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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20459
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FORM 10-K
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(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, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .
COMMISSION FILE NUMBER 1-13498
ASSISTED LIVING CONCEPTS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEVADA 93-1148702
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
11835 NE GLENN WIDING DRIVE, 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:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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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
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 [ ] 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: [ ]
The Registrant had 17,120,745 shares of common stock, $.01 par value,
outstanding at March 9, 2001. The aggregate market value of the voting stock
held by non-affiliates of the registrant on such date was approximately $13.5
million.
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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, 2000 we had operations in 16 states.
We also provide personal care and support services and make available
routine nursing services (as permitted by applicable law) designed to meet the
personal and 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 to, 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 experienced significant and rapid growth between 1994 and 1998,
primarily through the development of assisted living residences and, to a much
lesser extent, through acquisition of assisted living residences. When we
completed our initial public offering in November 1994 we had a base of five
leased residences (137 units). We opened twenty residences (798 units) in 1999
and no new residences in 2000. As of December 31, 2000, we had 185 assisted
living residences in operation representing an aggregate of 7,149 units. Of
these residences, we owned 115 residences (4,515 units) and leased 70 residences
(2,634 units). For the year ended December 31, 2000, our 165 Same Store
Residences (those residences that had been operating in their entirety for both
1999 and 2000) had an average occupancy rate of 83.7% and an average monthly
rental rate of $1,985 per unit.
The principal elements of our business strategy are to:
- increase occupancy and improve operating efficiencies at our existing
base of residences;
- reduce overhead costs where possible; and
- establish necessary financing to meet maturing obligations.
We anticipate that revenues at a majority of our residences will continue
to come from private pay sources. However, we believe that by having located
residences in states with favorable regulatory and reimbursement climates, we
should have 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.
Although we manage the mix of private paying tenants and Medicaid paying
tenants residing in our facilities, any significant increase in our Medicaid
population could have an adverse effect on our financial position, results of
operations or cash flows, particularly if the states operating these programs
continue to or more aggressively seek limits on reimbursement rates. See "Risk
Factors -- We depend on reimbursement by third-party payors" included in Item 7.
Assisted Living Concepts, Inc. is a Nevada corporation. Our principal
executive offices are located at 11835 NE Glenn Widing Drive, Building E,
Portland, Oregon 97220-9057, and our telephone number is (503) 252-6233.
RECENT DEVELOPMENTS
Securityholder Litigation Settlement
In September 2000, we reached an agreement to settle the class action
litigation relating to the restatement of our financial statements for the years
ended December 31, 1996 and 1997 and the first three
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fiscal quarters of 1998. This agreement received final court approval on
November 30, 2000 and we were subsequently dismissed from the litigation with
prejudice.
The total cost of the settlement was approximately $10,020,000 (less $1.0
million of legal fees and expenses reimbursed by our corporate liability
insurance carriers and other reimbursements of approximately $193,000). We made
two payments of $2.3 million each on October 23, 2000 and January 23, 2001
towards the settlement. The remaining amount due will be paid in two payments of
$2.3 million each, due on April 23, 2001 and July 23, 2001, and a final payment
of $1.0 million due within 90 days following the July 23, 2001 payment.
The settlement had been pending the approval of our corporate liability
insurance carriers who had raised certain coverage issues that resulted in the
filing of litigation between us and the carriers. These carriers consented to
the settlement, and we and the carriers agreed to dismiss the litigation
regarding coverage issues and to resolve those issues through binding
arbitration. The arbitration proceeding is pending. To the extent that the
carriers are successful, we and the carriers agreed that the carriers' recovery
is not to exceed $4.0 million. The parties further agreed that payment of any
such amount awarded will not be due in any event until 90 days after we have
satisfied our obligations to the plaintiffs in the class action, with any such
amount to be subordinated to new or refinancing of existing obligations. We
believe that we have strong defenses regarding this dispute and consequently
have not recorded a liability in relation to this matter.
As a result of the class action settlement, we recorded a charge of
approximately $10,020,000, which was partially offset by a reduction in general,
and administrative expenses of approximately $1,193,000 as a result of the
reimbursement of legal fees and expenses incurred in connection with the
litigation. The settlement resulted in an increase in net loss of $8,827,000 (or
approximately $0.52 per basic and diluted share) for the year ended December 31,
2000.
Indiana Litigation Settlement
In a lawsuit filed in 2000, the Indiana State Department of Health ("ISDH")
had alleged that we were operating our Logansport, Indiana facility known as
McKinney House, as a residential care facility without a license. We believe our
services have been consistent with those of a "Housing with Services
Establishment" (which is not required to be licensed) pursuant to Indiana Code
Section 12-10-15-1.
To avoid the expense and uncertainty of protracted litigation and, also
because we wished to assure the State that we operate in a manner that is
consistent with Indiana law, we agreed to the following settlement on behalf of
all facilities owned and operated by us in the State of Indiana. The State and
ALC agreed upon a Program Description that clarifies the services that we can
provide without requiring licensure as a residential care facility. This Program
Description provides guidelines regarding the physical and medical condition of
the residents in our facilities and the services to be provided to them. We
agreed that prior to March 20, 2001, we will provide in-service training
regarding the Program Description throughout our Indiana facilities. Under the
Program Description, we must discharge residents who require certain types or
levels of care that we agreed not to provide in Indiana. We are currently
implementing the Program Description and, while its full impact is not now
known, we do not expect the impact to be material to our financial condition,
results of operations, cash flow and liquidity. Without admitting liability, we
paid a civil penalty of $10,000. The State dismissed the lawsuit against us with
prejudice.
Management Changes
On March 3, 2000, our Board of Directors announced the appointment of Wm.
James Nicol and John Gibbons to the Board, 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
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with consulting services through the end of 2000. See "Executive
Compensation -- Agreements with Former Officers" included in Item 11.
On March 16, 2000, we announced the appointment of Drew Q. Miller as Senior
Vice President, Chief Financial Officer and Treasurer and the resignation of Mr.
Gibbons as Interim Chief Financial Officer.
On April 21, 2000, we eliminated the position of Vice President and Chief
Operating Officer which had been held by Leslie Mahon. Keren Brown Wilson
assumed these duties until her position of President and CEO was restructured in
October, 2000.
Effective October 19, 2000, Dr. Wilson resigned as President and Chief
Executive Officer and from our Board. She will remain active with us, continuing
to represent us at various assisted living industry events and providing
consulting services to us, as requested, until December 31, 2001. We incurred a
charge of $800,000 in the fourth quarter of 2000 in connection with her
resignation, such amount to be paid out over the fourteen-month period ending
December 31, 2001.
Upon the resignation of Dr. Wilson, Mr. Nicol served as the Acting
President and Chief Executive Officer until his permanent appointment. On
November 8, 2000, our Board appointed Wm. James Nicol as President and Chief
Executive Officer and Jill M. Krueger replaced Dr. Wilson on the Executive
Committee.
In January, 2001, our Board determined the Executive Committee was no
longer needed and discontinued it.
Annual Meeting of Shareholders
On January 16, 2001, we held our annual shareholders' meeting. The sole
purpose of this meeting was the re-election of two of our directors, Richard C.
Ladd and Jill M. Krueger, and the election of four new directors, Wm. James
Nicol (Chairman, President & Chief Executive Officer), John M. Gibbons, Leonard
Tannenbaum and Bruce E. Toll. Following the meeting, Mr. Gibbons was appointed
Vice Chairman of the Board.
Modification and Amendment to Rights Agreement
On November 8, 2000, we modified and amended our Rights Agreement to
provide that the acquisition of up to $15.0 million in face value of our
convertible debentures is not to be considered "beneficially owned," as defined
under the Rights Agreement, for purposes of calculating whether a beneficial
owner owns 15% or more of our common shares then outstanding, in which event
certain rights as described in the Rights Agreement would arise.
Amendment of Loan Documents
On March 12, 2001, we amended certain loan documents with U. S. Bank
National Association ("U.S. Bank"). Pursuant to the amendment, we agreed to pay
fees of $34,700 in exchange for the following: the modification of certain
financial covenants, and the waiver of U.S. Bank's right to declare an event of
default for our failure to comply with certain financial covenants as of
December 31, 2000 and for our anticipated failure to comply with certain
financial covenants for the three months ending March 31, 2001. The amendment
also provides the following: approval for us to repurchase for cash up to $25.0
million in face value of our convertible debentures prior to maturity; a
requirement that we deposit $500,000 in cash collateral with U.S. Bank in the
event certain regulatory actions are commenced with respect to the properties
securing our obligations to U.S. Bank; and the requirement that U.S. Bank
release such deposits to us upon satisfactory resolution of the regulatory
action.
Additional Financing
In November 2000, we entered into a short-term bridge loan with Red
Mortgage Capital, Inc. ("Red Mortgage") in the amount of $4.0 million secured by
three previously unencumbered properties. This loan matures on August 1, 2001,
requires monthly interest-only payments until maturity and bears interest at the
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greater of 10% or LIBOR plus 3.5%. We intend to replace this loan with long-term
HUD financing prior to its maturity.
On March 2, 2001, we entered into an agreement with Heller Healthcare
Finance, Inc. ("Heller") for a $45.0 million line of credit, under which five
wholly owned subsidiaries are the jointly and severally liable borrowers of any
funds drawn. This line matures on August 31, 2002 and requires monthly
interest-only payments until maturity. This line bears an interest rate of 3.85%
over the three-month LIBOR rate floating monthly and will be secured by up to 32
properties owned by the borrowers and leased to another of our affiliates or us.
We guaranteed the line. In addition to having paid a commitment fee of $450,000,
we are to pay funding fees of 0.5% of the principal amount funded at the time of
funding and pay an exit fee of 1.0% of the principal being repaid. The borrowers
may elect to exercise up to three six-month extensions of the maturity date,
subject to the satisfaction of certain conditions. We intend to replace a
substantial portion of this financing with long-term HUD financing to the extent
the processing time and increasing limitations by HUD on submission of
applications and amount financed permit. While the line remains outstanding, we
have agreed that all of our remaining unencumbered properties, except one, will
remain unencumbered, unless the net proceeds of such financing are used to
repurchase our convertible debentures or pay off other indebtedness (if approved
by Heller). Proceeds of the line may be used for the payment of our
shareholders' litigation settlement, the repurchase of 16 of our leased
properties and the repurchase of some of our convertible debentures. Our initial
draw on this line was $1.3 million on March 2, 2001.
Option Cancellation
In November 2000, the Board of Directors, at the recommendation of the
Compensation Committee, approved an offer (the "Offer") to holders of options
under both the 1994 Stock Option Plan and the Non-Executive Employee Equity
Participation Plan. We agreed to make lump sum payments of $250 to each option
holder who agreed to the cancellation of all of their options having an exercise
price of $5.00 or greater ("Eligible Options"), except that certain executive
officers, directors, and consultants were asked to agree to the cancellation of
their Eligible Options without any such payment. We completed the Offer in
December 2000, paying approximately $17,000 for the cancellation of options
covering the issuance of 596,103 shares of common stock.
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, or elect not to do so, and do not 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
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providers who are reimbursed directly by the resident or a third-party payor
(such as Medicaid or long-term care insurance). Our policy is to 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 4 regional vice
presidents of operations who oversee the overall performance and finances of
each region, 16 regional 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. 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 several
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, legal support, treasury functions, and human resource management.
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, most of our markets include an assisted
living competitor offering assisted living facilities that are similar in size,
price and range of service. 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 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 number of new assisted living
facilities may outpace demand in some markets. The effects of such overbuilding
include (a) significantly longer fill-up periods, (b) pressure to lower or
refrain from increasing rates, (c) competition for workers in already tight
labor
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markets and (d) lower margins 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 operate our
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.
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. We participate in
Medicaid programs in all of these states except Florida. 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, 1998, 1999 and 2000, direct payments
received from state Medicaid agencies accounted for approximately 10.7%, 10.4%
and 11.1%, respectively, of our revenue while the tenant-paid portion received
from Medicaid residents accounted for approximately 5.8%, 5.9% and 6.2%,
respectively, of our revenue during these periods. We expect in the future that
state Medicaid reimbursement programs will continue to constitute a significant
source of our revenue.
GOVERNMENT REGULATION
Our assisted living residences are subject to certain state statutes, rules
and regulations, including those which provide for licensing requirements. In
order to qualify as a state licensed facility, our residences must comply with
regulations which address, among other things, staffing, physical design,
required services and resident characteristics. As of December 31, 2000, 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 remuneration of any kind in return for the referral of
Medicaid patients, or to induce the purchasing, leasing, ordering or arranging
of any goods or
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services to be paid for by Medicaid. Violations of these laws may result in
civil and criminal penalties and exclusions from participation in the Medicaid
program. The Inspector General of the Department of Health and 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.
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. 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.
See Risk Factors, "We are subject to significant government regulation."
LIABILITY AND INSURANCE
Providing services in the senior living industry involves an inherent risk
of liability. Participants in the senior living and long-term care industry are
subject to lawsuits alleging negligence or related legal theories, many of which
may involve large claims and result in the incurrence of significant legal
defense costs. We currently maintain insurance policies to cover such risks in
amounts which we believe are in keeping with industry practice. There can be no
assurance that a claim in excess of our insurance will not be asserted. A claim
against us not covered by, or in excess of, our insurance, could have a material
adverse affect on us.
Based on poor loss experience, insurers for the long term care industry
have become increasingly wary of liability exposures. A number of insurance
carriers have stopped writing coverage to this market, and those remaining have
increased premiums and deductibles substantially. While nursing homes have been
the primary targets of these insurers, assisted living companies, including us,
have experienced premium and deductible increases. During the claim year ended
December 31, 2000, our professional liability insurance coverage included
deductible levels of $100,000 per incident; for the claim year ending December
31, 2001 this deductible level has been replaced with a retention level of
$250,000 for all states except Florida and Texas in which our retention level is
$500,000. In certain states, particularly Florida and Texas, many long-term care
providers are facing very difficult renewals. There can be no assurance that we
will be able to obtain liability insurance in the future or that, if such
insurance is available, it will be available on terms acceptable to us.
EMPLOYEES
As of December 31, 2000 we had 3,613 employees, of whom 1,628 were
full-time employees and 1,985 were part-time employees. None of our employees
are represented by any labor union. We believe that our labor relations are
generally good.
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ITEM 2. PROPERTIES
The following chart sets forth, as of December 31, 2000 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, 2000.
OPENING OCCUPANCY (%)
RESIDENCE UNITS DATE(1) OWNERSHIP(2) AT 12/31/00(3)
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WEST REGION
Idaho
Burley......................................... 35 08/97 Leased 100.0
Caldwell....................................... 35 08/97 Leased 100.0
Garden City.................................... 48 04/97 Owned 91.7
Hayden......................................... 39 11/96 Leased 94.9
Idaho Falls.................................... 39 01/97 Owned 43.6
Moscow......................................... 35 04/97 Owned 40.0
Nampa.......................................... 39 02/97 Leased 94.9
Rexburg........................................ 35 08/97 Owned 77.1
Twin Falls..................................... 39 09/97 Owned 64.1
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Sub Total............................ 344 78.8
Oregon
Astoria........................................ 28 08/96 Owned 92.9
Bend........................................... 46 11/95 Owned 100.0
Brookings...................................... 36 07/96 Owned 97.2
Canby.......................................... 25 12/90 Leased 96.0
Estacada....................................... 30 01/97 Owned 76.7
Eugene......................................... 47 08/97 Leased 93.6
Hood River..................................... 30 10/95 Owned 100.0
Klamath Falls.................................. 36 10/96 Leased 100.0
Lincoln City................................... 33 10/94 Owned 78.8
Madras......................................... 27 03/91 Owned 96.3
Myrtle Creek................................... 34 03/96 Leased 79.4
Newberg........................................ 26 10/92 Leased 100.0
Newport........................................ 36 06/96 Leased 91.7
Pendleton...................................... 39 04/91 Leased 87.2
Prineville..................................... 30 10/95 Owned 90.0
Redmond........................................ 37 03/95 Leased 94.6
Silverton...................................... 30 07/95 Owned 83.3
Sutherlin...................................... 30 01/97 Leased 96.7
Talent......................................... 36 10/97 Owned 91.7
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Sub Total............................ 636 92.0
Washington
Battleground................................... 40 11/96 Leased 97.5
Bremerton(4)................................... 39 05/97 Owned 97.4
Camas.......................................... 36 03/96 Leased 94.4
Enumclaw....................................... 40 04/97 Owned 95.0
Ferndale....................................... 39 10/98 Owned 92.3
Grandview...................................... 36 02/96 Leased 91.7
Hoquiam........................................ 40 07/97 Leased 82.5
Kelso.......................................... 40 08/96 Leased 90.0
8
10
OPENING OCCUPANCY (%)
RESIDENCE UNITS DATE(1) OWNERSHIP(2) AT 12/31/00(3)
--------- ----- ------- ------------ --------------
Kennewick...................................... 36 12/95 Leased 86.1
Port Orchard................................... 39 06/97 Owned 89.7
Port Townsend.................................. 39 01/98 Owned 100.0
Spokane........................................ 39 09/97 Owned 92.3
Sumner(4)...................................... 48 03/98 Owned 83.3
Vancouver...................................... 44 06/96 Leased 86.4
Walla Walla.................................... 36 02/96 Leased 100.0
Yakima......................................... 48 07/98 Owned 97.9
-----
Sub Total............................ 639 92.2
Arizona
Apache Junction................................ 48 03/98 Owned 64.6
Bullhead City.................................. 40 08/97 Leased 70.0
Lake Havasu.................................... 36 04/97 Leased 100.0
Mesa........................................... 50 01/98 Owned 68.0
Payson......................................... 39 10/98 Owned 82.1
Peoria......................................... 50 07/99 Owned 42.0
Prescott Valley................................ 39 10/98 Owned 87.2
Surprise....................................... 50 10/98 Owned 32.0
Yuma........................................... 48 03/98 Owned 93.8
-----
Sub Total............................ 400 69.3
CENTRAL REGION
Texas
Abilene........................................ 38 10/96 Leased 86.8
Amarillo....................................... 50 03/96 Leased 96.0
Athens......................................... 38 11/95 Leased 94.7
Beaumont....................................... 50 04/96 Leased 78.0
Big Springs.................................... 38 05/96 Leased 89.5
Bryan.......................................... 30 06/96 Leased 100.0
Canyon......................................... 30 06/96 Leased 96.7
Carthage....................................... 30 10/95 Leased 96.7
Cleburne....................................... 45 01/96 Owned 100.0
Conroe......................................... 38 07/96 Leased 97.4
College Station................................ 39 10/96 Leased 76.9
Denison........................................ 30 01/96 Owned 100.0
Gainesville.................................... 40 01/96 Leased 100.0
Greenville..................................... 41 11/95 Leased 100.0
Gun Barrel City................................ 40 10/95 Leased 90.0
Henderson...................................... 30 09/96 Leased 83.3
Jacksonville................................... 39 12/95 Leased 97.4
Levelland...................................... 30 01/96 Leased 93.3
Longview....................................... 30 09/95 Leased 100.0
Lubbock........................................ 50 07/96 Leased 88.0
Lufkin......................................... 39 05/96 Leased 87.2
Marshall....................................... 40 07/95 Leased 80.0
McKinney....................................... 39 01/97 Owned 100.0
McKinney....................................... 50 05/98 Owned 84.0
Mesquite....................................... 50 07/96 Leased 98.0
9
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OPENING OCCUPANCY (%)
RESIDENCE UNITS DATE(1) OWNERSHIP(2) AT 12/31/00(3)
--------- ----- ------- ------------ --------------
Midland........................................ 50 12/96 Owned 84.0
Mineral Wells.................................. 30 07/96 Leased 100.0
Nacogdoches.................................... 30 06/96 Leased 100.0
Orange......................................... 36 03/96 Leased 88.9
Pampa.......................................... 36 08/96 Leased 91.7
Paris Oaks..................................... 50 12/98 Owned 100.0
Plainview...................................... 36 07/96 Leased 88.9
Plano.......................................... 64 05/98 Owned 76.6
Port Arthur.................................... 50 05/96 Owned 96.0
Rowlett........................................ 36 10/96 Owned 97.2
Sherman........................................ 39 10/95 Leased 102.6
Sulphur Springs................................ 30 01/96 Owned 93.3
Sweetwater..................................... 30 03/96 Leased 100.0
Temple......................................... 40 01/97 Leased 80.0
Wichita Falls.................................. 50 10/96 Leased 100.0
-----
Sub Total............................ 1,581 92.2
Nebraska
Beatrice....................................... 39 07/97 Leased 97.4
Blair.......................................... 30 07/98 Owned 70.0
Columbus....................................... 39 06/98 Owned 97.4
Fremont........................................ 39 05/98 Owned 100.0
Nebraska City.................................. 30 06/98 Owned 90.0
Norfolk........................................ 39 04/97 Leased 84.6
Seward......................................... 30 10/98 Owned 70.0
Wahoo.......................................... 39 06/97 Leased 79.5
York........................................... 39 05/97 Leased 92.3
-----
Sub Total............................ 324 87.7
Iowa
Atlantic....................................... 30 09/98 Owned 86.7
Carroll........................................ 35 01/99 Owned 100.0
Clarinda....................................... 35 09/98 Owned 100.0
Council Bluffs................................. 50 03/99 Owned 68.0
Denison........................................ 35 05/98 Leased 88.6
Sergeant Bluff................................. 39 11/99 Owned 28.2
-----
Sub Total............................ 224 76.8
SOUTHEAST REGION
Georgia
Rome........................................... 39 08/99 Owned 51.3
Florida
Defuniak Springs............................... 39 07/99 Owned 53.9
Milton......................................... 39 06/99 Owned 79.5
NW Pensacola................................... 39 06/99 Owned 43.6
Quincy......................................... 39 04/99 Owned 48.7
-----
Sub Total............................ 156 56.4
10
12
OPENING OCCUPANCY (%)
RESIDENCE UNITS DATE(1) OWNERSHIP(2) AT 12/31/00(3)
--------- ----- ------- ------------ --------------
Louisiana
Alexandria..................................... 48 07/98 Owned 45.8
Bunkie......................................... 39 01/99 Owned 59.0
Houma.......................................... 48 08/98 Owned 89.6
Ruston......................................... 39 01/99 Owned 89.7
-----
Sub Total............................ 174 70.7
South Carolina
Aiken.......................................... 39 02/98 Owned 97.4
Clinton........................................ 39 11/97 Leased 89.7
Goose Creek.................................... 39 08/98 Owned 79.5
Greenwood...................................... 39 05/98 Leased 76.9
Greer.......................................... 39 06/99 Owned 89.7
James Island................................... 39 08/98 Owned 97.4
North Augusta.................................. 39 10/98 Owned 82.1
Port Royal..................................... 39 09/98 Owned 74.4
Summerville.................................... 39 02/98 Owned 87.2
-----
Sub Total............................ 351 86.0
EAST REGION
Indiana
Bedford........................................ 39 03/98 Owned 97.4
Bloomington.................................... 39 01/98 Owned 41.0
Camby.......................................... 39 12/98 Owned 87.2
Crawfordsville................................. 39 06/99 Owned 100.0
Elkhart........................................ 39 09/97 Leased 76.9
Fort Wayne..................................... 39 06/98 Owned 53.9
Franklin....................................... 39 05/98 Owned 46.2
Huntington..................................... 39 02/98 Owned 87.2
Jeffersonville................................. 39 03/99 Owned 12.8
Kendallville................................... 39 05/98 Owned 48.7
Lafayette...................................... 39 11/99 Owned 82.1
LaPorte........................................ 39 10/98 Owned 53.9
Logansport..................................... 39 02/98 Owned 89.7
Madison........................................ 39 10/97 Leased 74.4
Marion......................................... 39 03/98 Owned 43.6
Muncie......................................... 39 02/98 Owned 89.7
New Albany..................................... 39 05/98 Owned 74.4
New Castle..................................... 39 02/98 Owned 97.4
Seymour........................................ 39 05/98 Owned 94.9
Shelbyville.................................... 39 05/98 Owned 51.3
Warsaw......................................... 39 10/97 Owned 51.3
-----
Sub Total............................ 819 69.2
Michigan
Coldwater...................................... 39 10/99 Owned 66.7
Kalamazoo...................................... 39 11/99 Owned 66.7
Three Rivers................................... 39 04/99 Owned 56.4
-----
Sub Total............................ 117 63.3
11
13
OPENING OCCUPANCY (%)
RESIDENCE UNITS DATE(1) OWNERSHIP(2) AT 12/31/00(3)
--------- ----- ------- ------------ --------------
New Jersey
Bridgeton...................................... 39 03/98 Owned 89.7
Burlington..................................... 39 11/97 Owned 94.9
Egg Harbor..................................... 39 04/99 Owned 97.4
Glassboro...................................... 39 03/97 Leased 97.4
Millville...................................... 39 05/97 Leased 92.3
Pennsville..................................... 39 11/97 Owned 94.9
Rio Grande..................................... 39 11/97 Owned 94.9
Vineland....................................... 39 01/97 Leased 82.1
-----
Sub Total............................ 312 93.0
Ohio
Bellefontaine.................................. 35 03/97 Owned 48.6
Bucyrus........................................ 35 01/97 Owned 100.0
Cambridge...................................... 39 10/97 Owned 100.0
Celina......................................... 39 04/97 Owned 76.9
Defiance....................................... 35 02/96 Owned 94.3
Findlay........................................ 39 03/97 Owned 56.4
Fremont........................................ 39 07/97 Leased 92.3
Greenville..................................... 39 02/97 Owned 100.0
Hillsboro...................................... 39 03/98 Owned 53.9
Kenton......................................... 35 03/97 Owned 91.4
Lima........................................... 39 06/97 Owned 28.2
Marion......................................... 39 04/97 Owned 92.3
Newark......................................... 39 10/97 Leased 100.0
Sandusky....................................... 39 09/98 Owned 59.0
Tiffin......................................... 35 06/97 Leased 85.7
Troy........................................... 39 03/97 Leased 100.0
Wheelersburg................................... 39 09/97 Leased 59.0
Zanesville..................................... 39 12/97 Owned 92.3
-----
Sub Total............................ 682 79.3
Pennsylvania
Butler......................................... 39 12/97 Owned 94.9
Hermitage...................................... 39 03/98 Owned 64.1
Indiana........................................ 39 03/98 Owned 71.8
Johnstown...................................... 39 06/98 Owned 56.4
Latrobe........................................ 39 12/97 Owned 92.3
Lower Burrell.................................. 39 01/97 Owned 102.6
New Castle..................................... 39 04/98 Owned 94.9
Penn Hills..................................... 39 05/98 Owned 79.5
Uniontown...................................... 39 06/98 Owned 92.3
-----
Sub Total............................ 351 82.9
-----
Grand Total.......................... 7,149 83.0%
=====
- ---------------
(1) Reflects the date operations commenced, typically the licensure date for
developed residences and the date of purchase for acquired residences.
(2) As of December 31, 2000, we owned 115 residences and we leased 70 residences
pursuant to long-term operating leases. Of the 115 owned residences, 37 are
subject to permanent mortgage financing, 3 are
12
14
subject to short-term loans which we intend to replace with permanent HUD
mortgage financing, 8 secure our litigation payable, 3 were added as
additional security for one lender and 16 were used as collateral for a
financing that occurred subsequent to December 31, 2000. See Notes 5, 8 and
19 to the consolidated financial statements included elsewhere herein.
(3) Occupancy is calculated based upon occupied units at December 31, 2000.
(4) As of December 31, 2000, Bremerton and Sumner had received notices of stop
placement of admissions and Sumner had received a notice of license
revocation from the State of Washington Department of Social and Health
Services. These matters were still outstanding at the time of this filing.
In 2000, we also leased office space for the corporate office in Portland,
Oregon and the regional offices in Vancouver, WA; Dallas, Texas; Omaha,
Nebraska; and Dublin, Ohio.
ITEM 3. LEGAL PROCEEDINGS
Securityholder Litigation Settlement
In September 2000, we reached an agreement to settle the class action
litigation relating to the restatement of our financial statements for the years
ended December 31, 1996 and 1997 and the first three fiscal quarters of 1998.
This agreement received final court approval on November 30, 2000 and we were
subsequently dismissed from the litigation with prejudice.
The total cost of the settlement was approximately $10,020,000 (less $1.0
million of legal fees and expenses reimbursed by our corporate liability
insurance carriers and other reimbursements of approximately $193,000). We made
two payments of $2.3 million each on October 23, 2000 and January 23, 2001
towards the settlement. The remaining amount due will be paid in two payments of
$2.3 million each, due on April 23, 2001 and July 23, 2001, and a final payment
of $1.0 million due within 90 days following the July 23, 2001 payment.
The settlement had been pending the approval of our corporate liability
insurance carriers who had raised certain coverage issues that resulted in the
filing of litigation between us and the carriers. These carriers consented to
the settlement, and we and the carriers agreed to dismiss the litigation
regarding coverage issues and to resolve those issues through binding
arbitration. The arbitration proceeding is pending. To the extent that the
carriers are successful, we and the carriers agreed that the carriers' recovery
is not to exceed $4.0 million. The parties further agreed that payment of any
such amount awarded will not be due in any event until 90 days after we have
satisfied our obligations to the plaintiffs in the class action, with any such
amount to be subordinated to new or refinancing of existing obligations. We
believe that we have strong defenses regarding this dispute and consequently
have not recorded a liability in relation to this matter.
As a result of the class action settlement, we recorded a charge of
approximately $10,020,000, which was partially offset by a reduction in general,
and administrative expenses of approximately $1,193,000 as a result of the
reimbursement of legal fees and expenses incurred in connection with the
litigation. The settlement resulted in an increase in net loss of $8,827,000 (or
approximately $0.52 per basic and diluted share) for the year ended December 31,
2000.
Indiana Litigation Settlement
In a lawsuit filed in 2000, the Indiana State Department of Health ("ISDH")
had alleged that we were operating our Logansport, Indiana facility known as
McKinney House as a residential care facility without a license. We believe our
services have been consistent with those of a "Housing with Services
Establishment" (which is not required to be licensed) pursuant to Indiana Code
Section 12-10-15-1.
To avoid the expense and uncertainty of protracted litigation and, also
because we wished to assure the State that we operate in a manner that is
consistent with Indiana law, we agreed to the following settlement on behalf of
all facilities owned and operated by us in the State of Indiana. The State and
ALC agreed upon a Program Description that clarifies the services that we can
provide without requiring licensure as a residential care facility. This Program
Description provides guidelines regarding the physical and medical condition of
the
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15
residents in our facilities and the services to be provided to them. We agreed
that prior to March 20, 2001, we will provide in-service training regarding the
Program Description throughout our Indiana facilities. Under the Program
Description, we must discharge residents who require certain types or levels of
care that we agreed not to provide in Indiana. We are currently implementing the
Program Description and, while its full impact is not now known, we do not
expect the impact to be material to our financial condition, results of
operations, cash flow and liquidity. Without admitting liability, we paid a
civil penalty of $10,000. The State dismissed the lawsuit against us with
prejudice.
Other Litigation
In addition to the matters referred to in the immediately preceding
paragraphs, we are involved in various lawsuits and claims arising in the normal
course of business. In the aggregate, such other suits and claims should not
have a material adverse effect on our financial condition, results of
operations, cash flow and liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
We held our Annual Meeting of Stockholders on January 16, 2001. The meeting
involved the election of six directors. The directors who were nominated and
elected to serve as directors until the 2002 Annual Meeting of Stockholders and,
in each case, until their respective successors are duly elected and qualified
were Wm. James Nicol, John M. Gibbons, Jill M. Krueger, Richard C. Ladd, Bruce
E. Toll and Leonard Tannenbaum. Shares represented at the annual meeting were
15,669,644 of total outstanding shares of 17,120,745 to reach a quorum of 91.5%.
The results of the election were at least 87.3% in favor of each of the above
six directors.
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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.
1998 1999(1) 2000
---------------- --------------- --------------
HIGH LOW HIGH LOW HIGH LOW
------ ------ ------ ----- ----- -----
Years ended December 31:
1st Quarter....................... $21.63 $17.50 $14.50 $3.31 $2.38 $1.31
2nd Quarter....................... 21.38 14.13 3.31 2.88 1.50 0.63
3rd Quarter....................... 18.00 12.44 -- -- 0.88 0.44
4th Quarter....................... 14.50 9.88 2.25 .81 0.63 0.19
- ---------------
(1) On April 15, 1999, the AMEX halted trading in the Common Stock. Trading was
resumed on October 4, 1999 after our restatement related to the years ended
December 31, 1996 and 1997 and the first three fiscal quarters of 1998 was
completed.
As of December 31, 2000, we had approximately 99 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 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.
Our common stock currently is listed on the AMEX under the symbol "ALF,"
our 5.625% Convertible Subordinated Debentures due 2003 (the "5.625%
Debentures") currently are listed on AMEX under the symbol "ALS5E03" and our
6.0% Convertible Subordinated Debentures due 2002 (the "6.0% Debentures")
currently are listed on AMEX under the symbol "ALS6K02." AMEX recently notified
us that we had fallen below certain of AMEX's continued listing guidelines and
that it was reviewing our listing eligibility. In particular, we have incurred
losses from continued operations for each of its past six fiscal years ending
December 31, 2000, and the price per share of our common stock as quoted on AMEX
recently has been below the minimum bid price of $1.00 per share. We may choose
to effect a reverse stock split in the event that the price of our common stock
does not otherwise meet the minimum bid requirement. However, we reported a net
loss of $1.51 per basic and diluted share for the year ended December 31, 2000,
and may not report net income in the near future. We have provided AMEX with
additional information and have been involved in ongoing discussions with AMEX
in connection with its review of our listing eligibility. While AMEX has decided
not to delist us at this time, they will continue to review our listing status
on a quarterly basis.
If AMEX were to delist our securities, it is possible that the securities
would continue to trade on the over-the-counter market. However, the extent of
the public market for the securities and the availability of quotations would
depend upon such factors as the aggregate market value of each class of the
securities, the interest in maintaining a market in such securities on the part
of securities firms and other factors. There can be no assurance that any public
market for our securities will exist in the event that such securities are
delisted.
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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, 1998, 1999 and 2000, as well as the consolidated balance sheet data as of
December 31, 1999 and 2000, 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."
YEARS ENDED DECEMBER 31,
------------------------------------------------------
1996 1997 1998 1999 2000
------- ------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenue..................................................... $21,022 $49,605 $ 89,384 $117,489 $139,423
Operating expenses:
Residence operating expenses.............................. 14,055 31,591 57,443 81,767 95,032
Corporate general and administrative...................... 1,864 4,050 11,099 21,178 18,365
Building rentals.......................................... 3,949 7,969 12,764 15,367 16,004
Depreciation and amortization............................. 1,094 3,683 6,339 8,981 9,923
Litigation settlement..................................... -- -- -- -- 10,020
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............................ 20,962 47,293 99,611 132,433 149,344
------- ------- -------- -------- --------
Operating income (loss)..................................... 60 2,312 (10,227) (14,944) (9,921)
------- ------- -------- -------- --------
Other income (expense):
Interest expense.......................................... (1,146) (4,946) (11,039) (15,200) (16,363)
Interest income........................................... 455 1,526 3,869 1,598 786
Gain (loss) on sale of assets............................. (854) (1,250) (651) (127) 13
Loss on sale of marketable securities..................... -- -- -- -- (368)
Debenture conversion costs................................ (426) -- -- -- --
Other income (expense), net............................... (4) (121) (1,174) (260) 67
------- ------- -------- -------- --------
Total other expense................................. (1,975) (4,791) (8,995) (13,989) (15,865)
------- ------- -------- -------- --------
Loss before cumulative effect of change in accounting
principle................................................. (1,915) (2,479) (19,222) (28,933) (25,786)
Cumulative effect of change in accounting principle......... -- -- (1,523) -- --
------- ------- -------- -------- --------
Net loss.................................................... $(1,915) $(2,479) $(20,745) $(28,933) $(25,786)
======= ======= ======== ======== ========
Basic and diluted net loss per common share:
Loss before cumulative effect of change in accounting
principle................................................. $ (0.23) $ (0.21) $ (1.18) $ (1.69) $ (1.51)
Cumulative effect of change in accounting principle......... -- -- (0.09) -- --
------- ------- -------- -------- --------
Basic and diluted net loss per common share................. $ (0.23) $ (0.21) $ (1.27) $ (1.69) $ (1.51)
======= ======= ======== ======== ========
Basic and diluted weighted average common shares
outstanding............................................... 8,404 11,871 16,273 17,119 17,121
======= ======= ======== ======== ========
AT DECEMBER 31,
--------------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 2,105 $ 63,269 $ 55,036 $ 7,606 $ 9,889
Working capital (deficit)................................... (27,141) 40,062 43,856 37 (16,983)
Total assets................................................ 147,223 324,367 414,669 346,188 336,458
Long-term debt, excluding current portion................... 49,663 157,700 266,286 233,199 231,657
Shareholders' equity........................................ 56,995 132,244 119,197 89,344 63,886
16
18
QUARTERLY FINANCIAL DATA
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE, OCCUPANCY AND AVERAGE RENTAL DATA)
1999 QUARTERLY FINANCIAL DATA 2000 QUARTERLY FINANCIAL DATA
------------------------------------------------ -------------------------------------------------
1ST 2ND 3RD 4TH YEAR TO 1ST 2ND 3RD 4TH YEAR TO
RESULTS OF OPERATIONS QTR QTR QTR QTR DATE QTR QTR QTR QTR DATE
--------------------- ------- ------- ------- ------- -------- ------- ------- -------- ------- --------
Revenue.................... $26,583 $28,479 $30,398 $32,029 $117,489 $33,132 $34,146 $ 35,308 $36,837 $139,423
Operating income (loss).... (4,243) (6,115) (2,561) (2,025) (14,944) 28 434 (8,598) (1,785) (9,921)
Net loss................... (7,660) (9,006) (6,256) (6,011) (28,933) (3,791) (3,821) (12,445) (5,729) (25,786)
Basis and diluted net loss
per common share(1)...... $ (0.45) $ (0.53) $ (0.37) $ (0.35) $ (1.69) $ (.22) $ (.22) $ (.73) $ (.34) $ (1.51)
Basic and diluted weighted
average common shares
outstanding.............. 17,116 17,116 17,121 17,121 17,119 17,121 17,121 17,121 17,121 17,121
Average monthly rental rate
per unit................. $ 1,871 $ 1,881 $ 1,903 $ 1,926 $ 1,898 $ 1,947 $ 1,974 $ 2,002 $ 2,038 $ 1,991
Average occupancy
rate(2).................. 72.9% 74.3% 76.0% 77.5% 75.1% 78.4% 79.8% 81.4% 83.1% 80.7%
End of period occupancy
rate(2).................. 73.2% 75.9% 76.5% 78.7% 78.7% 79.6% 81.6% 82.6% 83.0% 83.0%
- ---------------
(1) Quarter net loss per share amounts may not add to the full year total due to
rounding.
(2) Based upon available units.
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ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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. We
provide personal care and support services, and make available routine nursing
services (as permitted by applicable law) designed to meet the personal and
health care needs of our residents. As of December 31, 2000, we had operations
in 16 states.
We experienced significant and rapid growth between 1994 and 1998,
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 had an operating base of five
leased residences (137 units) located in Oregon. We opened twenty residences
(798 units) in 1999 and no residences in 2000. As of December 31, 2000, we
operated 185 residences (7,149 units), of which we owned 115 residences (4,515
units) and leased 70 residences (2,634 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 regional management and
corporate support functions such as legal, accounting and other
administrative expenses;
- building rentals; and
- depreciation and amortization.
We anticipate that the majority of our revenues will continue to come from
private pay sources. However, we believe that by having located residences in
states with favorable regulatory and reimbursement climates, we should have 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 manage the mix of private paying tenants and Medicaid paying
tenants residing in our facilities, any significant increase in our Medicaid
population could have an adverse effect on our financial position, results of
operations or cash flows, particularly if states operating these programs
continue to or more aggressively seek limits on reimbursement rates. See "Risk
Factors -- We depend on reimbursement by third-party payors."
We believe that our current cash on hand, cash available from operations
and financing by Heller will be sufficient to meet our working capital needs
through July 2002. However, we will have up to $45.0 million in principal from
the Heller financing maturing on August 31, 2002 (unless the five wholly owned
subsidiaries, which are the borrowers, are able to and do extend the maturity
dates for up to three six-month extensions), and have $161.3 million (less any
amounts repurchased with the Heller line of credit) in principal amount of
convertible debentures maturing between November 2002 and May 2003. We also
expect the cost to maintain our long-lived assets in their present condition to
increase; however, we cannot yet estimate the financial impact since our
experience is limited due to the newness of these assets.
We are currently exploring various alternatives to address our financing
needs and the maturities of our long-term debt. The Heller and Red Mortgage
financings have been sought to fund potential working capital needs, to fund the
cost of our shareholders' litigation settlement, the repurchase of 16 of our
leased properties and the repurchase of some of our convertible debentures in
the open market. We expect to replace the Red Mortgage financing with long-term
HUD mortgage loans and we also expect to replace a substantial portion of
18
20
the Heller financing with long-term HUD mortgage loans, to the extent the
processing time and increasing limitations by HUD on submission of applications
and amount financed permit. In addition, we are also considering issuing new
securities with longer maturities to the holders of our convertible debentures
in exchange for some or all of their debentures. We have 48 unencumbered
residences available to use as collateral for these various alternatives, 47 of
which are subject to negative covenants not to encumber them except under
certain circumstances, including the use of the net proceeds of the financing
which they secure for the reduction of our indebtedness to our convertible
debenture holders. No commitments are currently in place and there can be no
assurance that our efforts will be successful, in which event we will have to
consider other alternatives, including reorganization under the bankruptcy laws
or raising highly dilutive capital through the issuance of equity or
equity-related securities.
RESULTS OF OPERATIONS
The following table sets forth, for the periods presented, operating
expenses as a percentage of revenue.
YEARS ENDED DECEMBER 31,
--------------------------
1998 1999 2000
------ ------ ------
Revenue..................................................... 100.0% 100.0% 100.0%
Operating expenses:
Residence operating expenses.............................. 64.3% 69.6% 68.1%
Corporate general and administrative...................... 12.4% 18.0% 13.2%
Building rentals.......................................... 12.8% 12.0% 10.6%
Building rentals to related party......................... 1.5% 1.1% 0.9%
Depreciation and amortization............................. 7.1% 7.6% 7.1%
Litigation settlement..................................... -- -- 7.2%
Terminated merger expense................................. 1.2% 0.2% --
Site abandonment costs.................................... 2.7% 4.2% --
Write-off of impaired assets and related expenses......... 9.5% -- --
----- ----- -----
Total operating expenses.......................... 111.4% 112.7% 107.1%
----- ----- -----
Operating loss.............................................. (11.4)% (12.7)% (7.1)%
----- ----- -----
Other income (expense):
Interest expense.......................................... (12.4)% (12.9)% (11.7)%
Interest income........................................... 4.3% 1.4% 0.6%
Gain (loss) on sale of assets............................. (0.7)% (0.1)% --
Loss on sale of marketable securities..................... -- -- (0.3)%
Other income (expense), net............................... (1.3)% (0.2)% --
----- ----- -----
Total other income (expense)...................... (10.1)% (11.9)% (11.4)%
----- ----- -----
Loss before cumulative effect of change in accounting
principle................................................. (21.5)% (24.6)% (18.5)%
Cumulative effect of change in accounting principle......... (1.7)% -- --
----- ----- -----
Net loss.................................................... (23.2)% (24.6)% (18.5)%
===== ===== =====
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21
The following table sets forth, for the 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."
YEARS ENDED DECEMBER 31,
--------------------------
TOTAL RESIDENCES 1998 1999 2000
---------------- ------ ------ ------
Residences operated (end of period)......................... 165 185 185
Units operated (end of period).............................. 6,329 7,148 7,149
Average occupancy rate (based on occupied units)............ 72.3% 75.1% 80.7%
Sources of revenue:
Medicaid state portion.................................... 10.7% 10.4% 11.1%
Medicaid resident portion................................. 5.8% 5.9% 6.2%
Private................................................... 83.5% 83.7% 82.7%
----- ----- -----
Total............................................. 100.0% 100.0% 100.0%
===== ===== =====
The following table sets forth, for the periods presented, the total number
of residences and units operated, average occupancy rates and the sources of our
revenue for 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 and the 165 Same Store
Residences included in operating results for all of fiscal years 1999 and 2000.
Same Store Residences are defined as those residences, which were operating
throughout comparable periods.
YEARS ENDED YEARS ENDED YEARS ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
-------------- -------------- --------------
SAME STORE RESIDENCES 1997 1998 1998 1999 1999 2000
--------------------- ----- ----- ----- ----- ----- -----
Residences operated (end of period)........ 59 59 108 108 165 165
Units operated (end of period)............. 2,104 2,157 4,035 4,048 6,350 6,351
Average occupancy rate (based on occupied
units)................................... 86.9% 93.5% 80.5% 84.7% 77.8% 83.7%
Sources of revenue:
Medicaid state portion................... 11.9% 15.1% 12.7% 13.4% 10.8% 12.1%
Medicaid resident portion................ 6.5% 8.7% 6.9% 7.7% 6.1% 6.7%
Private.................................. 81.6% 76.2% 80.4% 78.9% 83.1% 81.2%
----- ----- ----- ----- ----- -----
Total............................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== ===== =====
The following table sets forth, for the periods presented, the results of
operations for 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 and the 165 Same Store
Residences included in operating results for all of fiscal years 1999 and 2000
(in thousands).
YEARS ENDED YEARS ENDED YEARS ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
----------------- ----------------- -------------------
SAME STORE RESIDENCES 1997 1998 1998 1999 1999 2000
--------------------- ------- ------- ------- ------- -------- --------
Revenue................................ $38,274 $42,002 $70,920 $77,881 $113,511 $127,943
Residence operating expenses........... 22,908 24,801 43,659 52,154 77,396 85,689
------- ------- ------- ------- -------- --------
Residence operating income............. 15,366 17,201 27,261 25,727 36,115 42,254
Building rentals....................... 5,635 6,375 12,385 14,825 15,336 15,977
Depreciation and amortization.......... 2,280 1,647 3,451 3,067 7,181 7,181
------- ------- ------- ------- -------- --------
Total other operating
expenses................... 7,915 8,022 15,836 17,892 22,517 23,158
------- ------- ------- ------- -------- --------
Operating income............. $ 7,451 $ 9,179 $11,425 $ 7,835 $ 13,598 $ 19,096
======= ======= ======= ======= ======== ========
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Year ended December 31, 2000 compared to year ended December 31, 1999:
CONSOLIDATED SAME STORE RESIDENCES
YEARS ENDED DECEMBER 31, YEARS ENDED DECEMBER 31,
------------------------------ ------------------------------
INCREASE/ INCREASE/
1999 2000 (DECREASE) 1999 2000 (DECREASE)
------ ------ ---------- ------ ------ ----------
(IN MILLIONS) (IN MILLIONS)
Revenue......................... $117.5 $139.4 18.6% $113.5 $127.9 12.7%
Operating expenses:
Residence operating
expenses................... 81.8 95.0 16.1% 77.4 85.7 10.7%
Corporate general and
administrative............. 21.2 18.4 (13.2)% -- -- --
Building rentals.............. 15.4 16.0 3.9% 15.3 16.0 4.6%
Depreciation and
amortization............... 9.0 9.9 10.0% 7.2 7.2 --
Litigation settlement......... -- 10.0 100.0% -- -- --
Terminated merger expense..... 0.2 -- (100.0)% -- -- --
Site abandonment costs........ 4.9 -- (100.0)% -- -- --
------ ------ ------ ------ ------ ----
Total operating
expenses............ 132.5 149.3 12.7% 99.9 108.9 9.0%
------ ------ ------ ------ ------ ----
Operating income
(loss).............. $(15.0) $ (9.9) 34.0% $ 13.6 $ 19.0 39.7%
====== ====== ====== ====== ====== ====
We incurred a net loss of $25.8 million, or $1.51 per basic and diluted
share, on revenue of $139.4 million for the year ended December 31, 2000 (the
"2000 Period") as compared to 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").
We had certificates of occupancy for 185 residences, all of which were
included in the operating results as of the end of both the 2000 Period and 1999
Period. Of the residences included in operating results as of the end of the
2000 Period and 1999 Period, we owned 115 residences and leased 70 residences
(all of which were operating leases).
Revenue. Revenue was $139.4 million for the 2000 Period as compared to
$117.5 million for the 1999 Period, an increase of $21.9 million or 18.6%.
The increase includes:
- $7.5 million related to the full year impact of the 20 residences (798
units) which opened during the 1999 Period;
- $14.4 million was attributable to the 165 Same Store Residences (6,351
units).
Revenue from the Same Store Residences was $127.9 million for the 2000
Period as compared to $113.5 million for the 1999 Period, an increase of $14.4
million or 12.7%. The increase in revenue from Same Store Residences was
attributable to a combination of an increase in average occupancy to 83.7% and
average monthly rental rate to $1,985 for the 2000 Period as compared to average
occupancy of 77.8% and average monthly rental rate of $1,891 for these same
stores in the 1999 Period.
Residence Operating Expenses. Residence operating expenses were $95.0
million for the 2000 Period as compared to $81.8 million for the 1999 Period, an
increase of $13.2 million or 16.2%.
The increase includes:
- $4.9 million related to the full year impact of the 20 residences (798
units) which opened during the 1999 Period;
- $8.3 million was attributable to the 165 Same Store Residences (6,351
units).
Residence operating expenses for the Same Store Residences were $85.7
million for the 2000 period as compared to $77.4 million for the 1999 Period, an
increase of $8.3 million or 10.7%.
21
23
The principal elements of the increase in Same Store residence operating
expenses are:
- $4.2 million related to additional payroll expenses incurred in
connection with the increase in occupancy at the Same Store Residences
during the period;
- $1.4 million related to increase in real estate taxes as a result of
changes in assessments;
- $1.3 million related to provision for uncollectible rent due to the
completion of an assessment of our accounts receivable collections
process begun during the three months ended December 31, 2000. As a
result, we increased our provision for bad debts, primarily related to
private pay accounts, and wrote off or reserved balances where the
probability of collection was low;
- $378,000 related to increase in utility costs as a result of increase in
rates and increase in usage as result of an increase in occupancy; and
- $277,000 related to increase in maintenance expense associated with the
upkeep of our buildings.
Corporate General and Administrative. Corporate general and administrative
expenses as reported were $18.4 million for the 2000 Period as compared to $21.2
million for the 1999 Period. Our corporate general and administrative expenses
before capitalized payroll costs were $21.8 million for the 1999 Period compared
to $18.4 million for the 2000 Period, a decrease of $3.4 million. The principal
elements of the decrease include:
- $2.8 million related to decreased professional fees primarily associated
with legal, financial advisory and accounting costs due to regulatory
issues, securityholder litigation and the restatement of our financial
statements for the years ended December 31, 1996, 1997 and the first
three fiscal quarters of 1998;
- $1.2 million as a result of reimbursement of legal and professional fees
from our insurance carrier as a result of the settlement of our
litigation related to the restatement of the financial statements for the
years ended December 31, 1996 and 1997 and the first three fiscal
quarters of 1998. Of the $1.2 million in reimbursements, we incurred
approximately $600,000 of these expenses during the 2000 Period and the
remaining $600,000 during the year ended December 31, 1999; and
- $1.8 million in the 1999 Period related to the final operations of our
home health business.
The decrease was offset by increases in corporate, general and
administrative expense of:
- $1.3 million related to increased network costs associated with the
development of our communications infrastructure, including dial-up and
intranet access for our remote locations;
- $500,000 related to increased payroll costs, including severance costs of
$1.2 million relating to former officers; and
- $700,000 related to increased premiums for our directors and officers and
liability insurance policies.
We capitalized $617,000 of payroll costs associated with the development of
new residences during the 1999 Period. Since we discontinued our development
activities during the 1999 Period, we did not capitalize any payroll costs in
the 2000 Period.
Building Rentals. Building rentals were $16.0 million for the 2000 Period
as compared to $15.4 million for the 1999 Period, an increase of $600,000 or
3.9%. This increase was primarily attributable to the additional rental expense
associated with the March 1999 amendment of 16 of our leases which were
previously accounted for as financings. The amendment eliminated our continuing
involvement in the residences in the form of a fair value purchase option. As a
result of the amendment, the leases have been reclassified as operating leases
for the last nine months of the 1999 Period and the full 2000 Period.
Depreciation and Amortization. Depreciation and amortization was $9.9
million for the 2000 Period as compared to $9.0 million for the 1999 Period, an
increase of $900,000 or 10.0%. Depreciation expense was $9.6 million and
amortization expense related to goodwill was $292,000 for the 2000 Period as
compared to $8.7 million and $294,000, respectively, for the 1999 Period. The
increase in depreciation is the result of a full
22
24
year of depreciation associated with the 20 owned residences that commenced
operations during the 1999 Period.
Litigation Settlement. During the third quarter of the 2000 Period we
settled the class action litigation against us related to the restatement of our
financial statements for the years ended December 31, 1996 and 1997 and the
first three fiscal quarters of 1998. The total cost of this settlement to us was
$10.0 million. Accordingly, we recognized a charge of $10.0 million during the
2000 Period. We received reimbursements of approximately $1.2 million from our
corporate liability insurance carriers and other parties in relation to the
settlement. The $1.2 million of reimbursements has been recorded as a reduction
of corporate, general and administrative expenses as discussed above.
Site Abandonment Costs. 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.
Interest Expense. Interest expense was $16.4 million for the 2000 Period as
compared to $15.2 million for the 1999 Period. Interest expense before
capitalization for the 2000 Period was $16.4 million as compared to $17.2
million for the 1999 Period, a net decrease of $800,000.
Interest expense decreased by:
- $840,000 due to the March 1999 amendment of 16 of our operating leases
which were previously accounted for as financings. As a result, the
leases were accounted for as operating leases, effective March 31, 1999.
Accordingly, rent expense related to such leases after the date of the
amendment, has been classified as building rentals, rather than interest
expense;
- $80,000 due to financing fees related to variable rate debt and letter of
credit renewals; and
- $95,000 due to interest expense associated with the repayment of joint
venture advances in February 1999.
This decrease was offset by an increase in interest expense of $215,000 as
a result of increases in interest rates on variable rate debt.
We capitalized $2.0 million of interest expense for the 1999 Period. There
was no capitalized interest in the 2000 Period as a result of the
discontinuation of our development activities.
Interest Income. Interest income was $786,000 for the 2000 Period as
compared to $1.6 million for the 1999 Period, a decrease of $814,000. The
decrease is related to interest income earned on lower average cash balances
during the 2000 Period.
Loss on Sale of Marketable Securities. Loss on sale of marketable
securities was $368,000 for the 2000 Period as a result of the sale of
securities with a historical cost basis of $2.0 million for proceeds of $1.6
million.
Gain (Loss) on Sale of Assets. Gain on sale of assets was $13,000 for the
2000 Period as compared to a loss of $127,000 for the 1999 Period. The gain
during the 2000 Period was related to the sale of miscellaneous equipment. The
loss during the 1999 Period was related to the disposal of leasehold
improvements associated with relocating our corporate offices in January 1999.
Other Income (Expense). Other income was $67,000 for the 2000 Period as
compared to other expense of $260,000 for the 1999 Period. Other income during
the 2000 Period was primarily related to a contract to provide development
services to a third party. 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.
Net Loss. As a result of the above, net loss was $25.8 million or $1.51 per
basic and diluted share for the 2000 Period, compared to a net loss of $28.9
million or $1.69 loss per basic and diluted share for the 1999 Period.
23
25
Year ended December 31, 1999 compared to year ended December 31, 1998:
CONSOLIDATED SAME STORE RESIDENCES
YEARS ENDED DECEMBER 31, YEARS ENDED DECEMBER 31,
------------------------------ ----------------------------
INCREASE/ INCREASE/
1998 1999 (DECREASE) 1998 1999 (DECREASE)
------ ------ ---------- ----- ----- ----------
(IN MILLIONS) (IN MILLIONS)
Revenue........................... $ 89.4 $117.5 31.4% $70.9 $77.9 9.9%
Operating expenses:
Residence operating expenses.... 57.4 81.8 42.5% 43.7 52.2 19.5%
Corporate general and
administrative............... 11.1 21.2 91.0% -- -- --
Building rentals................ 12.8 15.4 20.3% 12.4 14.8 19.4%
Depreciation and amortization... 6.3 9.0 42.9% 3.5 3.1 (11.4)%
Terminated merger expense....... 1.1 0.2 (81.8)% -- -- --
Site abandonment costs.......... 2.4 4.9 104.2% -- -- --
Write off of impaired assets and
related expenses............. 8.5 -- (100.0)% -- -- --
------ ------ ------ ----- ----- -----
Total operating
expenses.............. 99.6 132.5 33.0% 59.6 70.1 17.6%
------ ------ ------ ----- ----- -----
Operating income
(loss)................ $(10.2) $(15.0) 47.1% $11.3 $ 7.8 (31.0)%
====== ====== ====== ===== ===== =====
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 or 31.4%.
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 for 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 9.9%. The increase in revenue from Same Store Residences was
attributable to a combination of an increase in average occupancy to 84.7% and
average
24
26
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.
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 or 42.5%.
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 Administrative 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.
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 financial statements for the years ended December 31, 1996, 1997
and the first three fiscal quarters of 1998;
- $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.
25
27
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 a $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.
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.
26
28
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 a net loss of $20.7 million or $1.27 loss per basic and diluted share for the
1998 Period.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2000, we had a working capital deficit of $17.0 million
(including current portion of settlement payable of $7.8 million) and
unrestricted cash and cash equivalents of $9.9 million.
Net cash provided by operating activities was $700,000 during the year
ended December 31, 2000.
Net cash used in investing activities totaled $808,000 during the year
ended December 31, 2000. The primary sources of cash were $1.6 million related
to the sale of marketable securities and a decrease of $1.1 million of
restricted cash due to the release of funds restricted per the terms of
agreements with U.S. Bank. We used $3.5 million of cash in investing activities
related to capital expenditures.
Net cash provided by financing activities totaled $2.4 million during the
year ended December 31, 2000. Proceeds of $4.0 were received on a short-term
bridge loan secured by three previously encumbered assets. The use of cash in
financing activities was due to principal payments on long term debt of $1.6
million.
On March 12, 2001, we amended certain loan documents with U.S. Bank.
Pursuant to the amendment, we agreed to pay fees of $34,700 in exchange for the
following: the modification of certain financial covenants, and the waiver of
U.S. Bank's right to declare an event of default for our failure to comply with
certain financial covenants as of December 31, 2000 and for our anticipated
failure to comply with certain financial covenants for the three months ending
March 31, 2001. The amendment also provides the following: approval for us to
repurchase for cash up to $25.0 million in face value of our convertible
debentures prior to maturity; a requirement that we deposit $500,000 in cash
collateral with U.S. Bank in the event certain regulatory actions are commenced
with respect to the properties securing our obligations to U.S. Bank; and the
requirement that U.S. Bank release such deposits to us upon satisfactory
resolution of the regulatory action. 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 loan documents to be due and
payable. In addition, certain of our leases and
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loan agreements contain covenants and cross-default provisions such that a
default on one of those agreements could cause us to be in default on one or
more other agreements.
In November 2000, we entered into a short-term bridge loan with Red
Mortgage in the amount of $4.0 million secured by three previously unencumbered
properties. This loan matures on August 1, 2001, requires monthly interest-only
payments and bears interest at the greater of 10% or LIBOR plus 3.5%. We intend
to replace this loan with long-term HUD financing prior to its maturity.
On March 2, 2001, we entered into an agreement with Heller for a $45.0
million line of credit, under which five wholly owned subsidiaries are the
jointly and severally liable borrowers of any funds drawn. This line matures on
August 31, 2002 and requires monthly interest-only payments until maturity. This
line bears an interest rate of 3.85% over the three-month LIBOR rate floating
monthly and will be secured by up to 32 properties owned by the borrowers and
leased to another of our affiliates or us. We guaranteed the line. In addition
to having paid a commitment fee of $450,000, we are to pay funding fees of 0.5%
of the principal amount funded at the time of funding and pay an exit fee of
1.0% of the principal being repaid. The borrowers may elect to exercise up to
three six-month extensions of the maturity date, subject to the satisfaction of
certain conditions. We intend to replace a substantial portion of this financing
with long-term HUD financing to the extent the processing time and increasing
limitations by HUD on submission of applications and amount financed permit.
While the line remains outstanding, we have agreed that we will not sell or
grant mortgages on our remaining unencumbered properties, except one, unless the
net proceeds are used to repurchase our convertible debentures or otherwise
reduce our indebtedness (if approved by Heller). Proceeds of the line may be
used for the payment of our shareholders' litigation settlement, the repurchase
of 16 of our leased properties and the repurchase of some of our convertible
debentures. Our initial draw on this line was $1.3 million on March 2, 2001.
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, general economic, financial, competitive, legislative,
regulatory and other factors that are beyond our control. We made two payments
of approximately $2.3 million each towards our litigation settlement on October
23, 2000 and January 23, 2001 and on November 1, 2000 we made our $4.7 million
semi-annual interest payment on our convertible subordinated debentures. We are
obligated to pay the remaining $5.6 million related to the litigation settlement
in two installments of approximately $2.3 million each, due on April 23, 2001
and July 23, 2001, with final payment of $1.0 million due within 90 days
following the July 23, 2001 payment. Additionally, our next $4.7 million
semi-annual interest payment on our convertible subordinated debentures is due
on May 1, 2001. We may also be required to reimburse our insurance carriers for
up to $4.0 million of costs incurred by the carriers in connection with the
securityholder litigation, depending on the outcome of a pending dispute over
coverage (see Part I, Item 3 of this report).
We believe that our current cash on hand, cash available from operations
and financing by Heller will be sufficient to meet our working capital needs
through July 2002. However, we will have up to $45.0 million in principal from
the Heller financing maturing on August 31, 2002 (unless the five wholly owned
subsidiaries, which are the borrowers, are able to and do extend the maturity
dates for up to three six-month extensions), and have $161.3 million (less any
amounts repurchased with the Heller line of credit) in principal amount of
convertible debentures maturing between November 2002 and May 2003. We also
expect the cost to maintain our long-lived assets in their present condition to
increase; however, we cannot yet estimate the financial impact since our
experience is limited due to the newness of these assets.
Approximately $27.2 million of our indebtedness was secured by letters of
credit as of December 31, 2000 which in some cases have termination dates prior
to the maturity of the underlying debt. As such letters of credit expire,
beginning in 2003, 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.
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We are currently exploring various alternatives to address our financing
needs and the maturities of our long-term debt. The Heller and Red Mortgage
financings have been sought to fund potential working capital needs, to fund the
cost of our shareholders' litigation settlement, the repurchase of 16 of our
leased properties and the repurchase of some of our convertible debentures in
the open market. We expect to replace the Red Mortgage financing with long-term
HUD mortgage loans and we also expect to replace a substantial portion of the
Heller financing with long-term HUD mortgage loans, to the extent the processing
time and increasing limitations by HUD on submission of applications and amount
financed permit. In addition, we are also considering issuing new securities
with longer maturities to the holders of our convertible debentures in exchange
for some or all of their convertible debentures. We have 48 unencumbered
residences available to use as collateral for these various alternatives, 47 of
which are subject to negative covenants not to encumber them except under
certain circumstances, including the use of the net proceeds of the financing
which they secure for the reduction of our indebtedness to our convertible
debenture holders. No commitments are currently in place and there can be no
assurance that our efforts will be successful, in which event we will have to
consider other alternatives, including reorganization under the bankruptcy laws
or raising highly dilutive capital through the issuance of equity or
equity-related securities.
INFLATION
We do not believe that inflation has materially adversely affected our
operations. We expect, however, that 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 (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for
Derivative Instrument and Hedging Activities, as amended, which establishes
accounting and reporting standards for derivative instruments and hedging
activities by requiring that all derivatives be recognized into the balance
sheet and measured at fair value. The effective date for SFAS No. 133 for the
Company is January 1, 2001. At the current time, we do not have any derivative
financial instruments.
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 litigation
described in this report, (iii) the possibility that we will experience slower
fill-up of our newer residences and/or declining occupancy in our stabilized
residences, either of which would adversely affect residence revenues and
operating margins, (iv) our ability to operate our facilities in compliance with
evolving regulatory requirements and (v) the possibility that we will not be
able to obtain financing needed to fund our future operations and retire our
6.0% Debentures and our 5.625% Debentures due in 2002 and 2003, respectively. 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.
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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 $237.3 million as of December 31, 2000. In addition, we had
shareholders' equity of $63.9 million as of December 31, 2000. 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 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. On March 12, 2001, we amended
certain loan documents with U.S. Bank. Pursuant to the amendment, we agreed to
pay fees of $34,700 in exchange for the following: the modification of certain
financial covenants, and the waiver of U.S. Bank's right to declare an event of
default for our failure to comply with certain financial covenants as of
December 31, 2000 and for our anticipated failure to comply with certain
financial covenants for the three months ending March 31, 2001. The amendment
also provides for the following: approval for us to repurchase for cash up to
$25.0 million in face value of our convertible debentures prior to maturity; a
requirement that we deposit $500,000 in cash collateral with U.S. Bank in the
event certain regulatory actions are commenced with respect to the properties
securing our obligations to U.S. Bank; and the requirement that U.S. Bank
release such deposits to us satisfactory resolution of the regulatory action. We
cannot provide assurance that we will comply in the future with the modified
financial covenants included in the agreement, or with the financial covenants
set forth in our other debt agreements and leases. 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; and
- in the case of a lease, terminating the lease and suing for damages.
In addition, many of our debt instruments and leases contain
"cross-default" provisions pursuant to which a default under one obligation can
cause a default under one or more other obligations. Accordingly, we could
experience a material adverse effect on our financial condition if any lender or
lessor notifies us that we are in any such cross-default under any debt
instrument or lease.
WE WILL 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, general economic, financial, competitive, legislative,
regulatory and other factors that are beyond our control. We made two payments
of approximately $2.3 million each towards our litigation settlement on October
23, 2000 and January 23, 2001 and on November 1, 2000 we made our $4.7 million
semi-annual interest payment on our convertible subordinated debentures. We are
obligated to pay the remaining $5.6 million related to the litigation settlement
in two installments of approximately $2.3 million each, due on April 23, 2001
and July 23, 2001, with final payment of $1.0 million due within 90 days
following the July 23, 2001 payment. Additionally, our next $4.7 million
semi-annual interest payment on our convertible subordinated debentures is due
on May 1, 2001. We may also be required to reimburse our
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insurance carriers for up to $4.0 million of costs incurred by the carriers in
connection with the securityholder litigation, depending on the outcome of a
pending dispute over coverage (see Part I, Item 3 of this report).
We believe that our current cash on hand, cash available from operations
and financing by Heller will be sufficient to meet our working capital needs
through July 2002. However, we will have up to $45.0 million in principal from
the Heller financing maturing on August 31, 2002 (unless the five wholly owned
subsidiaries, which are the borrowers, are able to and do extend the maturity
dates for up to three six-month extensions), and have $161.3 million (less any
amounts repurchased with the Heller line of credit) in principal amount of
convertible debentures maturing between November 2002 and May 2003. We also
expect the cost to maintain our long-lived assets in their present condition to
increase; however, we cannot yet estimate the financial impact since our
experience is limited due to the newness of these assets.
We are currently exploring various alternatives to address our financing
needs and the maturities of our long-term debt. The Heller and Red Mortgage
financings have been sought to fund potential working capital needs, to fund the
cost of our shareholders' litigation settlement, the repurchase of 16 of our
leased properties and the repurchase of some of our convertible debentures in
the open market. We expect to replace the Red Mortgage financing with long-term
HUD mortgage loans and we also expect to replace a substantial portion of the
Heller financing with long-term HUD mortgage loans, to the extent the processing
time and increasing limitations by HUD on submission of applications and amount
financed permit. In addition, we are also considering issuing new securities
with longer maturities to the holders of our convertible debentures in exchange
for some or all of their debentures. We have 48 unencumbered residences
available to use as collateral for these various alternatives, 47 of which are
subject to negative covenants not to encumber them except under certain
circumstances, including the use of the net proceeds of the financing which they
secure for the reduction of our indebtedness to our convertible debenture
holders. No commitments are currently in place and there can be no assurance
that our efforts will be successful, in which event we will have to consider
other alternatives, including reorganization under the bankruptcy laws or
raising highly dilutive capital through the issuance of equity or equity-related
securities.
Approximately $27.2 million of our indebtedness was secured by letters of
credit as of December 31, 2000 which in some cases have termination dates prior
to the maturity of the underlying debt. As such letters of credit expire,
beginning in 2003, 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.
POSSIBLE AMERICAN STOCK EXCHANGE DELISTING.
Our common stock currently is listed on the AMEX under the symbol "ALF,"
our 5.625% Debentures currently are listed on AMEX under the symbol "ALS5E03"
and our 6.0% Debentures currently are listed on AMEX under the symbol "ALS6K02."
AMEX recently notified us that we had fallen below certain of AMEX's continued
listing guidelines and that it was reviewing our listing eligibility. In
particular, we have incurred losses from continued operations for each of its
past six fiscal years ending December 31, 2000, and the price per share of our
common stock as quoted on AMEX recently has been below the minimum bid price of
$1.00 per share. We may choose to effect a reverse stock split in the event that
the price of our common stock does not otherwise meet the minimum bid
requirement. However, we reported a net loss of $1.51 per basic and diluted
share for the year ended December 31, 2000, and may not report net income in the
near future. We have provided AMEX with additional information and have been
involved in ongoing discussions with AMEX in connection with its review of our
listing eligibility. While AMEX has decided not to delist us at this time, they
will continue to review our listing status on a quarterly basis.
If AMEX were to delist our securities, it is possible that the securities
would continue to trade on the over-the-counter market. However, the extent of
the public market for the securities and the availability of quotations would
depend upon such factors as the aggregate market value of each class of the
securities, the interest in maintaining a market in such securities on the part
of securities firms and other factors. There can
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be no assurance that any public market for our securities will exist in the
event that such securities are delisted.
WE MAY INCUR SIGNIFICANT COSTS AND LIABILITY AS A RESULT OF LITIGATION.
Securityholder Litigation Settlement
In September 2000, we reached an agreement to settle the class action
litigation relating to the restatement of our financial statements for the years
ended December 31, 1996 and 1997 and the first three fiscal quarters of 1998.
This agreement received final court approval on November 30, 2000 and we were
subsequently dismissed from the litigation with prejudice.
The total cost of the settlement was approximately $10,020,000 (less $1.0
million of legal fees and expenses reimbursed by our corporate liability
insurance carriers and other reimbursements of approximately $193,000). We made
two payments of $2.3 million each on October 23, 2000 and January 23, 2001
towards the settlement. The remaining amount due will be paid in two payments of
$2.3 million each, due on April 23, 2001 and July 23, 2001, and a final payment
of $1.0 million due within 90 days following the July 23, 2001 payment.
The settlement had been pending the approval of our corporate liability
insurance carriers who had raised certain coverage issues that resulted in the
filing of litigation between us and the carriers. These carriers consented to
the settlement, and we and the carriers agreed to dismiss the litigation
regarding coverage issues and to resolve those issues through binding
arbitration. The arbitration proceeding is pending. To the extent that the
carriers are successful, we and the carriers agreed that the carriers' recovery
is not to exceed $4.0 million. The parties further agreed that payment of any
such amount awarded will not be due in any event until 90 days after we have
satisfied our obligations to the plaintiffs in the class action, with any such
amount to be subordinated to new or refinancing of existing obligations. We
believe that we have strong defenses regarding this dispute and consequently
have not recorded a liability in relation to this matter.
As a result of the class action settlement, we recorded a charge of
approximately $10,020,000, which was partially offset by a reduction in general,
and administrative expenses of approximately $1,193,000 as a result of the
reimbursement of legal fees and expenses incurred in connection with the
litigation. The settlement resulted in an increase in net loss of $8,827,000 (or
approximately $0.52 per basic and diluted share) for the year ended December 31,
2000.
Although we believe we have strong defenses regarding our dispute with the
insurance carriers, we cannot predict the outcome of this litigation and
currently are unable to evaluate the likelihood of success or the range of
possible loss. However, if such litigation was determined adversely to us, such
a determination could have a material adverse effect on our financial condition,
results of operations, cash flow and liquidity.
Indiana Litigation Settlement
In a lawsuit filed in 2000, the Indiana State Department of Health ("ISDH")
had alleged that we were operating our Logansport, Indiana facility known as
McKinney House as a residential care facility without a license. We believe our
services have been consistent with those of a "Housing with Services
Establishment" (which is not required to be licensed) pursuant to Indiana Code
Section 12-10-15-1.
To avoid the expense and uncertainty of protracted litigation and, also
because we wished to assure the State that we operate in a manner that is
consistent with Indiana law, we agreed to the following settlement on behalf of
all facilities owned and operated by us in the State of Indiana. The State and
ALC agreed upon a Program Description that clarifies the services that we can
provide without requiring licensure as a residential care facility. This Program
Description provides guidelines regarding the physical and medical condition of
the residents in our facilities and the services to be provided to them. We
agreed that prior to March 20, 2001, we will provide in-service training
regarding the Program Description throughout our Indiana facilities. Under the
Program Description, we must discharge residents who require certain types or
levels of care that we agreed not to provide in Indiana. We are currently
implementing the Program Description and, while its full impact is
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not now known, we do not expect the impact to be material to our financial
condition, results of operations, cash flow and liquidity. Without admitting
liability, we paid a civil penalty of $10,000. The State dismissed the lawsuit
against us with prejudice.
Other Litigation
In addition to the matters referred to in the immediately preceding
paragraphs, we are involved in various lawsuits and claims arising in the normal
course of business. In the aggregate, such other suits and claims should not
have a material adverse effect on our financial condition, results of
operations, cash flow and liquidity. However, if these matters were determined
adversely to us, such a determination could have a material adverse effect on
our financial condition, results of operations, cash flow and liquidity.
WE ARE SUBJECT TO SIGNIFICANT GOVERNMENT REGULATION.
The 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 and units per residence;
- the provision of services;
- equipment;
- staffing, including professional licensing and criminal background
checks;
- operating policies and procedures;
- fire prevention measures;
- environmental matters;
- resident characteristics;
- physical design and compliance with building and safety codes;
- confidentiality of medical information;
- safe working conditions;
- family leave; and
- disposal of medical waste.
Our cost to comply with these regulations is significant. In addition, it
could adversely affect our financial condition or results of operations if a
court or regulatory tribunal were to determine that we had failed to comply with
any of these laws or regulations. Because these laws and regulations are amended
from time to time we cannot predict when and to what extent liability may arise.
See "Confidentiality of Medical Information," "Restrictions imposed by laws
benefiting disabled persons" and "Medical waste."
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, of which we paid $16,000 in the aggregate in
2000;
- temporary stop placement of admission of new residents, or imposition of
other conditions to admission of new residents to the facility, which
included 4 residences (2 in Washington and 2 in Idaho) in 2000, 2 of
which are still in stop placement as of this date;
- termination of a facility's Medicaid contract;
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- conversion of license to provisional status; and
- suspension or revocation of a facility's license, which in 2000 included
one residence in Washington against which the state has commenced license
revocation procedures. This matter is still pending at the time of this
filing.
To date, these adverse actions have resulted in minimal fines and temporary
suspension of admissions at certain residences. Because regulations vary from
one jurisdiction to another and because determinations regarding whether to make
a license provisional, to 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 residence 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.
The operation of our residences is 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 or
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 Balanced
Budget Act of 1997 expanded 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 change and interpretation. Aggressive anti-fraud actions, however,
could have an adverse effect on our financial position, results of operations or
cash flows.
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 effects
of such overbuilding include (a) significantly longer fill-up periods, (b)
pressure to lower or refrain from increasing rates, (c) competition for workers
in already tight labor markets and (d) lower margins until excess units are
absorbed. We believe that each local market is different, and we are and will
continue to react in a variety of ways 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 residences will not adversely
affect our operations.
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. Some of the
states in which we operate impose licensing requirements on individuals serving
as program directors at assisted living residences and others may adopt similar
requirements. 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.
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OUR PROPERTIES ARE GEOGRAPHICALLY CONCENTRATED AND WE DEPEND ON THE ECONOMIES OF
THE SPECIFIC AREAS IN WHICH WE OPERATE OUR PROPERTIES.
We depend significantly on the economies of Texas, Indiana, Oregon, Ohio
and Washington. As of December 31, 2000, 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 any of these states could have
a material adverse effect on our financial condition and results of operations.
WE DEPEND ON REIMBURSEMENT BY THIRD-PARTY PAYORS.
Although revenue at a majority of our residences come primarily from
private payors, a portion of our revenues depend upon reimbursements from
third-party government payors, including state Medicaid waiver programs. For the
years ended December 31, 1998, 1999 and 2000, direct payments received from
Medicaid funded programs accounted for approximately 10.7%, 10.4% and 11.1%
respectively, of our revenue. Also, our tenant-paid portion of Medicaid revenue
accounted for approximately 5.8%, 5.9% and 6.2% respectively, of our revenue
during the years ended December 31, 1998, 1999 and 2000. We expect that state
Medicaid waiver programs will continue to constitute a significant source of our
revenue in the future. Furthermore, we cannot guarantee that our proportionate
percentage of revenue received from Medicaid waiver programs will not increase.
There are continuing efforts by governmental and private third-party payors to
contain or reduce the costs of health care by lowering reimbursement rates,
increasing case management review of services and negotiating reduced contract
pricing. Recent changes include the development and implementation of a
prospective payment system ("PPS") for reimbursement of various healthcare
services. While it is unclear what effects PPS will have on our reimbursement
from state Medicaid waiver programs, it is possible that our revenues and
profitability may be affected adversely. Also, there has been, and our
management expects that there will continue to be, additional proposals
attempting to reduce the federal and some state budget deficits by limiting
Medicaid reimbursement in general. Adoption of any of these proposals at either
the federal or the state level could have a material adverse effect on our
business, financial condition, results of operations and prospects.
We anticipate that revenues at a majority of our residences will continue
to come from private pay sources. However, we believe that by having located
residences in states with favorable regulatory and reimbursement climates, we
should have 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.
Although we manage the mix of private paying tenants and Medicaid paying
tenants residing in our facilities, any significant increase in our Medicaid
population could have an adverse effect on our financial position, results of
operations or cash flows, particularly if the states operating these programs
continue to or more aggressively seek limits on reimbursement rates.
CONFIDENTIALITY OF MEDICAL INFORMATION.
In 1996, the HIPAA law created comprehensive new requirements regarding the
confidentiality of medical information that is or has been electronically
transmitted or maintained. Under the 1996 law, Congress required the Department
of Health and Human Services to promulgate regulations. The requirements set
forth in the regulations are extensive and may require to us to significantly
change the way we maintain and transmit healthcare information for our
residents.
Healthcare providers must take "reasonable steps" to ensure that the
provider, as well as the provider's business partners, comply with the law's
requirements. Therefore, we may be required to ensure that the other entities
with which we do business are also in compliance with these laws. HIPAA also
created certain consumer rights with which we may be required to comply,
including a right of notice regarding our information practices, a right of
access to inspect and copy such individual's protected medical information, and
a right to receive an accounting of all disclosures made by us, with certain
exceptions. It is anticipated that significant changes in the regulations will
occur prior to finalization; however, we do not expect that the costs
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to comply with the final regulations will have an adverse effect on our
financial position, results of operations or cash flows.
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 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. 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.
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 LIABLE FOR LOSSES NOT COVERED BY OR IN EXCESS OF OUR INSURANCE.
Providing services in the senior living industry involves an inherent risk
of liability. Participants in the senior living and long-term care industry are
subject to lawsuits alleging negligence or related legal theories, many of which
may involve large claims and result in the incurrence of significant legal
defense costs. We currently maintain insurance policies to cover such risks in
amounts which we believe are in keeping with industry practice. There can be no
assurance that a claim in excess of our insurance will not be asserted. A claim
against us not covered by, or in excess of, our insurance, could have a material
adverse affect on us.
Based on poor loss experience, insurers for the long term care industry
have become increasingly wary of liability exposures. A number of insurance
carriers have stopped writing coverage to this market, and those remaining have
increased premiums and deductibles substantially. While nursing homes have been
the primary targets of these insurers, assisted living companies, including us,
have experienced premium and deductible increases. During our claim year ended
December 31, 2000, our professional liability insurance coverage included
deductible levels of $100,000 per incident; for the claim year ending December
31, 2001 this deductible has been replaced with a retention level of $250,000,
except in Florida and Texas in which the retention level is $500,000. In certain
states, particularly Florida and Texas, many long-term care providers are facing
very difficult renewals. There can be no assurance that we will be able to
obtain liability insurance in the future or that, if such insurance is
available, it will be available on terms acceptable to us.
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 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
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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 at a
disposal site. In that event, we may be liable for the costs of any required
remediation or removal of the hazardous or toxic substances at the disposal
site. In connection with the ownership or operation of our properties, we could
be liable for these costs, as well as some other costs, including governmental
fines and injuries to persons or properties. As a result, any hazardous or toxic
substances which are present, with or without our knowledge, at any property we
hold or operate could have an adverse effect on our business, financial
condition or results of operations.
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 $27.2 million outstanding at
December 31, 2000 with a weighted average interest rate of 4.2%. Assuming that
our balance of variable rate debt remains constant at $27.2 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 $272,000.
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 $272,000.
The table below presents principal cash flows and related weighted average
interest rates by expected maturity dates (in thousands).
DECEMBER 31, EXPECTED MATURITY DATE DECEMBER 31, DECEMBER 31,
-------------------------------------------------------------------- 1999 2000
2001 2002 2003 2004 2005 THEREAFTER TOTAL FAIR VALUE FAIR VALUE
------ ------- ------- ------ ------ ---------- -------- ------------ ------------
Long-term debt:
Fixed rate................ $1,085 $ 1,119 $ 1,105 $1,140 $1,210 $39,218 $ 44,877 $ 44,690 $ 44,877
Average interest rate..... 7.93% 7.93% 7.93% 7.93% 7.93% 7.93% 7.93%
Variable rate............. $ 605 $ 674 $ 728 $ 786 $ 852 $23,575 $ 27,220 $ 28,753 $ 27,220
Average interest rate..... 4.15% 4.15% 4.15% 4.15% 4.15% 4.15% 4.15%
------ ------- ------- ------ ------ ------- -------- -------- --------
Total long-term
debt.............. $1,690 $ 1,793 $ 1,833 $1,926 $2,062 $62,793 $ 72,097 $ 73,443 $ 72,097
Convertible debentures:
6.0% debentures........... $ -- $86,250 $ -- $ -- $ -- $ -- $ 86,250 $ 50,888 $ 36,225
Average interest rate..... 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0%
5.625% debentures......... $ -- $ -- $75,000 $ -- $ -- $ -- $ 75,000 $ 43,500 $ 29,250
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 $ 65,475
------ ------- ------- ------ ------ ------- -------- -------- --------
Total long-term debt
and convertible
debentures........ $1,690 $88,043 $76,833 $1,926 $2,062 $62,793 $233,347 $167,831 $137,572
====== ======= ======= ====== ====== ======= ======== ======== ========
We are also exposed to market risks from fluctuations in interest rates and
the effects of those fluctuations on market values of our cash equivalents and
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
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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.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
GENERAL
We have provided below certain information regarding our directors and
executive officers:
NAME AGE(1) POSITION
---- ------ --------
Wm. James Nicol(4)................... 57 President, Chief Executive Officer and Chairman of the
Board of Directors
John M. Gibbons(2)(3)(4)............. 52 Director, Vice Chairman of the Board of Directors
Richard C. Ladd(2)................... 62 Director
Jill M. Krueger(2)(3)(4)............. 41 Director
Bruce E. Toll(2)..................... 57 Director
Leonard Tannenbaum(3)................ 29 Director
Sandra Campbell...................... 54 Senior Vice President, General Counsel and Secretary
Nancy Gorshe......................... 50 Senior Vice President of Community Relations
Drew Q. Miller....................... 48 Senior Vice President, Chief Financial Officer and
Treasurer
M. Catherine Maloney................. 38 Vice President, Controller and Chief Accounting
Officer
- ---------------
(1) As of December 31, 2000.
(2) Member of the Audit Committee.
(3) Member of the Compensation Committee.
(4) Member of the Special Committee for Securityholder Litigation.
Wm. James Nicol was appointed to the Board of Directors as 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.
John M. Gibbons was appointed to the Board of Directors in March 2000. He
brings over 17 years of public company senior management experience in finance
and executive management positions. From July 2000 to the present, he has served
as President and Vice chairman of TMC Communications, Inc., a telecommunications
services provider. From February 1994 until February 2000, he was employed 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. Since July 2000, he has served on the board of Deckers
Outdoor Corporation (AMEX-DECK).
Richard C. Ladd 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 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
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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 which provides rehabilitative and fitness services, pharmacy
services, an extensive outcome measurement system and innovative programming and
consulting services designed to optimize the health and well being of the
elderly population. 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.
Bruce E. Toll was elected to the Board of Directors in January 2001. Mr.
Toll serves on the Board of Directors of UbiquiTel, Inc., a publicly traded
company which provides Sprint PCS digital communication services to mid-size
markets in the western and mid-western United States. He is the owner of BET
Investments, Inc., which owns, develops, and manages commercial and industrial
properties in the Philadelphia area. He is also the owner and operator of an
automobile agency, Robert Auto Mall in Downingtown, Pennsylvania and the
Chairman of Puresyn Corp., a biotech company located in Malvern, Pennsylvania.
In addition, he is the President of Toll Management Company, which owns and
manages commercial and apartment properties on the Philadelphia area. Mr. Toll
is Vice-Chairman, founder, and director of Toll Brothers, Inc., which today is
the leading builder of luxury homes in the nation and recipient of a number of
awards. He is the father-in-law of Leonard Tannenbaum.
Leonard Tannenbaum, CFA, was elected to the Board of Directors in January
2001. Mr. Tannenbaum is currently the Managing Partner at MYFM Capital LLC, an
investment banking firm. Mr. Tannenbaum currently serves on the board of
directors of the following public companies: Cortech, Inc.; New World
Coffee-Manhattan Bagel, Inc.; and General Devices, Inc. He also currently serves
on the board of Timesys, an embedded Linux company, and Transcentives.com, an
internet holding company. He formerly served on the board of Westower
Corporation. Previously, Mr. Tannenbaum was the president of the on-line auction
company CollectingNation.com, a partner in a $50 million hedge fund, an
assistant portfolio manager at Pilgrim Baxter, and an Assistant Vice President
in Merrill Lynch's small company group. Mr. Tannenbaum received both his M.B.A.
and Bachelors of Science from the Wharton School at the University of
Pennsylvania. He is the son-in-law of Bruce E. Toll.
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 us, 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 us, 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 Senior Vice President, Chief
Financial Officer and Treasurer. Mr. Miller has over 16 years of senior finance
and accounting experience in health care services. From 1996 to 2000, Mr. Miller
served as 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.
M. Catherine Maloney joined us as Controller in June 1998, and currently
serves as Vice President, Controller, and Chief Accounting Officer. Prior to
joining us, Ms. Maloney was an Audit Manager with KPMG LLP.
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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, 2000, each of our officers, directors
and 10% stockholders complied with all Section 16(a) filing requirements
applicable to them.
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ITEM 11. EXECUTIVE COMPENSATION
We have set forth in the following table information concerning the
compensation paid during the fiscal year ended December 31, 2000 to Mr. Nicol
and Dr. Wilson, each of whom served as our Chief Executive Officer during a
portion of 2000 and each of our four other most highly compensated executive
officers (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION(1) COMPENSATION AWARDS
----------------------------------- -------------------------
SECURITIES
OTHER UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(2) COMPENSATION OPTIONS COMPENSATION
--------------------------- ---- -------- --------- ------------ ---------- ------------
Wm. James Nicol(4)............. 2000 $ 46,000 -- -- 50,000 --
President and Chief Executive
Officer and Chairman
Keren Brown Wilson(5).......... 2000 $200,000 -- $800,000(3) 100,000 --
Founder, Former President, 1999 200,000 $(100,000) $187,500(3) 7,500 --
Chief Executive Officer and 1998 203,000 100,000 -- -- --
Vice Chairman
Leslie Mahon(4)................ 2000 $ 70,000 -- $350,000 10,000 --
Senior Vice President and 1999 141,300 17,500 -- 30,000 --
Chief Operating Officer
Drew Q. Miller(4).............. 2000 $145,000 -- -- 150,000 --
Senior Vice President, Chief
Financial Officer and
Treasurer
Sandra Campbell................ 2000 $195,000 -- -- 50,000 --
Senior Vice President, 1999 150,000 51,250 -- -- --
General Counsel and 1998 141,600 25,000 -- 15,000 --
Secretary
Nancy Gorshe(6)................ 2000 $150,000 $ 12,500 -- -- --
Senior Vice President 1999 125,000 15,000 -- -- --
of Community Relations 1998 101,300 -- -- 55,000 --
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(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) Dr. Wilson was paid a bonus of $100,000 in 1998 related to the execution of
the ARC merger agreement. Payments made to her subsequent to December 31,
1998 were reduced by $100,000 to reflect repayment of this bonus payments.
Severance payment was made to Mr. Mahon during 2000 for $350,000 in
accordance with his employment agreement in April, 2000 when Mr. Mahon's
position was eliminated.
(3) During 1999 Dr. Wilson agreed to forfeit 50,000 shares of restricted stock
held by her for $187,500. During 2000, we restructured our relationship with
Dr. Wilson and agreed to pay Dr. Wilson the amount of $800,000 to which she
may have been entitled under her employment agreement, of which
approximately $182,000 was paid in 2000 and the remainder to be paid through
monthly salary through December 31, 2001, and quarterly installments through
September 30, 2001.
(4) Mr. Nicol and Mr. Miller began their employment with us in November 2000 and
March 2000, respectively. Mr. Nicol was appointed President and Chief
Executive Officer in November 2000. Mr. Mahon began his employment with us
in March 1999 and resigned as Chief Operating Officer in April 2000.
(5) Dr. Wilson served as President and Chief Executive Officer during 2000 until
October 2000.
(6) Ms. Gorshe began her employment with us in February 1998.
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We have provided in the following table information on stock options
granted during 2000 to the Named Executive Officers.
STOCK OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
-------------------------------------------------- POTENTIAL REALIZABLE
% OF TOTAL VALUE AT ASSUMED
NUMBER OF OPTIONS ANNUAL RATE OF STOCK
SECURITIES GRANTED TO PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES EXERCISE OPTION TERM(1)
OPTIONS IN FISCAL PRICE EXPIRATION ----------------------
NAME GRANTED YEAR ($/SH) DATE 5% 10%
---- ---------- ---------- -------- ---------- --------- ---------
Wm. James Nicol............ 50,000 4.8% $1.81 2/29/10 $ 95,025 $ 99,550
Keren Brown Wilson......... 100,000 9.6% 1.44 3/29/10 151,200 158,400
Leslie Mahon............... 10,000 1.0% 1.44 3/29/10 15,120 15,840
Drew Q. Miller............. 150,000 14.4% 1.44 3/29/10 226,800 237,600
Sandra Campbell............ 50,000 4.8% 1.44 3/29/10 75,600 79,200
Nancy Gorshe............... 40,000 3.9% 1.44 3/29/10 60,480 63,360
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(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, 2000.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT FISCAL YEAR-END AT FISCAL YEAR-END(1)
SHARES -------------------- ---------------------
ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE REALIZED UNEXERCISABLE UNEXERCISABLE
---- ----------- -------- -------------------- ---------------------
Wm. James Nicol.................. -- -- 0/ 50,000 $0/$0
Keren Brown Wilson............... -- -- 122,500/105,000 $0/$0
Leslie Mahon..................... -- -- 0/ 0 $0/$0
Drew Q. Miller................... -- -- 33,334/116,666 $0/$0
Sandra Campbell.................. -- -- 0/ 50,000 $0/$0
Nancy Gorshe..................... -- -- 0/ 40,000 $0/$0
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(1) The closing trading price on the American Stock Exchange for the Common
Stock on December 31, 2000 was $0.31.
COMPENSATION OF DIRECTORS
Non-employee directors are compensated for services as a director and are
reimbursed for travel expenses incurred in connection with their duties as
directors. Under the terms of the 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.
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During 2000, 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 of any
committee meeting held on a day on which the Board of Directors did not meet.
During 2000, those outside directors serving on the Executive Committee earned
$5,000 per month for such services and on February 29, 2000, Mr. Nicol and Mr.
Gibbons each received non-qualified options to purchase 30,000 shares of common
stock at $1.81 per share for acting in such capacity. In January, 2001 the Board
of Directors disbanded the Executive Committee and Mr. Gibbons was appointed
Vice Chairman of the Board of Directors. Mr. Gibbons will receive $5,000 per
month for such services.
Mr. Nicol and Mr. Gibbons each received new non-employee director options
to purchase 20,000 shares of Common Stock under the 1994 Stock Option Plan at
$1.81 per share on February 29, 2000. In addition, on February 29, 2000, Ms.
Krueger, Mr. Ladd and Ms. 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
Employment Agreements with Current Officers
Set forth below are summaries of employment and consulting agreements with
certain individuals who were Named Executive Officers during 2000.
Wm. James Nicol
Effective November 1, 2000, we entered into an employment agreement with
Wm. James Nicol, providing for Mr. Nicol's services as President and Chief
Executive Officer. The agreement provides for such employment on a
month-to-month basis, at a salary of not less than $30,000 per month. Mr. Nicol
will also be eligible for bonus payments and incentive compensation awards based
on certain performance targets to be agreed between us and Mr. Nicol. Under the
agreement, in the event of a termination of employment by us for any reason
other than "Cause" (as defined), Mr. Nicol will be entitled to four months of
pay, as well as a pro-rated bonus payment. In connection with his employment
agreement, we agreed to indemnify Mr. Nicol 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.
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. We and Ms. Campbell agreed to amend the employment
agreement as of January 1, 2000. The amendment effectuated no changes in Ms.
Campbell's total annual compensation from the Company; it merely recharacterized
the amounts. The agreement, as amended, provides for an initial two and
one-half-year term, which expired without having been terminated, consequently
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), 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 two times her then-annual salary plus $10,000. In
addition, if there is a Change in Control (as defined), 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 $10,000, and all options
exercisable for common stock automatically vest and become exercisable. The
agreement provides that Ms. Campbell's salary is $195,000. 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. These options were
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cancelled in 2000. 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.
Nancy Gorshe
On February 3, 1998, we entered into an employment agreement with Nancy
Gorshe providing for Ms. Gorshe's services as Vice President/Community
Relations. The agreement provides for 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. We may terminate the agreement at any time
for "Cause" (as defined). 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) 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 $150,000. 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. These options were cancelled in 2000.
Drew Q. Miller
On March 16, 2000, we entered into an employment agreement with Drew Q.
Miller providing for Mr. Miller's services as Senior Vice President, Chief
Financial Officer and Treasurer. The agreement provides that Mr. Miller's annual
base salary shall equal $190,000. The agreement provides for an initial two-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 Mr. Miller with one and
one-half years' prior notice of our intention to terminate his employment, and
Mr. Miller may terminate the agreement by providing us with 45-days' prior
notice of his intention to resign. In addition, we may terminate the agreement
at any time for "Cause" (as defined) or Mr. Miller's permanent disability, and
Mr. Miller may terminate the agreement in the event there is a Change of Control
(as defined) or a material reduction in the scope and/or authority of his
duties. The agreement automatically terminates upon Mr. Miller's death. If we
terminate Mr. Miller's employment other than in connection with Mr. Miller's
death or disability or for Cause, or if Mr. Miller terminates the agreement as a
result of a Change of Control or a material reduction in the scope and/or
authority of his duties, we will continue to be obligated to pay Mr. Miller's
base salary until March 16, 2002 and all of Mr. Miller's options exercisable for
common stock shall automatically vest and become exercisable. Pursuant to the
agreement, Mr. Miller received options to purchase 150,000 shares of Common
Stock, to become exercisable in monthly installments of 4,167 shares commencing
April 16, 2000, at an exercise price of $1.44, equal to the fair market value of
the Common Stock on the date of grant. The agreement includes an agreement to
indemnify Mr. Miller 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 an officer.
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Agreements with Former Officers
Keren Brown Wilson
On October 19, 2000, as part of a restructuring of our relationship with
Dr. Keren Brown Wilson, Dr. Wilson resigned from the Board of Directors and from
her position as President and Chief Executive Officer. Effective on this date,
Dr. Wilson and we agreed among other things to the following: (i) Dr. Wilson
will be an at-will employee until December 31, 2001, and her base salary is to
be $16,666.67 per month, with a total of $200,000 to be paid in any event; (ii)
when Dr. Wilson's employment terminates, her stock options will vest, if not
already vested, and she will have one year from that date to exercise the stock
options; and, (iii) we will pay Dr. Wilson $559,677.37, plus 10% interest per
annum from October 19, 2000, until fully paid, to be paid in four (4) equal
quarterly installments commencing December 31, 2000.
In addition, we and Dr. Wilson agreed to the termination of Dr. Wilson's
employment agreement effective October 19, 2000. The employment agreement
provided for Dr. Wilson's services as President and Chief Executive Officer. The
employment agreement provided for an initial four-year term, subject to
automatic extension absent notice of termination under the terms of the
employment agreement.
Under the employment agreement, in the event of a termination of employment
for any reason other than "Cause" (as defined), Dr. Wilson was 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) for any reason
other than the death or disability or a termination by us for Cause, Dr. Wilson
would be entitled to a $3.0 million termination payment. The employment
agreement also contained "gross-up" provisions to compensate Dr. Wilson in the
event that any payment under the employment agreement was subject to an excise
tax imposed under Section 4999 of the Internal Revenue Code. The employment
agreement provided that Dr. Wilson was entitled to compensation at an annual
rate of $200,000.
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.
James 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.
Pursuant to the separation and consulting agreement, Mr. Cruckshank agreed
to provide us consulting services through December 31, 2000, for which we paid
him a bi-weekly amount equal to $3,000.
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 Common Stock, which
have an exercise price of $3.813 per share, will expire March 31, 2001.
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. On April 21, 2000, the position of Vice President and Chief Operating
Officer was eliminated and we paid Mr. Mahon a lump-sum payment of $350,000 in
accordance with his employment agreement. Except with respect to such payment
and the termination of Mr. Mahon's employment, the provisions of Mr. Mahon's
employment agreement remain in effect. The employment agreement 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
46
48
30,000 shares of Common Stock, 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. Mr. Mahon agreed
to the cancellation of these options.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
At December 31, 2000, the Compensation Committee was comprised of John
Gibbons, Bradley Razook, and Gloria Cavanaugh. From January 1, 2000 to March 28,
2000, the Compensation Committee was comprised of Mr. Razook, Ms. Cavanaugh, and
Ms. Krueger. On March 28, 2000, Mr. Nicol replaced Ms. Krueger on the
Compensation Committee. In November 2000, Mr. Gibbons replaced Mr. Nicol on the
Compensation Committee following Mr. Nicol's October 19, 2000 appointment as
President and Chief Executive Officer. Mr. Razook served as Chair of the
Compensation Committee throughout 2000. From January 17, 2001 to the present,
the Compensation Committee was comprised of John Gibbons (Chairman), Jill
Krueger and Leonard Tannenbaum.
Mr. Razook, is President and Managing Director at Cohen & Steers Capital
Advisors LLC ("C&S Advisors"). On January 24, 2000, we entered into an agreement
with C&S Advisors pursuant to which we paid C&S Advisors $471,000 through
December 31, 2000 for financial advisory services. This agreement terminated on
December 31, 2000, except that we are required to pay C&S Advisors fees under
this agreement if we complete certain financing and merger transactions on or
prior to December 31, 2001. We are currently exploring various financing
alternatives and the closing of any such financing could result in the payment
of fees to C&S Advisors. On March 2, 2001, we closed the Heller financing and
paid C&S Advisors $457,000 in relation to this transaction.
In December 2000, we entered into an agreement with MYFM Capital LLC under
which we could establish a line of credit with BET Associates LP ("BET") as
lender, providing for loans of up to $10.0 million. Subsequent to December 31,
2000, we terminated the agreement and paid MYFM $50,000 in connection with such
termination. Bruce E. Toll, our largest shareholder, and a current member of our
Board of Directors, is the sole member of BRU Holdings Company, Inc. LLC, which
is the sole general partner of BET. Leonard Tannenbaum is the Managing Partner
of MYFM Capital, LLC, the son-in-law of Mr. Toll, a 10% limited partner of BET
and a current member of our Board of Directors.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
We have set forth in the following table information as of February 16,
2001 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
our common stock;
(3) each of the Named Executive Officers for the fiscal year ended
December 31, 2000; and
(4) our directors and executive officers as a group.
SHARES PERCENT
BENEFICIALLY OF
NAME AND ADDRESS OF BENEFICIAL OWNER(1) OWNED(2) CLASS
--------------------------------------- ------------ -------
Wm. James Nicol............................................. 17,501 --
Richard C. Ladd............................................. 21,111 *
John M. Gibbons............................................. 17,501 *
Jill Krueger................................................ 26,668 *
Bruce E. Toll(3)............................................ 3,105,698.65 17.5%
3103 Philmont Avenue
Huntington Valley, Pennsylvania 19006
Leonard Tannenbaum.......................................... 469,603 2.7%
16 School St., 2nd Floor
Rye, NY 10580-2952
Les Mahon................................................... 11 *
Sandra Campbell............................................. 24,476 *
Nancy Gorshe................................................ 18,945 *
Drew Q. Miller.............................................. 54,166 *
Keren Brown Wilson(4)....................................... 882,912 5.2%
John W. Adams(5)............................................ 1,635,600 9.6%
885 Third Avenue, 34th Floor
New York, New York 10022
Greenlight Capital, L.L.C.(6)............................... 1,566,012 8.8%
420 Lexington Avenue, Suite 875
New York, New York 10170
Capital Group International, Inc. and Capital Guardian
Trust(7).................................................. 1,645,000 9.6%
11800 Santa Monica Blvd.
Los Angeles, CA 90025
All directors and executive officers as a group (15
persons).................................................. 243,352 1.4%
- ---------------
* Less than 1%.
(1) Except as otherwise noted above, the address of the directors and officers
is c/o Assisted Living Concepts, Inc., 11835 NE Glenn Widing Drive, Building
E, Portland, Oregon, 97220-9057.
(2) Includes options to purchase 17,501 shares held by Mr. Nicol, 21,111 shares
held by Mr. Ladd, 17,501 shares held by Mr. Gibbons, 26,668 shares held by
Ms. Krueger, 24,476 shares held by Ms. Campbell, 54,166 shares held by Mr.
Miller, 18,945 shares held by Ms. Gorshe, and 62,984 shares held
collectively by the executive officers not named above, which are
exercisable within 60 days of February 16, 2001. Beneficial ownership is
determined in accordance with the rules and regulations of the Securities
and Exchange Commission. Shares of Common Stock subject to currently
exercisable options, or options that will become exercisable within 60 days
of February 16, 2001, and shares issuable on conversion of debentures are
deemed to be outstanding for purposes of computing the percentage of the
person holding the options or debentures, but are not outstanding for
purposes of computing the percentage of any other person or entity.
48
50
(3) Based on the Form 13D/A as filed on November 22, 2000. 575,098.65 of such
shares are issuable upon the conversion of $12.1 million of our 6.0%
Debentures and $1.0 million of our 5.625% Debentures to BET Associates,
L.P., a partnership controlled by Mr. Toll, and 2,530,600 of such shares are
held by BRU Holding Company Inc., LLC, a limited liability company
controlled by Mr. Toll.
(4) Based on the Form 13G as filed on April 12, 2000.
(5) Based on the Form 13G/A as filed on February 16, 2001. These shares are held
by JWA Investment Corp. and Tempe Wicke investments L.P., which in turn are
controlled by Mr. Adams.
(6) Based on the Form 13D as filed on December 30, 1999. 667,412 of such shares
are issuable upon the conversion of the Company's 6.0% Debentures.
(7) Based on the Form 13G/A as filed on February 12, 2001.
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. We terminated the agreement for
these services effective January 2000. At that time SHS was owned 75% by Dr.
Wilson's spouse. In fiscal 2000, we paid SHS approximately $69,000 for services
performed in 1999.
In June 1999 we entered into a agreement with Concepts in Community Living,
Inc. ("CCL"), a company owned by Dr. Wilson's spouse, pursuant to which CCL
provided market research, demographic review and competitor analysis in many of
our current markets. This agreement was terminated on December 12, 1999. In
fiscal 2000, we paid CCL $69,000 for services performed in 1999.
We lease six residences from Assisted Living Facilities, Inc. of which Dr.
Wilson's spouse owns a 25% interest. During 2000, we paid Assisted Living
Facilities, Inc. approximately $1.3 million for building rent and escrow
reserves.
For information regarding certain other relationships and related
transactions, see Item 11 "Compensation Committee Interlocks and Insider
Participation."
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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 October 19, 2000, we filed a report on Form 8-K announcing that we had
restructured our relationship with Keren Brown Wilson, our former President,
Chief Executive Officer and Vice Chairman of the Board.
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ASSISTED LIVING CONCEPTS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
(ITEM 14(a))
PAGE
----
1. FINANCIAL STATEMENTS:
Independent Auditors' Report................................ 52
Consolidated Balance Sheets, December 31, 1999 and 2000..... 53
Consolidated Statements of Operations and Consolidated
Statements of Comprehensive Loss, Years Ended December 31,
1998, 1999 and 2000....................................... 54
Consolidated Statements of Shareholders' Equity, Years Ended
December 31, 1998, 1999 and 2000.......................... 55
Consolidated Statements of Cash Flows, Years Ended December
31, 1998, 1999 and 2000................................... 56
Notes to Consolidated Financial Statements.................. 57
2. FINANCIAL STATEMENT SCHEDULE:
Schedule II -- Valuation and Qualifying Accounts............ 83
51
53
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, 1999 and 2000, 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, 2000. 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 auditing standards generally
accepted in the United States of America. 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, 1999 and 2000, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States of America.
/s/ KPMG LLP
Portland, Oregon
March 12, 2001
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54
ASSISTED LIVING CONCEPTS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
DECEMBER 31,
--------------------
1999 2000
-------- --------
Current assets:
Cash and cash equivalents................................. $ 7,606 $ 9,889
Marketable securities, available for sale................. 1,680 --
Accounts receivable, net of allowance for doubtful
accounts of $1,062 at 1999 and $1,399 at 2000.......... 4,069 2,448
Prepaid insurance......................................... 282 1,765
Prepaid expenses.......................................... 666 1,042
Other current assets...................................... 3,419 2,729
-------- --------
Total current assets.............................. 17,722 17,873
-------- --------
Restricted cash............................................. 7,555 6,466
Property and equipment, net................................. 305,648 298,744
Goodwill, net............................................... 5,077 4,785
Other assets, net........................................... 10,186 8,590
-------- --------
Total assets...................................... $346,188 $336,458
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 1,318 $ 2,708
Construction payable...................................... 1,078 --
Accrued real estate taxes................................. 4,466 4,835
Accrued interest expense.................................. 1,940 1,937
Accrued payroll expense................................... 2,773 4,017
Other accrued expenses.................................... 2,030 4,229
Bridge loan payable....................................... -- 4,000
Litigation settlement payable............................. -- 7,765
Tenant security deposits.................................. 2,245 2,484
Related party payable..................................... -- 626
Other current liabilities................................. 341 565
Current portion of long-term debt and capital lease
obligation............................................. 1,494 1,690
-------- --------
Total current liabilities......................... 17,685 34,856
-------- --------
Other liabilities........................................... 5,960 6,059
Long-term debt and capital lease obligation, net of current
portion................................................... 71,949 70,407
Convertible subordinated debentures......................... 161,250 161,250
-------- --------
Total liabilities................................. 256,844 272,572
-------- --------
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 17,120,745 shares at
December 31, 1999 and 2000............................. 171 171
Additional paid-in capital................................ 144,443 144,451
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....................................... (54,711) (80,497)
-------- --------
Total shareholders' equity........................ 89,344 63,886
-------- --------
Total liabilities and shareholders' equity........ $346,188 $336,458
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
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ASSISTED LIVING CONCEPTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31,
--------------------------------
1998 1999 2000
-------- -------- --------
Revenue.................................................... $ 89,384 $117,489 $139,423
Operating expenses:
Residence operating expenses............................. 57,443 81,767 95,032
Corporate general and administrative..................... 11,099 21,178 18,365
Building rentals......................................... 11,400 14,103 14,734
Building rentals to related party........................ 1,364 1,264 1,270
Depreciation and amortization............................ 6,339 8,981 9,923
Litigation settlement.................................... -- -- 10,020
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......................... 99,611 132,433 149,344
-------- -------- --------
Operating loss............................................. (10,227) (14,944) (9,921)
-------- -------- --------
Other income (expense):
Interest expense......................................... (11,039) (15,200) (16,363)
Interest income.......................................... 3,869 1,598 786
Gain (loss) on sale of assets............................ (651) (127) 13
Loss on sale of marketable securities.................... -- -- (368)
Other income (expense), net.............................. (1,174) (260) 67
-------- -------- --------
Total other expense.............................. (8,995) (13,989) (15,865)
-------- -------- --------
Loss before cumulative effect of change in accounting
principle................................................ (19,222) (28,933) (25,786)
Cumulative effect of change in accounting principle........ (1,523) -- --
-------- -------- --------
Net loss................................................... $(20,745) $(28,933) $(25,786)
======== ======== ========
Basic and diluted net loss per common share:
Loss before cumulative effect of change in accounting
principle............................................. $ (1.18) $ (1.69) $ (1.51)
Cumulative effect of change in accounting principle...... (0.09) -- --
-------- -------- --------
Basic and diluted net loss per common share................ $ (1.27) $ (1.69) $ (1.51)
======== ======== ========
Basic and diluted weighted average common shares
outstanding.............................................. 16,273 17,119 17,121
======== ======== ========
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
--------------------------------
1998 1999 2000
-------- -------- --------
Net loss................................................... $(20,745) $(28,933) $(25,786)
Other comprehensive loss:
Unrealized loss on investments........................... -- (320) --
Reclassification adjustment for loss included in net
loss.................................................. -- -- 320
-------- -------- --------
Comprehensive loss......................................... $(20,745) $(29,253) $(25,466)
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
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ASSISTED LIVING CONCEPTS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
FAIR MARKET
VALUE IN ACCUMULATED
COMMON STOCK ADDITIONAL UNEARNED EXCESS OF OTHER
--------------- PAID-IN COMPENSATION HISTORICAL COMPREHENSIVE ACCUMULATED
SHARES AMOUNT CAPITAL EXPENSE COST LOSS DEFICIT
------ ------ ---------- ------------ ----------- ------------- -----------
Balance at December 31,
1997...................... 15,646 $156 $141,460 $(4,100) $(239) -- $ (5,033)
Common stock repurchased.... (529) (5) (7,057) -- -- -- --
Conversion of subordinated
debentures................ 1,855 19 13,387 -- -- -- --
Exercise of employee stock
options................... 122 1 745 -- -- -- --
Issuance of restricted
stock..................... 250 2 (2) -- -- -- --
Compensation expense earned
on restricted stock....... -- -- -- 608 -- -- --
Net loss.................... -- -- -- -- -- -- (20,745)
------ ---- -------- ------- ----- ----- --------
Balance at December 31,
1998...................... 17,344 173 148,533 (3,492) (239) -- (25,778)
Exercise of employee stock
options................... 27 -- 158 -- -- -- --
Compensation expense earned
on restricted stock....... -- -- -- 180 -- -- --
Retirement of restricted
stock..................... (250) (2) (4,248) 3,312 -- -- --
Unrealized loss on
marketable securities..... -- -- -- -- -- (320) --
Net loss.................... -- -- -- -- -- -- (28,933)
------ ---- -------- ------- ----- ----- --------
Balance at December 31,
1999...................... 17,121 171 144,443 -- (239) (320) (54,711)
Compensation expense on
issuance of consultant
options................... -- -- 8 -- -- -- --
Reclassification adjustment
for loss included in net
loss...................... -- -- -- -- -- 320 --
Net loss.................... -- -- -- -- -- -- (25,786)
------ ---- -------- ------- ----- ----- --------
Balance at December 31,
2000...................... 17,121 $171 $144,451 $ -- $(239) $ -- $(80,497)
====== ==== ======== ======= ===== ===== ========
TOTAL
SHAREHOLDERS'
EQUITY
-------------
Balance at December 31,
1997...................... $132,244
Common stock repurchased.... (7,062)
Conversion of subordinated
debentures................ 13,406
Exercise of employee stock
options................... 746
Issuance of restricted
stock..................... --
Compensation expense earned
on restricted stock....... 608
Net loss.................... (20,745)
--------
Balance at December 31,
1998...................... 119,197
Exercise of employee stock
options................... 158
Compensation expense earned
on restricted stock....... 180
Retirement of restricted
stock..................... (938)
Unrealized loss on
marketable securities..... (320)
Net loss.................... (28,933)
--------
Balance at December 31,
1999...................... 89,344
Compensation expense on
issuance of consultant
options................... 8
Reclassification adjustment
for loss included in net
loss...................... 320
Net loss.................... (25,786)
--------
Balance at December 31,
2000...................... $ 63,886
========
The accompanying notes are an integral part of these consolidated financial
statements.
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ASSISTED LIVING CONCEPTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
---------------------------------
1998 1999 2000
--------- -------- --------
OPERATING ACTIVITIES:
Net loss.................................................... $ (20,745) $(28,933) $(25,786)
Adjustment to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization............................. 6,339 8,981 9,923
Provision for doubtful accounts........................... 359 883 1,932
Site abandonment costs.................................... 2,377 4,912 --
Write-off of impaired assets and related expenses......... 8,521 -- --
Loss on the sale of marketable securities................. -- -- 368
Loss (gain) on sale of assets............................. 651 127 (13)
Cumulative effect of change in accounting principle....... 1,523 -- --
Compensation expense earned on restricted stock........... 608 180 --
Compensation expense on issuance of consultant options.... -- -- 8
Changes in assets and liabilities, excluding effects of
acquisitions:
Accounts receivable....................................... (3,302) 175 (311)
Prepaid expenses.......................................... (88) 44 (1,859)
Other current assets...................................... (909) 953 690
Other assets.............................................. 1,314 564 1,596
Accounts payable.......................................... (237) (304) 1,390
Accrued expenses.......................................... 2,840 245 3,809
Other current liabilities................................. 2,922 (2,271) 8,854
Other liabilities......................................... 823 2,545 _99
--------- -------- --------
Net cash provided by (used in) operating
activities........................................ 2,996 (11,899) 700
--------- -------- --------
INVESTING ACTIVITIES:
Sale of marketable securities, available for sale........... -- 2,000 1,632
Purchase of marketable securities, available for sale....... (4,000) -- --
Restricted cash............................................. -- (7,555) 1,089
Funds held in trust......................................... 1,956 -- --
Proceeds from sale and leaseback transactions............... 8,113 -- --
Proceeds from sale of property and equipment................ -- 19 14
Purchases of property and equipment......................... (117,972) (27,824) (3,543)
Acquisitions, net of cash, debt acquired and issuance of
common stock.............................................. (11,366) -- --
--------- -------- --------
Net cash used in investing activities............... (123,269) (33,360) (808)
--------- -------- --------
FINANCING ACTIVITIES:
Proceeds from bridge loan................................... -- -- 4,000
Proceeds from long-term debt................................ 49,004 -- --
Payments on long-term debt and capital lease obligation..... (289) (1,491) (1,609)
Proceeds from issuance of common stock, net................. 746 158 --
Repurchase of common stock.................................. (7,062) -- --
Debt issuance costs of offerings and long-term debt......... (5,359) -- --
Proceeds from issuance of convertible subordinated
debentures................................................ 75,000 -- --
Retirement of restricted stock.............................. -- (838) --
--------- -------- --------
Net cash provided by (used in) financing
activities........................................ 112,040 (2,171) 2,391
--------- -------- --------
Net (decrease) increase in cash and cash equivalents........ (8,233) (47,430) 2,283
Cash and cash equivalents, beginning of year................ 63,269 55,036 7,606
--------- -------- --------
Cash and cash equivalents, end of year...................... $ 55,036 $ 7,606 $ 9,889
========= ======== ========
Supplemental disclosure of cash flow information:
Cash payments for interest................................ $ 16,480 $ 15,528 $ 14,945
Cash payments for income taxes............................ $ -- $ -- $ --
Non-cash transactions:
Decrease in construction payable and property and
equipment............................................... $ (11,941) $ (5,864) $ (1,078)
Conversion of subordinated debentures (net of $509 of
unamortized financing costs in 1998).................... 13,406 -- --
Purchase of equipment with capital lease obligation....... -- -- 263
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 --
The accompanying notes are an integral part of these consolidated financial
statements.
56
58
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, leases and operates
assisted living residences which provide housing to older persons who need help
with the activities of daily living such as bathing and dressing. The Company
provides personal care and support services and makes available routine health
care services, as permitted by applicable law, designed to meet the needs of its
residents. The accompanying financial statements reflect the operating results
of 165, 185 and 185 residences for the years ended December 31, 1998, 1999 and
2000, 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 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. 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.
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.
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.
57
59
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
On November 8, 2000, the Company modified and amended its Rights Agreement
to provide that the acquisition of up to $15.0 million in face value of the
Company's convertible debentures is not to be considered "beneficially owned,"
as defined under the Rights Agreement, for purposes of calculating whether a
beneficial owner owns 15% or more of the Company's common shares then
outstanding, in which event certain rights as described in the Rights Agreement
would arise.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Assisted
Living Concepts Inc. and its wholly owned subsidiaries (the "Company"). All
significant intercompany balances and transactions have been eliminated in
consolidation.
CASH EQUIVALENTS AND MARKETABLE SECURITIES
Cash equivalents of $6.0 million and $4.6 million at December 31, 1999 and
2000, respectively, consist of highly liquid investments with maturities of
three months or less at the date of purchase. 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 5). Other liabilities
included $1.9 million of such amount at December 31, 1999 and 2000.
58
60
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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:
Buildings and building improvements..................... 40 years
Furniture and equipment................................. 3 to 7 years
Equipment under capital lease is recorded at the net present value of the
future minimum lease payments at the inception of the lease. Amortization of
equipment under capital lease is provided using the straight-line method over
the estimated useful life of 5 years.
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, 2000.
Interest and certain payroll costs incurred during construction periods are
capitalized as part of the building costs. Maintenance and repairs are charged
to expense as incurred, and significant betterments and improvements are
capitalized. Construction in process includes pre-acquisition costs and other
direct costs related to acquisition, development and construction of residences.
If a project is abandoned, any costs previously capitalized are expensed.
GOODWILL
Costs in excess of the fair value of the net assets acquired in purchase
transactions as of the date of acquisition have been recorded as goodwill and
are being amortized over periods ranging between 15 and 20 years on a
straight-line basis. Amortization of goodwill was $398,000, $294,000, and
$292,000 respectively, for the years ended December 31, 1998, 1999 and 2000.
Accumulated amortization of goodwill at December 31, 1999 and 2000 was $629,000
and $922,000, respectively. The Company assesses the recoverability of its
goodwill by determining whether the amortization of the goodwill balance over
its remaining life can be recovered through the undiscounted future operating
cash flows of the acquired operations. The amount of goodwill impairment, if
any, is measured based on projected discounted future operating cash flows using
a discount rate reflecting the Company's average cost of funds. The assessment
of the recoverability of goodwill will be impacted if estimated future operating
cash flows are not achieved.
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 10).
PRE-OPENING COSTS
Prior to the adoption of American Institute of Certified Public Accountants
("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 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.
59
61
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ADVERTISING COSTS
Advertising costs are expensed as incurred and were $368,000, $853,000 and
$612,000 for the years ended December 31, 1998, 1999 and 2000, respectively.
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
statement of operations for fiscal year 1998 as the cumulative effect of a
change in accounting principle.
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 effective interest method.
Amortization of deferred financing costs were $978,000, $1.6 million, and $1.6
million, respectively, for the years ended December 31, 1998, 1999 and 2000.
Accumulated amortization of deferred financing costs at December 31, 1999 and
2000 were $3.1 million and $4.7 million, respectively.
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. The collectibility of the accounts receivable is assessed
periodically and a provision for doubtful accounts is recorded 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.
60
62
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NET 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 833,000, 983,000 and 477,000 shares of common
stock were outstanding during the years ended December 31, 1998, 1999 and 2000,
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, 1998, 1999 and 2000 were, 6,685,789 shares of common
stock issuable upon conversion of the Company's convertible subordinated
debentures (see Note 9) and 250,000 shares of restricted stock for the year
ended December 31, 1998 (see Note 14) as their inclusion would be antidilutive.
SEGMENT REPORTING
Financial Accounting Standards Board SFAS No. 131, Disclosure about
Segments of an Enterprise and Related Information 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. The Company has no foreign operations
and no customers which provide over 10 percent of gross revenue. The Company
reviews operating results at the residence level; it also meets the aggregation
criteria in order to report the results as one business segment.
USE OF ESTIMATES
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
accounting principles generally accepted in the United States of America. Actual
results could differ from those estimates.
WORKER'S COMPENSATION
The Company utilizes third-party insurance for losses and liabilities
associated with worker's compensation claims subject to deductible levels of
$250,000 per occurrence. Losses up to this deductible level are accrued based
upon the Company's estimates of the aggregate liability for claims incurred
based on Company experience.
RECLASSIFICATIONS
Certain reclassifications have been made in the prior years' financial
statements to conform to the current year's presentation. Such reclassifications
had no effect on previously reported net loss or shareholders' equity.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, accounts receivable,
accounts payable, construction 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 amount of
the
61
63
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Company's long-term debt approximates 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, 1999 and
2000 (in thousands):
1999 2000
------------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------- -------- -------
6% Debentures............................... $86,250 $50,888 $86,250 $36,225
5.625% Debentures........................... 75,000 43,500 75,000 29,250
STOCK-BASED COMPENSATION
The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations including FASB
Interpretation No. 44, Accounting for Certain Transactions involving Stock
Compensation an interpretation of APB Opinion No. 25 issued in March 2000, to
account for its fixed plan stock options. Under this method, compensation
expense is recorded on the date of grant only if the current market price of the
underlying stock exceeded the exercise price. SFAS No. 123, Accounting for
Stock-Based Compensation, established accounting and disclosure requirements
using a fair value-based method of accounting for stock-based employees
compensation plans. As allowed by SFAS No. 123, the Company has elected to
continue to apply the intrinsic value-based method of accounting described
above, and has adopted the disclosure requirements of SFAS No. 123.
The Amended and Restated 1994 Employee Stock Option Plan (the "1994 Plan")
combines an incentive and nonqualified stock option plan, a stock appreciation
rights ("SAR") plan and a stock award plan (including restricted stock). The
1994 Plan is a long-term incentive compensation plan and is designed to provide
a competitive and balanced incentive and reward program for participants.
The Company's Non-Executive Employee Equity Participation 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.
The Company accounts for stock and stock options issued to non-employees in
accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force
(EITF) consensus on Issue No. 96-18, Accounting for Equity Instruments that are
Issued to Other than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services.
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, 2000, 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, 1998, 1999 and
2000, direct payments received from state Medicaid agencies accounted for
approximately 10.7%, 10.4%, and 11.1% respectively, of the Company's revenue
while the tenant paid portion received from Medicaid residents accounted for
approximately 5.8%, 5.9% and 6.2%,
62
64
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
respectively, of the Company's revenue during these periods. The Company expects
in the future that State Medicaid reimbursement programs will constitute a
significant source of revenue for the Company.
2. ACQUISITIONS AND JOINT VENTURE
Acquisitions
Effective October 23, 1997, the Company acquired 98.8% of the outstanding
capital stock of Home and Community Care, Inc. ("HCI") that it did not already
own. 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 Note 13). 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, 1998 and 1999, the Company paid
earnout payments of $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 was 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.
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 Notes 6 and 10).
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 Note 13). 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
63
65
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
$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.
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.
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. Pursuant to the joint
venture agreements, the Company entered into irrevocable 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 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 $4.7 million for the year
ended December 31, 1998. 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 13).
64
66
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. RESTRICTED CASH
Restricted cash consists of $4.4 million related to loan agreements (see
Note 8) with U.S. Bank National Association ("U.S. Bank"), $1.0 million related
to certain lease agreements (See Note 5), and $1.1 related to required workers
compensation insurance deposits.
4. 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, 1999 was $1.7 million. The investments held at December 31, 1999
had a historical cost of $2.0 million and were 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. These
investments were sold during the year ended December 31, 2000 for $1.6 million,
resulting in realized losses of $368,000.
5. LEASES
A summary of leases that the Company has entered into is as follows:
NUMBER OF
SALE AND NUMBER OF UNITS
NUMBER LEASEBACK SALE AND UNDER
OF 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
---------- ------------- --------- ------------- ----------- ----------
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 --
Lease expansions during
2000........................ -- -- -- -- 1 --
-- -- -- --- ----- ----
Leases at December 31, 2000... 6 64 70 -- 2,634 --
== == == === ===== ====
The Company has entered into agreements to lease six assisted living
residences in Oregon from Assisted Living Facilities, Inc., a related party (the
"Oregon Leases"). During 1998 the Company terminated a lease with Oregon Heights
Partners ("OHP"). The lessor in each case obtained funding through the sale of
bonds issued by the state of Oregon, Housing and Community Services Department
("OHCS"). In connection with the Oregon Leases, the Company entered into "Lease
Approval Agreements" with OHCS and Assisted Living Facilities, Inc., pursuant to
which the Company is obligated to comply with the terms and conditions of
certain regulatory agreements to which the lessor is a party (See Note 8). The
leases, which have fixed terms of 10 years, have been accounted for as operating
leases. Aggregate deposits on these residences as of December 31, 1999 and 2000
were $126,000 which are reflected in other assets.
During 1998 the Company completed the sale of 4 residences under sale and
leaseback arrangements. The Company sold the residences for approximately $10.3
million and leased them back over initial terms ranging from 12 to 15 years. The
Company did not enter into any sale and leaseback agreements in 1999 or 2000.
65
67
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company recognized losses of $651,000 on the above sale and leaseback
transactions for the year ended December 31, 1998. The losses are presented in
the Consolidated Statements of Operations as net loss on sale of assets. Gains
on sale and leaseback transactions of $508,000 for the year ended December 31,
1998, have been recorded as deferred income included in other liabilities and
are being amortized over the initial terms of the corresponding leases.
In March 1999, the Company amended 16 leases, resulting in the
reclassification of such leases from financings to operating leases (see Note
6).
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 has accounted for the amended leases on a
contractual cash payment basis and amortizes 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. Pursuant to
certain lease agreements, the Company restricted $1.0 million of cash balances
as additional collateral (see Note 3). The Company did not meet certain
financial covenants at December 31, 2000 but has subsequently received a waiver
of the right to declare an event of default (See Note 8).
As of December 31, 2000, future minimum annual lease payments under
operating leases are as follows (in thousands):
2001...................................................... $ 16,805
2002...................................................... 16,805
2003...................................................... 16,805
2004...................................................... 16,805
2005...................................................... 16,805
Thereafter................................................ 96,888
--------
$180,913
========
6. PROPERTY AND EQUIPMENT
As of December 31, 1999 and 2000, property and equipment, stated at cost,
consist of the following (in thousands):
1999 2000
-------- --------
Land................................................... $ 21,329 $ 21,378
Buildings and building improvements.................... 286,347 287,178
Equipment.............................................. 5,344 7,149
Furniture.............................................. 8,602 8,638
-------- --------
Total property and equipment................. 321,622 324,343
Less accumulated depreciation and amortization......... 15,974 25,599
-------- --------
Property and equipment -- net................ $305,648 $298,744
======== ========
66
68
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Land, buildings and certain furniture and equipment relating to 51
residences serve as collateral for the litigation payable (See Note 16), bridge
loan payable (See Note 7) and for long-term debt (See Note 8). The Company also
encumbered the land, buildings and certain furniture and equipment relating to
16 additional properties in March, 2001 in relation to the Heller Healthcare
Finance, Inc., ("Heller") financing (See Note 19).
Depreciation and amortization expense was $5.9 million, $8.7 million and
$9.6 million, for the years ended December 31, 1998, 1999 and 2000,
respectively.
In 2000, the Company entered into a capital lease agreement to finance
information technology equipment. The lease expires on March 30, 2003. The gross
amount of equipment and related accumulated amortization recorded under this
capital lease was $263,000 and $18,000, respectively at December 31, 2000.
During the years ended December 31, 1998 and 1999 the Company capitalized
interest costs of $6.0 million and $2.0 million, respectively, relating to
financing of construction in process. In addition, the Company capitalized
payroll costs that were directly related to the construction and development of
the residences of $1.8 million and $617,000 for the years ended December 31,
1998 and 1999, respectively. No interest or payroll costs were capitalized in
2000.
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 abandonment 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, 2000. Of the
residences with certificates of occupancy, the Company owned 115 residences and
leased 70 residences (all of which are operating leases).
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.
7. BRIDGE LOAN PAYABLE
In November 2000, the Company entered into a short-term bridge loan with
Red Mortgage ("Red Mortgage") in the amount of $4.0 million secured by three
previously unencumbered properties. This loan matures on August 1, 2001,
requires monthly interest-only payments and bears annual interest at the greater
of 10% or LIBOR plus 3.5% (10.3% at December 31, 2000).
67
69
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. LONG-TERM DEBT
As of December 31, 1999 and 2000, long-term debt consists of the following
(in thousands):
1999 2000
------- -------
Trust Deed Notes, payable to the State of Oregon Housing and
Community Services Department (OHCS) through 2028......... $10,025 $ 9,890
Variable Rate Multifamily Revenue Bonds, payable to the
Washington State Housing Finance Commission Department
through 2028.............................................. 8,235 7,900
Variable Rate Demand Revenue Bonds, Series 1997 payable to
the Idaho Housing and Finance Association through 2017.... 7,120 6,875
Variable Rate Demand Revenue Bonds, Series A-1 and A-2
payable to the State of Ohio Housing Finance Agency
through 2018.............................................. 12,845 12,445
Capital lease obligation.................................... -- 212
Mortgages payable........................................... 35,218 34,775
------- -------
Total long-term debt........................................ $73,443 $72,097
Less current portion........................................ 1,494 1,690
------- -------
Long-term debt.............................................. $71,949 $70,407
======= =======
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 9.0%.
The Variable Rate Multifamily Revenue Bonds are payable to the Washington
State Housing Finance Commission Department and at December 31, 2000 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 4.24% during 2000.
The Variable Rate Demand Housing Revenue Bonds, Series 1997 are payable to
the State of Idaho Housing and Finance Association and at December 31, 2000 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 4.27% during 2000.
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
4.20% during 2000.
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 terms include 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 a
fixed interest rate of 7.58% and secured by a mortgage encumbering each of three
Oregon residences. The mortgage terms include 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 a fixed interest rate of 8.79% and secured by one Pennsylvania residence and
one South Carolina residence. The mortgage terms include monthly payments of
$43,000 over 25 years with a balloon payment of $5.9 million due at maturity in
September 2008.
68
70
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 terms include 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, 2000, the following annual principal payments are
required (in thousands):
2001....................................................... $ 1,690
2002....................................................... 1,793
2003....................................................... 1,833
2004....................................................... 1,926
2005....................................................... 2,062
Thereafter................................................. 62,793
-------
Total............................................ $72,097
=======
The Company's credit agreements with U.S. Bank contain restrictive
covenants which include compliance with certain financial ratios. During the
third quarter of 1999, the Company amended certain loan agreements with U.S.
Bank. 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 related to the delivery of financial statements and compliance with
financial covenants, including an amendment to certain financial covenants. The
amendment also provides for the release of the additional collateral upon the
achievement of specified performance targets, provided that the Company is in
compliance with the other terms of the loan agreements. The Company achieved
certain of these specified targets during the fourth quarter of fiscal 1999 and
the first quarter of fiscal 2000 resulting in the release of $1.2 million and
$1.1 million of the restricted cash, respectively.
On July 21, 2000, the Company finalized an agreement with U.S. Bank whereby
U.S. Bank agreed to modify and waive certain financial covenants with which the
Company would have otherwise failed to comply as of June 30, 2000. In exchange
for the modification and waiver of financial covenants through the quarters
ended June 30, 2000 and September 30, 2000, the Company provided three
previously unemcumbered Washington state properties as additional collateral.
The agreement also provided for the release of $1.8 million of cash collateral
currently held by U.S. bank upon the satisfaction of certain conditions, which
were satisfied in August 2000.
The Company determined that it would not meet the U.S. Bank covenants at
December 31, 2000. On March 12, 2001, the Company amended certain loan documents
with U.S. Bank. Pursuant to the amendment, the Company agreed to pay fees of
$34,700 in exchange for the following: the modification of certain financial
covenants, and the waiver of U.S. Bank's right to declare an event of default
for the Company's failure to comply with certain financial covenants as of
December 31, 2000 and for its anticipated failure to comply with certain
financial covenants for the three months ending March 31, 2001. The amendment
also provides the following: approval for the Company to repurchase for cash up
to $25.0 million in face value of its convertible debentures prior to maturity;
a requirement that the Company deposit $500,000 in cash collateral with U.S.
Bank in the event certain regulatory actions are commenced with respect to the
properties securing its obligations to U.S. Bank; and the requirement that U.S.
Bank release such deposits to the Company upon satisfactory resolution of the
regulatory action. 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 loan documents to be due and payable. In addition, certain
of the Company's leases and loan agreements contain
69
71
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
agreements.
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, 1999 and 2000 was $378,000 and $422,000, 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 $172,000 as of December 31,
1999 and 2000, 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, 1999 and 2000, the Company was restricted from
distributing $233,000 and $278,000 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.
9. 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. 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
70
72
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
10. 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 and $54,000 at December
31, 1999 and 2000, respectively, consists primarily of lease termination 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.
11. 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.
12. INCOME TAXES
The Company incurred a loss for both financial reporting and tax return
purposes for the years ended December 31, 1998, 1999, and 2000 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:
1998 1999 2000
----- ----- -----
Statutory federal tax rate.................................. (34.0)% (34.0)% (34.0)%
Non deductible goodwill..................................... 12.4% 0.3% 0.3%
Losses for which no benefit is provided..................... 21.5% 33.6% 26.9%
Litigation settlement....................................... --% --% 6.6%
Other....................................................... 0.1% 0.1% 0.2%
----- ----- -----
Effective tax rate.......................................... --% --% --%
===== ===== =====
71
73
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
An analysis of the significant components of deferred tax assets and
liabilities, consists of the following as of December 31 (in thousands):
1999 2000
-------- --------
Deferred tax assets:
Net operating loss carryforward...................... $ 19,876 $ 27,846
Investment in joint venture operations............... 2,815 1,741
Deferred gain on sale and leaseback transactions..... 1,555 1,480
Other................................................ 3,836 3,470
-------- --------
Total deferred tax assets.................... 28,082 34,537
Valuation allowance.................................... (19,422) (25,530)
Deferred tax liabilities:
Property and equipment, primarily due to
depreciation...................................... (8,316) (8,210)
Other................................................ (344) (797)
-------- --------
Total deferred tax liabilities............... (8,660) (9,007)
-------- --------
Net deferred tax asset (liability)................... $ -- $ --
======== ========
The valuation allowance for deferred tax assets as of December 31, 1999 and
2000 was $19.4 million and $25.5 million, respectively. The increase in the
total valuation allowance for the years ended December 31, 1998, 1999 and 2000
was $6.1 million, $10.5 million, and $6.1 million, respectively.
As a result of acquisitions, the Company acquired net operating loss
carryforwards for federal and state tax purposes approximating $311,000 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 $117,500 to offset the deferred tax asset related to the
loss carryforwards. Additionally, any tax benefit realized from the use of
approximately $100,000 of the acquired operating loss carryforwards will be
applied to reduce goodwill.
At December 31, 2000, the Company had net operating loss carryforwards of
approximately $73.7 million and $59.0 million available to reduce future federal
and state taxable income, respectively. The carryforwards expire at various
dates beginning in the year 2009 through the year 2021.
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, 2000. This amount is attributable to
differences between financial and tax reporting of employee stock option
transactions.
13. RELATED PARTY TRANSACTIONS
The Company leases six residences from Assisted Living Facilities, Inc. The
spouse of the Company's former president and chief executive officer owns a 25%
interest in Assisted Living Facilities, Inc. For the years ended December 31,
1998, 1999 and 2000, the Company incurred lease rental expense of $1.2 million,
$1.3 million, and $1.3 million, respectively. In addition, in 1997 the Company
leased one residence from Oregon Heights Partnership ("OHP") in which the former
president and chief executive officer's spouse owns an interest. The Company
paid OHP $195,000 in rent payments in 1998. 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 was owned 75% by the former president and chief executive officer's spouse.
The Company paid $3.8 million, $1.6 million, and $69,000 during the years ended
December 31, 1998, 1999, and 2000, respectively, (including
72
74
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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 former president and chief
executive officer's spouse. For the years ended December 31, 1998, 1999 and
2000, the Company paid CCL indirectly through SHS for these services fees of
$566,000, $255,000, and $0, 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 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
and $17,000 for such services in 1999 and 2000, respectively. 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. 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 and $416,000, respectively, related to HCI sites the
Company elected to develop. There were no such payments in 2000.
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 former 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 former 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 the Company 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 paid C&S Advisors approximately
$471,000 for financial advisory services in connection with certain financing
and merger and acquisition transactions. The new agreement terminated on
December 31, 2000, except that even after the expiration or termination of the
new agreement the Company is required to pay C&S Advisors fees under the new
agreement if the Company
73
75
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
completes certain financing, including the Heller financing discussed in Note
18, and merger and acquisition transactions on or prior to December 31, 2001. On
March 2, 2001, the Company closed the Heller financing and paid C&S Advisors
$457,000 in relation to this transaction (See Note 20).
In December 2000, the Company entered into an agreement with MYFM Capital,
LLC ("MYFM") under which the Company could establish a line of credit with BET
Associates LP ("BET") as lender, providing for loans of up to $10.0 million.
Subsequent to December 31, 2000, the Company terminated the agreement and paid
MYFM $50,000 in connection with such termination. Bruce E. Toll, who is the
beneficial owner of 3.1 million of our common shares, and a current member of
the Company's Board of Directors, is the sole member of BRU Holdings Company,
Inc., LLC, which is the sole general partner of BET. Leonard Tannenbaum is the
Managing Partner of MYFM Capital, LLC, the son-in-law of Mr. Toll, a 10% limited
partner of BET, and is also a current member of the Company's Board of
Directors.
14. STOCK OPTION PLANS 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.
Except for the Board of Directors administering the options of the non-employee
Directors, the Plans are administered by the Compensation Committee of the Board
of Directors which establish the terms and provisions of options granted under
the Plans, not otherwise provided under the Plans. Incentive options may be
granted only to officers or other full-time employees of the Company, while
non-qualified options may be granted to directors, officers or other employees
of the Company, or consultants who provide services to the Company.
The Amended and Restated 1994 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 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 or the Board, as applicable; 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 upon changes in
the Company's capitalization. The Board of Directors, at its option, may
discontinue or amend the 1994 Plan at any time, provided that certain conditions
are satisfied.
Under the Non-Executive Employee Equity Participation Plan of Assisted
Living Concepts, Inc. (the "Non-Officer Plan") the Company may grant consultants
and non-executives up to 1,000,000 shares of Common Stock 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.
74
76
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 as of December 31:
1998 1999 2000
----- ----- -----
Expected dividend yield..................................... -- -- --
Expected volatility......................................... 45.12% 73.70% 98.57%
Risk-free interest rate..................................... 5.56% 6.14% 5.26%
Expected life (in years).................................... 10 3 3
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
No. 123, the Company's net loss would have been reduced to the pro forma amounts
indicated below: (in thousands except per share data)
1998 1999 2000
-------- -------- --------
Net loss as reported............................... $(20,745) $(28,933) $(25,786)
Net loss pro forma................................. (23,990) $(31,772) $(27,586)
Basic and diluted net loss per common share as
reported......................................... $ (1.27) $ (1.69) $ (1.51)
Basic and diluted net loss per common share pro
forma............................................ $ (1.47) $ (1.86) $ (1.61)
Pro forma net loss reflects only options granted after 1995. Therefore, the
full impact of calculating compensation costs for stock options under SFAS No.
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.
A summary of the status of the Company's stock options as of December 31,
1998, 1999 and 2000 and changes during the years ended on those dates is
presented below:
1998 1999 2000
--------------------- --------------------- ----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
1998 AVERAGE 1999 AVERAGE 2000 AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- --------- --------- --------- ---------- ---------
Options at beginning of the
year........................... 1,629,967 $10.82 1,867,169 $12.07 1,744,420 $ 9.78
Granted.......................... 674,132 15.76 460,250 3.71 1,038,850 1.34
Exercised........................ (121,606) 6.00 (26,934) 5.83 -- --
Canceled......................... (315,324) 15.82 (556,065) 12.65 (1,309,372) 10.21
--------- --------- ----------
Options at end of the year....... 1,867,169 $12.07 1,744,420 $ 9.78 1,473,898 $ 3.38
========= ========= ==========
Options exercisable at end of
year........................... 833,465 982,973 476,686
Weighted-average fair value of
options granted during the
year........................... $10.22 $2.52 $1.32
75
77
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarized information about stock options outstanding
at December 31, 2000.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------- ----------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
NUMBER REMAINING AVERAGE NUMBER AVERAGE
RANGE OF EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ------------------------ ----------- ---------------- -------------- ----------- --------------
0.00$to 0.38...... 51,000 9.85 $ 0.38 -- $ 0.00
1.00$to 1.13...... 346,148 9.33 1.12 9,666 1.10
1.31$to 1.44...... 383,500 9.00 1.44 44,503 1.44
1.50$to 1.69...... 44,834 8.87 1.67 15,171 1.67
1.75$to 1.81...... 156,500 9.15 1.81 32,727 1.81
2.19$to 2.88...... 131,837 8.44 2.86 45,196 2.86
3.19$to 4.63...... 154,668 3.05 4.56 151,339 4.57
4.88$to 16.50...... 166,826 6.53 11.38 146,577 11.35
16.7$5 to 20.75..... 38,085 7.18 17.55 31,173 17.60
21.2$5 ..... 500 7.25 21.25 334 21.25
--------- -------
1,473,898 $ 3.38 476,686 $ 6.71
========= =======
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 was reflected as a separate component of
shareholders' equity to be amortized as compensation expense over the seven year
vesting period. The Company recorded $608,000 and $180,000 of compensation
expense with respect to such award for the years ended December 31, 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.
In November 2000, the Board of Directors, at the recommendation of the
Compensation Committee, approved an offer (the "Offer") to holders of options
under both the 1994 Stock Option Plan and the Non-Officer Plan. The Company
agreed to make lump sum payments of $250 to each option holder that agreed to
the cancellation of all of his options having an exercise price of $5.00 or
greater ("Eligible Options"), except that certain executive officers, directors,
and consultants were asked to agree to the cancellation of their Eligible
Options without any payment. The Company completed the Offer in December 2000,
paying approximately $17,000 for the cancellation of options covering the
issuance of 596,103 shares of common stock.
15. WORKER'S COMPENSATION
The Company utilizes third-party insurance for losses and liabilities
associated with worker's compensation claims subject to deductible levels of
$250,000 per occurrence for all claims incurred beginning January 1, 2000.
Claims incurred prior to January 1, 2000 were fully insured. Losses up to this
deductible level are accrued based upon the Company's estimates of the aggregate
liability for claims incurred based on Company experience. At December 31, 2000,
other current liabilities includes worker's compensation claims payable of
approximately $1.0 million relating to outstanding 2000 claims.
76
78
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. LEGAL PROCEEDINGS
Securityholder Litigation Settlement
In September, 2000, the Company reached an agreement to settle the class
action litigation relating to the restatement of its financial statements for
the years ended December 31, 1996 and 1997 and the first three fiscal quarters
of 1998. This agreement received final court approval on November 30, 2000 and
the Company was subsequently dismissed from the litigation with prejudice.
The total cost of the settlement was approximately $10,020,000 (less $1.0
million of legal fees and expenses reimbursed by the Company's corporate
liability insurance carriers and other reimbursements of approximately
$193,000). The Company made two payments of $2.3 million each on October 23,
2000 and January 23, 2001 towards the settlement. The remaining amount due will
be paid in two payments of $2.3 million each, due on April 23, 2001 and July 23,
2001, and a final payment of $1.0 million due within 90 days following the July
23, 2001 payment.
The settlement had been pending the approval of the Company's corporate
liability insurance carriers who had raised certain coverage issues that
resulting the filing of litigation between the Company and the carriers. These
carriers consented to the settlement, and the Company and the carriers agreed to
dismiss the litigation regarding coverage issues and to resolve those issues
through binding arbitration. The arbitration proceeding is pending. To the
extent that the carriers are successful, the Company and the carriers have
agreed that the carriers' recovery is not to exceed $4.0 million. The parties
further agreed that payment of any such amount awarded or agreed to will not be
due in any event until 90 days after the Company has satisfied its obligations
to the plaintiffs in the class action, with any such amount to be subordinated
to new or refinancing of existing obligations. The Company believes it has
strong defenses regarding this dispute and consequently has not recorded a
liability in relation to this matter.
As a result of the class action settlement, the Company recorded a charge
of approximately $10,020,000, which was partially offset by a reduction in
general, and administrative expenses of approximately $1,193,000 as a result of
the reimbursement of legal fees and expenses incurred in connection with the
litigation. The settlement resulted in an increase in net loss of $8,827,000 (or
approximately $0.52 per basic and diluted share) for the year ended December 31,
2000.
Although the Company believes it has strong defenses regarding its dispute
with the insurance carriers, the Company cannot predict the outcome of this
litigation and currently is unable to evaluate the likelihood of success or the
range of possible loss. However, if such litigation was determined adversely to
the Company, such a determination could have a material adverse effect on its
financial condition, results of operations, cash flow and liquidity.
Indiana Litigation Settlement
The Company was served with a complaint, filed May 30, 2000 in the Marion
(Indiana) Superior Court on behalf of the Commissioner of the Indiana State
Department of Health ("ISDH"). ISDH had alleged that the Company was operating
its Logansport, Indiana facility known as McKinney House as a residential care
facility without a license. The Company believes that its services were
consistent with those of a "Housing with Services Establishment" (which is not
required to be licensed) pursuant to Indiana Code Section 12-10-15-1.
To avoid the expense and uncertainty of protracted litigation and, also
because the Company wished to assure the State that it operates in a manner that
is consistent with Indiana law, the Company agreed to the following settlement
on behalf of all facilities owned and operated by the Company in the State of
Indiana. The Company and the State agreed upon a Program Description that
clarifies the services that the Company can provide without requiring licensure
as a residential care facility. This Program Description provides
77
79
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
guidelines regarding the physical and medical condition of the residents in the
Company's facilities and the services to be provided to them. The Company agreed
that prior to March 20, 2001, it would provide in-service training regarding the
Program Description throughout its Indiana facilities. Under the Program
Description, the Company must discharge residents who require certain types or
levels of care that the Company agreed not to provide in Indiana. The Company is
currently implementing the Program Description and, while its full impact is not
now known, the Company does not expect the impact to be material to its
financial condition, results of operations, cash flow and liquidity. Without
admitting liability, the Company paid a civil penalty of $10,000. The State
dismissed the lawsuit against the Company with prejudice.
Other Litigation
In addition to the matter referred to in the immediately preceding
paragraphs, the Company is involved in various lawsuits and claims arising in
the normal course of business. In the aggregate, such other suits and claims
should not have a material adverse effect on the Company's financial condition,
results of operations, cash flow and liquidity.
17. EMPLOYEE BENEFIT PLANS
Effective January 1, 1998, the Company implemented a 401(k) Savings Plan
("the Plan"). The Plan is a defined contribution plan covering employees of
Assisted 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 has not made any contributions to this plan.
Effective November 5, 1998, the Company implemented a Severance Pay Plan
for Program Directors, Associate Program Directors, and Corporate and Regional
Office Operations Employees ("the Severance Plan"). The Severance Plan was
amended, effective January 1, 2001. This Severance Plan covers certain eligible
employees and provides that under specific conditions employees may receive up
to 6 months annual base salary as severance pay, depending upon their length of
service with the Company and other factors that are defined in the Severance
Plan. During the year ended December 31, 1999, the Company paid out benefits of
$19,000 under this plan. No such benefits were paid during the years ended
December 31, 1998 and 2000.
18. LIQUIDITY
The Company's ability to satisfy its obligations, including payments with
respect to its outstanding indebtedness and lease obligations, will depend on
future performance, which is subject to its ability to stabilize its operations,
and to a certain extent, general economic, financial, competitive, legislative,
regulatory and other factors that are beyond its control. The Company made two
payments of approximately $2.3 million each towards its litigation settlement on
October 23, 2000 and January 23, 2001 and on November 1, 2000 made its $4.7
million semi-annual interest payment on its convertible subordinated debentures.
The Company is obligated to pay the remaining $5.6 million related to the
litigation settlement in two installments of approximately $2.3 million each,
due on April 23, 2001 and July 23, 2001, with final payment of $1.0 million due
within 90 days following the July 23, 2001 payment. Additionally, the Company's
next $4.7 million semi-annual interest payment on its convertible subordinated
debentures is due on May 1, 2001. The Company may also be required to reimburse
its insurance carriers for up to $4.0 million of costs incurred by the carriers
in connection with the securityholder litigation, depending on the outcome of a
pending dispute over coverage (See Note 16).
The Company believes that its current cash on hand, cash available from
operations and financing by Heller (obtained subsequent to year end) will be
sufficient to meet its working capital needs through July 2002. However, the
Company will have up to $45.0 million in principal from the Heller financing
maturing on
78
80
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
August 31, 2002 (unless the five wholly owned subsidiaries, which are the
borrowers, are able to and do extend the maturity dates for up to three
six-month extensions), and have $161.3 million (less any amounts repurchased
with the Heller line of credit) in principal amount of convertible debentures
maturing between November 2002 and May 2003. The Company also expects the cost
to maintain its long-lived assets in their present condition to increase;
however, the Company cannot yet estimate the financial impact since its
experience is limited due to the newness of these assets (See Note 19).
The Company is currently exploring various alternatives to address its
financing needs and the maturities of its long-term debt. The Heller and Red
Mortgage financings have been sought to fund potential working capital needs, to
fund the cost of the Company's shareholder litigation settlement, the repurchase
of 16 of the Company's leased properties and the repurchase of some of its
convertible debentures in the open market. The Company expects to replace the
Red Mortgage financing with long-term HUD mortgage loans and also expects to
replace a substantial portion of the Heller financing with long-term HUD
mortgage loans, to the extent the processing time and increasing limitations by
HUD on submission of applications and amount financed permit. In addition, the
Company is also considering issuing new securities with longer maturities to the
holders of its convertible debentures in exchange for some or all of their
debentures. The Company has 48 unencumbered residences available to use as
collateral for these various alternatives, 47 of which are subject to negative
covenants not to encumber them except under certain circumstances, including the
use of the net proceeds of the financing which they secure for the reduction of
the Company's indebtedness to its convertible debenture holders. No commitments
are currently in place and there can be no assurance that the Company's efforts
will be successful, in which event the Company will have to consider other
alternatives, including reorganization under the bankruptcy laws or raising
highly dilutive capital through the issuance of equity or equity-related
securities.
19. SUBSEQUENT EVENTS
Equipment Financing
Effective February 22, 2001, the Company entered into a loan agreement to
finance technology equipment in the amount of $550,000. The agreement required
an initial payment of $150,000 (which has been paid) and monthly payments of
$25,000 (principal and interest) until maturity on August 31, 2002. The loan
bears an interest rate of 12.5% and is secured by the related technology
equipment which had been purchased in 2000.
Heller Financing
On March 2, 2001, the Company entered into an agreement with Heller
Healthcare Finance, Inc. for a $45.0 million line of credit, under which five
wholly owned subsidiaries are the jointly and severally liable borrowers of any
funds drawn. This line matures on August 31, 2002, requires monthly
interest-only payments until maturity. This line bears an interest rate of 3.85%
over the three-month LIBOR rate floating monthly and will be secured by up to 32
properties owned by the borrowers and leased to the Company or another of its
wholly owned subsidiaries. The Company guaranteed the line. In addition to
having paid a commitment fee of $450,000, the Company is to pay funding fees of
0.5% of the principal amount funded at the time of funding and pay an exit fee
of 1.0% of the principal being repaid. The borrowers may elect to exercise up to
three six-month extensions of the maturity date, subject to the satisfaction of
certain conditions. The Company intends to replace a substantial portion of this
financing with long-term HUD financing to the extent the processing time and
increasing limitations by HUD on submission of applications and amount financed
permit. While the line remains outstanding, the Company has agreed that it will
not sell or grant mortgages on its remaining unencumbered properties, except
one, unless the net proceeds are used to repurchase the Company's convertible
debentures or otherwise reduce its indebtedness (if approved by Heller).
Proceeds of the line may be used for the payment of the Company's shareholders'
litigation settlement, the repurchase of 16 of its
79
81
ASSISTED LIVING CONCEPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
leased properties and the repurchase of some of its convertible debentures. The
Company made an initial draw of $1.3 million on this line on March 2, 2001.
20. LISTING STATUS WITH AMERICAN STOCK EXCHANGE (UNAUDITED)
The Company's common stock currently is listed on the American Stock
Exchange ("AMEX") under the symbol "ALF," its 5.625% Convertible Subordinated
Debentures currently are listed on AMEX under the symbol "ALS5E03" and its 6.0%
Convertible Subordinated Debentures currently are listed on AMEX under the
symbol "ALS6K02." AMEX recently notified the Company that the Company had fallen
below certain of AMEX's continued listing guidelines and that it was reviewing
the Company's listing eligibility. In particular, the Company has incurred
losses from continued operations for each of its past six fiscal years ending
December 31, 2000, and the price per share of the Company's common stock as
quoted on AMEX recently has been below the minimum bid price of $1.00 per share.
The Company may choose to effect a reverse stock split in the event that the
price of its common stock does not otherwise meet the minimum bid requirement.
However, the Company reported a net loss of $1.51 per basic and diluted share
for the year ended December 31, 2000. The Company has provided AMEX with
additional information and has been involved in ongoing discussions with AMEX in
connection with its review of the Company's listing eligibility. While AMEX has
decided not to delist the Company at this time, they will continue to review its
listing status on a quarterly basis.
If AMEX were to delist the Company's securities, it is possible that the
securities would continue to trade on the over-the-counter markets. However, the
extent of the public market for the securities and the availability of
quotations would depend upon such factors as the aggregate market value of each
class of the securities, the interest in maintaining a market in such securities
on the part of securities firms and other factors. There can be no assurance
that any public market for the Company's securities will exist in the event that
such securities are delisted.
80
82
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 13, 2000 By: /s/ DREW Q. MILLER
------------------------------------
Name: Drew Q. Miller
Title: Senior Vice President, Chief
Financial
Officer and Treasurer
March 13, 2000 By: /s/ M. CATHERINE MALONEY
------------------------------------
Name: M. Catherine Maloney
Title: Vice President, Controller
and
Chief Accounting Officer
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 Wm. James Nicol 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.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ WM. JAMES NICOL Chairman, President and March 13, 2001
- ------------------------------------------------ Chief Executive Officer
Wm. James Nicol
/s/ DREW Q. MILLER Senior Vice President, Chief March 13, 2001
- ------------------------------------------------ Financial Officer and Treasurer
Drew Q. Miller
/s/ M. CATHERINE MALONEY Vice President, Controller and March 13, 2001
- ------------------------------------------------ Chief Accounting Officer
M. Catherine Maloney
81
83
SIGNATURE TITLE DATE
--------- ----- ----
/s/ JOHN M. GIBBONS Director and Vice Chairman March 13, 2001
- ------------------------------------------------
John M. Gibbons
/s/ RICHARD C. LADD Director March 13, 2001
- ------------------------------------------------
Richard C. Ladd
/s/ JILL M. KRUEGER Director March 13, 2001
- ------------------------------------------------
Jill M. Krueger
/s/ BRUCE E. TOLL Director March 13, 2001
- ------------------------------------------------
Bruce E. Toll
/s/ LEONARD TANNENBAUM Director March 13, 2001
- ------------------------------------------------
Leonard Tannenbaum
82
84
SCHEDULE II
ASSISTED LIVING CONCEPTS, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
(IN THOUSANDS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- -------- -------- -------- --------
BALANCE AT BALANCE AT
BEGINNING END
DESCRIPTION OF YEAR ADDITIONS DEDUCTIONS(1) OF YEAR
----------- ---------- --------- ------------- ----------
Year ended December 31, 1998:
Valuation accounts deducted from assets:
Allowance for doubtful receivables................ $ 79 $ 359 $ 259 $ 179
------ ------ ------ ------
Year ended December 31, 1999:
Valuation accounts deducted from assets:
Allowance for doubtful receivables................ $ 179 $1,071(2) $ 188 $1,062
------ ------ ------ ------
Year ended December 31, 2000:
Valuation accounts deducted from assets:
Allowance for doubtful receivables................ $1,062 $1,932 $1,595 $1,399
------ ------ ------ ------
- ---------------
(1) Represents amounts written off.
(2) $561,000 of additions were charged to operating expenses, $510,000 of
additions related to home health operations which were discontinued and are
reported in general and administrative expenses in 1999.
83
85
ASSISTED LIVING CONCEPTS, INC. AND SUBSIDIARIES
INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION
- ------- -----------
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 Amendment to Registration Rights Agreement, dated as of June
12, 1997, effective as of November 8, 2000.
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 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 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).
10.2 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).
10.3 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).
10.4 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).
10.5 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).
10.6 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).
10.7 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).
10.8 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).
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10.10 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).
10.11 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).
10.12 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).
10.13 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).
10.14 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).
10.15 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).
10.16 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).
10.17 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).
10.18 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).
10.19 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).
10.20 Modification and Amendment to Employment Agreement, dated as
of January 19, 2000, by and between the Company and Nancy
Inez Gorshe.
10.21 Modification and Amendment to Employment Agreement, dated as
of January 1, 2000, by and between the Company and Sandra
Campbell.
10.22 Employment Agreement, dated as of November 1, 2000, by and
between the Company and Wm. James Nicol.
10.23 Loan Agreement, dated as of February 20, 2001, among Heller
Healthcare Finance, Inc., as Agent and a Lender, the
financial institutions who are or become parties thereto as
Lenders, ALC Ohio, Inc. and ALC Pennsylvania, Inc., ALC
Iowa, Inc., ALC Nebraska, Inc. and ALC New Jersey, Inc., as
Borrowers, and the parties who are or become Borrowers
thereunder. (Incorporated by reference to the same titled
exhibit to the Company's Report on Form 8-K, dated May 9,
2001).
10.24 Guaranty, dated as of February 20, 2001, by Assisted Living
Concepts, Inc., for the benefit of Heller Healthcare
Finance, Inc. (Incorporated by reference to the same titled
exhibit to the Company's Report on Form 8-K, dated May 9,
2001).
10.25 Third Amendment and Modification of Reimbursement Agreement,
dated as of March 12, 2001, between the Company and U.S.
Bank National Association.
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10.26 First Amendment to the Non-Executive Employee Equity
Participation Plan (Incorporated by reference to the same
titled exhibit to the Company's Registration Statement on
Form S-8, dated March 12, 2001, Registration No. 333-56920).
12.1 Computation of Ratio of Earnings to Fixed Charges.
23.1 Report on Schedule and Consent of KPMG LLP.
86