to
restate our financial statements for the fiscal year ended December 31, 1996,
the fiscal year ended December 31, 1997 and each of the first three fiscal
quarters of the fiscal year ended December 31, 1998. On September 30, 1999, we
filed restated financial statements with the Securities and Exchange
Commission ("SEC") for the fiscal years ended December 31, 1996 and 1997 and
for each of the first three fiscal quarters of the fiscal year ended December
31, 1998.
The restatement resulted primarily from:
. the earlier recognition of certain expenses that we previously
capitalized in connection with our development and financing activities;
. a modification in how we accounted for certain of our lease
arrangements;
. a modification in how we accounted for certain of our acquisitions and
joint venture agreements;
. the capitalization of fees we received during 1997 and 1998 that we
previously recorded as a reduction of expenses or other income;
. the elimination of an impairment write-down that we had previously
recorded on three of our residences;
. the elimination of certain accrued expenses previously recorded pursuant
to a change in accounting principle; and
. an increase in the amount of goodwill that we wrote-off in the second
quarter of 1998 relating to exiting our home health operations.
The overall effect of the restatement on net income and net income per share
in each of the periods subject to the restatement is illustrated in the
following table:
<TABLE>
<CAPTION>
As previously reported As restated
--------------------------------- -----------------------
Net Income
(Loss) Per
Share Net Loss
--------------- Per Basic and
Period Net Income (Loss) Basic Diluted Net Loss Diluted Share
------ ----------------- ------ ------- -------- -------------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Year ended 12/31/96..... $ 149 $ 0.02 $ 0.01 $ (1,915) $(0.23)
Year ended 12/31/97..... $ 4,209 $ 0.35 $ 0.34 $ (2,479) $(0.21)
Quarter ended
3/31/98(1)............. $ 1,906 $ 0.12 $ 0.12 $ (784) $(0.05)
Quarter ended 6/30/98... $(4,378) $(0.28) $(0.28) $(11,831) $(0.75)
Quarter ended 9/30/98... $ 2,722 $ 0.16 $ 0.16 $ (720) $(0.04)
</TABLE>
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(1) Net income and net income per share, as previously reported for the
quarter ended March 31, 1998, do not reflect the cumulative effect of
the change in accounting principle which was adopted during the quarter
ended June 30, 1998, effective January 1, 1998.
3
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Termination of Merger Agreement
On February 1, 1999, we agreed with American Retirement Corporation ("ARC")
to terminate our previously announced merger agreement, which had been entered
into during November 1998. We recorded a charge of approximately $1.1 million
in the fourth quarter of 1998, and $228,000 the first quarter of 1999 for
expenses incurred related to the terminated merger.
Securityholder Litigation
Since February 1, 1999, 12 separate complaints were filed in the United
States District Court for the District of Oregon against us and certain of our
past and present officers and directors. Pursuant to Order signed on June 1,
1999, those complaints were consolidated for all purposes. On July 23, 1999, a
consolidated complaint was filed, and on October 20, 1999, an amended
consolidated complaint ("Complaint") was filed.
The Complaint purports to be brought on behalf of a class of purchasers of:
(a) our common stock from February 6, 1997 through March 31, 1999, inclusive;
(b) our 6.0% convertible subordinated debentures due November 1, 2002 ("6.0%
Debentures") from October 21, 1997 through March 31, 1999, inclusive; and (c)
our 5.625% convertible subordinated debentures due May 1, 2003 ("5.625%
Debentures") from July 22, 1998 through March 31, 1999, inclusive.
The Complaint also names as defendants Schroder & Co., Inc., Morgan Stanley
Dean Witter and Smith Barney, Inc. (solely as underwriters in connection with
the 6.0% Debentures) and KPMG LLP, our independent auditors (in connection
with our offerings of common stock, 6.0% Debentures and 5.625% Debentures).
The Complaint alleges violations of the federal securities laws and seeks
unspecified damages. We filed an answer to the Complaint on December 7, 1999.
We cannot predict the outcome of the foregoing litigation and currently are
unable to evaluate the likelihood of success or the range of possible loss.
However, if the foregoing consolidated action were determined adversely to us
and/or to those to whom our indemnity obligations exist, such a determination
could have a material adverse effect on our financial condition, results of
operations, cash flow and liquidity.
Termination of Joint Venture Agreements
During fiscal years 1997 and 1998, we entered into joint venture agreements
with respect to the operation of certain start-up residences pursuant to which
90% of the operating risks and rewards related to such residences were
allocated to the joint venture partner, in which we had an interest. We
consolidated the operations of the joint venture agreements in our financial
statements. The joint venture partner reimbursed us for 90% of the start-up
losses of the joint venture residences incurred in the second quarter of 1997
and through the third quarter of 1998, and we recognized such reimbursements
as other income in our financial statements during such quarters. As part of
the restatement such loss reimbursements have been accounted for as loans,
rather than other income. We also reflected amounts paid to repurchase the
joint venture partner's interest in the operations of the joint venture
residences in excess of reimbursed losses as interest and other expense.
During the first quarter of 1999, we negotiated with the joint venture
partner to acquire, for $3.8 million, all of such partner's remaining
interests in the operations of the remaining 17 residences subject to joint
venture agreements through the third quarter of 1998. The joint venture
partner did not reimburse us for any start-up losses, nor have we entered into
any new joint venture agreements with respect to the operation of start-up
residences, subsequent to the third quarter of 1998.
Management Changes
On March 16, 1999, our board of directors announced the appointment of Dr.
Keren Brown Wilson, our co-founder, as our President and Chief Executive
Officer. The board also announced the appointment of Leslie J. Mahon as Vice
President and Chief Operating Officer and James W. Cruckshank as Vice
President and Chief Financial Officer. As of March 16, 1999, we also entered
into a consulting agreement with William McBride, pursuant to which Mr.
McBride agreed to provide us with consulting services and to resign from his
position as
4
<PAGE>
our Chief Executive Officer, and amended Dr. Wilson's existing employment
agreement. The terms of these agreements are summarized in Item 11.
On March 31, 1999, we announced the resignation of Mr. McBride as Chairman
of the Board of Directors and the election by the board of Richard C. Ladd as
Interim Chairman. We also announced that Mr. McBride had decided not to seek
reelection to the board of directors at the next annual meeting.
In April 1999, we announced the increase in the number of board members from
five to six and the election by the board of Jill Krueger to serve as a
director and as chairman of our Audit Committee.
On March 3, 2000, our Board of Directors announced the appointment of W.
James Nicol and John Gibbons to our Board of Directors, including the
appointment of Mr. Nicol as Chairman of the Board. We also announced the
formation of an Executive Committee of our Board of Directors comprised of Dr.
Keren Brown Wilson, Mr. Nicol and Mr. Gibbons. On March 3, 2000, we also
announced the resignation of James W. Cruckshank as our Chief Financial
Officer and the appointment of Mr. Gibbons as Interim Chief Financial Officer.
At that time, we entered into a Separation and Consulting Agreement with Mr.
Cruckshank, pursuant to which Mr. Cruckshank's employment agreement with us
was terminated, and Mr. Cruckshank agreed to provide us with consulting
services through the end of 2000. See "Executive Compensation--Consulting
Agreements."
On March 16, 2000, we announced the addition of Drew Miller as our Chief
Financial Officer and Treasurer and the resignation of Mr. Gibbons as Interim
Chief Financial Officer.
Amendments to Certain Leases
In March 1999, we amended 16 leases with a single lessor. Prior to the
amendment the leases were accounted for as financings due to our continuing
involvement in the residences in the form of a fair market value purchase
option. The amendments resulted in the reclassification of such leases from
financings to operating leases.
In June 1999, we amended all of our 37 leases with another lessor. These
amendments restructured provisions related to future minimum annual rent
increases, or "rent escalators," which prior to the amendments required us to
account for rent expense related to such leases on a straight-line basis. From
the date of the amendment forward, we will account for the amended leases on a
contractual cash payment basis and amortize the deferred rent balance as of
the date of the amendment over the remaining initial terms of the lease. Those
amendments also redefined the lease renewal option with respect to certain
leases and provided the lessor with the option to declare an event of default
in the event of a change of control under certain circumstances. In addition,
the amendments also provide us with the ability, subject to certain
conditions, to sublease or assign our leases with respect to two residences.
Amendment of Loan Agreements
During the third quarter of 1999, we amended certain loan agreements with
one of our creditors. Pursuant to the amendment, we agreed to provide $8.3
million of additional cash collateral in exchange for the forbearance or
waiver of certain possible defaults, including an amendment to certain
financial covenants. The amendment provides for the release of the additional
collateral upon the achievement of specified performance targets, provided
that we are in compliance with the other terms of the loan agreements. We
achieved certain of these specified targets during the fourth quarter of
fiscal 1999 and $1.2 million of the cash was released from restriction.
Site Abandonment Costs
Except for the completion of 20 residences opened during 1999, we
discontinued all development activity in 1999 in order to focus on stabilizing
our current base of operating residences. We wrote-off approximately $4.9
million primarily associated with sites which we will no longer seek to
develop. We own land for the development of seven sites and the expansion of
three existing residences, where construction has not yet commenced. We
currently have three of the sites listed for sale and are retaining the
remaining sites for possible future development. We have no intention of
developing these sites at this time.
5
<PAGE>
Services
Our residences offer residents a supportive, "home-like" setting and
assistance with activities of daily living. Residents are individuals who, for
a variety of reasons, cannot live alone but do not typically need the 24-hour
skilled medical care provided in nursing facilities. We design services
provided to these residents to respond to their individual needs and to
improve their quality of life. This individualized assistance is available 24
hours a day, to meet both anticipated and unanticipated needs, including
routine health-related services, which are made available and are provided
according to the resident's individual needs and state regulatory
requirements. Available services include:
. General services, such as meals, laundry and housekeeping;
. Support services, such as assistance with medication, monitoring health
status, coordination of transportation; and
. Personal care, such as dressing, grooming and bathing.
We also provide or arrange access to additional services beyond basic
housing and related services, including physical therapy and pharmacy
services.
Although a typical package of basic services provided to a resident includes
meals, housekeeping, laundry and personal care, we do not have a standard
service package for all residents. Instead, we are able to accommodate the
changing needs of our residents through the use of individual service plans
and flexible staffing patterns. Our multi-tiered rate structure for services
is based upon the acuity of, or level of services needed by, each resident.
Supplemental and specialized health-related services for those residents
requiring 24-hour supervision or more extensive assistance with activities of
daily living are provided by third-party providers who are reimbursed directly
by the resident or a third-party payor (such as Medicaid or long-term care
insurance). We assess the level of need of each resident regularly.
Operations
Each residence has an on-site program director who is responsible for the
overall day-to-day operation of the residence, including quality of care,
marketing, social services and financial performance. The program director is
assisted by professional and non-professional personnel, some of whom may be
independent providers or part-time personnel, including nurses, personal
service assistants, maintenance and kitchen personnel. The nursing hours vary
depending on the residents' needs. We consult with outside providers, such as
registered nurses, pharmacists, and dietitians, for purposes of medication
review, menu planning and responding to any special dietary needs of
residents. Personal service assistants who primarily are full-time employees
are responsible for personal care, dietary services, housekeeping and laundry
services. Maintenance services are performed by full and part-time employees.
We have established an infrastructure that includes 5 regional vice
presidents of operations who oversee the overall performance and finances of
each region, 17 regional operations managers and 2 regional associate
operations managers who oversee the day-to-day operations of up to 10 to 12
residences, and team leaders who provide peer support for up to three to four
residences. Presently, residence personnel also are supported by corporate
staff based at our headquarters. We also have regional property managers who
oversee the maintenance of the residences and five regional marketing
coordinators who assist with marketing the residence. Corporate and regional
personnel work with the program directors to establish residence goals and
strategies, quality assurance oversight, development of Company policies and
procedures, government relations, marketing and sales, community relations,
development and implementation of new programs, cash management and treasury
functions, and human resource management.
6
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Competition
The long-term care industry generally is highly competitive. We expect that
the assisted living business, in particular, will become even more competitive
in the future given the relatively low barriers to entry and continuing health
care cost containment pressures.
We compete with numerous other companies providing similar long-term care
alternatives. We operate in 16 states and each community in which we operate
provides a unique market. Overall, a limited number of our markets include an
assisted living competitor offering assisted living facilities that are
similar in size, price and range of service. In markets where we have
competition, our competitors include other companies that provide adult day
care in the home, higher priced assisted living centers (typically larger
facilities with more amenities), congregate care facilities where tenants
elect the services to be provided, and continuing care retirement centers on
campus like settings.
We expect to face increased competition from new market entrants as assisted
living receives increased attention and the number of states which include
assisted living in their Medicaid programs increases. Competition will also
grow from new market entrants, including publicly and privately held companies
focusing primarily on assisted living. Nursing facilities that provide long-
term care services are also a potential source of competition for us.
Providers of assisted living residences compete for residents primarily on the
basis of quality of care, price, reputation, physical appearance of the
facilities, services offered, family preferences, physician referrals and
location. Some of our competitors operate on a not-for-profit basis or as
charitable organizations. Some of our competitors are significantly larger
than us and have, or may obtain, greater resources than ours. While we
generally believe that there is moderate competition for less expensive
segments of the private market and for Medicaid residents in small
communities, we have seen an increase in competition in certain of our
markets.
We believe that many assisted living markets have become or are on the verge
of becoming overbuilt. Regulation and other barriers to entry into the
assisted living industry are not substantial. In addition, because the segment
of the population that can afford to pay our daily resident fee is finite, the
development of new assisted living facilities could outpace demand. The short
term effects of overbuilding include (a) significantly longer fill-up periods
(2-3 years as compared to 12-18 months previously experienced), (b) pressure
to lower or refrain from increasing rates and (c) competition for workers in
already tight labor markets. Long term effects include lower margins for an
estimated 3-5 years until excess units are absorbed. Recently, we have
experienced slower fill-up than expected of new residences in some markets as
well as declining occupancy in our stabilized residences due to the increase
in options available to potential new residents which units are vacated. We
believe that each local market is different, and we are and will continue to
react in a variety of ways, including selective price discounting, to the
specific competitive environment that exists in each market. There can be no
assurance that we will be able to compete effectively in those markets where
overbuilding exists, or that future overbuilding in other markets where we
have opened or plan to open residences will not adversely affect our
operations.
Funding
Assisted living residents or their families generally pay the cost of care
from their own financial resources. Depending on the nature of an individual's
health insurance program or long-term care insurance policy, the individual
may receive reimbursement for costs of care under an "assisted living,"
"custodial" or "alternative care benefit." Government payments for assisted
living have been limited. Some state and local governments offer subsidies for
rent or services for low-income elders. Others may provide subsidies in the
form of additional payments for those who receive Supplemental Security Income
(SSI). Medicaid provides coverage for certain financially or medically needy
persons, regardless of age, and is funded jointly by federal, state and local
governments. Medicaid contracts for assisted living vary from state to state.
Although a majority of our revenues come from private payors, the cost
structure of the residences has historically been, and is expected to continue
to be, sufficiently low so that the residences are able to operate profitably
if all of their revenues are derived through Medicaid contracts.
7
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In 1981, the federal government approved a Medicaid waiver program called
Home and Community Based Care which was designed to permit states to develop
programs specific to the healthcare and housing needs of the low-income
elderly eligible for nursing home placement (a "Medicaid Waiver Program"). In
1986, Oregon became the first state to use federal funding for licensed
assisted living services through a Medicaid Waiver Program authorized by the
Health Care Financing Administration ("HCFA"). Under a Medicaid Waiver
Program, states apply to HCFA for a waiver to use Medicaid funds to support
community-based options for the low-income elderly who need long-term care.
These waivers permit states to reallocate a portion of Medicaid funding for
nursing facility care to other forms of care such as assisted living. In 1994,
the federal government implemented new regulations which empowered states to
further expand their Medicaid Waiver Programs and eliminated restrictions on
the amount of Medicaid funding states could allocate to community-based care,
such as assisted living. A limited number of states including Oregon, New
Jersey, Texas, Arizona, Nebraska, Florida, Idaho and Washington currently have
operating Medicaid Waiver Programs that allow them to pay for assisted living
care. Without a Medicaid Waiver Program, states can only use federal Medicaid
funds for long-term care in nursing facilities.
During the years ended December 31, 1997, 1998 and 1999, direct payments
received from state Medicaid agencies accounted for approximately 11.1%, 10.7
and 10.4%, respectively, of our revenue while the tenant-paid portion received
from Medicaid residents accounted for approximately 5.9%, 5.8 and 5.9%,
respectively, of our revenue during these periods. We expect in the future
that state Medicaid reimbursement programs will continue to constitute one of
our sources of revenue.
The Balanced Budget Act ("BBA") of 1997, Public Law 105-33, included
sweeping changes to Medicare and Medicaid, significantly reducing rates of
increase for payments to home health agencies. Under the BBA, home health
agencies (as well as certain other health related industries) will no longer
be reimbursed under a cost based system. Rather, the BBA requires the
Secretary of Health and Human Services to establish and implement a
prospective payment system under which home health care services will be
reimbursed on a per diem basis for cost reporting periods beginning on and
after October 1, 2000. In 1998, following the adoption of the BBA, we closed
our home health operations. The shift to a prospective payment system under
the BBA does not apply to assisted living residences and therefore should not
affect our assisted living operations.
We anticipate that revenues at a majority of our residences will continue to
come from private pay sources. However, we believe that locating residences in
states with favorable regulatory and reimbursement climates should provide a
stable source of residents eligible for Medicaid reimbursement to the extent
that private pay residents are not available and, in addition, provide our
private pay residents with alternative sources of income when their private
funds are depleted and they become Medicaid eligible. Although we will seek to
manage the mix of private paying tenants and Medicaid paying tenants residing
in our facilitites, this shift could have an adverse affect on our financial
position, results of operations or cash flows, particularly if third-party
payors such as Medicaid continue to seek limits on reimbursement rates.
Government Regulation
Our assisted living residences are subject to certain state statutes, rules
and regulations, including those which provide for licensing requirements. In
order to qualify as a state licensed facility, our residences must comply with
regulations which address, among other things, staffing, physical design,
required services and resident characteristics. As of December 31, 1999, we
had obtained licenses in Oregon, Washington, Idaho, Nebraska, Texas, Arizona,
Iowa, Louisiana, Ohio, New Jersey, Pennsylvania, Florida, Michigan, Georgia
and South Carolina. We are not currently subject to state licensure
requirements in Indiana. Our residences are also subject to various local
building codes and other ordinances, including fire safety codes. These
requirements vary from state to state and are monitored to varying degrees by
state agencies.
As a provider of services under the Medicaid program in the United States,
we are subject to Medicaid fraud and abuse laws, which prohibit any bribe,
kickback, rebate or renumeration of any kind in return for the referral of
Medicaid patients, or to induce the purchasing, leasing, ordering or arranging
of any goods or services to be
8
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paid for by Medicaid. Violations of these laws may result in civil and
criminal penalties and exclusions from participation in the Medicaid program.
The Inspector General of the Department of Health and Human Services issued
"safe harbor" regulations specifying certain business practices, which are
exempt from sanctions under the fraud and abuse law. Several states in which
we operate have laws that prohibit certain direct or indirect payments or fee-
splitting arrangements between health care providers if such arrangements are
designed to induce or encourage the referral of patients to a particular
provider. We at all times attempt to comply with all applicable fraud and
abuse laws. There can be no assurance that administrative or judicial
interpretation of existing laws or regulations or enactments of new laws or
regulations will not have a material adverse effect on our results of
operations or financial condition.
Currently, the federal government does not regulate assisted living
residences as such. State standards required of assisted living providers are
less in comparison with those required of other licensed health care
operators. For instance, the states we initially targeted for
development/expansion typically do not set staffing ratios. Current Medicaid
regulations provide for comparatively flexible state control over the
licensure and regulation of assisted living residences. There can be no
assurance that federal regulations governing the operation of assisted living
residences will not be implemented in the future or that existing state
regulations will not be expanded.
Under the Americans with Disabilities Act of 1990, all places of public
accommodation are required to meet certain federal requirements related to
access and use by disabled persons. A number of additional federal, state and
local laws exist that also may require modifications to planned facilities to
create access to the properties by disabled persons. Although we believe that
our facilities are substantially in compliance with, or are exempt from,
present requirements, we will incur additional costs if required changes
involve a greater expenditure than anticipated or must be made on a more
accelerated basis than anticipated. Further legislation may impose additional
burdens or restrictions with respect to access by disabled persons, the costs
of compliance with which could be substantial.
Employees
As of December 31, 1999 we had 3,718 employees, of whom 1,546 were full-time
employees and 2,172 were part-time employees. None of our employees are
represented by any labor union. We believe that our labor relations are
generally good.
ITEM 2. Properties
The following chart sets forth, as of December 31, 1999 the location, number
of units, date of licensure, and ownership status of our residences. In
addition, the chart sets forth occupancy rates as of December 31, 1999.
<TABLE>
<CAPTION>
Occupancy (%)
Opening at
Residence Units Date(1) Ownership(2) 12/31/99(3)
--------- ----- ------- ------------ -------------
<S> <C> <C> <C> <C>
Western Region
Idaho
Burley.............................. 35 08/97 Leased 88.6
Caldwell............................ 35 08/97 Leased 60.0
Garden City......................... 48 04/97 Owned 83.3
Hayden.............................. 39 11/96 Leased 100.0
Idaho Falls......................... 39 01/97 Owned 89.7
Moscow.............................. 35 04/97 Owned 71.4
Nampa............................... 39 02/97 Leased 74.4
Rexburg............................. 35 08/97 Owned 65.7
Twin Falls.......................... 39 09/97 Owned 48.7
---
Sub Total......................... 344
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
Occupancy (%)
Opening at
Residence Units Date(1) Ownership(2) 12/31/99(3)
--------- ----- ------- ------------ -------------
<S> <C> <C> <C> <C>
Oregon
Astoria............................. 28 08/96 Owned 96.4
Bend................................ 46 11/95 Owned 87.0
Brookings........................... 36 07/96 Owned 100.0
Canby............................... 25 12/90 Leased 100.0
Estacada............................ 30 01/97 Owned 100.0
Eugene.............................. 47 08/97 Leased 100.0
Hood River.......................... 30 10/95 Owned 96.7
Klamath Falls....................... 36 10/96 Leased 100.0
Lincoln City........................ 33 10/94 Owned 75.7
Madras.............................. 27 03/91 Owned 100.0
Myrtle Creek........................ 34 03/96 Leased 100.0
Newberg............................. 26 10/92 Leased 100.0
Newport............................. 36 06/96 Leased 83.3
Pendleton........................... 39 04/91 Leased 87.2
Prineville.......................... 30 10/95 Owned 96.7
Redmond............................. 37 03/95 Leased 100.0
Silverton........................... 30 07/95 Owned 96.7
Sutherlin........................... 30 01/97 Leased 100.0
Talent.............................. 36 10/97 Owned 100.0
---
Sub Total......................... 636
Washington
Battle Ground....................... 40 11/96 Leased 100.0
Bremerton........................... 39 05/97 Owned 82.1
Camas............................... 36 03/96 Leased 100.0
Enumclaw............................ 40 04/97 Owned 95.0
Ferndale............................ 39 10/98 Owned 79.5
Grandview........................... 36 02/96 Leased 91.7
Hoquiam............................. 40 07/97 Leased 100.0
Kelso............................... 40 08/96 Leased 90.0
Kennewick........................... 36 12/95 Leased 47.2
Port Orchard........................ 39 06/97 Owned 97.4
Port Townsend....................... 39 01/98 Owned 97.4
Spokane............................. 39 09/97 Owned 87.2
Sumner.............................. 48 03/98 Owned 97.9
Vancouver........................... 44 06/96 Leased 77.3
Walla Walla......................... 36 02/96 Leased 100.0
Yakima.............................. 48 07/98 Owned 89.6
---
Sub Total......................... 639
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Occupancy (%)
Opening at
Residence Units Date(1) Ownership(2) 12/31/99(3)
--------- ----- ------- ------------ -------------
<S> <C> <C> <C> <C>
Midwest Region
Indiana
Bedford............................. 39 03/98 Owned 61.5
Bloomington......................... 39 01/98 Owned 38.5
Camby............................... 39 12/98 Owned 43.6
Crawfordsville...................... 39 06/99 Owned 76.9
Elkheart............................ 39 09/97 Leased 89.7
Fort Wayne.......................... 39 06/98 Owned 38.5
Franklin............................ 39 05/98 Owned 53.9
Huntington.......................... 39 02/98 Owned 59.0
Jeffersonville...................... 39 03/99 Owned 28.2
Kendalville......................... 39 05/98 Owned 48.7
Lafayette........................... 39 11/99 Owned 38.5
LaPorte............................. 39 10/98 Owned 43.6
Logansport.......................... 39 02/98 Owned 100.0
Madison............................. 39 10/97 Leased 97.4
Marion.............................. 39 03/98 Owned 38.5
Muncie.............................. 39 02/98 Owned 89.7
New Albany.......................... 39 05/98 Owned 64.1
New Castle.......................... 39 02/98 Owned 82.1
Seymour............................. 39 05/98 Owned 69.2
Shelbyville......................... 39 05/98 Owned 92.3
Warsaw.............................. 39 10/97 Owned 48.7
---
Sub Total......................... 819
Iowa
Atlantic............................ 30 09/98 Owned 83.3
Carroll............................. 35 01/99 Owned 60.0
Clarinda............................ 35 09/98 Owned 97.1
Council Bluff....................... 50 03/99 Owned 62.0
Denison............................. 35 05/98 Leased 62.9
Sergeant Bluff...................... 39 11/99 Owned 10.3
---
Sub Total......................... 224
Michigan............................
Coldwater........................... 39 10/99 Owned 38.5
Kalamazoo........................... 39 11/99 Owned 46.2
Three Rivers........................ 39 04/99 Owned 28.2
---
Sub Total......................... 117
Nebraska
Beatrice............................ 39 07/97 Leased 97.4
Blair............................... 30 07/98 Owned 86.7
Columbus............................ 39 06/98 Owned 97.4
Fremont............................. 39 05/98 Owned 100.0
Nebraska City....................... 30 06/98 Owned 86.7
Norfolk............................. 39 04/97 Leased 79.5
Seward.............................. 30 10/98 Owned 80.0
Wahoo............................... 39 06/97 Leased 71.8
York................................ 39 05/97 Leased 100.0
---
Sub Total......................... 324
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
Occupancy (%)
Opening at
Residence Units Date(1) Ownership(2) 12/31/99(3)
--------- ----- ------- ------------ -------------
<S> <C> <C> <C> <C>
Southeast Region
Georgia
Rome................................ 39 08/99 Owned 25.6
Florida
Defuniak Springs.................... 39 07/99 Owned 20.5
Milton.............................. 39 06/99 Owned 51.3
NW Pensacola........................ 39 06/99 Owned 43.6
Quincy.............................. 39 04/99 Owned 43.6
---
Sub Total......................... 156
Louisiana
Alexandria.......................... 48 07/98 Owned 66.7
Bunkie.............................. 39 01/99 Owned 43.6
Houma............................... 48 08/98 Owned 81.3
Ruston.............................. 39 01/99 Owned 46.2
---
Sub Total......................... 174
South Carolina
Aiken............................... 39 02/98 Owned 87.2
Clinton............................. 39 11/97 Leased 33.3
Goose Creek......................... 39 08/98 Owned 41.0
Greenwood........................... 39 05/98 Leased 41.0
Greer............................... 39 06/99 Owned 66.7
James Island........................ 39 08/98 Owned 82.1
North Augusta....................... 39 10/98 Owned 35.9
Port Royal.......................... 39 09/98 Owned 71.8
Summerville......................... 39 02/98 Owned 79.5
---
Sub Total......................... 351
Texas
Athens.............................. 38 11/95 Leased 94.7
Carthage............................ 30 10/95 Leased 93.3
Greenville.......................... 40 11/95 Leased 95.0
Gun Barrel City..................... 40 10/95 Leased 100.0
Henderson........................... 30 09/96 Leased 100.0
Jacksonville........................ 39 12/95 Leased 97.4
Longview............................ 30 09/95 Leased 93.3
Marshall............................ 40 07/95 Leased 87.5
Paris Oaks.......................... 50 12/98 Owned 100.0
Sulphur Springs..................... 30 01/96 Owned 100.0
---
Sub Total......................... 367
Southwest Region
Texas
Abilene............................. 38 10/96 Leased 100.0
Amarillo............................ 50 03/96 Leased 98.0
Beaumont............................ 50 04/96 Leased 92.0
Big Springs......................... 38 05/96 Leased 97.4
Bryan............................... 30 06/96 Leased 100.0
Canyon.............................. 30 06/96 Leased 100.0
Cleburne............................ 45 01/96 Owned 100.0
College Station..................... 39 10/96 Leased 79.5
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
Occupancy (%)
Opening at
Residence Units Date(1) Ownership(2) 12/31/99(3)
--------- ----- ------- ------------ -------------
<S> <C> <C> <C> <C>
Conroe.............................. 38 07/96 Leased 94.7
Denison............................. 30 01/96 Owned 86.7
Gainesville......................... 40 01/96 Leased 97.5
Levelland........................... 30 01/96 Leased 100.0
Lubbock............................. 50 07/96 Leased 96.0
Lufkin.............................. 39 05/96 Leased 100.0
McKinney............................ 39 01/97 Owned 100.0
McKinney............................ 50 05/98 Owned 94.0
Mesquite............................ 50 07/96 Leased 92.0
Midland............................. 50 12/96 Owned 98.0
Mineral Wells....................... 30 07/96 Leased 100.0
Nagadoches.......................... 30 06/96 Leased 100.0
Orange.............................. 36 03/96 Leased 97.2
Pampa............................... 36 08/96 Leased 100.0
Plainview........................... 36 07/96 Leased 94.4
Plano............................... 64 05/98 Owned 89.1
Port Arthur......................... 50 05/96 Owned 98.0
Rowlett............................. 36 10/96 Owned 100.0
Sherman............................. 39 10/95 Leased 94.9
Sweetwater.......................... 30 03/96 Leased 96.7
Temple.............................. 40 01/97 Leased 60.0
Wichita Falls....................... 50 10/96 Leased 86.0
-----
Sub Total......................... 1,213
Arizona
Apache Junction..................... 48 03/98 Owned 93.8
Bullhead City....................... 40 08/97 Leased 82.5
Lake Havasu......................... 36 04/97 Leased 69.4
Mesa................................ 50 01/98 Owned 66.0
Payson.............................. 39 10/98 Owned 100.0
Peoria.............................. 50 07/99 Owned 16.0
Prescott Valley..................... 39 10/98 Owned 59.0
Surprise............................ 50 10/98 Owned 28.0
Yuma................................ 48 03/98 Owned 83.3
-----
Sub Total......................... 400
Northeast Region
New Jersey
Bridgeton........................... 39 03/98 Owned 79.5
Burlington.......................... 39 11/97 Owned 100.0
Egg Harbor.......................... 39 04/99 Owned 100.0
Glassboro........................... 39 03/97 Leased 100.0
Millville........................... 39 05/97 Leased 82.1
Pennsville.......................... 39 11/97 Owned 94.9
Rio Grande.......................... 39 11/97 Owned 100.0
Vineland............................ 39 01/97 Leased 97.4
-----
Sub Total......................... 312
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
Occupancy (%)
Opening at
Residence Units Date(1) Ownership(2) 12/31/99(3)
--------- ----- ------- ------------ -------------
<S> <C> <C> <C> <C>
Ohio
Bellefountaine...................... 35 03/97 Owned 51.4
Bucyrus............................. 35 01/97 Owned 97.1
Cambridge........................... 39 10/97 Owned 59.0
Celina.............................. 39 04/97 Owned 79.5
Defiance............................ 35 02/96 Owned 82.9
Findlay............................. 39 03/97 Owned 53.9
Fremont............................. 39 07/97 Leased 89.7
Greenville.......................... 39 02/97 Owned 97.4
Hillsboro........................... 39 03/98 Owned 74.3
Kenton.............................. 35 03/97 Owned 100.0
Lima................................ 39 06/97 Owned 35.9
Marion.............................. 39 04/97 Owned 51.3
Newark.............................. 39 10/97 Leased 92.3
Sandusky............................ 39 09/98 Owned 33.3
Tiffin.............................. 35 06/97 Leased 85.7
Troy................................ 39 03/97 Leased 100.0
Wheelersburg........................ 39 09/97 Leased 25.6
Zanesville.......................... 39 12/97 Owned 89.7
-----
Sub Total......................... 682
Pennsylvania
Butler.............................. 39 12/97 Owned 84.6
Hermitage........................... 39 03/98 Owned 82.1
Indiana............................. 39 03/98 Owned 53.8
Johnstown........................... 39 06/98 Owned 46.2
Latrobe............................. 39 12/97 Owned 97.4
Lower Burrell....................... 39 01/97 Owned 89.7
New Castle.......................... 39 04/98 Owned 100.0
Penn Hills.......................... 39 05/98 Owned 59.0
Uniontown........................... 39 06/98 Owned 87.2
-----
Sub Total......................... 351
-----
Grand Total....................... 7,148
=====
</TABLE>
- --------
(1) Reflects the date operations commenced, typically the licensure date for
developed residences and the date of purchase for acquired residences.
With the exception of four facilities purchased in 1998 (Plano, TX;
McKinney, TX; Alexandria, LA and Paris Oaks, TX), we developed all of the
residences identified as opening in 1998 and 1999.
(2) As of December 31, 1999, we owned 115 residences, 37 of which were subject
to permanent mortgage financing and 78 of which were unencumbered, and we
leased 70 residences pursuant to long-term operating leases. See Notes 6
and 9 to the consolidated financial statements included elsewhere herein.
(3)Occupancy is calculated based upon occupied units at December 31, 1999.
In 1999, we also leased approximately 28,000 square feet of office space for
the Corporate and Regional offices in Portland, Oregon; Glendale, Arizona;
Dallas, Texas; Omaha, Nebraska; and Dublin, Ohio.
14
<PAGE>
ITEM 3. Legal Proceedings
Securityholder Litigation
Since February 1, 1999, 12 separate complaints were filed in the United
States District Court for the District of Oregon against us and certain of our
past and present officers and directors. Pursuant to Order signed on June 1,
1999, those complaints were consolidated for all purposes. On July 23, 1999, a
consolidated complaint was filed, and on October 20, 1999, an amended
consolidated complaint ("Complaint") was filed.
The Complaint purports to be brought on behalf of a class of purchasers of:
(a) our common stock from February 6, 1997 through March 31, 1999, inclusive;
(b) our 6.0% convertible subordinated debentures due November 1, 2002 ("6.0%
Debentures") from October 21, 1997 through March 31, 1999, inclusive; and (c)
our 5.625% convertible subordinated debentures due May 1, 2003 ("5.625%
Debentures") from July 22, 1998 through March 31, 1999, inclusive.
The Complaint also names as defendants Schroder & Co., Inc., Morgan Stanley
Dean Witter and Smith Barney, Inc. (solely as underwriters in connection with
the 6.0% Debentures) and KPMG LLP, our independent auditors (in connection
with our offerings of common stock, 6.0% Debentures and 5.625% Debentures).
The Complaint alleges violations of the federal securities laws and seeks
unspecified damages. We filed an answer to the Complaint on December 7, 1999.
We cannot predict the outcome of the foregoing litigation and currently are
unable to evaluate the likelihood of success or the range of possible loss.
However, if the foregoing consolidated action were determined adversely to us
and/or to those to whom our indemnity obligations exist, such a determination
could have a material adverse effect on our financial condition, results of
operations, cash flow and liquidity.
Other Litigation
In addition to the matter referred to in the immediately preceding
paragraphs, we are involved in various lawsuits and claims arising in the
normal course of business. In the opinion of our management, although the
outcomes of these other suits and claims are uncertain and because of the
early stages of these matters, management cannot estimate the losses or range
of losses, should the outcomes be unfavorable. In the aggregate such other
suits and claims should not have a material adverse effect on our financial
condition, results of operations, cash flow or liquidity.
ITEM 4. Submission of Matters to a Vote of Security Holders
We held our Annual Meeting of Stockholders on November 16, 1999. The meeting
involved the election of five directors. The directors who were nominated and
elected to serve as directors until the 2000 Annual Meeting of Stockholders
and, in each case, until their respective successors are duly elected and
qualified were Dr. Keren Brown Wilson, Richard C. Ladd, Jill M. Krueger,
Bradley G. Razook and Gloria J. Cavanaugh. Shares represented at the annual
meeting were 15,995,424 of total outstanding shares of 17,120,745 to reach a
quorum of 93.4%. The results of the election were as follows:
<TABLE>
<CAPTION>
For Withheld
---------- --------
<S> <C> <C>
Dr. Keren Brown Wilson.. 15,630,513 364,911
Richard C. Ladd.. 15,634,213 361,211
Jill M. Krueger.. 15,636,498 358,926
Bradley G. Razook.. 15,295,139 700,285
Gloria J. Cavanaugh.. 15,634,563 360,861
</TABLE>
15
<PAGE>
PART II
ITEM 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
Our Common Stock, par value $0.01 (the "Common Stock"), is listed on the
American Stock Exchange ("AMEX") under the symbol "ALF." The following table
sets forth the high and low closing sales prices of the Common Stock, as
reported by the AMEX, for the periods indicated.
<TABLE>
<CAPTION>
1997 1998 1999
------------- ------------- ------------
High Low High Low High Low
------ ------ ------ ------ ------ -----
<S> <C> <C> <C> <C> <C> <C>
Years ended December 31:
1st Quarter..................... $10.68 $ 7.13 $21.63 $17.50 $14.50 $3.31
2nd Quarter..................... 14.50 9.88 21.38 14.13 3.31 2.88
3rd Quarter..................... 19.75 13.25 18.00 12.44 -- --
4th Quarter..................... 22.38 15.75 14.50 9.88 2.25 .81
</TABLE>
On April 15, 1999, the AMEX halted trading in the Common Stock. Trading was
resumed on October 4, 1999 after our restatement was completed.
As of December 31, 1999, we had approximately 103 holders of record of
Common Stock. We are unable to estimate the number of additional shareholders
whose shares are held for them in street name or nominee accounts.
Our current policy is to retain any earnings to finance the operations and
expansion of our business. In addition, certain outstanding indebtedness and
certain lease agreements restrict the payment of cash dividends. It is
anticipated that the terms of future debt financing may do so as well.
Therefore, the payment of any cash dividends on the Common Stock is unlikely
in the foreseeable future.
16
<PAGE>
ITEM 6. Selected Financial Data
The following table presents selected historical consolidated financial
data. The consolidated statement of operations data for the years ended
December 31, 1997, 1998 and 1999, as well as the consolidated balance sheet
data as of December 31, 1998 and 1999, are derived from our consolidated
financial statements included elsewhere in this report which have been audited
by KPMG LLP, independent auditors. You should read the selected financial data
below in conjunction with our consolidated financial statements, including the
related notes, and the information in Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
The Company
---------------------------------------------
Years Ended December 31,
---------------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Consolidated Statements of
Operations Data:
Revenue........................ $ 4,067 $21,022 $49,605 $ 89,384 $117,489
Operating expenses:
Residence operating
expenses.................... 2,779 14,055 31,591 57,443 81,767
Corporate general and
administrative.............. 1,252 1,864 4,050 11,099 21,178
Building rentals............. 798 3,949 7,969 12,764 15,367
Depreciation and
amortization................ 296 1,094 3,683 6,339 8,981
Terminated merger expense.... -- -- -- 1,068 228
Site abandonment costs....... -- -- -- 2,377 4,912
Write-off of impaired
assets...................... -- -- -- 8,521 --
------- ------- ------- -------- --------
Total operating expenses... 5,125 20,962 47,293 99,611 132,433
------- ------- ------- -------- --------
Operating income (loss)........ (1,058) 60 2,312 (10,227) (14,944)
------- ------- ------- -------- --------
Other income (expense):
Interest expense............... (96) (1,146) (4,946) (11,039) (15,200)
Interest income................ 579 455 1,526 3,869 1,598
Loss on sale of assets......... -- (854) (1,250) (651) (127)
Debenture conversion costs..... -- (426) -- -- --
Other income (expense), net.... -- (4) (121) (1,174) (260)
------- ------- ------- -------- --------
Total other income
(expense)................. 483 (1,975) (4,791) (8,995) (13,989)
------- ------- ------- -------- --------
Loss before taxes and
cumulative effect of change in
accounting principle.......... (575) (1,915) (2,479) (19,222) (28,933)
Cumulative effect of change in
accounting principle.......... -- -- -- (1,523) --
------- ------- ------- -------- --------
Net loss....................... $ (575) $(1,915) $(2,479) $(20,745) $(28,933)
======= ======= ======= ======== ========
Basic and diluted net loss per
common share:
Loss before cumulative effect
of change in accounting
principle..................... $ (0.10) $ (0.23) $ (0.21) $ (1.18) $ (1.69)
Cumulative effect of change in
accounting principle.......... -- -- -- $ (0.09) --
------- ------- ------- -------- --------
Basic and diluted net loss per
common share.................. $ (0.10) $ (0.23) $ (0.21) $ (1.27) $ (1.69)
======= ======= ======= ======== ========
Basic and diluted weighted
average common shares
outstanding................... 6,000 8,404 11,871 16,273 17,119
</TABLE>
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------
1995 1996 1997 1998 1999
------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents ...... $ 7,335 $ 2,105 $ 63,269 $ 55,036 $ 7,606
Working capital (deficit)....... (5,320) (27,141) 40,062 43,856 7,592
Total assets.................... 53,546 147,223 324,367 414,669 346,188
Long-term debt, excluding
current portion................ 24,553 49,663 157,700 266,286 233,199
Shareholders' equity............ 15,644 56,995 132,244 119,197 89,344
</TABLE>
17
<PAGE>
Quarterly Financial Data (Unaudited)
(in thousands except per share data)
<TABLE>
<CAPTION>
1998 Quarterly Financial Data 1999 Quarterly Financial Data
------------------------------------------- --------------------------------------------
1st 4th Year to 1st 4th Year to
Qtr 2nd Qtr 3rd Qtr Qtr Date Qtr 2nd Qtr 3rd Qtr Qtr(2) Date
------- ------- ------- ------- ------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Results of Operations
Revenue................. $18,773 $21,153 $24,012 $25,446 $89,384 $26,583 $28,479 $30,398 $32,029 $117,489
Operating income
(loss)................. 1,408 (8,609) 1,657 (4,683) (10,227) (4,243) (6,115) (2,561) (2,025) (14,944)
Net income (loss) before
cumulative effect of
change in accounting
principle.............. 739 (11,831) (720) (7,410) (19,222) (7,660) (9,006) (6,256) (6,011) (28,933)
Change in accounting
principle.............. (1,523) -- -- -- (1,523) -- -- -- -- --
Net loss................ (784) (11,831) (720) (7,410) (20,745) (7,660) (9,006) (6,256) (6,011) (28,933)
Basic and diluted income
(loss) per share(1)
Income (loss) per common
share before cumulative
effect of change in
accounting principle... 0.05 (0.75) (0.04) (0.43) (1.18) (0.45) (0.53) (0.37) (0.35) (1.69)
Cumulative effect of
change in accounting
principle.............. (0.10) -- -- -- -- -- -- -- -- --
Loss per share.......... $(0.05) $(0.75) $(0.04) $(0.43) $(1.27) $(0.45) $(0.53) $(0.37) $(0.35) $(1.69)
Basic and diluted
weighted average common
shares outstanding..... 15,688 15,679 16,604 17,094 16,273 17,116 17,116 17,121 17,121 17,119
</TABLE>
- --------
(1) Quarter net income (loss) per share amounts may not add to the full year
total due to rounding.
(2) The fourth quarter of 1999 includes $510,000 of bad debt expense related
to our home health operations.
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Restatement
On February 1, 1999, we announced that after consultation with our
independent auditors, we would restate our financial statements for the fiscal
quarter ended June 30, 1997, the fiscal quarter ended September 30, 1997, the
fiscal year ended December 31, 1997, the fiscal quarter ended March 31, 1998,
the fiscal quarter ended June 30, 1998 and the fiscal quarter ended September
30, 1998. On March 31, 1999, we announced that the restatement would be more
extensive than we had previously believed, and might include periods prior to
the second quarter of 1997, including the fiscal year ended December 31, 1996.
After further consultation with our independent auditors, we determined to
restate our financial statements for the fiscal year ended December 31, 1996,
the fiscal year ended December 31, 1997 and each of the first three fiscal
quarters of the fiscal year ended December 31, 1998. On September 30, 1999, we
filed restated financial statements with the Securities and Exchange
Commission for the fiscal years ended December 31, 1996 and 1997 and for each
of the first three fiscal quarters of the fiscal year ended December 31, 1998.
The restatement reduced the net income for the fiscal years ended December
31, 1996 and 1997 and for the nine months ended September 30, 1998 by $2.1
million, $6.7 million and $11.0 million, respectively. The cumulative effect
of the restatement reduced shareholders' equity by $19.7 million through
September 30, 1998. As a result of the restatement, we reported net losses of
$1.9 million, $2.5 million and $13.3 million for the fiscal years 1996 and
1997 and the nine months ended September 30, 1998, respectively, compared to
previously reported net income of $149,000, $4.2 million and a net loss of
$2.4 million, respectively. As a result of the restatement, the Company
reported net loss per diluted share of $0.23, $0.21 and $0.84 for the fiscal
years ended December 31, 1996 and 1997 and the nine months ended September 30,
1998, respectively, compared to previously reported net income of $0.03 and
$0.34, and net loss of $0.14, per diluted share, respectively. After the
restatement, the Company's cash position as of December 31, 1996 and 1997 and
as of September 30, 1998 was $2.1 million, $63.3 million and $79.6 million,
respectively, as compared to $2.1 million, $63.4 million and $79.8 million,
respectively, as previously reported. In addition, our working capital
position as of December 31, 1996 and 1997 and as of September 30, 1998 was
negative $27.1 million, positive $40.1 million and positive
18
<PAGE>
$63.0 million, respectively, as compared to previously reported working
capital of negative $26.4 million, positive $41.0 million and positive $64.1
million, respectively.
Overview
We operate free-standing assisted living residences, primarily in small
middle-market rural and suburban communities with a population typically
ranging from 10,000 to 40,000. We provide personal care and support services,
and make available routine nursing services (as permitted by applicable
regulations) designed to meet the personal and health care needs of our
residents. As of December 31, 1999, we had operations in 16 states.
We have experienced significant and rapid growth, primarily through the
development of assisted living residences and, to a lesser extent, through the
acquisition of assisted living residences. At the closing of our initial
public offering in November 1994, we began operating five residences (137
units) located in Oregon. As of December 31, 1999, we had received
certificates of occupancy on 185 residences (7,148 units), of which we owned
115 residences (4,515 units) and leased 70 residences (2,633 units).
We derive our revenues primarily from resident fees for the delivery of
assisted living services. Resident fees typically are paid monthly by
residents, their families, state Medicaid agencies or other third parties.
Resident fees include revenue derived from a multi-tiered rate structure,
which varies based on the level of care provided. Resident fees are recognized
as revenues when services are provided. Our operating expenses include:
. residence operating expenses, such as staff payroll, food, property
taxes, utilities, insurance and other direct residence operating
expenses;
. general and administrative expenses consisting of corporate and regional
support functions such as legal, accounting and other administrative
expenses;
. building rentals; and
. depreciation and amortization.
Our operating results for the year ended December 31, 1999 were adversely
affected by several factors, including the diversion of management's time and
attention related to the following:
. investment in infrastructure to accommodate growth of the Company;
. write-offs during 1999 relating to our decisions not to proceed with the
development of certain sites which we had acquired for development;
. the restatement of our financial statements for certain prior periods;
and
. securityholder litigation which commenced in February 1999.
These distractions continued throughout 1999 and, as such, our operating
results for the year ended December 31, 1999 are not necessarily indicative of
our future operating performance. With respect to our Stabilized Residences
(as defined below), our operating margins were substantially lower in 1999
because our occupancy rates declined and our operating expenses increased in
those residences. This was partly due to increased competition in certain
markets for labor and residents and partly due to the diversion of
management's time and attention relating to the matters described above. These
factors have also resulted in slower fill-up and increased operating expenses
in our Start-Up Residences (as defined below). We expect these trends to
continue to affect our operating results in 2000.
We anticipate that revenues at a majority of our residences will continue to
come from private pay sources. However, we believe that locating residences in
states with favorable regulatory and reimbursement climates should provide a
stable source of residents eligible for Medicaid reimbursement to the extent
that private pay residents are not available and, in addition, provide our
private pay residents with alternative sources of income when their private
funds are depleted and they become Medicaid eligible. Although we will seek to
manage the
19
<PAGE>
mix of private paying tenants and Medicaid paying tenants residing in our
facilities, any shift to a high Medicaid population could have an adverse
affect on our financial position, results of operations or cash flow,
particularly if third party payors such as Medicaid continue to seek limits on
reimbursement rates. See "Risk Factors--We depend on reimbursements by third-
party payors."
We believe that many assisted living markets have become or are on the verge
of becoming overbuilt. Regulation and other barriers to entry into the
assisted living industry are not substantial. In addition, because the segment
of the population that can afford to pay our daily resident fee is finite, the
development of new assisted living facilities could outpace demand. The short
term effects of overbuilding include (a) significantly longer fill-up periods
(2-3 years as compared to 12-18 months previously experienced), (b) pressure
to lower or refrain from increasing rates and (c) competition for workers in
already tight labor markets. Long term effects include lower margins for an
estimated 3-5 years until excess units are absorbed. We have experienced
slower fill-up than expected of new residences in some markets as well as
declining occupancy in our stabilized residences due to the increase in
options available to potential new residents when units are vacated. We
believe that each local market is different, and we are and will continue to
react in a variety of ways, including selective price discounting, to the
specific competitive environment that exists in each market. There can be no
assurance that we will be able to compete effectively in those markets where
overbuilding exists, or that future overbuilding in other markets where we
have opened or plan to open residences will not adversely affect our
operations.
For the year ended December 31, 1999, we commenced operations in 20
additional residences, all of which we developed. At this time, we have no
plans for further development. We expect that these 20 residences will incur
operating losses during the fill-up period. As a result, our operating results
will be adversely affected by operating losses at these residences and other
Start-Up Residences, which we expect will range from $1.5 million to $2.0
million during 2000.
We believe that our current cash on hand and cash available from operations
will be sufficient to meet our operating needs through June 2001. However, to
provide us with additional capital, we intend to explore various financing
alternatives and/or commitments to engage in sale and leaseback transactions
(including loans on and sale and leasebacks of, our uncollateralized
properties). We currently do not have in place any of such loan or lease
commitments. As a result of the securityholder litigation, the restatement and
other factors, there can be no assurances that financing from any source will
be available in the future, or, if available, that such financing will be on
terms acceptable to us. See "Liquidity and Capital Resources" and "Risk
Factors--We may require additional financing."
Results of Operations
The following table sets forth, for periods presented, the number of total
residences and units operated, average occupancy rates and the sources of our
revenue. The portion of revenues received from state Medicaid agencies are
labeled as "Medicaid state portion" while the portion of our revenues that a
Medicaid-eligible resident must pay out of his or her own resources is labeled
"Medicaid resident portion."
<TABLE>
<CAPTION>
Years Ended
December 31,
-------------------
Total Residences 1997 1998 1999
---------------- ----- ----- -----
<S> <C> <C> <C>
Residences operated (end of period)..................... 109 165 185
Units operated (end of period).......................... 4,024 6,329 7,148
Average occupancy rate (based on occupied units)........ 71.7% 72.3% 75.1%
Sources of revenue:
Medicaid state portion................................ 11.1% 10.7% 10.4%
Medicaid resident portion............................. 5.9% 5.8% 5.9%
Private............................................... 83.0% 83.5% 83.7%
----- ----- -----
Total............................................... 100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
20
<PAGE>
The following table sets forth, for the periods presented for Stabilized
Residences, the total number of residences and units operated, average
occupancy rates and the sources of our revenue. Stabilized Residences are
defined as those residences, which were operating for more than twelve months
prior to the beginning of the period or had achieved a 95% occupancy rate as
of the beginning of the reporting period.
<TABLE>
<CAPTION>
Years Ended
December 31,
-------------------
Stabilized Residences 1997 1998 1999
--------------------- ----- ----- -----
<S> <C> <C> <C>
Residences operated (end of period)..................... 32 65 115
Units operated (end of period).......................... 1,063 2,434 4,386
Average occupancy rate (based on occupied units)........ 95.1% 93.9% 85.4%
Sources of revenue:
Medicaid state portion................................ 11.4% 14.5% 13.3%
Medicaid resident portion............................. 6.5% 8.2% 7.6%
Private............................................... 82.1% 77.3% 79.1%
----- ----- -----
Total............................................... 100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
The following table sets forth, for the periods presented for Start-up
Residences, the total number of residences and units operated, average
occupancy rates and the sources of our revenue. Start-up Residences are
defined as those residences, which were operating for less than twelve months
prior to the beginning of the period or had not achieved a 95% occupancy rate
as of the beginning of the reporting period.
<TABLE>
<CAPTION>
Years ended
December 31,
-------------------
Start-up Residences 1997 1998 1999
------------------- ----- ----- -----
<S> <C> <C> <C>
Residences operated (end of period)..................... 77 100 70
Units operated (end of period).......................... 2,961 3,895 2,762
Average occupancy rate (based on occupied units)........ 59.8% 55.7% 56.0%
Sources of revenue:
Medicaid state portion................................ 11.3% 7.1% 2.8%
Medicaid resident portion............................. 5.7% 3.4% 1.4%
Private............................................... 83.0% 89.5% 95.8%
----- ----- -----
Total............................................... 100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
The following table sets forth, for the periods presented for Same Store
Residences, the total number of residences and units operated, average
occupancy rates and the sources of our revenue. Same Store Residences are
defined as those residences, which were operating throughout comparable
periods.
<TABLE>
<CAPTION>
Years ended Years ended Years ended
December December December
31, 31, 31,
------------ ------------ ------------
Same Store Residences 1996 1997 1997 1998 1998 1999
- --------------------- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Residences operated (end of
period)............................ 19 19 59 59 108 108
Units operated (end of period)...... 595 605 2,104 2,157 4,035 4,048
Average occupancy rate (based on
occupied units).................... 90.0% 95.6% 86.9% 93.5% 80.5% 84.7%
Sources of revenue:
Medicaid state portion............ 16.1% 13.8% 11.9% 15.1% 12.7% 13.4%
Medicaid resident portion......... 9.1% 7.6% 6.5% 8.7% 6.9% 7.7%
Private........................... 74.8% 78.6% 81.6% 76.2% 80.4% 78.9%
----- ----- ----- ----- ----- -----
Total........................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== ===== =====
</TABLE>
21
<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 corporate level interest
expense. In addition, the following tables exclude the effect of the
capitalization of corporate and property level interest expense.
The following table sets forth, for the periods presented, the results of
operations for Stabilized Residences (in thousands).
<TABLE>
<CAPTION>
Years ended December
31,
-----------------------
Stabilized Residences 1997 1998 1999
--------------------- ------- ------- -------
<S> <C> <C> <C>
Revenue............................................. $21,245 $46,260 $84,771
Residence operating expenses........................ 12,255 27,456 56,781
------- ------- -------
Residence operating income........................ 8,990 18,804 27,990
Building rentals.................................... 3,323 7,193 14,825
Depreciation and amortization....................... 945 1,777 3,610
------- ------- -------
Total other operating expenses.................... 4,268 8,970 18,435
------- ------- -------
Operating income................................ $ 4,722 $ 9,834 $ 9,555
======= ======= =======
</TABLE>
The following tables sets forth, for the periods presented, the results of
operations for Start-up Residences (in thousands).
<TABLE>
<CAPTION>
Years ended December
31,
-----------------------
Start-up Residences 1997 1998 1999
------------------- ------- ------- -------
<S> <C> <C> <C>
Revenue $27,164 $40,013 $32,718
Residence operating expenses........................ 18,519 27,591 24,986
------- ------- -------
Residence operating income........................ 8,645 12,422 7,732
Building rentals.................................... 4,612 5,535 520
Depreciation and amortization....................... 2,010 4,063 4,470
------- ------- -------
Total other operating expenses.................... 6,622 9,598 4,990
------- ------- -------
Operating income................................ $ 2,023 $ 2,824 $ 2,742
======= ======= =======
</TABLE>
The following table sets forth, for the periods presented, the results of
operations for the 19 Same Store Residences included in operating results for
all of fiscal years 1996 and 1997, and the 59 Same Store Residences included
in operating results for all of fiscal years 1997 and 1998 and the 108 Same
Store Residences included in operating results for all of fiscal years 1998
and 1999 (in thousands).
<TABLE>
<CAPTION>
Years ended Years ended Years ended
December 31, December 31, December 31,
--------------- --------------- ---------------
Same Store Residences 1996 1997 1997 1998 1998 1999
--------------------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Revenue.................... $10,877 $12,397 $38,274 $42,002 $70,920 $77,881
Residence operating
expenses.................. 6,682 7,070 22,908 24,801 43,659 52,154
------- ------- ------- ------- ------- -------
Residence operating
income.................. 4,195 5,327 15,366 17,201 27,261 25,727
Building rentals........... 2,374 2,440 5,635 6,375 12,385 14,825
Depreciation and
amortization.............. 543 461 2,280 1,647 3,451 3,067
------- ------- ------- ------- ------- -------
Total other operating
expenses................ 2,917 2,901 7,915 8,022 15,836 17,892
------- ------- ------- ------- ------- -------
Operating income....... $ 1,278 $ 2,426 $ 7,451 $ 9,179 $11,425 $ 7,835
======= ======= ======= ======= ======= =======
</TABLE>
22
<PAGE>
Year ended December 31, 1999 compared to year ended December 31, 1998:
We incurred a net loss of $28.9 million, or $1.69 per basic and diluted
share, on revenue of $117.5 million for the year ended December 31, 1999 (the
"1999 Period") as compared to a net loss (after the cumulative effect of
change in accounting principle and other charges as described below) of $20.7
million, or $1.27 per basic and diluted share, on revenue of $89.4 million for
the year ended December 31, 1998 (the "1998 Period").
We had certificates of occupancy for 185 residences, all of which were
included in the operating results as of the end of the 1999 Period as compared
to certificates of occupancy for 173 residences, 165 of which were included in
the operating results as of the end of the 1998 Period. Of the residences
included in operating results as of the end of the 1999 Period, we owned 115
residences and leased 70 residences (all of which were operating leases) as
compared to 95 owned residences and 70 leased residences (54 of which were
operating leases and 16 of which were accounted for as financings) as of the
end of the 1998 Period.
Revenue. Revenue was $117.5 million for the 1999 Period as compared to $89.4
million for the 1998 Period, an increase of $28.1 million.
The increase includes:
. $20.8 million related to the full year impact of the 57 residences
(2,302 units) which opened during the 1998 Period;
. $3.9 million related to the opening of an additional 20 residences (798
units) during the 1999 Period; and
. $7.0 million was attributable to the 108 Same Store Residences (4,048
units).
These increases were offset by:
. a reduction in revenues from home health operations of $3.1 million in
the 1999 Period (the Company exited all home health operations in 1998
and did not earn any revenues for such services during the 1999 Period);
and
. a reduction of $558,000 in revenues for a residence the Company leased
and operated nine months of the 1998 Period. The lease was terminated
September 30, 1998.
Revenue from the Same Store Residences was $77.9 million for the 1999 Period
as compared to $70.9 million for the 1998 Period, an increase of $7.0 million
or 9.8%. The increase in revenue from Same Store Residences was attributable
to a combination of an increase in average occupancy to 84.7% and average
monthly rental rate to $1,873 for the 1999 Period as compared to average
occupancy of 80.5% and average monthly rental rate of $1,823 for the 1998
Period.
Of the $117.5 million in revenues reported for the 1999 Period:
. $84.8 million or 72.2% was attributable to Stabilized Residences;
. $32.7 million or 27.8% was attributable to Start-Up Residences.
As of the end of the 1999 Period, we had 115 Stabilized Residences (4,386
units) with an average occupancy of 85.4% and an average monthly rental rate
of $1,866 and we had 70 Start-Up Residences (2,762 units) with an average
occupancy of 56.0% and an average monthly rental rate of $1,987.
Residence Operating Expenses. Residence operating expenses were $81.8
million for the 1999 Period as compared to $57.4 million for the 1998 Period,
an increase of $24.4 million.
23
<PAGE>
The increase includes:
. $13.9 million related to the full year impact of the 57 residences
(2,302 units) which opened during the 1998 Period;
. $4.3 million related to the opening of an additional 20 residences (798
units) during the 1999 Period; and
. $8.5 million was attributable to the 108 Same Store Residences (4,048
units).
These increases were offset by a reduction in expenses associated with our
home health operations of $2.3 million. We exited our home health operations
during the 1998 Period. Expenses incurred during the 1999 Period for home
health operations were related to the closure of the home health operations
and are included in Corporate, General and Administative expenses.
Residence operating expenses for the Same Store Residences were $52.2
million for the 1999 period as compared to $43.7 million for the 1998 Period,
an increase of $8.5 million or 19.4%. This increase results from the
additional expenses incurred in connection with the increase in occupancy at
the Same Store Residences during the period.
Of the $81.8 million in residence operating expenses reported for the 1999
Period, $56.8 million or 69.4% was attributable to Stabilized Residences and
$25.0 million or 30.6% was attributable to Start-Up Residences.
Corporate General and Administrative. Corporate general and administrative
expenses as reported were $21.2 million for the 1999 Period as compared to
$11.1 million for the 1998 Period. Our corporate general and administrative
expenses before capitalized payroll costs were $21.8 million for the 1999
Period as compared to $12.9 million for the 1998 Period, an increase of $8.9
million. Of the increase:
. $1.7 million, or 19.1%, related to increased payroll costs, including
severance costs of $1.0 million for certain terminated corporate
employees including costs associated with severance and consulting
agreements between us and our former chief executive officer;
. $4.3 million, or 48.3%, related to additional professional fees
primarily associated with increased legal, financial advisory and
accounting costs due to regulatory issues, securityholder litigation and
the restatement of our earnings for the years ended December 31, 1996,
1997 and the interim 1998 periods;
. $1.8 million, or 20.2%, related to the final operations of our home
health business, including provision for bad debt of $510,000;
. $1.1, or 12.4% related to an increase in travel and other related
expenses associated with the increase in number of regional offices from
three to five.
We capitalized $1.8 million and $617,000 of payroll costs associated with
the development of new residences for each of the 1998 Period and the 1999
Period.
Building Rentals. Building rentals were $15.4 million for the 1999 Period as
compared to $12.8 million for the 1998 Period, an increase of $2.6 million.
This increase was primarily attributable to $2.5 million of additional rental
expense associated with the March amendment of 16 of our leases, as discussed
above, which were previously accounted for as financings. As a result of the
amendment, the leases have been reclassified as operating leases for the last
nine months of the 1999 Period.
As of the end of the 1999 Period we had 70 operating leases as compared to
54 operating leases as of the end of the 1998 Period.
24
<PAGE>
Depreciation and Amortization. Depreciation and amortization was $9.0
million for the 1999 Period as compared to $6.3 million for the 1998 Period,
an increase of $2.7 million. Depreciation expense was $8.7 million and
amortization expense was $294,000 for the 1999 Period as compared to $5.9
million and $398,000, respectively, for the 1998 Period. The increase in
depreciation is the result of:
. the full year effect of depreciation on the 53 owned residences which
commenced operations during the 1998 Period; and
. depreciation associated with the 20 owned residences that commenced
operations during the 1999 Period.
The increase in depreciation was offset by the impact of the March amendment
of 16 of our leases, as discussed above, which were previously accounted for
as financings. As a result of this amendment, the 1999 Period reflects 3
months of depreciation expense associated with these facilities as compared to
12 months in the 1998 Period.
Terminated Merger Expense. During the fourth quarter of the 1998 Period, we
recorded a $1.1 million charge relating to our terminated merger with American
Retirement Corporation ("ARC"). On February 1, 1999 we agreed with ARC to
terminate our previously announced merger agreement, which had been entered
into during November 1998. We incurred approximately $228,000 of additional
merger related expenses during the first quarter of 1999.
Site Abandonment Costs. As a result of our decision to reduce the number of
new residence openings during the 1998 Period and beyond, we wrote-off $2.4
million of capitalized costs during the 1998 Period relating to the
abandonment of certain development sites. In 1999, the Company wrote-off $4.9
million of capitalized cost relating to the abandonment of all remaining
development sites, with the exception of 10 sites where the Company owns the
land.
Write-Off of Impaired Assets and Related Expenses. In the 1998 Period, we
recorded an $8.5 million charge consisting of $7.5 million write-off of
unamortized goodwill resulting from the exit from our home health operations
and a $1.0 million provision for exit costs associates with closing such home
health care operations. We recorded no such charges for the 1999 Period.
Interest Expense. Interest expense was $15.2 million for the 1999 Period as
compared to $11.0 million for the 1998 Period. Gross interest expense for the
1999 Period was $17.2 million as compared to $17.0 million for the 1998
Period, a net increase of $200,000.
Interest expense increased by:
. $1.4 million due to interest expense related to the April 1998 issuance
of 5.625% Debentures; and
. $2.3 million related to the new mortgage financing entered into during
the 1998 Period.
This increase was offset by decreases in interest expense of:
. $616,000 as a result of the redemption in August 1998 of the 7.0%
Convertible Subordinated Debentures due 2005 (the "7.0% Debentures");
. $2.5 million as a result of the amendment of the 16 leases resulting in
a change from financing obligations to operating leases; and
. $380,000 as a result of the termination of the joint venture agreements
in February, 1999.
We capitalized $6.0 million of interest expense for the 1998 Period compared
to $2.0 million for the 1999 Period. We do not expect to capitalize any
interest in the 2000 Period as a result of the discontinuation of our
development activities.
25
<PAGE>
Interest Income. Interest income was $1.6 million for the 1999 Period as
compared to $3.9 million for the 1998 Period, a decrease of $2.3 million. The
decrease is related to interest income earned on lower average cash balances
during the 1999 Period primarily resulting from the completion of construction
on 20 residences which opened during 1999.
Loss on Sale of Assets. Loss on sale of assets was $127,000 for the 1999
Period as compared to $651,000 for the 1998 Period. The loss during the 1999
Period was related to the disposal of leasehold improvements associated with
relocating our corporate offices in January 1999. Of the loss on sale of
assets recorded during the 1998 Period, $547,000 resulted from losses
pertaining primarily to additional capital costs incurred during the 1998
Period on sale and leaseback transactions completed in the 1997 Period and
$75,000 related to losses incurred in connection with terminating one
operating lease during the 1998 Period. The remainder of the loss on sale of
assets was attributable to losses incurred in connection with one sale and
leaseback transaction completed during the 1998 Period.
Other Income (Expense). Other expense was $260,000 for the 1999 Period as
compared to $1.2 million for the 1998 Period. Other expenses during the 1999
Period included $170,000 of administrative fees incurred in connection with
our February 1999 repurchase of the remaining joint venture partner's interest
in the operations of 17 residences. Other expense during the 1998 Period
included $907,000 of financing costs which were expensed during the period. Of
such amount, $614,000 related to financing costs which had been previously
capitalized in association with a financing commitment that was terminated
during the fourth quarter 1998 and the remaining $293,000 was associated with
the termination of a swap agreement at the end of the third quarter of the
1998 Period. In addition, other expenses during the 1998 Period included
$210,000 of administrative fees incurred in connection with our repurchase of
the joint venture partner's interest in the operations of 21 residences during
the period.
Cumulative Effect of Change in Accounting Principle. We adopted AICPA
Statement of Position 98-5, Reporting on the Costs of Start-up Activities
("SOP 98-5") effective January 1, 1998. Under SOP 98-5, start-up costs
associated with the opening of new residences are expensed as incurred. We
recognized a charge of $1.5 million during the 1998 Period associated with
adopting such provision. We had no changes in accounting principle during the
1999 Period.
Net Loss. As a result of the above, net loss (after the cumulative effect of
change in accounting principle and other charges as described above) was $28.9
million or $1.69 per basic and diluted share for the 1999 Period, compared to
$20.7 million or $1.27 loss per basic and diluted share for the 1998 Period.
Year ended December 31, 1998 compared to year ended December 31, 1997
We incurred a net loss (after the cumulative effect of change in accounting
principle and other charges as described below) of $20.7 million, or $1.27 per
basic and diluted share, on revenue of $89.4 million for the year ended
December 31, 1998 (the "1998 Period") as compared to a net loss of $2.5
million, or $0.21 per basic and diluted share, on revenue of $49.6 million for
the year ended December 31, 1997 (the "1997 Period").
We had certificates of occupancy for 173 residences, 165 of which were
included in the operating results as of the end of the 1998 Period as compared
to 130 residences with certificates of occupancy, 109 of which were included
in the operating results as of the end of the 1997 Period. Of the residences
included in operating results as of the end of the 1998 Period, we owned 95
residences and leased 70 residences (54 of which were operating leases and 16
of which were accounted for as financings) as compared to 42 owned residences
and 67 leased residences (51 of which were operating leases and 16 of which
were accounted for as financings) as of the end of the 1997 Period.
26
<PAGE>
Revenue. Revenue was $89.4 million for the 1998 Period as compared to $49.6
million for the 1997 Period, an increase of $39.8 million. Of this increase:
. $18.5 million or 46.5% related to the full year impact of the 49
residences (1,875 units) which opened during the 1997 Period;
. $15.7 million or 39.4% related to the opening of an additional 57
residences (2,297 units) during the 1998 Period;
. $3.7 million or 9.3% was attributable to the 59 Same Store Residences
(2,157 units); and
. the remaining $1.9 million or 4.8% related to a full year of results
from our ancillary operations (home health operations revenues began
diminishing subsequent to June 1998 when we began our exit plan to
discontinue these services) as compared to two full months of such
activity in the 1997 Period.
Revenue from the Same Store Residences was $42.0 million for the 1998 Period
as compared to $38.3 million for the 1997 Period, an increase of $3.7 million
or 9.7%. The increase in revenue for Same Store Residences was attributable to
a combination of an increase in average occupancy to 93.5% and average monthly
rental rate to $1,753 for the 1998 Period as compared to 86.9% and $1,720,
respectively, for the 1997 Period.
Of the $89.4 million in revenues reported for the 1998 Period:
. $46.3 million or 51.8% was attributable to Stabilized Residences;
. $40.0 million or 44.7% was attributable to Start-Up Residences; and
. $3.1 million or 3.5% was attributable to our ancillary service
operation.
As of the end of the 1998 Period, we had 65 Stabilized Residences (2,434
units) with an average occupancy of 93.9% and an average monthly rental rate
of $1,762 and we had 100 Start-Up Residences (3,895 units) with an average
occupancy of 55.7% and an average monthly rental rate of $1,934.
Residence Operating Expenses. Residence operating expenses were $57.4
million for the 1998 Period as compared to $31.6 million for the 1997 Period,
an increase of $25.8 million. Of this increase:
. $10.5 million or 40.7% related to the full year impact of the 49
residences (1,885 units) which opened during the 1997 Period;
. $11.8 million or 45.7% related to the opening of an additional 57
residences (2,297 units) during the 1998 Period;
. $1.9 million or 7.4% was attributable to the 59 Same Store Residences
(2,157 units); and
. the remaining $1.6 million or 6.2% related to a full year of expenses
associated with our ancillary service operation as compared to two full
months of such activity in the 1997 Period.
Residence operating expenses for the Same Store Residences were $24.8
million for the 1998 Period as compared to $22.9 million for the 1997 Period,
an increase of $1.9 million or 8.3%. This increase results from the additional
expenses incurred in connection with the increase in occupancy at the Same
Store Residences during the period.
Of the $57.4 million in residence operating expenses reported for the 1998
Period, $27.5 million or 47.9% was attributable to Stabilized Residences,
$27.6 million or 48.1% was attributable to Start-Up Residences and $2.3
million or 4.0% was attributable to our ancillary service operation.
Corporate General and Administrative. Corporate general and administrative
expenses as reported were $11.1 million for the 1998 Period as compared to
$4.1 million for the 1997 Period. Our corporate general and administrative
expenses before capitalized payroll costs were $12.9 million for the 1998
Period as compared to $5.9 million for the 1997 Period, an increase of $7.0
million. This increase results from additional investments
27
<PAGE>
in our corporate and regional infrastructure to support the opening of new
residences and the on-going operation of our existing base of residences. Of
the increase:
. $3.9 million or 56.0% related to increased payroll costs;
. $525,000 or 7.5% related to increased marketing expenses;
. $450,000 or 6.5% related to the increased corporate office rental
expense; and
. the remaining $2.1 million or 30.0% related to increased general
corporate expenses such as legal and travel related expenses.
We capitalized $1.8 million of payroll costs associated with the development
of new residences for each of the 1998 Period and the 1997 Period.
Building Rentals. Building rentals were $12.8 million for the 1998 Period as
compared to $8.0 million for the 1997 Period, an increase of $4.8 million. Of
the increase:
. $4.2 million was the result of the full year impact of the 26 operating
leases entered into during the 1997 Period;
. $400,000 related to the four leases entered into during the 1998 Period;
and
. the remainder of the increase was primarily driven by an increase in
expense on leases entered into prior to the 1997 Period offset by one
operating lease which was terminated during the 1998 Period.
As of the end of the 1998 Period we had 54 operating leases as compared to
51 operating leases as of the end of the 1997 Period.
Depreciation and Amortization. Depreciation and amortization was $6.3
million for the 1998 Period as compared to $3.7 million for the 1997 Period,
an increase of $2.6 million. Depreciation expense was $5.9 million and
amortization expense was $398,000 for the 1998 Period as compared to $2.9
million and $800,000, respectively, for the 1997 Period. The increase in
depreciation is the result of:
. the full year effect of depreciation on the 16 owned residences which
commenced operations during the 1997 Period;
. depreciation associated with the 53 owned residences that commenced
operations during the 1998 Period; and
. depreciation associated with the full year impact of seven residences
which were sold and leased back during the 1997 Period which were
accounted for as financings.
Amortization expense decreased as a result of the change in accounting for
certain costs incurred prior to opening new residences. Effective January 1,
1998, we adopted Statement of Position 98-5, Reporting on the Costs of Start-
Up Activities ("SOP 98-5"). See the discussion of cumulative effect of change
in accounting principle below.
Terminated Merger Expense. During the fourth quarter of the 1998 Period, we
recorded a $1.1 million charge relating to our terminated merger with ARC. On
February 1, 1999 we agreed with ARC to terminate our previously announced
merger agreement, which had been entered into during November 1998. We
incurred approximately $200,000 of additional merger related expenses during
the first quarter of 1999.
Site Abandonment Costs. As a result of our decision to reduce the number of
new residence openings during the 1998 Period and beyond, we wrote-off $2.4
million of capitalized costs during the 1998 Period relating to the
abandonment of 36 development sites. Of such costs, $1.0 million were written-
off during the second quarter and the remaining $1.4 million were written-off
during the fourth quarter 1998.
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Write-Off of Impaired Assets and Related Expenses. In the 1998 Period, we
recorded an $8.5 million charge consisting of:
. $7.5 million write-off of unamortized goodwill resulting from the exit
from our home health operations;
. a $1.0 million provision for exit costs associated with closing such
home health care operation. During the fourth quarter of 1998, we
reduced the provision by $400,000 from $1.4 million as a result of a
change in the estimate for such exit costs.
Interest Expense. Interest expense was $11.0 million for the 1998 Period as
compared to $4.9 million for the 1997 Period. Gross interest expense for the
1998 Period was $17.0 million compared to $11.5 million for the 1997 Period, a
net increase of $5.5 million.
Interest expense increased by:
. $4.8 million due to the full year impact of interest expense related to
the October 1997 issuance of 6.0% Debentures;
. $3.6 million due to interest expense related to the April 1998 issuance
of 5.625% Debentures;
. $1.8 million related to the new mortgage financing entered into during
the 1998 Period;
. $750,000 related to the full year impact of seven residences which were
sold and leased back during the 1997 Period which were accounted for as
financings; and
. $475,000 related to interest expense associated with losses which were
reimbursed by the partner to our joint venture agreement (accounted for
as loans) incurred in connection with the operation of joint venture
residences (interest was calculated based on the average loan balance
using an imputed 20% interest rate, and other expense was calculated
based on a $10,000 administrative fee per residence).
This increase was offset by:
. a $5.5 million reduction associated with construction financing used to
fund development activity during the 1997 Period which was either repaid
or converted to leases prior to the 1998 Period; and
. a $400,000 reduction as a result of the redemption in August 1998 of the
7.0% Debentures.
We capitalized $6.0 million of interest expense for the 1998 Period compared
to $6.6 million for the 1997 Period.
Interest Income. Interest income was $3.9 million for the 1998 Period as
compared to $1.5 million for the 1997 Period, an increase of $2.4 million. The
increase is related to interest income earned on higher average cash balances
during the 1998 Period primarily resulting from the April 1998 offering of the
5.625% Debentures from which we received net proceeds of approximately $72.2
million.
Loss on Sale of Assets. Loss on sale of assets was $651,000 for the 1998
Period as compared to $1.3 million for the 1997 Period. Of the loss on sale of
assets recorded during the 1998 Period, $547,000 resulted from losses
pertaining primarily to additional capital costs incurred during the 1998
Period on sale and leaseback transactions completed in the 1997 Period and
$75,000 related to losses incurred in connection with terminating one
operating lease during the 1998 Period. The remainder of the loss on sale of
assets was attributable to losses incurred in connection with one sale and
leaseback transaction completed during the 1998 Period. We entered into four
sale and leaseback transactions during the 1998 Period as compared to 24 sale
and leaseback transactions during the 1997 Period.
Other Income (Expense). Other expense was $1.2 million for the 1998 Period
as compared to $121,000 for the 1997 Period. Other expenses during the 1998
Period included $907,000 of financing costs which were
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expensed during the period. Of such amount, $614,000 related to financing
costs which had been previously capitalized and deferred in association with a
future financing commitment terminated during the fourth quarter 1998 and the
remaining $293,000 was associated with the termination of a swap agreement at
the end of the third quarter of the 1998 Period. In addition, other expenses
during the 1998 Period included $210,000 of administrative fees incurred in
connection with our repurchase of the joint venture partner's interest in the
operations of 21 residences during the period.
Cumulative Effect of Change in Accounting Principle. We adopted AICPA
Statement of Position 98-5, Reporting on the Costs of Start-up Activities
("SOP 98-5") effective January 1, 1998. Under SOP 98-5, start-up costs
associated with the opening of new residences are expensed as incurred. We
recognized a charge of $1.5 million during the 1998 Period associated with
adopting such provision. Prior to the adoption of SOP 98-5, we capitalized
pre-opening costs on our balance sheet and amortized such costs over a 12-
month period.
Net Loss. As a result of the above, net loss (after the cumulative effect of
change in accounting principle and other charges as described above) was $20.7
million or $1.27 per basic and diluted share for the 1998 Period, compared to
$2.5 million, or $0.21 per basic and diluted share for the 1997 Period.
Liquidity and Capital Resources
We have historically financed our activities with the net proceeds from the
offerings of debt and equity securities, sale and leaseback financing, long-
term mortgage financing and cash flows from operations. At December 31, 1999,
we had $234.7 million of indebtedness outstanding, including $161.3 million of
convertible subordinated debentures. As of December 31, 1999, approximately
88% of our indebtedness bore interest at fixed rates, with a weighted average
interest rate of 6.3%. Our variable rate indebtedness carried an average rate
of 3.4% as of December 31, 1999. As of December 31, 1999, we had working
capital of $7.6 million as compared to $43.9 million as of December 31, 1998.
As of December 31, 1999, our unrestricted cash balance was $7.6 million as
compared to $55.0 million as of December 31, 1998.
Net cash used in operating activities was $11.9 million for the year ended
December 31, 1999, as compared with $3.0 million provided by operating
activities for the year ended December 31, 1998 and $4.5 million provided by
operating activities for the year ended December 31, 1997.
Net cash used in investing activities was $33.4 million for the year ended
December 31, 1999, as compared with $123.3 million and $94.0 million,
respectively, for the years ended December 31, 1998 and 1997. During the year
ended December 31, 1999, the primary uses of cash were:
. $27.8 million related to the development of new assisted living
residences in Arizona, Florida, Georgia, Iowa, Indiana, Louisiana;
Michigan, New Jersey and South Carolina; and
. $7.6 million related to restrictions in accordance with certain loan and
lease agreements.
During the third quarter of 1999, we amended certain loan agreements with
U.S. National Bank Association ("U.S. Bank"). Pursuant to the amendment, we
agreed to provide $8.3 million of additional cash collateral in exchange for
the waiver of certain possible defaults related to the delivery of financial
statements and compliance with financial covenants, including an amendment to
certain financial covenants. In August 1999, we restricted $8.3 million of
cash balances as a result of such amendment. The amendment also provides for
the release of the additional collateral upon the achievement of specified
performance targets, provided that we are in compliance with the other terms
of the loan agreements. We achieved certain of these specified targets during
the fourth quarter of fiscal 1999 and $1.2 million of the restricted cash was
released. Additionally, during the third quarter of 1999, we agreed to provide
$418,000 of additional cash collateral pursuant to certain lease agreements
with one of our lessors. We restricted $418,000 of cash balances as a result
of such action.
Several of our debt instruments and leases contain financial covenants,
including debt to cash flow and net worth tests. There can be no assurance
that we will be in compliance with these financial covenants in the future,
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particularly if we are unable to stabilize our operations and efficiently
manage our business. Our credit agreements with U.S. Bank require us to comply
with two financial ratios that become more restrictive commencing in the second
quarter of 2000. Although we were in compliance with these covenants at
December 31, 1999, we have determined that it is probable that we will not meet
these more restrictive covenants at June 30, 2000. If we fail to comply with
one or more of the U.S. Bank covenants or any other debt or lease covenants
(after giving effect to any applicable cure period), the lender or lessor may
declare us in default of the underlying obligation and exercise any available
remedies, which may include:
. in the case of debt, declaring the entire amount of the debt immediately
due and payable;
. foreclosing on any residences or other collateral securing the
obligation;
. in the case of a lease, terminating the lease and suing for damages.
In addition, many of our debt instruments and leases contain "cross-default"
provisions pursuant to which a default under one obligation can cause a default
under one or more other obligations. Accordingly, it could have a material
adverse effect on our financial condition if any lender or lessor notifies us
that we are in default under any debt instrument or lease.
We believe that our current cash on hand, working capital resources, cash
flow from operations and potential loans on uncollateralized properties are
sufficient to meet our operating needs for the next 12 to 18 months. However,
to provide us with additional capital, we may explore various financing
alternatives and/or commitments to engage in sale and leaseback transactions.
We currently do not have in place any of such loan or lease commitments for
future financing beyond our existing financing and sale and leaseback
arrangements. As a result of the securityholder litigation, the restatement and
other factors, there can be no assurances that financing from any source will
be available in the future, or, if available, that such financing will be
available on terms acceptable to us.
As of December 31, 1999, we had invested excess cash balances in short-term
certificates of deposit and highly liquid marketable debt securities.
Inflation
We do not believe that inflation has materially adversely affected our
operations. We expect salary and wage increases for our skilled staff will
continue to be higher than average salary and wage increases, as is common in
the health care industry. We expect that we will be able to offset the effects
of inflation on salaries and other operating expenses by increases in rental
and service rates, subject to applicable restrictions with respect to services
that are provided to residents eligible for Medicaid reimbursement.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. SFAS No. 137, issued in June 1999, deferred the effective
date of SFAS No. 133 to all fiscal quarters of fiscal years beginning after
June 15, 2000. We do not expect the adoption of this statement to have a
material impact on our financial position or results of operations.
Year 2000
We did not anticipate nor did we experience any interruptions as a result of
Year 2000 issues. We expended less than $25,000 for Year 2000 compliance.
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RISK FACTORS
Set forth below are the risks that we believe are material. This report on
Form 10-K, including the risks discussed below, contains forward-looking
statements made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. These forward-looking statements may
be affected by risks and uncertainties, including without limitation (i) our
ability to control costs and improve operating margins (ii) the degree to
which our future operating results and financial condition will be affected by
the securityholder litigation described in this report and the resulting
distraction of management's time and attention, (iii) the possibility that we
may incur start-up costs in excess of our present expectations, (iv) the
possibility that we will experience slower fill-up of our start-up residences
and/or declining occupancy in our stabilized residences, either of which would
adversely affect residence operating margins, and (v) the possibility that we
will not be able to obtain financing needed to fund our operations after June
2001. In light of such risks and uncertainties, our actual results could
differ materially from such forward-looking statements. Except as may be
required by law, we do not undertake any obligation to publicly release any
revisions to any forward-looking statements contained herein to reflect events
and circumstances occurring after the date hereof or to reflect the occurrence
of unanticipated events.
We face difficulties in stabilizing our operations following our rapid growth.
We have experienced rapid growth since 1994, which has placed significant
demands on our management resources. Our ability to stabilize operations and
manage our business following this growth requires us to continue to expand
our operational, financial and management information systems and to continue
to attract, train, motivate, manage and retain key employees. If we are unable
to manage this growth effectively, our business, financial condition and
results of operations could be adversely affected. Our ability to stabilize
operations and manage our business efficiently has been, and for the
foreseeable future will continue to be, adversely affected by the diversion of
management's time and attention to the pending securityholder litigation and
matters relating to the restatement of our financial statements for prior
reporting periods. See, "--We may incur significant costs and liability as a
result of our securityholder litigation," and "--Defaults may be declared
under our debt and lease agreements."
We are highly leveraged; our loan and lease agreements contain financial
covenants.
We are highly leveraged. We had total indebtedness, including short term
portion, of $234.7 million as of December 31, 1999. In addition, we had
shareholders' equity of $89.3 million as of December 31, 1999. The degree to
which we are leveraged could have important consequences, including:
. making it more difficult to satisfy our debt or lease obligations;
. increasing our vulnerability to general adverse economic and industry
conditions;
. limiting our ability to obtain additional financing;
. requiring dedication of a substantial portion of our cash flow from
operations to the payment of principal of, and interest on, our debt or
leases, thereby reducing the availability of such cash flow to fund
working capital, capital expenditures or other general corporate
purposes;
. limiting our flexibility in planning for, or reacting to, changes in our
business or industry; and
. placing us at a competitive disadvantage to less leveraged competitors.
Several of our debt instruments and leases contain financial covenants,
including debt to cash flow and net worth tests. There can be no assurance
that we will be in compliance with these financial covenants in the future,
particularly if we are unable to stabilize our operations and efficiently
manage our business. Our credit agreements with U.S. Bank require us to comply
with two financial ratios that become more restrictive commencing in the
second quarter of 2000. Although we were in compliance with these covenants at
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December 31, 1999, we have determined that it is probable that we will not
meet these more restrictive covenants at June 30, 2000. If we fail to comply
with one or more of the U.S. Bank covenants or any other debt or lease
covenants (after giving effect to any applicable cure period), the lender or
lessor may declare us in default of the underlying obligation and exercise any
available remedies, which may include:
. in the case of debt, declaring the entire amount of the debt immediately
due and payable;
. foreclosing on any residences or other collateral securing the
obligation;
. in the case of a lease, terminating the lease and suing for damages.
In addition, many of our debt instruments and leases contain "cross-default"
provisions pursuant to which a default under one obligation can cause a
default under one or more other obligations. Accordingly, it could have a
material adverse effect on our financial condition if any lender or lessor
notifies us that we are in default under any debt instrument or lease.
We may require additional financing.
Our ability to satisfy our obligations, including payments with respect to
our outstanding indebtedness and lease obligations, will depend on future
performance, which is subject to our ability to stabilize our operations and
to a certain extent, to general economic, financial, competitive, legislative,
regulatory and other factors that are beyond our control. Although we believe
that our current cash on hand and cash available from operations are
sufficient to meet our operating needs through June 2001, there can be no
assurance that cash available from operations will be sufficient to fund our
operations beyond such time. In addition, our 6.0% Debentures and our 5.625%
Debentures mature in November 2002 and May 2003, respectively, which will
require substantial additional financing. We are reviewing our future capital
requirements to identify financing options. As a result of the securityholder
litigation, the restatement and other factors, there can be no assurance that
financing from any source will be available in the future, or, if available,
that such financing will be available on terms acceptable to us.
Certain of our indebtedness is secured by letters of credit which in some
cases have termination dates prior to the maturity of the underlying debt. As
such letters of credit expire, we will need to obtain replacement letters of
credit, post cash collateral or refinance the underlying debt. There can be no
assurance that we will be able to procure replacement letters of credit from
the same or other lending institutions on terms that are acceptable to us. In
the event that we are unable to obtain a replacement letter of credit or
provide alternate collateral prior to the expiration of any of these letters
of credit, we would be in default on the underlying debt.
We may incur significant costs and liability as a result of our securityholder
litigation.
Since February 1, 1999, 12 separate complaints were filed in the United
States District Court for the District of Oregon against us and certain of our
past and present officers and directors. Pursuant to Order signed on June 1,
1999, those complaints were consolidated for all purposes. On July 23, 1999, a
consolidated complaint was filed, and on October 20, 1999, an amended
consolidated complaint ("Complaint") was filed.
The Complaint purports to be brought on behalf of a class of purchasers of:
(a) our common stock from February 6, 1997 through March 31, 1999, inclusive;
(b) our 6.0% convertible subordinated debentures due November 1, 2002 ("6.0%
Debentures") from October 21, 1997 through March 31, 1999, inclusive; and (c)
our 5.625% convertible subordinated debentures due May 1, 2003 ("5.625%
Debentures") from July 22, 1998 through March 31, 1999, inclusive.
The Complaint also names as defendants Schroder & Co., Inc., Morgan Stanley
Dean Witter and Smith Barney, Inc. (solely as underwriters in connection with
the 6.0% Debentures) and KPMG LLP, our independent auditors (in connection
with our offerings of common stock, 6.0% Debentures and 5.625% Debentures).
The Complaint alleges violations of the federal securities laws and seeks
unspecified damages. We filed an answer to the Complaint on December 7, 1999.
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Pursuant to our by-laws, we are obligated to indemnify our officers and
directors to the maximum extent allowed by law for any liability incurred by
them as a result of the litigation. In addition, we previously entered into
indemnity agreements with certain of the individual defendants and the
underwriters.
In addition to the securityholder litigation there are additional claims and
lawsuits which have arisen in the ordinary course of business.
We cannot predict the outcome of the foregoing litigation and currently are
unable to evaluate the likelihood of success or the range of possible loss.
However, if the foregoing litigation were determined adversely to us, such a
determination could have a material adverse effect on our financial condition,
results of operations, cash flow or liquidity.
We face significant competition.
The long-term care industry is a highly competitive industry. We expect that
the assisted living business, in particular, will become even more competitive
in the future given the relatively low barriers to entry and continuing health
care cost containment pressures.
We compete with numerous other companies providing similar long-term care
alternatives. We operate in 16 states and each community in which we operate
provides a unique market. Overall, a limited number of our markets include an
assisted living competitor offering assisted living facilities that are
similar in size, price and range of service. In markets where we have
competition, our competitors include other companies that provide adult day
care in the home, higher priced assisted living centers (typically larger
facilities with more amenities), congregate care facilities where tenants
elect the services to be provided, and continuing care retirement centers on
campus like settings.
We believe that the rapid growth of the assisted living industry has
resulted in an oversupply of assisted living residences in certain of our
markets. Recently, we have experienced slower fill-up of Start-Up Residences
in these markets than expected, as well as declining occupancy in our
Stabilized Residences due to the increase in options available to potential
new residents when units are vacated. There can be no assurance that we will
be able to compete effectively in those markets where overbuilding exists, or
that future overbuilding in other markets where we have opened or plan to open
residences will not adversely affect our operations.
We expect to face increased competition from new market entrants as assisted
living receives increased attention and the number of states which include
assisted living in their Medicaid waiver programs increases. These new market
entrants will include publicly and privately held companies, including not for
profit corporations, focusing primarily on assisted living, as well as
hospitals and nursing homes that offer assisted living as a segment of their
overall businesses. We also compete with nursing facilities that provide long-
term care services. We also face competition for development and acquisitions
of assisted living residences. Some of our present and potential competitors
are significantly larger and have, or may obtain, greater financial resources
than we do. Consequently, we cannot guarantee that we will not encounter
increased competition in the future which could limit our ability to attract
residents or expand our business and could have a material adverse effect on
our financial condition and results of operations and prospects.
Overbuilding in the assisted living industry.
We believe that many assisted living markets have become or are on the verge
of becoming overbuilt. Regulation and other barriers to entry into the
assisted living industry are not substantial. In addition, because the segment
of the population that can afford to pay our daily resident fee is finite, the
development of new assisted living facilities could outpace demand. The short
term effects of overbuilding include (a) significantly longer fill-up periods
(2-3 years as compared to 12-18 months previously experienced), (b) pressure
to lower or refrain from increasing rates and (c) competition for workers in
already tight labor markets. Long term effects include lower margins for an
estimated 3-5 years until excess units are absorbed. Recently, we have
experienced
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slower fill-up than expected of new residences in some markets as well as
declining occupancy in our stabilized residences due to the increase in
options available to potential new residents which units are vacated. We
believe that each local market is different, and we are and will continue to
react in a variety of ways, including selective price discounting, to the
specific competitive environment that exists in each market. There can be no
assurance that we will be able to compete effectively in those markets where
overbuilding exists, or that future overbuilding in other markets where we
have opened or plan to open residences will not adversely affect our
operations.
Defaults may be declared under our debt and lease agreements.
Almost all of our loan agreements and leases contain customary covenants
requiring that we deliver periodic financial statements and certify that they
are materially accurate. As a result of the restatement initially announced in
February 1999, it is possible that a lender or lessor may assert a default
under the terms of these instruments with regard to the financial statements
for reporting periods in 1996, 1997 and 1998. We have received waivers from
certain of our creditors and lessors with respect to possible defaults under
certain of these covenants. There can be no assurance that one or more other
creditors or lessors will not attempt to declare a default and exercise any
remedies they may deem available, which could include attempting to terminate
the applicable lease or foreclose on one or more residences securing the
applicable indebtedness. To date, we have not received notice of a declaration
of default from any such other creditor or lessor. We continue to make all
required payments under each of these instruments.
We may not be able to attract and retain qualified employees and control labor
costs.
We compete with other providers of long-term care with respect to attracting
and retaining qualified personnel. We also depend upon the available labor
pool of low-wage employees. A shortage of qualified personnel may require us
to enhance our wage and benefits packages in order to compete. Most of the
states in which we operate impose licensing requirements on individuals
serving as program directors at assisted living residences. In many states in
which we operate, particularly South Carolina, the growth in demand for
licensed assisted living program directors has exceeded the rate at which
candidates can be licensed. Until a program director at a particular residence
can be licensed, we are required to retain the services of outside licensed
managers at a significant additional cost. We cannot guarantee that our labor
costs will not increase, or that, if they do increase, they can be matched by
corresponding increases in revenues.
Our properties are geographically concentrated and we depend on the economies
and Medicaid waiver programs of the specific areas in which we operate our
properties.
We depend on the economies of Texas, Indiana, Oregon, Ohio and Washington
and, to some extent, on the continued funding of state Medicaid waiver program
in some of those states. As of December 31, 1999, 21.6% of our properties were
in Texas, 11.4% in Indiana, 10.3% in Oregon, 9.7% in Ohio and 8.6% in
Washington. Adverse changes in general economic factors affecting the
respective health care industries or laws and regulatory environment in each
of these states, including Medicaid reimbursement rates, could have a material
adverse effect on our financial condition and results of operations.
We depend on reimbursements by third-party payors.
Although revenues at a majority of our residences come primarily from
private pay sources, a portion of our revenues depends upon reimbursement from
third-party payors, including state Medicaid waiver programs and private
insurers. For the years ended December 31, 1997, 1998 and 1999, direct
payments received from Medicaid funded programs accounted for approximately
11.1%, 10.7% and 10.4%, respectively, of our revenue. Also, our tenant-paid
portion of Medicaid residents accounted for approximately 5.9%, 5.8%, and
5.9%, respectively, of our revenue during the years ended December 31, 1997,
1998 and 1999. We expect that state Medicaid waiver programs will constitute a
significant source of our revenue in the future. Furthermore, we cannot
guarantee that our proportionate percentage of revenue received from Medicaid
waiver programs will not increase. There are continuing efforts by
governmental and private third-party payors to contain or reduce the
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costs of health care by lowering reimbursement rates, increasing case
management review of services and negotiating reduced contract pricing. Our
revenues and profitability will be affected if these efforts are successful.
Also, there has been, and our management expects that there will continue to
be, a number of proposals attempting to reduce the federal and some state
budget deficits by limiting Medicaid reimbursement in general. Adoption of any
of these proposals at either the federal or the state level could have a
material adverse effect on our business, financial condition, results of
operations and prospects.
The Balanced Budget Act ("BBA") of 1997, Public Law 105-33, included
sweeping changes to Medicare and medicaid, significantly reducing rates of
increase for payments to home health agencies. Under the BBA, home health
agencies (as well as certain other health related industries) will no longer
be reiumbursed under a cost based system. Rather, the BBA requires the
Secretary of Health and Human Services to establish and implement a
prospective payment system under which home health care services will be
reimbursed on a per diem basis for cost reporting periods beginning on and
after October 1, 2000. In 1998, following the adoption of the BBA, we closed
our home health operations. The shift to a prospective payment system under
the BBA does not apply to assisted living residences and therefore should not
affect our assisted living operations.
In November 1999, President Clinton signed into law the Medicare, Medicaid
and State Children's Health Insurance Programs Balanced Budget Refinement Act
("Budget Refinement Act") which reduces some of the reimbursement cutbacks
under the BBA. The Budget Refinement Act delays implementation of cost-cutting
measures and increases payments from the BBA to some sectors of the health
care industry. Long term care facilities will receive increased payments under
the Budget Refinement Act and other changes required by the BBA will be
ameliorated. Therefore, it is possible that the Budget Refinement Act could
result in increased competition from other types of long term care facilities,
such as skilled nursing facilities and home health agencies. The extent of the
relief provided by the Budget Refinement Act is estimated to be $16 billion
over five years.
We anticipate that revenues at a majority of our residences will continue to
come from private pay sources. However, we believe that locating residences in
states with favorable regulatory and reimbursement climates should provide a
stable source of residents eligible for Medicaid reimbursement to the extent
that private pay residents are not available and, in addition, provide our
private pay residents with alternative sources of income when their private
funds are depleted and they become Medicaid eligible. Although we will seek to
manage the mix of private paying tenants and Medicaid paying tenants residing
in our facilities, any shift to a high Medicaid population could have an
adverse affect on our financial position, results of operations or cash flows,
particularly if third-party payors such as Medicaid continue to seek limits on
reimbursement rates.
We are subject to significant government regulation.
We are subject to federal and state laws prohibiting fraud by health care
providers, including criminal provisions which prohibit filing false claims or
making false statements to receive payment or certification under Medicaid, or
failing to refund overpayments or improper payments. Violation of these
provisions is a felony punishable by up to five years imprisonment and/or
$25,000 fines. Civil provisions prohibit the knowing filing of a false claim
or the knowing use of false statements to obtain payment. The penalties for
such a violation are fines of not less than $5,000 nor more than $10,000, plus
treble damages, for each claim filed.
State and federal governments are devoting increasing attention and
resources to anti-fraud initiatives against health care providers. The Health
Insurance Portability and Accountability Act of 1996 ("HIPAA") and the BBA
expand the penalties for health care fraud, including broader provisions for
the exclusion of providers from the Medicaid program. We have established
policies and procedures that we believe are sufficient to ensure that our
facilities will operate in substantial compliance with these anti-fraud and
abuse requirements. While we believe that our business practices are
consistent with Medicaid criteria, those criteria are often vague and subject
to interpretation. Aggressive anti-fraud actions, however, could have an
adverse effect on our financial position, results of operations or cash flows.
36
<PAGE>
The development and operation of assisted living facilities and the
provision of health care services are subject to federal laws, and state and
local licensure, certification and inspection laws that regulate, among other
matters:
. the number of licensed residences;
. the provision of services;
. equipment;
. staffing, including professional licensing and criminal background
checks;
. operating policies and procedures;
. fire prevention measures;
. environmental matters;
. resident characteristics; and
. physical design and compliance with building and safety codes.
In the ordinary course of our business, we receive and have received notices
of deficiencies for failure to comply with various regulatory requirements. We
review such notices and, in most cases, we will agree with the regulator upon
the steps to be taken to bring the facility into compliance with regulatory
requirements. From time to time we may dispute the matter and sometimes will
seek a hearing if we do not agree with the regulator. In some cases or upon
repeat violations, the regulator may take one or more adverse actions against
a facility. These adverse actions can include:
. the imposition of fines;
. temporary stop placement of admission of new residents, or imposition of
other conditions to admission of new residents to the facility;
. termination of a facility's Medicaid contract; and
. conversion of license to provisional status, suspension or revocation of
a facility's license.
During 1998 and 1999, these adverse actions resulted in our paying aggregate
fines of $9,800 and $4,350 on eight and six residences, respectively and
temporary suspension of admissions at certain residences. During 1998, a
license revocation action was commenced with respect to one of our residences
in the State of Washington. In July 1999 following discussions with the
licensing agency, we settled this action without the revocation becoming
effective. Because regulations vary from one jurisdiction to another and
because determinations regarding whether to make a license provisional,
suspend or revoke a license, or to impose a fine, are subject to
administrative discretion, it is difficult for us to predict whether a
particular remedy will be sought or obtained in any given case. These types of
regulatory enforcement actions may adversely affect facility occupancy levels,
revenues and costs of operation. We cannot guarantee that federal, state, or
local governments will not impose additional restrictions on our activities
that could materially adversely affect us.
We are also subject to various laws and regulations, both federal and state,
due to the size and nature of our business, including laws and regulations
relating to:
. confidentiality of medical information;
. safe working conditions;
. family leave; and
. disposal of medical waste.
37
<PAGE>
Our cost to comply with these regulations is significant. In addition, it
could adversely affect our financial condition or results of operations if a
court or regulatory tribunal were to determine that we had failed to comply
with any of these laws or regulations. Because these laws and regulations are
amended from time to time, we cannot predict when and to what extent liability
may arise. In addition, because these laws vary from state to state, expansion
of our operations to states where we do not currently operate may subject us
to additional restrictions on the manner in which we operate our facilities.
See "Confidentiality of Medical Information," "Restrictions imposed by laws
benefiting disabled persons" and "Medical waste."
Confidentiality of Medical Information
Because we provide limited health care services to our residents, we are
subject to certain requirements regarding protection of confidential medical
information. HIPAA requires a significant overhaul of health care information
systems to protect such individual medical information. In November 1999, the
Department of Health and Human Services released proposed regulations to
protect the confidentiality of individual health information. Although the
final regulations have not yet been released, the cost to the health care
industry of complying with such regulations is likely to be significant.
Restrictions imposed by laws benefiting disabled persons.
Under the Americans with Disabilities Act of 1990, all places of public
accommodation are required to meet certain federal requirements related to
access and use by disabled persons. A number of additional federal, state and
local laws exist that also may require us to modify existing and planned
residences to allow disabled persons to access the residences. We believe that
our residences are either substantially in compliance with present
requirements or are exempt from them, and we attempt to check for compliance
in all facilities we consider acquiring. However, if required changes cost
more than anticipated, or must be made sooner than anticipated, we would incur
additional costs. Further legislation may impose additional burdens or
restrictions related to access by disabled persons, and the costs of
compliance could be substantial.
Medical waste
Some of our facilities generate potentially infectious waste due to the
illness or physical condition of the residents, including, for example, blood-
soaked bandages, swabs and other medical waste products and incontinence
products of those residents diagnosed with infectious diseases. The management
of potentially infectious medical waste, including handling, storage,
transportation, treatment and disposal, is subject to regulation under various
laws, both federal and state. These laws and regulations set forth the
management requirements, as well as permit, record keeping, notice and
reporting obligations. Any finding that we are not in compliance with these
laws and regulations could adversely affect our business operations and
financial condition. Because these laws and regulations are amended from time
to time, we cannot predict when and to what extent liability may arise. In
addition, because these environmental laws vary from state to state, expansion
of our operations to states where we do not currently operate may subject us
to additional restrictions on the manner in which we operate our facilities.
We may be adversely affected by health care reform efforts.
Health care and related services is an area of extensive and dynamic
regulatory change. Changes in the law, new interpretations of existing laws,
or changes in payment methodology, which may be applied retroactively, may
have a dramatic effect on:
. the definition of permissible or impermissible activities;
. the relative costs associated with doing business; and
. the amount of reimbursement by both government and other third-party
payors.
38
<PAGE>
Congress and state legislatures, from time to time, consider and enact
various health care reform proposals. Congress and state legislatures can be
expected to continue to review and assess alternative health care delivery
systems and payment methodologies. Also, public debate of these issues can be
expected to continue in the future. We cannot predict the ultimate timing or
effect of legislative efforts or their impact on us. We cannot guarantee that
either the various states or the federal government will not impose additional
regulations upon our activities which might adversely affect our business,
financial condition, results of operations or prospects.
We face significant pressure to reduce our prices.
The health care services industry is currently experiencing market-driven
reforms from forces within and outside the industry pressuring health care and
related companies to reduce health care costs. These market-driven reforms are
resulting in industry-wide consolidation that is expected to increase the
downward pressure on health care service providers' margins, as larger buyer
and supplier groups exert pricing pressure on health care providers. We cannot
predict the ultimate timing or effect of these market-driven reforms. We
cannot guarantee that any of these reforms will not have a material adverse
effect on our financial condition, results of operations.
We may be liable for losses not covered by or in excess of our insurance.
The provision of health care services entails an inherent risk of liability.
In recent years, participants in the long-term care industry have been subject
to an increasing number of lawsuits alleging malpractice or related legal
theories. Many of these lawsuits involve large claims and significant defense
costs. In addition, we may be subject to claims alleging violations of federal
or state laws relating to safe working conditions, environmental matters and
the use and disposal of hazardous or potentially hazardous substances such as
medical waste. We currently maintain liability insurance intended to cover
such claims. We believe our insurance is in keeping with industry standards.
We cannot guarantee, however, that claims in excess of our insurance coverage
or claims not covered by our insurance coverage will not arise. A successful
claim against us not covered by, or in excess of, our insurance coverage could
have a material adverse effect upon our financial condition or results of
operations. Claims against us, regardless of their merit or eventual outcome,
may also have a material adverse effect upon our ability to attract residents
or expand our business and would require management to devote time to matters
unrelated to the operation of our business. In addition, we must renew our
insurance policies annually. We cannot guarantee that we will be able to
obtain liability insurance coverage in the future or that, if such coverage is
available, it will be available on acceptable terms.
We could incur significant costs related to environmental remediation or
compliance.
We are subject to various federal, state and local environmental laws,
ordinances and regulations. Some of these laws, ordinances and regulations
hold a current or previous owner, lessee or operator of real property liable
for the cost of removal or remediation of some hazardous or toxic substances,
including, without limitation, asbestos-containing materials, that could be
located on, in or under such property. These laws and regulations often impose
liability whether or not we knew of, or were responsible for, the presence of
the hazardous or toxic substances. The costs of any required remediation or
removal of these substances could be substantial. Furthermore, there is no
limit to our liability under such laws and regulations. As a result, our
liability could exceed our property's value and aggregate assets. The presence
of these substances or failure to remediate these substances properly may also
adversely affect our ability to sell or lease the property, or to borrow using
our property as collateral.
We may be liable under some laws and regulations as an owner, operator or an
entity that arranges for the disposal of hazardous or toxic substances, such
as asbestos-containing materials, at a disposal site. In that event, we may be
liable for the costs of any required remediation or removal of the hazardous
or toxic substances at the disposal site. In connection with the ownership or
operation of our properties, we could be liable for these costs, as well as
some other costs, including governmental fines and injuries to persons or
properties. As a result, any hazardous or toxic substances which are present,
with or without our knowledge, at any property we hold or
39
<PAGE>
operate, or which we acquire or operate in the future, could have an adverse
effect on our business, financial condition or results of operations.
Market conditions may decrease the value of our common stock.
The market price of our common stock may fluctuate significantly in response
to various factors and events, including:
. the liquidity of the market for our common stock;
. outstanding shareholder litigation;
. variations in our operating results; and
. new statutes or regulations or changes in the interpretation of existing
statutes or regulations affecting the health care industry generally or
assisted living residence businesses in particular.
In addition, the stock market in recent years has experienced broad price
and volume fluctuations that often have been unrelated to the operating
performance of particular companies. These market fluctuations also may
adversely affect the market price of our common stock.
We depend on senior management and skilled personnel.
We depend, and will continue to depend, upon the services of Dr. Wilson,
President, Chief Executive Officer and Vice Chairman of the Board of
Directors; Ms. Campbell, Senior Vice President, General Counsel and Secretary;
Ms. Gorshe, Senior Vice President of Community Relations; Mr. Miller, Chief
Financial Officer and Treasurer; Mr. Mahon, Vice President and Chief Operating
Officer; Ms. Maloney, Vice President, Controller and Chief Accounting Officer;
and Mr. Parker, Vice President of Development.
We have entered into employment agreements with these officers as well as
other key personnel. We also depend upon our ability to attract and retain
management personnel who will be responsible for the day-to-day operations of
each residence. If we lose the services of any or all of our officers or we
are unable to attract additional management personnel in the future, our
business, financial condition or results of operations could be adversely
affected.
ITEM 7A. Quantitative and Qualitative Disclosure Regarding Market Risk and
Risk Sensitive Instruments
Market risk represents the risk of changes in value of a financial
instrument, derivative or non-derivative, caused by fluctuations in interest
rates, foreign exchange rates and equity prices. Changes in these factors
could cause fluctuations in our earnings and cash flows.
For fixed rate debt, changes in interest rates generally affect the fair
market value of the debt instrument, but not our earnings or cash flows. We do
not have an obligation to prepay any of our fixed rate debt prior to maturity,
and therefore, interest rate risk and changes in the fair market value of our
fixed rate debt will not have an impact on our earnings or cash flows until we
decide, or are required, to refinance such debt.
For variable rate debt, changes in interest rates generally do not impact
the fair market value of the debt instrument, but do affect our future
earnings and cash flows. We had variable rate debt of $28.2 million
outstanding at December 31, 1999 with a weighted average interest rate of
3.4%. Assuming that our balance of variable rate debt remains constant at
$28.2 million, each one-percent increase in interest rates would result in an
annual increase in interest expense, and a corresponding decrease in cash
flows, of $280,000. Conversely, each one-percent decrease in interest rates
would result in an annual decrease in interest expense, and a corresponding
increase in cash flows, of $280,000.
40
<PAGE>
The table below presents principal cash flows and related weighted average
interest rates by expected maturity dates.
<TABLE>
<CAPTION>
Expected Maturity Date
-----------------------------------------------------------------------
Fair
2000 2001 2002 2003 2004 Thereafter Total Value
------ ------ ------- ------- ------ ---------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term Debt
Fixed rate............ $1,157 $1,234 $ 1,299 $ 1,374 $1,456 $38,170 $ 44,690 $ 44,690
Average interest
rate................. 7.97% 7.97% 7.97% 7.97% 7.97% 7.97% 7.97%
Variable rate......... $ 337 $ 366 $ 396 $ 430 $ 465 $26,759 $ 28,753 $ 28,753
Average interest
rate................. 3.35% 3.35% 3.35% 3.35% 3.35% 3.35% 3.35%
------ ------ ------- ------- ------ ------- -------- --------
Total long-term
debt................ $1,494 $1,600 $ 1,695 $ 1,804 $1,921 $64,929 $ 73,443 $ 73,443
Convertible debentures
6.0% Debentures....... $ -- $ -- $86,250 $ -- $ -- $ -- $ 86,250 $ 50,888
Average interest
rate................. 6% 6% 6% 6% 6% 6% 6%
5.625% Debentures..... $ -- $ -- $ -- $75,000 $ -- $ -- $ 75,000 $ 43,500
Average interest
rate................. 5.625% 5.625% 5.625% 5.625% 5.625% 5.625% 5.625%
------ ------ ------- ------- ------ ------- -------- --------
Total convertible
debentures.......... $ -- $ -- $86,250 $75,000 $ -- $ -- $161,250 $ 94,388
------ ------ ------- ------- ------ ------- -------- --------
Total long-term debt
and convertible
debentures.......... $1,494 $1,600 $87,945 $76,804 $1,921 $64,929 $234,693 $167,831
====== ====== ======= ======= ====== ======= ======== ========
</TABLE>
We are also exposed to market risks from fluctuations in interest rates and
the effects of those fluctuations on market values of our cash equivalent
short-term investments. These investments generally consist of overnight
investments that are not significantly exposed to interest rate risk, except
to the extent that changes in interest rates will ultimately affect the amount
of interest income earned and cash flow from these investments.
We do not have any derivative financial instruments in place to manage
interest costs, but that does not mean we will not use them as a means to
manage interest rate risk in the future.
We do not use foreign currency exchange forward contracts or commodity
contracts and do not have foreign currency exposure.
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.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not Applicable.
41
<PAGE>
PART III
ITEM 10. Directors and Executive Officers of the Company
General
We have provided below certain information regarding our directors and
executive officers:
<TABLE>
<CAPTION>
Name Age(1) Position
---- ------ --------
<C> <C> <S>
W. James Nicol(2)(4)(6)....... 56 Director and Chairman of the Board of
Directors
Dr. Keren Brown Wilson(2)(5).. 52 President, Chief Executive Officer and
Vice Chairman of the Board of
Directors
Richard C. Ladd(5)(3)......... 61 Director
Jill M. Krueger(3)(6)......... 40 Director
Bradley G. Razook(4).......... 44 Director
Gloria J. Cavanaugh(4)(5)..... 57 Director
John M. Gibbons(2)(3)......... 51 Director
Sandra Campbell............... 53 Senior Vice President, General Counsel
and Secretary
Nancy Gorshe.................. 49 Senior Vice President of Community
Relations
Drew Q. Miller ............... 47 Chief Financial Officer and Treasurer
Leslie W. Mahon............... 52 Vice President and Chief Operating
Officer
Paul B. Parker................ 33 Vice President of Development
M. Catherine Maloney.......... 37 Vice President, Controller and Chief
Accounting Officer
</TABLE>
- --------
(1) As of December 31, 1999
(2) Member of the Executive Committee.
(3) Member of the Audit Committee.
(4) Member of the Compensation Committee.
(5) Member of the Education, Training and Quality Assurance Committee.
(6) Member of the Special Committee for Securityholder Litigation.
W. James Nicol was appointed Chairman of the Board on March 3, 2000. Mr.
Nicol has over 20 years experience of senior executive management, including
finance and corporate development in health care service organizations. Mr.
Nicol has most recently served as the Chief Financial Officer of
HemoTherapies, Inc., a San Diego based medical device start-up company. Prior
to joining HemoTherapies, he served in various senior executive roles for
numerous companies, including Chief Operating Officer of Laguna Medical
Systems, President and Chief Executive Officer of Health Management, Inc. and
Chief Financial Officer of Careline, Inc. and Quantum Health Resources, Inc.
Mr. Nicol has served as a senior officer and/or member of the Board of
Directors of six publicly-traded companies.
Dr. Keren Brown Wilson is one of our co-founders and served as our
President/Chief Executive Officer of the Company from our formation in July
1994 until September 1997, and as President/Chief Operating Officer from
September 1997 until March 1999. She has served as Vice Chairman of our Board
of Directors since September 1997, and as President and Chief Executive
Officer since March 1999. From September 1997 until March 1999 Dr. Wilson
served as our Chief Operating Officer. Dr. Wilson has over twenty years of
experience in aging service delivery systems and has, for the past 17 years,
focused primarily on assisted living. Since 1983, Dr. Wilson has also been an
Associate Professor at the Institute for Aging at Portland State University.
In these capacities, Dr. Wilson was responsible for designing, developing and
managing the state of Oregon's first assisted living residence along with the
state's first Medicaid-eligible assisted living residence. She currently
serves as Chair of the Assisted Living Federation of America and is on the
Board of Directors of the American Society on Aging and the IOM Quality of LTC
Committee.
Richard C. Ladd has served as Chairman of our Board of Directors from March
1999 to March 2000 and has been a director since September 1994. Since
September 1994, Mr. Ladd has been the President of Ladd and Associates, a
health and social services consulting firm. He is also co-director of the
National Long-Term Care
42
<PAGE>
Balancing Project and was an adjunct assistant professor at the School of
Internal Medicine, University of Texas Medical Branch at Galveston, Texas.
From June 1992 to September 1994, Mr. Ladd served as the Texas Commissioner of
Health and Human Services where he oversaw the development and implementation
of a 22,000-bed Medicaid Waiver Program to be used for assisted living and
other community-based service programs. From November 1981 to June 1992, Mr.
Ladd served as Administrator of the Oregon Senior and Disabled Services
Division. He is also a member of numerous professional and honorary
organizations.
Jill M. Krueger was elected to the Board of Directors in April 1999, and
presently serves as Chairman of our Audit Committee. Since 1996, Ms. Krueger
has served as President and Chief Executive Officer of Health Resources
Alliance, an organization designed to optimize market position and achieve
synergies which enable its 20 member organizations to prosper in a managed
care environment. From 1988 to 1996 Ms. Krueger was a partner at KPMG LLP
where she served as its Partner in charge of the firm's National Long Term
Care and Retirement Housing Practice.
Bradley G. Razook has been a director since August 1994. Mr. Razook is
currently President and Managing Director at Cohen & Steers Capital Advisors,
LLC. From July 1997 until February 1999, Mr. Razook served as Managing
Director and Head of Health Care Industry Group of Schroder & Co., Inc. From
1990 to July 1997, Mr. Razook was Executive Vice President of National
Westminster Bank PLC, New York Branch. Prior to being appointed Executive Vice
President, Mr. Razook held the position of Managing Director. From 1985 to
1990, Mr. Razook was a First Vice President and counsel at Drexel Burnham
Lambert, Inc., an investment banking firm.
Gloria J. Cavanaugh was appointed as a director on September 7, 1997. Ms.
Cavanaugh has been the executive director of the American Society on Aging
since 1975. From 1968 to 1975, she was Director of Continuing Education at the
Andrus Gerontology Center, University of Southern California. Ms. Cavanaugh
has almost thirty years experience developing and offering educational
programming on aging issues, including such areas as aging in place/housing
and assisted living. Ms. Cavanaugh serves on the Board of Directors of
Generations United, The National Alliance for Caregiving, The National Policy
and Resource Center on Women and Aging and the Center for Assistive
Technology, State University of New York at Buffalo.
John M. Gibbons was appointed a Director in March 2000. He brings over 16
years of public company senior management experience in finance and executive
management positions. During his six years at The Sports Club Company, a
developer and operator of luxury sports and fitness clubs, Mr. Gibbons held a
number of positions, including Chief Financial Officer, Chief Operating
Officer and most recently President and Chief Executive Officer. He was a
director of The Sports Club from 1995 through February 2000. Prior to joining
The Sports Club, Mr. Gibbons was employed by Com-Systems, a publicly-traded
long-distance telecommunications company, where he served in multiple
capacities, including as Senior Vice-President, General Manager and Chief
Financial Officer.
Sandra Campbell joined us as Senior Vice President, General Counsel and
Secretary in January of 1998. Ms. Campbell has almost 20 years of experience
in practicing law in real property, secured transactions and general business
law. Prior to joining the Company she was a partner in the law firm of
Bullivant Houser Bailey where she was employed from April 1995 to December
1998. From January 1992 to April 1995, Ms. Campbell served as Chief Legal
Counsel for First Fidelity Thrift & Loan Association.
Nancy Gorshe joined us as Vice President of Community Relations in January
of 1998 and has over twenty years of experience in the field of geriatric
health, community and long-term care and housing. Prior to joining the
Company, she was President of Franciscan ElderCare Corporation which is
comprised of nursing homes, assisted living facilities, and subacute units in
nursing homes and hospitals from 1993 to 1997. In addition, Ms. Gorshe has
served as Executive Director of Providence Elderplace, a long-term care HMO.
Drew Q. Miller joined us in March, 2000 as Chief Financial Officer and
Treasurer. Mr. Miller has over 16 years of senior finance and accounting
experience in health care services. Most recently Mr. Miller served as
43
<PAGE>
Chief Executive Officer and President of Advantage Behavior Health, Inc., a
southern California-based comprehensive behavioral management company. Prior
to Advantage, he served as Chief Financial Officer of Comprehensive Care
Corporation, a publicly traded company engaged in the development, delivery
and management of behavioral services.
Leslie J. Mahon joined us as Vice President and Chief Operating Officer in
March of 1999 and his background includes 10 years experience in the health
care industry as the Chief Executive Officer of Lantis Enterprises, Inc., a
private company that operates 37 nursing and assisted living facilities in
five states.
Paul B. Parker joined us in July 1998, and currently serves as Vice
President of Development. Mr. Parker has eight years experience in the
development and acquisition of assisted living facilities, health policy and
regulation as well as reimbursement. Prior to joining ALC, he served as Chief
Executive Officer of Supportive Housing Services, Inc. and President of LTC
Development Company. Both firms specialize in the development of assisted
living facilities.
M. Catherine Maloney joined us as Controller in June 1998, and currently
serves as Vice President, Controller, and Chief Accounting Officer. Prior to
joining the Company, Ms. Maloney was an Audit Manager with KPMG LLP.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our officers, directors and
greater than ten-percent stockholders to file with the Commission and the
American Stock Exchange initial reports of ownership and reports of changes in
ownership of our Common Stock and other equity securities. Such persons or
entities are required by Commission regulations to furnish us with copies of
all Section 16(a) forms they file.
To our knowledge, based solely on review of the copies of such reports
furnished to us and written representations that no other reports were
required, during the fiscal year ended December 31, 1999, each of our
officers, directors and 10% stockholders complied with all Section 16(a)
filing requirements applicable to them.
44
<PAGE>
ITEM 11. Executive Compensation
We have set forth in the following table information concerning the
compensation paid during the fiscal year ended December 31, 1999 to Mr.
McBride and Dr. Wilson, each of whom served as our Chief Executive Officer
during a portion of 1999 and each of our four other most highly compensated
executive officers (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation(1) Long-Term Compensation Awards
----------------------------------- ----------------------------------
Restricted Securities
Name and Principal Other Annual Stock Underlying All Other
Position Year Salary Bonus(2) Compensation(3) Awards(3) Options Compensation
------------------ ---- -------- --------- --------------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
William McBride III(4).. 1999 $ 68,500 $(100,000) $1,375,000 -- -- --
Former Chief Executive 1998 247,000 100,000 -- -- -- --
Officer and Chairman 1997 -- -- -- $3,400,000 -- --
Dr. Keren Brown Wilson.. 1999 $200,000 $(100,000) $ 187,500 -- 7,500 --
President and Chief 1998 203,000 100,000 -- -- -- --
Executive Officer 1997 200,000 -- -- $ 850,000 -- --
Vice Chairman
Leslie J. Mahon(5)...... 1999 $141,300 $ 17,500 -- -- 30,000 --
Chief Operating
Officer
Sandra Campbell(6)...... 1999 $150,000 $ 51,250 -- -- -- --
Senior Vice President, 1998 141,600 25,000 -- -- 15,000 --
General Counsel and
Secretary
Nancy Gorshe(7)......... 1999 $125,000 $ 15,000 -- -- -- --
Senior Vice President 1998 101,300 -- -- -- 55,000 --
Of Community Relations
James Cruckshank(5)..... 1999 $115,400 -- -- -- 30,000 --
</TABLE>
- -------
(1) Excludes certain perquisites and other personal benefit amounts, such as
car allowance, which, for any executive officer did not exceed, in the
aggregate, the lesser of $50,000 or 10% of the total annual salary and
bonus for such executive.
(2) Each of Mr. McBride and Dr. Wilson was paid a bonus of $100,000 in 1998
related to the execution of the ARC merger agreement. Payments made to
each of them subsequent to December 31, 1998 were reduced by $100,000 to
reflect repayment of these bonus payments.
(3) Restricted stock awards are valued in the table above at their fair market
value based on $17.00, the per share closing price of our Common Stock on
the American Stock Exchange on the date of the award. At December 31,
1998, Mr. McBride and Dr. Wilson held 200,000 and 50,000 shares,
respectively, of restricted stock valued at $2.6 million and $656,000,
respectively (calculated by multiplying the amount of restricted stock by
the closing market price of $13.125 on the last trading day of 1998). As
of March 15, 1999 Mr. McBride and Dr. Wilson agreed to forfeit the shares
of restricted stock held by each of them for $750,000 and $187,500,
respectively. In addition, during 1999 Mr. McBride received a severance
payment of $490,000 and consulting payments of $135,000. See "Employment
Agreements" and "Consulting Agreement."
(4) Mr. McBride became Chief Executive Officer on October 3, 1997, but did not
begin receiving compensation until January 1, 1998. In March 1999, Mr.
McBride resigned as Chief Executive Officer.
(5) Mr. Mahon and Mr. Cruckshank each began his employment with us in March
1999. Subsequent to December 31, 1999, Mr. Cruckshank resigned as Chief
Financial Officer.
(6) Ms. Campbell began her employment with us on December 31, 1997 and began
receiving compensation in January 1998.
(7) Ms. Gorshe began her employment with us in February 1998.
45
<PAGE>
We have provided in the following table information on stock options granted
during 1999 to the Named Executive Officers.
STOCK OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants
-----------------------------------------
Potential
Realizable Value
at Assumed
% of Total Annual Rate of
Number of Options Stock Price
Securities Granted to Appreciation for
Underlying Employees Exercise Option Term(1)
Options in Fiscal Price Expiration ----------------
Name Granted Year ($/Sh) Date 5% 10%
---- ---------- ---------- -------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
William McBride III..... -- -- -- -- -- --
Dr. Keren Brown Wilson.. 7,500 1.6% $1.69 11/16/09 $ 8,000 $ 20,000
Leslie J. Mahon......... 30,000 6.5% $5.00 03/01/09 $94,300 $239,000
Sandra Campbell......... -- -- -- -- -- --
Nancy Gorshe............ -- -- -- -- -- --
James Cruckshank........ 30,000 6.5% $3.81 03/18/09 $71,900 $182,200
</TABLE>
- --------
(1) In accordance with rules of the Securities and Exchange Commission (the
"Commission"), shown are the gains or "option spreads" that would exist
for the respective options granted. These gains are based on the assumed
rates of annual compound stock price appreciation of 5% and 10% from the
date the option was granted over the full option term. These assumed
annual compound rates of stock price appreciation are mandated by the
rules of the Commission and do not represent our estimate or projection of
future Common Stock prices.
We have provided in the following table information with respect to the
Named Executive Officers concerning unexercised stock options held as of
December 31, 1999.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying In-The-Money Options
Unexercised Options at Fiscal Year-
at Fiscal Year-End End(1)
Shares -------------------- --------------------
Acquired Value Exercisable/ Exercisable/
Name on Exercise Realized Unexercisable Unexercisable
---- ----------- -------- -------------------- --------------------
<S> <C> <C> <C> <C>
William McBride III..... -- -- 145,000/ 0 $0/$0
Keren Brown Wilson...... -- -- 215,000/ 7,500 $0/$3,263
Leslie J. Mahon......... -- -- 0/30,000 $0/$0
Sandra Campbell......... -- -- 38,334/26,666 $0/$0
Nancy Gorshe............ -- -- 25,001/29,999 $0/$0
James Cruckshank........ -- -- 0/30,000 $0/$0
</TABLE>
- --------
(1) The closing trading price on the American Stock Exchange for the Common
Stock on December 31, 1999 was $2.125.
Compensation of Directors
During 1999 each non-employee director received a fee of $12,000 per year
for services as a director, plus $1,000 for attendance in person, or $500 for
attendance by telephone, at each meeting of the Board of Directors or any
committee meeting held on a day on which the Board of Directors does not meet.
During 2000, those outside directors serving on the Executive Committee
receive $5,000 per month for such service and on February 29, 2000 received
non-qualified options to purchase 30,000 shares of common stock at $1.81 per
share for acting in such capacity. In addition, we reimburse the directors for
travel expenses incurred in
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<PAGE>
connection with their duties as our directors. On November 16, 1999, we
granted each of our directors non-qualified options to purchase 7,500 shares
of common stock at $1.69 per share. These options vest ratably on each of
November 16, 2000, 2001 and 2002. Under the terms of our Amended and Restated
1994 Stock Option Plan, each new non-employee director receives non-qualified
options to purchase 20,000 shares of common stock at the time he or she joins
the Board of Directors. Such director options vest with respect to one third
of the amount of each grant on each of the first, second and third
anniversaries of the grant date, and expire on the earlier of the seventh
anniversary of the date of vesting or one year following the director's
ceasing to be a director for any reason. Jill Krueger, Jim Nicol and John
Gibbons received such new non-employee director options to purchase 20,000
shares of Common Stock at $2.88, $1.81 and $1.81 per share on April 15, 1999,
February 29, 2000 and February 29, 2000, respectively.
On February 29, 2000, Jill Krueger, Richard Ladd and Gloria Cavanaugh
received nonqualified options to purchase at $1.81 per share, 30,000, 10,000
and 10,000 shares of Common Stock, respectively.
Employment Agreements
Keren Brown Wilson
We entered into employment agreements with Dr. Wilson in October 1997,
providing for Dr. Wilson's services as President and Chief Operating Officer.
The agreement provides for a four-year term with automatic extensions until
the date (if any) which is the fourth anniversary of our notice, or six months
after the employee's notice, of a desire to terminate the agreement.
Notwithstanding such "evergreen" provision, the agreement may be terminated by
us for cause or by the employee for "Good Reason." The latter is defined in
the agreement as
(1) material diminution of title, duties, or salary;
(2) reduction in benefit not generally applicable to senior executive
personnel; or
(3) a direction by the Board of Directors to report to any person or group
other than the Board of Directors.
The agreement also constitutes "Good Reason" for Dr. Wilson to terminate her
employment if our shareholders fail to elect Dr. Wilson to the Board of
Directors, or if the Directors fail to elect Dr. Wilson as vice-Chairman of
the Board of directors unless in either case Dr. Wilson has declined to be so
elected.
Under the agreement, in the event of a termination of employment for any
reason other than cause, the employee will be entitled to the payment of an
amount equal to four times her annual salary. In the event of a termination
within one year of a change in control (as defined in the agreement) for any
reason other than the death or disability of the employee or a termination by
us for cause, Dr. Wilson would be entitled to a $3.0 million termination
payment. The agreements also contain "gross-up" provisions to compensate Dr.
Wilson in the event that any payment under such contracts is subject to an
excise tax imposed under Section 4999 of the Internal Revenue Code. The
employment agreements provide that Dr. Wilson is entitled to compensation at
an annual rate of $200,000. Pursuant to the employment agreement, Dr. Wilson
were awarded, without cost, 50,000 shares of "restricted stock," under our
1994 Amended and Restated Stock Option Plan. The restricted stock agreements
relating to the restricted stock provide that the restrictions applicable to
such shares lapse, and such shares will no longer be subject to forfeiture in
the event of termination of employment, at the rate of 25% per year commencing
on October 3, 2001, the fourth anniversary of the date of award, subject to
acceleration in the event of a change in control. Dividends are payable on the
restricted stock to the extent paid on all other shares of Common Stock. The
restricted stock does not have voting rights.
In connection with her employment agreement, we agreed to indemnify Dr.
Wilson to the extent permitted under Nevada law against liability and expenses
incurred by her in any proceeding in which she is involved due to her role as
officer or director. The indemnity agreement excludes certain claims from
indemnification by us.
Effective as of March 15, 1999, we entered into an amendment with Dr. Wilson
to her employment agreement to provide that we will employ Dr. Wilson as
President and Chief Executive Officer. In addition, we
47
<PAGE>
paid Dr. Wilson a lump sum cash payment of $187,500 (which was reduced to
$87,000 to reflect repayment of a $100,000 bonus paid in 1998 related to the
execution of our merger agreement with ARC) in consideration for Dr. Wilson's
agreement to forfeit her interest in 50,000 shares of restricted stock held by
her and to terminate the restricted stock agreement related to those shares.
Sandra Campbell
On December 31, 1997, we entered into an employment agreement with Sandra
Campbell providing for Ms. Campbell's services as Senior Vice President,
General Counsel and Secretary. The agreement provides for an initial two and
one-half-year term. If the agreement has not been terminated prior to the
expiration of the initial term, then the agreement is automatically extended
on a continuous basis. We may terminate the agreement by providing Ms.
Campbell with two and one-half years' prior notice of our intention to
terminate her employment, and Ms. Campbell may terminate the agreement by
providing us with four months prior notice of her intention to resign. In
addition, we may terminate the agreement at any time for "Cause" and Ms.
Campbell may terminate the agreement for "Good Reason" (each as defined in the
agreement), and the agreement automatically terminates upon Ms. Campbell's
death or permanent disability. If we terminate Ms. Campbell's employment other
than for Cause and without providing the notice referred to above, or if Ms.
Campbell terminates the agreement for Good Reason, then we must make a lump-
sum payment to Ms. Campbell equal to her then-annual salary plus $100,000. In
addition, if there is a Change in Control (as defined in the Agreement),
regardless of whether she remains in our employ, Ms. Campbell is entitled to
receive an additional amount equal to two times her then-annual salary plus
$100,000, and all options exercisable for common stock automatically vest and
become exercisable. The agreement provides that our President or Chief
Executive Officer will determine Ms. Campbell's annual compensation subject to
adjustment from time to time at the discretion of the Board of Directors. Ms.
Campbell's current salary is $190,000. In addition, Ms. Campbell received
options to purchase 50,000 shares of Common Stock, to become exercisable in
annual installments of 16,666 shares commencing December 31, 1998, at an
exercise price of $16.50, equal to the fair market value of the Common Stock
on the date of grant. The agreement includes an agreement to indemnify Ms.
Campbell to the extent permitted under Nevada law against liability and
expenses incurred by her in any proceeding in which she is involved due to her
role as an officer. The indemnity agreement excludes certain claims from
indemnification by us.
Leslie Mahon
On March 15, 1999, we entered into an employment agreement with Leslie Mahon
providing for Mr. Mahon's services as Vice President and Chief Operating
Officer. The agreement provides for an initial two-year term, subject to
automatic one-year extensions unless we notify Mr. Mahon during the 90-day
period ending on March 15 of each year that we wish to terminate the agreement
on March 15 of the following year. Notwithstanding this "evergreen" provision,
we may terminate the agreement at any time for "Cause" (as defined in the
agreement) and Mr. Mahon may resign at any time upon 90 days' prior written
notice to us. If we terminate Mr. Mahon's employment without "Cause" and
without offering Mr. Mahon comparable employment (employment with us or an
affiliated company that is not materially different in level of
responsibility, at the same or higher salary level, with same or similar title
or rank and within a 20-mile radius of his immediately prior position with
us), then we must make a lump-sum payment to Mr. Mahon in an amount equal to
twice his then annual salary. The agreement provides that our Chief Executive
Officer will determine Mr. Mahon's annual compensation subject to adjustment
from time to time at the discretion of the Board of Directors. Mr. Mahon's
current salary is $175,000. The agreement further provides that Mr. Mahon is
subject to confidential information restrictions for as long as Mr. Mahon
possesses any confidential information, and non-competition provisions until
one year after the termination of Mr. Mahon's employment. In addition, Mr.
Mahon received options to purchase 30,000 shares of Common Stock, to become
exercisable in annual installments of 10,000 shares commencing March 15, 2000,
at an exercise price of $5.00, equal to the fair market value of the Common
Stock on the date of the grant.
48
<PAGE>
Nancy Gorshe
On February 3, 1998, we entered into an employment agreement with Nancy
Gorshe providing for Ms. Gorshe's services as Vice President/Community
Relations. On January 19, 2000, we entered into an amendment to Ms. Gorshe's
employment agreement. The agreement, as amended, provides for an initial two-
year term, subject to automatic one year extensions unless we notify Ms.
Gorshe during the 90 day period ending on February 3 of each year that we wish
to terminate the agreement on February 3 of the following year,
notwithstanding this "evergreen" provision. We may terminate the agreement at
any time for "Cause" (as defined in the agreement). If we terminate Ms.
Gorshe's employment without "Cause" and without offering Ms. Gorshe comparable
employment (employment with us or any affiliated company that is not
materially different in level of responsibility, at the same or higher salary
level, with same or similar title or rank and within a 20-mile radius of her
immediately prior position with us) or if within one year following a Change
of Control (as defined in the agreement) we either terminate Ms. Gorshe
without cause or she voluntarily resigns (and we have not offered her
comparable employment in either case), then we must make a lump-sum payment to
Ms. Gorshe in an amount equal to twice her then annual salary. In addition, if
we terminate Ms. Gorshe within one year following a Change in Control, all
Common Stock options held by Ms. Gorshe will automatically become immediately
exercisable. The agreement provides that our President or Chief Executive
Officer will determine Ms. Gorshe's annual compensation subject to adjustment
from time to time at the discretion of the Board of Directors. Ms. Gorshe's
current salary is $125,000. The agreement further provides that Ms. Gorshe is
subject to confidential information, and non-competition provisions until one
year after the termination of Ms. Gorshe's employment. In addition, Ms. Gorshe
received options to purchase 20,000 shares of Common Stock, to become
exercisable in annual installments of 6,667 shares commencing on July 27,
1999, at an exercise price of $16.50, equal to the fair market value of the
Common Stock on the date of grant.
In addition to the foregoing employment agreements, we intend to enter into
an employment agreement with Drew Q. Miller in connection with his services as
our Chief Financial Officer and Treasurer pursuant to which we intend to pay
Mr. Miller a salary of $190,000 per year and grant Mr. Miller options
exercisable for 150,000 shares of common stock at an exercise price equal to
the fair market value of the common stock on the date of grant.
Consulting Agreements
Agreements With Mr. McBride
Effective as of March 15, 1999, we entered into a consulting agreement with
Mr. McBride which provided, among other things, for the termination of Mr.
McBride's employment agreement, entered into in October 1997.
The employment agreement with Mr. McBride provided for Mr. McBride's
services as Chief Executive Officer. The agreement provided for a four-year
term with automatic extensions until the fourth anniversary of our notice, or
six months after Mr. McBride's notice, of a desire to terminate the agreement.
Notwithstanding such "evergreen" provision, the employment agreement provided
that we may terminate it for "Cause" or Mr. McBride may terminate if for "Good
Reason." Under the employment agreement, in the event of a termination of
employment for any reason other than cause, Mr. McBride would have been
entitled to the payment of an amount equal to four times his annual salary. In
the event of a termination within one year of a change in control (as defined
in the employment agreement) for any reason other than his death or disability
or a termination by us for cause, Mr. McBride would have been entitled to a
$4.0 million termination payment. The employment agreement also contained a
"gross-up" provision to compensate Mr. McBride in the event that any payment
under such contract was subject to an excise tax imposed under Section 4000 of
the Internal Revenue Code. The employment agreement provided that Mr. McBride
was entitled to compensation at an annual rate of $265,000. Pursuant to the
employment agreement, Mr. McBride was awarded, without cost to him,
200,000 shares of "restricted stock" under the Amended and Restated 1994
Employee Stock Option Plan. The restricted stock agreement relating to the
restricted stock provided that the restrictions applicable to such shares
would lapse, and such shares would no longer be subject to forfeiture in the
event of termination of employment, at the rate of 25% per year commencing on
October 3, 2001, the fourth anniversary of the date of award, subject to
acceleration in the event of a change in control.
49
<PAGE>
Effective as of March 15, 1999, we entered into a consulting agreement with
Mr. McBride which provided for the termination of his employment agreement,
the forfeiture of his $4.0 million termination payment, the forfeiture of his
restricted stock and the extinguishment of Mr. McBride's and our rights and
obligations under that agreement. Pursuant to the consulting agreement, Mr.
McBride agreed to provide consulting services to us and to resign from his
position as our Chief Executive Officer. The termination of Mr. McBride's
employment pursuant to the consulting agreement is by mutual agreement.
Pursuant to the consulting agreement Mr. McBride received a lump-sum cash
termination payment of $490,000 (which was reduced to $390,000 to reflect
repayment of a $100,000 bonus paid in 1998 related to the execution of our
merger agreement with ARC). In addition, we paid Mr. McBride a lump sum cash
payment of $750,000 in consideration for Mr. McBride's agreement to forfeit
his interest in 200,000 shares of restricted stock held by him and to
terminate the related restricted stock agreement.
Pursuant to the consulting agreement, Mr. McBride will provide consulting
services to us for a period of two years, on a basis of not more than forty
hours per month at a rate of $15,000 per month. During the consulting term,
Mr. McBride will also be entitled to participate in our medical insurance
plans at a cost equal to our cost of providing coverage. If we terminate the
consulting relationship without "Cause" (as defined in the consulting
agreement), Mr. McBride will be entitled to the balance of the cash amounts
which he would have received had the consulting relationship continued for the
remainder of the two year term. In addition, upon the occurrence of a "Change
in Control" of the Company (as defined in the consulting agreement), the
consulting relationship will automatically terminate and Mr. McBride will be
entitled to a lump-sum cash payment in an amount equal to the balance of the
cash amounts which he would have received had the consulting relationship
continued for the remainder of the two year term.
In addition, Mr. McBride has agreed that he will not disclose confidential
information belonging to us, and, for a period of two years following the
effectiveness of the consulting agreement, he will not compete with us or
solicit our employees. However, if the consulting relationship is terminated
as a result of a Change in Control of the Company, Mr. McBride's covenant not
to compete will automatically terminate. Pursuant to the consulting agreement,
we also reimbursed Mr. McBride for his attorneys fees incurred in the
negotiation and preparation of the consulting agreement in the amount of
approximately $8,000.
In connection with his employment agreement, we agreed to indemnify Mr.
McBride to the extent permitted under Nevada law against liability and
expenses incurred by him in any proceeding in which he is involved due to his
role as officer or director. The indemnity agreement excludes certain claims
from indemnification by us. We and Mr. McBride have also entered into certain
stock option agreements pursuant to which Mr. McBride has been granted options
exercisable for 150,000 shares of Common Stock. Mr. Mcbride's indemnity
agreement and option agreements with us survive the termination of his
employment agreement. Effective November 11, 1999, our Board of Directors
approved an amendment to our option agreements with non-employee directors to
clarify that the provisions of the 1994 Plan relating to the expiration of
options following a termination of directorship apply to all options granted
to such directors and not only to the original 20,000 options granted at the
time each director joined the Board of Directors. This amendment also applied
to 120,000 options granted to Mr. McBride prior to his employment as our Chief
Executive Officer. As a result of the amendment, these options, which have an
exercise price of $4.50 per share, will expire one year after Mr. McBride's
departure from the Board, rather than three months after such departure as
provided in his original option agreement.
Agreements with Mr. Cruckshank
Effective as of March 3, 2000, we entered into a Separation and Consulting
Agreement with Mr. Cruckshank which provided, among other things, for the
termination of Mr. Cruckshank's employment agreement, entered into on March
15, 1999.
The employment agreement with Mr. Cruckshank provided for Mr. Cruckshank's
services as Vice President and Chief Financial Officer. The agreement provided
for an initial two-year term, subject to automatic one-year extensions unless
we notified Mr. Cruckshank during the 90-day period ending on March 15 of each
year that
50
<PAGE>
we wished to terminate the agreement on March 15 of the following year.
Notwithstanding this "evergreen" provision, we were able to terminate the
agreement at any time for "Cause" (as defined in the agreement) and Mr.
Cruckshank could resign at any time upon 90 days' prior written notice to us.
If we terminate Mr. Cruckshank's employment without "Cause" and without
offering Mr. Cruckshank comparable employment (employment with us or an
affiliated company that is not materially different in level of
responsibility, at the same or higher salary level, with same or similar title
or rank and within a 20-mile radius of the location of his immediately prior
position with us), then we would have been obligated to make a lump-sum
payment to Mr. Cruckshank in an amount equal to twice his then annual salary.
The agreement provided that our Chief Executive Officer would determine Mr.
Cruckshank's annual compensation subject to adjustment from time to time at
the discretion of the Board of Directors. The agreement further provided that
Mr. Cruckshank was subject to confidential information restrictions for as
long as Mr. Cruckshank possessed any confidential information, and non-
competition provisions until one year after the termination of Mr.
Cruckshank's employment. In addition, Mr. Cruckshank received options to
purchase 30,000 shares of Common Stock, to become exercisable in annual
installments of 10,000 shares commencing March 15, 2000, at an exercise price
of $3.81, equal to the fair market value of Common Stock on the date of grant.
Effective as of March 3, 2000, we entered into a separation and consulting
agreement with Mr. Cruckshank which provided for the termination of his
employment agreement, the forfeiture of any severance or future bonus payment
(other than a $50,000 bonus that we paid Mr. Cruckshank in connection with the
execution of the Separation and Consulting Agreement) and the extinguishment
of Mr. Cruckshank's and our rights and obligations under that employment
agreement. Pursuant to the separation and consulting agreement, Mr. Cruckshank
resigned from his position as our Vice President, Chief Financial Officer and
Treasurer.
Pursuant to the separation and consulting agreement, Mr. Cruckshank will
provide consulting services to us through December 31, 2000, for which we will
pay him a bi-weekly amount equal to $3,000. If we terminate the consulting
relationship without "Cause" (as defined in the separation and consulting
agreement), Mr. Cruckshank will be entitled to the balance of the cash amounts
which he would have received had the consulting relationship continued for the
remainder of its term. During the consulting term, Mr. Cruckshank will also be
entitled to participate in our medical insurance plans at his sole expense.
In addition, Mr. Cruckshank has agreed that he will not disclose any of our
confidential information and, during the term of his service as a consultant
and for a period of one year thereafter, he will not compete with us or
solicit our employees. Mr. Cruckshank also agreed that for a period of three
years following the expiration or earlier termination of the Separation and
Consulting Agreement he will not engage in tender offers, proxy solicitations
or other similar actions involving our common stock, or act to seek to control
or influence our management, Board of Directors or policies.
Pursuant to Mr. Cruckshank's employment agreement, Mr. Cruckshank was
granted options exercisable for 30,000 shares of common stock. In connection
with the termination of employment, Mr. Cruckshank agreed to the termination,
as of March 2, 2000, of his options to purchase 20,000 shares of common stock,
which were to vest on March 15, 2001 and March 15, 2002. We also agreed with
Mr. Cruckshank that his options to purchase 10,000 shares of Company common
stock, which vest on March 15, 2000 and have an exercise price of $3.813 per
share, will expire on the earlier of 90 days after (a) December 31, 2000 or
(b) the termination of his consulting agreement with "Cause" (as defined in
the Separation and Consulting Agreement); provided that Mr. Cruckshank will
forfeit such options if he breaches the consulting agreement, is terminated
with "Cause", or voluntarily terminates his consulting agreement with us.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee is comprised of Mr. Razook and Ms. Krueger.
In March 1999, one of our directors, Mr. Razook became President and
Managing Director at Cohen & Steers Capital Advisors LLC ("C&S Advisors").
Pursuant to an agreement entered into during 1999 with
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<PAGE>
Cohen & Steers Capital Management, Inc., an affiliate of C&S Advisors
("CSCM"), we paid CSCM and C&S Advisors an aggregate of $1.3 million in 1999
for financial advisory services. On January 24, 2000, our agreement with CSCM
was terminated by mutual consent, and a new agreement with C&S Advisors was
entered into. Pursuant to our new agreement, we anticipate that we may pay C&S
Advisors approximately $700,000 for financial advisory services plus customary
fees and commissions in the event that we are advised by C&S Advisors in
connection with certain financing and merger and acquisition transactions. The
new agreement terminates on December 31, 2000, except that (a) we may
terminate the agreement at any time upon 90 days written notice and (b) even
after the expiration or termination of the new agreement we will be required
to pay C&S Advisors fees under the new agreement if we complete certain
financing and merger and acquisition transactions on or prior to December 31,
2001.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
We have set forth in the following table information as of March 27, 2000
with respect to the beneficial ownership of our Common Stock (based upon
information provided by such persons) by:
(1) each of our directors;
(2) each person who is known by us to own beneficially more than 5% of its
Shares;
(3) each of the Named Executive Officers for the fiscal year ended December
31, 1999; and
(4) our directors and executive officers as a group.
<TABLE>
<CAPTION>
Shares Percent
Beneficially of
Name and Address of Beneficial Owner(1) Owned(2) Class
--------------------------------------- ------------ -------
<S> <C> <C>
W. James Nicol....................................... -- *
Dr. Keren Brown Wilson............................... 1,035,412 6.1%
Richard C. Ladd...................................... 57,500 *
Bradley G. Razook(3)................................. 46,500 *
170 Water Street, 20th Floor
New York, NY 10038
Gloria Cavanaugh..................................... 22,500 *
John M. Gibbons...................................... -- *
Jill Krueger......................................... 6,667 *
William McBride III(4)............................... 226,000 1.3%
Leslie J. Mahon...................................... 10,000 *
Sandra Campbell...................................... 39,128 *
Nancy Gorshe......................................... 25,001 *
Drew Q. Miller....................................... -- *
James W. Cruckshank.................................. 12,000 *
Bruce E. Toll(5)..................................... 2,645,098.65 14.9%
3103 Philmont Avenue
Huntington Valley, PA 19006
Wellington Management Company, LLP(6)................ 1,690,000 9.9%
75 State Street
Boston, MA 02109
Greenlight Capital, L.L.C.(7)........................ 1,566,012 8.8%
420 Lexington Avenue, Suite 875
New York, New York 10170
Capital Group International, Inc.and Capital Guardian
Trust(8)............................................ 1,445,000 8.4%
11100 Santa Monica Blvd.
Los Angeles, CA 90025
John W. Adams(9)..................................... 1,200,000 7.0%
885 Third Avenue, 34th Floor
New York, New York 10022
All directors and executive officers as a group (13
persons)(10)........................................ 1,284,914 7.5%
</TABLE>
- --------
* Less than 1%
52
<PAGE>
(1) Except as otherwise noted above, the address of our directors and
officers is c/o Assisted Living Concepts, Inc., 11835 NE Glenn Widing
Drive, Portland, Oregon, 97220.
(2) Includes options to purchase 215,000 by Dr. Wilson, 57,500 by Mr. Ladd,
42,500 by Mr. Razook, 22,500 by Ms. Cavanaugh, 6,667 by Ms. Krueger,
145,000 by Mr. McBride, 38,334 by Ms. Campbell, 10,000 by Mr. Cruckshank,
10,000 by Mr. Mahon, 25,001 by Ms. Gorshe, 23,334 by Mr. Parker and
18,334 by Ms. Maloney which are exercisable within 60 days of March 27,
2000.
(3) Includes 4,000 shares owned by Mr. Razook's children.
(4) Mr. McBride no longer serves as a director or executive officer.
(5) Based on the Form 13D/A as filed on November 12, 1999. 575,098.65 of such
shares are held by BET Associates, L.P., a partnership controlled by Mr.
Toll.
(6) Based on the Form 13G/A as filed on February 11, 2000.
(7) Based on the Form 13D as filed on December 30, 1999. 667,412 of such
shares are issuable upon the conversion of our 6.0% Debentures.
(8) Based on the Form 13G as filed on February 11, 2000.
(9) Based on the Form 13D as filed on November 30, 1999. These shares are
held by JWA Investment Corp. and Tempe Wicke Investments L.P., which in
turn are controlled by Mr. Adams as filed on February 11, 2000.
(10) Excludes 504,000 shares beneficially owned by Mr. McBride, and 12,000
shares beneficially owned by Mr. Cruckshank.
ITEM 13. Certain Relationships and Related Transactions
During 1999, Supportive Housing Services, Inc. ("SHS") provided services to
us for market feasibility analysis, site pre-acquisition services, field
construction supervision, construction management oversight and building setup
in conjunction with our development activities. SHS is owned 75% by Dr.
Wilson's spouse. We paid SHS approximately $1.6 million for such services in
1999 (including $255,000 reflecting payment to CCL (as defined below) in
1999). Such agreement was terminated effective January 2000.
During 1999, Concepts in Community Living, Inc. ("CCL"), a company owned by
Dr. Wilson's spouse, provided feasibility studies and pre-development
consulting services to SHS and certain developers with respect to certain
assisted living residence sites we were developing and constructing. Both
directly and through these developers, we paid CCL approximately $255,000
indirectly through SHS for rendering such services in 1999. In June 1999 we
entered into a new agreement with CCL pursuant to which CCL provided market
research, demographic review and competitor analysis in many of our current
markets. We paid CCL $157,000 for such services in 1999. We terminated the
June 1999 agreement on December 12, 1999.
We lease six residences from Assisted Living Facilities, Inc. Dr. Wilson's
spouse owns a 25% interest. During 1999, we paid Assisted Living Facilities,
Inc. approximately $1.4 million for building rent and escrow reserves.
Until February 10, 1999 Mr. McBride owned a $400,000 or 16.6% interest, and
Dr. Wilson's spouse owned a $200,000 or 8.3% interest, in Health Equity
Investors ("HEI"). In the second quarter of 1997, we entered into joint
venture agreements with HEI to operate certain new assisted living residences
that we owned or leased. The joint venture concurrently entered into a non-
cancelable management agreement with us pursuant to which we managed the
properties operated by the joint venture for an amount equal to the greater of
8% of gross revenues or $2,000 per month per residence. Through February 10,
1999, we consolidated 100% of the revenues and expenses attributable to these
residences with our revenues and expenses, and HEI reimbursed us for 90.0% of
the start-up losses of the joint venture. We received loss reimbursements from
HEI of $4.7 million for the year ended December 31, 1998, and no loss
reimbursements in 1999. As of February 10, 1999, 17 residences owned or leased
by us were being operated by the joint venture.
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<PAGE>
On February 10, 1999, we purchased HEI's joint venture interest with respect
to the 17 properties then being operated by the joint venture for an aggregate
purchase price of approximately $3.8 million. HEI's investment with respect to
such properties was $3.2 million. As a result of such purchases, Mr. McBride
and Dr. Wilson's spouse received distributions of approximately $537,000 and
$269,000, respectively, in 1999.
In October 1997, we acquired Home and Community Care, Inc. ("HCI"). Certain
of our officers and directors were officers, directors or stockholders of HCI.
Mr. McBride and Dr. Wilson's spouse owned 13.9% and 4.7%, respectively, of
HCI's outstanding common stock at the time of acquisition, substantially all
of which was acquired in March 1997. The terms of the acquisition were
approved by a committee of independent directors. Pursuant to the HCI
acquisition agreement, Mr. McBride and Dr. Wilson's spouse received "earnout"
payments from us in 1999 of $207,000 and $75,000, respectively, related to HCI
sites we elected to develop.
For information regarding certain other relationships and related
transactions, see Item 11 "Compensation Committee Interlocks and Insider
Participation."
54
<PAGE>
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1 and 2. Consolidated Financial Statements and Financial Statement
Schedules
The financial statements and financial statement schedules listed in the
accompanying index to financial statements and financial statement schedules
are filed as part of this Annual Report.
3. Exhibits
Those Exhibits required to be filed by Item 601 of Regulation S-K are listed
on the accompanying index immediately following the signature page and are
filed as part of this Report.
(b) Reports on Form 8-K
On December 11, 1999, we filed a Form 8-K. The Form 8-K disclosed that the
Board of Directors approved an amendment to the Company's By-Laws. The
amendment deleted the provision of the By-Laws that required the company to
hold a special meeting of the stockholders at the written request of a
majority of the voting power of the Company's stock. It also deleted the
provision of the By-Laws that permitted the stockholders of the Company to
take action by written consent.
55
<PAGE>
ASSISTED LIVING CONCEPTS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
(Item 14(a))
<TABLE>
<CAPTION>
Page
----
<S> <C>
1.Financial Statements:
Independent Auditors' Report............................................ 57
Consolidated Balance Sheets, December 31, 1998 and 1999................. 58
Consolidated Statements of Operations and Consolidated Statements of
Comprehensive Loss, Years Ended December 31, 1997, 1998 and 1999 ...... 59
Consolidated Statements of Shareholders' Equity, Years Ended December
31, 1997, 1998 and 1999................................................ 60
Consolidated Statements of Cash Flows, Years Ended December 31, 1997,
1998 and 1999.......................................................... 61
Notes to Consolidated Financial Statements.............................. 62
2.Financial Statement Schedule:
Schedule II--Valuation and Qualifying Accounts.......................... 88
</TABLE>
56
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
of Assisted Living Concepts, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Assisted
Living Concepts, Inc. and subsidiaries as of December 31, 1998 and 1999, and
the related consolidated statements of operations, comprehensive loss,
shareholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1999. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Assisted
Living Concepts Inc. and subsidiaries as of December 31, 1998 and 1999, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1999, in conformity with generally
accepted accounting principles.
As discussed in note 14 to the consolidated financial statements, in 1998
the Company changed its method of accounting for pre-opening costs associated
with newly developed residences.
KPMG LLP
Portland, Oregon
March 29, 2000
57
<PAGE>
ASSISTED LIVING CONCEPTS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
December 31,
------------------
1998 1999
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 55,036 $ 7,606
Restricted cash.......................................... -- 7,555
Marketable securities, available for sale................ 4,000 1,680
Accounts receivable, net of allowance for doubtful
accounts of $179 at 1998 and $1,062 at 1999............. 5,127 4,069
Prepaid expenses......................................... 992 948
Other current assets..................................... 4,472 3,419
-------- --------
Total current assets.................................... 69,627 25,277
-------- --------
Property and equipment..................................... 284,754 321,622
Construction in process.................................... 51,304 --
-------- --------
Total property and equipment............................ 336,058 321,622
Less accumulated depreciation........................... 9,133 15,974
-------- --------
Property and equipment--net............................. 326,925 305,648
-------- --------
Goodwill, net.............................................. 5,371 5,077
Other assets, net.......................................... 12,746 10,186
-------- --------
Total assets............................................ $414,669 $346,188
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................... $ 1,622 $ 1,318
Construction payable..................................... 6,942 1,078
Accrued real estate taxes................................ 4,837 4,466
Accrued interest expense................................. 2,268 1,940
Accrued payroll expense.................................. 1,382 2,773
Other accrued expenses................................... 2,477 2,030
Other current liabilities................................ 4,857 2,586
Current portion of long-term debt........................ 1,386 1,494
-------- --------
Total current liabilities............................... 25,771 17,685
-------- --------
Other liabilities.......................................... 3,415 5,960
Long-term debt............................................. 105,036 71,949
Convertible subordinated debentures........................ 161,250 161,250
-------- --------
Total liabilities....................................... 295,472 256,844
-------- --------
Commitments and contingencies
Shareholders' equity:
Preferred Stock, $.01 par value; 1,000,000 shares
authorized; None issued or outstanding.................. -- --
Common Stock, $.01 par value; 80,000,000 shares
authorized; issued and outstanding 17,344,143 shares in
1998 and 17,120,745 shares in 1999...................... 173 171
Additional paid-in capital............................... 148,533 144,443
Unearned compensation expense............................ (3,492) --
Fair market value in excess of historical cost of
acquired net assets attributable to related party
transactions............................................ (239) (239)
Accumulated other comprehensive loss..................... -- (320)
Accumulated deficit...................................... (25,778) (54,711)
-------- --------
Total shareholders' equity.............................. 119,197 89,344
-------- --------
Total liabilities and shareholders' equity.............. $414,669 $346,188
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
58
<PAGE>
ASSISTED LIVING CONCEPTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------
1997 1998 1999
------- -------- --------
<S> <C> <C> <C>
Revenue........................................... $49,605 $ 89,384 $117,489
Operating expenses:
Residence operating expenses.................... 31,591 57,443 81,767
Corporate general and administrative............ 4,050 11,099 21,178
Building rentals................................ 2,691 11,400 14,103
Building rentals to related party............... 5,278 1,364 1,264
Depreciation and amortization................... 3,683 6,339 8,981
Terminated merger expense....................... -- 1,068 228
Site abandonment costs.......................... -- 2,377 4,912
Write-off of impaired assets and related
expenses....................................... -- 8,521 --
------- -------- --------
Total operating expenses...................... 47,293 99,611 132,433
------- -------- --------
Operating income (loss)........................... 2,312 (10,227) (14,944)
------- -------- --------
Other income (expense):
Interest expense................................ (4,946) (11,039) (15,200)
Interest income................................. 1,526 3,869 1,598
Loss on sale of assets.......................... (1,250) (651) (127)
Other income (expense), net..................... (121) (1,174) (260)
------- -------- --------
Total other (income) expense.................. (4,791) (8,995) (13,989)
------- -------- --------
Loss before cumulative effect of change in
accounting principle............................. (2,479) (19,222) (28,933)
Cumulative effect of change in accounting
principle........................................ -- (1,523) --
------- -------- --------
Net loss.......................................... $(2,479) $(20,745) $(28,933)
======= ======== ========
Basic and diluted net loss per common share:
Loss before cumulative effect of change in
accounting principle........................... $ (0.21) $ (1.18) $ (1.69)
Cumulative effect of change in accounting
principle...................................... -- (0.09) --
------- -------- --------
Basic and diluted net loss per common share....... $ (0.21) $ (1.27) $ (1.69)
======= ======== ========
Basic and diluted weighted average common shares
outstanding...................................... 11,871 16,273 17,119
======= ======== ========
</TABLE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------
1997 1998 1999
------- -------- --------
<S> <C> <C> <C>
Net loss.......................................... $(2,479) $(20,745) $(28,933)
Other comprehensive loss:
Unrealized loss on investments.................. -- -- (320)
------- -------- --------
Comprehensive loss................................ $(2,479) $(20,745) $(29,253)
======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
59
<PAGE>
ASSISTED LIVING CONCEPTS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Fair Market
Value in Accumulated
Common Stock Additional Unearned Excess of Other Total
-------------- Paid-In Compensation Historical Comprehensive Accumulated Shareholders'
Shares Amount Capital Expense Cost Loss Deficit Equity
------ ------ ---------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1996................... 11,030 110 $ 59,678 $ -- $(239) -- $ (2,554) $ 56,995
Net proceeds from public
offering............... 4,140 42 72,086 -- -- -- -- 72,128
Shares issued for
acquisition............ 337 3 5,073 -- -- -- -- 5,076
Exercise of employee
stock options.......... 139 1 373 -- -- -- -- 374
Grant of restricted
stock.................. -- -- 4,250 (4,250) -- -- -- --
Compensation expense
earned on restricted
stock.................. -- -- -- 150 -- -- -- 150
Net loss................ -- -- -- -- -- -- (2,479) (2,479)
------ ---- -------- ------- ----- ----- -------- --------
Balance at December 31,
1997................... 15,646 $156 $141,460 (4,100) $(239) -- $ (5,033) $132,244
Common stock
repurchased............ (529) (5) (7,057) -- -- -- -- (7,062)
Conversion of
subordinated
debentures............. 1,855 19 13,387 -- -- -- -- 13,406
Exercise of employee
stock options.......... 122 1 745 -- -- -- -- 746
Issuance of restricted
stock.................. 250 2 (2) -- -- -- -- --
Compensation expense
earned on restricted
stock.................. -- -- -- 608 -- -- -- 608
Net loss................ -- -- -- -- -- -- (20,745) (20,745)
------ ---- -------- ------- ----- ----- -------- --------
Balance at December 31,
1998................... 17,344 $173 $148,533 $(3,492) $(239) -- $(25,778) $119,197
Exercise of employee
stock options.......... 27 -- 158 -- -- -- -- 158
Compensation expense
earned on restricted
stock.................. -- -- -- 180 -- -- -- 180
Retirement of restricted
stock.................. (250) (2) (4,248) 3,312 -- -- -- (938)
Other comprehensive
loss................... -- -- -- -- -- (320) -- (320)
Net loss................ -- -- -- -- -- -- (28,933) (28,933)
------ ---- -------- ------- ----- ----- -------- --------
Balance at December 31,
1999................... 17,121 $171 $144,443 $ -- $(239) $(320) $(54,711) $ 89,344
====== ==== ======== ======= ===== ===== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
60
<PAGE>
ASSISTED LIVING CONCEPTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
1997 1998 1999
--------- --------- --------
<S> <C> <C> <C>
Operating activities:
Net loss...................................... $ (2,479) $ (20,745) $(28,933)
Adjustment to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization............... 3,683 6,339 8,981
Provision for doubtful accounts............. 23 359 883
Site abandonment costs...................... -- 2,377 4,912
Write-off of impaired assets and related
expenses................................... -- 8,521 --
Loss on sale of assets...................... 1,250 651 127
Cumulative effect of change in accounting
principle.................................. -- 1,523 --
Compensation expense earned on restricted
stock...................................... 150 608 180
Changes in assets and liabilities, excluding
effects of acquisitions:
Accounts receivable......................... (808) (3,302) 175
Prepaid expenses............................ (530) (88) 44
Other current assets........................ (3,039) (909) 953
Other assets................................ (633) 1,314 564
Accounts payable............................ (155) (237) (304)
Accrued expenses............................ 3,616 2,840 245
Other current liabilities................... 1,824 2,922 (2,271)
Other liabilities........................... 1,595 823 2,545
--------- --------- --------
Net cash provided by (used in) operating
activities................................... 4,497 2,996 (11,899)
--------- --------- --------
Investing activities:
Sale of marketable securities, available for
sale......................................... -- -- 2,000
Purchase of marketable securities, available
for sale..................................... -- (4,000) --
Restricted cash............................... -- -- (7,555)
Funds held in trust........................... 6,559 1,956 --
Proceeds from sale and leaseback
transactions................................. 51,671 8,113 --
Proceeds from sale of land.................... -- -- 19
Purchases of property and equipment........... (148,139) (117,972) (27,824)
Acquisitions, net of cash, debt acquired and
issuance of common stock..................... (4,064) (11,366) --
--------- --------- --------
Net cash used in investing activities......... (93,973) (123,269) (33,360)
--------- --------- --------
Financing activities:
Proceeds from construction financing.......... 43,210 -- --
Repayments of construction financing.......... (63,497) -- --
Proceeds from long-term debt.................. 21,854 49,004 --
Payments on long-term debt.................... (5,516) (289) (1,491)
Proceeds from issuance of common stock, net... 72,502 746 158
Repurchase of common stock.................... -- (7,062) --
Debt issuance costs of offerings and long-term
debt......................................... (4,163) (5,359) --
Proceeds from issuance of convertible
subordinated debentures...................... 86,250 75,000 --
Retirement of restricted stock................ -- -- (838)
--------- --------- --------
Net cash provided by (used in) financing
activities................................... 150,640 112,040 (2,171)
--------- --------- --------
Net increase (decrease) in cash and cash
equivalents.................................. 61,164 (8,233) (47,430)
Cash and cash equivalents, beginning of year.. 2,105 63,269 55,036
--------- --------- --------
Cash and cash equivalents, end of year........ $ 63,269 $ 55,036 $ 7,606
========= ========= ========
Supplemental disclosure of cash flow
information:
Cash payments for interest.................. $ 9,741 $ 16,480 $ 15,528
Cash payments for income taxes.............. $ 1,547 $ -- $ --
Non-cash transactions:
Increase (decrease) in construction payable
and property and equipment................. $ 2,881 $ (11,941) $ (5,864)
Conversion of subordinated debentures (net
of $509 of unamortized financing costs in
1998)...................................... -- 13,406 --
Conversion of construction financing to sale
leaseback.................................. -- 2,150 --
Unrealized loss on investment............... -- -- (320)
Amendment of leases and removal of related
assets..................................... -- -- 29,492
Retirement of restricted stock.............. -- -- 3,412
Amendment of leases and removal of related
debt....................................... -- -- 31,488
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
61
<PAGE>
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Business and Summary of Significant Accounting Policies
The Company
Assisted Living Concepts, Inc. ("the Company") owns, operates and develops
assisted living residences which provide housing to older persons who need
help with the activities of daily living such as bathing and dressing. The
Company provides personal care and support services and makes available
routine health care services designed to meet the needs of its residents. The
accompanying financial statements reflect the operating results of 109, 165
and 185 residences for the years ended December 31, 1997, 1998 and 1999,
respectively. Residences are included in operating results as of the first day
of the month following licensure.
On November 22, 1994, the Company sold 4,000,000 shares of common stock at
$4.625 per share in an initial public offering realizing net proceeds of
approximately $16.4 million after underwriter discounts, commissions and other
expenses.
In August 1995, the Company completed the offering of $20.0 million 7%
Convertible Subordinated Debentures ("7% Debentures") due August, 2005
realizing net proceeds of approximately $19.2 million after discounts,
commissions and other expenses. In September 1996, $6.1 million of the 7%
Debentures were converted into 811,333 shares of the Company's common stock
which resulted in $13.9 million of 7% Debentures outstanding. In August 1998,
the Company called for redemption all of the remaining $13.9 million of the 7%
Debentures. All of the 7% Debentures were converted into shares of the
Company's common stock, resulting in the issuance of 1,855,334 additional
shares of common stock.
In July 1996, the Company sold 4,192,500 shares of common stock at $9.50 per
share in a public offering realizing net proceeds of $37.3 million, after
underwriter discounts, commissions and other expenses.
In June 1997, the Company's Board of Directors declared a two for one stock
split on the Company's common stock. The record date for the stock split was
June 30, 1997 and the stock split occurred on July 10, 1997. All information
in the accompanying consolidated financial statements has been restated to
reflect the stock split.
In addition, in June 1997 the Company's Board of Directors declared a
dividend distribution of one preferred share purchase right ("Preferred Share
Purchase Right") on each outstanding share of the Company's common stock. In
the event that a person or group of persons acquires or announces a tender
offer to acquire 15% or more of the common stock (the "Acquiring Person"), the
Preferred Stock Purchase Rights, subject to certain limited exceptions, will
entitle each shareholder (other than the Acquiring Person) to buy one one-
hundredth of a share of newly created Series A Junior Participating Preferred
Stock of the Company at an exercise price of $54 (after giving effect to the
stock split). The Company may redeem the rights at one cent per right at any
time before a person or group has acquired 15% or more of the outstanding
common stock. The record date for Preferred Share Purchase Right distribution
was June 30, 1997. The stock split occurred immediately prior to the Preferred
Share Purchase Right distribution.
In October 1997 the Company sold 4,140,000 shares of common stock at $18.50
per share in a public offering realizing net proceeds of $72.1 million, after
underwriter discounts, commissions and other expenses.
In October 1997, the Company completed the public offering of $86.3 million
of 6% Convertible Subordinated Debentures ("6% Debentures") due November 2002
realizing net proceeds of $82.9 million after underwriter discounts,
commissions and other expenses. The 6% Debentures are convertible at any time
at or prior to maturity, unless previously redeemed, at a conversion price of
$22.57 per common share, which equates to an aggregate of 3,821,444 shares of
the Company's common stock.
62
<PAGE>
In April 1998, the Company completed the offering of $75.0 million of 5.625%
Convertible Subordinated Debentures ("5.625% Debentures") due May 2003
realizing net proceeds of $72.2 million after discounts, commissions and other
expenses. The 5.625% Debentures are convertible at any time at or prior to
maturity, unless previously redeemed, at a conversion price of $26.184 per
common share, which equates to an aggregate of 2,864,345 shares of the
Company's common stock.
Principles of Consolidation
The consolidated financial statements include the accounts of Assisted
Living Concepts Inc. and its wholly owned subsidiaries (the "Company"). All
significant intercompany balances and transactions have been eliminated in
consolidation.
Restatement of Historical Financial Statements
On February 1, 1999, the Company announced that after consultation with its
independent auditors the Company would restate its financial statements for
the fiscal quarter ended June 30, 1997, the fiscal quarter ended September 30,
1997, the fiscal year ended December 31, 1997, the fiscal quarter ended March
31, 1998, 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. On September 30, 1999, the Company filed
restated financial statements with the Securities and Exchange Commission
("SEC") for the fiscal years ended December 31, 1996 and 1997 and for each of
the first three fiscal quarters of the fiscal year ended December 31, 1998.
The restatement reduced the net income for the fiscal years ended December
31, 1996 and 1997 and for the nine months ended September 30, 1998 by $2.1
million, $6.7 million and $11.0 million, respectively. The cumulative effect
of the restatement reduced shareholders' equity by $19.7 million through
September 30, 1998. As a result of the restatement, the Company reported net
losses of $1.9 million, $2.5 million and $13.3 million for the fiscal years
1996 and 1997 and the nine months ended September 30, 1998 respectively,
compared to previously reported net income of $149,000 and $4.2 million, and
net loss of $2.4 million, respectively. The Company reported net loss per
diluted share of $0.23, $0.21 and $0.84 for the fiscal years ended December
31, 1996 and 1997 and the nine months ended September 30, 1998, respectively,
compared to previously reported net income per diluted share of $0.03 and
$0.34 and net loss per diluted share of $0.14, respectively. After the
restatement, the Company's cash position as of December 31, 1996 and 1997 and
as of September 30, 1998 was $2.1 million, $63.3 million and $79.6 million,
respectively, as compared to $2.1 million, $63.4 million and $79.8 million
respectively, as previously reported. As a result of the restatement, the
Company's working capital position as of December 31, 1996 and 1997 and as of
September 30, 1998 was negative $27.1 million, positive $40.1 million and
positive $63.0 million, respectively, compared to previously reported working
capital of negative $26.4 million, positive $41.0 million and positive $64.1
million, respectively.
The restatement resulted primarily from: (i) the earlier recognition of
certain expenses which were previously capitalized in association with the
Company's development and financing activities; (ii) a modification in how the
Company accounted for certain lease arrangements; (iii) a modification in how
the Company accounted for certain of its acquisitions and its joint venture
arrangements; (iv) the capitalization of fees received by the Company
previously recognized as either a reduction of expenses or as other income;
(v) the elimination of an impairment write-down that the Company had
previously recorded on three of its residences; (vi) elimination of certain
accrued expenses previously recorded pursuant to a change in accounting
principle; and (vii) the increase in goodwill written off in the second
quarter of 1998 relating to exiting the Company's home health operation.
63
<PAGE>
Cash, Cash Equivalents and Marketable Securities
Cash and cash equivalents include cash on deposit and highly liquid
investments with maturities of three months or less at the date of purchase.
The Company's investments in cash equivalents are classified as held to
maturity and are stated at cost which approximates fair value. The Company's
investments in marketable securities are classified as available for sale.
These investments are stated at fair value with any unrealized gains or losses
included as accumulated other comprehensive loss in shareholders' equity.
Interest income is recognized when earned.
Leases
The Company determines the classification of its leases as either operating
or capital at their inception. The Company reevaluates such classification
whenever circumstances or events occur that require the reevaluation of the
leases.
The Company accounts for arrangements entered into under sale and leaseback
agreements pursuant to Statement of Financial Accounting Standards (SFAS) No.
98, "Accounting for Leases." For transactions that qualify as sales and
operating leases, a sale is recognized and the asset is removed from the
books. For transactions that qualify as sales and capital leases, the sale is
recognized, but the asset remains on the books and a capital lease obligation
is recorded. Transactions that do not qualify for sales treatment are treated
as financing transactions. In the case of financing transactions, the asset
remains on the books and a finance obligation is recorded as part of long-term
debt. Losses on sale and leaseback agreements are recognized at the time of
the transaction absent indication that the sales price is not representative
of fair value. Gains are deferred and recognized on a straight-line basis over
the initial term of the lease.
All of the Company's leases contain various provisions for annual increases
in rent, or rent escalators. Certain of these leases contain rent escalators
with future minimum annual rent increases that are not considered contingent
rents. The total amount of the rent payments under such leases with non-
contingent rent escalators is being charged to expense on the straight-line
method over the term of the leases. The Company records a deferred credit,
included in other liabilities, to reflect the excess of rent expense over cash
payments. This deferred credit is reduced in the later years of the lease term
as the cash payments exceed the rent expense (See Note 6).
Property and Equipment
Property and equipment are recorded at cost and depreciation is computed
over the assets' estimated useful lives on the straight-line basis as follows:
<TABLE>
<S> <C>
Buildings....................................................... 40 years
Furniture and equipment......................................... 3 to 7 years
</TABLE>
Asset impairment is analyzed on assets to be held and used by the rental
demand by market to determine if future cash flows (undiscounted and without
interest charges) are less than the carrying amount of the asset. If an
impairment is determined to have occurred, an impairment loss is recognized to
the extent the assets carrying amount exceeds its fair value. Assets the
Company intends to dispose of are reported at the lower of (i) fair carrying
amount or (ii) fair value less the cost to sell. The Company has not
recognized any impairment losses on property through the year ended December
31, 1999.
Interest and certain payroll costs incurred during construction periods are
capitalized as part of the building costs. Maintenance and repairs are charged
to expense as incurred, and significant betterments and improvements are
capitalized. Construction in process includes pre-acquisition costs and other
direct costs related to acquisition, development and construction of
residences. If a project is abandoned, any costs previously capitalized are
expensed.
64
<PAGE>
Goodwill
Costs in excess of the fair value of the net assets acquired in purchase
transactions as of the date of acquisition have been recorded as goodwill and
are being amortized over periods ranging between 15 and 20 years on a
straight-line basis. Amortization of goodwill was $128,000, $398,000 and
$294,000, respectively, for the years ended December 31, 1997, 1998 and 1999.
Accumulated amortization of goodwill at December 31, 1998 and 1999 was
$278,000 and $629,000, respectively. Management maintains an impairment review
policy whereby the future economic benefit of the recorded balance is
substantiated at the end of each reporting period.
During the year ended December 31, 1998, the Company wrote-off all the
unamortized goodwill (approximately $7.5 million) associated with Pacesetter
Home Health Care, Inc. ("Pacesetter"), a wholly owned subsidiary of Home and
Community Care, Inc. The shut-down of Pacesetter operations was a result of a
change in the regulatory reimbursement environment during the quarter ended
June 30, 1998 (See Note 12).
Pre-Opening Costs
Prior to the adoption of AICPA Statement of Position 98-5, Reporting on the
Costs of Start-up Activities (SOP 98-5), pre-opening costs associated with
newly developed residences, prior to the commencement of their operations were
capitalized and amortized over 12 months. As a result of the Company's
adoption of SOP 98-5 (effective as of January 1, 1998), pre-opening costs are
expensed as incurred (See Note 14).
Deferred Financing Costs
Financing costs related to the issuance of debt are capitalized as other
assets and amortized to interest expense over the term of the related debt
using the straight-line method, which approximates the interest method.
Income Taxes
The Company uses the asset and liability method of accounting for income
taxes under which deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to the differences between the
financial statement carrying amounts of the existing assets and liabilities
and their respective tax bases (temporary differences). Deferred tax assets
are reduced by a valuation allowance when, in the opinion of management, it is
more likely than not that some portion or all of the deferred tax assets will
not be realized.
Revenue Recognition
Revenue is recognized when services are rendered and consists of residents'
fees for basic housing and support services and fees associated with
additional services such as routine health care and personalized assistance on
a fee for service basis. Management of the Company assesses the collectibility
of the accounts receivable periodically and records a provision for doubtful
accounts as considered necessary.
Classification of Expenses
Residence operating expenses exclude all expenses associated with corporate
or support functions which have been classified as corporate general and
administrative expense.
Comprehensive Loss
On January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for reporting and
presentation of comprehensive income and its components in a full set of
financial statements. Comprehensive loss consists of net loss and several
other items that current accounting standards require to be recognized outside
of net loss and is presented in the consolidated statements of shareholders'
equity and comprehensive loss. The Statement requires only additional
disclosures in the consolidated financial statements; it does not affect the
Company's financial position or net loss. The Company recorded an unrealized
loss on marketable securities of $320,000 for the year ended December 31,
1999.
65
<PAGE>
Net Income (Loss) Per Common Share
Basic earnings per share (EPS) is calculated using net loss attributable to
common shares divided by the weighted average number of common shares
outstanding for the period. Diluted EPS is calculated in periods with net
income using income attributable to common shares considering the effects of
dilutive potential common shares divided by the weighted average number of
common shares and dilutive potential common shares outstanding for the period.
Vested options to purchase 568,000, 833,000 and 983,000 shares of common
stock were outstanding during the years ended December 31, 1997, 1998 and
1999, respectively. These options were excluded from the respective
computations of diluted loss per share, as their inclusion would be
antidilutive.
Also excluded from the computations of diluted loss per share, for the years
ended December 31, 1997, 1998 and 1999 were 5,676,777, 6,685,789 and 6,685,789
shares of common stock, respectively, issuable upon conversion of the
Company's convertible subordinated debentures (see Note 10) and 250,000 shares
of restricted stock for the year ended December 31, 1998 (see Note 18) as
their inclusion would be antidilutive.
Segment Reporting
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information." This
SFAS requires public enterprises to report certain information about their
operating segments in a complete set of financial statements to shareholders.
It also requires reporting of certain enterprise-wide information about the
Company's products and services, its activities in different geographic areas,
and its reliance on major customers. The basis for determining the Company's
operating segments is the manner in which management operates the business.
This SFAS is effective for financial statements for periods beginning after
December 15, 1997 and, as such, was adopted by the Company in 1998. The
Company has no foreign operations, no customers which provide over 10 percent
of gross revenue, and has determined that it has only one operating segment.
Use of Estimates
Management of the Company has made certain estimates and assumptions
relating to the reporting of assets and liabilities, and the disclosure of
contingent assets and liabilities, and the reported amounts of revenue and
expenses during the reporting period to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
Reclassifications
Certain reclassifications have been made in the prior years' financial
statements to conform to the current year's presentation. Such
reclassifications had no effect on previously reported net loss or
shareholders' equity.
66
<PAGE>
Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents, accounts receivable,
accounts payable and accrued liabilities approximates fair value because of
the short-term nature of the accounts and/or because they are invested in
accounts earning market rates of interest. The carrying value of marketable
debt securities and funds held in trust approximates fair value because they
bear interest at market rates. The carrying amount of the Company's long-term
debt and construction financing approximate fair value as the interest rates
approximate the current rates available to the Company. The following table
sets forth the carrying amount and approximate fair value (based on quoted
market values) of the Company's subordinated debentures as of December 31,
1998 and 1999 (in thousands):
<TABLE>
<CAPTION>
1998 1999
------------------ ------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
6% Debentures...................... $86,250 $71,156 $86,250 $50,888
5.625% Debentures.................. 75,000 58,500 75,000 43,500
</TABLE>
Stock-based Compensation
In October 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-
Based Compensation," which provides an alternative to APB Opinion No. 25,
"Accounting for Stock Issued to Employee," in accounting for stock-based
compensation issued to employees. The Statement encourages, but does not
require financial reporting to reflect compensation expense for grants of
stock, stock options and other equity instruments to employees based on
changes in the fair value of the underlying stock. The Company continues to
apply the existing accounting rules contained in APB Option No. 25,
"Accounting for Stock Issued to Employees." While recognition of employee
stock-based compensation is not mandatory, SFAS 123 requires companies that
choose to continue applying the provisions of APB No. 25 to disclose pro forma
net loss and loss per share data (See Note 18).
The Amended and Restated 1994 Employee Stock Option Plan combines an
incentive and nonqualified stock option plan, a stock appreciation rights
("SAR") plan and a stock award plan (including restricted stock). The 1994
Plan is a long-term incentive compensation plan and is designed to provide a
competitive and balanced incentive and reward program for participants.
The Company's Non-Officer Stock Option Plan (the "Non-Officer Plan") is a
non-qualified stock option plan intended as a long-term incentive compensation
plan designed to provide a competitive and balanced incentive and reward
programs for participants.
Concentration of Credit Risk
The Company depends on the economies of Texas, Indiana, Oregon, Ohio and
Washington and to some extent, on the continued funding of State Medicaid
waiver programs in some of those states. As of December 31, 1999, 21.6% of the
Company's properties were in Texas, 11.4% in Indiana, 10.3% in Oregon, 9.7% in
Ohio and 8.6% in Washington. Adverse changes in general economic factors
affecting the respective health care industries or laws and regulator
environment in each of these states, including Medicaid reimbursement rates,
could have a material adverse effect on the Company's financial condition and
results of operations.
State Medicaid reimbursement programs constitute a significant source of
revenue for the Company. During the years ended December 31, 1997, 1998 and
1999, direct payments received from state Medicaid agencies accounted for
approximately 11.1%, 10.7% and 10.4%, respectively, of the Company's revenue
while the tenant paid portion received from Medicaid residents accounted for
approximately 5.9%, 5.8% and 5.9%, respectively, of the Company's revenue
during these periods. The Company expects in the future that State Medicaid
reimbursement programs will constitute a significant source of revenue for the
Company.
67
<PAGE>
2. Acquisitions and Joint Venture
Acquisitions
Effective October 23, 1997, the Company acquired 98.8% of the outstanding
capital stock of Home and Community Care, Inc. ("HCI"). The Company had
acquired an initial 1.2% interest in HCI as a result of HCI's acquisition of
Pacesetter, a home health care agency in which the Company had made an
investment in November 1996. Several employees of the Company, including
members of the Board of Directors, owned collectively approximately 40.0% of
the outstanding common stock in HCI (See Notes 16 and 17). In the second
quarter of 1997 the Company signed a licensing agreement with HCI, pursuant to
which the Company agreed to allow HCI to use certain of the Company's
proprietary information and materials in connection with the development of
HCI's assisted living residences. During the second quarter of 1997, the
Company received $178,000 in fees from HCI and recorded such fees as other
income included in other income/expenses. The HCI purchase was completed at a
purchase price of approximately $4.0 million in cash (which reflects
approximately $5.3 million of cash paid net of (i) approximately $250,000 in
cash acquired, (ii) approximately $850,000 in fees from HCI for services
rendered during 1997, and (iii) $150,000 in dividends received from HCI during
1997), and the assumption of approximately $6.6 million in liabilities. HCI
stockholders were entitled to receive certain "earnout" payments over a two-
year period based on the number of HCI's assisted living residence sites,
which the Company elected to complete. At the time of the acquisition, HCI had
20 sites under development. For each completed residence, HCI stockholders
received an additional $7,500 per unit (approximately $300,000 per residence)
in cash. During the years ended December 31, 1997, 1998 and 1999, the Company
paid earnout payments of $0, $1.7 million and $1.5 million, respectively, and
capitalized such payments in property and equipment.
The acquisition was accounted for as a purchase, and the operating results
of HCI have been included in the Company's consolidated financial statements
since the date of acquisition. The cost of the acquisition has been allocated
based on the estimated fair value of the net assets acquired of approximately
$3.4 million. The excess of the aggregate purchase price over the fair market
value of net assets acquired of approximately $7.5 million was recorded as
goodwill and amortized on a straight-line basis over 20 years.
During the second quarter of 1998 the Company announced a plan to exit all
home health business operations being conducted by Pacesetter. During the year
ended December 31, 1998, the Company incurred a $8.5 million charge to
earnings associated with exiting the Pacesetter operations. Such charge
consisted of (i) a $7.5 million write-off of all unamortized goodwill
associated with Pacesetter and (ii) a $1.0 million provision for exit costs
expected to be incurred during the phase out of the Pacesetter business.
During the fourth quarter 1998, the $1.4 million provision for exit costs was
reduced by $400,000 to $1.0 million as a result of a change in the estimate
for such exit costs. In addition, the Company incurred a $1.0 million charge
recorded as site abandonment expense during second quarter 1998 for previously
capitalized development costs relating to 11 sites acquired in the HCI
acquisition that it had determined not to develop (See Note 7 and Note 12).
Effective October 23, 1997, the Company acquired the 90.1% of the
outstanding capital stock of Carriage House Assisted Living Inc. ("Carriage
House") it did not already own. Several employees of the Company, including
members of the Board of Directors, owned collectively approximately 23.0% of
the outstanding common stock of Carriage House (See Notes 16 and 17). The
Company had acquired its initial 9.9% ownership in Carriage House's
outstanding capital stock during 1996. The acquisition was completed at a
purchase price of $5.2 million with the exchange of 337,460 shares of Common
Stock (based on a stock price of $15.41 per share) for all of the outstanding
common stock of Carriage House and the assumption of approximately $3.2
million in liabilities.
The acquisition was accounted for as a purchase and the operating results of
Carriage House have been included in the Company's consolidated financial
statements since the acquisition date. The cost of the acquisition has been
allocated based on the estimated fair value of the net assets acquired of
approximately $3.4 million. The excess of the aggregate purchase price over
the fair market value of net assets acquired of approximately $4.7 million has
been recorded as goodwill and is being amortized on a straight-line basis over
20 years.
68
<PAGE>
The following unaudited pro forma consolidated results of operations for the
Company for the year ended December 31, 1997 assume that HCI and Carriage
House acquisitions had occurred as of January 1, 1997 (in thousands, except
per share amounts):
<TABLE>
<CAPTION>
(Unaudited) Total
----------- --------
<S> <C>
Net revenue..................................................... $55,241
Net loss........................................................ (2,680)
Basic and diluted net loss per common share..................... $ (0.23)
</TABLE>
The unaudited pro forma consolidated results of operations do not purport to
be indicative of the results that would have been reported if the acquisitions
had been completed as of the beginning of the period presented.
On April 30, 1998, the Company completed the acquisitions of two assisted
living residences in Plano and McKinney, Texas, having units of 64 and 50,
respectively. The residences were acquired for a total purchase price of
approximately $5.2 million. The acquisitions were accounted for as purchases
and the operating results of the facilities have been included in the
Company's consolidated financial statements since the acquisition date. The
cost of the acquisitions has been allocated based on the estimated fair value
of the net assets acquired of approximately $5.2 million. No goodwill was
recorded.
On July 1, 1998, the Company completed the acquisition of an assisted living
residence in Alexandria, Louisiana having 48 units. The residence was acquired
for a purchase price of approximately $2.8 million. The acquisition was
accounted for as a purchase and the operating results of the facility have
been included in the Company's consolidated financial statements since the
acquisition date. The cost of the acquisition has been allocated based on the
estimated fair value of the net assets acquired of approximately $2.8 million.
No goodwill was recorded.
On December 1, 1998, the Company completed the acquisition of an assisted
living residence in Paris, Texas, having 50 units. The residence was acquired
for a purchase price of approximately $3.4 million. The acquisition was
accounted for as a purchase and the operating results of the facility have
been included in the Company's consolidated financial statements since the
acquisition date. The cost of the acquisition has been allocated based on the
estimated fair value of the net assets acquired of approximately $3.0 million.
The excess of the aggregate purchase price over the fair market value of net
assets acquired is approximately $432,000 and has been recorded as goodwill
and is being amortized on a straight-line basis over 20 years.
Pro forma consolidated results of operations including the four facilities
acquired during 1998 are excluded, as they are not considered significant to
the Company's operations.
Joint Venture
During 1997, the Company entered into joint venture agreements with a joint
venture partner to operate certain new assisted living residences which
commenced operations during the second, third and fourth quarters of 1997. Of
the $2.3 million of total capital raised by the joint venture partner to
invest in such arrangements, the Company contributed $300,000 and recorded
such investment in other non-current assets. In addition, certain members of
management held interests in the joint venture partner (See Note 16). Pursuant
to the joint venture agreements, the Company entered into non-cancelable
management agreements under which the Company managed the residences operated
by the joint venture for an amount equal to the greater of 8% of gross
revenues or $2,000 per month per residence. Because the Company retained
direct control of the residences operated by the joint venture, the Company
consolidated the operations of the residences subject to the joint venture
agreements in its consolidated financial statements. The joint venture partner
reimbursed the Company for 90.0% of the start-up losses of the joint venture,
and the Company recognized such reimbursements as loans included in other
liabilities. The Company also reflected amounts paid to repurchase the joint
venture partner's interest in excess of reimbursed losses as interest and
other expense. Interest was calculated based on the average loan
69
<PAGE>
balance using an imputed 20.0% interest rate and other expense was calculated
based on a $10,000 administrative fee per residence. The Company received loss
reimbursements of $2.3 million and $4.7 million for the years ended December
31, 1997 and 1998, respectively. The Company did not repay any of these loans,
and incurred interest expense of $52,000 in connection with these loans,
during the year ended December 31, 1997. The Company repaid $4.0 million of
these loans in 1998, and incurred interest and other expense of $687,000 in
connection with these loans, for the year ended December 31, 1998. As of
December 31, 1998, 17 residences owned or leased by the Company were being
operated by the joint venture. During the first quarter of 1999 the Company
announced that it had negotiated with the joint venture partner to purchase,
for approximately $3.8 million, all of the joint venture partner's interest in
the remaining 17 residences subject to the joint venture agreements (See Note
16).
3. Restricted Cash
During 1999, the Company restricted $8.7 million of cash balances in
accordance with certain loan and lease agreements. The agreements provide for
the release of this collateral upon the achievement of specified performance
targets, provided that the Company is in compliance with the other terms of
the loan agreements (see Notes 6 and 9). The Company achieved certain of these
targets and obtained a release of $1.2 million of restricted cash in December
1999.
4. Funds Held In Trust
During 1996, the Company issued $8.5 million in tax-exempt bonds to provide
permanent financing on five Washington residences. As of December 31, 1997,
four of the five properties had been completed and the Company had received
proceeds of $6.5 million. The remaining $2.0 million of proceeds was released
during the first quarter of 1998 once the remaining residence had been
completed and licensed.
5. Marketable Securities
Marketable securities consist of U.S. Treasury securities and other highly
liquid marketable debt securities. The aggregate market value of securities
held at December 31, 1998 and 1999 was $4.0 million and $1.7 million,
respectively. The investments held at December 31, 1999 have a historical cost
of $2.0 million and have been classified as available for sale in accordance
with Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investment in Debt and Equity Securities." As a result, unrealized
investment losses of $320,000 are included as a component of comprehensive
loss and shareholders' equity at December 31, 1999. There were no unrealized
investment losses at December 31, 1998.
70
<PAGE>
6. Leases
A summary of leases that the Company has entered into since its inception is
as follows:
<TABLE>
<CAPTION>
Number of
Sale and Number of
Number of Leaseback Sale and Units under
Leased Residences Total Leaseback Leases
Residences Accounted for Number of Residences Units under Accounted
("Oregon as Operating Operating Accounted for Operating for as
Leases") Leases Leases as Financings Leases Financings
---------- ------------- --------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Leases at December 31,
1994................... 4 -- 4 -- 114 --
Leases entered into
during 1995............ -- 5 5 -- 150 --
------ ------ ------ ------ ------ ------
Leases at December 31,
1995................... 4 5 9 -- 264 --
Leases entered into
during 1996............ 1 19 20 9 763 316
Residences repurchased
during 1996............ -- (4) (4) -- (146) --
------ ------ ------ ------ ------ ------
Leases at December 31,
1996................... 5 20 25 9 881 316
Leases entered into
during 1997............ 2 24 26 7 1,025 247
------ ------ ------ ------ ------ ------
Leases at December 31,
1997................... 7 44 51 16 1,906 563
Leases entered into
during 1998............ -- 4 4 -- 139 --
Lease expansions during
1998................... -- -- -- -- 47 10
Leases terminated during
1998................... (1) -- (1) -- (45) --
------ ------ ------ ------ ------ ------
Leases at December 31,
1998................... 6 48 54 16 2,047 573
Lease expansions during
1999................... -- -- -- -- 13 --
Leases modified and
reclassified during
1999................... -- 16 16 (16) 573 (573)
------ ------ ------ ------ ------ ------
Leases at December 31,
1999................... 6 64 70 -- 2,633 --
====== ====== ====== ====== ====== ======
</TABLE>
The Company has entered into agreements to lease six assisted living
residences in Oregon from Assisted Living Facilities, Inc., a related party
(the "Oregon Leases"). During 1998 the Company terminated a lease with Oregon
Heights Partners ("OHP"). The lessor in each case obtained funding through the
sale of bonds issued by the state of Oregon, Housing and Community Services
Department ("OHCS"). In connection with the Oregon Leases, the Company entered
into "Lease Approval Agreements" with OHCS and Assisted Living Facilities,
Inc., pursuant to which the Company is obligated to comply with the terms and
conditions of certain regulatory agreements to which the lessor is a party
(See Note 9). The leases, which have fixed terms of 10 years, have been
accounted for as operating leases. Aggregate deposits on these residences as
of December 31, 1997, 1998 and 1999 were $176,000, $126,000 and $126,000
respectively, which are reflected in other assets.
During the years ended December 31, 1997 and 1998 the Company completed the
sale of 24 and 4 residences under sale and leaseback arrangements,
respectively. The Company sold the residences for approximately $51.7 million
in 1997 and $10.3 million in 1998 and leased them back over initial terms
ranging from 12 to 20 years. In addition, the Company assumed four leases
under sale and leaseback agreements that were acquired with the Carriage House
purchase that was completed in October of 1997. The Company did not enter into
any sale and leaseback agreements in 1999.
The Company recognized losses of $1.3 million and $651,000 on the above sale
and leaseback transactions for the years ended December 31, 1997 and 1998,
respectively. The losses are presented in the Consolidated Statements of
Operations as net loss on sale of assets. Gains on sale and leaseback
transactions of $1.1 million and $508,000 for the years ended December 31,
1997 and 1998 respectively, have been recorded as deferred income included in
other liabilities and are being amortized over the initial terms of the
corresponding leases. For the year ended December 31, 1997, a substantial
portion of such gains and losses resulted from sale and leaseback transactions
with LTC (See Note 17).
71
<PAGE>
In March 1999, the Company amended 16 leases, resulting in the
reclassification of such leases from financings to operating leases (see Notes
7 and 9).
In June 1999, the Company amended all of its 37 leases with LTC. These
amendments included provisions to restructure future minimum annual rent
increases, or "rent escalators," that were not deemed to be contingent rents.
Because of the rent escalators, prior to the amendments, the Company accounted
for rent expense related to such leases on a straight-line basis. From the
date of the amendment forward, the Company will account for the amended leases
on a contractual cash payment basis and amortize the deferred rent balance at
the date of the amendment over the remaining initial term of the lease. Those
amendments also redefined the lease renewal option with respect to certain
leases and provided the lessor with the option to declare an event of default
in the event of a change of control under certain circumstances. In addition,
the amendments also provide the Company with the ability, subject to certain
conditions, to sublease or assign its leases with respect to two Washington
residences.
Certain of the Company's leases and loan agreements contain covenants and
cross-default provisions such that a default on one of those instruments could
cause the Company to be in default on one or more other instruments. The
Company was in compliance with these lease and loan covenants at December 31,
1999. During the third quarter of 1999, the Company agreed to provide $418,000
of additional cash collateral pursuant to certain lease agreements with one of
its lessors. The Company restricted $418,000 of cash balances as a result of
such action (see Note 3).
As of December 31, 1999, future minimum annual lease payments under
operating leases are as follows (in thousands):
<TABLE>
<S> <C>
2000................................ $ 16,641
2001................................ 16,638
2002................................ 16,638
2003................................ 16,638
2004................................ 16,638
Thereafter.......................... 95,960
--------
$179,153
========
</TABLE>
7. Property and Equipment
As of December 31, 1998 and 1999, property and equipment, stated at cost,
consist of the following (in thousands):
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Land...................................................... $ 18,217 $ 21,329
Buildings................................................. 256,904 286,347
Equipment................................................. 2,865 5,344
Furniture................................................. 6,768 8,602
-------- --------
Property and equipment.................................... 284,754 321,622
Construction in process................................... 51,304 --
-------- --------
Total property and equipment............................ 336,058 321,622
Less accumulated depreciation............................. 9,133 15,974
-------- --------
Property and equipment--net............................. $326,925 $305,648
======== ========
</TABLE>
Land, buildings and certain furniture and equipment relating to 37
residences serve as collateral for long-term debt (See Note 9). Depreciation
expense was $2.9 million, $5.9 million and $8.7 million, for the years ended
December 31, 1997, 1998 and 1999, respectively.
72
<PAGE>
As of December 31, 1998 construction in process consists of the following
(in thousands):
<TABLE>
<S> <C>
Land purchased and earnest deposits................................. $ 4,230
Construction costs.................................................. 39,030
Capitalized interest, insurance and legal fees...................... 5,518
Capitalized payroll................................................. 1,478
Other costs......................................................... 1,048
-------
$51,304
=======
</TABLE>
During the years ended December 31, 1997, 1998 and 1999, the Company
capitalized interest costs of $6.6 million, $6.0 million and $2.0 million,
respectively, relating to financing of construction in process. In addition,
the Company capitalized payroll costs that are directly related to the
construction and development of the residences of $1.8 million, $1.8 million
and $617,000 for the years ended December 31, 1997, 1998 and 1999,
respectively.
As a result of the Company's decision to reduce the number of new residence
openings during the year ended December 31, 1998 and beyond, the Company
wrote-off $2.4 million of capitalized costs during 1998 relating to the
abandonment of 36 development sites. In 1999, the Company wrote-off $4.9
million of capitalized costs relating to the abandonement of all remaining
development sites, with the exception of 10 sites where the Company owns the
land. Of these 10 sites, 7 are being held for future development ($1.0
million) and are included in land, and 3 sites ($452,000) are listed for sale
and included in other current assets.
The Company had certificates of occupancy for 185 residences, all of which
were included in the operating results as of December 31, 1999, as compared to
173 residences with certificates of occupancy, 165 of which were included in
the operating results as of December 31, 1998. Of the residences with
certificates of occupancy, the Company owned 115 residences and leased 70
residences (all of which are operating leases) as compared to 115 owned
residences and 70 leased residences (54 of which were operating leases and 16
of which were accounted for as financings) as of December 31, 1998. At
December 31, 1998, property and equipment included $31.4 million in land and
buildings related to sale and leaseback transactions accounted for as
financings (See Note 6).
During 1996 and 1997 the Company entered into 16 sale and leaseback
transactions which contained purchase options entitling the Company to
purchase the properties at fair market value at the end of initial lease terms
ranging from 14 to 15 years. As a result of the purchase options the Company
accounted for these sale and leaseback transactions using the financing method
in SFAS No. 98, "Accounting for Leases." In March 1999, the Company amended
these leases. The amendments eliminated the Company's purchase option;
therefore, the leases were reclassified as operating leases at that date. As a
result of the amendments, the Company recorded (i) the disposal of net
property and equipment in the amount of $29.5 million, (ii) the extinguishment
of long-term debt in the amount of $31.5 million and (iii) a deferred gain of
$2.0 million. The deferred gain is included in other non-current liabilities
and is being amortized over the remaining initial lease term as an offset to
rent expense.
8. 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, 1998
and 1999, such deposits of $1.6 million and $2.2 million, respectively have
been recorded as other current liabilities.
73
<PAGE>
9. Long-Term Debt
As of December 31, 1998 and 1999, long-term debt consists of the following
(in thousands):
<TABLE>
<CAPTION>
1998 1999
-------- -------
<S> <C> <C>
Trust Deed Notes, payable to the State of Oregon Housing
and Community Services Department (OHCS) through 2028..... $ 10,155 $10,025
Variable Rate Multifamily Revenue Bonds, payable to the
Washington State Housing Finance Commission Department
through 2028.............................................. 8,500 8,235
Variable Rate Demand Revenue Bonds, Series 1997 payable to
the Idaho Housing and Finance Association through 2017.... 7,350 7,120
Variable Rate Demand Revenue Bonds, Series A-1 and A-2
payable to the State of Ohio Housing Finance Agency
through 2018.............................................. 13,220 12,845
Finance lease obligations (Note 6)......................... 31,488 --
Mortgages payable.......................................... 35,627 35,218
Capital lease obligations payable through 2002 with a
weighted average interest rate of 10.1%................... 82 --
-------- -------
Total long-term debt....................................... $106,422 $73,443
Less current portion....................................... 1,386 1,494
-------- -------
Long-term debt............................................. $105,036 $71,949
======== =======
</TABLE>
The Trust Deed Notes payable to OHCS are secured by buildings, land,
furniture and fixtures of six Oregon residences. The notes are payable in
monthly installments including interest at effective rates ranging from 7.375%
to 11.80%.
The Variable Rate Multifamily Revenue Bonds are payable to the Washington
State Housing Finance Commission Department and at December 31, 1999 were
secured by an $8.7 million letter of credit and by buildings, land, furniture
and fixtures of the five Washington residences. The letter of credit expires
in 2003. The bonds had a weighted average interest rate of 3.42% during 1999.
The Variable Rate Demand Housing Revenue Bonds, Series 1997 are payable to
the State of Idaho Housing and Finance Association and at December 31, 1999
were secured by a $7.5 million letter of credit and by buildings, land,
furniture and fixtures of four Idaho residences. The letter of credit expires
in 2004. The bonds had a weighted average interest rate of 3.41% during 1999.
In July 1998, the Company obtained $12.7 million in Variable Rate Demand
Housing Revenue Bonds with the State of Ohio Housing Finance Agency ("OHFA")
and $530,000 in Taxable Variable Rate Demand Housing Revenue Bonds with OHFA.
The bonds are due July 2018 and are secured by a $13.5 million letter of
credit and by buildings, land, furniture and fixtures of seven Ohio
residences. The letter of credit expires in 2005. The bonds had a weighted
average interest rate of 3.26% during 1999.
In April 1998, the Company obtained $14.6 million in mortgage financing at a
fixed interest rate of 7.73% and secured by a mortgage encumbering each of
seven Texas residences. The mortgage is amortized with monthly payments of
$110,000 over 25 years with a balloon payment of $11.8 million due at maturity
in May 2008.
In July 1998, the Company obtained $6.6 million in mortgage financing at an
initial interest rate of 7.58% and secured by a mortgage encumbering each of
three Oregon residences. The interest rate increases 15 basis points per year
through maturity. The mortgage is amortized with monthly payments of $49,000
over 25 years with a balloon payment of $5.3 million due at maturity in August
2008.
In September 1998, the Company obtained $5.9 million in mortgage financing
at an interest rate of 8.79% and secured by one Pennsylvania residence and one
South Carolina residence. The mortgage is amortized with monthly payments of
$43,000 over 25 years with a balloon payment of $5.9 million due at maturity
in September 2008.
74
<PAGE>
In November 1998, the Company obtained $8.7 million in mortgage financing at
a fixed interest rate of 8.65% and secured by a mortgage encumbering each of
three New Jersey residences. The mortgage is amortized with monthly payments
of $71,000 over 25 years with a balloon payment of $7.2 million due at
maturity in December 2008.
As of December 31, 1999, the following annual principal payments are
required (in thousands):
<TABLE>
<S> <C>
2000................................. $ 1,494
2001................................. 1,600
2002................................. 1,695
2003................................. 1,804
2004................................. 1,921
Thereafter........................... 64,929
-------
Total.............................. $73,443
=======
</TABLE>
The Company's credit agreements with U.S. National Bank Association ("U.S.
Bank") contain restrictive covenants which include compliance with two
financial ratios. The Company complied with all required covenants at December
31, 1999; accordingly, the related debt is classified as long-term. The
financial ratio covenant becomes more restrictive commencing the quarter
ending June 30, 2000. The Company has determined that it is probable that it
will not meet this more restrictive covenant at June 30, 2000. Failure to
comply with any covenant constitutes an event of default, which will allow
U.S. Bank (at its discretion) to declare any amounts outstanding under the
credit agreements to be due and payable. In addition, certain of the Company's
leases and loan agreements contain covenants and cross-default provisions such
that a default on one of those instruments could cause the Company to be in
default on one or more other instruments.
In August 1999, the Company amended certain loan agreements with one of its
creditors. Pursuant to the amendment, the Company agreed to provide $8.3
million of additional cash collateral in exchange for the waiver of certain
possible defaults, including an amendment to certain financial covenants. In
August 1999, the Company restricted $8.3 million of cash balances as a result
of such amendment. The amendment also provides for the release of the
additional collateral upon the achievement of specified performance targets,
provided the Company is in compliance with other terms of the loan agreements.
During the fourth quarter of 1999, the Company achieved certain of the
specified targets and received a release of $1.2 million of such funds.
In addition to the debt agreements with OHCS related to the six owned
residences in Oregon, the Company has entered into Lease Approval Agreements
with OHCS and the lessor of the Oregon Leases, which obligates the Company to
comply with the terms and conditions of the underlying trust deed relating to
the leased buildings. Under the terms of the OHCS debt agreements, the Company
is required to maintain a capital replacement escrow account to cover expected
capital expenditure requirements for the Oregon Leases and the six OHCS loans,
which as of December 31, 1998 and 1999 was $286,000 and $378,000,
respectively, and is reflected in other assets in the accompanying financial
statements. In addition, for the six OHCS loans in the Company's name, a
contingency escrow account is required. This account had a balance of
$351,000, $240,000 and $172,000 as of December 31, 1997, 1998 and 1999,
respectively, and is reflected in other current assets. Distribution of any
assets or income of any kind by the Company is limited to once per year after
all reserve and loan payments have been made, and only after receipt of
written authorization from OHCS.
As of December 31, 1997, 1998 and 1999, the Company was restricted from
distributing $318,200, $380,100 and $233,000, respectively, of income, in
accordance with the terms of the loan agreements and Lease Approval Agreements
with OHCS.
As a further condition of the debt agreements, the Company is required to
comply with the terms of certain regulatory agreements which provide, among
other things, that in order to preserve the federal income tax exempt status
of the bonds, the Company is required to lease at least 20% of the units of
the projects to low or moderate income persons as defined in Section 142(d) of
the Internal Revenue Code. There are additional requirements as to the age and
physical condition of the residents with which the Company must also comply.
Non-compliance with these restrictions may result in an event of default and
cause acceleration of the scheduled repayment.
75
<PAGE>
10. Convertible Subordinated Debentures
In August 1995, the Company completed the offering of $20.0 million of 7%
Debentures due August 2005 realizing net proceeds of approximately $19.2
million. The 7% Debentures were convertible at any time at or prior to
maturity, unless previously redeemed, at a conversion price of $7.50 per
common share.
In September 1996, $6.1 million of the 7% Debentures were converted into
811,333 shares of the Company's common stock which resulted in $13.9 million
of 7% Debentures remaining outstanding. The Company incurred a charge of
$426,000 in 1996 in connection with the conversion, which was included in
other expense. In August 1998, the Company called for redemption of all of the
remaining $13.9 million of the 7% Debentures. All of the 7% Debentures were
converted into shares of the Company's Common Stock, resulting in the issuance
of 1,855,334 additional shares of common stock.
In October 1997, the Company completed the offering of $86.3 million of 6%
Debentures due November 2002, realizing net proceeds of approximately $82.9
million. The 6% Debentures are convertible at any time at or prior to
maturity, unless previously redeemed, at a conversion price of $22.57 per
common share, which equates to an aggregate of 3,821,444 shares of the
Company's common stock and bear interest payable semi-annually on May 1 and
November 1 of each year, commencing May 1, 1998. The 6% Debentures are
unsecured and subordinated to all senior indebtedness of the Company. The 6%
Debentures are subject to redemption, as a whole or in part, at any time from
time to time commencing on or after November 15, 2000 at the Company's option
at a redemption price equal to 100% of the principal amount thereof, plus
accrued and unpaid interest to the redemption date.
In April 1998, the Company completed the private placement of $75.0 million
of 5.625% Debentures due May 2003, realizing net proceeds of approximately
$72.2 million. The 5.625% Debentures are convertible at any time at or prior
to maturity, unless previously redeemed, at a conversion price of $26.184 per
common share, which equates to an aggregate of approximately 2,864,345 shares
of the Company's common stock and bear interest payable semiannually on May 1
and November 1 of each year, commencing November 1, 1998. The 5.625%
Debentures are unsecured and subordinated to all senior indebtedness of the
Company. The 5.625% Debentures are subject to redemption, as a whole or in
part, at any time from time to time on or after May 15, 2001 at the Company's
option at a redemption price equal to 100% of the principal amount thereof,
plus accrued and unpaid interest to the redemption date.
11. Stock Repurchase
During the year ended December 31, 1998, the Company purchased approximately
529,000 shares of its common stock for a total purchase price of approximately
$7.1 million in accordance with a stock repurchase plan initiated in May 1998.
The Board of Directors terminated the stock repurchase plan in November 1998.
12. Write-off of Impaired Assets and Related Expenses
In June 1998, the Company announced a plan to exit all home health business
operations being conducted by Pacesetter. The decision to exit Pacesetter's
operations was a result of certain laws becoming effective that adversely
affected the prospective payment system for home health care services. Based
on this decision, the Company recorded a $8.9 million charge to earnings
during the second quarter 1998. Such charge consisted of (i) a $7.5 million
write-off of all unamortized goodwill associated with Pacesetter and (ii) a
$1.4 million provision for estimated exit costs expected to be incurred during
the phase out period. Of this $1.4 million provision, $560,000 related to
severance, salaries and benefits incremental to the shut down effort;
$720,000 related to leases, equipment and related costs of closing offices;
and $150,000 related to travel and moving costs. During the fourth quarter
1998, the $1.4 million provision for exit costs was reduced by $400,000 to
$1.0 million as a result of a change in the estimate for such exit costs.
During the years ended December 31, 1998 and 1999, approximately $760,000 and
$154,000, respectively of this reserve was utilized. The remaining reserve of
approximately $86,000 at December 31, 1999 consists primarily of lease
termination
76
<PAGE>
costs. Expenses related to Pacesetter's final operations of $430,000 and $1.8
million for the six month period of June 1998 through December 1998 and for
the year ended December 31, 1999 have been expensed as incurred. The phase out
period concluded during 1999. The $1.8 million in 1999 includes bad debt
expense of $510,000, recorded in the fourth quarter, and is included in
corporate, general and administrative expense.
13. Termination of Merger Agreement
On February 1, 1999, the Company agreed with American Retirement Corporation
("ARC") to terminate its previously announced merger agreement, which had been
entered into during November 1998. The Company recorded charges of
approximately $1.1 million and $228,000 in 1998 and 1999, respectively, for
costs relating to the terminated merger agreement.
14. Cumulative Effect of Change in Accounting Principle
Effective January 1, 1998, the Company adopted SOP 98-5, which requires that
pre-opening costs be expensed as incurred. In connection with such adoption,
$1.5 million of previously capitalized, unamortized pre-opening costs were
written off as of January 1, 1998 and presented in the accompanying 1998
statement of operations for fiscal year 1998 as the cumulative effect of a
change in accounting principle.
15. Income Taxes
The Company incurred a loss for both financial reporting and tax return
purposes for the years ended December 31, 1997, 1998, and 1999 and, as such,
there was no current or deferred tax provision.
The provision for income taxes differs from the amount of loss determined by
applying the applicable U.S. statutory federal rate to pretax loss as a result
of the following items at December 31:
<TABLE>
<CAPTION>
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
Statutory federal tax
rate................... (34.0)% (34.0)% (34.0)%
Non deductible
goodwill............... -- % 12.4 % 0.3 %
Losses for which no
benefit is provided.... 34.6 % 21.5 % 33.6 %
Other................... (0.6)% 0.1 % 0.1 %
----- ----- -----
Effective tax rate...... -- % -- % -- %
===== ===== =====
</TABLE>
An analysis of the significant components of deferred tax assets and
liabilities, consists of the following as of December 31 (in thousands):
<TABLE>
<CAPTION>
1998 1999
-------- -------
<S> <C> <C>
Deferred tax assets:
Net operating loss
carryforward........... $ 6,635 $19,876
Investment in joint
venture operations..... 1,996 2,815
Deferred gain on sale
and leaseback
transactions........... 631 1,555
Debt financing recorded
for books.............. 12,174 --
Other................... 4,841 3,836
Valuation allowance....... (8,937) (19,422)
Deferred tax liabilities:
Property and equipment,
primarily due to
depreciation........... (5,722) (8,316)
Debt financing
capitalized asset
basis.................. (11,364) --
Other................... (254) (344)
-------- -------
Net deferred tax asset
(liability)............ $ -- $ --
======== =======
</TABLE>
77
<PAGE>
The valuation allowance for deferred tax assets as of December 31, 1998 and
1999 was $8.9 million and $19.4 million, respectively. The increase in the
total valuation allowance for the years ended December 31, 1997, 1998 and 1999
was $2.0 million, $6.1 million and $10.5 million, respectively.
As a result of the acquisitions discussed in Note 2, the Company acquired
net operating loss carryforwards for federal and state tax purposes
approximating $950,000 which are available to offset future taxable income, if
any, through 2011. The future use of these net operating loss carryforwards is
subject to certain limitations under the Internal Revenue Code and therefore,
the Company has established a valuation allowance of $358,000 to offset the
deferred tax asset related to the loss carryforwards. Additionally, any tax
benefit realized from the use of approximately $300,000 of the acquired
operating loss carryforwards will be applied to reduce goodwill.
At December 31, 1999, the Company had net operating loss carryforwards of
approximately $52.6 million available to reduce future taxable income. The
carryforwards expire at various dates beginning in the year 2009 through the
year 2020.
The portion of the valuation allowance for deferred tax assets for which
subsequently recognized tax benefits will be applied directly to contributed
capital is $1.4 million as of December 31, 1999. This amount is attributable
to differences between financial and tax reporting of employee stock option
transactions.
16. Related Party Transactions
The Company leases six residences from Assisted Living Facilities, Inc. The
spouse of the Company's president and chief executive officer owns a 25%
interest in Assisted Living Facilities, Inc. During the year ended December
31, 1997, the Company paid such entity aggregate lease deposits of $31,500,
and incurred lease rental expense of $1.1 million, $1.2 million, and $1.3
million for the years ended December 31, 1997, 1998 and 1999, respectively. In
addition, in 1997 the Company leased one residence from Oregon Heights
Partnership ("OHP") in which the president and chief executive officer's
spouse owns an interest. The Company paid OHP $50,000 in lease deposits in
1997 and $278,000 and $195,000 in rent payments in 1997 and 1998,
respectively. The lease with OHP was terminated in September 1998, effective
October 1, 1998.
In 1997, the Company contracted with Supportive Housing Services, Inc.
("SHS") to provide services to the Company for market feasibility analysis,
site pre-acquisition services, field construction supervision and construction
management oversight in conjunction with the Company's development activities.
SHS is owned 75% by the president and chief executive officer's spouse. The
Company paid $480,000, $3.8 million, and $1.6 million during the years ended
December 31, 1997, 1998 and 1999, respectively, (including the amounts paid to
CCL (as defined below)) for such development services. The Company capitalized
such payments as construction in process. In July 1999 the Company delivered
180 days' written notice terminating their agreement with SHS for such
consulting services.
In addition, the Company and SHS entered into a consulting agreement whereby
the Company agreed to provide SHS with consulting services in the assisted
living industry, including providing data on the Company's facility
prototypes, facilitating the introduction to other potential customers and
providing market analysis on the assisted living industry. The Company
received fees for such services from SHS of $195,000 and $906,000 during the
years ended December 31, 1997 and 1998, respectively, and has recorded such
fees as a reduction of construction in process.
Commencing in 1995, the Company contracted with Concepts in Community
Living, Inc. ("CCL"), directly and through its developers, to perform
feasibility studies and pre-development consulting services for the developers
on the Company's behalf. CCL is owned 100% by the president and chief
executive officer's spouse. For the years ended December 31, 1997, 1998 and
1999, the Company paid CCL indirectly through SHS for these services fees of
$568,000, $566,000 and $255,000, respectively, which were capitalized in
construction in process on the consolidated balance sheets. In June 1999 the
Company entered into a new agreement with CCL
78
<PAGE>
pursuant to which CCL provided market research, demographic review and
competitor analysis in many of our current markets. The agreement provided
that Company pay CCL a retainer of $10,000 per month, plus fees in excess of
the retainer, if any, in connection with specific projects that the Company
authorizes under the agreement. The Company paid CCL $157,000 for such
services in 1999. The Company terminated the June 1999 agreement by notice
dated December 12, 1999.
The Company acquired HCI and Carriage House in October of 1997 (See Note 2).
Several employees of the Company, including members of the Board of Directors,
owned collectively 40.0% of the outstanding common stock in HCI and
approximately 23.0% of the outstanding common stock of Carriage House. In
addition, LTC held substantial interests in HCI and Carriage House prior to
their acquisition by the Company (See Note 17). Pursuant to the HCI
acquisition agreement, during 1998 and 1999, related parties (current or
former officers, directors, or employees) received "earnout" payments from the
Company of $428,000 for 1998 and $416,000 for 1999, respectively, related to
HCI sites the Company elected to develop.
During 1997, the Company entered into joint venture agreements with a joint
venture partner to operate certain new assisted living residences which
commenced operations during the second, third and fourth quarters of 1997 (See
Note 2). The Company, Mr. McBride, the Company's former Chairman and Chief
Executive Officer, Dr. Wilson, the Company's President and Chief Executive
Officer, and Dr. Wilson's spouse each acquired interests in the joint venture
partner. During 1998, Mr. McBride owned a $400,000 or 16.6% interest, and Dr.
Wilson's spouse owned a $200,000 or 8.3% interest, in the joint venture. On
February 10, 1999, the Company announced with respect to these joint venture
agreements that it had negotiated with the joint venture partner to purchase,
for approximately $3.8 million, all of the joint venture partner's interests
in the operation of the remaining 17 residences subject to the joint venture
agreements. As a result of such purchases, Mr. McBride and Dr. Wilson's spouse
received distributions of approximately $537,000 and $269,000, respectively in
1999. The Company has no current intention of entering into similar
arrangements in the future.
During 1998 Mr. Razook, one of the Company's directors, was Managing
Director and Head of the Health Care Industry Group of Schroder & Co. Inc.
("Schroders"), an investment banking firm. During 1998 Schroders served as the
initial purchaser of our $75.0 million offering of 5.625% Debentures for which
Schroders received a customary commission. Also during 1998, Schroders
provided financial advisory services and delivered a fairness opinion in
connection with a proposed merger for which we paid Schroders a fee of
$200,000. In March 1999, Mr. Razook became President and Managing Director at
Cohen & Steers Capital Advisors LLC ("C&S Advisors"). Pursuant to an agreement
with Cohen & Steers Capital Management, Inc., an affiliate of C&S Advisors
("CSCM"), the Company paid CSCM and C&S Advisors $1.3 million in 1999 for
financial advisory services. On January 24, 2000, the Company's agreement with
CSCM was terminated by mutual consent, and a new agreement with C&S Advisors
was entered into. Pursuant to the new agreement, the Company anticipates that
it may pay C&S Advisors approximately $700,000 for financial advisory services
plus customary fees and commissions in the event that the Company is advised
by C&S Advisors in connection with certain financing and merger and
acquisition transactions. The new agreement terminates on December 31, 2000,
except that (a) the Company may terminate the agreement at any time upon 90
days written notice and (b) even after the expiration or termination of the
new agreement the Company will be required to pay C&S Advisors fees under the
new agreement if the Company completes certain financing and merger and
acquisition transactions on or prior to December 31, 2001.
79
<PAGE>
17. Transactions with LTC Properties, Inc.
During the period November 1994 to September 1997, two members of the
Company's Board of Directors served as executive officers and directors of
LTC. In September 1997, Mr. Dimitriadis resigned from the Company's Board of
Directors and Mr. McBride resigned as an executive officer and director of
LTC. The Company engaged in the following transactions with LTC since January
1, 1995.
<TABLE>
<CAPTION>
Number of Sale
and Leaseback
Residences
Accounted for as 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 purchased during
1996....................... (4) (146) (7.6)
--- ----- -----
Leases at December 31,
1996....................... 14 505 29.7
Leases entered into during
1997....................... 21 832 52.7
--- ----- -----
Leases at December 31,
1997....................... 35 1,337 82.4
Leases entered into during
1998....................... 2 89 5.0
--- ----- -----
Leases at December 31,
1998....................... 37 1,426 $87.4
Leases entered into during
1999....................... -- -- --
--- ----- -----
Leases at December 31,
1999....................... 37 1,426 $87.4
=== ===== =====
</TABLE>
The Company incurred annual lease expense of $4.3 million, $9.1 million and
$9.0 million for the years ended December 31, 1997, 1998 and 1999,
respectively, pursuant to leases with LTC (See Note 6). The Company recognized
losses of $1.1 million and $504,000 on these sale and leaseback transactions
for the years ended December 31, 1997 and 1998, respectively. For the same
periods, the Company deferred gains of $951,000 and $55,000, respectively.
During 1995 the Company sold and leased back from LTC two residences for
$3.2 million with annual lease payments of $380,000. During 1996 the Company
sold and leased back 16 residences for $34.1 million with annual lease
payments of $3.3 million. Subsequently, the Company repurchased four of the 16
residences at a cost of $7.6 million plus a $214,000 administrative fee.
During 1997, the Company sold and leased back 21 residences for $52.7 million
with annual rent payments of $5.3 million. During 1998, the Company sold and
leased back two residences for $5.0 million with annual rent payments of
$447,000. As of December 31, 1998 the Company had sold and leased back 37
residences for $87.4 million with annual lease payments of $8.8 million.
During 1996 and 1997, the Company received from LTC $18.9 million and $43.2
million, respectively, of mortgage financing on eight and 19 residences,
respectively. As of December 31, 1997, the Company had repaid all of such
mortgage financing, except for one mortgage ($2.2 million) which was converted
to a sale and leaseback financing during the year ended December 31, 1998.
Interest was paid on a monthly basis ranging from 9.9% to 10.4% per annum. The
Company incurred $5.4 million, $180,000 and $0 in interest expense related to
these mortgage financings during the years ended 1997, 1998 and 1999,
respectively.
The Company acquired Carriage House in October 1997. LTC owned 9.9% of the
outstanding common stock of Carriage House (Notes 2 and 16). As a result, the
Company became the tenant on four assisted living residences leased by
Carriage House from LTC. These four leases are included in the table above and
the lease table in Note 6.
The Company acquired HCI in October of 1997. LTC owned 41.2% of the
outstanding common stock in HCI (See Notes 2 and 16).
80
<PAGE>
During 1997, the Company contracted with LTC Development Company, Inc. to
provide services to the Company for market feasibility analysis, pre-
acquisition services and construction management oversight on several of the
residences under development. LTC Development Company, Inc. is owned 100% by
LTC. The Company paid approximately $415,000 for these services during 1997
and capitalized such fees and recorded them as construction in process. During
1998 and 1999 LTC Company, Inc. did not provide such services, and did not
receive any such fees.
During the year ended December 31, 1996 the Company entered into a $50.2
million sale and leaseback financing commitment with LTC. This commitment was
renegotiated in November 1997 committing the Company to complete sale and
leaseback transactions with LTC with respect to nine residences during 1998.
In November 1997 the Company paid LTC $614,000 in connection with such
commitment and recorded such costs as deferred financing costs. In addition,
the Company entered into a commitment with LTC in October 1997 to complete
$50.0 million of sale and leaseback transactions by December 2000. Pursuant to
this commitment, the Company was obligated to pay a 2.0% fee on any unused
portion of the commitment as of the expiration date (or up to a maximum of
$1.0 million if none of the commitment were utilized). As a result of the
Carriage House acquisition in October 1997 the Company also became obligated
to enter into sale and leaseback arrangements with LTC by September 1998 with
respect to six Carriage House residences which were under development or
construction. In addition, HCI entered into a commitment with LTC in September
1997, which was assumed by the Company as part of the HCI acquisition, to
complete $50.0 million of sale and leaseback transactions by December 1999.
Pursuant to this commitment, the Company was obligated to pay a 2.0% fee on
any unused portion of the commitment as of the expiration date (or up to a
maximum of $1.0 million if none of the commitment were utilized).
During the second quarter of 1998, the Company determined that it would not
enter into sale and leaseback arrangements with LTC to the full extent of
certain of the sale and leaseback commitments, and recorded a $1.2 million
liability for expenses expected to be incurred in connection with this
determination. In December 1998, the Company and LTC terminated the
commitments referred to above at no cost to the Company, other than
approximately $200,000 of professional fees. As such, the Company reversed
$1.0 million of the previously recorded liability during the fourth quarter of
1998.
In December 1998, the Company determined that it would not utilize an
additional commitment to complete sale and leaseback transactions with LTC
with respect to nine residences which it had entered into during November
1997. As such, the Company wrote-off $614,000 of previously capitalized
deferred financing costs relating to such commitment.
In June 1999, the Company amended all of its 37 LTC leases. These amendments
restructured provisions related to future minimum annual rent increases, or
"rent escalators," which prior to the amendments required the Company to
account for rent expense related to such leases on a straight-line basis. From
the date of the amendment forward, the Company is accounting for the amended
leases on a contractual cash payment basis and amortizing the deferred rent
balance as of the date of the amendment over the remaining initial term of the
leases. Those amendments also redefined the lease renewal option with respect
to certain leases and provided the lessor with the option to declare an event
of default in the event of a change of control under certain circumstances. In
addition, the amendments provide the Company with the ability, subject to
certain conditions, to sublease or assign its leases with respect to two
Washington residences.
18. Stock Option Plan and Restricted Stock
The Company has two Stock Option Plans (the "Plans") which provide for the
issuance of incentive and non-qualified stock options and restricted stock.
The Plans are administered by the Compensation Committee of the Board of
Directors which set the terms and provisions of options granted under the
Plans. Incentive options may be granted only to officers or other full-time
employees of the Company, while non-qualified options may be granted to
directors, officers or other employees of the Company, or consultants who
provide services to the Company.
81
<PAGE>
The Amended and Restated 1994 Employee Stock Option Plan combines an
incentive and nonqualified stock option plan, a stock appreciation rights
("SAR") plan and a stock award plan (including restricted stock). The 1994
Plan is a long-term incentive compensation plan and is designed to provide a
competitive and balanced incentive and reward program for participants.
Under the Amended and Restated 1994 Stock Option Plan (the "1994 Plan"), the
Company may grant options or award restricted stock to its employees,
consultants and other key persons for up to 2,208,000 shares of common stock.
The exercise price of each option equals the market price of the Company's
stock on the date of grant. Each option shall expire on the date specified in
the option agreement, but not later than the tenth anniversary of the date on
which the option was granted. Options typically vest three years from the date
of issuance and typically are exercisable within seven to nine years from the
date of vesting. Each option is exercisable in equal installments as
designated by the Compensation Committee or the Board at the option price
designated by the Compensation Committee; however, incentive options cannot be
less than the fair market value of the common stock on the date of grant. All
options are nontransferable and subject to adjustment by the Compensation
Committee upon changes in the Company's capitalization. The Board of
Directors, at its option, may discontinue or amend the 1994 Plan at any time.
During the year ended December 31, 1998, the Company's board of directors
adopted The Non-Executive Employee Equity Participation Plan of Assisted
Living Concepts, Inc. (the "Non-Officer Plan") pursuant to which up to 500,000
shares of Common Stock are issuable pursuant to non-qualified options granted
under the Non-Officer Plan. Officers, directors and significant employees of
the Company are not eligible to participate in the Non-Officer Plan; however,
consultants and non-executives are eligible. On November 5, 1999, the board of
directors authorized an additional 500,000 shares of Common Stock to be
issuable pursuant to non-qualified options granted under the Non-Officer Plan.
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 1997, 1998 and 1999,
respectively: dividend yield of zero percent, expected volatility of 39.81%,
45.12% and 73.70%, respectively, risk-free interest rate has been fixed at
5.66% (based on the 10-year treasury rate), 5.56% (based on the 10-year
treasury rate) and 6.14% (based on the three year treasury rate),
respectively, and expected life of 10 years, 10 years and 3 years,
respectively.
The Company applies APB Opinion No. 25 in accounting for its Plans, and
accordingly, no compensation cost has been recognized for its stock options
issued to employees in the financial statements as all options were issued at
fair value on the date of the grant. Had the Company determined compensation
cost based on the fair value at the grant date for its stock options under
SFAS 123, the Company's net income would have been reduced to the pro forma
amounts indicated below: (in thousands except per share data)
<TABLE>
<CAPTION>
1997 1998 1999
-------- --------- ---------
<S> <C> <C> <C>
Net loss as reported.......................... $(2,479) $(20,745) $(28,933)
Net loss pro forma............................ (3,928) (23,990) $(31,772)
Basic and diluted net loss per common share as
reported..................................... $ (0.21) $ (1.27) $ (1.69)
Basic and diluted net loss per common share
pro forma.................................... $ (0.33) $ (1.47) $ (1.86)
</TABLE>
Pro forma net loss reflects only options granted in 1996 through 1999.
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,
1996 is not considered. The resulting pro forma compensation costs may not be
representative of that expected in the future years.
82
<PAGE>
A summary of the status of the Company's stock options as of December 31,
1997, 1998 and 1999 and changes during the years ended on those dates is
presented below:
<TABLE>
<CAPTION>
1997 1998 1999
-------------------- -------------------- --------------------
Weighted- Weighted- Weighted-
Average Average Average
Number of Exercise Number of Exercise Number of Exercise
Shares Price Shares Price Shares Price
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Options at beginning of the year...... 1,105,202 $ 6.15 1,629,967 $10.82 1,867,169 $12.07
Granted............................... 940,350 15.08 674,132 15.76 460,250 3.71
Exercised............................. (139,770) 6.05 (121,606) 6.00 (26,934) 5.83
Canceled.............................. (275,815) 9.53 (315,324) 15.82 (556,065) 12.65
--------- ------ --------- ------ --------- ------
Options at end of the year............ 1,629,967 $10.82 1,867,169 $12.07 1,744,420 $ 9.78
========= ====== ========= ====== ========= ======
Options exercisable at end of year.... 567,756 833,465 982,973
Weighted-average fair value of options
granted during the year.............. $ 9.24 $ 10.22 $ 2.52
</TABLE>
The following table summarized information about stock options outstanding
at December 31, 1999.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------- ----------------------------
Weighted-Average
Range of Number Remaining Weighted-Average Number Weighted-Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
---------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$ 0.00 to 1.69 74,000 9.83 $ 1.46 -- $ --
$ 1.75 to 2.88 179,500 9.49 2.81 -- --
$ 2.94 to 3.81 56,750 9.24 3.44 -- --
$ 4.00 to 4.63 272,250 4.15 4.62 265,000 4.63
$ 4.81 to 5.00 41,000 8.94 4.98 2,500 4.86
$ 5.75 to 6.50 185,668 5.76 6.49 180,168 6.50
$ 6.69 to 12.18 182,708 6.90 8.67 147,629 8.17
$12.25 to 14.50 234,854 8.75 14.16 79,424 14.17
$14.56 to 16.38 31,084 7.81 15.02 18,924 15.00
$16.50 to 21.25 486,606 8.02 16.85 289,328 16.75
---------------- --------- ---- ------ ------- ------
$ 0.00 to $21.25 1,744,420 7.44 $ 9.78 982,973 $10.04
================ ========= ==== ====== ======= ======
</TABLE>
In October 1997, the Company awarded 250,000 shares of non-voting restricted
stock to two key executive officers. At the time of the grant the Company's
common stock had a fair market value of $17.00 per share. No cash
consideration was paid for such shares by the recipients. Such shares vested
in three equal annual installments, commencing on the fourth anniversary of
grant. The Company recorded unearned compensation expense of $4.3 million in
connection with the issuance of the restricted stock as of the date of the
grant. This unearned compensation expense has been reflected as a separate
component of shareholders' equity to be amortized as compensation expense over
the seven year vesting period. The Company recorded $150,000, $608,000 and
$180,000 of compensation expense with respect to such award for the years
ended December 31, 1997, 1998 and 1999, respectively. The Company recorded the
issuance of the restricted stock in 1998 upon issuance. During the first
quarter of 1999, the Company retired the 250,000 shares of restricted stock
upon payment to the two key executives of $750,000 and $187,500 (the latter of
which was reduced to $87,500 to reflect repayment of a $100,000 bonus paid in
1998 to one of the key executives) in consideration for the forfeiture of
their interest in the 250,000 shares of restricted stock.
83
<PAGE>
19. Non-cash Investing and Financing Activities
The following is a summary of non-cash investing and financing activities
related to acquisitions for the year ended December 31, 1997 (in thousands):
In October of 1997, the Company acquired all of the outstanding capital
stock of Carriage House as follows:
<TABLE>
<S> <C>
Fair value of assets acquired......................................... $8,279
Issuance of 337,460 shares of the Company's common stock.............. 5,076
------
Liabilities assumed................................................... $3,203
======
</TABLE>
In October of 1997, the Company acquired all of the outstanding capital
stock of HCI as follows:
<TABLE>
<S> <C>
Fair value of assets acquired........................................ $11,877
Cash paid............................................................ 5,262
-------
Liabilities assumed.................................................. $ 6,615
=======
</TABLE>
20. Legal Proceedings
Securityholder Litigation
Since February 1, 1999, 12 separate complaints were filed in the United
States District Court for the District of Oregon against the Company and
certain of its past and present officers and directors. Pursuant to Order
signed on June 1, 1999, those complaints were consolidated for all purposes.
On July 23, 1999, a consolidated complaint was filed, and on October 20, 1999,
an amended consolidated complaint ("Complaint") was filed.
The Complaint purports to be brought on behalf of a class of purchasers of:
(a) the Company's common stock from February 6, 1997 through March 31, 1999,
inclusive; (b) the Company's 6.0% convertible subordinated debentures due
November 1, 2002 ("6.0% Debentures") from October 21, 1997 through March 31,
1999, inclusive; and (c) the Company's 5.625% convertible subordinated
debentures due May 1, 2003 ("5.625% Debentures") from July 22, 1998 through
March 31, 1999, inclusive.
The Complaint also names as defendants Schroder & Co., Inc., Morgan Stanley
Dean Witter and Smith Barney, Inc. (solely as underwriters in connection with
the 6.0% Debentures) and KPMG LLP, the Company's independent auditors (in
connection with the Company's offerings of common stock, 6.0% Debentures and
5.625% Debentures).
The Complaint alleges violations of the federal securities laws and seeks
unspecified damages. The Company filed an answer to the Complaint on December
7, 1999.
The Company cannot predict the outcome of the foregoing litigation and
currently is unable to evaluate the likelihood of success or the range of
possible loss. However, if the foregoing consolidated action was determined
adversely to the Company and/or to those to whom our Company's indemnity
obligations exist, such a determination could have a material adverse effect
on the Company's financial condition, results of operations, cash flow and
liquidity.
Other Litigation
In addition to the matter referred to in the immediately preceding
paragraphs, we are involved in various lawsuits and claims arising in the
normal course of business. In the opinion of our management, although the
outcomes of these other suits and claims are uncertain and because of the
early stages of these matters, management cannot estimate the losses or range
of losses, should the outcomes be unfavorable. In the aggregate such other
suits and claims should not have a material adverse effect on our financial
condition, results of operations, cash flow or liquidity.
84
<PAGE>
21. Employee Benefit Plan
Effective January 1, 1998, the Company implemented a 401 (k) Savings Plan
("the Plan"). The Plan is a defined contribution plan covering employees of
Asssisted Living Concepts, Inc. who have one year of service and are age 21 or
older. Each year participants may contribute up to 15% of pre-tax annual
compensation and 100% of any Employer paid cash bonus (not to exceed $10,000),
as defined in the Plan. ALC may provide matching contributions as determined
annually by ALC's Board of Directors. Contributions are subject to certain
limitations. The Company did not make contribution in 1998 or 1999.
85
<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
March 30, 2000 /s/ Drew Q. Miller
By: _________________________________
Name: Drew Q. Miller
Title: Chief Financial Officer
March 30, 2000 /s/ M. Catherine Maloney
By: _________________________________
Name: M. Catherine Maloney
Title: Vice President, Controller
and Chief Accounting Officer
86
<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 or Drew Q. Miller,
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 them, shall do or cause to be
done by virtue hereof. This Power of Attorney may be signed in several
counterparts.
IN WITNESS WHEREOF, each of the undersigned has executed this Power of
Attorney as of the dated indicated opposite his or her name.
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Keren Brown Wilson Vice Chairman, President and March 30, 2000
- ------------------------------------ Chief Executive Officer
Keren Brown Wilson
/s/ Drew Q. Miller Chief Financial Officer and March 30, 2000
- ------------------------------------
Drew Q. Miller Treasurer
/s/ M. Catherine Maloney Vice President/Controller March 30, 2000
- ------------------------------------ and
M. Catherine Maloney Chief Accounting Officer
/s/ W. James Nicol Director and Chairman of March 30, 2000
- ------------------------------------ Board of Directors
W. James Nicol
/s/ Gloria J. Cavanaugh Director March 30, 2000
- ------------------------------------
Gloria J. Cavanaugh
/s/ John M. Gibbons Director March 30, 2000
- ------------------------------------
John M. Gibbons
/s/ Richard C. Ladd Director March 30, 2000
- ------------------------------------
Richard C. Ladd
/s/ Bradley G. Razook Director March 30, 2000
- ------------------------------------
Bradley G. Razook
/s/ Jill M. Krueger Director March 30, 2000
- ------------------------------------
Jill M. Krueger
</TABLE>
87
<PAGE>
SCHEDULE II
ASSISTED LIVING CONCEPTS, INC.
VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1997, 1998 and 1999
(in thousands)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
-------- ---------- --------- ------------- ----------
Balance at Balance at
Beginning End
Description of Year Additions Deductions(1) of Year
----------- ---------- --------- ------------- ----------
<S> <C> <C> <C> <C>
Year ended December 31, 1997:
Valuation accounts deducted
from assets:
Allowance for doubtful
receivables.................. $ 33 $ 83(3) $ 37 $ 79
---- ------ ---- ------
Year ended December 31, 1998:
Valuation accounts deducted
from assets:
Allowance for doubtful
receivables.................. $ 79 $ 359(2) $259 $ 179
---- ------ ---- ------
Year ended December 31, 1999:
Valuation accounts deducted
from assets:
Allowance for doubtful
receivables.................. $179 $1,071(4) $188 $1,062
---- ------ ---- ------
</TABLE>
- --------
(1) Represents amounts written off.
(2) Charged to residence operating expenses.
(3) $23,000 of additions were charged to operating expenses, $60,000 of
additions were a result of an acquisition.
(4) $561,000 of additions were charged to operating expenses, $510,000 of
additions related to home health operations which were shut down in 1998
and are reported in general and administrative expenses.
88
<PAGE>
ASSISTED LIVING CONCEPTS, INC. AND SUBSIDIARIES
Index to Exhibits
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
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 October 2, 1997 by and between the Company and
Harris Trust and Savings Bank, as Trustee providing for Issuance of
Securities in Series. (Incorporated by reference to Exhibit 4.1 to
the Company's Report on Form 8-K, dated October 20, 1997, File No. 1-
13498).
4.2 Rights Agreement dated as of June 12, 1997, between Assisted Living
Concepts, Inc. and American Stock Transfer & Trust Company, as Rights
Agent, which includes the form of Certificate of Resolution
Establishing Designations, Preferences and Rights of Series A Junior
Participating Preferred Stock of Assisted Living Concepts Inc. as
Exhibit A, the form of Right Certificate as Exhibit B and the Summary
of Rights to Purchase Preferred Shares as Exhibit C (Incorporated by
reference to the same titled exhibit to the Company's Report on Form
8-K, dated July 24, 1997, File No. 1-83938).
4.3 Registration Rights Agreement, dated as of October 31, 1997, by and
between the Company and Carriage House Assisted Living, Inc.
(Incorporated by reference to the same titled exhibit to the
Company's Registration Statement on Form S-3, dated December 31,
1997, Registration No. 333-43521).
4.4 Indenture, dated as of April 13, 1998, by and between the Company and
Harris Trust and Savings Bank, as Trustee (Incorporated by reference
to the same titled exhibit to the Company's Registration Statement on
Form S-3, dated May 11, 1998, Registration No. 333-52297).
4.5 Registration Rights Agreement, dated as of April 7, 1998, by and
between the Company and Schroder & Co., Inc. (Incorporated by
reference to the same titled exhibit to the Company's Registration
Statement on Form S-3, dated May 11, 1998, Registration No. 333-
52297).
4.6 Form of Debenture (Incorporated by reference to the same titled
exhibit to the Company's Registration Statement on Form S-3, dated
May 11, 1998, Registration No. 333-52297).
10.1 Indemnification Agreement dated October 3, 1997 by and between the
Company and William McBride III. (Incorporated by reference to the
same titled exhibit to the Company's Report on Form 8-K, dated
October 20, 1997, File No. 1-13498).
10.2 Indemnification Agreement dated October 3, 1997 by and between the
Company and Keren Brown Wilson. (Incorporated by reference to the
same titled exhibit to the Company's Report on Form 8-K, dated
October 20, 1997, File No. 1-13498).
10.3 Amended and Restated 1994 Stock Option Plan of the Company
(Incorporated by reference to the same titled exhibit to the
Company's Report on Form 8-K, dated October 20, 1997, File
No. 1-13498).
10.4 Non-Executive Employee Equity Participation Plan of the Company
(Incorporated by reference to the same titled exhibit to the
Company's Registration Statement on Form S-8, dated July 13, 1998,
Registration No. 333-58953).
10.5 Deferred Compensation Plan of the Company (Incorporated by reference
to the same titled exhibit to the Company's Report on form 10-K for
the fiscal year ended December 31, 1998).
10.6 Consulting Agreement, dated as of March 15, 1999, by and between the
Company and William McBride III (Incorporated by reference to the
same titled exhibit to the Company's Report on form 10-K for the
fiscal year ended December 31, 1998).
</TABLE>
89
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
10.7 Amended and Restated Employment Agreement, dated October 1999, as
amended as of March 15, 1999, by and between the Company and Keren
Brown Wilson (Incorporated by reference to the same titled exhibit to
the Company's Report on form 10-K for the fiscal year ended December
31, 1998).
10.8 Employment Agreement, dated as of December 31, 1997, by and between
the Company and Sandra Campbell (Incorporated by reference to the
same titled exhibit to the Company's Report on form 10-K for the
fiscal year ended December 31, 1998).
10.9 Employment Agreement, dated as of February 3, 1998, by and between the
Company and Nancy Gorshe (Incorporated by reference to the same
titled exhibit to the Company's Report on form 10-K for the fiscal
year ended December 31, 1998).
10.10 Separation and Consulting Agreement, dated as of March 3, 2000, by and
between the Company and James Cruckshank (Incorporated by reference
to the same titled exhibit to the Company's Report on form 8-K dated
March 3, 2000 File No. 001-13498).
10.11 Employment Agreement, dated as of March 15, 1999, by and between the
Company and Leslie Mahon (Incorporated by reference to the same
titled exhibit to the Company's Report on form 10-K for the fiscal
year ended December 31, 1998).
10.12 Merger Agreement dated as of October 4, 1997 by and between the
Company and Home and Community Care, Inc. (Incorporated by reference
to the same titled exhibit to the Company's Report on Form 8-K, dated
October 20, 1997, File No. 1-13498).
10.13 Joint Venture Agreement dated as of April 1, 1997 by and between the
Company and Health Equity Investors, LLC. (Incorporated by reference
to the same titled exhibit to the Company's Report on Form 8-K, dated
October 20, 1997, File No. 1-13498).
10.14 Reimbursement Agreement, dated as of November 1, 1996, between the
Company and U.S. Bank of Washington, National Association
(Incorporated by reference to the same titled exhibit to the
Company's Report on form 10-K for the fiscal year ended December 31,
1998).
10.15 Reimbursement Agreement, dated as of July 1, 1997, between the Company
and United States National Bank of Oregon (Incorporated by reference
to the same titled exhibit to the Company's Report on form 10-K for
the fiscal year ended December 31, 1998).
10.16 Reimbursement Agreement, dated as of July 1, 1998, between the Company
and U.S. Bank National Association (Incorporated by reference to the
same titled exhibit to the Company's Report on form 10-K for the
fiscal year ended December 31, 1998).
10.17 Deed of Trust and Security Agreement, dated March 31, 1998, among DMG
Texas ALC, Partners, L.P., American Title Company of Houston and
Transatlantic Capital Company (Incorporated by reference to the same
titled exhibit to the Company's Report on form 10-K for the fiscal
year ended December 31, 1998).
10.18 Mortgage and Security Agreement, dated November 12, 1998, between DMG
New Jersey ALC, Inc. and Transatlantic Capital Company (Incorporated
by reference to the same titled exhibit to the Company's Report on
form 10-K for the fiscal year ended December 31, 1998).
10.19 Deed of Trust and Security Agreement, dated July 10, 1998, among DMG
Oregon ALC, Inc., Chicago Title Company and Transatlantic Capital
Company (Incorporated by reference to the same titled exhibit to the
Company's Report on form 10-K for the fiscal year ended December 31,
1998).
10.20 Loan Agreement, dated as of September 3, 1998, by and between MLD
Delaware Trust and the Company (Incorporated by reference to the same
titled exhibit to the Company's Report on form 10-K for the fiscal
year ended December 31, 1998).
</TABLE>
90
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
10.21 Loan Agreement, dated as of September 3, 1998, by and between MLD
Delaware Trust and the Company (Incorporated by reference to the same
titled exhibit to the Company's Report on form 10-K for the fiscal
year ended December 31, 1998).
10.22 Amendment and Modification of Reimbursement Agreements, dated as of
August 18, 1999, by and between the Company and U.S. Bank National
Association (Incorporated by reference to the same titled exhibit to
the Company's Report on form 10-K for the fiscal year ended December
31, 1998).
10.23 Modification and Amendment to Employment Agreement, dated as of
January 19, 2000, by and between the Company and Nancy Inez Gorshe.
12.1 Computation of Ratio of Earnings to Fixed Charges.
23.1 Report on Schedule and Consent of KPMG LLP.
27 Financial Data Schedule Article 5 of Regulation S-X.
</TABLE>
91
<PAGE>
EXHIBIT 10.23
MODIFICATION AND AMENDMENT TO
EMPLOYMENT AGREEMENT
(Location Specific)
REFERENCE DATE: January 19, 2000
PARTIES Nancy Inez Gorshe ("Employee")
and Assisted Living Concepts, Inc. ("Company")
11835 NE Glenn Widing Drive, Building E
Portland, Oregon 97220-9057
RECITAL:
Employee and Company entered into that certain Employment Agreement dated
February 3, 1998 (the "Agreement"), which provides for an expiration date of
February 3, 2000. Thereafter, the Board of Directors of Company promoted
Employee to Senior Vice President of Community Relations (the "New Position"),
and on November 30. 19991, the Compensation Committee approved the
modifications and amendments to the Employment Agreement set forth herein.
NOW, THEREFORE, for valuable consideration, the receipt of which is
acknowledged, the parties agree as follows:
AGREEMENTS:
1. Employee and Company hereby agree to modify and amend the
Employment Agreement as follows:
(a) Delete Section 1.1 in its entirety and insert:
1.1 Employment. Effective on the Commencement Date of
----------
February 3, 1998, Assisted Living Concepts, Inc. ("ALC") or one of its
Affiliated Companies (defined below) hereby agrees to employ Employee, and
Employee hereby agrees to serve the Company, on the terms and conditions of
this Agreement. Such employment shall be for the initial term of two (2)
years, with an automatic rollover at the end of each year from and after
the Commencement Date for an additional year unless terminated by the
Company by its providing written notice of such termination to Employee
within ninety (90) days prior to the anniversary of the Commencement Date
(in which event Employee shall have one year remaining until the
termination of this Agreement, unless terminated earlier pursuant to
Section 6 hereunder). For example, in the event that Employee were an
employee of the Company on March 15, 2000 and the Company were not to have
provided written notice to Employee between December 15, 1999 and March 15,
2000 that Employee's employment would terminate on March 15, 2001, then the
term of this Agreement would automatically rollover an additional year to
March 15, 2002 from March 15, 2001. On the other hand, the Company were to
provide written notice to Employee of the termination of this Agreement
within 90 days prior to the anniversary
<PAGE>
date of March 15, 2000, then this Agreement would terminate on March 15,
2001 (unless terminated earlier pursuant to Section 6 hereunder), and there
would be no automatic rollover.
For purposes of this Agreement, "Affiliated Companies" shall mean an entity
controlling, controlled by, or under common control with ALC, and shall include
a corporation which acquires the stock of ALC, should a merger occur.
(b) Delete the last sentence of Section 1.2 and insert: "Employee's
position and duties may change from time to time during the term of this
Agreement. Such change might include, without limitation. Employee's place of
work being relocated at the discretion of the party to whom Employee reports,
provided that the position qualifies as Comparable Employment within the meaning
of that term, as defined in Section 6.2(b)."
(c) Delete Section 6.2(b), in its entirety and insert: "Without Cause.
In the event of the termination of the employment of Employee by the Company
without cause and without the Company offering Comparable Employment (defined
below) prior to the expiration hereof, Employee shall be paid an amount equal to
that set forth in Schedule 6.2(b), which is attached hereto and incorporated
herein by this reference (the "Severance Amount"), and such Severance Amount
shall be paid in a lump sum within 60 days after the effective date of the
termination of employment; provided, however, that if Employee is offered
Comparable Employment with ALC or an Affiliated Company and refuses to accept
the offer of Comparable Employment, then the Company shall have no obligation
whatsoever to pay the Severance Amount. Likewise, if Employee is offered and
accepts a position with the Company which is Comparable Employment, the Company
shall have no obligation whatsoever to pay any Severance Amount due to such
change, however, this Agreement shall remain in full force and effect until its
expiration or earlier termination after such change to Comparable Employment.
"Comparable Employment" shall mean employment with ALC or an Affiliated Company
in a position that is: (i) not materially different in level of responsibility
or duties; (ii) at the same or higher salary level; (iii) with the same or
similar title or rank; and (iv) which is to be based within a 20-mile radius of
the location of Employee's prior position with the Company."
(d) Revise "comparable employment" in Section 6.4 to "Comparable
Employment."
(e) Amend the Agreement with the attached Schedule 6.2(b) reflecting
the Severance Amount.
2. Full Force and Effect. Except as modified and amended herein, the
Agreement shall remain in full force and effect. In the event of any
inconsistency between this Modification and Amendment Agreement (this
"Modification") and the Agreement, this Modification shall prevail.
Due to this Modification being "Location Specific," Employee MUST complete
"Work Location" set forth below in order for this Modification to be effective.
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto execute this Modification on the
date below written.
"EMPLOYEE"
Date: January 19, 2000 /s/ Nancy Gorshe_________________________
Nancy Inez Gorshe
Present Position:
Senior Vice President of Community Relations
Work Location:
11835 NE Glenn Widing Drive, Building E
Portland, Oregon 97220-9057
"COMPANY"
ASSISTED LIVING CONCEPTS, INC.
Date: January 19, 2000 By:__/s/ Keren Brown Wilson________________
Keren Brown Wilson
Chief Executive Officer and President
3
<PAGE>
Schedule 6.2(b)
The Severance Amount shall be calculated as follows:
Employee's Annual Salary (as of the date of termination) x 24 (months) =
$___________
4
<PAGE>
EXHIBIT 12.1
RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1997 1998 1999
------------ ------------ ------------
(in thousands)
<S> <C> <C> <C>
Net loss before cumulative effect of
change in accounting principle........ $(2,479) $(19,222) $(28,933)
Add fixed charges......................
Interest costs including amortization
of debt issuance cost................. 4,946 11,039 15,200
------- --------- --------
Earnings (loss) before fixed
charges........................... $ 2,467 $ (8,183) $(13,733)
======= ========= ========
Fixed charges:
Interest expense including
amortization of debt issuance
costs............................... 4,946 11,039 15,200
Capitalized interest................. 6,616 5,979 2,017
------- --------- --------
Total fixed charges................ $11,562 17,018 17,217
======= ========= ========
Ratio of earnings to fixed charges..... -- -- --
======= ========= ========
Deficiency of earnings to cover fixed
charges............................... $ 9,095 $ 25,201 $ 30,950
======= ========= ========
</TABLE>
<PAGE>
EXHIBIT 23.1
Independent Auditors' Report on Schedule and Consent
The Board of Directors
Assisted Living Concepts, Inc.:
The audits referred to in our report dated March 29, 2000, included the
related financial statement schedule as of December 31, 1998 and 1999 and each
of the years in the three-year period ended December 31, 1999, included in the
Annual Report on Form 10-K. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express
an opinion on this financial statement schedule based on our audits. In our
opinion, such financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.
We consent to 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 March 29, 2000, relating to the consolidated balance sheets
of Assisted Living Concepts, Inc. and subsidiaries as of December 31, 1998 and
1999, and the related consolidated statements of operations, comprehensive
loss, shareholders' equity, and cash flows for each of the years in the three-
year period ended December 31, 1999, which report appears in the December 31,
1999 Annual Report on Form 10-K of Assisted Living Concepts, Inc.
KPMG LLP
Portland, Oregon
March 30, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 10-K AND IS
QUALIFIED INT ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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